Posts Tagged ‘credit’

What do overseas property investors see that Australian property investors don?t?

Thursday, August 12th, 2010

Foreign investors are getting spooked by the ?perky? Australian property market, according to this article:

Overseas bank investors are becoming increasingly jittery about Australia’s housing market. Bank analysts are fielding calls from overseas-fund managers about the sustainability of a surge in prices over the past year.

So while Australian property investors celebrate increasing prices, overseas investors are getting wary of an overheated market.

In Australia we have been inundated with theories regarding restricted supply, immigration, lack of land release, low interest rates and any number of other ?fundamentals? to explain the continued rise, and possible sustainability of Australia?s property market.

But are we exposed more than we realise?

According to this article, Australian banks are increasingly exposed to the cost of foreign sourced credit:

Australian banks now finance much of their lending from offshore because our national thirst for credit outstrips our collective ability to fund it.

?

The nightmare scenario goes something like this: International investors refuse to extend our banks credit at a reasonable price. This forces the banks to pass on additional costs to their customers and, in some cases, refuse credit. These tight credit conditions could squeeze property developers and highly-geared property investors alike. Many developers would be forced to offload housing stock quickly- by reducing sale prices – to raise cash to repay their loans as they fell due and/or cover the increasing costs of their debt.

Overseas property investors will be acutely aware of the value of the Australian dollar, as their investment will be bought and sold at a relative exchange rate. They will need to understand the current and future Australian dollar trends and risks.

But local investors are not encouraged to look into global economics. In fact, the level of financial education in Australia (and perhaps a large portion of the world) is unfortunately weak. Instead of being a ?smart country?, perhaps we are only the ?lucky country? after all. Will an external shock end our run of luck?

So, what do you think will happen to the Australian property market? Vote below and tell us what you think!

Is China setting itself up for a credit bust?

Thursday, July 16th, 2009

Today, China posted an impressive 7.9% GDP growth in the 3 months to June 2009. The most commonly accepted reasons for such a rapid revival in growth are:

  1. 4 trillion yuan stimulus package
  2. Relaxation of lending standards for banks

No doubt, this gives the markets plenty of reasons to be optimistic about the world economy. Economic figures for housing and autos seem to point to a strong recovery in China. Yet on the other hand, there are many other contradictory economic signals as well. For example, Chinese exports are falling for 8 months straight (see China’s exports sink 21%). Consumer prices fell 1.7% in June (see China’s June CPI falls 1.7%). Producer prices fell 7.8% in June (see China’s PPI falls 7.8% in June).

The biggest concern we have for China right now is the surging growth in lending. Take a look at China’s lending growth over the past 3 years:

China's credit growth 2006 to H1 2009

As you can see, bank lending in China surged in 2009. As the Chines economy slowed significantly, it is very likely that private demand for debt will decline significantly too. What do you think will happen if the Chinese government force feed even more credit into the economy? Chances are, a lot of these credit will leak into speculations, unproductive projects and mal-investments.

This is a recipe for exploding amount of bad debts in the near future.

Effects of retreating foreign banks in Australia

Sunday, November 23rd, 2008

Recently, we found this news report in the mainstream media:

 A significant retreat of foreign banks from the Australian corporate lending market is under way, which will leave the “Big Four” domestic institutions scrambling to pick up the slack in a mass refinancing of company debt due to happen over the next 12 months.

According to research compiled by banking analysts at Merrill Lynch, the total debt raised by Australian companies since 2006 stands at $285 billion. Merrill estimates that as much as $54 billion of that amount is held by what it describes as “retreating” offshore banks.

“This dislocation represents a potential benefit for major banks to refinance and upsize to good customers at vastly improved margins. However, it also raises the likelihood of potential bad debts collapsing sooner and a need for capital.”

As we mentioned before in Can falling interest rates and rising mortgage rate come together?,

In other words, there are not enough domestic deposits to fund all the needed credit (e.g. home loans) in this country.

Australia is dependent on foreigners for credit because of its lack of domestic savings. The retreat of foreign banks from Australia will result in more credit rationing for Australia’s businesses. Over the next 12 months, as businesses need to refinance their company debt, they may find that either (1) the price of money will go up further or (2) credit being denied. With the economy slowing, Australian banks are increasingly more careful with their lending. Furthermore, the recent lending fiascos (e.g. ABC, Centro, etc) will mean that they are in damage control mode, which implies that they will have to be even more stingy with their lending.

What is the longer-term effect of this?

Inevitably, this means that the weaker businesses will fail because their supply of credit is choked. Those who still have credit flowing through their balance sheet will find their debt repayment cost increases. That, along with falling revenue due to the slowing economy means that they will have to cut costs more aggressively. Since employees are one of the greatest costs for businesses, staff retrenchments will be undertaken. Laid-off workers will tighten their belts and cut their spending, which means other businesses will have their revenue cut. Businesses will become more pessimistic about the future, which means they will no longer invest for the future. This will result in businesses higher in the chain of production to suffer, which means they will have to cut the number of staffs. Many of these unemployed workers have large amount of debts, which means they will have to sell their assets (e.g. house) to de-leverage. This will in turn depress asset prices. Depressed asset prices will increase the chances of asset owners to fall into negative equity, which means that should they become unemployed, their debts will become bad debts for the banks. Bad debt for the banks will mean further rationing of credit. Further rationing of credit will start the next round of vicious cycle.

In engineering terms, this is called a positive feedback loop. It would not be easy for the government to intervene strategically to short-circuit this feedback loop.

Bernanke ticking off another inflation trick- becoming a business lender

Wednesday, October 8th, 2008

Remember back in Bernankeism and hyper-inflation, we talked about Ben Bernanke and companys’ unconventional (and crazy) schemes for attempting to induce inflation in a deflationary economy. One of the listed crazy ideas was:

Loan money into existence, accepting as collateral almost any private-sector asset whatever.

Today, we found this news report: Fed announces bailout of business lending.

Congratulations, Ben Bernanke!

In this news report, the Fed fears that…

… companies not facing financial problems are at risk of default on their commercial paper if they are not able secure another round of funding when their current borrowing matures.

Therefore, it announced a program to almost lend directly to businesses, by establishing a Special-Purpose-Vehicle to buy commercial paper from issuers (i.e. borrowers that include corporations). The announcement from the Fed can be found here. The loan security arrangement for non-asset-backed commercial paper (non-ABCP) are listed in the terms and conditions document in the Fed’s announcement.

This means the Fed is bypassing the banking system in order to make loans directly to the private sector.

Cost of credit or availability of credit?

Tuesday, October 7th, 2008

As you will already know by now, the Reserve Bank of Australia (RBA) cut interest rates by 1% today, which was more than what the financial market expected at 0.5%. What a bold move! Or is it a sign that the RBA is panicking? Or perhaps is it a result of a plan by central banks around the world to synchronise their rate cuts in order to soothe the global credit market?

There are plenty of commentaries about this surprise move by the RBA and we wouldn’t repeat them here. But there is something in the RBA statement that caught our eye:

The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.

The issue is not so much that the cost of credit is too high. Rather, the availability of credit is becoming the issue. What’s the implication?

Remember, back in Econ101 at university, you may have learnt to draw the demand-supply graph whereby the ‘market price’ is the intersection between the demand and supply? The assumption behind the demand-supply graph is that supply is always available as long as one is willing to pay the price. Thanks to freeze-up of the global credit market, this assumption is no longer true. That is, credit may not even be granted even if one is willing to bid for it at a higher price.

Assuming that the credit crisis will drag on, this means that more and more borrowers may soon find that lenders are no longer willing to lend despite being willing to do so previously. In other words, lending standards will be tightening even further. The implication is that more and more borrowers (whether businesses or households) who need to refinance or roll-over their loans may suddenly find that the supply of new credit are being denied.

This will be the point when the crisis in the financial markets spread to the real economy. As Alan Kohler wrote in Interest rate give and take,

If credit ain?t available, it doesn?t matter what it costs.

When ‘cash’ becomes confetti, inflation/deflation becomes irrelevant

Tuesday, September 23rd, 2008

The financial and economic events of this month is amazing and history will one day judge September 2008 as one of the major turning points.
Today, if you follow the inflation/deflation debate on the Internet forums, blogsphere, etc, you will find this issue to be a highly divisive, polarising and at times, rather emotional debate. No wonder it is a highly confusing time for investors and traders.

For investors, it will be a big mistake to take sides in this debate. You may have certain inclination towards one or the other side of the fence, but do not dig in and get permanently committed to an opinion/idea. From our observations, some people have become too religious and emotionally involved to one side of the debate. They have become so religious that whoever belongs to the other side is regarded as an infidel. Such loss of objectivity will cloud your judgement.

First, for our newer readers, please take a read at What is inflation and deflation? for our definitions of inflation or deflation. They are not the mainstream idea of price rise/falls.

So, will hyper-inflation or severe deflation be the endgame of this financial crisis?

We don’t know which one will be. But our guess is that it is probably the former. But that does not mean we are loyally committed to that position and bet our entire life and wealth on that. After all, life is more subtle than that either black or white. Because we cannot know with certainty what the future will hold until time has passed, it becomes a game of probability for the present.

Now, take a read at Understanding the big picture in the inflation-deflation debate,

So, the world?s fiat money system works under the ?mechanism? of credit. Because money has to be returned, it acts, in theory, as a check against abuse and rampant monetary inflation.

The fact that the global financial system is facing acute deflation threat shows that this credit-system ?mechanism? is working to protect the integrity of fiat money!

At the root of the deflation argument is the fact that we live in a credit-based economy. As long as this credit-based system is in place, any inflationary bubble will be ultimately deflationary. Please note that the word “ultimately” in the previous sentence is bold. The word, “ultimately,” is a very important qualifier. This implies that before the ‘ultimate’ deflation, we can have inflation in the interim.

So, to illustrate the point of this qualifier, let us conduct a thought experiment. For the purpose of argument, let’s assume that the credit mechanism is firmly in place.

Say, the US nationalisation of its financial sector transfers most of these toxic private sector debt into the public debt. Given that the US government already has a huge amount of debt, this means they have to raise even more debt. The only way for the US government to issue more debt is to issue government bonds, which is still borrowed money that has to be returned. We can see why this is still ultimately deflationary because no matter how much the US government borrows, it has to return them eventually (e.g. by raising taxes).

Now, let?s take a step further and say that the US government monetises its debt by selling the newly issued government bonds to the Federal Reserve. That?s in effect printing of money. Even then, some will argue it is still ultimately deflationary because it is still credit i.e. the government has to eventually buy back the bond from Federal Reserve.

Let?s take a step even further. Let?s say the government pays off that expired monetised debt by monetising even more debt. That?s like an individual borrowing from one credit card to pay off another credit card. Imagine what will happen if the government do that! Its debt will grow exponentially, which is hyper-inflationary. Still, it can be argued that it is still ultimately deflationary because all these government debt has to be returned.

At this point, let’s pause and think.

In such hyper-inflationary environment, it’s doubtful whether people will see government legal tender ‘cash’ as money any more. In Zimbabwe, during an auction of a car, ‘cash’ no longer function as money. Instead, petrol vouchers (denominated in litres of petrol) were used as a unit of account for the bids. In Vietnam, the recent high inflation of the Vietnamese currency leads to some instances whereby people no longer uses legal tender ‘cash’ as money in buying/selling land.

The point we are trying to make is that by the time the situation becomes that bad, all talks about inflation or deflation is irrelevant because, ‘cash’ no longer function as money for practical purposes. They become as good as confetti. Who cares about the inflation or deflation in the supply of confetti?

Please note that the purpose of this article is not to make an inflation/deflation forecasts in the prediction sense. Its purpose is to show you how dragging an idea to the extreme can lead to erroneous thinking. In this example, while it is true that deflation will ultimately happen theoretically in the context of a credit-based system, it is pragmatically irrelevant.

Why is the RBA backflipping on interest rates?

Wednesday, August 20th, 2008

It was just a few months ago, the Reserve Bank of Australia (RBA) was very hawkish on interest rates. Its priority was to fight price inflation and with that, even approved of the banks raising their mortgage rates. It was said that if not for the mortgage rate rises, the RBA would have raised rates even more.

It seems that all of a sudden, the RBA began to hint strongly about cutting interest rates. What is going on? As this article,  The Great Interest Rate Forecast Back Flip, reported,

Indeed, the Macquarie analysts are actually concerned the sudden turnaround in RBA intention suggests it might know something about the economy we don’t. “Has the RBA’s business liaison program revealed some financial fragility in the economy that has not yet been unveiled?” while suggesting that “for this reason lower interest rates are unlikely to be the green light for growth investors might hope for”.

One thing many experts even fail to understand is that a fall in interest rates does not automatically mean a loosening monetary policy. As we explained before in What makes monetary policy ?loose? or ?tight??,

A common misperception is to assume that any rise in interest rates automatically implies a monetary tightening (and conversely for a fall in interest rates).

What had been happening is that the demand for credit in the Australian economy is decelerating very rapidly. That is, Australian households, individuals and businesses scaling back on their borrowings. When the demand for credit slows down tremendously, what was before a ‘loose’ monetary policy can become ‘tight’ all of a sudden.  If credit demand falls further, the RBA can still cut interest rates and still have ‘tight’ money. If you are confused by this, please read our earlier article, What makes monetary policy ?loose? or ?tight??.

The best way to explain this concept is to use Japan as an example. In the 1990s, Japan famously cut interest rates to zero. Yet, asset prices kept on falling for 16 years straight. That is an excellent example of deflation whereby credit became a dirty word. Even when interest rates was zero, Japan’s monetary policy was still ‘tight.’

For Australia, a rapidly decelerating credit growth is very bad news. Since a lot of Australian consumer spending is financed by the growth of credit, this will mean a severe slowdown in the Australian economy. Furthermore, rising asset prices is fuelled by exponential increase in credit. A rapid deceleration of credit growth will result in asset price deflation.

We can imagine the RBA worrying about the storm clouds gathering ahead- US is in recession, UK is going to fall into recession, Europe is stumbling into recession, Japan is feared to fall into recession, falling commodity prices, China is slowing down, etc. If the rest of the world economy is slowing down significantly, there is no way Australia can escape.

Refuting Michael Pascoe’s optimism about continued growth

Thursday, August 7th, 2008

As we all know, there are a lot of chatters about recessions in the Australian media recently. As always the case, there are two opposing camps of perennial optimists and committed doomsayers on this recession debate. The question is, will there be a recession in Australia?

Our answer is, a recession is not a matter of if but a matter of when. In other words, we still believe that the economy moves in cycles. We do not believe there is such a thing as ever-lasting growth forever and ever till infinity. In fact, we made the first recession call back in February 2007 in Where are we in the business cycle?:

Thus, we believe that Australia (and the US as well) is at the top of the business cycle. For investors, we have to bear in mind that we are now probably at the cyclical top. If we assume that the current trend of companies? profit growth will extend indefinitely into the future, we will be in for a nasty surprise.

Due to some quirk in human nature, it is very easy to fall into turkey thinking as we explained in Failure to understand Black Swan leads to fallacious thinking. Therefore, it is in this context that we wish to refute Michael Pascoe’s punditry on recession, Doomsayers to the fore. We have been hearing his commentary for a couple of years already and know that he had made many wrong calls in the past, including the comments he made last year about the sub-prime crisis being just a “storm in a tea-cup.” Below are our refutations on his “10 reasons for why we won’t suffer a national recession any time soon”:

The Reserve Bank has lots and lots of dry powder if it needs it. As a result of bumping up interest rates, the RBA can easily cut and cut quite dramatically if it thinks the economy is slowing too fast.

This was the same argument made by Shane Oliver, the chief economist of AMP. As we refuted Oliver’s factual error in Aussie household debt not as bad as it seems?,

[Reflation] did not work in Japan! Remember Japan?s infamous zero-interest rate monetary policy as well as massive government spending fiscal policy? Yet, deflation dogged the nation for more than 16 years. There is only one way to fight deflation and that way leads to hyperinflation (see Recipe for hyperinflation).

Central to Michael Pascoe’s idea is the belief that the pushing of the short-term overnight cash-rates levers by the RBA is a kind of do-it-all snake oil that can solve every economic malaise. But as we sarcastically put forth this question in Why does the central bank (RBA) need to punish the Australian economy with rising interest rates?,

Think about this: if raising interest rates is ?bad? and cutting interest rates is ?good,? then why don?t the RBA set interest rates to zero, thereby putting the economy into a path of eternal boom (plus runaway inflation)? For those who think this is a good idea, then this article will set to let you understand why this is a bad idea.

Also, as we quoted Ludwig von Mises in How will asset-driven ?growth? eventually harm the economy?,

The economists were and are still today confronted with the superstitious belief that the scarcity of factors of production could be brushed away, either entirely or at least to some extent, by increasing the amount of money in circulation and by credit expansion.

To make a final debunking of this idea, consider this present fact: the US Federal Reserve raising interest rates in baby steps from 1% to 5.25% under Alan Greenspan. Then, in reaction to the credit crisis, it began slashing interest rates quickly to 2% today. Did that solve the core of the rot in the US economy? As we explained yesterday in Would the RBA?s rate cut do any good?, a too hasty and massive cuts in interest rates will have a very negative effect on the Australian dollar, which will not be good news for the Australian economy.

Next, Michael Pascoe said,

The RBA is ready to push money at the banks if necessary. Cutting interest rates isn’t the Governor’s only option. He also is set up to lend the banks money in exchange for mortgages if liquidity gets too tight.

Well, take a look at how the US is faring right now. This step may save the banks, but it may not be good for the Australian people. Furthermore, when debt deflation takes hold, shoving money to banks will not be enough to persuade the economy to take on more debt. As we said before in What makes monetary policy ?loose? or ?tight??,

… we have to remember that the central bank cannot control the demand for money and credit. It can supply whatever amount of them that it wants, but it cannot force business and people to desire them. Put it simply, you can lead a horse to the water, but you cannot force it to drink.

Michael Pascoe said,

We’re not the US or the UK. While a couple of our banks have ‘fessed up to big write offs and provisions, they all remain fabulously profitable and their loan book is in much better shape.

We have this to say at How safe are Australian banks?.

Next, he said,

If the unemployment starts to rise uncomfortably, the government has the option of turning off or at least turning down the big immigration inflow it’s presently encouraging. Australia’s gross immigration is running at more than 300,000 people a year.

The problem is not one of over or under employment. Rather, it is the structure (or configuration) of employment. Take a read at Overproduction or mis-configuration of production?. Also, if Australia falls into serious unemployment problems, do you think migrants will still want to come here?

Next, he said,

The Federal Government has surpluses it can turn into spending if it looks like we’re heading for the recession door. Kevin Rudd wants to be Prime Minister for a lot more than one term.

If the government spends too much money too early (by turning the budget surplus into deficit), it will not solve the problems of mal-investments and mis-configuration of production in the economy. Instead, price inflation will be the main effect. Remember, at this point in time, Australia is close to full employment.

Next, he said,

The oil price could well continue to fall, providing some needed psychological relief for consumers feeling battered by prices prices and, what’s worse, the media screaming doom and gloom about oil.

Mere short-term psychological factors will not solve the basic economic problem of scarcity of factors of production and mal-investments. Take a read at our guide, What causes economic booms and busts?.

Next, he said,

The big picture hasn’t changed – Beijing still wants to see about 200 million peasants move into the cities from subsistence existences down on the farm over about 10 years. Think about the infrastructure demands for housing and moving that many people every year and you won’t be panicked into worrying too much about the United States not buying as many Chinese-made shirts and sandshoes.

And therefore demand for our resources remains strong. The surging iron ore and coal prices are yet to fully emerge from the statistical noise and be shown as the great stimulus that the terms of trade are providing.

He got this half-right. Our views on China is summarised in Crisis and the China growth story. Let’s say China’s economic growth slowed down from around 12% to say, 5%. Relative to the ailing US economy, it is still a fantastic growth rate. But relative to itself, it is a major recession. What will this do to commodity prices in the short to medium term?

Next, he said,

Remember where our economy has come from. Yes, there has been a sharp slowdown in retail sales and credit growth – but they’re coming off very high bases. And the economy overall was running at near capacity – the RBA had to make room for the resources boom impetus.

Michael Pascoe forgot that Australia’s debt level had gone too far from the mean by a far margin. The “base” that he mentioned should be the mean, which is somewhere very much lower that where it is today.

Finally, he said,

And, finally, we do learn from our mistakes. The doomsayers tend to be so busy screaming about any potential disaster that they overlook moves buy the government and RBA to counteract them. We have to give the mandarins just a little credit – the RBA certainly doesn’t want a repeat of the last recession when it was arguably a little slow to put up rates and then far to slow in cutting them.

He forgot that Australia is not an isolated economy. It is a relatively small economy that is very much inter-linked to the global financial system and is at the mercy of global macroeconomic forces. There are some factors that is totally beyond the control of the Australian government and the RBA- for example, oil prices, credit crisis, etc.

The difference between money and credit

Sunday, August 3rd, 2008

For our long-time readers, we often mention the word “money” and “credit” side by side in the context of money supply (e.g. our earlier article, 363 tons of US dollars to Iraqóhow much money will eventually be multiplied into the economy?). The problem with this is that it is a form of sloppy language that can lead our readers astray in their understanding of the economy. It leads to confusion between money supply and credit. Therefore, we are writing this article to address this issue.

Before you continue reading this article, please take a read at Introduction to banking corporate accounting and Effect of write-down on bank balance sheet because we will be explaining money and credit in terms of simplified corporate accounting.

Let’s suppose there are two banks in the economy that has an initial balance sheet that looks like this:

Bank A
Assets: 0
Liabilities: 0
Equity: 0

Bank B
Assets: 0
Liabilities: 0
Equity: 0

Now, say Tom has 100 gold coins. Therefore, the total supply of money in the economy is 100. He deposits the 100 gold coins into Bank A. The outcome will look like this:

Bank A
Assets: 100 (gold coins)
Liabilities: 100 (gold coins)
Equity: 0

Bank B
Assets: 0
Liabilities: 0
Equity: 0

Now Bank A lends 90 of the gold coins to Dick. The outcome will look like this:

Bank A
Assets: 90 (loan of gold coins) 10 (gold coins)
Liabilities: 100 (gold coins)
Equity: 0

Bank B
Assets: 0
Liabilities: 0
Equity: 0

At this point in time, the money supply has increase from 100 to 190 (100 in gold coin deposits and 90 in the hands of Dick). Credit, on the other hand, had increased from 0 to 90. Now, let’s say Dick then deposit the 90 gold coins on his hands into Bank B. The outcome will be:

Bank A
Assets: 90 (loan of gold coins), 10 (gold coins)
Liabilities: 100 (gold coins deposit)
Equity: 0

Bank B
Assets: 90 (gold coins)
Liabilities: 90 (gold coins deposit)
Equity: 0

At this point in time, the money supply is still 190 and credit still at 90. Now, Bank B then loan 81 gold coins to Harry. The outcome will now be:

Bank A
Assets: 90 (loan of gold coins), 10 (gold coins)
Liabilities: 100 (gold coins deposit)
Equity: 0

Bank B
Assets: 81 (loan of gold coins), 9 (gold coins)
Liabilities: 90 (gold coins deposit)
Equity: 0

At this point in time, money supply has grown from 190 to 271 (190 as gold coin deposits and 81 in the hands of Harry). Credit has grown from 90 to 171. Let’s say Harry lost all the coins in a fit of vice by splashing them all on drugs. He then lost his job due to his drug addiction and becomes insolvent as a result. What will happen next?

Bank B’s asset will have to be completely written down:

Bank B
Assets: 0 (loan of gold coins), 9 (gold coins)
Liabilities: 90 (gold coins deposit)
Equity: -81

Bank B is insolvent in this case because its equity has gone negative. For the sake of illustration, let’s assume that there’s a massive cover-up between the government and the banking system to keep this bad news from the public. At this point in time, the total credit in the economy has gone back down to 90. Thanks to the cover-up, both banks are still operating. Therefore, the money supply is still at 271 (190 as gold coin deposits and 81 in the hands of the drug dealers, who then spends it all on other things).

Now, here comes a twist. The government needs to secretly bail out Bank B but where is it going to find all the gold coins? Since Bank B has only 9 gold coins left, it is only a matter of time before Dick will realise that his deposits are amiss. Therefore, the government decide to come up with a scam. It will raise taxes and hauled in 20 gold coins as a result. Then it will dilute the gold in the 20 gold coins and produce 81 ‘gold’ coins. It then ship the 61 counterfeit ‘gold’ coins to Bank B. Now, the balance sheet of Bank B will look like this:

Bank B
Assets: 61 (‘gold’ coins), 9 (gold coins)
Liabilities: 90 (gold coins deposit)
Equity: -20

No one discovers this scam. Officially, the money supply still stands at 271 (190 as gold coins deposit, 61 gold coins dispersed in the economy by the drug dealers’ high spending ways and 20 supposedly at the government. Total credit still stands at 90. Now, Bank B decides to lend 40 ‘gold’ coins to Thomas, a pious and enterprising businessman.  The balance sheet will now look like this:

Bank B
Assets: 40 (loan of ‘gold’ coins), 21 (‘gold’ coins), 9 (gold coins)
Liabilities: 90 (gold coins deposit)
Equity: 0 -20

Now, the money supply swells to 311 (190 as gold coin deposit, 61 gold coins dispersed in the economy, 20 supposedly at the government, 40 ‘gold’ coins in the hands of Thomas). The total amount of credit has swelled from 90 to 130.  The monetary base in the economy is at 161 (9 gold coins in Bank B, 21 ‘gold’ coins in Bank B, 61 gold coins dispersed in the economy, 10 gold coins in Bank A, 20 ‘gold coins in the government and 40 ‘gold’ coins in the hands of Thomas). You can do a quick cross check on the figures- originally there was 100 gold coins and the government took 20 and dilute it into 81 ‘gold’ coins.

That’s the end of this simple story. In summary, money and credit are related but they do not refer to the same thing.