Thursday, May 8, 2014


So much for the savings-investment function, and the free market ... 

This is you depositing your money in the bank.

If you deposit your money in a bank we are taught that they will lend your money out like this ...

How the savings-investment function is supposed to work.

However, according to the most recent policy bulletin produced by the Bank of England - "Money Creation in the Modern Era" - the major banks aren't actually lending the money of their depositors. Instead they are making loans and advancing credit from the money created by central banks, like the Federal Reserve and the Bank of England, via Quantitative Easing policies (which I discuss here). 

Quantitative Easing has the same effect as printing money.

This revelation from the Bank of England is significant for three reasons. 

First, the Bank of England is telling us that client deposits remain in their "demand" accounts.  

Relatedly, and second, this means that the central bank's monetary policy rather than the savings-investment function (i.e. you make a deposit, the banks lend) now dominates our economic lives. 

Finally, if the economy is dependent on central bank QE policies to advance electronic credits and create money what we learned in Economics 101 is a quaint concept, that's no longer tied to reality. 

More to the point,  the Bank of England is telling us, once again, that there are no invisible hands in our market system. Free markets have little to do with how money moves, and how our modern economy functions. 

It's really that simple.

- Mark

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