Do you know how money is created?

jimgoose

Maximus Alexander wrote: »

Why would the system collapse? Would the not just say "Sorry you can't withdraw any cash at the moment because we don't have any on hand"?

Customer hears "The bank has no money!!", and then cue much cracking open of neighbours' skulls and feasting on the goo inside. In short, it is substantially a wetware issue.

Caliden

Maximus Alexander wrote: »

Why would the system collapse? Would the not just say "Sorry you can't withdraw any cash at the moment because we don't have any on hand"?

"When will you have money on hand?"

"We will need to print more, so we don't know...."


That went down very well in Greece if I recall correctly....

kjl

I think the OP had been watching too much Zeitgeist.

Did you know Jesus is also the Sun???? Thats why he's birthday is on Christmas because the sun is colder in December and Santa .... wait how did it go again?

pqdvdplayer

pqdvdplayer wrote: »

I don't mean physically, but do you understand the way in which the value of the money is actually created. I know exactly how, but I am just curious to see if people on here also know about the biggest scam known to mankind (not really, because the majority of mankind doesn't have a f*****g clue)

Yawn...

Blay

Blay wrote: »

Aw 4 serius hunz?

Twit twoo looking gud hun

topper75

Caliden wrote: »

90% of the wealth in existence is a number in a computer, there's only 10% of the wealth floating around in paper form.

Both the computer memory bits and the paper are intrinsically worthless.

Luckily for me - "perceptions are reality". They have perceived value.

Buzz Killington the third

kjl wrote: »

I think the OP had been watching too much Zeitgeist.

Like I said already, forget the rest of Zeitgeist... the part about money is actually true. Look it up.

Maximus Alexander

Caliden wrote: »

"When will you have money on hand?"

"We will need to print more, so we don't know...."


That went down very well in Greece if I recall correctly....

Surely if you were printing it and then writing off the balance in the account, that would be fine. You would be creating new cash, but not new money.

thelad95

Maximus Alexander wrote: »

Surely if you were printing it and then writing off the balance in the account, that would be fine. You would be creating new cash, but not new money.

History has shown that printing off ridiculous amounts of cash sparks exponential inflation. In no time it would cost 10million euro to get a loaf of bread.

Maximus Alexander

thelad95 wrote: »

History has shown that printing off ridiculous amounts of cash sparks exponential inflation. In no time it would cost 10million euro to get a loaf of bread.

That's usually because they're creating new money though, no? You wouldn't be doing that in this case.

KahBoom

Behind the scenes it's complicated, but it boils down to this (really): When banks make loans, new money is created, and this is the source of around 97% of the money supply.

Even though it really is that simple, most people still tend to have a mini-meltdown from cognitive dissonance, when they hear it - then their minds proceed to reject it like a traumatic memory.

Fun question: Where then, does the money come from, to pay the interest on the loans?

thelad95

KahBoom wrote: »

Behind the scenes it's complicated, but it boils down to this (really): When banks make loans, new money is created, and this is the source of around 97% of the money supply.

Even though it really is that simple, most people still tend to have a mini-meltdown from cognitive dissonance, when they hear it - then their minds proceed to reject it like a traumatic memory.

Fun question: Where then, does the money come from, to pay the interest on the loans?

It comes from supplying labour, but the money being used to pay labour is also debt. That is my understanding of it.

KahBoom

Iwasfrozen wrote: »

Kyuss I haven't been talking to you in ages. How are you buddy?!

Here I am

KahBoom

thelad95 wrote: »

It comes from supplying labour, but the money being used to pay labour is also debt. That is my understanding of it.

Ya kind of: Startup business takes loan from bank, pays workers, workers spend money in economy (or put it in the bank).

Similarly: Government issues bonds, banks buy bonds (this is government debt), government pays for public services among many other payments, workers/welfare-recipients/contractors/etc. spend this money in the economy (or put it in the bank).

So yea, government often ends up paying interest also, on money created from nothing - and it's these interest payments on government debt, which make it so burdensome for the whole country.

jimgoose

KahBoom wrote: »

...Fun question: Where then, does the money come from, to pay the interest on the loans?

That's where the "wealth" comes into it. Labour in it's various forms adds value, as Sorcha from Morkeshing would say, and generates actual wealth.

KahBoom

jimgoose wrote: »

That's where the "wealth" comes into it. Labour in it's various forms adds value, as Sorcha from Morkeshing would say, and generates actual wealth.

Yes, labour and real resources in the economy, create actual wealth - money decides how that wealth is distributed mostly - and banks tend to get interest on money created from nothing, giving them a pretty effortless way to gain a large share of wealth over time.

jimgoose

KahBoom wrote: »

Yes, labour and real resources in the economy, create actual wealth - money decides how that wealth is distributed mostly - and banks tend to get interest on money created from nothing, giving them a pretty effortless way to gain a large share of wealth over time.

Aye. This is supposed to be the reward of Risk, which seems to be a highly theoretical concept at least as far as Irish banks are concerned. :pac:

pH

I guess this whole fractional reserve banking is one of these things that people watch a video about, add two and two (well maybe lend two) and get five and then go slightly silly.

I'm not saying that it doesn't exist, but when making silly claims about banks "creating money out of thin air" ask yourself two questions:

If the bank did genuinely create this money from nothing, then why would they really care if it was not paid back? They magicked it into existence, yes it would be nice to make some money back from "nothing" but it's hardly the end of the world if someone doesn't pay back money you "created from thin air"

If a bank could create money from nothing, why then go to all this hassle of lending it to some pleb who may or may not pay it back - if you could create €100 notes at home you'd just spend them yourself - you wouldn't need to go though a charade of "lending" it to someone.

Yes I do understand FRB, yes I understand how it increases the money supply/availability but that doesn't imply that a bank can therefore create money.

KahBoom

People say it's "making money out of thin air" because even fractional reserve isn't true - it's not limited by savings/depots: Banks aren't constrained by reserve limits, they are constrained by capital requirements.

So long as loans banks give out, are backed by assets (houses, businesses etc. - anything) valued at around 5-10% of the loan (whatever the capital requirement limit is), then loans can be given out indefinitely.

That normally goes on until inflation hits 2-4%, and then the central bank raises interest rates to slow down loan issuance.

So, it is not really even fractional reserve banking.

topper75

KahBoom wrote: »

So, it is not really even fractional reserve banking.

This is a bit glib and ignores the liquidity spectrum of these 'assets' that back the loan. It can be quite broad to say the least.

robbiezero

take everything wrote: »

OP, if you really want to give us nightmares, tell us about credit default swaps.
Fractional reserve lending is so 2008.

Give him a chance to watch the video on that.

KahBoom

topper75 wrote: »

This is a bit glib and ignores the liquidity spectrum of these 'assets' that back the loan. It can be quite broad to say the least.

How is it glib? Assets (which capital requirements deal with) have nothing to do with savings/deposits (bank reserves).

Naz_st

KahBoom wrote: »

So long as loans banks give out, are backed by assets (houses, businesses etc. - anything) valued at around 5-10% of the loan (whatever the capital requirement limit is), then loans can be given out indefinitely.

If you know of a bank that loans out €1m for a house worth 50k, I want their number!

faceman

You have me convinced OP

I'm selling my car folks for 4 rainbows and a packet of Starburst. Cash buyers keep away!

KahBoom

Naz_st wrote: »

If you know of a bank that loans out €1m for a house worth 50k, I want their number!

Well, I should amend what I said, to say that all bank loans/debt, have to be matched with about 5% capital (in total, not per-loan)

Here's a brief news article from the US, on it being increased to just 5% recently:
reuters.com/article/2014/04/08/us-financial-regulations-leverage-idUSBREA3709B20140408

...
The rules require the eight biggest bank holding companies to maintain top-tier capital equal to 5 percent of total assets.
...

jimgoose

faceman wrote: »

You have me convinced OP

I'm selling my car folks for 4 rainbows and a packet of Starburst. Cash buyers keep away!

You're doing it wrong - gearing old fruit, gearing. What you should do is write a cheque for seventeen times the car's current book-value and give it to some gowl to buy a crappy two-up two-down in Ranelagh, payable over twenty years at some extortionate APR like 14%. Then use the income thus generated to get a 142-reg Mercedes-Benz on finance, then write a cheque for seventeen times the book-value of that, and so on... see where I'm going? After about five years of this you'll either buy the entire Maldives and retire there with your Sunseeker, or else you'll get the electric chair and you won't give a shít anyway. It's all good! :cool:

topper75

KahBoom wrote: »

People say it's "making money out of thin air" because even fractional reserve isn't true - it's not limited by savings/depots: ...

So long as loans banks give out, are backed by assets (houses, businesses etc. - anything)

...

So, it is not really even fractional reserve banking.

KahBoom wrote: »

How is it glib? Assets (which capital requirements deal with) have nothing to do with savings/deposits (bank reserves).

It's glib because it glosses over the fact that if we all go down to withdraw at a certain time tomorrow then the whole thing falls apart. If I want my money back from the bank, no use them telling me that they'll get it for me as soon as they sell Tommy Ryan's boat/Mary Murphy's house/Joe O'Sullivans printworks. The precarious ratio of loans/deposits IS a gamble whatever fancy maths you use to try explain it away.

The Dagda

pH wrote: »

I guess this whole fractional reserve banking is one of these things that people watch a video about, add two and two (well maybe lend two) and get five and then go slightly silly.

I'm not saying that it doesn't exist, but when making silly claims about banks "creating money out of thin air" ask yourself two questions:

If the bank did genuinely create this money from nothing, then why would they really care if it was not paid back? They magicked it into existence, yes it would be nice to make some money back from "nothing" but it's hardly the end of the world if someone doesn't pay back money you "created from thin air"

If a bank could create money from nothing, why then go to all this hassle of lending it to some pleb who may or may not pay it back - if you could create €100 notes at home you'd just spend them yourself - you wouldn't need to go though a charade of "lending" it to someone.

Yes I do understand FRB, yes I understand how it increases the money supply/availability but that doesn't imply that a bank can therefore create money.

You claim to understand "FRB" yet this post shows a remarkable misunderstanding and oversimplification of the whole process.

hmmm

Hopefully all will become clear once people finish their leaving cert economics course, and they realise that the process by which banks lend money is not some giant conspiracy. It's ironic that the ECB (which sets limits on bank lending) is meeting today.

Naz_st

The Dagda wrote: »

You claim to understand "FRB" yet this post shows a remarkable misunderstanding and oversimplification of the whole process.

How so?

I think the general point here is that banks don't "create money out of thin air" in the sense that the loans they create (which do "create money" or rather liquidity), are generally backed by something of notionally equal or similar value. For example, if you go to the bank and look for 500k mortgage on a house worth 500k, the "value" was already in the system, the "money" the bank created is releasing the value implicit in the asset. So one important function of a bank is to add liquidity to the system. Of course there is a problem in this model when banks overvalue underlying assets, as we know. But that is an implicitly different problem to flat out saying that the banking system is wrong because it "creates money out of thin air".

Also, the counterpoint to the "banks create money by lending" that is often overlooked, is that money is "destroyed" when you pay it back.