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By Steven Baker MP, on 14 December 09
 This article gives a summary of the legal nature of banking contracts as presented by Jesús Huerta de Soto in Money, Bank Credit and Economic Cycles (PDF). A second article will discuss artificial credit expansion and its effects.
In his speech in the 2009 Banking Bill debate, the Earl of Caithness, one of the most experienced Conservative peers, said:
My Lords, the Banking Bill which we are currently discussing in the House is very complex and detailed, but it does nothing to resolve the current banking crisis, which lies at the heart of our economic problems. [...]
The Banking Bill fails to address the fault which has led to every major banking and currency crisis during the past 200 years, including this one. It merely, lazily and weakly, papers over the cracks. Like Lilliputians, we are trying to tie down Gulliver with ever more strands of rope. It did not work then; it has not worked since 1811; and it will not work now.
He went on to explain that no Act of Parliament established the present banking system but that it emanates from a base of judicial decisions:
Prior to 1811, title to the money in depositors’ accounts belonged to the depositor. However, in that year, decisions in Carr v Carr and, in 1848, Foley v Hill gave legal status to the banking practice of removing depositors’ money from their accounts and lending it to others. Since then, title to depositors’ money has transferred from the depositor to the bank at the moment when the deposit is made.
Bankers have always seen it as their job to invest as much of their depositors’ money as they prudently can, in order to earn income for themselves while, at the same time, maintaining sufficient cash flow to be able to honour depositors’ cheques when presented and to meet withdrawals when demanded. If new deposits fail to materialise in sufficient strength or if borrowers fail to repay on time or at all, banks need to be rescued or they will fail. Historically, bank failures then led to a demand for central banks to act as lenders of last resort to save imprudent bankers who got caught short.
These judicial decisions meant that, from then until now, money deposited belonged to the bank and not the depositor, thereby allowing bankers to use customers’ deposits as they saw fit, always provided that they could manage cash flow so as to meet depositors’ requirements. In good times, that enabled them to take greater risks. Then, with the advent of central banks as lenders of last resort, the bankers soon learned they could take even greater risks with virtual impunity. When their lending became too aggressive and their reserves and deposit receipts were less than required to meet cash flow, they began to lend to each other. Banks with excess reserves would lend on the overnight market to those with a shortfall. With all these supposed safety mechanisms to protect them, bankers came to believe they could become even more aggressive in their lending, enabling them to make increased profits for themselves.
The provision of these safety mechanisms had, in some cases, merely encouraged them to take excessive risks. Further, these two judicial decisions overlooked or failed to consider the fact that when banks lend depositors’ funds, more than one receipt for the same deposit is issued. This was not done intentionally by individual banks or it would immediately have been seen as fraudulent. Rather, it was done by the system as a whole. This process continued to the present. It is as a result that our UK money supply has grown from £31 billion in 1971, when President Nixon closed the gold window, to in excess of £1,700 billion today. Let us consider the implications of those last two figures. They mean that every year since 1971 the banking system has created, on average, for its own use, in excess of £44 billion. That is more per year than the entire money supply which had, until 1971, sustained our economy since recorded history and through two world wars. Is it any wonder that we have suffered such serious inflation over that period? It is clear that the normal, everyday onward lending of depositors’ funds by retail banks has been the principal producer of inflation.
Now, the 1844 Bank Charter Act ended the overissue of notes over specie but it did not deal with the overissue of demand deposits drawn by cheque. This omission, combined with the judicial decisions described by Caithness, left open the possibility of the same mechanism which was known to cause economic crises in the nineteenth century and which has caused the crisis we are in today: artificial expansion of credit.
This article deals with the legal principles under which banking should operate; a second article will explain artificial credit expansion and its consequences.
Continue reading “What is wrong with banking, part 1: the legal nature of banking contracts”
By Steven Baker MP, on 19 November 09
 Through tomorrow and Saturday, ESCP Europe and The Cobden Centre are hosting a Colloquium on Sound Money. The Colloquium is to be directed by Founding Fellow Dr Anthony J Evans and chaired by Corporate Affairs Director, Steve Baker.
A team of academics, banking professionals, entrepreneurs and politicians will meet to discuss:
- What is Money?
- The Interest Rate and Intertemporal Coordination
- The Gold Standard and the Great Depression
- Deflation and Prosperity
- Free Banking vs 100% Reserves
- Central Banking
- Proposals for Reform
The authors whose work will be under consideration are Carl Menger, Joseph Salerno, Frank Shostak, Ludwig von Mises, Friedrich A Hayek, Joan and Richard James Sweeney, Murray Rothbard, Lawrence Reed, Lawrence H White, George Selgin, Vera Smith, Tim Congdon, Richard Salsman and Jesús Huerta de Soto.
By Toby Baxendale, on 18 November 09
Via Reclogging the US credit system, Caitlin Long warns us that there is another impending credit fuelled bubble that is due to be created to accommodate the commercial property market renewals in the next few years. Either a new bubble will emerge as this large level of re-issuance is financed by new bank credit creation, or there will be another bust of epic proportions should this not happen.
Either-way, if it gets funded, this will cause more mis-allocation of capital to this and associated sectors postponing the recovery. If it does not get funded, then we could be back with another Lehman style “event” with all its terrible consequences.
The US financial system faces a daunting challenge in the next five years: $4,200bn of debt that is largely of speculative quality comes due in the commercial real estate and non-investment grade debt markets. At best, this wall of maturing US debt will strain credit capacity. At worst, it will prolong the credit crunch and restrain economic growth.
The next two years are crucial, since delay by banks and other lenders in recognising losses on commercial real estate loans could lead to a pile-up of debt maturities in the credit system in 2012 as this is when loans to highly leveraged corporate borrowers begin to mature en masse.
Such a 2012 reclogging of the credit system, if it happens, could force businesses to liquidate bad investments or pressure the Fed to re-open the monetary and credit spigots, potentially complicating the Fed’s exit from its existing stimulus programs.
The biggest risk to refinancing capacity for this wall of maturing debt, though, is the Fed raising interest rates to control inflationary pressures and dollar depreciation, if necessary. Higher interest rates would preclude marginal borrowers from qualifying for refinancing, regardless of whether credit capacity exists.
Read more.
By James Tyler, on 18 November 09
Cobden Centre Advisory Board member and Chief Executive of Tyler Capital, James Tyler, sets out the case for 100% reserve banking.
Background
In October 2008 the Federal Reserve briefed a secret congressional committee that the US economy had, at one stage, been only a few hours away from a total meltdown in the financial system.
How did this come to pass, and how can we prevent it again?
The Problem
Fractional Reserve Banking (FRB) is an inherently unstable complex system.
Each and every bubble and crisis has some kind of link to FRB, going back thousands of years.
Even where financial crises are caused by natural disasters (the San Francisco earthquake of 1906 being a prime example), the financial crisis only followed because banks did not have enough reserves to pay out worried depositors – due to fractional reserves.
In a nutshell, depositors wanted what they thought was their property back, only to find it did not exist.
Over 70% of people in the UK believe that money placed in an instant access account remains their property. This is not the case.
Fractional Reserve Banking
- Person ‘A’ deposits £100 of cash into his instant-access bank account.
- At this point, he signs over property rights to the bank – the bank gives him a promise to return on demand
- The bank retains a small reserve (say £3), and lends out £97 to Person ‘B’
- Both ‘A’ and ‘B’ both have a claim to instant access on this money.
- In one move, the bank has turned £100 into £197 of useable money
- ‘B’ buys a Widget from WidgeCo for £97
- WidgeCo deposits the £97 with his bank ‘Z’.
- Bank ‘Z’ now lends out around £94 to person ‘C’ keeping just under £3 as a ‘reserve’
- Person ‘C’ borrows to buy computer, and pays £94 to ‘D’
- Money supply has started its process of mushrooming:
- ‘A’ Has the right to £100
- ‘B’ has spent his claim to £97, and owns a widget
- WidgeCo has a claim to £97
- ‘C’ Has spent £94 and owns a computer
- This process continues until there is no more money to lend
- If any one person with a claim to their money exercises their right, the inverse pyramid collapses.
- If person ‘A’ claims any more than £3 of his money, the inverse pyramid collapses.
In 2007/8 this money pyramid almost collapsed.
Continue reading “How to avoid future encounters with financial meltdown”
By Ewen Stewart, on 16 October 09
 UK Household Savings Ratio (click to enlarge) Equity Strategist Ewen Stewart makes the case that the national debt will within 5 years be over £150,000 per family of 4 with debt repayments of twice the present defence budget, up from £31 billion in 2008/9 to £70 billion in 2013/14. He explains the root causes of our difficulties and indicates a route to recovery.
It’s all over. What a fuss about nothing. The economy will soon be growing again and, look, the FTSE100 is up almost 50% since the March low. Even house prices, according to the Halifax, have risen 6 months in a row. The doom mongers were wrong. Central Banks and Keynesian public spending programmes, together with QE, have worked. Brown indeed has saved the world!
Well that would be one interpretation and a very short sighted one too, for this recovery shows all the hallmarks of a drug addict who claims to be going straight injecting a further mighty dose of the substance that has caused such decay in the first place to prolong the party.
The problem is that the underlying fault lines in the UK economy remain and, thanks to the Government’s response, are even more pronounced.
The underlying problem is, in my view, an addiction to debt, a banking system which is over-leveraged, and now government finances that are out of control. This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation.
It is my central conjecture that much of the economic growth over the last decade was less the result of genuine private wealth creation but more the result of a number of unique factors which were both unsustainable in their nature and damaging to long term growth. If this view is correct the scale of the over-leverage and the action required to alleviate the problem become even more pronounced.
Continue reading “Happy days are here again? Another view from the City”
By Steven Baker MP, on 30 September 09
FT columnist Martin Wolf considers narrow banking and 100% reserves.
The FT has a new series on the future of investment. But what, I wonder, is the future of finance itself? Who is confident that the financial system now emerging from the crisis is safer, or better at servicing the public’s needs, than the one that went into it? The answer has to be: few people. The question is how to remedy this dire situation.
What entered the crisis was, we now know, an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead.
via FT.com / Columnists / Martin Wolf – Why narrow banking alone is not the finance solution.
By Steven Baker MP, on 11 September 09
Revised and updated: reconciling our conflicting views of the market through consistent principle and morality. This post originally appeared on www.stevebaker.info.
 Leviathan, 1st Edition, 1st Print, from Toby Baxendale's original A Christian friend is an avowed socialist and another associate is determinedly left wing. I asked them recently what socialism meant to them. The answer was essentially “people being good to one another”: kindness, compassion, fairness and justice, even liberty. Who would oppose that?
But can force make it so?
Though I write with great affection for my friends, when I hear or read “socialism”, I understand a quite different thing: misery. Everywhere Marxist theory was determinedly put into practice, the result was tremendous suffering, not utopia, and yet Marxist ideas persist in our thinking.
Socialism, though formally hopeful, causes misery because a socialist society must force individuals to take particular courses of action for the good of all. For example, Lenin’s acclaimed Marxist philosopher Bukharin wrote:
For a long time yet, the working class will have to fight against all its enemies, and in especial against the relics of the past, such as sloth, slackness, criminality, pride. All these will have to be stamped out. Two or three generations of persons will have to grow up under the new conditions before the need will pass for laws and punishments and for the use of repressive measures by the workers’ State.
And so socialist societies have justified sustained repression.
When the Soviet Union fell, it seemed we all accepted that public ownership of the means of production was a dead end. New Labour and the “Third Way” came to prominence, despite the third way being nothing new, merely the idea that government can successfully intervene in a market economy to bring about positive outcomes. The problem is, it does not work.
Today, we have a financial crisis, a credit crunch, but few reflect that for a long time we have laboured under the most pervasive price control of all: deliberate manipulation of the rate of interest. Around the world, millions have waited with trepidation for committees of wise men to announce the interest rate. We have had a combination of historically low levels of saving combined with historically high levels of borrowing. Where did this mismatch come from? The rate of interest has been deliberately suppressed, misleading people into saving less and borrowing more than would have been sustainable.
The phenomenon is rather like a gym in which the treadmills may be remote controlled. If just a few people slow down, the central controller does nothing. But imagine the controller sees “too many” people slowing down at once for a break. “This will not do!” he cries, “We must have higher levels of activity!” He turns up all the treadmills at once, and keeps turning them up as exhaustion builds. Eventually large numbers collapse at once. Do we take a break and rebuild ourselves? No! We must inject adrenalin, take sports drinks, anything to get back to peak activity immediately. Eventually, this must end in catastrophe for the participants, but with artificially-low interest rates and quantitative easing, this is what we do to individuals and corporations in the economy.
The consequence is social disaster: high levels of government debt, unemployment and the direct creation of new money, a phenomenon which can only widen wealth inequality because new money is given to the wealthy. Yet this is the consequence of just one intervention in the free market.
When people set out to intervene in the economy by force of authority, they usually fail to realise a simple point: you cannot control the economy without controlling people. The economy comprises the actions of thinking, purposeful human beings with their own ends and means. Socialism requires intervention in that striving, intervention that at best has unintended consequences because the information necessary to intervene successfully is simply not available. Jamie Whyte’s The kindness of geniuses explains charmingly.
Those of us of good faith all want the same thing: prosperity, kindness, compassion, fairness, justice, liberty. People being good to one another. The twentieth century teaches us that state planning of the economy does not deliver these things, so how should society be organised?
Views of the free market
I asked my friends how they reacted to the term free market. They understand this term to mean exploitation. I understand it to mean freely-chosen cooperation for mutual benefit.
As we were sitting in a bar, I asked “Where was the exploitation when you bought that last round?” We wanted a drink, we had earned it in our own ways and the barman was happy to serve it to us. Perhaps the barman was there against his will, but how are we to know? Are we all to approach every transaction with a questionnaire? Should the barman have asked us if we had been exploited before serving us? Are we to invent possible exploitation somewhere up the supply chain for beer? Is it intrinsically exploitative for one man to serve beer to another?
Of course, this is absurd, but people suppose the free market inherently exploits without demonstrating how. This is not to deny the existence of isolated exploitation, but to question how free exchange is inherently exploitative, or corrupting, or the cause of whatever harm is perceived by the commentator. This is Marxist thinking and we know where it leads.
Before me, I have four books which begin to reconcile these difficulties:
Continue reading “Moral Markets and Honest Money”
By Sean Corrigan, on 10 September 09
 Lord Timon's Purse In Lord Timon’s Purse, Sean Corrigan explores the causes of the forty US banking failures of 2009 and sets out some of the basics of money and bank credit.
Despite the US seeing its fortieth banking failure of the calendar year – the greatest number in sixteen years ‐ financial markets are managing their usual feat of deluding themselves that a Goldilocks outcome is in prospect.
News articles abound in sighting of what, in the tiresome horticultural parlance, are invariably referred to as ‘green shoots’; a back up in bond yields is rationalized away as a ‘re‐normalization’ from crazily‐depressed levels (a view with which we actually have some sympathy); rising commodity prices are not to be feared, being merely the expression of an understandable eagerness to indulge in ‘recovery’ plays; slack labour markets and the widespread under‐utilization of capacity is seen to allow central banks to maintain their current accommodative stance for many months to come and – mindful of the ‘mistakes’ made in 1937 – when the unwinding process finally arrives, it will be well‐signalled and gentle.
So, ‘Out of the eater came forth meat; out of the strong came forth sweetness’ and out of banking weakness comes forth equity delight – or so the Street desperately hopes.
Away from the sales pitches and book‐talking, opinion is still, as ever, divided over the outlook for prices. The old war of words is being rehashed between those who see a long, gloomy stretch of near‐deflation as the outcome and those beginning to fret over a resurgence of inflation almost as soon as the real economy regains some traction.
Inevitably, this polemic has degenerated into yet another battle pitting Gold Bugs against New Dealers and Dollar Permabears vs. card‐carrying Keynesians – a Prosperian dialogue light on intellectual substance and generally lacking in insight.
Sean revisits some of the basics (emphasis mine):
On such observations as these [on bank lending and bond issuance] rests the case of those Deflationists who do at least possess sufficient sophistication not to regard a mere drop in the CPI index (and one highly influenced by the fall in over‐elevated energy prices, at that) as the Alpha and Omega of the argument. However, these sages then usually make at least one of two further mistakes in their analysis; viz., that they confound Money with Credit and that they then entirely neglect what is fast becoming the primary mechanism by which new money is being introduced to the economy.
In order to dispel the confusion, we must here digress to reprise a few basics.
ʹMoneyʹ‐ for now disregarding the question of its particular composition ‐ is above all the medium of exchange whose other commonly‐cited attributes as a unit of account and a store of value are decidedly derivative, emergent functions, the first of which is not strictly commensurate with current money itself – e.g., SDRs ‐ and the second of which is sadly more often an aspiration rather than a statement of fact.
In order to function as the medium of exchange, money must be widely and unequivocally accepted ‐ indeed, it must be THE most widely accepted ‐ substitute for the specific consumable goods we seek in a typical trade when we surrender a different batch of consumables to our counterparty but have no use for the goods which he, in turn, is offering for sale. The upshot of this is that money is itself a present good, that is, one instantly utilisable in the here and now.
Again, to emphasise the crucial point, money must be thought of as THE present good par excellence (not, incidentally, just a mere representation of such goods) the one for which there is always a ready market: to say otherwise is an existential denial that it is money at all. While this may have been easier to grasp when money actually took the form of a tangible good ‐ whether cowrie shells, cattle, or silver crowns ‐ it is no less the case today when it has largely been robbed of physical expression.
Money, then, is the medium in which we can make final settlement of any transaction, as is recognised by those étatiste legal tender laws which Leviathan wields to force free individuals to use the bastard versions to whose creation it reserves to itself the exclusive right of sanction and from whose creation it thereby intends mischievously to profit.
By contrast, ‘Credit’ is an assignation of the right of command over present goods to another, whether for a fixed or an indeterminate period. Entailed in this alienation is a sacrifice for which we seek recompense by charging a fee ‐ namely, interest.
[NB: contra the mainstream misconception, interest is not the price of money (that can only mean its reciprocal value expressed in the other goods for which it exchanges), but the price of the time which passes while we forego enjoyment of our property]
Read more here.
By Steven Baker MP, on 2 September 09
 Responding to an article in The Times, Steven Baker indicates the origins of our views on the economic situation and its causes, of our prospects and of the best route to sustainable prosperity.
For the Times, Jim O’Neill, Chief Economist at Goldman Sachs, writes:
Based on the evidence I have seen this month, it looks as though the world moved out of recession in the second quarter. When we see the evidence for this, in the third-quarter data, it is likely that many areas will have returned to close to trend growth.
He goes on to explain the emotional and subjective criticism he has received in response to previous articles, the evidence and his optimistic outlook for the world economy, concluding:
Since March, close to the time that developed stock markets bottomed, our GLI has shown a vigorous bounce and, indeed, for the past two months the monthly increases have been the sharpest we can find. The chart of the monthly changes, as you can see, looks pretty much like a V, not a W. Right now, it suggests a much stronger bounce in the world in the next six months than consensus and, along with other data, is why in our latest forecasts we predict that world GDP will recover by 4 per cent in 2010. This will include the UK because, despite all its challenges, it is an economy small and open enough to be greatly influenced by the rest of the world.
Now, we have already explained why the FTSE is rising, the cause of the appearance of prosperity (also Corrigan) and that uninterrupted growth in the stock market never indicates favourable economic conditions. We have shown that our understanding of the nature of money produces a measure which, in contrast to the Bank of England’s M4, correlates to economic activity. We have introduced a better measure of private prosperity than GDP. We have indicated here and here alternative prognoses for the global economy. Our primer introduces our supporting literature.
Mr O’Neil is a senior economist and Goldman Sachs makes a great deal of money. So why do we disagree?
There are three important schools of economic thought: Keynesian, Monetarist and Austrian. We follow the Austrian School. In contrast to the others, it has a robust capital theory and an understanding of the interest rate as the price which coordinates the economy across time. Unfortunately, Mr O’Neill’s economic thinking causes him to look at the immediate empirical evidence and make pronouncements which, while superficially justified, lack a deep theoretical understanding of the situation, that is, the distortions in the capital structure of production.
Of course, this is not to assert that money cannot be made by bankers in the short term under the present system. The question is whether that system of thinking can explain our predicament and the best route out.
Continue reading “Now it’s looking like V for victory over recession – Times Online”
By Toby Baxendale, on 31 August 09
The distinguished writer and economist for the Sunday Times, David Smith, on the 30th of August in this article wrote the following;
Why have stock markets risen so strongly? It has been a two-stage process. The initial spurt from the dark days of early March came with a realisation that the world was not entering a second great depression (third if you count the end of the 19th century) and that not all banks would have to be nationalised. Markets were priced for disaster and decided this had been averted.
The second leg has been driven by good figures. “Economic data generally continue to be better than expected, which suggests that we are emerging from the longest and deepest recession” says Bob Doll, chief equity investment officer at Black Rock.
So it would appear that to this economist the FTSE moves only because of expectations about the future. This may well be part of the case, but as I have argued here, it is the state of liquidity that determines the great movements in the stock market indices. The Bank of England has expanded its balance sheet by some 158% since September of last year. This massive amount of liquidity coupled with the £175 billion of Quantitive Easing, has to go somewhere in the economy. If people’s demand to hold money remains the same, those recipients of all this excess liquidity can only but spend it!
To recap, I wrote:
- “Money is the medium of exchange. It is the most marketable of all commodities that facilitates the exchange of one person’s goods and services for the other person’s goods and services.
- Since the economy has slowed, it must follow that there is less production of goods and services to exchange for money. This has the effect of suppressing the prices of those goods and services.
- Conversely when the economy is booming and more production is facilitating more demand for money to exchange for more of those goods and services, you would expect to see prices rising.
- If we have a given demand for goods and services, even if it is a suppressed demand, such as it is in the economy of today (in Recession / Depression) and there is a sudden increase in the supply of money, such as has happened with the stunning 158% rise in the Bank of England’s Balance Sheet, certain peoples monetary liquidity has dramatically risen. To start the process of eliminating this surplus liquidity, it would seem that money has moved into near liquid markets such as the various stock exchanges of the industrialized world when the practice of massive money pumping has taken place.”
I also wrote,
If more money exists today than yesterday then all other things being equal, we can deduce that there is a surplus of money in relation to money demanded. What happens to this surplus? The only way to get shot of a surplus of money is to spend it. This spending increase prices of the goods and services that it is being spent on. One of the most liquid places for you to spend this surplus is to put it in near liquid assets such as highly traded shares. As excess liquidity builds up all over the world, over and above money demanded, we see various stock exchanges rising. In a separate article, our colleague Sean Corrigan points out that the huge increase in M1 in China has set the Shanghai Composite reaching for the top of Mount Everest!
We should always remember that we describe as an asset bubble a large increase in the price of those assets. A price is the amount of pounds Sterling we pay for our assets. This is the same as saying an asset bubble is a large increase in the payment of pounds Sterling for these assets. So the larger the monetary footprint in the economy, the more Sterling paid for things. Certainly this was the case for the Housing Boom and if the FTSE continues in its rise, I strongly suspect that this is the case here.
David Smith then continues to say,
We should not read too much into share prices. One thing we have learnt during this crisis is that markets are skittish, and hugely influenced by confidence and mood. There are solid economic reasons why the stock market has risen, however. Cazenove, taking the bull by the horns, says there is still plenty of value in British shares and limited downside risks.
The key influences on markets will be surprises. On the plus side, markets have priced in a recovery, both in Britain and globally. On the minus side, that recovery is expected to be weaker than usual, because of the banking system’s long period of convalescence, tight credit and a throbbing fiscal hangover that will require years of tax increases and public spending cuts.
Where the stock market goes depends on where the news comes in relation to these expectations.
To a certain extent I do not disagree with this. I would qualify this by saying that the above sentiments are what causes the FTSE to extend from trend, but not the cause of the trend. So what is the cause of the large movements in the stock exchange?
My contention is that it is the rate of monetary pumping into the economy that creates excess liquidity. If you can actually define money and count it, you can see the effect of excess money pumping very clearly. My co authoured working paper cited here shows the correct way to count money and what the problems are with the traditional M0 / M4 measures. I am very glad we have created a lot of interest on the Social Science Research Network. We then introduce MA or Money Actual, sometimes called the AMS, Austrian Money Supply, it shows a very convincing correlation to GDP and retails sales.
 Changes in MA +24 months and GDP  Changes in MA and retail sales Here we add the correlation with FTSE:
 Changes in MA and the FTSE As you can see, the broad movements in the money supply effect the FTSE. As people have more liquidity in relation to their money demand, it moves into liquid markets. Liquid markets such as FTSE and as Corrigan shows, the Shanghai Composite, rise. This applies to virtually any of the stock markets of the world. The government is the monopoly issuer of money or currency and privately created bank credit can only exist on the scale it does by the granting of special legal privilege to bankers to not keep their creditors whole at all points in time. As these vital functions are controlled in full by the State, it should come as no surprise that the main influence on FTSE is the prevailing surplus liquidity of the day, first and foremost, then investor sentiment.
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