A credit/money bubble and the financial crisis

The Buttonwood column in this week’s Economist discussed a book by Richard Duncan which proposes a quantity theory of credit and suggests the current financial crisis results from the collapse of a credit bubble

That Mr. Duncan would talk of a “credit bubble that would end in collapse” is surely a step towards understanding financial crises.

I am not sure there should be a distinction between credit and money because money is created when bankers make loans. As there is a fractional reserve system involved the bulk of our money supply is credit.  Thus the quantity theory of money and the quantity theory of credit are basically the same thing.

We could just as easily say the money bubble ended in collapse.

A further complication is that all this credit/money involves interest charged on those loans.

I am not aware of any economist who has tried to think out the implications of charging interest on the loans that make up the money supply but I suspect it is a big problem.  It seems to be something like a Ponzi scheme and Ponzi schemes eventually collapse.

A more detailed look the problems of money creation  is a part of the essay “LETS go to market: Dealing with the economic  crisis” on this weblog.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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One Response

  1. People have trouble getting their heads around the fact that the quantity of money can fall as well as rise. Yes it ‘evaporates’. If it does it can quickly put a country into a Depression, not a recession. This writer is perfectly correct, but he is not original.

    For people who want to get their heads around the subject, there is a very readable book written by Milton and Rose Friedamn on the cause of the great depression. They blamed to ultimate cause on the Fed, which allowed hundreds of banks to collapse, leading to a massive reduction of the money supply.

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