New greek finance minister.
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03-02-2015, 06:01 AM
RE: New greek finance minister.
(03-02-2015 04:45 AM)earmuffs Wrote:  
Quote:If only a fraction of a deposit need be held in reserve, the total amount in "circulation" increases. This is really simple math, muffs. Let's say I deposit a hundred dollars to bank A. Bank A lends 90 to bank B, who lends 80 of it to a fourth party. How much money is there now? Answer: more than 100.

Further. Yes there is more than $100 but the person that borrowed $80 owes $80, the person that borrowed $90 owes $90 etc.. It's important to recognize that debt is created because there's a huge difference between borrowing, thus creating debt, and creating money out of thin air. I'm saying debt is created, you're saying money out of thin air is created. It's very different and it's important because if Person C defaults/declares bankruptcy, that effects Person B which than effects Person A etc.. If money is simply just created out of thin air Person A is not effected because if Person C declares bankruptcy than Person B just loses the money they created out of thin air.

ie: Person A puts $100 into the Bank.
The Bank lends $90 to Person B.
Person B starts a business which fails and declares bankruptcy. The court rules that their debt is to be written off.
The Bank than still owes Person A $100, but they are now down $90. What happens if Person A wants their money? The Bank only has $10. The Bank collapses, and Person A is $90 out of pocket.

In the real world the bank losing money on loans isn't a big deal because it hardly ever happens and their profit and reserves are more than enough to make up for the shortfalls and so we don't notice it because the bank absorbs the loses.

My point is that you need to distinguish between creating debt and creating money out of thin air, it's not a trivial manner, the consequences change drastically.

Quote:Future debt is not counted as a negative (constrictive) to TODAY'S money supply. They both (the examples above) increase the money supply today.


It also increases debt...

Quote:Anyway. Muffs. Where does money come from if not created by banks then? Is it created by central reserve bank? This is one thing that has always confused me.

Yes. The reserve bank is the only institute that can create money from thin air. That is, it can lend however much money [to the government] it wants, at whatever interest rate, and not have that money backed up by assets. Banks must have money in order to lend it. They get money when you put your money in the bank and from their profits.
(Counterfeit money is also another way to create money from thin air by the way).

What you have to remember is that money is simply a system that represents value.
You can't really increase it, you increase what it represents, wealth. And the only way to do that is to physically add something to the market place in the form of goods or services.

ie: Person A borrows $100 from the bank. They are -$110 (we'll say $10 interest).
They than take this $100 and open a gold mine. They than mine up $200 worth of gold. They than sell this on the market. They pay the bank $110 to repay the debt. The bank is up $10 for services rendered. People in the market place exchange money for gold from Person A. They are down $200 collectively however they are up $200 worth of gold. Person A is than up $90 and $100 wealth has been "created" because the gold added to the market increases the example worlds overall wealth. The amount of money is the same but the overall wealth has increased.

Prior:
Bank: $-100
Person A: $100
People: $200

After:
Bank: $110
Person A: $90
People: $200 worth of gold but $-200 money.

This is how wealth increases. This is how we're better off today than our great grandparents, because more shit is being shoved into the market place and so everyone's wealth is going up.

HOWEVER, this also shows the issue of our system. We must always be growing economically in order to meet lending interest rates.

The above example is a sort of "every day" transaction how things work. Small scale. However on a macro scale the interest rate charged by the bank is an issue.

ie: In this world there are 3 people and a Bank.
Person A puts $100 in the Bank.
Bank lends $45 to Person B and $45 Person C at 10% interest. And keeps $10 by law in reserve.

The $90 is backed by Person A's $100 that Person A put into the bank. (thus no new money was created, thus cjlr, Bucky and Bemore are wrong).

Both Person B and Person C must pay the bank $49.50 each. $99 total.

The $9 represents services rendered by the bank. However the issue is that there is only $90 in circulation. Ultimately either Person B OR Person C will pay off their debt but there's no way both can pay off their debt. No matter how much wealth, ie: gold, they produce there is only ever a limited amount of money and never enough to cover bank interest rates. (think macro-macro scale)

This is where the reserve bank comes in. It lends the government money created out of thin air in order to make up the lack of money in the market place to cover bank interest rates. The government can also borrow from overseas in order to bring overseas money into the local economy. Basically it wants to put money into the economy so that bank interest rates can be covered. If a government stopped all borrowing than eventually (or rather quickly, I'm not actually sure) people are not going to be able to meet loan obligations, simply because there's not enough money in the system (or not enough in the hands of those that need it), and there's gonna be problems. Like, bring a nation or two to its knees problems.

This is also why we have recessions because it just gets to a point where it's unsustainable and something gives way. A whole lot of "losers" are created literally overnight and a small number of "winners" get richer.

The system is pretty fucked up however it is the best one, and most realistic, we have given our (we're all a bunch of greedy fucks who will never simple "get along") circumstances.

Quote:I understood that the deal was:
I put money in bank.
Bank pays me interest for the privilege of having my money and investing it for their profit.
Now, the interest has to come from somewhere - my understanding was that the banks would invest in funds and based on the performance of the fund would be able to afford to pay everyone the interest.

You put your money in the bank. They than take your money, minus the legal reserve amount they have to hold, and loan it out to people in the form of mortgages, personal loans etc.. etc.. They charge these people high interest rates and pay you low interest rates. ie: Mortgage rates here are around 6%, my savings account gets 2% interest.
That 4% difference is what the bank gets. They than spend that on business costs and the rest is profit.


The reserve bank sets interest rates to counter inflation (primary goal) and manipulate the lending/borrowing market. If they lower interest rates they can stimulate business and create jobs because borrowing money is cheaper. However interest you get on your money in the bank goes down.

Bla bla bla. I thought we were talking about how they money supply is increased.
No wonder they call Economics the "Dismal Science".
There is some joke about no two economists an agree about anything.

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03-02-2015, 06:39 AM
RE: New greek finance minister.
(03-02-2015 05:19 AM)morondog Wrote:  While I haven't watched the video, watching PM's questions in Brit parliament leaves me rather sceptical that they can shed light on any goddamned thing Tongue

Lol, some MP just about says that in the vid.

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03-02-2015, 07:32 AM
RE: New greek finance minister.
Banks are only required to hold 10 percent of deposits - and can make loans with the other 90 percent.....

All well and good - till -- like now -- when people start defaulting on loans en mass.........

So effectively - yes - banks make money out of thin air.....

Then again -- so does the government...

The US dollar is not backed by anything - except your willingness to BELIEVE in it.

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03-02-2015, 09:04 AM
RE: New greek finance minister.
(03-02-2015 07:32 AM)onlinebiker Wrote:  The US dollar is not backed by anything - except your willingness to BELIEVE in it.

That is how every currency has worked since the dawn of recorded history.

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03-02-2015, 09:12 AM
RE: New greek finance minister.
(02-02-2015 06:28 PM)earmuffs Wrote:  
(02-02-2015 10:26 AM)cjlr Wrote:  Trivial counterpoint: real-world money supplies increase. Period. Fact. Deal with it. And since surely you would acknowledge this, one is left wondering how you account for it...

If only a fraction of a deposit need be held in reserve, the total amount in "circulation" increases. This is really simple math, muffs. Let's say I deposit a hundred dollars to bank A. Bank A lends 90 to bank B, who lends 80 of it to a fourth party. How much money is there now? Answer: more than 100.

The money itself doesn't care whose asset or liability it is, which is where you're getting caught up. The loan I "spend" is money the bank has already "spent".

I'm not saying there isn't more money in the system. I am saying that that money is not new money created out of thin air, it is countered (in the sense of balancing ones books) by someone owing that money.

Money increases because governments can create as much money as they damn well please (out of thin air). This money created by governmental central banks is than put into the system via various means, buying government bonds, quantitative easing etc.. all that shit.
Yes more money is put into the system when banks are required to hold less in reserve, but that money is not the same as the central bank creating money because the bank must a) have money to lend money and b) it's countered by someone oweing that money to the bank when the bank lends it out.

If you're going to be tediously insistent that money creation by commercial banks is not "out of thin air", then neither is it by central banks - because that also arises from debt.

(02-02-2015 06:28 PM)earmuffs Wrote:  
Quote:One could be tediously pedantic and insist this is somehow semantically distinct from "creation", but to do so would be to reject decades of traditional economic terminology for no reason.

One could and one will because to say the banks (actual banks) create money out of thin air is wrong. Yes they add more money into the system but it is money that is already in the system and it is based around debt so it balances out, meaning the the amount of money created out of thin air by the bank is zero.

This is true in principle only if all debts are always eventually repaid, and no interest is ever charged. Neither of which, you may have noticed, holds.

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03-02-2015, 09:13 AM
RE: New greek finance minister.
(03-02-2015 09:04 AM)cjlr Wrote:  
(03-02-2015 07:32 AM)onlinebiker Wrote:  The US dollar is not backed by anything - except your willingness to BELIEVE in it.

That is how every currency has worked since the dawn of recorded history.

And there is actually not enough of anything of value (gold for example) to actually "back" the total value of the trillions of dollars of money in circulation. Requiring currencies be "backed" is highly constrictive.

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03-02-2015, 09:18 AM
RE: New greek finance minister.
(03-02-2015 09:13 AM)Bucky Ball Wrote:  
(03-02-2015 09:04 AM)cjlr Wrote:  That is how every currency has worked since the dawn of recorded history.

And there is actually not enough of anything of value (gold for example) to actually "back" the total value of the trillions of dollars of money in circulation. Requiring currencies be "backed" is highly constrictive.

Sure, but there never was.

Notwithstanding that the "value" of the various shiny bits of metal (or shells or rocks or whatever) we used in pre-modern economies was just as much a consensual social fiction in any case.

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03-02-2015, 11:30 AM
RE: New greek finance minister.
(03-02-2015 09:18 AM)cjlr Wrote:  
(03-02-2015 09:13 AM)Bucky Ball Wrote:  And there is actually not enough of anything of value (gold for example) to actually "back" the total value of the trillions of dollars of money in circulation. Requiring currencies be "backed" is highly constrictive.

Sure, but there never was.

Notwithstanding that the "value" of the various shiny bits of metal (or shells or rocks or whatever) we used in pre-modern economies was just as much a consensual social fiction in any case.

True. WTF are they gonna do when they find this ?
http://news.bbc.co.uk/2/hi/3492919.stm

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03-02-2015, 01:13 PM
RE: New greek finance minister.
(03-02-2015 11:30 AM)Bucky Ball Wrote:  
(03-02-2015 09:18 AM)cjlr Wrote:  Sure, but there never was.

Notwithstanding that the "value" of the various shiny bits of metal (or shells or rocks or whatever) we used in pre-modern economies was just as much a consensual social fiction in any case.

True. WTF are they gonna do when they find this ?
http://news.bbc.co.uk/2/hi/3492919.stm

Cause Diamonds are not super common on earth and only a commodity because of a Global Monopoly price fixing?

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