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 nanshe1111
Joined: 2/7/2014
Msg: 26
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Banks and the financial systemPage 2 of 7    (1, 2, 3, 4, 5, 6, 7)

Surely you aren't suggesting that as a better system.


Of course I am not, but who said I'm talking about forceful labor? Imagine a community of people stuck somewhere in another planet. They are all starving and thirsting for water. They looked around themselves and saw the enormous amount of resources that the planet was providing for FREE. Do you think it would matter how much paper/fiat money they have or would it be Unity, Imagination/Ideas, Initiative and the common goal to better everyone's lives that would matter? Do you consider those values outdated and irrelevant?

We are heading for doom right now because we value a piece of paper instead of what really matters.
 nanshe1111
Joined: 2/7/2014
Msg: 27
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Posted: 2/16/2014 11:52:34 AM
At the very core of the Monetary System is Selfishness and the air that it breathes is the people's sense of entitlement. That moment when people started discriminating who deserves to have access to the resources that this undiscriminating planet is providing for free is also the moment when the monetary system and the likes were born.

The different sets of keys to financial success:
1) Be born of "old money"
2) Health, Intelligence, a little hardwork and luck
3) Health, Hardwork/Perseverance, a little intelligence and luck
4) Health, Beauty, Fame and luck
5) Health (athletes)
5) Luck

There are two things most common to to the sets I mentioned above, Health and Luck. You have to be healthy and you have to be lucky to be at the right place, right time and be the right person to be successful.

But what of those who aren't healthy and aren't lucky? Yup, the monetary system discriminates.
 flyguy51
Joined: 8/11/2005
Msg: 28
Banks and the financial system
Posted: 2/16/2014 12:03:53 PM

Is this sustainable? Absolutely not. Eventually, it's going to collapse.

Demigod, if you're going to talk sustainability, virtually nothing we have now is sustainable on its present trajectory. Eventually, the trajectory will have to be altered. In the case of money, it's value will eventually have to be reset to a different position in order to maintain its viability.

As an example: after WWII, Germany's economy was in disarray. One major component to right their economy was to have its citizens exchange their Reichsmark to the new Deutchmark at a great loss. I don't remember the ratio of exchange, but everyone's wealth was cut steeply. However, the strength of the new currency caused the new nation's economy to take off.

Of course I am not, but who said I'm talking about forceful labor? Imagine a community of people stuck somewhere in another planet. They are all starving and thirsting for water. They looked around themselves and saw the enormous amount of resources that the planet was providing for FREE. Do you think it would matter how much paper/fiat money they have or would it be Unity, Imagination/Ideas, Initiative and the common goal to better everyone's lives that would matter? Do you consider those values outdated and irrelevant?

Nanshe, you hold an overly simplified view of the realities of the world. You bring up forced labor when you hold the pyramids as an ideal of human achievement, whether you realize it or not. We could create many amazing things by forcing people to work against their will.

The community on the other planet scenario you describe has nothing in common with the realities of thirsty people in Africa.

And the "pieces of paper" we value are able to purchase "what really matters." Any charitable organization will even admit to that...
 nanshe1111
Joined: 2/7/2014
Msg: 29
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Banks and the financial system
Posted: 2/16/2014 12:22:15 PM

Nanshe, you hold an overly simplified view of the realities of the world.


Am I? or are we overcomplicating things? In truth it is very simple, This planet provides for free, Is it not? We have an abundance of resources, don't we? We have 7 billion people for manpower, don't we? So what exactly is our problem here? What do you think is the solution? My answer? The problem is the people and the answer is also the people!

Here is an in depth explanation and analysis of the monetary system by a REAL expert. Fast forward to 32 minutes of the video. "The World's a Stage"

http://www.youtube.com/watch?v=pTbIu8Zeqp0
 IgorFrankensteen
Joined: 6/29/2009
Msg: 30
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Banks and the financial system
Posted: 2/16/2014 1:55:41 PM

And where does this money come from? There's only one place, the general money supply. And where does that come from? The vast majority comes from the principal of loans. Once again, if there is only $5000 in the money supply,


There is another place, unless you are sticking with a theoretical model economy, limited to $5 k. If you are, then nothing I said is meaningful. I thought we were talking about an actual economy, such as the one in the US.

If you are talking about an ACTUAL economy, the additional money can be printed (or created virtually as required) as the additional WEALTH (i.e. actual goods and services) is created.

I still find your arguments confusing, because I'm not seeing any evidence that you DO think wealth is created. Your $5k model doesn't allow for it, certainly.
 Demigod1979
Joined: 12/4/2011
Msg: 31
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Banks and the financial system
Posted: 2/16/2014 3:00:29 PM

Demigod, if you're going to talk sustainability, virtually nothing we have now is sustainable on its present trajectory. Eventually, the trajectory will have to be altered. In the case of money, it's value will eventually have to be reset to a different position in order to maintain its viability.

I think with the current system the way it is, it's difficult to predict or control the supply of money. We saw this when the 2008 financial crisis hit - the Fed lowered rates all the way to zero and it still didn't revive lending. The herd mentality of the "business cycle" makes guarantees that any upturn/downturn will be accelerated, leading to periods of boom and bust. As for the currency, I'd prefer to have one that remains stable, but that would mean lending without interest (not going to happen with private banks) or having the government control the money supply (also not going to happen with our current economic models).


There is another place, unless you are sticking with a theoretical model economy, limited to $5 k. If you are, then nothing I said is meaningful. I thought we were talking about an actual economy, such as the one in the US.

You seemed to have missed the point of my example, which was about the viability of paying back loans at a specific point in time (not over time, which seems to be what you're referring to). The $5k amount is not a limit, it was just the total amount of money in the money supply at that time (after the banks had made those five loans). As they create more loans, or retire old ones, the money supply will grow or shrink, but that's not important to the discussion. The point is, the amount owed will always exceed the amount that exists. If the bank issues more loans to account for more wealth, those loans will also have interest charges attached to them, which can only be paid off with even more loans. Under the current system, we will never have a scenario where assets = liabilities.


If you are talking about an ACTUAL economy, the additional money can be printed (or created virtually as required) as the additional WEALTH (i.e. actual goods and services) is created.

Additional wealth would increase the value of existing money, not create it. Also, banks are under no obligation to automatically create new money to account for new wealth (e.g., in a recession/depression they will hold off on the creation of new loans, no matter the wealth that exists in the economy). Of course most of the time there is plenty of money in the money supply relative to goods and services, it's just that you should be aware that that money is part of an ever-growing debt pool which may, at any time, collapse (you can only swap credit card balances for so long).
 Doremi_Fasolatido
Joined: 2/14/2009
Msg: 32
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Banks and the financial system
Posted: 2/16/2014 5:10:19 PM
Msg# 21. "How do we stop a monster we all had a hand in creating?

I don't think we can stop our monetary/political/production/ systems as they are all interconnected. All depend on one another and all need to be regulated by us. I realize many say business and industry and yes our monetary systems would thrive if left alone.

Look how well that worked for a majority of people during the industrial revoloution. Sure, industry thrived but it only worked for a select few. Those who produced the goods,and ultimately the capital these select few enjoyed were left out of the equation. I call this "cannibalistic industry" as the industries used to consume the very people who kept it running.

So, I'd say recognizing the problem unregulated Banking or anything that affects the public is one of the first steps in making it work better for all. Once this happens those who are aware of the good ,and bad things our system provides can then elect those who want to make it work best for all.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 33
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Banks and the financial system
Posted: 2/16/2014 7:37:04 PM

We saw this when the 2008 financial crisis hit - the Fed lowered rates all the way to zero and it still didn't revive lending.


That's because it has never been the cost of money, that causes or prevents by itself, the expansion of an economy. What makes an economy expand, is lots of people buying things. Making loans cheaper only helps, if the problem is lots of customers, but insufficient production. Your misunderstanding of this is identical to the Republicans' misunderstanding (intentional or not) that leads them to (pretend to?) believe in "Supply Side Economics."

Right now still, there are tons of businesses who have a lot more cash on hand than they did in 2008, some even more cash on hand than they did BEFORE 2008. But they STILL aren't expanding and hiring, for the simple reason that there are still no CUSTOMERS.


Additional wealth would increase the value of existing money, not create it. Also, banks are under no obligation to automatically create new money to account for new wealth (e.g., in a recession/depression they will hold off on the creation of new loans, no matter the wealth that exists in the economy).


Not only are banks under no obligation to print new money, they are legally prohibited from doing so. Again, you are mixing up Wealth, and Money, and Cash. There are three different things here. The Federal Government is the only body that can print money.

Additional wealth has nothing to do with the value of money. If you plant seeds and for some reason, twice as much grows as normally does, the price of it isn't required to go down. If available cash had anything to do with Wealth, then no one would ever bother to increase production. The reason why prices for something SOMETIMES fall when production increases, AND the cost of production per unit remains the same, is only because the desire to BUY the items falls.

Here's a true story to ponder:

Back in the early days of cars, Henry Ford brought out the famous Model T. He sold tons of them at first, because for the first time, there were cars that were cheap enough that a lot more people could afford them than before. Again, Ford was able to expand his business, because he had LOTS OF CUSTOMERS WITH MONEY TO SPEND. Not because he had extra money on hand, or low interest rates.

Here's where it gets interesting though. After a while, Fords competitors started making better cars, and selling them for the same, or slightly more than Ford's T's. But Ford himself was stuck in an ego loop. He refused to change the design of the T, refused to even allow different paint colors for it. Instead, he kept sales up by lowering the price again and again, driving his factories to increase productivity any way they could, until he was finally losing money.

Finally, when his creditors had enough, Ford brought out the Model A, and saved his company, by finally being willing to sell a car that CUSTOMERS WANTED TO BUY.

The price of the Model T during that mess, went lower and lower. It's price had NOTHING to do with the availability of money, NOTHING to do with the VALUE of cash, NOTHING to do with interest rates on loans.

It's all about CUSTOMERS, and how much ACTUAL WEALTH those customers have, that they can turn into spending money.

The reason banks stopped lending back in 2008, wasn't just because of the debt mess they had put themselves into, it was because the bulk of the US populations' spending ability had been steadily reduced over the previous two decades at least. This is why the cost of health care has been such a big issue. The rising cost of health care drives down the spending cash available to CUSTOMERS. The fall of spending cash of CUSTOMERS drives down demand. The fall of demand, eliminates any intelligent reason for a business to increase production, hire more people, and so on.
 Demigod1979
Joined: 12/4/2011
Msg: 34
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Banks and the financial system
Posted: 2/16/2014 9:05:35 PM

That's because it has never been the cost of money, that causes or prevents by itself, the expansion of an economy. What makes an economy expand, is lots of people buying things. Making loans cheaper only helps, if the problem is lots of customers, but insufficient production. Your misunderstanding of this is identical to the Republicans' misunderstanding (intentional or not) that leads them to (pretend to?) believe in "Supply Side Economics."

Right now still, there are tons of businesses who have a lot more cash on hand than they did in 2008, some even more cash on hand than they did BEFORE 2008. But they STILL aren't expanding and hiring, for the simple reason that there are still no CUSTOMERS.

Yes, spending is the main issue in the current economy. As many Keynesian economists have said, what needs to be done right now is for the government to increase spending to get the economy going again, since they are the largest customer.


Not only are banks under no obligation to print new money, they are legally prohibited from doing so. Again, you are mixing up Wealth, and Money, and Cash. There are three different things here. The Federal Government is the only body that can print money.

Who said anything about physically printing money? As explained before, banks create checkbook money (which has to be treated the same as Federal Reserve Notes) by issuing loans. This bank-issued loan money is basically the only thing I'm talking about here since it's the issue at hand (why you're referring to physical cash is beyond me). The wealth element is also something that you brought up (it had nothing to do with my example, which was a straight-forward math analysis about the problem with the money supply). Who's the one that's mixing things up here?


Additional wealth has nothing to do with the value of money. If you plant seeds and for some reason, twice as much grows as normally does, the price of it isn't required to go down. If available cash had anything to do with Wealth, then no one would ever bother to increase production. The reason why prices for something SOMETIMES fall when production increases, AND the cost of production per unit remains the same, is only because the desire to BUY the items falls.

Lots of factors can affect the price of specially-made goods in the short-term, but over the long run, the supply of money will cause prices to rise (the threat of runaway inflation is one of the reasons why the Federal Reserve exists - price stability is one of its mandates). Note that the price of volatile items is typically not included in the index when calculating inflation (usually only commodities are, since their price remains relatively stable, and is thus a good barometer of the money supply).
 Demigod1979
Joined: 12/4/2011
Msg: 35
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Banks and the financial system
Posted: 2/17/2014 6:09:14 AM

Governments may be the biggest customer for spending but the overall population is much larger and it is consumer confidence in their own spending that actually drives the economy ... the downfalls are pretty much always people stopping their spending out of fear. due to whatever. ... the actual collapse in 2008 was driven by fear and people pulling their money out of the economy ... so much of it too late to do anything but speed the downfall and guarantee their own losses.

Part of it is fear, but part of it is lack of spending power. Earnings have stagnated over time, to the point where even two people working full-time jobs often times isn't enough (previously, a single breadwinner could earn all that his family needed). Although some jobs have come back, those jobs are lower-paying jobs than the ones that existed before. I think that a concentration of wealth at the top is hurting the situation; the rich tend to store most of their money away (often times in tax havens or invested overseas where they can get a bigger return) while the lower- and middle-class tend to spend most of their money.

The situation is somewhat different up here in Canada. We don't have lack of spending, but the exact opposite. Fueled by low interest rates, our debt to income ratio is now sitting at a worrying 163.7% and there are no signs that it's slowing down. Mortgages are the major factor in this, and getting a loan on a house is still extremely cheap due to the low interest rates (the Bank of Canada is keeping it's rate at 1%, as it fears the economy is still too fragile). As always, people flock to cheap credit, and I feel that Canadians are becoming more exposed to financial shocks.


the bail out was only needed because people in general were not willing to do the required spending. Our economy rests on the fickle attitude of the fund managers more than the government.

Actually, the bailout was to inject money into the banks to offset their liabilities and keep them afloat (originally it was supposed to buy toxic assets from the banks but that was scrapped as impracticable). No amount of consumer spending could have done that. You're also getting the correlation backwards - it's the banks that refused to extend credit to businesses and consumers, resulting in layoffs and cutbacks that make it difficult for people to spend.


Banks used to be just banks and held and borrowed money but now they sell insurance and promote stocks and have major conflicts of interest ... if the government had any balls they would force the banks to be just banks again. And for them to settle for the pretty much guaranteed profits that are respectable but not exponential like they presently strive to have by any means possible.

There used to be walls between these things (now they're mostly Chinese walls). And yes, banking should be a boring business. It's the rise of the shadow-banking industry that really tipped the balance though. They were making so much money trading and selling their mortgage-backed securities that it was difficult to stop, and it infected the entire financial system. The only thing that saved Canada's banks from sharing the fate of American and European banks is that there were regulations that prevented taking on such risk.
 flyguy51
Joined: 8/11/2005
Msg: 36
Banks and the financial system
Posted: 2/17/2014 7:42:49 AM

There used to be walls between these things (now they're mostly Chinese walls). And yes, banking should be a boring business. It's the rise of the shadow-banking industry that really tipped the balance though. They were making so much money trading and selling their mortgage-backed securities that it was difficult to stop, and it infected the entire financial system. The only thing that saved Canada's banks from sharing the fate of American and European banks is that there were regulations that prevented taking on such risk.

The now controversial Gramm Leach Bliley Act of 1999 took down these walls you mention. Most economists say that it was a large ingredient in the current crisis. However, I have also read that some people still support it (such as President Clinton who signed it-- surprise) and claim that it actually lessened the effects of the crisis. Their reasoning is that the act allowed diversification in the banking industry, and that it is actually the largest and most diversified banks that have weathered the storm the best.

I say bunk to that. Just because a bank is left standing after a crisis does not automatically mean that it didn't have a very large part in creating the crisis!
 Ed Bear
Joined: 5/19/2007
Msg: 37
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Banks and the financial system
Posted: 2/17/2014 9:33:33 AM
Demigod1979: You've got it wrong, and Igor has it right, this time.

"Money" is not the whole economy. Wealth is grown as food, mined from the earth, made with labour, provided with as services. Anything that someone else will give you something or do something for is wealth that has value. The actual cash really only comes into it as an exchange medium when the guy with the oysters doesn't want the cigars the oyster-lover is making.

Most of the rest has been covered here pretty well; the long-term problem of the current economy is that there is STILL a huge amount of illusory wealth left over from bubble-blowing in the last two decades. It's all being juggled (or the chairs moved around) and nobody wants to be the one to catch it. There's no way to pay debt other than to stop spending until you earn enough. That has its own problems, of course.

At the dawn of the '90s, the dot-com boom and the "economy 2.0" fantasy made people willing to believe that technology was going to create things/services that people would be wiling to pay more and more for. (Of course, most of it was amassing wealth by making people unemployed so they couldn't pay anything at all.)

The dot-com boom went bust. Lots of people lost everything. The ones who got out in time, or who had one of the really functioning businesses, had lots of money- and a problem. They were used to massive returns on vapor - literally money for nothing - and they were too greedy to invest in anything that would simply return solid, safe profit. They also worried that all that loose debt and bankruptcy was going to drag down other businesses as a whole, and wanted a safe place to put their money.

So, at the end of the decade and the boom, they put their money into seemingly "real" assets - housing. "Safe as houses," the real-estate pimps always said, and people seem to always need a place to live. They bought real estate, and in the process drove up real-estate prices with demand, keeping them rolling in income as they'd hoped.

But those losses were still out there, still looking to be paid back. Businesses failed (save for construction) and people were unemployed. Did they need houses? Maybe - but almost everyone could rent, or downsize, share, move back into mom's or score a repossessed trailer. They could rent out part of their property, or all of it, to pay their housing bills.

Housing, though, is an UNFAIRLY PRIVILEGED INVESTMENT. It comes with tax breaks and the promise of ill-gotten inflationary gains, despite its long history of boom-and-bust with only the "bottom feeders" who had money during the busts to clean up. Since the construction industry needed more buyers for all the houses they were building to grab that greedy money, more liberal lending pushed people to buy what they couldn't afford and not let it earn anything; everyone fixated on the tax advantages without remembering that they were CONSUMING housing by living in it instead of renting it out. They were told that the more housing they had, the more they'd make.

They bought it.

Meanwhile, the perfectly sane and long-proven post-depression regulations that kept banks safe and solvent were done away with by deregulating gamesters (like those backing Gramm-Leach-Bliley) who said there would be new ways to amass money. There were - ways that provided no value, but simply grabbed from others.

While it was the oil price tripling that started the collapse, stopping the auto industry in its tracks, it was the huge bubble that made it a massive disaster. As everyone should remember form the Savings & Loan disaster, separating risk and profit guarantees failure for those stuck with the risk. And those who got away with the cash have no reason to give any of it back; that's why I think higher income taxes are necessary for long-term economic recovery.

Can people work and create wealth to pay back the money borrowed from the future? America's exemplary productive capacity can do that. But is isn't, because now the greedy money has freer trade, and can build things overseas. Since unemployed people can't buy them, they SELL them overseas as well. Suddenly, the American production machine is spinning in idle. Staving off bankruptcy by selling resources, government contracts and other productive entities offshore takes the public sector and resource wealth out of the equation.

And the political power of wealth has so far staved off restoration of regulation, restoration of income taxation, and criminal prosecution of those who took all the cash. How is buying insurance on loans you haven't made different from insuring a person you don't get any benefit from? You'd be motivated to secretly KILL that person, so it's illegal. But investment firms and investors ARE able to insure loans and then cause defaults to cash in - either by cutting supplies, screwing with management or in some cases actually paying the loan holders to pay a few days late - just enough to trigger the default.

Why is higher income tax critical? Because of all the borrowing, borrowing, borrowing that allowed massive high-end and corporate tax cuts. There's no argument that US income taxes have been reduced and made flatter. And giving all that cash to businesses and wealthy investors DID make them richer - but when the borrowed money has to be paid back, the lower tax rates mean that someone else will be bearing the burden.
ED BEAR
 Yule_liquor
Joined: 12/7/2011
Msg: 38
Banks and the financial system
Posted: 2/17/2014 12:22:10 PM
^


And the political power of wealth has so far staved off restoration of regulation, restoration of income taxation, and criminal prosecution of those who took all the cash


And this is exactly the crux by which the banking/financial industry holds the public hostage.
Any efforts to re-instate measures of prudent regulation & control will be warded off easily
as they have tilted the political edge in their favor.
But take note that this does not emanate just from a domestic power hub
but rather from (usually face-less)globalistic influences or oligarchies that "pull the strings" that exert a greater control on the world economy!
 bamagrl68
Joined: 11/14/2010
Msg: 39
Banks and the financial system
Posted: 2/17/2014 1:19:09 PM
nanshe1111- We are on the same page. Being raised by my grandparents, who survived the great depression and taught me a thing or two about the debt pit and the value of people over things did me a huge favor.
I'm not saying Japan is better than the US, but it's considered shameful to be in debt there and we could learn something from that.
Some people think they need all this stuff, but you can't take it with you in the end.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 40
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Banks and the financial system
Posted: 2/17/2014 3:48:28 PM

As explained before, banks create checkbook money


I've been pondering this today, and I suddenly realized that I and others have been using some misleading terminology here.

Banks do NOT "create money." Ever. Yes, they will give you a loan for more than they have in the vault. But that is not in any way, and act of "creating" money. What they do is, they provide the assurance that the money you borrow and spend, is backed by their deep pockets. They are giving YOU some of their anticipated earnings now, and in exchange, you will give them some of YOUR future earnings later.

The reason they can lend more than they have, is because they have more than one customer. It wouldn't work if there was only one bank, and only one customer. They'd only be able to lend you as much as they had on hand, if that was the case.

What this means, actually should help our understanding of what can go, and has gone wrong with the deal. If the lending institution gives out an amount greater than the value of either the property the loan is to be used to purchase, or greater than the earning power of the borrower, then when the borrower does default, the institution can't recoup even their principle. Again, if they are MOSTLY good about lending to people accurately, a few misfires wont matter, because they'll make up enough from everyone else, to pay their own bills and such.

The way lending institutions fail, is that enough people who THEY own money to, demand their payments all at once, and the institution is forced to in turn, "call" their own loans. If they lent more than the property or people are worth, they wont get enough from doing so, to answer the demand from THEIR creditors, and they will fail.

When all the institutions are busily loaning money to each other, a "domino effect" can occur, and one after another, lenders will call in their customers loans, breaking THEIR business or financial lives down, and then in turn they will fail themselves, and THEIR creditors will break THEIR financial existence down.

Again, it comes back to whether there is sufficient real wealth behind everything.

Anyway, the only people who can 'create money' is the government. And when they print or coin cash, they are not creating VALUE or WEALTH.

The reason they have to do so sometimes, is that there are times when a lot of people start hoarding cash for some reason. There has to be enough cash in the system for people to buy things, so if savings are TOO high, the government can only get things moving by printing more.

Anyway, the main point I wanted to make, is that lending institutions do not CREATE money. I was among the several people who inadvertently chose the wrong words to say what was actually going on.
 Demigod1979
Joined: 12/4/2011
Msg: 41
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Banks and the financial system
Posted: 2/17/2014 5:53:07 PM

Your example doesn’t make any sense. Why would a bank lend out $5000 if that was the total money supply at the time? How would the bank create more loans, if they don’t have any left to lend? Because their balance sheet would say $0. So in your example where does the original $5000 go? Does it get spent and redeposited in the bank.? Where is it going to get spent?

You misunderstand. The $5000 that comprises the total money supply was created by the bank when it issued the loans. Although this "money" is essentially an IOU, it increases the money supply.


That would be you mixing things up. Here is a simple example you might be able to get your head around.

Assume that the liquidity requirement of bank’s is 10% $100 is deposited. The bank then lends $90. That $90 gets spent. The shopkeeper then deposits $90 into his bank. That bank then lends $81. That $81 gets spent and gets deposited into the bank. Then $72.90 gets lent and spent and so on. This continues until there is nothing left to deposit and lend out.

That is how banks create wealth in the economy by lending money.


Again, from Wikipedia:

The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money

Basically, when a bank makes a loan they increase the total money supply by the same amount. By doing this, banks can duplicate money many times over. Of course this checkbook money is not actual physical cash (nothing is printed or stamped), but it works the same way so is counted the same.


I've been pondering this today, and I suddenly realized that I and others have been using some misleading terminology here.

Banks do NOT "create money." Ever. Yes, they will give you a loan for more than they have in the vault. But that is not in any way, and act of "creating" money. What they do is, they provide the assurance that the money you borrow and spend, is backed by their deep pockets. They are giving YOU some of their anticipated earnings now, and in exchange, you will give them some of YOUR future earnings later.

Perhaps it is a difference in terminology, but I would say that they actually DO create money - they just don't create cash.

As Wiki puts it:

At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money...

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans ... As this process continues, more commercial bank money is created... When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400


When banks lend money they create an IOU (or checkbook/commercial bank money) into the depositor's bank account. This IOU is a promise to pay money and the cash for this IOU doesn't actually exist (if it did, they wouldn't need to give you a promise). However, this IOU can be redeemed for government-printed money, can be used to buy goods and services, can be used to pay bills and taxes, and increases the money supply. For all intents and purposes, it IS money. It behaves and can be used exactly like hard, physical currency (the only difference is that it exists digitally on a bank's computer).

Of course you may think an IOU does not constitutes actual money, and for most IOUs that's true (if I promise to give you $50 in the future, you cannot use that to buy groceries today). However, the bank's IOUs CAN be treated like real money, and we use it as such every day (when I pay my credit card bill, I transfer the IOU from my deposit account to my credit card, and it's accepted as payment). Similarly, if someone owes you money then they can pay you using the IOU in their bank account (e.g., a cheque) instead of cash.


The reason they can lend more than they have, is because they have more than one customer. It wouldn't work if there was only one bank, and only one customer. They'd only be able to lend you as much as they had on hand, if that was the case.

I don't see why multiple customers would be needed. Under the fractional reserve system, the bank can lend and re-lend to the same customer at the same time (they just have to set up a different account for each new loan). Of course this is highly impractical and there is no reason why anyone would do this, but I don't see why it couldn't be done.


The reason they have to do so sometimes, is that there are times when a lot of people start hoarding cash for some reason. There has to be enough cash in the system for people to buy things, so if savings are TOO high, the government can only get things moving by printing more.

I would say the government prints money only to make sure that people can redeem the IOUs in their bank accounts when they want to. Of course both they, and the banks, are hoping that most people will keep their money in the bank so they don't have to print a lot of new cash.
 Bachelorette.Number1
Joined: 4/18/2013
Msg: 42
Banks and the financial system
Posted: 2/17/2014 8:40:16 PM
I agree with bama and nanshe and with the fake wealth.

Didn't any of you watch It's A Wonderful Life? When there's a run on the bank and George explains that he doesn't have the actual cash to give the customers? It's invested in everyone's houses, he says.
Pretty simple.

It's all capitalistic greed.
You gotta show a profit. That's the bottom line.
If the Orange Company made a profit of $100,000,000.00 last year, they'd better make more this year or it'll be a bad year......even though they'll make $50,000,000.00.
Which is why you see companies running off to find the cheapest labor from the cheapest countries. It's why they're taking back the pensions and closing stores. It's why they spend money on ads telling you why you need their product.
Greed gone haywire. More, more, more.

Nanshe is right - there is enough. Only not when you need more than enough.
 Demigod1979
Joined: 12/4/2011
Msg: 43
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Banks and the financial system
Posted: 2/18/2014 6:50:37 PM

a) the bank would never be allowed to lend out 100% of its reserves

Eh? Banks cannot lend out their reserves (the reserve cash is NEVER part of the money supply). It's only the bank-created IOU that expands the money supply when they create a loan.


b) people do not withdraw 100% of their deposits and then do not put them back on deposit anywhere.

Yes, banks depend on people depositing their money at the bank. The entire financial system depends on only a tiny fraction of people redeeming their IOUs.


In your model the bank (entity number 6) is bankrupt the minute it divvies up all it's reserves

Yes, the bank can never make good on all of their promises to depositors. They are technically bankrupt the instant that they create a loan.

Consider this. If you owe $100 to ten people, yet only have $100 in total cash and assets, then what does that make you?


Secondly, you are expected to do something with that cash to create more cash for yourself in order to pay back the whole.

No, you are expected to create wealth, not create cash (as you know, counterfeiting is illegal ;) )


In your fictional fixed economy, say we have been given 5kg of gold bullion where in this reality there is only 5kg in existence and I melt this down to create five 1kg coins. Then lend out these coins with the expectation of getting back 5.5kg of gold when there is only 5kg in existence, is ludicrous! That isn't an economic model of any kind, certainly doesn't represent a fiat fractional reserve model which you are comparing it to.

Do you seriously not remember what happened with gold? They devalued the currency by mixing it with other metals.

Mixing gold with other metals is the equivalent of creating new fiat money today (whether that money is cash or credit). Banks demand more money from borrowers than that which exists in the economy. What keeps the system going is that banks do not demand all their loan money at once, and they keep creating new loans, thus injecting more credit money into the economy. The cost is that the ever-growing money supply makes inflation inevitable, decreasing the value of everyone's money. Whether it's with gold or fiat money, the end result is the same: inflation.
 OMG!WTF!
Joined: 12/3/2007
Msg: 44
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Banks and the financial system
Posted: 2/18/2014 8:00:38 PM

Consider this. If you owe $100 to ten people, yet only have $100 in total cash and assets, then what does that make you?


This is part of your f'up. Banks don't lend money without security...ever. The 10% reserve requirement of banks is not by any stretch their only asset. Much of the mortgage backed lending they undertake is actually insured by the government so in the event of a default, 100% of the loan is repaid. The balance of uninsured mortgages are secured by real property and at times, the other personal assets of the borrower. Commercial loans are secured again by property, leases, invoices and assets of the company and are typically at a lesser loan to value than other loans. But suggesting banks only have assets of 10% of their liability is absurd.

What you're projecting is an all out run on banks and if that happens you have much more to worry about than the economy.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 45
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Banks and the financial system
Posted: 2/19/2014 12:48:16 AM
Near as I can tell, Demi, you are absolutely intent and adamant, insisting that there is no such thing as wealth creation.

Either that, or you insist that there is no such thing as adjusting the money supply to match the amount of wealth created.

Or, you are insisting that even if wealth is created, that because existence is shackled to a set amount of "money" (which I put in quotes here, because you do clearly differentiate between printed or coined money, and a concept of value, though you never get around to spelling out HOW you do so)..... that therefore all capitalism is doomed.

Since you are obviously unwilling to define any of your terms to mean what the rest of the world means by them, and insisting on your own inaccurate definitions, of COURSE your proof that we are all doomed is correct. It's just meaningless, because you DO insist on non-standard definitions, which have nothing to do with the actual economies of the world.

Yes, you are quite right, that IF we set a strict limit on how much wealth there is in the world (to your $5000 for example), that the act of expecting anyone to borrow that wealth, and return MORE than they borrow back, would be impossible by definition. Everyone keeps telling you that your imaginary economy with such limits is not the one that we actually use, but you so far have refused to recognize this.

I will therefore leave all this to you, since it isn't logical to negotiate with someone who refuses to negotiate.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 46
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Banks and the financial system
Posted: 2/19/2014 6:03:18 PM
faithdefender:

When a bank issues a loan it credits the customer. When a bank issues a loan it is effectively debiting depositors accounts. If there are no depositors accounts to debit. Where did they get the $5000 from? For every credit, there has to be a corresponding debit. That is basic accounting.


You are missing a few things here and there as well. "Basic" accounting, as you describe it, is NOT how things work. lending institutions are NOT required to have deposits equal to the total of all monies lent out. It's similar to the way the Stock Market is allowed to function: people are allowed there, to "control" shares of a given official value, as though they own them outright, by actually investing as little as ten percent of their face value. When they sell them, they do have to make up the difference, but the plan investors who take advantage of this "buying on margin" follow, is that they expect the stock to change in value such that they make a profit overall. Thus, if they "buy" $1000 worth of IBM stock, and only pay $100 for the control of those shares, when the stock rises in value to $1200, they sell it, and get the $200 profit, less fees and interest. They don't get the $1100 difference between what they ACTUALLY invested and the final selling price, because they still owed the other $900.

If the stock instead goes DOWN in value, say to $300, and the margin investor is forced to sell at that point, the investor will still have to pay off the original $900 plus fees and interest, and receive none of the three hundred.

Loan institutions are also NOT required to have 100% of what they loan out on deposit. But if the loans get called, they will have to pay 100% of what they DID loan out back. This is why a loan institution collapse means that not only have all uninsured depositors lost everything they deposited, but the people who loaned the Institution money get almost nothing back either.
 Demigod1979
Joined: 12/4/2011
Msg: 47
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Banks and the financial system
Posted: 2/19/2014 6:17:25 PM
Yes, but in your model they do, that's why it's stupid

I'm pretty sure I indicated that the $5000 is money that's been loaned by a bank - by default, that excludes reserve cash.


The reserve cash IS part of the money supply!
http://www.federalreserve.gov/faqs/money_12845.htm

Perhaps you're using a different definition of "reserve cash"...

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply)
...
At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money

Again, my example was about the principal that is created by a loan (in other words, the $80 from the Wiki example I quoted above, NOT the $20 that's kept as reserve).


Yes, but in your model they don't, thats why it's stupid.

When did I ever indicate that the borrowers do not deposit into a bank account? (the only thing I indicated is that there is a total of $5000 in the money supply, which obviously includes both cash and money in bank deposits).


No, I said you are expected to do something with that cash... Which ultimately creates cash such as putting it back in the bank SO THE BANK can create more cash, not you go out and buy a printing press!

Frankly, I have no idea what you're saying there (putting cash in the bank creates cash?). Can you clarify a little bit?


No it isn't, not sure if you are confusing driving out good money with bad or you just haven't understood how fiat money works, users still have to value the notes that are tendered against the assets of that bank, if that bank is fudging the figures (mixing gold with other metals or in your model there is no more assets) the notes will be devalued by the users. Archimedes was set the task to work this out because they knew how much pure gold weighed, he had a eureka moment.

The value of money has nothing to do with the "assets at a bank", it is tied to the goods and services in the economy (obviously, if money can't buy goods and services it is worthless). The more money that exists compared to goods and services, the less valuable it is, thus inflation. Inflation will eat away at the value of money, making money less valuable than before. It's the same effect of with mixing gold with other metals - you get more coins but each coin is worth less than previous coins.


Near as I can tell, Demi, you are absolutely intent and adamant, insisting that there is no such thing as wealth creation.

Either that, or you insist that there is no such thing as adjusting the money supply to match the amount of wealth created.

Or, you are insisting that even if wealth is created, that because existence is shackled to a set amount of "money" (which I put in quotes here, because you do clearly differentiate between printed or coined money, and a concept of value, though you never get around to spelling out HOW you do so)..... that therefore all capitalism is doomed.

Since you are obviously unwilling to define any of your terms to mean what the rest of the world means by them, and insisting on your own inaccurate definitions, of COURSE your proof that we are all doomed is correct. It's just meaningless, because you DO insist on non-standard definitions, which have nothing to do with the actual economies of the world.

Yes, you are quite right, that IF we set a strict limit on how much wealth there is in the world (to your $5000 for example), that the act of expecting anyone to borrow that wealth, and return MORE than they borrow back, would be impossible by definition. Everyone keeps telling you that your imaginary economy with such limits is not the one that we actually use, but you so far have refused to recognize this.

I will therefore leave all this to you, since it isn't logical to negotiate with someone who refuses to negotiate.

The things that I've been posting here are basically things that the Wikipedia article on fractional reserve banking says (why do you think I keep quoting from it?). It outlines pretty clearly how the lending process goes, and how new commercial bank money is created by it.

As for my example, I used a snapshot for the sake of simplicity, but it is no different if a continued scenario is used, where wealth is generated from economic activity over time, new loans are created and old ones paid back. It doesn't matter how many new borrowers you add and how big the money supply grows, the problem highlighted in my example still remains: the total money that borrowers owe to the bank exceeds the total amount of money in the money supply at any particular point in time.

E.g.,
The five borrowers use the loan money to produce products and services. The bank extends more credit to more people to take advantage of this new economic activity, in the form of credit cards, car loans and business loans - let's say five more people get a loan/credit of $2000 each with 10% interest, expanding the money supply by a total of $10,000.

At this point, the total money supply is $15,000 ($5000 + $10,000). The total owed is $16,500 ($5000 * 1.1 + $10,000 * 1.1).

The five original borrowers then pay back their loans and the bank exterminates the principal while taking the interest, reducing the money supply by $5500 (of course in real life this is done gradually with each payment). They also spend some of their interest money, putting it back into the money supply to be earned by borrowers (interest earned from the five borrowers was $500 - they spend $300 back into the economy and keep $200 to use elsewhere).

At this point, the total money supply is $9800 ($15,000 - $5500 + $300). The total owed is $11,000 ($16,500 - $5500).

Of course you can go on and on forever, but the basically point is, you will never get to a point where total money supply = total owed (the latter will always be bigger). It will never happen because of the interest charges applied to each loan.

Of course this doesn't mean we're doomed, just that the money supply must continually grow in order for our economy to be healthy. As a corollary, it also means that during times of economic distress the supply of new loans will be limited, meaning borrowers will have a difficult time paying back what they owe.


A bank could make good on all their promises to depositors. They would have to call in all their loans. Not an ideal situation for the economy however .Did you miss the whole point about Balance Sheets?

That contradicts fractional reserve banking, which is based on the premise that not all depositors will withdraw their money at the same time (since most of the money in a bank is IOUs, to truly pay back everyone they'd have to hand out IOUs to everyone :p). Besides, in real life the banks could not recall all their loans (that would assume the borrowers have all that money ready to pay back, which defeats the purpose of getting a loan in the first place); they'd have to seize whatever collateral was pledged by the borrower and try to sell it at firesale prices.

If banks really could pay back everyone then bank runs would never happen (as evidenced by the 2008 financial crisis, they still do).


So what if the lending activities of bank’s create inflation? Inflation is healthy if it is kept in check. An inflation rate of 2-3 percent is ideal. Would you rather deflation? That is what caused the Great Depression.

Our economy cannot handle deflation because banks lend with interest (if they didn't then deflation wouldn't be a problem). If the money supply shrinks, like during deflation, then borrowers would find it difficult to find the money they need to pay back their loans with interest, resulting in massive defaults and a non-functioning economy. If they actually COULD pay back all their loans then deflation wouldn't be an issue since there would be enough money for everyone and so no one has to default. It's the very nature of our financial system that makes inflation "healthy". Basically, our economy is like a train that can never stop, and in fact must go faster and faster in order to be functional at all.
 IgorFrankensteen
Joined: 6/29/2009
Msg: 48
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Banks and the financial system
Posted: 2/20/2014 4:24:16 AM

Our economy cannot handle deflation because banks lend with interest (if they didn't then deflation wouldn't be a problem). If the money supply shrinks, like during deflation, then borrowers would find it difficult to find the money they need to pay back their loans with interest, resulting in massive defaults and a non-functioning economy. If they actually COULD pay back all their loans then deflation wouldn't be an issue since there would be enough money for everyone and so no one has to default. It's the very nature of our financial system that makes inflation "healthy". Basically, our economy is like a train that can never stop, and in fact must go faster and faster in order to be functional at all.


Part right, and part wrong, with the most problematic interpretation being the idea that BECAUSE the economy has to stay moving to survive, that it's a bad way to do things.

You are right that deflation tends to favor lenders, because it means that the value of their loans goes up. This is part of why we have so many rich investor advocates of deflationary concepts, such as dealing with high costs by lowering wages, instead of by finding better ways to do things, or by lowering top officer pay. Borrowers tend to favor inflation, because since loan repayments are almost never tied to a fluctuating valuation of currency, inflation means that it takes less real wealth creation in order to repay the loans.

And yes, since our population is always growing, our economy has to always grow as well. And since lots of people want to have their lives improve over time, it has to grow even faster than the population does.

But the fact that this is all difficult and complicated and tricky to manage, doesn't mean it's wrong or bad. It doesn't mean that because we need more real wealth, in order to carry on into the future without a steady loss of freedom and satisfaction in life, that therefore we are in some sort of depressing death spiral.

Maybe I am not grasping what it is you are saying in sum about it all. From the start of this thread, I have been under the impression that you were saying that our whole way of growing an economy is inherently false, and bad for us. Is that right, or did you have something else in mind?

Or is the problem that you think that an EXPANDING economy, is synonymous with an INFLATING economy? Economic EXPANSION is different from economic INFLATION.
 Demigod1979
Joined: 12/4/2011
Msg: 49
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Banks and the financial system
Posted: 2/20/2014 5:43:11 AM

Part right, and part wrong, with the most problematic interpretation being the idea that BECAUSE the economy has to stay moving to survive, that it's a bad way to do things.

You are right that deflation tends to favor lenders, because it means that the value of their loans goes up. This is part of why we have so many rich investor advocates of deflationary concepts, such as dealing with high costs by lowering wages, instead of by finding better ways to do things, or by lowering top officer pay. Borrowers tend to favor inflation, because since loan repayments are almost never tied to a fluctuating valuation of currency, inflation means that it takes less real wealth creation in order to repay the loans.

And yes, since our population is always growing, our economy has to always grow as well. And since lots of people want to have their lives improve over time, it has to grow even faster than the population does.

But the fact that this is all difficult and complicated and tricky to manage, doesn't mean it's wrong or bad. It doesn't mean that because we need more real wealth, in order to carry on into the future without a steady loss of freedom and satisfaction in life, that therefore we are in some sort of depressing death spiral.

Maybe I am not grasping what it is you are saying in sum about it all. From the start of this thread, I have been under the impression that you were saying that our whole way of growing an economy is inherently false, and bad for us. Is that right, or did you have something else in mind?

Or is the problem that you think that an EXPANDING economy, is synonymous with an INFLATING economy? Economic EXPANSION is different from economic INFLATION.

For the most part, I wanted to discuss (or muse about) our debt-based economy and its implications. The economic truth is that the vast majority of the money in the economy is debt money (current estimates in the US put physical currency at about 10% of money in circulation). I find it sort of a sad fact, since it means that our prosperity depends almost entirely on the bank's willingness to extend credit, but I think it's also something that many people don't realize when they talk about things like government debt. There's a general impression that debt is a bad thing, and that people should try to pay off their debts (it's true on a personal level). A lot of people talk about how the government should stop spending and try to reduce the national debt. This sounds good in principle, but decreasing the debt load for such a large entity at a time of slow economic growth would also mean decreasing our money supply, which is disastrous for the economy. Of course the government will eventually have to start paying some of it off (not always necessary, since inflation and a growing GDP can reduce debt levels) but the rest of society will have to pick up the slack and take on more debt if we are to have a prosperous economy.

So is debt a good thing, or a bad thing? On a personal level it's bad, but on a national level it's good. This seems to be something of a conundrum since no one wants to be in debt, but our collective happiness depends on a great number of people being indebted. Any thoughts on this?
 Demigod1979
Joined: 12/4/2011
Msg: 50
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Banks and the financial system
Posted: 2/20/2014 5:23:23 PM

Where did the bank get the original $5000 from? Assets have to equal Liabilities. So for the purpose of your scenario I will assume they borrowed it from another bank.
...

I'm going to stop you right there. You assume wrong - banks expand the money supply when they lend.

From the Wikipedia article on money creation (http://en.wikipedia.org/wiki/Money_creation):

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased. A central bank may introduce new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Commercial bank lending then multiplies this base money through fractional reserve banking, which expands the total of broad money (cash plus demand deposits).
...
Through fractional reserve banking, the modern banking system expands the money supply of a country beyond the amount initially created by the central bank.

Do you get it? Commercial banks don't simply re-lend the money they borrow from the central bank. They use it as the basis for loans, which expands the money supply.

Honestly, you should take the time to actually learn how the modern banking system works.
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