The Fictitious Numbers in Banks We All Trust
And I’m back…
After two and a half weeks abroad, I’m exciting to get back into things. But as I look out at the headlines and potential ASX opportunity, I find myself frustrated.
I mean, look at stock prices. Did they have any reason to keep climbing? They’re now higher than they’ve been in years. And for what? Potentially lower rates and better than expected economic growth (in the US at least), which still isn’t all that great.
Maybe it’s because I’m getting older.
As the years roll on, I’m getting more frustrated with the financial world.
One thing I’ve been thinking about lately is plastic money and the fictitious numbers in banks we all trust.
All this stuff, it’s not backed by gold or some other commodity. And it seems central banks and commercial banks can create as much of it as they like. You and I have to trust we can trade this fiat money for goods and services because the government said so.
Of course, none of this is likely news to anyone. But in my early 20s, I didn’t think twice about such things. To me, the guys talking about this stuff were the ones wearing tin foil hats and trying to communicate with aliens.
But now, on the other side of 25, this is the stuff I think about daily.
What if the government can’t pay off their debt? What if banks do go bust? What would that mean for property values? How can I shelter myself from such an apocalypse?
Commercial banks have too much power
What gets me the most is how much power commercial banks have.
Like the other day, I walked into the local branch to take out some money and change my pin. I got the money, that was all good.
But the guy helping me made a mistake. He had told the computer I took out $2,500 when I didn’t take out nearly that much.
So, I spent a few minutes waiting for him to fix it up. All it took was a few key strokes, but it got me thinking…I’m seeing first hand just how easy it is for commercial banks to create money.
The teller didn’t have to go into the back to physically get the cash and put it back into my account. There’s no volt full of gold bars or stacks of money. This was all figures on a computer, numbers that could easily be added to or subtracted.
What’s worse is what those numbers in my account (and yours) represent.
You think this is your money? Stacks of cash waiting in the back for your withdrawal? This is money the bank owes you. And as you might have experienced, banks can be incredibly frivolous with how they explain away some of the money they owe you.
I’ll give you another example. When my wife and I bought some property, we knew there were going to be fees involved. We knew the bank might take a little bit more here and there.
But we ended up feeling like a personal slush fund for the bank. It seemed like they created new fees and miscalculated old ones just so they could reduce that debt they owed us.
This was really easy for them to do. The accounts we were looking at were not accounts full of our money after all. They were accounts showing the debt the bank owed us.
All it took was a few key strokes for the bank to reduce that debt to us.
‘Sorry, we miscalculated stamp duty…sorry, we forgot to action your discount package…sorry, we shouldn’t have charged you that fee, but we might do it again when you’re not looking.’
Just look at what the banks are doing now…
What have they done with that power so far?
The Australian Financial Review writes:
‘The banks are unlikely to reverse the rate hikes of 2018 that they blamed on narrowing margins, even as funding costs fall to their lowest levels in more than a year.
‘While some banks are cutting fixed-rate loans as a way to capture market share, analysts believe borrowers are unlikely to enjoy cuts across the board as most banks choose to use the lower costs to repair their margins.’
And that’s fine. These are private, profit-motivatived businesses. I don’t want to force them to do or not do something. If one bank treats customers terribly, then they’re going to lose business until they fix that problem.
That’s capitalism. But it’s not just one bank behaving badly.
Try and get a loan outside the Big Four…
You might get something, but it will be more expensive, the terms will be worse. Like the Big Four, these ‘other lenders’ are also (short-term) profit-motivated banks.
They create far too much when they think they can make money. When times get tough, then they look to pile on the fees for existing customers.
What makes this all worse is the effect that banks have on us indirectly. I mean, I bet you were feeling pretty good in 2017. Property prices were high. On paper, you were wealthy.
But what about now? Banks are far tougher with their lending. Not because they want to, but because they have to. Property prices have come down.
Maybe you had to delay that overseas trip because you’ve now got to pay down your mortgage and avoid going into negative equity territory.
All of this is the elephant in the room, Steve Hanke said at Grant’s 2019 NY Conference. We still allow profit-motivated institution to control about 95% of the money supply.
What have they done with that power so far? Have they funnelled money into key areas of the economy to promote growth? Have they created money in new, important industries to make Aussies and Australian businesses better off long term?
No. Most have just funnelled money into places where they can earn a dollar regardless of the consequences.
Of course, I’m not suggesting we give all the power, interest rate decisions and the quantity of money to one non-profit entity. But how about some incentives? These people working at the bank care about money, after all.
Why not allow them to take home more money for doing the right things?
Your fed-up friend,
Editor, Money Morning
PS: You want to know how you can hedge yourself against endless money creation? Buy productive businesses. And you can do just that in the stock market. A stock is a proportional share in a business, after all. I tend to favour small-caps myself.
To check out our analysts’ three favourite small-caps for 2019, check out this free report.