According to the State, credit is money (to mean valuable) as a consequence of their guarantee of bank deposits, but is it?

Credit isn't money because the State guarantee is a bluff... Credit is (regarded as) money because bank deposits are guaranteed by the State but would the State print the necessary banknotes in the event of a banking "crisis"?

And since the deposit is a demand deposit, it must be a guarantee for cash instead of Treasuries...

Previously: Treasuries are more reliable than bank deposits
It is a contradiction to think that bank deposits are reliable and yet think that Government debt is worthless, it is not possible for a logical person to think that the bond market "should" collapse and yet still keep "money" on deposit in a banking institution.

Bank credit has value in that either the Govt will borrow on the debt markets or it will issue newly printed money to banks. So far, (in the circumstances of Northern Rock) the Government has chosen to lend to the banks and fund this with Treasuries... so if it cannot (continue to) raise funding from the Treasury market then bank credit will only be reliable if the Government prints the extra money.

Are there any circumstances where the Government will recognise bank deposits (with printed cash) and yet not refund Treasuries? If the Government is both i) Forced to either repay the (Treasury) debt with cash or to default (not allowed to keep borrowing) ii) Decides not to monetise the debt by printing money... then the Treasury market has then collapsed and the Government is not credit-worthy. Will it then (in those circumstances) print money (it cannot borrow) to allow for bank deposits to be redeemed?

It is unlikely that it will do so in those circumstances... although it could if it is felt that the guarantee of bank deposits is worth more than the credit-worthiness of State debt.

Credit is money only if you think that the State guarantee is reliable and since Treasuries aren't money, it can only be reliable if the money is (going to be) physically printed which is unlikely. If the Government do intend on printing the required cash then why not print it up now, in readiness? When the bank makes a loan the borrower would receive fresh cash from the central bank and be required to repay the debt to the commercial bank which would owe the original sum (in cash, without interest) to the central bank at maturity. The commercial bank would need to establish that the loan is genuine (to an outside party) otherwise it would be an interest-free loan (to itself) which would not be supported by the central bank since it would allow arbitrage (they could purchase Treasuries and make a risk-free profit).

The State could (might) argue that the reason they do not issue the required banknotes is only a matter of convenience and that the guarantee of bank deposits is genuine, that they are prepared to print the fresh cash needed. However, this is disingenuous because if they felt that this type of full-reserve banking should prevail they would not have issued the State guarantee of bank deposits in the first place; they would have allowed the banks to go bust and compensate the depositors according to their loss.

The State could (might) argue that the reason they do not issue the required banknotes is only a matter of convenience and that the guarantee of bank deposits is genuine, that they are prepared to print the fresh cash needed. How can we know if their guarantee (and their necessary subsequent claim (position) that credit is money) is a bluff? Can they be trusted to print enough notes and coins to allow all redemptions?

They (the State) want you to think that credit is money so that they aren't forced to print (or decline to print). They would prefer not to print, which we know since they have not yet printed up to now... But would they (print) in the event of a significant bank run? Unless you expect them to do so (and unless Treasuries are "money" and will be exchanged for bank credit) then credit isn't money...

Credit is money only if you think the State guarantee of bank deposits is reliable. If you think that money is safe in the bank (bank deposits are reliable) then you must also think that credit is money... So then, credit isn't money and your deposits are not safe in the bank. Credit "is money" only if your deposits are safe in the bank... Your money is not safe.


And since credit is inflationary (and can be exchanged at parity for cash, with no "risk premium" in the price) we can deduce that the aggregate of market sentiment is that the State guarantee of bank deposits is reliable...

Wednesday 8 April 2009