Saturday, August 20, 2016

Bank of England and Ex Nihilo Credit Regime

I hope this is clear:

Once upon a time, people would build a mill financed by a collection of homeowners whose homes were at risk if the credit (backed by the homes) could not be repaid by the revenue from the mill's operation.   There was some reward in building a mill and getting an agreed percentage of the income from the mill for having financed the mill, not to mention the fact that a mill also helps build up a community.  Think of the probity and due diligence in such an arrangement, with direct skin in the game.

An individual may do this as well, if his resources commanded enough credit to back such a project.  Again, this is a business arrangement.  It was either a joint venture, or a sole entrepreneur.  Everyone had skin in the game, no loans involved.  Especially no loans at interest.

Such business arrangements are creative and unitive.  They create something good, the unite the community.

Today a bank, as you see in the essay to which I link here, lends absolutely nothing.    Please note, as usual, they say "money" when they mean "credit."  Funny thing is, bankers are quite careful with these terms when they discuss business among themselves, but switch to confuse-ish when they communicate outside of the banks.

As mega-economist JK Galbraith said:
‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5  J. K. Galbraith
Indeed, and nothing is more fundamental to the deception than calling credit money.

In spite of backed by nothing, as the cited essay notes, that credit does call forth goods and services.  He who provides the goods and services wants to be paid, and is paid, in credit (not money!)  Credit against whom?  For the credit was created ex-nihilo.  "We owe it to ourselves" comes the answer.  That answer is actually quite true, but disguises the implications.  In essence, ex nihilo credit is the apotheosis of capitalism: privatize the profits, socialize the losses. The Hegemon's minions get the profits, we get the liability, the losses.  We owe it to ourselves.

Yes, a mill is built, as are bridges to no where and wars for profit and defense against blowback, and Tuskegee experiments, are all financed as well backed by absolutely nothing.  Yes, there are also homes financed this way, backed by absolutely nothing.  But what homes?  To whom?  Where?  Although economics prides itself on being a value-neutral science, it is the branch of study that produced the term "moral hazard."

We, ourselves, make good on the ex nihilo credit extended with inflation, a degradation of  current goods and services although the prices remain constant, we pay for it by less in terms of wages, as the fruit of our labors is diverted to paying down what "we owe ourselves."  When that credit is maxed out, we borrow, from say the Chinese.  And when that is maxed out, we pile the debt on to future generations.  Now note, for all of that, there is no money.  It is all credit, ex nihilo credit.

But here is the problem.  With bank credit created ex nihilo, by charter from the Hegemon, the range of goods and services that may be called forth is not the same that would be called forth in a money-based economy.  There is no probity with ex-nihilo credit, only politics.

It is an undisputed fact that Nixon went off the gold standard (lite) because the Vietnam war was bankrupting USA.  The first thing we bought on ex nihilo credit was 4 more years of defeat.  Then we got around to other things no sane people would finance: Fukushima nuclear power plant in 1976, and the other USA power plants, and so much more.  But but but, Fukushima is in Japan!  Yes!  And EximBank lends ex nihilo credit to Toshiba so Toshiba can buy from GE that in which no sane person would invest: crazy dangerous unstable massive nuclear power plants in an earthquake and tsunami zone.  Am I editorializing?  How come GE requires 100% indemnification on every plant it builds?  Because they are safe?  No.  Upon whose account is this liability placed?  We owe it to ourselves!

What could go wrong?  Nothing.  Because by the time something does go wrong, all the players are retired.  Mistakes were made, let's move forward.  As with all ex nihilo credit projects funded, the profits are privatized, the losses are socialized. Political agenda advanced.  And it gets better: with no government backing, Toshiba has come up with a free market micro-nuclear power plant that meets the needs of small communities.  Its safety and affordabilty has caused quite a stir, but, given regulatory capture, the regulators make sure we won't see safe nuclear power soon.

And since ex nihilo credit is a provision of the Hegemon, it is lent within bounds set by the Hegemon.  It is not price signals and the market deciding what assets are allocated to what needs, it is an auction by the Hegemon to rent-seekers who have what projects they will pursue at what interest rates. The winners are those whose projects at that price intrigue or delight the Hegemon.   Hmmmm...  a billion to advance frankenfoods?  Sold!  War?  You bet.  Bailout the banks? Existential imperative.  Domed stadium?  Of course!

Banking has become a completely distorted program of granular work in this regard.  We no longer have banking in USA. The lowest, closest form of banking to the market, the credit union, is no longer a credit union.  It's just small.

Now, should any of these not pay off, well, the bank does not want "nothing" (that which it put at risk, nothing), nor does it want your house.  What it gets is for as long as it takes, backed by law,  is a repayment out of your income stream what it anticipated in giving you a loan of nothing for something for which you come to learn you cannot pay.  Now you are trapped, enslaved if you took the student loan bait.  And it cost the Hegemon absolutely nothing, because we owe it to ourselves.

See the difference?  Usually, if a loan goes bad,  the lender loses something.  With capitalism, if a loan goes bad, the lender loses absolutely nothing.  You lose the house, but you are obliged to still pay for it, or go bankrupt.  if you go bankrupt, it doesn't cost the bank anything.  they already have a reserve for bad debt built into their system, and the write off of your debt simply restores the bank's ability to  lend again, given the reserve requirements of fractional reserve banking. Student loans are special cases, those who seek education become slaves if they cannot pay back the loan.

Now, if you understand this, can you see it is not the money lent they want back, since no money was lent anyway, nor does getting paid back nothing for nothing mean anything.  Nor do the banks want the house.  What they want is your income stream, a percentage thereof, for nothing.  And that is precisely what they get as long as you are solvent.  And if you become insolvent, they don't care.

So can you see yet how it is interest, and not merely the FED, or lending nothing for something that is the problem.  It is interest paid, usury, defined as any amount for any time at any rate, that is the problem.

As Galbraith said, the point is to disguise.  And with the vast majority of economic activity based on ex nihilo credit, the vast ocean of commentary is oriented to the extant regime. But this evil regime is no secret, it was easy enough for me to figure out.  For most of history people pointed out this baleful tendency. That Bank of England explanation above is quite honest, but it is rendered impotent by calling ex nihilo credit "money."And once you know, you can estimate with probity what will work or not work, to your benefit.

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