Steven Keen and the Roving Cavaliers of Credit
Posted by The Interest on February 8, 2009
Over at the naked capitalism, Yves cross posted with permission from Steve Keen’s Debtwatch blog a post titled Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit” (Now that we’ve got all of this crisscross out of the way…)
Keen’s point in all of this is that credit money is created first before fiat money. Put simply, the bank extends credit, but the fiat end where this money then gets deposited in another bank where credit can again be created doesn’t really work out that way.
What he is getting at is that money is almost always debt. A bank doesn’t wait for its deposits to increase for it to participate in fractional-reserve banking. Rather, it just creates the money, immediately, out of thin-air. Thus, our money supply is really a credit supply with the money part taking place later on in the exchange of goods.
His argument than is that there will in fact be credit crunches where banks no longer lend, but the idea that helicopter Ben can just add to the reserves of the banks doesn’t mean that this money will end up in the pockets of the people who then will spend it.
As we’ve started to learn hear at “Where’s the Interest?”, the velocity of money has a role in the nominal money supply where $1 can be used in many transactions thus increase the apparent money in the system. What Keen is saying though is that velocity and nominal money supply is a follow-on phenomenon of credit creation and without more credit creation, velocity will surely slow.
Thus, getting back to “Where’s the Interest?”, is there less nominal money available in the system to even produce the interest need to pay on debts? More research is needed.
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