Double Entry Bookkeeping

The ECB has printed €498 billion... sorry, of course it hasn't printed any money. That's not allowed.

First let's take a look at some physics. In particular: antimatter. It's common in science fiction, so most people are familiar with it. Anti-matter is matter's opposite. If matter and antimatter ever come into contact, they combine and the mass-energy equivalent energy of those masses is released (violently). We take 1kg of mass and 1kg of anti-mass, put them together and we end with zero kilograms of anything (but quite a lot of energy). In effect we have cancelled the two masses out. In principle, there is nothing stopping the reverse from being possible, we take zero and pull it apart into X kilograms of matter and X kg of antimatter.

Double entry bookkeeping is a marvellous tool for accountancy, and it does for economics what equations do for physics. It makes you tell the truth by recording both sides of any transaction.

Double entry bookkeeping is governed by one key equation:

Assets = Liabilities + Equity

or in its expanded form

Assets = Liabilities + Equity + (Income - Expenditure)

We're going to look at the ECB, and the non-expanded form will be fine. The rule is that any entry we make must have both a "from" and a "to" account (there's a little bit of magic that goes on when we involve income and expenditure, to do with what direction a credit or debit moves the account, but we'll brush over that):

From                       To                            Amount
--------------------------------------------------------------------
Equity:Opening Balance     Asset:ECB                     0
Asset:Owed by Member Bank  Liability:Member Bank Current 498 billion

A balance sheet is a snapshot at any moment, and it must always sum to zero (see the fundamental accounting equation). The ECB balance sheet will add up to zero, because the assets equal the liabilities. The member bank holds a current account at the ECB, which is set such that it is a liability to the ECB -- the ECB owes the member bank that money. Simultaneously, the ECB loan account is a huge asset, because the member bank owes them that same money.

Magic, eh? No money needed printing. We've done just as we did in the antimatter example: we've taken a zero a ripped it into a big pile of plus stuff, and a big pile of minus stuff. When I say "we", I mean the ECB.

There is no need to run a printing press to do this; it's just numbers on a computer. Companies have to provide balance sheets to auditors so that this sort of jiggery pokery can be stopped. For example, I could go to my computer and say "Andy the borrower owes Andy the lender £1,000". What I can't do is use that (virtual) debtor (Andy the borrower) as collateral for a loan from the bank. They will ask to see my books, and will quickly discover me.

The ECB has no such limit, they are the lender of last resort, there is no one to show their books to that can tell them "no". What's worse is that they can transfer the balance from their virtual current account to a real bank's current account. This would be like me saying "Transfer £1,000 from my asset, Andy the Borrower to my HSBC current account".

While they didn't print any physical money; the effect is identical. A big pile of liquid cash which didn't exist yesterday, exists today. There are then some enormous debtors too; but that's just to keep the books balanced -- they need never ask for that debt to be repaid.

We should all see this for what it is: a pre-emptive bail out created by inflating the money supply.