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“Remember, that credit is money.”

 

-       Benjamin Franklin.

 

 

About 15 years ago, an older relative who enjoyed considerable status and influence within her local community expressed some surprise about how her bank account operated. She had always assumed that the banknotes that she deposited within her account would literally be kept in some kind of vault for safe keeping and left untouched. She fully expected to see the very same notes whenever she made a withdrawal. The idea that her money would be reused and lent on by the bank – and that the bank notes that returned would not likely be “hers” – came as something of a revelation to her. (Quite how bank depositors manage to earn interest was evidently not something that she unduly worried about. But given that current savers now earn essentially nothing, perhaps her lack of concern on the topic is more widely shared.)

 

Banks and banking are certainly poorly understood. Given the severity of the crisis, we can say with some confidence that banking is poorly understood even by bankers. The widespread unfamiliarity with the workings of the banking system may even be a good thing, for a while. For as Henry Ford once said,

 

“It is well enough that people or the nation do not understand our banking and monetary system for if they did, I believe that there would be a revolution before morning.”

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Comments

[Tradebot]

Hi Tim,

Insigtful analysis as always. I have been long worried about the huge influx of Gov't funding at artificially low rates - which has historically always led to unintended consequences. Emphasis : ALWAYS. I think we are now building a massive bubble in long dated (5+years) bonds - for both credit and Govts.