Richard Werner, a German economist, is convinced that banks are central actors in the process of money creation. They accomplish their mission largely by originating credit cards and providing home and auto loans. This viewpoint points out the absurdities of today’s financial climate. Specifically, it addresses the area of credit and its deep influence on people’s lives and the economy at large.
In Werner’s view, the act of a bank lending money to one borrower does not necessarily correlate with deposits from another customer. This confusing facet obscures an important trend in 21st century banking. Money is often created through credit rather than just being transferred from old deposits. American consumers are feeling financial pressure like never before. Meanwhile, they are loading up on credit card debt and turning around and taking out long-term loans for luxury cars. This phenomenon has forced millions of people to become “house poor.” As a result, their available funds are tied up in housing stock, with insufficient left over for other needs.
People are taking that extra money they are sitting on, and investing it into income earning assets. They expect that these investments will lead to returns that exceed the cost of the interest on their loans. These investments typically consist of things like the stock market, currency like bitcoin, and gold or other precious metals. This is key to grasping why these investments make so much money. They can be rigged and harmed by inflation because of the excessive money circulating in the market.
The best example of this is the stock market disconnected from the real economy. This often leads investors to see a healthy stock market during times when the overall economy is flat or even in recession. Just one of these nosebleed category seats for a top act at the Sphere in Las Vegas can run you close to $1,000. A cocktail at the venue will cost you around $50, cake and tip included. These expenses illustrate the paradox of how one part of the economy can indeed prosper while the rest lingers in malaise.
The commodity markets are today ironically trapped in a deflationary flywheel, pathologically signaling the opposite — economic contraction. The gap between rising asset prices and falling commodity prices underscores one reality—one broad trend. While some investments are flourishing, supported by liquidity injections and asset allocation decisions made since the start of the pandemic, other sectors continue to struggle against extreme headwinds. The wider index without precious metals factored in is probably sitting around its 2019 valuation, ushering in a new era of standstill within traditional economic gauging.
Except that economic participants have been conditioned to push prices for risk assets, housing, and desirable consumer goods to extremes. This rapid increase in values is due, in large part, to the creation of money Werner refers to as “loosey goosey.” It’s the case that banks have been issuing credit with looser restraints. This practice is forcing people into a two-tiered economy, where those able to use debt for wealth accumulation and investment fare far better than those who cannot.