1. Money and Inequality: Bath 2014

2. What is Money?

3. social construct Store of value Medium of exchange Unit of account Based on trust

4. Conclusion Above all, money is accepted by society as a call on its resources.

5. Money Creation “The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.” - J. K. Galbraith, Canadian economist

6. Creation of Money 2.6% is notes and coins All the rest only exists as entries in an account 97.4% has been created by banks, lending it into existence When a bank makes a loan, it creates a liability for itself in the credit it puts into the recipient's account and balances that with an asset which is the loan

7. Process of Money Creation Starts with lending, not saving Really banks’ role is accepting (guaranteeing the ability of someone to meet their obligations) Once they offer a loan, they create a loan instrument, which becomes their asset, and they also create a deposit in the recipient’s account (a balancing liability) That’s it!

8. The Myth of Fractional Reserve Banking In USA 10% of deposits required in reserves In UK reserves are variable depending on the perceived riskiness of the loan The problem is not whether banks have the right ratio of deposits to lending; but whether they are believed to be solvent by other banks, who will happily lend them extra themselves to meet their obligations to other banks. However, the idea of FRB is a myth, as Central Banks will lend extra reserves as needed until things go egregiously wrong, as with Northern Rock – but couldn’t apply to the bigger banks – the systemic consequences would be too great Too big to Fail is a reality

9. Asset Transfer Once the borrower spends the money, there needs to be a transfer of resources from the borrower’s bank to that of the recipient of the “money” This takes place within the BoE’s accounts. A regular settling of accounts takes place, whereby the net amounts are transferred between all the participating banks. If one bank is short of reserves in its account with BoE, they normally will borrow reserves from another bank at the inter-bank lending rate (Libor); failing that they borrow from the BoE, as “Lender of last resort”. All is fine so long as confidence is high…..

10. Massive Growth in Debt-based Money (1)

11. Massive Growth in Debt-based Money (2)

13. Quantitative Easing BoE creates money (Base Money (M0) with which it buys govt bonds from banks and others This increases the price of bonds, benefiting all bond-holders & reducing effective interest rate It also increases the liquidity of the banks for settling transfers between each other No direct effect on bank lending or on real economy

18. Mechanisms by which inequality fuels financial crises Sharp increases in debt-to-income ratios among lower- and middle-income households looking to maintain consumption levels as they fall behind in terms of income; The creation of large pools of idle wealth, which increase the demand for investment assets, fuel financial innovation, and increase the size of the financial sector; And disproportionate political power for elite financial interests which often yields policies that negatively affect the stability of the financial system.

20. The evolution of income inequality, 1960{2008

21. Inequality measures 1961- 2011/2

22. Key Points UK income inequality increased by 32% between 1960 and 2005. During the same period, it increased by 23% in the USA, and in Sweden it decreased by 12%. In the 1960s Sweden and the UK had similar levels of income inequality. By 2005 the gap between the two had increased by 28%. Since the 1980s income inequality in the United States and the UK has increased substantially and has returned to levels not seen since the 1920s. The growth in inequality in the last 30 years has been driven by the top 1% of wage incomes.

23. Key Points (2) Inequality measures drawn from standard household surveys underestimate income inequality by as much as 10 percentage points, due to the under-representation of the top 1% of incomes. There is scope for governments to tackle inequality. Large income inequalities are not inevitable; Sweden owes its high levels of equality to policies introduced since the 50s.

24. Distribution of Bank Lending 1997-2013

25. Relative distribution of wealth drain from banking sector

26. What is Contribution of Money System to Inequality? With 97% of money borrowed into existence, interest is being paid by someone for all of that. This flows to the banks. Bank lending goes primarily to asset purchase, resulting in an increase in value of existing assets (owned exclusively by the haves, whether this is housing, shares or more exotic financial instruments). Financial crises lead to recessions in the real economy. Unemployment and pay restraint hits lower income groups more heavily, leading to a further increase in inequality. Recessions result in a fall in government revenue. Cut-backs in government services always hit the poor harder than the rich. So post- tax and post-benefits income distribution becomes even worse. Bank lending at present is highly “pro-cyclical”, ie banks will lend any amount they think can be repaid, but their expectations are based on economic conditions. In a boom they lend more and in a recession they lend less.

27. Fiscal consolidation - Budget deficit reduced, on average, by ~1% GDP in each case - Decline in budget deficits followed by rise in inequality - Why? -Social benefit and public sector wage/employment cuts disproportionately affect lower-income groups -Long-term unemployment reduces earnings Source: IMF, 2013

28. The Banking System Money system ‘on loan’ – interest being paid on most of the money in the economy House prices are pushed up by ‘loan money’ Stock market bubbles created Fear and envy are created Source: Positive Money

29. Conclusions – Bank lending Thought experiment Lending at interest requires perpetual growth in money supply to make repayment of loans and interest possible. Requires (at present) perpetual growth in debt As debt becomes ever greater in ratio to GDP, increasingly unstable Greater GDP only way to reduce debt ratios This is clearly unsustainable – need to find a new way to run financial system