The world's expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum … This doubling of existing credit levels could be achieved without increasing the risk of a major crisis, said the report from the WEF ahead of its high-profile annual meeting in Davos. But researchers warned that leaders must be wary of new credit "hotspots", where too much lending takes place, as the world emerges from a financial catastrophe blamed in large part "to the failure of the financial system to detect and constrain" these areas of unsustainable debt. … Regulators, and policy makers need more robust indicators of unsustainable lending, risk, and credit shortages. – UK Telegraph
Dominant Social Theme: Banks and bankers lead the way.
Free-Market Analysis: There is always a need for banks and bankers. We're not surprised. We are on record as stating that one of the power elite's most critical dominant social themes is the necessity for the banking industry, including most importantly central banking. Thus it is, in the run-up to its annual Davos affair, that the World Economic Forum has discovered that nations, especially impoverished ones, will need an extra US$100 trillion.
This certainly establishes the utility of the banking system – for what else could hand out major amounts of credit? Central banks will have to print money and commercial banks will have to distribute it, if they can. Of course the World Economic Forum is upbeat about these prospects. The doubling of existing levels of credit, it reports, will no spark a major financial crisis.
It does have some warnings, however, as the Telegraph reports. Those who lend must be careful "hotspots" where too much credit is being concentrated. The Forum offers the following analysis: "Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse." In order to guard against such developments, regulators will need more tools to determine leverage and inordinate risk-taking.
Of course this is not what we understand caused the financial crisis, which has effectively destroyed the 20th century dollar-reserve system. What we understand is that Western central banks, especially the Federal Reserve, printed money so furiously and expanded credit so rapidly that over decades dangerous financial imbalances built up and were discharged in 2008 in a tremendous, urgent bust. Central banks have been reflating ever since. Issuing another US$100 trillion would probably enable the world's bankers to blow another bubble, thus floating the current system, or at least allowing for an orderly transition to a more globalized currency, which is apparently the ultimate goal.
The World Economic Forum seems to agree. Credit, we learn once more, is the lifeblood of the economy: "Much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential," the Forum explains. We learn that credit has jumped from $57 trillion to $109 trillion between 2000 and 2009; fortunately, this ravenous demand can be met "responsibly, sustainably – and with fewer crises". The report was written in conjunction with consulting firm McKinsey.
One might be impressed with the foresight of the World Economic Forum in predicting this kind of credit expansion and with the confidence that the report shows in the banking sector. Even though US$100 trillion seems like a lot of money, commercial banks will find a way to make this sum available. All that is needed is a little more regulatory oversight and doubtless a little more transparency.
The additional oversight and the added transparency are treated matter-of-factly by the Forum's report. But there are others who might see it from a more urgent perspective. On the same day as the Forum's screed was offered, the chief executive of Virgin Money (a sister company of the airline) was providing testimony about banks to a British Committee. Here's how the Telegraph reported it:
Jayne-Anne Gadhia, chief executive of Virgin Money, told a meeting of the Treasury Select Committee that the UK's five biggest lenders had an "effective oligopoly" and said more needed to be done to improve competition. "The consumer has not got much of a look in. The problem is that effectively with the oligopoly it was very difficult to get scale," said Ms Gadhia. Under repeated questioning from the MPs, Ms Gadhia declined to call for the forced separation of banks, but admitted that some form of break-up of the branch networks of the largest lenders could be good for customers.
In fact, the West's banking industry is probably the world's biggest bubble. Whole industries can collapse in the Anglosphere (car-making in America, for instance) and central banks may act only reluctantly. But let the financial sector begin to wilt and trillions literally are available at the push of an electronic button.
It is not just Britain's banks that constitute an effective oligopoly. The problem is much bigger than that. The West's larger banks constitute one as well, in our view. How could they not? They are borne of legal action, shaped by statist regulation and buttressed by endless waves of money-from-nothing.
Central banks – abetted by the awesome power of the state – print money with the touch of a button. Absent the market, there is no way of telling how much money is too much. The system is a boom-maker and a bust creator. And since central banks cannot provide this money directly to consumers because then the system's fraud (what else is there to call it?) would become apparent, they distribute through commercial banks and are loath to lose a single one.
Yes. central bankers need their commercial banking distribution arm and will do whatever it takes to keep it. So far, within the context of the 2008 financial crisis, we have estimated that sustaining the financial architecture has cost Western central banks between US$20 trillion and US$50 trillion.
Most people in the world today, especially the West, still cannot conceive of a different type of money system than the one we have today. But in fact, the system that is in place now is merely a distorted, "fun-house" reflection of what once was. It is like a kind of Cuckoo Bird that has climbed into a nest, settled in and destroyed whatever was there previously.
Many of the rituals of private banking remain, but not the substance. Money is still counted and recounted by the teller, but it is no long backed by substance. The bank loan officer is difficult to convince, but actually once the bank loans money it creates MORE of it in a fiat-money environment. In a sense, the money is not at risk, or certainly not in an era of credit expansion. (And during a contraction, the central bank is there to print more money and liquify credit.) The private-money system that used to run the world has long since departed. Was it by accident?
Travel back in time. Banks began their lives as money warehouses and as these warehouses began issuing receipts for the gold and silver left in their coffers, the receipts gradually became "money" too, and circulated locally. Eventually banks began to issue receipts above and beyond their supplies of precious metals and this practice became known as fractional reserve banking.
Fractional reserve banking has been the source of much controversy, but here at the Bell we have regularly pointed out that if the practice is acceptable to the market then we cannot find fault with it. Historically speaking there have been many episodes of fractional reserve banking (unfacilitated by the state) so far as we can tell. It is also known as free-banking.
At the same time as receipts circulated as money, another monetary breakthrough took place: Real Bills were evolving. Just as warehouse receipts were a way of creating money, so Real Bills were apparently a way of creating credit. Industrial sellers issued them to buyers, if the buyers did not have cash-on-hand. Real Bills thus greased the wheels of commerce throughout the West. We have just finished a lengthy email correspondence with Ingo Bischoff, who has studied the evolution and application of Real Bills. Bischoff is the founder of the "Georgist" San Francisco School of Economics. You can read his previous Daily Bell interview here: Ingo Bischoff Interview.
Our email exchange (abetted by other perceptive feedbackers) took place on the thread beneath our recent interview of Ellen Brown. Real Bills are a most controversial subject within hard-money libertarian circles, but it seems difficult (impossible?) to deny that they circulated prior to the 20th century and perhaps in great quantity. They may not be so well known to money historians today because they were the tools of industry and their circulation was never so broad as warehouse receipts.
Here's Bischoff's explanation of Real Bills as posted toward the bottom of the Brown-interview thread: "There [were] no money warehouses for Real Bills. Individuals acquired Real Bills from a business or a holder. The [holder] either discounted them again or they held them to maturity for payment. Commercial banks discounted them, created a redeemable currency against them and held them until maturity for payment. However, since Real Bills expire after 90 days, for a commercial bank to stay in business, they had to be constantly scouring for Real Bills to discount."
It is very sad how much knowledge has been drained from the Western world regarding money, and in only a century or so. Prior to the current, mercantilist, central banking economy, there was a whole intricately developed private money system, complete with gold, silver, warehouse notes and Real Bills ("Bills of Exchange").
The powers-that-be behind the explosion of government-centric central banking in the 20th century have not only reduced this system to a dim memory, they have industriously scrubbed its existence from history books and educational texts. Today powerfully educated academics and financial magnates alike have no idea of how the world operated only a century since. The mechanisms of public banking and state involvement at all levels of finance seem normal to them.
It is really incredible that not more than 10 or 12 decades ago there was a world-spanning private money-economy that the current system has supplanted – and ruinously so. The vast, teeming "banks" and financial firms of the 21st century are nothing but the effluvia of statist central banking itself. It is probably safe to say that if a private money marketplace were to return, a good deal of what constitutes commercial and investment bank activity could be jettisoned.
The World Economic Forum many proclaim that US$100 trillion in new credit is necessary over the next decades, and that only the current banking system is able to provide such a massive amount of currency; but those who bother to study the emerging history of money available on the Internet will soon be informed otherwise. There are alternatives to the current boom/bust financial system with all its terrible stimulation and horrible contractions. There is another, better way. Time has obscured its lineaments; but the Internet uncovers them.