Wednesday, 18 April 2012

Deposit insurance is a licence to print money

Three seemingly irrefutable statements with regard to banking are as follows...

i) Any institution with (state-provided) deposit insurance which expands its balance sheet in an unfunded* way is increasing the money supply and printing money.
ii) Banks have state-provided deposit insurance.
iii) Banks expand their balance sheet in an unfunded way.


Since all three of these statements are true we can deduce that banks are printing money.

*An unfunded balance sheet expansion is one where the liabilities of the firm are increased without an equivalent (and meaningful) increase in assets.

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