Hologram Tam & the Great Banking Swindle
By Adrian Ash
October 8, 2007
If forgery covered quantity as well as quality,
the private banking system would face jail today...
THOMAS McANEA didn't seem much of a threat to Britain's
national security.
A failed businessman who drank too much, and an ex-con freed on a
technicality, he had barely "two pennies" to rub together, according
to the Scottish police.
But McAnea was also an expert forger, a specialist in faking
holograms for official documents. And in January, 'Hologram Tam' – as his
underworld clients knew him – was caught with nearly $1.7 million worth of
counterfeit banknotes.
McAnea printed Chinese take-away menus alongside the fake cash as a
cover to look legit. By the time of his arrest, the police estimate, Hologram
Tam and his gang had put almost £700,000 of fake banknotes – more than $1.3
million – into Britain's financial system.
All told, according to the trial report in The Times,
McAnea's printing works had the capacity to produce $4 million worth of
counterfeit notes per day, "enough potentially to destabilize the British
economy."
But that $4 million per day would have been peanuts compared to the
money created by the UK's private banking sector. It's been helping to grow the
money supply by more than $1 billion – each and every 24 hours – for the
last year and more.
Might this flood of legitimate money "destabilize" the
economy? It outweighs Thomas McAnea's threat 250 times over, after all. And if
forgery were a question of quantity as well as quality, the entire banking
system might be queuing up to empty its slop bucket tomorrow morning...right
alongside Hologram Tam.
"Modern economists have difficulty in
deciding whether they should define money as M1, currency plus demand
deposits," writes Charles Kindleberger in his classic text, Manias,
Panics & Crashes, "or as M2 – equal to M1 plus time deposits –
or M3, consisting of M2 plus highly liquid government securities."
Does the way we define money matter? The US Federal Reserve says
not. It famously ceased publication of its M3 data in March 2006, claiming that
the measure "had not played a role in the monetary policy process for many
years."
But lack of use didn't negate M3's value, however. Private
economists have since pegged its growth rate above 10% per year. At the end of
August this year, M3 growth hit 14% according to analysis by John Williams at
ShadowStats.
"At least we should all be able to rest assured that a global
deflation [a shrinking money supply] is not in the cards," as Rob Kirby
notes for Financial
Sense.
But across the Atlantic and here in London, inflation of the money
supply remains on view to the public – and M4 remains the key money-supply
data.
The broadest measure of money supply tracked by any central bank
outside Chile (those crazy Latinos go up to M6), it covers all notes and coins
in the British economy, plus bank deposits – both time and demand – and
Sterling bank bills, as well as all commercial paper, bonds and floating-rate
notes issued for five years or less.
In short, M4 measures what a 1959 commission called those
"highly liquid assets which are close substitutes for money, as good to
hold, and only inferior when the actual moment of payment arrives." And it
has more than doubled in the last decade. M4 has risen by 65% since the
"Deflation Scare" starting in 2002.
Forget for a moment, however, about the supply of what passes for
money – even if it did grow by 13.5% in August from 12 months before.
Gasp instead at the surge in private-sector lending...
After lagging the outstanding total of M4
money throughout the 1960s and '70s, the volume of private-sector debt first
ticked higher during Margaret Thatcher's deregulation of the financial services
industry in the early '80s.
Then the real jump came, back when the current government took
power in May 1997. The UK's money supply has very nearly tripled since then.
By the end of summer 2007...and just as the global "credit
crunch" began to bite after the British economy had enjoyed 15 years of
expansion, its longest boom ever in history...total private-sector lending in
the United Kingdom outstripped the sum total of broad money by almost half of
one year's entire economic output.
Put another way, private households and businesses in Britain now
owe the banks 39% more in debt than actually exists in cash, bank savings and
near-cash equivalents added together (August data).
Down there with the devil and his number-crunching detail,
"most banks have advanced more loans to borrowers than they hold in savers'
deposits," as The Telegraph noted recently. Little does the
newspaper know that the situation applies right across the entire British
economy. But the point is well made anyway.
Halifax Bank of Scotland (HBOS) has lent out £1.74, says The
Telegraph, for every £1 it's taken in from its savers. Standard Life Bank
has lent £2.40...Northern Rock lent £3.21...and Bristol & West, another
aggressive mortgage bank, has turned every £1 kept on deposit into £6.60 of
loans!
The scam is simple enough to spot, if not to stop. Lending £6.60
against every £1 on deposit makes for a tidy "arbitrage" between the
cost of paying bank savers and the income earned from debtors. And what The
Telegraph's horrified exposé misses, of course, is that – on the banks'
balance sheets – creating credit in this fashion looks simply beautiful.
Loans are called "assets", but cash-on-deposit is a
"liability". So the more money the banks lend, the greater their
assets. The less cash they accept from savers, the smaller their liabilities!
"The very fact of imitation," writes Glyn Davies of the
Roman denarius in his magisterial History of Money, "indicated
that the demand for money locally exceeded the official supply, a gap which the
counterfeiter exploited directly for his own interest."
Fast forward two thousand years, and Hologram Tam was merely
improving liquidity for his local economy, too – in this case, the economy of
drugs dealers, junkies and pimps in Glasgow.
Britain's biggest mortgage banks have merely been doing the same,
this time helping out would-be home owners with a flood of liquidity. It pushed
the average house prices up three-fold in the 10 years to July 2007. The
proportion of income going to service and repay the resulting mortgage debt
doubled over that period to a record 32% per month.
Might this surge in "seignorage" – the profits earned
first by medieval kings for issuing money, and now by the private banks for
issuing debt – come to overwhelm the poor serfs plowing the fields and trying
to decorate their newly-built starter homes (carpets and curtains included)?
It's not just Britain, of course, where money has been piling up
without the bother of taking physical form as notes, coins or even a line in
your banking deposit book. Prior to its untimely demise, the Federal Reserve's
M3 data showed mark growth compared with the smaller, less inclusive M2 measure.
You'll note the upturn in the gap between M2 and its
bigger cousin, the now-dead M3 money supply figure, right at the same time that
Britain discovered the joys of private money creation in the mid-to-late '90s.
A global stock-market boom followed, and a housing bubble followed
that when the frenzy in equities wore out. But in the Fed's own words, M3
included all of M2, plus large time deposits of $100,000 or more, as well as
"term repurchase agreements in amounts of $100,000 or more, certain term
Eurodollars, and balances in money market mutual funds restricted to
institutional investors."
Put another way, a big chunk of the private banking sector's money
is not included in M2. Now why would the Fed not want to track what was
happening there?