War on Savings By Sarel Oberholster

1. War on SavingsBy Sarel Oberholster Credit Theory Part 1

2. Abridged PowerPoint Presentation from War on Savings – Modern Monetary Policy Deficiencies Exposed. International Edition Sarel Oberholster 10 December 2008

3. The war upon Savings is an ancient one. Even the alchemic desire of turning lead to gold was part of this war. Saving is a sacrifice. Savings can be stolen, plundered but most of all used to protect against the ravishes of fate. Savings and the vessels of Savings have been lusted after since the production of the very first economic surplus. The inventions of deceit to dispossess Savings have no match in any other human endeavour. Wars were fought with it and over it. Everybody wanted some but not all were prepared to gather it the hard way.

4. Unfunded Monetary Credit The Central Bank as Market Maker for Central Government Bonds An Unfunded Monetary Credit is any money which is created from nothing and is not backed by any form of Savings. It is brought into existence through the (usually) monopoly power of Central Banks to supply the economy with legal tender. Central Government 1. Central Bank purchases Government Bonds 2. Central Bank creates new money to pay for Government Bonds Sterilised Money Creation Central Bank The Unfunded Monetary Credit is sterilised through the action of selling the Central Government Bonds to the Private Sector and receiving payment for the Bonds (The blue arrows are equal and neutralise each other; similarly are the orange arrows equal and neutralise each other) 3. Sells Government Bonds to Private Sector 4. Sterilises new money created Unfunded Monetary Credit has entered the economy since the Central Bank did not have the money to pay for the Central Government Bonds

5. Unfunded Monetary Credit The Debt Channel Central Bank money creation in the role as Liquidity Provider Central Bank The Central bank do not actually have money to lend out to banks. It therefore has to create an Unfunded Monetary Credit for banks when it performs its role as Liquidity Provider to the banking sector (and even to any designated credit providers). 1. Accepts approved collateral for loans to Private Banks 2. Creates new money to lend to Private Banks Private Sector Bank 3. Uses newly created money to make loans to customers

6. Unfunded Monetary Credit The Central Government Channel Central Bank money creation and monetising Central Government debt. The Central bank do not actually have money to lend out to Central Government. It therefore has to create an Unfunded Monetary Credit when it acts as an alternative source of funding for Central Government. Central Bank 1. Purchases Central Government Bonds 2. Creates new money to pay for the Government Bonds Central Government 3. Government can spend the money or give it away (for say consumption or bailouts).

7. Supply and Demand for Credit Savings • Savings originates from not spending income and is spending deferred to the future, a scarce resource. • The income in turn originates as an uncoerced payment for the production of goods and services for the economy. • Any form of increase in the monetary base originating from applied Monetary Policy can never be regarded as Savings (Unfunded Monetary Credits are not Savings).

8. Supply and Demand for Credit Savings Supply • Savings Preference – A need to have a ready supply of stored income to pay for any perceived future expense (includes a desire for a suitable store of value). A constant for any given point in time and it also means that there will be Savings even at zero interest rates (in the absence of monetary stimulation with Unfunded Monetary Credits). • Encouragement from Interest Rates – The availability of a real, after tax interest income will encourage savings formation. • Encouragement from risk premiums – Market related risk premiums to encourage the Saver to lend out the Savings until needed.

9. Supply and Demand for Credit Savings Supply and Marginal Utility • Marginal Utility – Each new unit of Savings Supply will require incrementally larger units of encouragement from interest rates or from risk premiums. • Incrementally increasing units of interest rate and risk premium implies an upward sloping Supply Curve for Savings (Ss). • The sum of interest for rent (use of the savings for any time period) and risk premium will be the market rate of interest (r) .

10. Supply and Demand for Credit The Savings Supply Curve Interest (r) Ss We can now plot the Supply Curve of Savings. Observe how equal increments in Quantity of Savings Supply will require larger increments of interest rates. Did you observe how equal increments in Quantity of Savings Supply required larger increments of interest rates. 0 Quantity of Debt/Savings (D)

11. Supply and Demand for Credit Credit (Debt) • An economic entity may exchange future income for consumption today. Discounted future income is debt. • Debt formation always requires a (i) willing and (ii) an able borrower. [(i) Has a desire to discount future income; & (ii) Has the financial standing and required collateral.] • Debt must be repaid from future income or capital. Stimulating debt formation in one period must by definition cause a contraction in a future period.

12. Supply and Demand for Credit Credit Demand (Demand for Savings) • Marginal Cost – Incrementally greater units of debt will be demanded for each incremental reduction in interest rate. It is in the nature of interest rate compounding and ease of repayment (reduced default risk). • Incrementally reducing units of interest rate and risk premium implies a downward sloping Supply Curve for Savings (Ss) (lowering interest rates gives rise to higher demand for debt). • The sum of interest for rent (use of Savings for any time period) and risk premium will be the market rate of interest (r) . • Debt Saturation – The debt demand will not be stopped at a zero interest rate but will be stopped by Debt Saturation. Debt Saturation is where no willing or able borrower can be found and may be before or after zero interest is achieved (debt formation can obviously continue to happen at zero interest rates if willing and able borrowers can be found).

13. Supply and Demand for Credit The Savings Demand Curve (Demand for Debt) Interest (r) Did you also observe the reverse, how equal increasing increments in Interest Rates had incrementally less impact on reducing demand for debt. We can now plot the Savings Demand Curve. Observe how equal lower increments of Interest Rates will more than proportionately increase demand for debt (use of the savings). Probable Debt Saturation Area Sd 0 Quantity of Debt/Savings (D)

14. Supply and Demand for Credit Dynamic Equilibrium between Savings and Debt Interest (r) Ss = Savings Supply We can now put the Savings and Debt together to find dynamic equilibrium (a point in time where there Savings Supply is equal to Debt Demand for a given interest rate). r0 Sd = Savings Demand or Debt 0 D0 Quantity of Debt/Savings (D)

15. Supply and Demand for Credit Dynamic Equilibrium between Savings, Monetary Stimulation and Debt (1) Interest (r) You will note that the presence of monetary stimulation (Unfunded Monetary Credits) has disturbed the dynamic equilibrium in the Savings and Debt markets. Savings Supply will no longer be at Do but some lesser amount where the new r1 interest rate intersects with the Ss curve. The equilibrium Savings/Debt foundation can now be expanded to introduce Unfunded Monetary Credits as monetary stimulations. Monetary Stimulation (M) adds as a constant to Savings Supply (just note that it is not Savings) to get a combined Curve of Ss+M. Ss = Savings Supply Ss+ M r0 r1 Sd = Savings Demand or Debt 0 Quantity of Debt/Savings (D) D0 D1

16. Supply and Demand for Credit Dynamic Equilibrium between Savings, Monetary Stimulation and Debt (2) Interest (r) We need to progress to the dynamic process required to achieve a new equilibrium after the addition of an initial Monetary Stimulation. You will note that the initial stimulation breeds two additional monetary stimulations of Unfunded Monetary Credits. The first additional intervention must restore the loss of Savings as a result of the now lower interest rate. Ss = Savings Supply The orange arrow indicates the quantity of the first additional intervention. (D0 - D2) Ss+ M r0 r1 Sd = Savings Demand or Debt 0 Quantity of Debt/Savings (D) D2 D0 D1

17. Supply and Demand for Credit Dynamic Equilibrium between Savings, Monetary Stimulation and Debt (3) Interest (r) We need to progress to the dynamic process required to achieve a new equilibrium after the addition of an initial Monetary Stimulation. You will note that the initial stimulation breeds two additional monetary stimulations of Unfunded Monetary Credits. The second additional intervention must restore the loss of Savings as a result of a loss of faith in the currency. Savers start looking for alternative stores of value. Ss1 Ss = Savings Supply The purple arrow indicates the quantity of the second additional intervention. (D2 - D3) Ss+ M r0 r1 Sd = Savings Demand or Debt 0 Quantity of Debt/Savings (D) D3 D2 D0 D1

18. Supply and Demand for Credit Dynamic Equilibrium between Savings, Monetary Stimulation and Debt (4) All these interventions must be maintained. Central Government/Central Bank must accept that any reduction in the total extent of the Unfunded Monetary Intervention (D1-D3) will cause a contraction in the economy. Interest (r) We now complete the dynamic process required to achieve a new equilibrium after the addition of an initial Monetary Stimulation. You will note that the initial stimulation breeds two additional monetary stimulations of Unfunded Monetary Credits. All the interventions together is the quantity D1-D3 (The big red arrow). Ss = Savings Supply Ss1 Ss+ M r0 r1 Sd = Savings Demand or Debt 0 Quantity of Debt/Savings (D) D3 D2 D0 D1

19. Here ends Part 1I trust that you have noted that the Unfunded Monetary Credits have driven Savings out of the economy. It further introduced a structural imbalance to the economy which must be maintained or a contraction will commence.The effect of the Unfunded Monetary Credits on the Macroeconomic environment will be discussed in Part 2