What I found particularly revealing is the comparison between the increase in M3 since 1995 (€6.17 trillion) and the amount of interest paid to the banks by Eurozone governments in the same period (€4.5 trillion). It would appear that virtually 75% of the money injected into the Eurozone by banks has ended up back with the banks. And that's just counting the interest payments paid by governments. I have no idea what the total amount of money paid in interest payments would be if we inlcuded the payments made by businesses and individuals.
It's a similar story in the UK. The Bank of England provides numbers for M4 (a slightly different measure to M3) since 1982 (see here). Again we can see that the number has been ramping up rapidly, reaching a peak of £2.21 trillion in April 2010 before dropping back slightly to its current value of £2.07 trillion in March 2012. Here's the graph.
If you would like to know the values for M3 in the USA, then tough. For obscure reasons, the Federal Reserve decided to discontinue providing figures for M3 in March 2006. Apparently, they considered that the cost of collecting the data wasn't worth the bother. Since then, we have heard about the Federal Reserve secretly loaning $1200 billion to the banks at a very favorable rate of 0.01% interest. I suppose that could be a coincidence.
The next best figure for the USA, namely M2 (which doesn't include large time deposits, institutional money market mutual fund balances, deposits of eurodollars and repurchase agreements or repos) now stands at $9.9 trillion as of April 2012. I think we can safely assume that the full figure will be substantially higher since M3 in the Eurozone tends to be about 15% higher than M2.
When I think of the thousands of trillions of euros, dollars and pounds that have been created out of thin air by commercial banks over the past decade or so, I can't help thinking that the current economic crisis could have been avoided. If instead of allowing the commercial banks to create money with a single criterion, namely maximizing profits, we had used a system in which the money creation process was under the control of central banks and aimed at activities that provide benefits to citizens, then I am certain that the world would be a much better place.
Thanks Simon for this excellent entry. It provides the answer to a question that has been haunting me for some time: how much of the current crisis in Europe was caused by the creation of money by banks?
ReplyDeleteAs you know the dominant narrative of the crisis is that the peoples of the Club Med had been living above their means, while the virtuous peoples in the north were saving and working. The implicit when the establishment says that the people of Greece or Spain or Portugal must pay, is that the monies channeled to these countries were nothing else than the savings (now loanable funds) of the hard-working citizens in the north. Your data show that this is not so. The peoples of Greece, Spain and Portugal are being put to the test of the "lost decade syndrome" not because they squandered the savings of the virtious north, but because they cannot pay back the loans of "money from thin air" provided bythe banks. (And they cannot pay back for the simple reason that commitments made during episodes of asset price inflation cannot be repaid). Can you compare in your graphs where M1 is? Merci d'avance pour ta reponse.Alejandro Nadal, Cener for Economic Studies, El Colego de México.E-mail: anadal@colmex.mx and Private E-mail: sirius.iceberggmail .com