Oddities from the Fringe

I was looking at the website for the Canadian Action Party last night - not because I think they have a hope of winning even a single seat in the election, but because sometimes the so-called "fringe" parties have interesting ideas.

Lurking on their website is a "comic book" that purports to explain how money is being created in the economies of various countries like our own.

I had to read it a couple of times to wrap my head around the ideas that they are trying to put forth. It boils down to this - according to these guys, the banking industry is creating an awful lot of "virtual money" by simply "creating it" on their books as part of a virtual transaction. The idea is that there is far more money "on the books" than there is in physical circulation.

The scenario is something like this:

You walk into the bank, and take out a mortgage on a house for $150,000.

The bank creates an account with a balance of -$150,000
Over the next 20 years, you pay into this account, with the bank skimming off 5% or so per annum.

At the end of the term, the bank has a bucket of 150,000 that didn't exist before.

Basically what they seem to be advocating is a return to a hard-currency backed system. Superficially, what they are seeing almost seems plausible - after all, I haven't actually _SEEN_ the cash for my paycheck since I was a teenager mowing lawns. Everybody since has either paid me with a cheque, or more recently, via direct deposit. In truth, I have no idea if that money "actually" exists or not.

As I said earlier, superficially they seem like they are making a reasonable point. After all, the government theoretically owns the currency of the land, and should have (more or less) the right to regulate what's happening with the availability of the cash.

The assertion that falls apart is that of the 'banks creating money'. Banks do not create money - they never have and never will. If a bank was to print an issue of currency notes in this country it would be a crime called forgery.

In its simplest form (ignoring the complexities of compound interest, service fees etc.), a bank "holds" my money for me, and is obligated to make it available to me on demand. In essence, I am making a loan to the bank from my holdings. In the meantime, the bank can - and does - use that money in a variety of vehicles to make money itself - loans, investments, whatever. They have a very delicate balance to manage where they have to keep enough available money around to pay out what they think I am going to ask for next week.

So, returning to my mortgage example earlier, to get that $150,000, the bank "borrows" $10 from 15,000 other customers - knowing that most of those customers won't demand that $10 next week. It all turns into a horribly complex shell game after that, but it boils down to there has to be a starting pool of money - period. It doesn't emerge out of the ether because someone "wishes" it to be so.

Over my lifetime, I have seen society begin the transition from hard currency for most transactions to "virtual cash" (debit cards, credit cards) for most day to day transactions. Just as the world moved slowly towards a cash economy from a barter economy thousands of years ago, we are slowly moving into a "cashless" economy. One where the tokens of cash are becoming less and less relevant. The other day, I was in Starbucks, and paid for a coffee with my debit card - why? because I had _NO_CASH_ in my wallet.

I don't buy the simplistic notion that banks are conjuring money out of the ether. I know far too many people in the financial sector that are simply too smart to need to engage in such basic fraud.

I wouldn't be at all surprised if you tried to balance the "world's chequebook", you would find that things just do not balance out. There's no doubt money that has simply "gone missing" - whether it's lurking in "old wierd Harold's mattress", or some incredibly wealthy, powerful person has managed to squirrel it away somewhere is hard to say.

Sadly, beyond this particular notion, I found little on the website that actually read like policy statements. As near as I can tell, the CAP is still a collection of incidentally compatible views - and not terribly coherent about what they represent. If their logic on the banking system is any indication, they have a lot of growing to do before they will represent even a credible margin voice in our country's political landscape.