Tony Greenham: ‘Your current account should be like a safety deposit box’.

29th August 2012

Mindful Money: How uncomfortable do you think most people would be with the concept of fractional reserve banking if it was properly explained to them? At present it seems that while the discussion is notionally about policymakers trying to protect consumers, it is really being framed as regulating for, not with them.

Tony Greenham: It is important to recognise that banks perform 3 key functions: 

  1. Payments services, including current accounts & foreign exchange
  2. Savings and loans
  3. Sales of other financial products such as insurance

The provision of ‘free' payment services under (1) must always be cross-subsidised from other products which encourages over-charging to other customers or service in (1) (eg overdraft charges and terrible forex rates when you use your cards abroad) or aggressive (IE mis-) selling under (2) or (3).

18 thoughts on “Tony Greenham: ‘Your current account should be like a safety deposit box’.”

  1. James says:

    So, let me get this right:

    1. Growth is much lower than forecast

    2. The deficit is much higher than forecast

    3. Inflation is much higher than forecast

    4. QE has pumped £375 billion into the economy

    5. The stock market has reached record highs.

    It does look suspiciously as though the QE experiment has delivered higher prices and share prices (as many would expect) but no real growth (also as expected).

    The good news is that the government has a plan in place to reverse the QE (just joking!).

    1. forbin says:

      yes the Government are going to call it EQ , Easing Quality…..

      thus “reversed” , come on no one else in the media noticed QE was printing money , or they kept quite hoping for a bung or better promotion …….

      Somalia here we come……


  2. Pavlaki says:

    Shaun – I have always assumed that the huge fall in the value of Sterling has caused most of our inflation as we import most of what we consume. Logically that effect should have dropped out over time if Sterling had stayed constant. I have noticed, however, that inflation picks up when the pound slides but does not drop back when it rises. I suspect that once consumers are used to higher prices (that are blamed on the drop in Sterling) and then when the pound rises importers simply pocket the improved margins. The next time the pound drops we get another price increase. This may sound cynical but I know for a fact that exporters have not been using the lower pound to drop their prices and improve turnover / market share, but rather to improve their margins, so I would not be surprised if in the ‘opposite’ scenario every opportunity was taken to ramp up margins.

    1. Anonymous says:

      Hi Pavlaki

      The UK is indeed relatively prone to inflationary episodes from a given rise in say the oil price. Some of this I suspect is psychological and has built up over time and some of it is built into the UK system via factors such as rail fares which rise on a Retail Price Index plus a percentage formula.

      Should I get appointed to the Monetary Policy Committee you can expect me to raise it at every meeting as this issue is as important as the level of interest rates.

  3. Joe says:

    Great blog Shaun, thanks again.

    I note that with the beginnings of some growth being noted, there are some voices piping up about looking at increasing the interest rate finally. Do you think that this is something that could happen soon?

    1. Drf says:

      Hi Joe,

      Those voices do not have any influence in settng interest rates for the most part. Interest rates will not increase until the market forces cause them to increase; then watch the reaction and dismay of governments who cannot continue to service their increasing debt!

    2. Anonymous says:

      Hi Joe

      Whilst market interest-rates may rise (and they have been edging higher recently) I do not expect there to be any rise in the official base rate of 0.5% anytime soon. Sorry if that is what you were hoping to read.

      In fact I think that the next move could yet be a cut rather than a rise. Please do not misunderstand me I am not in favour of that but merely thinking what the Bank of England might do.

  4. Anonymous says:

    Shaun- not today’s topic I know but thought it interesting re you earlier article on Greece

  5. Anonymous says:

    Some very good points here, Shaun. May I also add the effect of the resultant devaluation of the Pound? This forces prices up almost immediately (for those without swaps or cover) for our rather extensive (and now expensive) imports while doing rather little for the volume of exports. Why the latter? Well, of course some exporters act as the authorities expect, and reduce their foreign currency prices, hoping to sell more. But what about our car assembly industry? Granted they import a lot of components, whose price rises. But so far, looking around Spain, I see no evidence whatever that the vehicles made in the UK are in fact reducing in price, or indeed have done so (bar a couple of very special short term offers on executive cars ‘in extremis’). And that after a 25 to 30% devaluation. I know the matrix of costs for such a business is very complex, but the obvious and irrefutable conclusion is that our car exporters and probably others are more interested in making more profits in the UK than they are in increasing their output volume in competition with (eg) French and German makers. More profit is always excellent, but as a country we need to use our very large exchange advantage to compete with others around the world, not just sit back and see our management bonuses swell as the unit profit zooms up. Before our new BoE governor starts thinking about another massive devaluation, he might care to consider this effect.

    1. Drf says:

      Hi barncactus,

      The new governor of the BoE has just been reported as having made statements on the basis: “Mr Carney applauded Japan’s “bold policy experiment” to boost dramatically its own QE programme.

      He said: “Europe can draw lessons from Japan on the dangers of half measures… Europe remains in recession.” See

      So it is quite clear as we suspected that the reason he was selected by Osborne is that he will QE without restraint and without end, whilst doing all he can to keep ZIRP in place against market pressures. May God preserve us from the inevitable results of such Zimbabwe economics and his incompetent intended macro-debasement of Sterling!

      1. forbin says:

        Plan A to convince the British public that joining the Euro and the EU is a “good thing ” seems to be well underway

        Now if the Euro wasn’t such crap , perhaps it might work…..


        BoE and QE ?

        Shakira – Addicted To You

    2. Noo 2 Economics says:

      Hi Barncactus,

      “probably others are more interested in making more profits in the UK
      than they are in increasing their output volume in competition”

      Yes, absoloutely right for all companies in all countries and that could be part of the explanation (after discounting global QE) for the apparent disconnect between markets and economies.

      The companies are making more profit for various reasons including currency plays. The P/E ratios globally, whilst not low aren’t particularly high so there’s room for more equity growth as investors look at profit/earnings growth rather than the state of the economy .

      Unlike many on here I don’t believe we have reached “bubble” territory yet, As someone else has said, this is more disguised bank bail outs allowing the investment bankers to make bigger plays in the markets because they know more money is coming on the table via QE for the forseeable future, so they can gamble away and make more profit thanks to the taxpayer funded QE and good fundamentals for companies thanks to second order effects of QE in terms of currency debasement, allowing companies to make more money per unit without having to bother increasing volume. Butr what happens when the music/.QE stops? Indeed, have they worked out how to stop it without causing another crisis?

  6. Rods says:

    Hi Shaun,

    I have to agree with your analysis of why we have stagflation and think what has happened is a foretaste of that to come in 2016-17 once the Government can’t fund the persistent deficit through the markets and so use QE to infinity and beyond to do so. My money would then be on them targeting buying inflation linked bonds to maximise the benefit from shrinking the nations debts through the resultant 1970’s style inflation.

    It is interesting to note the damage that even the above target inflation we have at the moment does to economic growth. We all tend to just think of inflation as a CPI or RPI number that increases prices, but of course these price increases have a real cost to industry, where they have to spend regular management and workforce time in updating raw material and production costs, setting new factory gate or shelf prices and updating price lists, websites and shelf price tags. This being just one of many corrosive effects and costs of high inflation.

    Although some politicians and economists including the BOE are now hailing they can see green shoots, how much real economic growth will there actually be where inflation figures are massaged and will we be like Italy with years of very slow growth, where taxes and Government spending are well above trend at 43% and 49% respectively?

    1. forbin says:

      good points

      but I still think those green shoots are just mold on the corpse ….

      when it gets down to it how do you run an economy with a 125Billion deficit ?

      Good job America is in the same boat as such – thats why this isn’t the 1970’s again

      but come 2015 I think we’ll be pretty close , including power cuts…

      now there’s a economic problem that needed 10 years to sort out at least

      and why is oil cheap at $100 , brents back to $105 – I guess we’ll have a jump in inflation coming through soon….


      Popcorn futures look good , corn prices are failing , now theres something to look forwards too !

      1. Anonymous says:

        Hi Guys

        The effort to “improve” the inflation numbers continues as the link from the UK National Statistician below shows.

        They seem awfully keen to “improve” the inflation numbers do they not? The man picked has expressed his views on RPI in the past so they seem to have used Sir Humphrey Appleby rules here…..

  7. Drf says:

    Hi Shaun,

    “Why didn’t the UK’s economic contraction and then stagnation lead to falling prices?” The answer is perfectly clear – MANIPULATION! If you look at the increasing divergence between the varous ONS “fixed” inflation numbers and RPI for example it is clear what is going on. Even RPI does not represent the real increase in essential costs which normal people are now experiencing. Of course, this is for a specific and deliberate purpose.

    As I have observed previously on this blog, part government clandestine funding by means of debasement always has to be accompanied by manipulation of the official inflation numbers; if this were not done then even relatively ill-informed unintelligent ordinary voters would be able to see what is going on. With the smoke and mirrors conjuring they do not, and so potential rebellion is snuffed out; they look at rising costs and cannot understand why these are ocurring, and they do not understand the real reasons for these increases, but can only scratch their heads in disbelief.

    That is the deliberate strategy. If only the well informed and intelligent can see and understand the fiat monetary value theft which is going on, they are in a minority and cannot take any effective action to expose it. It was the same when the Roman government clipped the coins.

    1. Anonymous says:

      Hi Drf

      You too may be interested to know that another inflation review is on its way. Obviously rather like the famous Irish vote on Maastricht the wrong answer was apparently given only in January!

      Here is the link announcing it.

  8. Anonymous says:

    Shaun, as you noted the 12-month rate of price change for housing prices went from 1.9% in February to 2.7% in March. If you want comparable figures for the other indicators, the March increase was 2.8% for the CPI, 2.6% for the CPIH and 1.0% for the CPIH’s owner-occupied housing component, all unchanged from the previous month. So the imputed rents series used to measure OOH in the CPIH is highly insensitive to what is happening to current house prices. As you pointed out in your September 24 blog, “Why I believe that the UK is about to choose and use the wrong measure of house price inflation”, this is only one of several reasons why the CPIH should have had an OOH component based on the net acquisitions approach rather than the rental equivalence approach.

    The CPIH is actually quite a useful indicator for anyone who wants to calculate the difference between the CPI rate of change and the HFCE deflator due to differences in the treatment of OOH. As a macroeconomic indicator, it is highly defective. Unfortunately, for someone at the Department of the Treasury or the Bank of England, the fact that it has consistently registered a lower rate of inflation than the CPI has to be attractive. They can help win the war on inflation just by switching indicators. This is why it seems likely that the Chancellor of the Exchequer will make CPIH the BoE’s target indicator sometime during Carney’s term in office, even though it is the wrong thing to do and could potentially do great damage to the British economy.

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