Posted Jul 7, 2014 by Martin Armstrong
The Swiss are getting a bad reputation for starting to have some off-the-chain socialist nut-job groups who obviously do not understand humanity, desire to suppress it and control it, and never bother to investigate an issue before blurting out solutions. The latest proposal is to effectively destroy banking completely assuming that leverage is the problem. They obviously do not understand the difference between a Dark Age and Economic Freedom. They also fail to comprehend the history of banking or even what is really money.
These Socialist-Swiss are trying to move to what they call a Full-Money Initiative with the goal to break the power of the banks and send us all back into the Stone Age.. This new proposal is the referendum on the money order. In the future, these socialists only want the Swiss central bank be allowed to create money. Commercial banks may grant loans then only if they are backed by 100% sufficient reserves at the central bank. They clearly do not understand even the problem for they think this will suspend the Business Cycle. In their deranged and uneducated minds, they assume that it is the uncontrolled expansion of the money supply that creates financial bubbles. Interest would soar to 20% if not more without any leverage and real estate would collapse for the total value could never exceed the money supply. You could not buy a house on time.
We are plagued by these people who do not understand what is MONEY and they think they are targeting the problem of bubbles. They want “sure money:” They assume that just because whenever a commercial bank makes a loan based on securities and real estate, this is the problem. This is called liquidity and if someone could not borrow against such assets, governments could not sell debt. OOPS! Looks like half-thinking again.
The leverage from banking is a problem when banks are also proprietary trading. The problem that resulted in the original design of the Federal Reserve was rather simple. Banks use demand deposits to lend long-term based upon the model that ins NORMAL times, at best 10% of the total demand deposit is more than enough for reserves. In other words, not more than 10% of all depositors will withdraw their money under NORMAL economic conditions. The bank failure (aside from proprietary trading) takes place when some economic event shakes confidence and people then rush to the bank to get their cash placed on demand. The bank is borrowing short-term and lending long-term. This mismatch creates banking failures since they cannot liquidate the assets they lent money on long-term. As they stop lending, assets prices collapse be it stocks or real estate.
If we say that “real money” that exists today as cash (coins and banknotes) is the extent of the “real money supply” and the money created by “leverage” through the bank lending is fictitious, then the question arises is this electronically created money actually legal tender, which is simply the definition of the government is willing to accept it in payment of taxes. Since the government is borrowing rather than actually printing money, then the electronic leveraged money creation becomes legal tender. If government was not borrowing issuing barer bonds paying interest that is fully fungible within the banking system as good collateral, then such leveraged electronic money could not be legal tender. So is this simply a banking problem or in conjunction with government preferring to create money as debt that pays interest since they never pay anything back anyway.
The creation of the Euro introduced even more nightmares. Since they did not consolidate the debt of all member states, they left each state authorized to issue euro in cash for (paper/coins) and that also eliminated a single direct central bank. In the Eurozone, the paper euro cash is legal tender and all states must accept it in payment of taxes. True, each of the central banks of the Eurozone may bring paper cash into circulation throughout all of Europe. However, Euro coins are actually limited legal tender, insofar as no one is obliged to accept more than 50 coins or coins worth over 200 euros. German Euro commemorative coins are legal tender only in Germany.
The problem is not simply that we have the issue of money creation out of nothing. There have been associations suing banks, because their view is based on fraud under this limited understanding about lending. The Swiss initiative, however, tries to make a legislative amendment on this concept of simple money creation influence. This is in many ways trying to remove the creation of money through lending in private banking and placing it entirely in the hands of the central bank without any in-depth understand of the entire economic infrastructure.
These people with their whole money-initiative want to ensure that only government manufactures the National Bank money, as it actually provides the Federal Constitution. No constitution when written even understood, no less address, the creation of money through lending. It was not a question of counterfeiting or printing money. You simply deposited $20 and your account says you have $20, but the bank lent that to someone else and he too now shows $20 in their account. They did not “create” money, they created a book entry that says you have $20 not that you have a tangible $20 bill waiting for you.
This Swiss initiate assumes that book entry is actually money. True, over a century ago in Switzerland, voters banned the banks from printing paper money, because the money that was generated got out of hand. The US went through the same trend that collapsed because Andrew Jackson shut down the central bank and that led to the Panic of 1837 with massive defaults throughout the 1840s.
Nonetheless, the creation of physical banknotes by private banks was not leveraged money based upon assets, it was just fraud. Such banknotes were promising they had tangible assets in the bank that did not exist rather than leveraging the economy by lending. They are taking this UNLEVERAGED form of banknotes and extracting the same reasoning and arguing this should apply to the unlimited production of electronic money by the banks. However, the banks are not creating unlimited electronic money as was the case before. This is leveraging assets, not printing money for the sake of fraud. Still, these initiators of this idea have their website and they call this the Full-Money Initiative. They do not really understand the issue.
The initiative also assumes that the financial bubbles and inflation would be prevented and the creation of money would come back to the citizens benefit and the Swiss franc would be the safest money in the world. Money has NEVER even once served that function. They also could not see assets rise in value of money if money cannot increase in supply. That means DEFLATION. That also means a reduction in job growth, higher unemployment, and they cannot expect wage increases but must accept decreases. If the total money supply in 1,000 francs and you have 100 people, increase the population to 200 people but there can be no increase in money supply, then your income must decline as population increases and money does not.
Granted, today’s monetary system is falling apart not because the central banks have lost control of the money supply with private banks, they have lost control also in part because government always spend more than they take in and they borrow never paying anything back. Eliminating private banks from lending more than the cash on hand will send interest rates soaring and then the economy would collapse completely for government would still be borrowing and competing for a smaller supply of money to survive.
To force a referendum in Switzerland, the initiative must first collect 100,000 signatures within the 18 months time. The corresponding campaign started in early June and so far 68,000 citizens have pledged their signatures. Initiators are confident about the outcome of a possible referendum. While the Swiss is the only nation with a direct democracy allowing people to present such ideas, it does not ensure that these ideas are well thought out.