“If money is created by the banks, the next question is, how much money is created and for what purpose it is used. The use decides on the effect of this money creation by the banks. If the new money is used for consumption – i.e. if banks grant consumer credit – then of course there will be an inflation of consumer prices. This is easy to understand and well known, because if you create new money and use it to buy the same amount of goods and services, this increase in demand will lead to higher prices. This is well known as a problem and has therefore been kept under control in many countries since the 1970s, because the central banks have been paying more attention to it.
But apparently they are not paying attention to, or at least they like to encourage, banks generating credit – and thus money – to be used for financial transactions. So a lot of new purchasing power is created through creation of credit, which is used specifically to buy assets already in existence. This is the most common use of newly created bank money in many countries, such i.e. in the UK. So now we have more purchasing power to buy assets such as real estate and financial papers, but in the short term the number of assets is unchanged; therefore we obviously have to expect inflation of asset prices as a result. This leads to the formation of economic bubbles, and this development will continue as long as banks keep pumping new money into financial speculation through lending. It seems to resemble the game ‘Journey to Jerusalem’. The music plays, you walk around the chairs. As long as the music is playing (i.e. the creation of credit is running), you have to keep on running – or ‘dancing’, as the Citigroup CEO puts it – i.e. investing in financial markets. And as long as everyone keeps dancing around the chairs, you do not notice that there will not be enough of them when the music stops playing. So Chuck Prince of Citigroup said: ‘The music is playing, and we are still dancing’. But when the music stops playing and you want to sit down, it turns out that there are hardly any chairs left. The insiders have already taken hold of most of them, and they are all occupied. This means that those speculators who entered this game of speculation late will not take the expected capital gains. Because when the music stops, this means that the creation of bank credit for speculative purchases stops. But it is precisely because of this creation of bank credit for speculative purchases that asset prices have increased to such an extent. So there will be no more rising share and real estate prices as in Germany today – these prices will fall. The late speculators can no longer pay back their loans and will go bankrupt. Then the banks will grant even fewer loans, and the asset prices will continue to sink. This will lead to even more bankruptcies.
Banks themselves will soon be bankrupt because they have little equity on their balance sheets – usually less than ten per cent. In a financial bubble driven by bank credit creation (this applies to most financial bubbles), assets are usually inflated by several hundred per cent. But if they fall from this peak by only ten per cent, then the banks, which underpin all this with their loans, are basically bankrupt. So you can see that this will then happen quite quickly.”
Source: Werner, Richard. Gefahr im Anzug – Die Gegner des Genossenschaftswesens und ihre Vorgehensweise (Danger brewing – The opponents of the cooperative system and their approach, in: Verlag
Zeit-Fragen (ed.). Mehr als eine Rechtsform. Die Genossenschaftsidee – Kulturerbe der Menschheit (More than just a legal form. The cooperative idea – cultural heritage of humanity), 2018, p. 20-44, ISBN 978-3-909234-24-0
(Translation Current Concerns)
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