Glenn Sullivan

After reading Whakatāne Mayor Victor Luca’s latest article, I took the time to watch Professor Steve Keen on You Tube (“This is how the government prints money” - 8 Dec 2022, which also discusses bank lending)

Dr Luca’s claim that “most new money is created out of thin air by commercial banks. Every Time a commercial bank makes a loan it creates money”, he overlooks that in New Zealand, M2 money does not include term deposits invested with banks.

In the US, term deposits under US$100,000 are included in M2 money. New Zealand banks can only lend funds equivalent to deposits lodged with them, and have a statutory responsibility to protect these deposits with responsible lending. As poorer people’s loan default rates are high, this restricts lending to this sector.

When a New Zealad bank lends money, the M2 supply will increase, but only because the offsetting term deposits aren’t counted in M2 money.  

To quote Steve Keen in the above you Tube video “Borrowing from the banking sector does not create net worth to the public”.

He has a theory that money is created by bank lending exceeding repayments under a growth scenario (with some repayments to come later), however, this is merely M2 growth (with most term deposits ignored). Mr Keen is correct that money is created by government deficits, with the books being balanced with bond creation.

In New Zealand, money is created in this fashion, and it is only government policy that prevents more of this being used in health funding and infrastructure.