If there is debt, there is money, if there is no debt, there is no money

We continue to discuss the debate around the central bank from a new perspective...

We focus on money production and institutional structure in Turkey. In the first part of our series, we examined why the definition of money is important and the institutional structures of the Central Bank and the Mint. In this part, we will focus on how money enters the economy and circulates. Keeping track of a country's money printing and circulation is vital to understanding its economic structure.

Our interrogation, starting with money tracking, can reveal how the system works. The Mint, responsible for coin production, produces only about 3% of the total money supply. Any amount minted by the Mint is recorded as Treasury revenue as it belongs to the state. On the other hand, the Central Bank, a joint stock company, distributes its profits among its shareholders. The Bank's share distribution was detailed in our previous articles.

So how and to whom does the central bank give money?

The central bank issues banknotes and sells them to banks, essentially as an interest-bearing loan. At the same time, the central bank can also lend to certain private and legal persons; these cases require detailed scrutiny and assessment.

Banks offer loans using money from the central bank and deposits made by their customers. Two basic cycles operate continuously: first, between the central bank and commercial banks; and second, between commercial banks and the general market.

As for the functioning of the central bank, it sells banknotes to banks for a certain interest rate. The banks use these banknotes as loans and pay both the principal and interest to the central bank at maturity. At first glance, there is nothing wrong with this cycle, but a closer examination reveals serious problems. If this money had come from another source, it would probably have been borrowed on the same terms, i.e. at a certain interest rate. This debt would have been repaid on the same terms.

Then what is the point of having a national central bank?
Why all this work?

Structurally, the distinction between a central bank and an external provider is now blurred. The functional status attributed to the central bank has been so broadened that it can be confused with foreign institutions.

In this context, what will be the role and gains of the state? The Grand National Assembly of Turkey (GNAT) has the authority to print the country's money. This means that every citizen has a stake in the money. The TGNA will delegate this power to a bank, but will then have to demand money from that bank. The bank can refuse this request and respond by offering to raise funds from the market. What is particularly striking is that the money under discussion is fiat money, i.e. a currency that has no physical value and can be easily produced.

So how will the state collect the money?

The state tries to generate revenue primarily through taxes. But when this revenue is insufficient, it takes steps to raise additional revenue from State Economic Enterprises. This summarizes our current situation. If financiers withdraw their investments, there is a reduction in the amount of money circulating in the market. This leads to higher interest rates and lower tax revenues. The way the state deals with these challenges is another challenge. No matter how hard you try within the system, there is always a risk that it will fail. Let us now examine the first stage of this cycle in more detail.

What is our current setup?

The central bank is the only institution in a country that has the authority to print money. Paper money and banknotes are printed only by the central bank and this authority is not delegated to any other institution. Let's say the amount of money in circulation in a country is zero, the central bank prints 100 million liras worth of banknotes and lends this money to banks at an annual interest rate of 10%.

What happens in this situation?

100 million lira circulating in the market keeps our economy running for one year. At the end of the year, we will have to pay the central bank 100 million liras in principal and 10 million liras in interest at a 10% interest rate. Therefore, the market is responsible for repaying the 100 million liras it receives from the central bank at the end of the year as 110 million liras.

But is it possible?

No, this is not possible because only the Central Bank is legally authorized to print money. Therefore, money is actually the property of the Central Bank, and this institution undertakes the production of money. At the end of the maturity period, if there are only 100 million liras on the market, there are two options: The first is to keep the principal and pay only the interest; the second is to request new loans. If only the interest is paid, the amount of money in the market will fall.

As mentioned in our example, 100 million liras were released on the market. One year later, this amount will drop to 90 million liras. That is, the economic volume generated by 100 million liras will be managed with 90 million liras one year later. The following year it will drop to 81 million liras, which is unsustainable. This will lead to a slowdown in the economy and ultimately to a recession. If new money is borrowed, the amount of money in the market will increase numerically, but this increase will bring new debts to be repaid.

As a result, the first loan will never be repaid and the same will be true for subsequent loans. As long as this mechanism continues, all money in the market will turn into debt. So, if there is debt, there is money, and if there is no debt, there is no money. This is why we call this system the Debt-Backed Money System (BDPS).

When this basic questioning is done, we can understand that the first step of the system has been taken incorrectly. When the first step is wrong, every subsequent step is wrong. When the first button of a shirt is buttoned incorrectly, the other buttons are also buttoned incorrectly; this is the situation. Now, to summarize, we are making a very concise statement here; this is a summary of a summary.

What did we say?

The central bank sells money to banks by printing money, which constitutes the first cycle in the economy. Banks lend the money they receive from the central bank and the deposits they collect from customers, which forms the second cycle. If there is a failure in the first cycle, this failure is reflected in all subsequent processes. Most of the money in circulation, except for coins, exists in the form of debt. If there is debt, there is money; if there is no debt, there is no money. There is a remarkable situation in the second cycle.

I will discuss the second cycle in the next article.

In that article, we will reveal the true nature of the cycle between banks and the market.

Let me remind you in advance.

Prof. Dr. Mete GÜNDOĞAN

Guwuste.Com
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