The image and the post title are from a book review by David Fields at Naked Keynesianism. The book is The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China, by John Bellamy Foster & Robert W. McChesney.
Fields writes:
... As such, what has taken place is an historical transformation towards the process of financialization. With an inability to absorb effectively economic surpluses, concerning the promotion of rising wages along with productivity, NFCs, or non-financial corporations, are coerced to paying a larger share of their internal funds, specifically via debt leveraging (including consumers), to financial institutions. These financial institutions, which are increasingly concentrated in the hands of fewer and fewer people, have become some of the most powerful actors...
Borrowers borrow. Savers save. When borrowers repay, some (perhaps most) of the payment stays in finance. Fewer funds circulate. More borrowing is required -- more than before -- just to sustain the same level of economic activity as before. The natural pattern that arises is that money accumulates in finance until the economy can no longer sustain economic growth. And then we have a problem.
11 comments:
Art wrote: "Borrowers borrow. Savers save. When borrowers repay, some (perhaps most) of the payment stays in finance. Fewer funds circulate. More borrowing is required -- more than before -- just to sustain the same level of economic activity as before."
More borrowing is required because there is more and more saving due to savers leaving the money in the financial system and the savers are increasingly demanding the security of a fixed guaranteed return on those savings.
"It is better to have a permanent income than to be fascinating." - Oscar Wilde
Better for those that have it. Not better for the economy.
James, you said this:
More borrowing is required because
1. there is more and more saving due to savers leaving the money in the financial system and
2. the savers are increasingly demanding the security of a fixed guaranteed return on those savings.
I'm not sure if I'm supposed to give #1 and #2 equal weight, or if you are saying #2 is an important consequence of #1 (which makes #1 more important).
I agree and/or assert that #2 is a consequence. Demand for security increases when financial troubles emerge, which happens when finance grows too large, which happens when more and more money stays in the financial sector.
I think it is a bit of a chicken and egg scenario. The financial sector growth is due to growth in savings which is due to savers leaving more and more of the savings in the financial sector.
Financial sector growth means the financial sector is the most indebted. If everybody suddenly wanted to liquidate the money the financial sector owes to them, the financial sector would be instantly insolvent.
"The financial sector growth is due to growth in savings..."
To me, financial sector growth is due to the growth of outstanding debt. It is from debt that the financial sector makes its income. Not from savings. Interest paid on savings is money that has some chance of coming out of the financial sector, which would make it smaller.
The growth in outstanding debt is made possible by the growth in savings. The financial sector pays interest to attract more savings without which it cannot expand outstanding debt.
"The growth in outstanding debt is made possible by the growth in savings."
Well that's good to hear.
But I still don't have a satisfying explanation of how that works. Every time I bring it up people tell me lending creates deposits. So I ask why banks try to attract deposits, but the answers don't help. And then, there is the problem with "the loanable funds theory"...
First of all, bank loans are only about 12% of the outstanding debt.
That 12% is a somewhat different than the other 88%, but it is, however, analogous.
Loans do create deposits, but the banks do everything possible to make it more convenient to put the newly loaned money back into the banking system rather than taking it out in cash. The banks need the additional deposit growth to make more loans.
If you look at the period 1929-1933 you can see what happens when depositors try to take their deposits out of the the banks en masse. Not only did this mean banks could not increase their lending , it also meant banks had to liquidate some of their existing loan assets to meet the demand for deposit withdrawal.
"The banks need the additional deposit growth to make more loans."
Yeah, but people tell me banks don't lend out deposits. So then, what do banks do with that money? and, why do they need the deposits to make more loans?
Maybe if a bank has the deposits, it has a claim on some quantity of reserves. But again, my thoughts have been interrupted by people telling me the bank does not need reserves to make loans.
I think there is a lot of confusion on these issues, and not all of it is mine.
Banks need depositors, but depositors need the convenience of keeping money in banks so it is unlikely that depositors will start moving there money from their bank to their wallets in any great numbers. The statement that banks don't need deposits assumes that deposit money is trapped in the banking system and the money can never get out. That is technically a false assumption, but as a practical matter that assumption can be considered valid.
However the other 88% of debt that is not bank loans
is much more reliant on the savers that are funding those debts. Savers pulling money deposited in those credit markets is a much more likely scenario. In fact that is exactly what started to happen in the fall of 2008 and the consequences of that run are still reverberating through the economy.
Maybe if a bank has the deposits, it has a claim on some quantity of reserves. But again, my thoughts have been interrupted by people telling me the bank does not need reserves to make loans.
I think there is a lot of confusion on these issues, and not all of it is mine.
We can sort it out. Staring with why banks want reserves to begin with. They use reserves for the final settlement of deposit transactions.
Consider a simple two-bank example. Over the course of a day customers of the two banks do business and make payments to each other. Bank A accumulates $5000 worth of claims against bank B. Bank B accumulates $5100 worth of claims against bank A.
At the end of the day the two banks get together for clearance and settlement. First, in clearance they net out their claims where $5000 of mutual claims cancel out leaving Bank A owing Bank B $100. Finally, they settle that $100 with a transfer of reserves from Bank A to Bank B.
This process of payment, clearance and settlement is the daily pulse of the banking system. Ensuring that a bank can always find reserves for final settlement is what allows the claims of both banks to always trade at par and what it means for a central bank to furnish an elastic currency.
While reserves can always be found, they come at a cost with three basic price levels:
1) Bank A can borrow $100 in reserves from the central bank, which is the most expensive.
2) Bank A can borrow $100 in reserves from Bank B, which is less expensive.
3) Least expensive, Bank A can lure deposit customers from Bank B which forces a transfer of reserves through the process of clearance and settlement described above. The cost and availability of the first two establishes a ceiling on how much a bank will offer in the way of inducements.
Being profit-driven, banks naturally prefer the cheapest option and that is why they want to attract deposit customers.
The first option is intentionally priced to discourage use of it.
The middle option is the federal funds market and that is where the bulk of activity takes place at a price the central bank sets as a policy target.
Notice how lending wasn't even mentioned. The role of reserves is entirely in the scope of settlement and regulatory requirement. Not lending.
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