Chapter 2 - A Closer Look

IMF

The IMF lent significant billions of Euro to Greece. Where did the IMF get the billions that it lent? The money was not sitting in an account the day before. The money did not originate from the ECB. The IMF simply wrote the numbers in a ledger, told Greece that they now had bank credit, and demanded repayment with interest. What is interesting is that Greece had to be bailed out. It could not be allowed to refuse to pay as that would demonstrate the virtual origins of the money they were lent. Extra loans are always forthcoming because the lenders as a group don’t want the system to collapse. If they do not lend more, the system collapses because it is impossible to repay more than exists. This is evident in the red and green graph of debt and money below.

A graph of Money Supply and Debt for the Greece. This debt can never be repaid with this. So do not try to repay it. Graph by Andy Chalkley. Creative Commons Attribute

In May 2010, the IMF approved €30 billion in financial assistance for Greece. In March 2012, the IMF approved €28 billion in financial assistance for Greece. [1]

A repayment of about €1.5 billion was due to the IMF on 2015-06-30. That repayment was not made when due. A repayment of about €456 million was due on 13 July 2015. That repayment was also not made on the due date. I’ll ask you a few questions:

Never forget that money is a freely created commodity. It costs nothing to create money. Money can be printed on paper or numbers can be added to computer registers. Banks can lend out any amount of money because they create credit by typing numbers into a computer screen. Banks do not create money, they create credit. Banks do not lend money, they lend credit. You ask for a loan. They put credit in your account. They put credit in an account for money that does not exist.

The bank credit money system works provided the banks issue sufficient credit. In the case of Greece, insufficient credit has been issued since 2008.

From a Canadian horse’s mouth:

Bank of Canada: “Some people ask why the Bank of Canada can’t directly increase or decrease the Money Supply at will, since it regulates the supply of paper currency in circulation.

The answer is that the banknotes issued by the Bank represent only a small portion of all the money circulating in the economy at any one time.” [4]

The money lent to Greece did not originate from the European Central Bank as cash currency. It did not come from a printing press. So what did the IMF and other banks lend to Greece?

Where did the IMF get the thirty billion that it lent to Greece?

If I ask a European where Euros come from, I will likely get the answer: “The ECB”, which is short for the European Central Bank. If I ask another European I might get the answer: “The central banks of Europe which are under the control of the ECB”. You are sensible to assume this, as the various central banks under the authority of the ECB, are authorized to create one part of the money of Europe. The ECB states on it website: “The ECB has the exclusive right to authorise the issuance of banknotes within the euro area.”. They only have the exclusive right to issue banknotes. Interestingly, nowhere on their website does it say that they have the “exclusive right to create the money of Europe”. [2] This is clever wording because it allows private banks to create credit in any quantity. The private banks cannot create banknotes but they can create credit equal in value to banknotes.

The IMF cannot create banknotes, but it can create €30 billion, provided it only creates it as credit. The €30 billion is credit for €30 billion in banknotes that do not exist. The IMF cannot give you €30 billion in banknotes because it does not have €30 billion in banknotes. The IMF would have difficulty getting €30 billion in banknotes. It would have to use €30 billion of its own assets to purchase the €30 billion in banknotes fro the ECB, which it would not want to do. The IMF can write €30 billion in an account against your name. It did not need to contact the ECB. It does some simple bookkeeping. It writes €30 billion with a plus sign in one account and €30 billion with a minus sign in another account. In a collusion arrangement with other banks, the credit can be transferred to entities that you owe money to. You can transfer the €30 billion to someone that you owe money to and you owe €30 billion plus interest to the IMF. The backing for the €30 billion that it lends you is your agreement to repay.

Don’t get upset. This system works and has done so for many years. We shall look at this a little closer.

Have a look at this table with data on government debt. There are a few gaps where I struggled to find data. The government debt for each country is only part of the debt owed to moneylenders. There is also the private debt which is the money owed to banks by businesses and individuals. Much of this is mortgages. In a mortgage, your own asset is used as the backing for the credit created by the bank. The bank creates credit using the assets of its customers as backing. Look for something unusual in the table.

2014 Money Supply Government Debt Private Debt
€ billion € billion € billion
Belgium €522 €557 €818
Bulgaria 80 BGN €11.6 ?
Czech Republic 3882 CZK 1836 CZK 3814 CZK
Denmark 687 DKK 647 DKK 4675 DKK
Germany € 2797 €2170 €3183
Estonia €1.4 €2.1 ?
Ireland €215 €203 €500
Greece €162 €317 €231
Spain €1199 €1034 €1930
France €2255 €2038 €3833
Croatia 83 HRK 289 HRK ?
Italy €1458 €2135 €1957
Cyprus € 23 €18.8 ?
Latvia €12 (M2) €9.6 ?
Lithuania €24 €14.8 ?
Luxembourg €335 €11 €230
Hungary 19940 HUF 25430 HUF 36080 HUF
Malta €17 €5.8 ?
Netherlands €894 €451 €1574
Austria €306 €278 €473
Poland 1265 Zloty 203 1396 Zloty
Portugal €190 €225 €359
Romania 314 RON 255 RON ?
Slovenia €22.7 €30 ?
Slovakia €56 €40.3 ?
Finland €158 €121 €354
Sweden 2992 SEK 1347 SEK 9748 SEK
United Kingdom £2636 £2055 £2899
Norway 2028 NOK 596 NOK 6785 NOK
Euro area (19 countries) €9292.6
EU (27 countries) €12058
EU (All Sectors) €10304 €16592
Total Debt Europe €28650.4
Source: 2014 Government Debt from Eurostat, 2014 Private Debt from BIS, 2015 M3 from Trading Economics. This was tedious to put together. There may be transposition errors, errors in the source data, and unit errors. Use this as a comparison exercise only.

You may have noticed that all these countries are in debt. None are in credit. All countries are in debt. Have a look through this table. Is there a nation that can pay off its debts? If they attempted to pay off the debt, they would have no circulating medium in the economy.

Debt in Europe

Spot the country with no debt in Europe. There isn't one. Money is a freely created commodity, but they are all in debt.

The CIA World Fact Book describes the situation in Greece in this way: “The Greek economy averaged growth of about 4% per year between 2003 and 2007, but the economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and Athens’ failure to address a growing budget deficit.” The fact book blames the recession on the “world financial crisis” as if it was the fault of the ‘world’ and not the banks. They also mention “tightening credit conditions” which is a smart way of covering for the bank’s failure to maintain an adequate level of credit in the Money Supply. “tightening credit conditions” means a moneylenders refusal to issue credit. Their refusal causes a disastrous fall in the supply of credit. The banks have been careful to promote their situation with statements such as: “keep the central bank free from political influence”. The government lost influence over the Money Supply a long time ago. The suggestion is that the fault lies with the government and the people. Yet, 82% of the Money Supply is the credit supplied by banks. Only 18% of the Money Supply is Cash Currency supplied by the ECB. [3] Bank’s lending practices have over four times the influence on the Money Supply compared to the measly supply of paper notes issued by the ECB. The moneylenders simply destroyed the Money Supply. The government had its hands tied behind its back. Even if the government had some financial levers to pull, the politicians rely on the ‘advice’ from the generous hearted bank lobby.

A graph of Money Supply for the Greece. Graph by Andy Chalkley. Creative Commons Attribute

The budget deficit was not a failure on the part of the government. The banks stopped lending. The Money Supply fell. Credit dried up. Business dried up. Tax collection from dead businesses dried up. Tax collection from out-of-work citizens dried up. Less tax was collected. The deficit increased. The government got the blame when it was all due to the actions of the banks and their destructive lending habits.

The Deficit

Up until 2008, the budget deficit was a little on the high side but not excessively so. Typical analysis rather assumes that deficit is a bad thing. This is an erroneous assumption. The government is responsible for ensuring that there are sufficient tokens circulating in society to enable the trade between humans that sustains city life. Years ago, when governments created the circulating medium, the government would spend into society. Taxation occurred to prevent an oversupply of tokens. Remember that tokens can be created in any quantity at no cost. At that time, taxation was not revenue because fresh tokens could be created by the treasury in any quantity on an as-needs basis. When King Charles lost his head and William of Orange agreed to borrow money instead of creating money, the money game changed entirely. A brake was put on the government spending. But the principle still applies. The government is responsible for ensuring that there are adequate tokens in society even though it has no way of achieving this. Taxation is now called revenue which implies that revenue is income, which it is not. However, we are stuck with this conundrum and an economics fraternity that believes what it was taught. Deficit is not an evil. Deficit is natural. Deficit is normal. An excessive deficit is a problem. I have no definition of ‘excessive’ at this stage. Let me guess at five percent of something. The something is probably the GDP, but even that is a bit wobbly. It also depends on other factors. If the volume of credit provided by the banks is insufficient, then it is incumbent on the government to increase the volume of money tokens by increasing the difference between expenses and taxation. Unfortunately, this is called ‘deficit’ which has a negative connotation. Deficit is good, not bad. Deficit demonstrates government determination to increase the circulation and push the economy. When the banks stop the supply of credit in a manner to cause hardship, deficit is a sign of a responsible government. When the banks irresponsibly stop the supply of credit, the government needs to act quickly to bolster the economy by deficit spending or by taxing Hoarded Money to enhance the volume of circulating money. Unfortunately, banks and economists encourage the opposite.

When the banks destroyed their credit component of the Money Supply, it made it impossible to reduce the deficit in Greece. Thankfully, the government maintained a ‘difference’ for a while until they were forced to destroy the economy with IMF encouraged austerity. The evils of Austerity Economics assisted with the destruction of the Greek economy. If a nation is to rely on a high proportion of the Money Supply as credit issued by private banks and those banks fail to maintain the credit portion of the circulating medium, then it is necessary for the government to increase the Money Supply or increase velocity. In the following table, you can see that the norm is to have a deficit. We need to change the word ‘deficit’ to ‘difference’. I selected a few records for you to browse.

Government Deficit as a Percentage of GDP
200420052006200720082009201020112012201320142015
EU (28 countries)-2.9-2.5-1.6-0.9-2.4-6.6-6.4-4.6-4.3-3.3-3.0-2.4
Germany-3.7-3.4-1.70.2-0.2-3.2-4.2-1.00.0-0.20.30.7
Ireland1.31.62.80.3-7.0-13.8-32.1-12.6-8.0-5.7-3.7-1.9
Greece-8.8-6.2-5.9-6.7-10.2-15.1-11.2-10.3-8.8-13.2-3.6-7.5
Spain0.01.22.22.0-4.4-11.0-9.4-9.6-10.5-7.0-6.0-5.1
Italy-3.6-4.2-3.6-1.5-2.7-5.3-4.2-3.7-2.9-2.7-3.0-2.6
Lithuania-1.4-0.3-0.3-0.8-3.1-9.1-6.9-8.9-3.1-2.6-0.7-0.2
Portugal-6.2-6.2-4.3-3.0-3.8-9.8-11.2-7.4-5.7-4.8-7.2-4.4
Romania-1.1-0.8-2.1-2.8-5.5-9.5-6.9-5.4-3.7-2.1-0.8-0.8
United Kingdom-3.4-3.3-2.7-2.9-4.9-10.2-9.6-7.6-8.3-5.7-5.7-4.3
Data: Eurostat. Code: teina200.

The figures are high for Greece because the GDP was destroyed by bank action.

Here you can see that the deficit was tolerable until the banks destroyed the Money Supply:

A graph of Revenue, Expenditure, and Deficit for the Greece. Graph by Andy Chalkley. Creative Commons Attribute

When the Money Supply falls, a recession follows. The ensuing depression destroyed the GDP as shown in the following graph. Most tax is taken as Income Tax, Company Tax, and Sales Tax. These taxes rely on successful business transactions. With a fall in business transactions, there is less tax collected. At the same time, there was an upward pressure on government expenses as unemployment rose and more guns were potentially needed to potentially shoot the new welfare recipients as they protested. So the quote component: “Athens’ failure to address a growing budget deficit.”, is also inappropriate. If the Money Supply falls, there is no escaping a budget deficit when tax depends on transactions. If the banks stop the issue of credit, it is essential for the government to spend, spend, spend and borrow. The IMF persuaded them to do the opposite.

In this next strange graph we can see the devastation inflicted on the GDP by the failure of the banks to maintain the credit portion of the Money Supply. It is in USD because there is more data in USD:

GDP Greece. Graph by Andy Chalkley. Data: Eurostat. Creative Commons Attribute

Here is another graph of the fall in GDP but in euro and over a shorter timespan:

GDP Greece. Graph by Andy Chalkley. Data: Econostat. Creative Commons Attribute

As the GDP falls, the Tax Revenue falls. When the GDP falls, there are far fewer business transactions occurring. Businesses are downsizing. Businesses are closing. People are out of work. The result is a fall in tax collection by the government:

A graph of the Tax Revenue for Greece. Graph by Andy Chalkley. Creative Commons Attribute. Data:OECDstat https://stats.oecd.org/Index.aspx?DataSetCode=REV

As the GDP falls, the unemployment rises as shown in this next graph:

GDP Unemployment. Graph by Andy Chalkley. Creative Commons Attribute. Data:Greece Unemployment API_SL.UEM.TOTL.ZS_DS2_en_excel_v2.xls at World Bank

Unemployment is caused by a lack of jobs. A lack of jobs occurs because there is insufficient money circulating in the economy. There is insufficient money because the banks are issuing insufficient credit to maintain the money supply and the money that does exist is hoarded by those with economic privilege. 92% of money is hoarded in Greece by swimming pool owners lucky enough to be in a position to hoard.

The magnitude of the Money Supply needs to rise at a slow steady pace for a healthy economy. It should neither rise too quickly, nor too slowly. As the major part of the Money Supply is bank credit, (82% at 2016 [3]) a steady supply of fresh credit is needed to replace loans that are repaid. In the following graph, you can see the erratic credit creation of the private banks:

Bank Lending and Credit Private Sector Change for Greece. Graph by Andy Chalkley. Creative Commons Attribute Data: Bank of Greece

One thing that you cannot trust banks to do is lend in a steady manner for the benefit of the nation. Private banks lend for profit. The private banks do not like the government to be in competition, but when left to control the supply of credit to the nation, they become erratic in their lending. Some pretense at controlling the supply of credit is made by using a central bank. However, the central bank gives a beautiful illusion of control. The cyclical nature of lending by private banks can be overcome by using a public bank. The public bank can lend in a procyclical manner that maintains the level of credit when the private banks fail to do so. A public bank would fix the money problems of Greece within one year.