Tuesday, 7 July 2015

Bank of England slips up.

Can you spot the mistake in this tweet by the Bank of England?

It's plain impossible to capture the complexities of money creation in a 140 character tweet, so I'm being pedantic in criticising the BoE. But tweeters are not actually limited to 140 characters: you can always type more on a word processing system, then do a screen shot of what you've typed, and attach that to your tweet. I do that at least once a day.

Anyway, the above tweet suggests that 97% of bank deposits are created by commercial banks. Normally that 97% figure is about right. But since the advent of QE, vast amounts of money have been created by central banks and given to all and sundry in exchange for various privately held assets, mainly government debt. In fact far as I can see about 20% of money in the US takes that form at the moment. Thus the 97% figure is way out just at the moment.

So when someone sells $X of government debt to the central bank, they deposit that new money at their commercial bank, where their account is of course credited. And the money is then deposited by the commercial bank at the central bank (where the commercial bank's account is credited).

So that money is not "created by" commercial banks: it's created by the central bank.

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