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The Banking System is essentially a clearing house for settling trade exchanges
in monetary terms and for matching capital needs with supply, e.g. Postbank, Trust banks
and finance companies. A single national institution could (some say should) fulfil the
function, avoid the need for a Reserve Bank and thus isolate the remaining inflationary
factor which is outside the banking system. The banking system including the Reserve Bank,
can only deal with cards given to it by Government, including the wild card of unearned
gains. No bank can sift out the unearned gains element from countless transactions each
day. Nor is it their responsibility.
Savings with a bank intended to finance loans to other parties for chattels on hire purchase,
working capital, overdrafts, credit cards etc is a legitimate use of the medium of exchange.
Monetising a tradeable unearned gain abuses the medium. Financing the purchase of another
misuses it. Currently, the several functions confuse it. Defining the basis for the currency
is the Government's role. The value of an artificial privilege convertible into cash is not a
legitimate component of the currency base, but it is not the role of the banking system to
distinguish it.
Bank loans as such, like credit cards or Bills of Exchange have to be repaid, normally from
earnings. They are not in themselves a permanent, artificial, unproductive expansion of the
currency.
In N.Z. Banks, like finance companies can only lend the deposits made with
them¹. The Reserve Bank requires a proportion of these deposits to
be lodged with it (currently 10%) as a means of constraining lending. If their lending exceeds
that proportion of their deposits (90%) then they must borrow from the Reserve Bank (or other
banks) sufficient to validate the excess². The overnight interest
rate charged by the Reserve Bank sets the benchmark interest rate (O.C.R—Official Cash Rate).
Some Governments have been known to apply 100% reserve ratios to offset the effect of their
Budget Deficits as far as maybe. Certain capital reserves are also required.
Money is not some separate, elusive quantum which has to be controlled, and somehow has to
service countless transactions from very small to very large. The technical term
Money Supply³ of M1, 2, 3 is a small liquidity sequence,
not to be confused with the supply of money4
Money is essentially a measure of the relative labour content of goods and services permitting
the exchange of consumables, perishables, or durables, now, progressively or later. It assesses
the relative value of the labour content, whether of brain or brawn, applied by the seller or
avoided by the purchaser, for exchange purposes. Even gold has a dollar price, for these reasons.
When the capitalized value of a gratuitous licence which has no labour content, but does have an
effective purchasing power and exchange value for the labour of others, is introduced to the labour
exchange process, then the measure is thereby expanded but with no corresponding increase in the
goods and services. That's inflation. Too much money chasing too few goods; future
money but only present production. Over time the goods and services diminish in value whereas the rights appreciate,
compounding the effect.
The valuable licences or tradeable rights become part of the indiscriminate exchange of goods, services
and equities, all freely interchangeable, quantified in dollar terms, and convertible into cash, as maybe
minimally required. Electronic transfers now replace cheques, paper notes and coins. Whilst it may be
interesting to quantify M1, 2, 3 and the velocity of circulation, it cannot influence the external rogue
factor which drives them.
| Earnings $ |
+ |
Non Earnings $ |
= |
Total Money $ |
| Goods & Services |
+ |
Tradeable Rights |
= |
M1 to infinity |
| Cash & Cheques |
+ |
Certificates |
= |
Cash, cheques &
Certificates, all in $,
Interchangeable freely |
"The Reserve Bank can't directly determine the total amount of money there is in New
Zealand. But it does control the banking sector's key source of cash."
(RB on Inflation).
If the Reserve Bank temporarily corners some of the system's current assets, it reduces liquidity and so
stifles trade. This inhibits the unearned gains that expand the currency but it does not eliminate them.
The trade in power shares, which is demonstrably inflationary, has not been stopped. The significant,
gratuitous profits and the share values are a fiscal factor expanding the currency.The Stock exchange should reflect productivity without being all mixed up with the fortunes of those who own "The Economy."
It is not the Reserve Bank's province to set wage rates, interest rates, exchange rates, rent or the
price of anything. These are economic not fiscal matters. Relegating to the Reserve Bank
responsibility for "price stability" is a misleading abrogation of the Government's own responsibility
to deal with the currency inflation that causes the price inflation. Nor is the Reserve Bank
accountable for Government misuse of Reserve Bank credit. As above, the Reserve Bank often, appropriately, explains its statutory limitation.
1. In other countries this constraint does not apply. As a commercial risk
privately owned banks lend 8 or more times their Deposits. This multiplies
the inflationary and social risk from failure elements. The Federal Reserve,
World Bank (51% owned by the US Treasury) and I.M.F are also privately owned
by the Banks.
2. A fall in land values nullifies this constraint. Hence the Deposits Guarantee
Scheme now in place.
3. The Money Supply:
| M1: |
notes, coins and cheque accounts; |
| M2: |
call deposits |
| M3: |
term deposits; as a liquidity sequence. |
The NZ Monetary Aggregates (ex RBNZ)
M1 is only 3% of M1, 2, 3 which totalled $280bn in Feb 2007 and could not possibly be the basis
for every transaction.
4. Money:
- as a medium of exchange:
- Money is a medium of exchange, a standard of value, and a store of wealth. It is not
just notes and coins, but anything used to effect transactions denominated in terms
of money.
- There is no unique practical definition of money!
- The quantity of money will move in proportion to the value of the transactions(!)
- Since money represents generalised purchasing power, it might be linked over time with
the nominal value of total spending and output of goods and services in the economy.
- RBNZ G94/5
- The CPI and GDP influence M1, not the other way.
- M1 grows in line with nominal income growth.
- Short run M1 growth is influenced by equity returns growth.
- M1 does not lead development in the real or nominal economy. Thus M1 growth implies
nothing for future output growth or inflation.
- The Money Supply is not determined by the central bank.
- M1 growth is determined by output growth and inflation. In the short run the stock
market plays an important role.
- M1 is found to have no empirically relevant influence on either output, growth or
inflation.
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