September 09, 2019 Monday
Bedtime Story
Credit Creation is the Whole Game
The bank-issued credit is the largest credit
in existence in today’s world and so is the world and national debts as any
credit necessarily and symmetrically has to be reflected as debt in someone’s
balance sheet.
Credit and debt are like two sides of a
fair coin that are inseparable though human apes have shown their ingenuity in
undoing that impossibility too.
Today’s banking is almost nothing or very
little to do with the traditional role of bank as an intermediary between the
group that saves and the entrepreneurs that borrow and set up industries.
Modern banking and finance is all about the
creation of credit to feed into the growing population and its ever increasing
appetite for more and better things.
Today every third-world citizen - since
they have access to intelligent algorithms and affordable internet connectivity
can see the standard of living that apes inhabiting the North America and West
Europe enjoy - aspires to have diet, roads, air, health-care, working
conditions and even leisure matching or compatible to that of their first-world
counterparts.
The only possible way (it usually never
really works as wealth tends to get distribution in a highly skewed fashion
with the bulk of it ending up with a lucky few and the majority of apes ending
up with peanuts of wealth) to even possible aspire to that kind of life quality
is credit creation.
Usually when the commercial banks sanction
loan to a customer they do not hand over cash to him but instead open a deposit
account for the borrower.
The customer then uses this account to
withdraw money.
Later this same account is where he would
deposit the loaned money.
But since by the very act of loan
sanctioning a depositor account had been created the commercial banks has
inadvertently created credit through its loan.
Whenever a bank issues credit (which means
passes a loan) it makes a negative entry into its liabilities column of its
balance sheet and simultaneously incorporates the same amount into its assets
column.
It is an asset on the assumption that not
only the loan will be paid but paid with an interest.
Credit is therefore money.
It may also happen, as it does happen, that
commercial banks need not even wait for the depositors to deposit their money.
Central Banks may decide to inject reserves
into the commercial banks (this obviously will not happen to you or me but
those with powerful contacts and sources in the government and finance
ministry) which are then given out as loans by the commercial banks through the
fractional-reserve system.
Now a part of this money is lent out by the
commercial bank which is then deposited again possibly in some other bank after
series of business transactions.
Stay tuned to the voice of an
average story storytelling chimpanzee or login at http://panarrans.blogspot.com
Good night Mon Ami and my fellow cousin ape.
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Another great educator and a teacher that I am aware of is
Professor Subhashish Chattopadhyay in Bangalore, India.
While I narrate stories, Professor Subhashish an electronic
engineer and a former professor at BARC, does and teaches real mathematics and
physics.
He started the participation of Indian students at the International
Physics Olympiad.
Do visit him here:
All his books can be downloaded for free through this link:
For edutainment and English education of your children, I recommend
this large collection of Halloween Songs for Kids:
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