In response to economic illiteracy

Not at all what we are talking about.

I agree, but what actually occurs still seems to escape you.

A bank does not lend out the actual deposits it receives. When a bank makes a loan it simply enters some numbers into a customers deposit account...or prints those numbers on a piece of paper otherwise known as a check...and viola....money is created without a dollar of a cash deposit leaving the bank.

I will post the relevant link from Modern Money Mechanics for you this evening so you can read up.

 

Firstly a bank does lend out actual deposits it receives.
If I use cash as my example, this is clear and apparent. My shop deposits cash in the bank every day. Blokes on the street withdraw cash from the machine every day.



In these days of electronic money, the tally is kept digitally. But it is still transferred.
Now it isn't transferred immediately in the case of a written cheque. There is a clearing process. It takes a day.

Where the actual physical cash is stored, if indeed it even exists in paper format, doesn't matter, who owns it does. The ownership is transferred by signing that piece of paper.
Where the dollar is kept or what format it comes in, doesn't matter so much, only who can withdraw it does.

No money is created. Sorry. Ownership of existing money is simply transferred.

No magicly turning $100 into £10,000 "because bankers = evil conspiring scammers".
That is Occupy Wall street talking. Some unemployed bloke on drugs.

 

What does that have to with what I said?

We're not talking about "me". we're talking about how, when looking at the economy when people take loans, the money they spend, the vast majority ends up after the purchase of whatever the money was borrowed for, ends right back in the banking system.

Here is a paper was written by the Chief Economist at Standard and Poors that lends evidence to my claim:

Banks don't lend reserves

More reading on the topic.

Factual evidence that banks create money out of nothing

Here's an article from Forbes that says the same thing....

Here's a good paper from the Bank of England that describes the money creation process

This is where things get confusing. It's true that a bank must hold up to 10% in reserves relative to the loans they created, but reserves aren't lent, ever (see my links above).

A bank can make a loan many times what the bank actually holds. They don't even have to have the required reserve at the time the loan is made. The bank can acquire the reserves at the end of the day.

The bank holds deposits as reserves, reserves aren't lent, but a ratio of reserves to money created must be maintained (see links above).

What "imaginary money"? What are you even talking about?

There are a few people who deal exclusively in cash but take all the physical cash in circulation, it's still a tiny percentage of all the money in circulation. Furthermore, in order for a bank to hand out physical cash, they have to transfer money from excess reserves to required reserve accounts at the Fed.

Part of the problem here is the use of terms. I agree banks do not create money, they create credit, but they create credit denominated in the government unit of account. So when a bank creates credit, they simultaneously have a liability and an asset of the same value. So if a bank makes a loan of $100, the bank goes -$100 and the borrower goes +$100. Add them up and the result is zero. So the economy gains what's called exogenous money in that it adds money to the economy only as long as it is in circulation. When people make payments on their loans, they are reclaiming the money that was initially spent and when the loan is repaid, everything is reset back to zero.

So for instance, if I go into a bank and borrow $100. I fill out a loan app. If it's accepted, it's held as a note. That note has a value equal to the interest I agree to pay (let's say $5). So the bank deposits the note as a $105 asset and creates credit to me in the amount of $100. The $100 is indistinguishable from US government money.

Now I spend that money into the economy and the economy is +$100, but I must, over the next several months recapture that money and give it back to the bank. Overall, however, from an accounting standpoint, no new money has been created is the bank holds a liability that equals the amount I borrowed, thus -$100 (the bank's liability) plus my cash +$100 = zero

After I make my first payment of $10.50 the bank applies $10 to my loan and adds .50 cents to it's capital (profit).

So now the bank's note is worth $90+$4.50 in interest (at .50 cents in profit has been realized), the bank's liability is $90, I owe $90 and the economy still has $90 dollars circulating through it that weren't there before I borrowed the $100). Next month I earn money and make another $10.50 payment. Now the banks now the bank's note is worth $80+$4.00 in interest (another .50 cents is realized), the bank's liability is $80, I owe $80 and the economy still has $80 more dollars circulating through it. Until finally, after 8 more months, I've removed all $100 from the economy and repaid it to the bank. My payments are used to cancel the bank's liability and all that's left in the end is the $5 the bank keeps in interest.

Thats how it works.

 

@Econ4Every1

Right, the money ends up in another banking system "usually", not often the same one it was deposited in.
It gets transferred between banks.

Banks don't lend reserves. Correct. They are reserves, the part of the deposit that you aren't allowed to lend.
A bank can make a loan 90% x what it owns. Not many times. Less than one times.
That is the law and it is enforced tightly. Banks are checked for this daily. Yes, at the end of the day.

No money is created there is no ratio of reserves to money created, because none is created.
The ratio of reserves is applied to money deposited. Not money created.

Imaginary money. The 10x what is deposited that you imagine banks are lending out but that actually does not exist.

A bank does not create credit. A depositor creates credit. He credits the bank with his deposit. A bank then credits a borrower with that deposit. Who then credits whoever he buys things off of with that deposit.
The deposit, is the credit.

When you borrow and spend $100 you do not add + 100 to the economy.
The 100 was already in the economy. It is simply transferred to your ownership.
when you repay $100 you do not remove $100 from the economy. You simply transfer the ownership of it to someone else in the economy.

Nothing is created, nothing is destroyed. Money is simply being re-distributed between poeple.


In your example of borrowing and repaying $100, the only new money coming into the economy, is that which you are adding with your wages and only then if you earn them in a wealth creational manner.
You missed out one detail on your model, the bank doesn't make $5. it makes $5 minus the interest due to the depositor. The lender. The creditor.

Banks pay a commercial rate to borrow.

Banks don't lend their own money. They are a middle man service connecting lenders with borrowers.

 

Yes, in this case the money was created out of thin air by fractional reserve banking.

I have nothing in particular against fractional reserve banking. If banks want to operate that way, and if depositors want to put their money in a fractional reserve bank, that's fine with me. However, when the bank fails and there's a bank run, it should be nobody's business but the bank and the depositor. It should not then be my (or the government's) problem.

 

Oh god, not you too.

UG.

I'm really interested in how you all came up with the same error. To find out if you are being taught this in schools. And if so, which ones!

But I don't have time to butt heads with you over this and this isn't going anywhere I haven't been too many times before.
I'll bow out.
Thanks for taking the time with me guys, it's been fun.

 

It's a trade off. Tanks are light and fast or heavy armored and slow. Economies are nimble and elastic able to respond to demand or they are slow and increasingly secured.

People are largely ignorant of my position or yours and when asked to support a position they can be convinced to support something I'm sure we'd both disagree with.

 

If you want to understand read the links I posted for you. They aren't partisan or idiological sources. Read them and you will understand.

See ya, thanks for stopping by.

-cheers

 

I tried PM'ing you, but system told me I couldn't.

 

With the fairy tale:

Right back atcha, champ.

EVERY economist learns in first-year macro that your account, above, is a fairy tale

Wrong. The Zeitgeist video is factually correct. Google, "bank loan account entries" and start reading. Or you could just call your local commercial bank, ask to speak to the accountant, and ask him or her which account loan proceeds are taken OUT of in order to be put INTO the borrower's account. The answer, if you are willing to hear it, will advance your education.

 

Very unlikely:

"The process by which banks create money is so simple, the mind is repelled." -- John Kenneth Galbraith

I would venture that not one person in 1000 can accurately describe how money is created, and many of those who can't would be economists, who were supposed to have learned it in first-year macro, but have somehow forgotten.

 

Fractional Reserve Banking only "creates" money to the extent that the government doesn't have to print a dollar bill for every dollar bill shown on bank books. I deposit my paycheck and swipe like mad and never have to touch a dollar bill. There is no actual currency involved in relation to me--just debits and credits on ledgers.

 

Bank ledgers show dollars, not dollar bills.

That's what the banks create.

 

Technically I was referencing the minting of money, not the counting of it.

My bank hasn't created anything and I didn't give it anything. It is just a system to facilitate transactions. It just is a marker so the government doesn't have to print up 3 times as much currency. Nothing really prevents them from printing up that currency if they need to. It would be a rather ridiculous notion to think that bank would have to send out a courier 100 times a month to other banks just to carry my deposits to other people's banks all over the country.

 

Try and sell that to auditors and accountants. It's real money, and just as real as what the Fed prints. And yes, mortgages, term loans, etc. are creating money, and creating a lot more than the Fed prints. If it weren't, so many banks and other lenders wouldn't go bankrupt all the time. Inflate the value of the equities such loans are made against is the favorite method of getting around the assorted restrictions; that's where 'derivatives' came from, and why bond rating services are easily bribed to hand out bond ratings that don't match the underlying risk.

 

I know you've cast us off, but I wanted to be clear about this point.

When I said "loans create deposits" I never said nor did I imply that the deposits were at the same bank that created the loan. That was your assumption.

Most banks are part of the Federal Reserve System so lending from one bank and a deposit in another happens all within the same system. If one bank makes a loan and it needs reserves to meet its requirement, that bank knows that most of the money it created as part of that loan was deposited somewhere else in the FRS. For that reason, those funds add reserves to the system overall, thus, lending creates deposits and deposits are reserves.

Look, reserves DO NOT "back up" the banking system. In this day-and-age, they are poorly named and confuse people like you. Reserves should be called "settlement funds" because that is what they are used for. It's a system for banks to settle up between each other...

Here is what it might look before "Joe" takes a $100 loan:


And here is what it looks like after (below). In this case, Joe is depositing the money back into his bank, but it makes no difference what bank the money get's deposited in. If Joe's bank needed more reserves, it could simply borrow them from another bank in the FRS and Joes bank would know that the reserves are availible, because it created a loan which ended up as a deposit somewhere. Even if for some reason the banking system was out of reserves, Joe's bank knows that the Fed will always supply the necessary reserves.



This is undeniable and it is a fact. This isn't a "conspiracy", this is the way banking works.

Look if you don't want to read the links I sent, take an online video course. Seriously, this is a great college course on money and banking (He is actually teaching a class in the video). It's free! This is how banking works. I've taken it twice. The accounting is simple and it does not lie.

Money and Banking

There was about $75, million dollars in the US economy in 1789, if you are right, how could that $75 million be expanded to over $3 trillion dollars (base money) today if all loans are only made from existing money? Even if you go back to 1974, there was $874 billion in base money (M1), how can you get to $3 trillion or a GDP of $20 trillion only borrowing money that exists?

I don't agree with a lot of the Zeitgeist video, some of it is correct, but it makes a lot of false conclusions.

 

The effect of a single deposit of $10,000 in bank number 1, as a result of fractional reserve banking under the current rules where reserve requirements can be as low as 0% but only showing the results of that deposit being loaned and deposited and loaned in other banks with a 3% or 10% reserve requirement.

Bank Deposit.......3.00%.......10.00%
1.......$10,000.00 $9,700.00 $9,000.00
2.........$9,700.00 $19,109.00 $17,100.00
3.........$9,409.00 $28,235.73 $24,390.00
4.........$9,126.73 $37,088.66 $30,951.00
5.........$8,852.93 $45,676.00 $36,855.90
6.........$8,587.34 $54,005.72 $42,170.31
7.........$8,329.72 $62,085.55 $46,953.28
8.........$8,079.83 $69,922.98 $51,257.95
9.........$7,837.43 $77,525.29 $55,132.16
10.......$7,602.31 $84,899.53 $58,618.94

 

If half of my work is stolen from me won't that incentivize me to work twice as long to get what I want?

 

Would it?
I think I would put more time/effort into finding a way to avoid having half my work stolen from me.

 

It's a trade off. There are pros and cons to how we structure the economy. It is my position that, in order to be most effective, the economy has to be nible and elastic, though I freely admit this increases volatility.

I can't speak to your position specifically, but I find that many here advocate increased stability, but I'd argue that comes at the risk of agility and ultimately would decrease our competitive advantage relative to other nations.

Increased ignorance of our financial system is, imo, dragging our nation down. The question is, who is fueling that ignorance? I think there are a lot of special interests, especially those with money that benefit from increased ignorance. Coming as no surprise to you I'm sure, this has reached the highest levels of our government.

 

Is it really a trade-off though? Elastic and flexible(Agile) money benefits those who have access to it first the most and then has diminishing returns as it filters down the economic ladder. So while we have seen all boats rise (so to speak), some rise much farther than others and typically that tends to be those that access the money first. So in the end what you more often than not see is a levered up economy that is volatile as it is based entirely upon trust(debt) that has benefited the financial class far more than anyone else as they get to access the money before anyone else.

I would advocate for a stable currency based upon a commodity. While this doesn't entirely solve the issue of people having access to the money prior to anyone else it limits what can be created and all but removes the diminishing returns I mentioned above. I am not sure our currency is the best approach to competitive advantages over other countries. I will admit that in a world of "flexible" currencies it is much tougher to be the one with a "stable" currency but it is far from a death sentence from a trade perspective.

Ultimately I want to see us transition from our Boom and Bust economy and into something a bit more stable.

 

The auditors and accountants keep track of the ledgers so that they do not have to print it up. and no mortgages etc do not create money. They create the expectation of future money.

 

And that 'future money' is counted as an 'asset' that can be leveraged the minute it's created, sold, traded, borrowed against, and spent. Same with stocks, bonds, or any other financial instrument, so yes, it's money.

 

That's just false. All commercial banks create money by lending it into existence.

Irrelevant even if true, which is unlikely.

No. That's the intermediation function, which merchant banks perform. Commercial banks create money by lending it to borrowers in order to collect interest income on it. That is a much larger part of their revenue than fees for intermediation services.

No. Commercial banks CREATE money in the form of deposits when they lend.

Except that it is "high-powered" money that would provoke the banksters to lend far too much additional money into existence.

You are getting confused between the FORM of money and the SOURCE of money. No one is saying money has to be in the form of paper (though some say it should be in the form of gold coins).

 

you've just seen an excellent example of progress on that front. With the knowledge learned by Friedman and Bernanke from the Great Depression the recent housing crisis did not turn into a 16 year Depression and World War.