Peter J Morgan
Peter J Morgan BE (Mech.), Dip. Teaching – professional forensic engineer, retired economics, mathematics and physics teacher
PART 6 of 18
In the mid-1980s, New Zealand’s building societies were de-mutualised and became trading companies. The trustee savings banks were allowed to morph into trading banks and almost all were taken over by trading banks, a notable exception being the Taranaki Savings Bank, which morphed into TSB Bank. Banks rapidly discovered that creating new money out of nothing and ‘lending’ it, secured by mortgages over real estate, was easy to do and also very profitable while at the same time being very low-risk, as no home owner-occupier wants to lose their house in a mortgagee sale. Nowadays, ‘lending’ by banks to businesses is a relatively small proportion of banks’ loan books; the bulk of their ‘lending’ being on housing mortgages.
In the present inherently unstable debt-based funny money system, banks are creating an ever-larger stream of new debt (money), regardless of the amount of money being saved, enabling people to bid against each other to drive the price of real estate higher and higher, at a rate far in excess of the rate of increase of ordinary people’s incomes. This is exacerbated by council-controlled urban boundaries, tight planning restrictions and high rates of immigration. Banks are thus taking an ever-larger percentage of home buyers’ incomes in interest and principal repayments, to the point where more and more people are in effect becoming debt slaves, as were the feudal serfs of the Middle Ages. Income spent on servicing mortgage debt is income that cannot be spent on consumer goods and productive investments; this not only causes lower economic growth than would otherwise be possible but also a massive wealth transfer from the lower and middle classes to the wealthy. In New Zealand, this is exacerbated by the fact that the ‘big four’ trading banks – ANZ, ASB, Westpac and BNZ – are all subsidiaries of Australian banks, which are the recipients of obscene profits and in turn are controlled by their majority (? 60%) shareholders in the USA.
All too often, those who have managed to scrape up the necessary deposit and have arranged a mortgage so that they can buy a house, then face the prospect of living very frugally for many years while parting with a very substantial proportion of their family after-tax income. Whenever house prices increase at a faster rate than after-tax incomes, the proportion of after-tax income required to repay the principal sum borrowed – never mind the interest on the remaining principal – increases, and this inevitably results in lower disposable incomes for those who have recently bought a house. This, of course, is one of the major reasons why our real economy is in the doldrums, and also one of the major reasons that the RBNZ governor has been continually lowering the OCR.
It’s a Catch-22 situation for the governor, because when banks react and lower their mortgage interest rates, people are even more enabled to continue to bid-up the price of houses, thus exacerbating the problem. Selling existing houses to each other at continually inflating prices does not make us richer – it merely causes our economy to tank, because whenever any mortgage loan principal is repaid, that money (in reality a bank’s promise to pay money) is extinguished and disappears back into the nothing whence it came, thus shrinking the money supply until somebody takes out a fresh loan.
The present debt-based funny money system is inherently unstable and acts as a surreptitious wealth pump that pumps wealth from the people who create it – the entrepreneurs, business owners, professionals, self-employed and all wage and salary workers – to the financial elite who own and control the major banks and major corporations – at least 60% of whom are residents of the USA – so causing ever-growing inequality, which is already having dire consequences for society, as a growing proportion of the population cannot afford to own a house, and even worse, cannot afford to pay a full rental, and need various forms of social welfare.
In New Zealand in the mid-20th century, notes and coins, which are Sovereign Money (i.e., money created by the state) constituted well over half of the money in circulation. However, the development of electronics has led to EFTPOS, the Internet and online banking and online payments, resulting in a gradual decline in the use of notes and coins, such that now they make up only about 2% – and declining – of the money in circulation. The other 98% is the interest-bearing electronic bank IOUs in bank accounts that almost all of us prefer to use as money. New Zealanders are therefore paying interest to banks on total debt of about $310 billion – which banks created out of nothing! That banks pay interest to attract term deposits offsets this a little. Also, through taxation and charges by state-owned enterprises (SOEs), New Zealanders indirectly pay interest to the banks on about $113 billion of government and SOEs debt. Add the debt that local governments in New Zealand owe to banks and that $113 billion swells considerably – all created out of nothing! The interest on that debt would in effect be zero, had that money been ‘borrowed’ from the RBNZ!
