Credit crunch and the money supply

Mark Carney, the governor of the Bank of Canada, and recently appointed to the Financial Stability Board, to oversee international financial reform has made the news by pointing out there may be a new wave of credit tightening as a result of the European debt crisis.

When bankers and economist worry about a credit crisis they are talking about a decline in money supply.  This is because banks create money when they make loans.  If they don’t make loans there will be less money around.

In a declining economy there are two things to note.

First, as we feel the squeeze from an unsustainable use of resources, there will be need for less money in the economy. Otherwise there will be inflation.

Second, if the money supply declines more than is needed, then there will not be enough money for the exchange of the goods and services we are capable of producing.  This too could contribute to the recession.

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How not to become a slave

Through the centuries/millenia those people who have built empires have needed others to do the grunt work of agriculture, manufacturing and administration. This has often meant using force or capture to make people into slaves or serfs. A more subtle way to enslave people is to give them cash loans. In peasant societies loans have often been for weddings or funerals. While people owe money they remain under control and if they can’t repay the loan they and often their descendants become formal slaves.

Of course, this doesn’t apply to us. Or does it? It may be that many in our society are unable to do the things they really want to do because they have to work to pay of a debt which was encouraged and easy to get. A further complication is that in a time of economic difficulty people are losing their jobs but the debt is still there.

The CBC filled a report today from Statistics Canada that “the total amount of debt that Canadians hold in relation to their incomes continued to inch higher in the first quarter.

“The debt-to-income level ticked almost a full percentage point higher to 147.3 per cent in the January to March period, the agency said. The figure is a measure of total debt load — including mortgage and consumer debt — versus disposable income.”

If you don’t want to become a slave, then try not to get into debt.

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