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War on Savings By Sarel Oberholster. Credit Theory Part 2. Abridged PowerPoint Presentation from War on Savings – Modern Monetary Policy Deficiencies Exposed. International Edition Sarel Oberholster 10 December 2008.

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slide2

Abridged PowerPoint Presentation

from

War on Savings – Modern Monetary Policy Deficiencies Exposed.

International Edition

Sarel Oberholster

10 December 2008

slide3

The war upon Savings is an ancient one. Even the alchemic desire of turning lead to gold was part of this war. Saving is a sacrifice. Savings can be stolen, plundered but most of all used to protect against the ravishes of fate. Savings and the vessels of Savings have been lusted after since the production of the very first economic surplus. The inventions of deceit to dispossess Savings have no match in any other human endeavour. Wars were fought with it and over it. Everybody wanted some but not all were prepared to gather it the hard way.

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Unfunded Monetary Credit

Monetary Interventions

Monetary Power:- Central banks have only one power, the power to create money. The power to influence interest rates is a derivative of the power to create money. Targeted interest rates are achieved through supplying Unfunded Monetary Credits (lower interest rates) or withdrawing Unfunded Monetary Credits (rising interest rates) form the economy.

Monetary Tax:- Any monetary intervention which is permanent in nature or become permanent in nature is a stealth tax on all the owners of that currency. A monetary tax has no net long term stimulatory effect on the economy. The redistribution effect of a monetary tax may pretend to stimulate one area of the economy at the expense of another.

Temporary Monetary Intervention:- Any monetary intervention which is temporary in nature must again be removed form the economy. It is a unilateral loan by the Central bank against the purchasing power of the currency and is distributed to the economy via the Debt Channel.

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Unfunded Monetary Credit

Debt Channel Distribution

Central Bank

1. Accepts approved collateral for loans to Private Banks

2. Creates new money to lend to Private Banks

Private Sector Bank

3. Uses newly created money to make loans to customers

Debt Allocation in accordance with Basle II Capital Risk Weightings

Credit Rating AAA to AA

Risk Weighting 0%

Credit Rating A+ to A-

Risk Weighting 20%

Qualifying Residential Mortgages

Risk Weighting 35%

Leverage desirability in descending order.

Credit Rating BBB+ to BBB

Risk Weighting 50%

Credit Rating BB to B-

Risk Weighting 100%

Credit Rating below B-

Risk Weighting 150%

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Unfunded Monetary Credit

Macroeconomic impact of

Monetary Interventions

Collectively all goods, services and assets will be subject to the law of marginal utility and collectively all Factors of Production (Pf) will be subject to the law of diminishing returns.Note: The entry Macroeconomic Charts are for the initial monetary intervention and at a given point in time. Once a stimulation has been absorbed into the economy, it has no more power to stimulate any growth in the next period. Aggregate Demand will revert to pre-stimulation levels. Malinvestment in capacity to supply, factors of production and inventories will cause further downward price adjustment and waste away scarce resources. Removing all or part of the stimulation will exacerbate the economic contraction.

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Unfunded Monetary Credit

Macroeconomic impact of Monetary Interventions

Prices

(p)

A Central Bank intervention by way of an Unfunded Monetary Credit (Me) can now be added to the Macroeconomic model in equilibrium to observe the effect upon the macro economy.

As0 =ƒ(Pf) = Yi

Now what happens in the next period when there is no fresh Me to sustain Aggregate Demand at the a1 or a2 levels?

“The attempts to lower interest rates by credit expansion generate, it is true, a period of booming business. But the prosperity thus created is only an artificial hot-house product and must inexorably lead to the slump and to the depression.” Ludwig von Mises. Middle-of-the-Road Policy Leads to Socialismhttp://mises.org/story/2370

Aggregate Demand (Ad1) at level a1requires increased supply.

Macroeconomic equilibrium where Ad0 =As0 for a quantity a0and price level p0.

?

The Central Bank intervention by way of an Unfunded Monetary Credit (Me) adds to Aggregate Demand to a level a1.

Note that Me is debt driven additional demand and debt must be repaid at some future point in time.

As1=As0 + I0

Aggregate Demand (Ad1) at level a1comes at a price. Inflation (F0) in assets, goods or services. Note that assets such as shares, houses and collectables may express the price inflation. The inflation may appear disproportionately; generally in accordance with the allocation preferences of the Debt Channel.

The increased Aggregate Supply could come with economies of scale advantages (I0) and a lesser inflation impact (F1).

Macroeconomic Supply for all assets, goods and services.

As0 = ƒ(Pf) = Yi

p1

p2

Ad1= Ad0 + Me

F0

F1

p0

Macroeconomic Demand for all assets, goods and services.

Ad0 = C+ I + G = Yd

Ad0 = C+ I + G = Yd

Me

I0

0

a0

a1

a2

Quantity of assets, goods and services (a)

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Unfunded Monetary Credit

Macroeconomic impact of Monetary Interventions

Only this level of economic activity is self sustaining.

Debt once used cannot fund new Aggregate Demand in a next period.You cannot have your cake and eat it!

Prices

(p)

Thus Aggregate Demand will revert back to Ad0 unless the Central Bank adds a fresh Me at least equal to the previous Me.

As0 =ƒ(Pf) = Yi

Ad1 which included the Unfunded Monetary Credit must revert back to Ad0 without the Unfunded Monetary Credit even though the debt of the previous period remains in place.

This is the status of the economy at the end of the period of the monetary intervention with Unfunded Monetary Credits.

The debt created by the Unfunded Monetary Credit has been absorbed into the economy and will not be available for the next period.

A contraction happens automatically in the absence of a fresh Me intervention from the Central Bank in the next period.

This happens if they don’t.

As1=As0 + I0

p1

p2

Ad1= Ad0 + Me

F0 =Deflation

p0

Contraction (no new debt)

Ad0 = C+ I + G = Yd

Me

I0

0

a0

a1

a2

Quantity of assets, goods and services (a)

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Unfunded Monetary Credit

Macroeconomic impact of

Monetary Interventions

But what remains after the “do nothing” approach?

Policy options with the remnants.

  • Leave the initial Me stimulation in the economy as a tax against the holders of the currency. The debtors will repay their debt but the Central Bank will not sterilise the intervention. The economic effect is a redistribution of wealth from the economy to the Central Bank.
  • Collect the repayments and sterilise the initial intervention.
  • Counteract the absence of a monetary intervention with a fresh intervention. Another temporary stimulation can be engineered with an intervention greater than the previous intervention.
  • Continue rolling one intervention into the next for a perpetual growing economy, or will it fail at some stage?
  • The initial Me stimulation is still in the economy and maintains a structural distortion (see also part 1).
  • The debt supported by the Unfunded Monetary Credit is also still in place.
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Unfunded Monetary Credit

Compounding

Monetary Interventions

slide11

Here ends Part 2I trust you have noted that debt once used no longer has any stimulatory power and must reverse in a contraction. One monetary intervention will set off a spiral of monetary interventions increasing the risk and proportion of the contraction. The effect of the compounding Unfunded Monetary Credits trapping the Macroeconomic environment in Stasis (Deflationary Depression) will be discussed in Part 3.