Does fractional reserve banking create money as debt?

[zaphod2016]

Zeitgeist, the Money Masters and other conspiracy-theory videos make the claim that, through the process of fractional reserve banking, our money supply in America is fundamentally based on debt.

Many here on JREF have debunked other potions of these programs in the past, however, as best as I can tell, this statement is true.

Source: Federal Reserve Bank of New York (http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html)


Reserve Requirements and Money Creation
Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States.

One piece sticks out at me right away: reserve requirements currently play a relatively limited role in money creation in the United States. However, this statement seems extremely deceptive to me. Above this, it is stated: Reserve requirements apply only to transaction accounts, which are components of M1...the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves.

In other words, reserves themselves play a "relatively limited" role, because banks can borrow reserves on demand, and these reserve requirements only apply to the M1. In other words, as far as the process of creating debt-money from fractional reserve banking goes, the fractional part is extremely important, and the "reserves" appear to be a token at best.

To use the above example: the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money. Note: this assumes a 10% reserve, which as discussed above, is an extremely optimistic figure, and not necessary to the process in the majority of cases.

I leave it to the best and brightest here on JREF to either explain what I have misunderstood, or help debunk this claim entirely. As best I can tell, this cornerstone to banking "conspiracy theory" appears to be 100% true.

[Tin Foil Timothy]

It's interesting you've made this a poll Zaphod :) - And even more interesting it's in the Conspiracy theory section. :)

Fractional Reserve Banking creating money is debt is a fact and the way it is done.

The Federal Reserve explains it simply in their PDF for anyone who is still not convinced.

http://www.federalreserveeducation.org/fed101_html/policy/frtoday_depositCreation.pdf

[CurtC]

What does it mean, exactly, to "create money as debt"?

[Tin Foil Timothy]

What does it mean, exactly, to "create money as debt"?

It means the money is created into existence on the promise from the borrower to pay it back. Once the money is paid back it no longer exists again

[zaphod2016]

To expand on Tim's point: the main concern here is inflation.

Ie. bank A makes a $1,000 deposit at the central bank. They now have authority to loan $10,000, assuming a 10% reserve requirement.

What is that $9,000 made of? What is it?

I used to assume the answer was "nothing". It was just an arbitrary number to represent production. But the truth is far worse. That new $9,000 exists as debt. Specifically, someone has borrowed this money from the bank, in the form of a loan.

Now, we have $9,000 in new money. Unless productivity also expands by $9,000, we will have inflation. I.e. more dollars chasing the same amount of goods.

Furthermore, the debt must be repaid with interest. I.e. if you borrow $10k, you will be expected to pay back, say $11k after X years. Where does that $1,000 come from? It necessitates the creation of more money, and under the debt-money paradigm, this means more debt.

Tim: I put this as a poll here in the CT section so that our skeptical friends (those who vote "no") will have a chance to explain why I am wrong about this. Assuming no one debunks it, I can point others to this thread the next time this is called a CT. I am also extremely curious to see how many will vote "who cares?" This is a continuation of the "Zeitgeist" thread, which kind of dissolved into a distracted mess.

I'm willing to accept I'm wrong, but so far, no one has explained to me what I've misunderstood here.

I am missing a piece of the puzzle myself: is ALL US money based on debt (other than M1), or only a potion of it? I like that you are using primary sources from the Fed directly, because this way we can skip the whole "that's an unreliable source" debate, which tends to distract from the issue at hand.

[theprestige]

Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.

[plumjam]

Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.

so that's a yes

[ArmillarySphere]

I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game, however - it transfers money from the loaner to the bank and the account holders, causing no change in the total amount of money.

The main area of focus should be that the total amount of money in circulation increases just slightly faster than the total production increase. Inflation is actually a good thing, as long as it is reasonably low, since it promotes investing money into businesses instead of letting it sit idle in the bank. The trick is to find the right balance.

[zaphod2016]

theprestige:

I agree with your above comment, but I am trying to move past generalization into specifics.

You borrow $10k because the bank trusts you will repay them $11k in X years.

This $11k will be earned at a job or business, where you create value to your employer. No debate here at all. The $ is just a representation of whatever actual value is involved.

But as far the money supply itself is concerned, so long as all new money is backed by debt, it contains an inherit demand for interest, which demands a continuous source of new money to cover the spread. The result is an inherently unstable system, which demands a growing economy in order to function. When economic growth halts, or is even slowed significantly, it is mathematically certain that some people will default, because the money to cover the debt plus interest will simply not exist, irregardless of the amount of production (value) in the real world.

I.e. the $11k in wages earned from your employer are backed by another $11k debt somewhere in the system. So even after the original $10k debt is repaid, and that money has been removed from circulation, there is still an $11k debt in existence. The net result is perpetual growth of debt. The system shifts the debts themselves back and forth, but the total amount of outstanding debt never has an opportunity to decline.

This assumes all money out of M1 is debt-based. If I am wrong about this, that would undermine this theory.

[zaphod2016]

I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game,

Let me illustrate with simple math:

$100 loan @ 10% interest

Bank creates $100 in form of loan

Customer repays $110 a year later

Where did the $10 come from?

This isn't zero-sum at all- the new debt has an associated cost of $10. The net result is +$10 for the bank, -$10 to the debtor, plus $10 being removed from the money supply in addition to the $100 that was created for the loan.

And if you default, the $100 loan they gave you was already spent into circulation. It has already affected the net money supply. And the bank will still come after you to repay, usually with a higher penalty, only amplifying the paradox above. (i.e. if there's no $10 to cover spread, where does the $40 in penalties come from?)

During economic growth, so long as inflation is held in check, you are 100% right- there is no problem.

But- how does this system function in times of economic decline or stagnation?

[theprestige]

True, but when economic growth halts, or is even slowed significantly, it's because people aren't creating new wealth. And so of course they're defaulting on their loans. And of course there isn't enough money to cover the original estimated value of the loan. After all, they never created the wealth to cover it (hence the economic slowdown).

As long as the money supply is tracking with wealth-creation to within some acceptable degree of accuracy (which it does, in both my general scenario and your specific scenario), who cares?

And "who cares" is, in fact, my answer to the poll.

[Tin Foil Timothy]

I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game, however - it transfers money from the loaner to the bank and the account holders, causing no change in the total amount of money.

The main area of focus should be that the total amount of money in circulation increases just slightly faster than the total production increase. Inflation is actually a good thing, as long as it is reasonably low, since it promotes investing money into businesses instead of letting it sit idle in the bank. The trick is to find the right balance.

Interest isn't a zero sum game. Creating money, loaning it out and having it paid back thus destroying it again is a zero sum gain. The addition of interest creates a non zero sum gain as there's always more money required to be paid back as their is created. A shortfall. Apart from foreign sales/investments the only way to find this extra money is create it. i.e more debt

[ArmillarySphere]

Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself. No change in the total money supply occurs.

[Tin Foil Timothy]

Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.

your post deals more with the methods of obtaining the loan not whether money is required to be created.

You are incorrect however and paying back a loan with interest does require the creation of more money.

Of course as the borrower you can obtain this money more than one way.

1] you can of course obtain yet another loan to pay it off ( if your original business pklan failed for example )

2] Your business plan was succesful so you sell your goods/services to a 3rd party in exchange for money in order to pay off the loan. In this the money still has to be created by debt. i.e the buyer of your goods may have taken out a loan in order to purchase them. Whatever, somebody sonmewhere is paying back aloan+interest on that money

3] Steal it. And that money you stole was, you guessed it, created as debt.


It's quite simple. if $10k is created into existence on the basis that $11k has to be found to pay off the debt then the extra $1k has to be created from somewhere

[Tin Foil Timothy]

Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself. [/b]No change in the total money supply occurs.[/b]

That's not correct. Whatever is done with the interest (bank profit, operating expenses, re-investment, etc) it still has to be created somewhere and therefore is an increase in the money supply

[zaphod2016]

Re: what about interest?

Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself.

This makes perfect sense to me. :)

No change in the total money supply occurs.

Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?

If there is no change to money supply, doesn't this mean this profit came from the existing money supply?

And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?

[theprestige]

your post deals more with the methods of obtaining the loan not whether money is required to be created.

You are incorrect however and paying back a loan with interest does require the creation of more money.

Of course as the borrower you can obtain this money more than one way.

1] you can of course obtain yet another loan to pay it off ( if your original business pklan failed for example )

2] Your business plan was succesful so you sell your goods/services to a 3rd party in exchange for money in order to pay off the loan. In this the money still has to be created by debt. i.e the buyer of your goods may have taken out a loan in order to purchase them. Whatever, somebody sonmewhere is paying back aloan+interest on that money

3] Steal it. And that money you stole was, you guessed it, created as debt.


It's quite simple. if $10k is created into existence on the basis that $11k has to be found to pay off the debt then the extra $1k has to be created from somewhere
You have a good point. Therefore, I refer to my subsequent post, in which I continue the line of argument that as money is a representation of wealth, and wealth is a representation of value created by hard work, as long as these things track reasonably accurately with each other, who cares?

So you create more money, to represent your creation of more wealth. Who cares?

[Tin Foil Timothy]

Re: what about interest?



This makes perfect sense to me. :)



Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?

it comes from either

1] extra debt created through fractional reserve

2] Foreign sales/investments ( In a global market this is becoming an increasingly pointless factor though )




If there is no change to money supply, doesn't this mean this profit came from the existing money supply?

And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?

Well that's why the current system is so favourable to bankers. The added interest on all money created is basically constant flow of money ( and thus wealth) from us to them. A vicious expanding cycle as we have to keep borrowing an ever increasing amount off them in order to keep up the interest payments.

[zaphod2016]

So you create more money, to represent your creation of more wealth. Who cares?

If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.

[Tin Foil Timothy]

You have a good point. Therefore, I refer to my subsequent post, in which I continue the line of argument that as money is a representation of wealth, and wealth is a representation of value created by hard work, as long as these things track reasonably accurately with each other, who cares?

So you create more money, to represent your creation of more wealth. Who cares?

But those things don't track reasonably accurately. And that's what people are complaining about. how much was a new car 50 years ago and how much is it now. Or a house?

There's nothing wrong with creating money out of thin air. It has to be created somewhere. It's the creation of money as debt with interest that is the problem.

because there is always more money to be paid back than is created an infinitely expanding or inflationary economy is required. This means constant increases in toil and rape of the earth's resources to simply stand still.

We're getting away with it in the Western world because we're buying and profiting from the rich resources in poorer countries. But what happens when those resources run out? The whole thing is unsustainable.

And the other major problem with private banks creating the money is that they also have control over it's supply. Which means they have control over whether we have jobs a roof over our heads and food on the table

[Tin Foil Timothy]

If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.

The Achilles heel is the Interest. Usury was banned in older times precisely because of that.

And as I say above the other big problem is putting the creation of money in private hands.

[moon1969]

Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true. Central Bankers don"t rule the world. Just because Alan Greenspan made mistakes in his policy, that doesn"t mean that he is apart of some evil conspiracy by the central bankers. Ron Paul is still wrong about abolishing the Federal Reserve and the Rothschild family doesn"t own the Bank of England or the Federal Reserve and neither do the Rockefeller family.

[Tin Foil Timothy]

Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true. Central Bankers don"t rule the world. Just because Alan Greenspan made mistakes in his policy, that doesn"t mean that he is apart of some evil conspiracy by the central bankers. Ron Paul is still wrong about abolishing the Federal Reserve and the Rothschild family doesn"t own the Bank of England or the Federal Reserve and neither do the Rockefeller family.

I think looking at it as some evil conspiracy is the wrong angle. But by definition the bankers do have the power over money creation and it's supply and thus a certain power over the economy.

It doesn't really matter who owns the central bank the vast majority of money is created by private banks.

The system by default drains wealth from the masses and gives it to the few at the top of the pyramid. And it's only natural that those at the top are not going to relinquish that privilege lightly.

The interesting factor is that the economic basics of money creation are so widely dismissed and misunderstood. That says a lot about the lack of education and even more about just why there's a lack of education.

Why should it be left to sources normally associated with Conspiracy Theories to educate us about money creation. You can't help but feel that it's knowledge that the officials would rather not got into the mainstream.

Although I can understand it. Most people wouldn't be to happy to learn that they have to toil all hours to earn money that other people can simply create out of thin air.

[zaphod2016]

Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true.

For clarity: the statement in question is: Does fractional reserve banking create money as debt?

This thread has nothing to do with Rockefeller or the Bank of England or even my beloved Ron Paul. Please keep replies on-topic.

[zaphod2016]

As of 11:30pm Tuesday, 3 people have answered "no", zero of these people have offered an explanation or evidence. Please, friends; less rhetoric, more debunking.

[theprestige]

If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.
You're misunderstanding something. Money is a representation of wealth, and wealth is a representation of hard work.

Human desire and human effort aren't zero-sum games. Why should wealth or money, which describe these things, be zero-sum games?

But those things don't track reasonably accurately. And that's what people are complaining about. how much was a new car 50 years ago and how much is it now. Or a house?
How much more car do you get for your money now, than you did 50 years ago? How much more house?

The Achilles heel is the Interest. Usury was banned in older times precisely because of that.
Some would argue that there's a diffrerence between "usury" and a reasonable interest rate. I'm not going to let you consume my money for free, any more than I'm going to let you drive my car for free, or live in my house for free. If you want to use these things to make yourself better off, I expect to be made better off by letting you use them. Otherwise, you use them up, and I'm worse off than if I'd used them up myself.

Now, the practice of tyrannizing somebody by means of charging an unpayable interest rate ("usury") is just as bad for individuals and for the economy as the practice of tyrrany by charging an unpayable rent, or an unpayable automobile lease.

The idea is to charge you less for the use of my wealth, than the new wealth you will create by working hard with my wealth. That way we both come out ahead: You get access to wealth you hadn't worked for, and can use it to create new wealth for yourself. And I can benefit from your hard work, by letting you use wealth that I have already worked hard for.

Money is just a way of counting up how hard each of us has worked, and how valuable our neighbors think our work really is.

[LightinDarkness]

Zaphod:

Unfortunately the same woos in the other thread are still in this one, but maybe it will be easier to ignore them (I still can't find the ignore button - can someone tell me where that thing is?)

Money is technically created by buying securities - which is a debt instrument. When that cash is then lent out, more cash is available to lend because the chance of the demand for money increasing above and beyond reserves kept for the original loan is almost 0.

This does NOT lead to inflation per say, as long as the demand for money increases with supply, and borrowers are a direct proxy for demand. Inflation usually occurs due to reasons other than lending of money, it only occurs due to the Federal Reserve a fraction of the time and only when the estimates of money demand are overshot. Given that we have a fractional reserve and deflation has occurred throughout our economic history, the assumption that "fractional reserve = inflation" is false.

There is nothing wrong with fractional reserve banking, its the best type of banking we've seen so far. The question is not "does fractional reserve banking create money from debt" - because it does - but rather if this is a good system. It has its flaws, but its the best system available so far.

[Tin Foil Timothy]

How much more car do you get for your money now, than you did 50 years ago? How much more house?

Are you really being serious using that as an argument against the mistracking between money and value? i.e inflation



Some would argue that there's a diffrerence between "usury" and a reasonable interest rate. I'm not going to let you consume my money for free, any more than I'm going to let you drive my car for free, or live in my house for free. If you want to use these things to make yourself better off, I expect to be made better off by letting you use them. Otherwise, you use them up, and I'm worse off than if I'd used them up myself.


That's a nonsensical argument. The money is created out of thin air. it has no intrinsic value, and it's value isn't fixed.


Now, the practice of tyrannizing somebody by means of charging an unpayable interest rate ("usury") is just as bad for individuals and for the economy as the practice of tyrrany by charging an unpayable rent, or an unpayable automobile lease.

The idea is to charge you less for the use of my wealth, than the new wealth you will create by working hard with my wealth. That way we both come out ahead: You get access to wealth you hadn't worked for, and can use it to create new wealth for yourself. And I can benefit from your hard work, by letting you use wealth that I have already worked hard for.

Money is just a way of counting up how hard each of us has worked, and how valuable our neighbors think our work really is.

No, in the sense of creating money out of nothing and lending it out with interest it's nothing to do with counting how hard anyone has worked. When you take out a mortgage to buy a house the bank doesn't do any work above pressign a few keys on a keyboard and crediting your account with the required loan.

This is the point. to you and I who toilo for money then sure the money does represent work, but for the bank and it's fractional reserve system it doesn't work that way.

[Tin Foil Timothy]

Zaphod:

Unfortunately the same woos in the other thread are still in this one, but maybe it will be easier to ignore them (I still can't find the ignore button - can someone tell me where that thing is?)

Stop being so childish. A mature person would accept defeat instead of trying to bury their head in the sand as protection against anyone who can debunk their misleading nonsense.

You keep on injecting misleading and lame attempts at discrediting the Zeitgeist explanation of the monetary system in this forum and you are going to be debunked. ignoring it won't make it go away.

It's even fun watching you make yourself look increasingly more foolish as the days go by.

You continue to be debunked time and time again in the Zeitgeist thread and you will be here.




Money is technically created by buying securities - which is a debt instrument. When that cash is then lent out, more cash is available to lend because the chance of the demand for money increasing above and beyond reserves kept for the original loan is almost 0.

Gibberish nonsense.

The central bank creates a deposit in a bank's account by buying government bonds ( bills-IOUs). That money is not lent out it remains as the bank's reserve. The bank then creates new money ( out of thin air ) through fractional reserve banking. The amount of which is determined by the reserve ratio and is generally 10:1. so, for example, if the Fed deposits $10,000 into the bank, the bank can then create $9,000 of dent and credit the account of the borrower with that amount. this has increased the deposits of the bank from $10,000 to $19,000. From that another $8,100 of debt can be created increasing the deposit to $27,100. and so on and so on.




This does NOT lead to inflation per say, as long as the demand for money increases with supply, and borrowers are a direct proxy for supply. Inflation usually occurs due to reasons other than lending of money, it only occurs due to the Federal Reserve a fraction of the time and only when the estimates of money demand are overshot. Given that we have a fractional reserve and deflation has occurred throughout our economic history, the assumption that "fractional reserve = inflation" is false.

Another load of gibberish nonsense. Your problem is that you're not fooling anyone who actually understands the system.

Yet again I've completely debunked your economic gibberish in the Zeitgeist thread and yet again I can do it with ease here.

The existence of a fractional reserve system with interest doesn't guarantee the continual existence of inflation and it's complete nonsense to argue that a period of deflation proves that fractional reserve doesn't require inflation. Deflation can still happen. But the fractional reserve+interest system requires a certain amount of inflation as the expansion an never keep up.

That's why central banks aim for an optimum inflation rate. Too little inflation is just as bad as too much. They control it buy adjust interest rates and buying and selling bonds ) bills)

You can ignore me if you like, but you can't ignore the way the monetary system works. Unfortunately for you I simply give the same information the Federal Reserve does.

I think your big problem is one of pride. You are ignoring reality because you can't bring yourself to agree with the Zeitgeist film because of it's CT history.

Sure the original Zeitgeist film posited a lot of CTs. But Zeitgeist film is wholly accurate in it's description of the monetary system and even correctly uses a Federal Reserve document as reference.

You started off by calling out the Zeitgeist film as CT nonsense and one by one all of your arguments trying to discredit the film have been debunked.

You're now running out of Zeitgeist:Addendum statements to discredit regarding the money supply and are now flapping about like a fish gasping for air on the riverbank.

I do admire your tenacity. Most would have conceded by now. But do carry on it's your rep that's diminishing by the day. :)

Zeitgeist/Federal Reserve 1 - Lightindarkeness 0

:)











There is nothing wrong with fractional reserve banking, its the best type of banking we've seen so far. The question is not "does fractional reserve banking create money from debt" - because it does - but rather if this is a good system. It has its flaws, but its the best system available so far.[/QUOTE]

[Gazpacho]

$100 loan @ 10% interest

Bank creates $100 in form of loan

Customer repays $110 a year later

Where did the $10 come from?
It obviously came from the customer's income, which the customer might have had regardless of whether he borrowed the money (it depends on what kind of loan we're talking about). The customer effectively accepted a higher price for whatever he was buying, in exchange for having it sooner.

This isn't zero-sum at all- the new debt has an associated cost of $10. The net result is +$10 for the bank, -$10 to the debtor
The bank gets $10. In exchange, the borrower gets the use, during the term of the loan, of whatever he bought.

Your question of "Where does the interest come from?" is one that the borrower is supposed to get an answer for, before he ever takes the loan. It's his responsibility. People take loans based on plans that don't completely work out, and that's one thing. Taking a loan when you don't even have a plan for paying the interest is quite another, and foolish.

[zaphod2016]

It obviously came from the customer's income, which the customer might have had regardless of whether he borrowed the money (it depends on what kind of loan we're talking about). The customer effectively accepted a higher price for whatever he was buying, in exchange for having it sooner.


The bank gets $10. In exchange, the borrower gets the use, during the term of the loan, of whatever he bought.

Your question of "Where does the interest come from?" is one that the borrower is supposed to get an answer for, before he ever takes the loan. It's his responsibility. People take loans based on plans that don't completely work out, and that's one thing. Taking a loan when you don't even have a plan for paying the interest is quite another, and foolish.

I am speaking in regards to money supply. I understand what you are saying, and agree 100%, but it does not address the issue at hand.


The question is not "does fractional reserve banking create money from debt" - because it does -


Huzzah! I knew I wasn't totally crazy here. Thank you, thank you, thank you again for helping to separate fact from fiction. Fractional reserves banking DOES create money as debt.


...but rather if this is a good system. It has its flaws, but its the best system available so far.


Whether or not this is the best system seems to me a debate for the politics forum. My concern here was establishing the facts of the case, and you have helped me immensely with that. Thanks again.

To those of you who voted "no": pbbbbbbbt :p

Tim: stop picking on LightinDarkness; we have what we need. I keep telling you- this is an ally to our cause, not an opponent.

[PhantomWolf]

Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?

It comes from the money currently in circulation.

If there is no change to money supply, doesn't this mean this profit came from the existing money supply?

Yes

And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?

No because you have to remember that while banks are using that money to pay interest in savings and cheque accounts and their shareholders..., they also have to pay for their electricity, their rent, their staff's paychecks, and so forth. So while the money passes through the bank, just like any other business, it doesn't stop there and pile up, it gets spat back out in the form of both expenses and dividend.

[LightinDarkness]

Are you sure you want to add Tin Foil Timothy to your ignore list?

YES!

It is people like him that destroy the credibility of otherwise legitimate movements, I hope to God he never supported Ron Paul. Timothy - thanks for all the opportunities to debunk your conspiracy non-sense. I just got tired of debunking you over and over again because you were incapable of doing anything but ranting and raving with more made up stuff in response. However, I finally found the ignore button (was looking in all the wrong places). Go back to the David Icke forum that spawned you, troll.

Now, back on topic:
Zaphod - Happy to be of assistance :D. I still maintain that conspiracy theory intentionally mis-characterizes how money is created and the role that the Federal Reserve plays in it. However, it is true that debt, through temporary securities based debt exchange, creates money.

Many people have a negative perception of debt as a principle and, if you poll people on whether the concept is good or bad, most Americans will tell you its bad. We have had it ingrained by us by those who don't really understand finance that debt = bad. This is why when I think many people learn about this, they go a bit psycho because they assume debt is horrible. This is not true. If you appropriately manage debt it can be a good tool, both for the government and for your personal finances.

Also, I don't think whether its the best system is a political issue, more of a economic one - what else would you do? You can tie it to gold but the principle is the same: gold only has the value we give to it, just like the paper dollar. Its limited in scale of its actual usability much like paper. The only form of exchange that has innate value is bartering things we actually use, which would throw us back to medieval exchanges.

[zaphod2016]

No because you have to remember that while banks are using that money to pay interest in savings and cheque accounts and their shareholders..., they also have to pay for their electricity, their rent, their staff's paychecks, and so forth. So while the money passes through the bank, just like any other business, it doesn't stop there and pile up, it gets spat back out in the form of both expenses and dividend.

Thank you for a clear reply. Let me be sure I have this right:

Say we have $100 in the total money supply.

We issue a loan for $1000 @ 10% for 1 year.

We create $1000 to cover this, and send it out into circulation.

A year later, the $1000 is repaid, removed from circulation. No inflation; homeostasis is achieved.

We owe $100 in interest- this comes from the $100 in our existing money supply.

How did the $100 get there in the first place? It cannot be debt-money like the $1000 is, because it would have to be repaid also, and so could not also be used as an interest payment. The $100 of interest money stays in circulation- i.e. is spent by the bank, not retired after repayment.

Is the original $100 created without debt? If so, by which process?

[zaphod2016]

Also, I don't think whether its the best system is a political issue, more of a economic one - what else would you do? You can tie it to gold but the principle is the same: gold only has the value we give to it, just like the paper dollar. Its limited in scale of its actual usability much like paper. The only form of exchange that has innate value is bartering things we actually use, which would throw us back to medieval exchanges.

Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town? :D

Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.

Warning: here comes my inner left-winger again: why is a bank allowed to charge interest on money it doesn't have? Sure, it boosts economic growth, but couldn't we achieve better results if the SBA just gave 0% loans directly, in accordance with our needed money supply? Short version of my logic: removing the interest factor on money would increase spending power, boost economic growth. I.e. I can spend $11k on a new car, instead of $10k on the car, and $1k to the bank.

When I have $100 in my lame old ING account, I earn interest on $100. I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.

And to be clear: I have no moral problem with interest. It is logical to compensate for the opportunity costs of making a loan. But if the bank doesn't have the money to begin with- what is the risk to the bank? The "opportunity cost" argument sort of falls apart, doesn't it?

[moon1969]

Wallenberg family probaly has more money then the Rothschild family so does the Wallenberg family own the Federal Reserve? House of Morgan is also alot more powerful then the House of Rothschild. Point is that all of these people are not apart of some big conspiracy by the central bankers and they are not shape-shifting reptilians like David Icke claims.

[Gazpacho]

We owe $100 in interest- this comes from the $100 in our existing money supply.

How did the $100 get there in the first place? It cannot be debt-money like the $1000 is, because it would have to be repaid also, and so could not also be used as an interest payment. The $100 of interest money stays in circulation- i.e. is spent by the bank, not retired after repayment.
The best that I can tell, when people say that "lending creates money," they do not mean that money pops into existence from nothing as a result of a loan. They mean that it enables money to be used as money when it would otherwise sit in Scrooge McDuck's money bin, or under someone's mattress.

The former interpretation leads to the questions you are asking. The latter does not.

[Tin Foil Timothy]

Are you sure you want to add Tin Foil Timothy to your ignore list?

YES!

It is people like him that destroy the credibility of otherwise legitimate movements, I hope to God he never supported Ron Paul. Timothy - thanks for all the opportunities to debunk your conspiracy non-sense. I just got tired of debunking you over and over again because you were incapable of doing anything but ranting and raving with more made up stuff in response. However, I finally found the ignore button (was looking in all the wrong places). Go back to the David Icke forum that spawned you, troll.
...

Please don't be so childish.

How can you accuse my debunks of your attempts to discredit the Zeitgeist:Addenudum film as 'made up stuff' when the Federal Reserve itself supplies the information?

Fractional Reserve Banking isn't "consiparcy nonsense" it's the way it works.

[Tin Foil Timothy]

Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town? :D

Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.

Warning: here comes my inner left-winger again: why is a bank allowed to charge interest on money it doesn't have? Sure, it boosts economic growth, but couldn't we achieve better results if the SBA just gave 0% loans directly, in accordance with our needed money supply? Short version of my logic: removing the interest factor on money would increase spending power, boost economic growth. I.e. I can spend $11k on a new car, instead of $10k on the car, and $1k to the bank.

When I have $100 in my lame old ING account, I earn interest on $100. I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.

And to be clear: I have no moral problem with interest. It is logical to compensate for the opportunity costs of making a loan. But if the bank doesn't have the money to begin with- what is the risk to the bank? The "opportunity cost" argument sort of falls apart, doesn't it?

I can't see any reason why we can't just create money and spend it into existence. In fact wasn't that the way Lincoln's Greenbacks worked?

[Tin Foil Timothy]

Tim: stop picking on LightinDarkness; we have what we need. I keep telling you- this is an ally to our cause, not an opponent.

I'm not picking on LightinDarkness. I'm just correcting the errors in LightinDarkness' attempts to discredit the Zeitgiest Addendum film in regards to it's explantion of the monatary system. LightinDarkness personal insults and childish responses are also duly noted. Why can't people accept they are wrong without stomping their feet.

But that aside it's good to see that at least a good number of people are starting to understand how money is created from nothing and how the interest attached causes an inbuilt monetary shortfall.

So thanks for starting the thread.

[CurtC]

After reading through this thread, I get the impression of:

1. Yes, money can be thought of as debt.
2. So what?

Some here seem to be peeved that the interest always gets paid back to the bank, therefore the bank is like a black hole for wealth. If you're one of those people who sees it that way, instead of trying to outlaw interest, why don't you just get into the banking business? Start your own bank, and profit from the "money as debt" idea!

I think you'll quickly find out that owning a bank is not the "license to print money" (that old figurative phrase is a little too literal here) like you think it is.

[theprestige]

The interest comes out of the same thin air that the wealth it represents came out of: The borrower's hard work to create value.

Where does work come from? Where does value come from?

And have you actually compared the cars of today with the cars of 50 years ago? There's a lot more features, a lot more sophistication, and a lot more hard work represented in a modern car, compared to one built 50 years ago. Likewise houses.

That said, I'm perfectly happy to concede a certain amount of inflation. I'm even willing to concede that sometimes, a poorly-managed economy has too much inflation.

But if you think that any inflation is bad, and that all inflation can be proven by comparing today's cars to cars from half a century ago, then, well, you're wrong.

[Tin Foil Timothy]

After reading through this thread, I get the impression of:

1. Yes, money can be thought of as debt.
2. So what?

Some here seem to be peeved that the interest always gets paid back to the bank, therefore the bank is like a black hole for wealth. If you're one of those people who sees it that way, instead of trying to outlaw interest, why don't you just get into the banking business? Start your own bank, and profit from the "money as debt" idea!

I think you'll quickly find out that owning a bank is not the "license to print money" (that old figurative phrase is a little too literal here) like you think it is.

I think most of us realise where the interest goes. We know that the interest goes to pay bank operating costs, depositors interest and bank profits etc. And therefore most of it is spent back into the economy.

But focussing on that is somewhat missing the point. It's not the adding of interest on loans that is the problem really. Rather it's the adding of interest on the "Creation Of Money" But yes as debt is the method of money creation then in practise it's one and the same.

So in answer to ..

2] So what?

.. a situation where more money has to be paid back than is created means an infinitely expanding economy is required just to stand still.

So rather than outlaw interest we should remove interest from the creation of money. There's no reason why money can't just be created and spent into the economy as required.

[zaphod2016]

Wallenberg family probaly has more money then the Rothschild family so does the Wallenberg family own the Federal Reserve? House of Morgan is also alot more powerful then the House of Rothschild. Point is that all of these people are not apart of some big conspiracy by the central bankers and they are not shape-shifting reptilians like David Icke claims.

This has NOTHING to do with the topic at hand. Please go away.

I am asking a very specific question:

Where does M1 come from? Is it backed by debt like our fractional-reserve money, or is it created by some other method?

I'm not interested in reading ill-informed rhetoric; I want a clear, objective answer. If you don't know, fine, neither do I, but then hush-up and wait for someone who does know.

If you voted "who cares", I respect your opinion. I'm not here to convince you that you need to care about the things I care about, I am just trying to do some fact-checking.

[theprestige]

But money still just represents wealth.

People are always creating new wealth. That's what interest reflects: The new wealth you created with my wealth, which you borrowed. When you give my wealth back to me, I expect you to give me a piece of the new wealth you created, as appreciation for my willingness to let you make use of wealth you hadn't earned yourself.

And, of course, money is a lot easier to move around and talley up than chickens or cows or rocks. Plus it has the added advantage of being abstract and variable, just like our perceptions of wealth, work, work product, value, etc.

People are always creating new wealth, out of thin air. We can't create new chickens out of thin air, or new gold out of thin air, to tally up all the new wealth that's being created. But we can create new money out of thin air. So that's the metric we use.

[zaphod2016]

But money still just represents wealth.

People are always creating new wealth. That's what interest reflects: The new wealth you created with my wealth, which you borrowed. When you give my wealth back to me, I expect you to give me a piece of the new wealth you created, as appreciation for my willingness to let you make use of wealth you hadn't earned yourself.

And, of course, money is a lot easier to move around and talley up than chickens or cows or rocks. Plus it has the added advantage of being abstract and variable, just like our perceptions of wealth, work, work product, value, etc.

People are always creating new wealth, out of thin air. We can't create new chickens out of thin air, or new gold out of thin air, to tally up all the new wealth that's being created. But we can create new money out of thin air. So that's the metric we use.

Sir, please, refrain from posting further in this thread. I do not disagree with a single thing you have said. You are either ignoring, or misunderstanding, the nature of my confusion.

I am asking:

Where does the M1 come from, is it debt-based like fractional reserve money?

You answer:

But money still just represents wealth.

I ask:

Yes, I know that. I am asking about M1. Do you know the answer?

You answer:

No, but I like impressing people by posting and showing strangers on the Internet how smart I am

I reply:

Great. I agree with your points. Your analysis is nothing but brilliant. But I am asking for information about the specific mechanics of the money supply, to see if proposals for alternatives offer any better solutions, or if they are flawed and based on ignorance.

And I KNOW you think they are all based on ignorance. Fine. But I haven't even gotten that far yet- I am still trying to confirm that I understand the current system. If we don't understand the current system, it is asinine to debate the merits of an alternative.

And those of you who voted "no" to this poll, and are quick to tell me that "there is no problem" need to pause, and think. You yourselves misunderstand a key component of our current system. Fractional reserve = money as debt- but this is only one part of a larger system. This doesn't mean everything in CT videos are correct, it means that there are some legitimate criticisms of the current system. I am trying to separate fact from fiction, not debate monetary policy based on the ill-gotten views of the "duh bunkers" or "Zeitgeist faithful". Both groups need to STFU, imo.

[Tin Foil Timothy]

But money still just represents wealth.

People are always creating new wealth. That's what interest reflects: The new wealth you created with my wealth, which you borrowed. When you give my wealth back to me, I expect you to give me a piece of the new wealth you created, as appreciation for my willingness to let you make use of wealth you hadn't earned yourself.

Unlike Zaphod I diasgree with that. When a bank creates money from nothing to loan you they are not letting you make use of wealth.

You're confusing it with an investment and the investor wanting to pick up profit on the use of his wealth.




People are always creating new wealth, out of thin air. We can't create new chickens out of thin air, or new gold out of thin air, to tally up all the new wealth that's being created. But we can create new money out of thin air. So that's the metric we use.

People don't create wealth out of thin air, they create wealth out of toil. When you create money out of thin air it doesn't create anymore wealth. if you borrow some money to buy something you don't become wealthier. You only get wealthier once you've paid of the loan and you actually own the item.

Yeah that can be expanded upon and perhaps explained better but that's the essence of it.

And like Zaphod says the idea of the thread is to provide some understanding of the monetary system for those ignorant or ion denial of it.

The fact that 4 people have voted NO means there's some way to go in education.

[maxpower1227]

f the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000).

I'm trying to follow this logic here. I'm not getting it...

Let's follow this step by step. I'll write numbers as x/y, where x=money in reserve at the bank, y=money out on loan

Initial deposit: 100/0
Bank loans Joe $90: 10/90
Joe pays someone $90, who then has to deposit it back in the bank before the bank can loan out 90% of that: 100/0
Bank now loans out 90% of that $90: 19/81
etc...

It seems that whoever wrote that is accumulating all of the loans that are made, but it completely disregarding money as it is deposited to the bank. Or am I just missing something?

[theprestige]

Bah.

Banks don't create money. They receive, disburse, and inventory money. Money is created by the Treasury, according a number of rules--complicated rules--but rules nonetheless.

When you borrow money from a bank--even money the bank doesn't have on hand (fractional reserve banking, etc.)--the bank doesn't "create" new money for you. They draw down against the amount of funds they're permitted to give out, per the rules of the fractional reserve system.

No new money--M1 or otherwise--is created by loans, the payment of loans, the charging of interest, or the payment of interest. The money supply includes the notional money specified by the fractional reserve banking system, as well as the real funds actually on hand at any given bank.

Union Bank of California doesn't have the authority to reach into their ledgers and write down "$1,000", and then loan it out at interest to the next person that asks for a loan.

[Tin Foil Timothy]

Bah.

Banks don't create money. They receive, disburse, and inventory money. Money is created by the Treasury, according a number of rules--complicated rules--but rules nonetheless.

When you borrow money from a bank--even money the bank doesn't have on hand (fractional reserve banking, etc.)--the bank doesn't "create" new money for you. They draw down against the amount of funds they're permitted to give out, per the rules of the fractional reserve system.

No new money--M1 or otherwise--is created by loans, the payment of loans, the charging of interest, or the payment of interest. The money supply includes the notional money specified by the fractional reserve banking system, as well as the real funds actually on hand at any given bank.

Union Bank of California doesn't have the authority to reach into their ledgers and write down "$1,000", and then loan it out at interest to the next person that asks for a loan.

Sorry but you are wrong. Banks do create money.

The Fed creates the initial amount, the reserve and the bank creates the rest.

If the Fed deposits $10k into a bank, the bank ( with a 10% reserve ratio ) can then credit the account of a borrower with $9k. This $9k is created from nowhere. The deposits in the bank now equal $19k until the borrow withdraws it and spends it. And when he does that $9 usually ends up in another account where it can form the basis of another loan for $8k1 and so on .

[Gazpacho]

Indeed, I keep wondering, if private lending "creates money" in the sense that would normally be understood by someone reading those words (i.e. the sense of adding to the total number of dollars), why don't accountants seem to know this when they subtract out liabilities on a balance sheet?

And if the meaning is something other than what would normally be understood, could people please find a more accurate phrase and spare us the effort of debunking films like Zeitgeist Reloaded?

[Tin Foil Timothy]

I'm trying to follow this logic here. I'm not getting it...

Let's follow this step by step. I'll write numbers as x/y, where x=money in reserve at the bank, y=money out on loan

Initial deposit: 100/0

OK

Bank loans Joe $90: 10/90

The bank credits joe's account with $90. banks deposits now equal 100+90 = $190


Joe pays someone $90, who then has to deposit it back in the bank before the bank can loan out 90% of that: 100/0

Joe spends the $90 which means the Bank now only has $100 again. The $90 ends up back in the bank.

the bank now has $190.

Bank now loans out 90% of that $90: 19/81

Yup, the bank now credits the accoutn of a borrower with $81. The bank's deposits are now $271


and so on.


It seems that whoever wrote that is accumulating all of the loans that are made, but it completely disregarding money as it is deposited to the bank. Or am I just missing something?

No, that's how it works the loans are accumulated.

here's the Federal Reserve's pdf explaining it

http://www.federalreserveeducation.org/fed101_html/policy/frtoday_depositCreation.pdf

linked from this Fed page ..

http://www.federalreserveeducation.org/fed101_html/policy/money_print.htm


hope that helps. :)

[theprestige]

Sorry but you are wrong. Banks do create money.

The Fed creates the initial amount, the reserve and the bank creates the rest.

If the Fed deposits $10k into a bank, the bank ( with a 10% reserve ratio ) can then credit the account of a borrower with $9k. This $9k is created from nowhere. The deposits in the bank now equal $19k until the borrow withdraws it and spends it. And when he does that $9 usually ends up in another account where it can form the basis of another loan for $8k1 and so on .
The bank doesn't create this additional money. It's part of the deposit.

Your problem is that you're looking at it backwards.

The Fed creates the total amount of money. The total amount is tracked in a ledger. A fraction of it is actual literal money, held in reserve by the bank. The rest is notional funds, making up the remainder of the total. The bank may work with the total amount, even though it is only required to keep a fraction of the total on hand.

That's it. That's all the money there is: The total amount, including the fraction of literal money the bank must keep on hand. The Treasury can create more money, by crediting more to banks and depositing a larger fraction with them, but whatever the banks have, that's all they have.

Why you can't wrap your head around the concept of an abstract currency to track an abstract concept of wealth, I don't know.

[Gazpacho]

If the Fed deposits $10k into a bank, the bank ( with a 10% reserve ratio ) can then credit the account of a borrower with $9k. This $9k is created from nowhere. The deposits in the bank now equal $19k until the borrow withdraws it and spends it. And when he does that $9 usually ends up in another account where it can form the basis of another loan for $8k1 and so on .
Feynman told a story about how a painter came to his house to paint some walls yellow, except he only brought red paint and white paint. He told Feynman "I can mix the red and white paint, and get yellow." Feynman asked him whether he misspoke, and he hadn't. So Feynman got very excited, because here was a chance to see some phenomenon he didn't know about. The painter mixed together the red paint and the white paint...

and then pulled a tube of yellow pigment and squeezed it into the mix.


Likewise, if your only "proof" that private banks can create money is that they can draw on the Fed, which has all kinds of special access to the Treasury, my response to that is a big fat "no kidding!"

[Tin Foil Timothy]

The bank doesn't create this additional money. It's part of the deposit.

Your problem is that you're looking at it backwards.

The Fed creates the total amount of money. The total amount is tracked in a ledger. A fraction of it is actual literal money, held in reserve by the bank. The rest is notional funds, making up the remainder of the total. The bank may work with the total amount, even though it is only required to keep a fraction of the total on hand.

That's it. That's all the money there is: The total amount, including the fraction of literal money the bank must keep on hand. The Treasury can create more money, by crediting more to banks and depositing a larger fraction with them, but whatever the banks have, that's all they have.

Why you can't wrap your head around the concept of an abstract currency to track an abstract concept of wealth, I don't know.

Sorry but you are wrong. The fed does not create the total amount of the money. Banks create 90% of the money supply by fractional reserve banking.

But look, don't take my word for it, read the Federal Reserves own explanation which I've linked to above.

You can also read the Federal Reserve's Booklet called Modern Money Mechanics (http://66.102.9.104/search?q=cache:X19IFL3bTr0J:landru.i-link-2.net/monques/MMM.pdf+Modern+Money+Mechanics&hl=en&ct=clnk&cd=2&gl=uk)
thats the html version. page 7 explains how the banks create money. Teh fed calls it deposit expansion

The pdf version here http://landru.i-link-2.net/monques/MMM.pdf

[Tin Foil Timothy]

Feynman told a story about how a painter came to his house to paint some walls yellow, except he only brought red paint and white paint. He told Feynman "I can mix the red and white paint, and get yellow." Feynman asked him whether he misspoke, and he hadn't. So Feynman got very excited, because here was a chance to see some phenomenon he didn't know about. The painter mixed together the red paint and the white paint...

and then pulled a tube of yellow pigment and squeezed it into the mix.


Likewise, if your only "proof" that private banks can create money is that they can draw on the Fed, which has all kinds of special access to the Treasury, my response to that is a big fat "no kidding!"

You're not getting it.

I'll try and spell it out again....

1] $10k is deposited in a bank. it doesn't matter whether it's joe schmo or the fed who deposits it.

2] because of the 10% reserve ratio the bank can now create $9k and credit the account of a borrower. The bank now has deposits of $19k

It's called deposit multiplication. I've linked to 2 Federal reserve documents that explain this. Please read page 7 of the Modern Money Mechanics Document. It's all explained there.

[Gazpacho]

It's called deposit multiplication. I've linked to 2 Federal reserve documents that explain this.
The documents talk about loans like they're gifts that belong to someone for all time. They're not. When the bank credits a borrower's account with $9000 out of a $10,000 deposit, it is indebted to the depositor for that $9000. Why isn't that shown in the math?

[Tin Foil Timothy]

The documents talk about loans like they're gifts that belong to someone for all time. They're not. When the bank credits a borrower's account with $9000 out of a $10,000 deposit, it is indebted to the depositor for that $9000. Why isn't that shown in the math?

It's not shown in the math because the bank doesn't credit the borrowers account with $9,000 of the $10k. The $9,000 credited to the borrowers account is completely new money.


This is how Modern Money Mechanics describes it ....

Of course, they do not really pay out loans from the money they
receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the
borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system

[Tin Foil Timothy]

here's a better link to the Modern Money Mechanics pdf

http://www.truthsetsusfree.com/ModernMoneyMechanics.pdf

HTML Version (http://66.102.9.104/search?q=cache:lWRzbOa_TQ8J:www.truthsetsusfree.co m/ModernMoneyMechanics.pdf+Modern+Money+Mechanics&hl=en&ct=clnk&cd=3&gl=uk)

the previous pdf link wasn't downloading properly here and the HTML version was all messy

Hope the new links are clearer :)

[LightinDarkness]

Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town? :D

The problem is that there is no reason to artificially limit our money supply. There is not enough gold in all the world to link the world's currencies to it, its just a matter of fact - the amount of gold in circulation and in the ground is so little that if you divided up among all the people in the world who use the worlds currencies your talking about each person only having a fraction of an ounce.

What you end up with is massive deflation and economic hysteria, much like we had in the great depression but with a different cause.


Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.

Probably because having the federal government do anything always results in a disaster, and the less direct control the federal government has over anything the better off we all are. The government already has a role in creating money, just not releasing that money. WIth the spectacular ability of the Congress to constantly fail us, the last thing I want is ANYONE with a POLITICAL MOTIVATION directly in charge of the money supply with no checks or balances.

We actually have had your suggestion done before in Zimbabwe, where the politicians took over the Federal Reserve and began issuing money based on political motivates. Which is why the country now faces 50 million percent inflation a month, and why it takes about 40 billion Zimbabwe dollars to buy a dozen eggs.


Warning: here comes my inner left-winger again: why is a bank allowed to charge interest on money it doesn't have? Sure, it boosts economic growth, but couldn't we achieve better results if the SBA just gave 0% loans directly, in accordance with our needed money supply? Short version of my logic: removing the interest factor on money would increase spending power, boost economic growth. I.e. I can spend $11k on a new car, instead of $10k on the car, and $1k to the bank.

I thought you were a libertarian? :D The bank is allowed to charge interest for the privilege of giving you money that it could have reinvested elsewhere. Remember it could just take that fractional reserve money and plow it into other securities. When it decides to lend to you, you are more risk, thus you pay.

The problem with 0% loans is that without interest by the time you buy it back the money has usually lost its buying power due to inflation (and lest the woos come in, yet again inflation is not usually due to the Federal Reserve). That is why a 30 year home mortgage is actually a great deal: by the time you pay the loan principle back, the actual value of that money is worth far less than the interest and principle you paid in most cases.

Also, interest acts as a way of suppressing demand. If EVERYONE gets 0% money, the demand sky rockets beyond controllable levels. When interest is charged demand can remain at a reasonable leve.


When I have $100 in my lame old ING account, I earn interest on $100. I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.

Sure - if you agree to loan it out to people and take the risk.


And to be clear: I have no moral problem with interest. It is logical to compensate for the opportunity costs of making a loan. But if the bank doesn't have the money to begin with- what is the risk to the bank? The "opportunity cost" argument sort of falls apart, doesn't it?

The opportunity cost argument is still there. The best way to make money is not from individual consumers because they are too risky - its far better to plow that money into investment instruments.

[zaphod2016]

The problem is that there is no reason to artificially limit our money supply.

No disagreement there.

Probably because having the federal government do anything always results in a disaster, and the less direct control the federal government has over anything the better off we all are. ...We actually have had your suggestion done before in Zimbabwe, where the politicians took over the Federal Reserve and began issuing money based on political motivates. Which is why the country now faces 50 million percent inflation a month, and why it takes about 40 billion Zimbabwe dollars to buy a dozen eggs.

Excellent answer, and I see why we want monetary policy handled by a non-partisan group.

Remember it could just take that fractional reserve money and plow it into other securities. When it decides to lend to you, you are more risk, thus you pay.

Wait a sec- a bank can invest in whatever it wants with money it creates itself? This sounds too good to be true. I understand the logic behind fractional reserve banking to grow money supply with demand, but this assumes the new money is backed by the value of the debt. How does this work when a bank buys, say, a chunk of an index fund?

Also, re: the m1, here is what I am trying to debunk.

Before watching this, please note I am trying to DEBUNK this video, not claim it as holy gospel. Also, I am only pointing to a specific section, because this video goes way off into the usual CT craziness.

Money as Debt (http://www.youtube.com/watch?v=_yvRZoM-2r8#t=3m5s) 3:05-4:48

Basically, this section is working on the assumption that ALL money is fractional-reserve "debt money"; and if this is true, the video is mathematically accurate. We are dealing with a classic ponzi scheme.

But my inner skeptic is screaming: BS! For example, the problems of perpetual debt only exist if interest is being paid with other debt money. If there is some source of money equal to the amount of total outstanding interest, that is not itself debt-based, we have no problem at all.

I am a math-nerd who makes a living as a programmer, so please, speak to me in math. What is the variable missing from the above video?

[Gazpacho]

If not for my extreme dislike of the anti-semites among the anti-banking crowd, I might have given up trying to reach an agreement on this.

Tim, thank you for your patience. After thinking about it a while until my head started to hurt, maybe I begin to see the common ground. I come at this from the background of trying to teach myself (from knowledgable sources, university textbooks etc.) about finance. The books I've read talk about credit as a way of managing money over time.

For example, as a lender I give someone $1000 in return for his promise of $1100 in the future. An exchange takes places in a legal sense, but not in a real sense. He has given me nothing but his word, and he probably doesn't yet have the money he's going to give me in the future.

What I'm getting at is that while the idea of money travelling through time is a useful for analysis and valuable for commerce, only the present is real. It's up to banker to come up with some present money to get the time-travel illusion started. I can see how crediting the same deposit to two accounts as part of a larger plan over time is a reasonable way to accomplish that.

Am I getting warm?

[Pi_314]

Theres a new video about this subject, called {The bankers cabal}. Apparently I don't have enough post on this forum to put in a link, so you will need to search google to get it.

[zaphod2016]

After reading through this thread, I get the impression of:

1. Yes, money can be thought of as debt.
2. So what?

Some here seem to be peeved that the interest always gets paid back to the bank, therefore the bank is like a black hole for wealth. If you're one of those people who sees it that way, instead of trying to outlaw interest, why don't you just get into the banking business? Start your own bank, and profit from the "money as debt" idea!

I think you'll quickly find out that owning a bank is not the "license to print money" (that old figurative phrase is a little too literal here) like you think it is.

1. I don't object to this based on any moral reason, in fact, I may not object to this at all- I'm still just trying to get my facts straight.

2. The problem with debt-based money is this: how do you repay the interest? The above-linked video describes what is in essence a ponzi scheme (http://en.wikipedia.org/wiki/Ponzi_scheme)

I.e. we create $100 as debt, @ 10% interest, we now need $110 in circulation to meet the demand of this debt. You could donate every cent of profit to the church or charity, but the underlying issue doesn't go away- the $100 comes from fractional-reserve banking, where does the $10 for interest come from? If that $10 comes from more fractional reserve banking, you owe "interest on the interest"- assuming a flat 10% interest rate across the board- you need $11 to repay the $10 you used to repay the $100- and thus, we have a recursive function that can never complete itself- a loop without break or completion. Check my math:

$100
+ 10% = $110

$10
+10% = $11

$1
+10% = $1.10

$0.10
+10% = $0.11

$0.01
+10% = $0.011

At this point we are dealing in fractions of a cent; but you can picture this as an inverse exponential curve- getting closer to total repayment, but never able to actually get there

On the personal level, you borrow $100, repay $110- no problem. But as part of a closed-loop banking system, if that $10 in interest is backed by debt somewhere else in the system, someone else needs to find $1 to cover the interest on the $10. And, some else needs to find a dime to repay interest on that dollar. And around and around it goes- an inverse exponential curve.

The issue isn't "the evil bank took 10% of my money", the issue is: doesn't this system present a paradox?

More likely, this video is being deceptive, and ignoring a factor of money that is not debt-based. This is what I'm trying to determine.

3. A bank is allowed to deposit $1000 in a central bank, and then loan $10,000- which includes $9,000 it doesn't have. If that's not a "license to print money", I don't know what is!

4. Why not profit from banking? I do. I earn interest every month. But in light of the largest banking meltdown of my lifetime, I am interested to learn more about how these systems work.

I am trying to write a function in my head that encapsulates the system. I'm not arguing for or against anything (yet)- I'm just trying to make sure I understand what the system's instructions are, and the logic behind them.

[zaphod2016]

Theres a new video about this subject, called {The bankers cabal}. Apparently I don't have enough post on this forum to put in a link, so you will need to search google to get it.

The title of this video makes me nervous: "cabal"

If this video has anything to do with Jews, or banker families, or a history of banking, please save it for another thread. I agree with Gespacho: antisemitism has NOTHING to do with the subject at hand, and many of these videos don't just cross that line- they set up camp deep in 3rd-Reich territory.

[Gazpacho]

The above-linked video describes what is in essence a ponzi scheme (http://en.wikipedia.org/wiki/Ponzi_scheme)
Ponzi schemes are characterized by the lack of a real income source. Banks receive loan payments (if they make good loans).

[Pi_314]

The title of this video makes me nervous: "cabal"

If this video has anything to do with Jews, or banker families, or a history of banking, please save it for another thread. I agree with Gespacho: antisemitism has NOTHING to do with the subject at hand, and many of these videos don't just cross that line- they set up camp deep in 3rd-Reich territory.

The word jew is never uttered in the entire video. Whats with the assumptions? Watch it and make up yer own mind.

[zaphod2016]

Ponzi schemes are characterized by the lack of a real income source. Banks receive loan payments (if they make good loans).

The ponzi scheme works like so: you give me $100, and next week I give you $200.

I get that $200 from other poor fools, after promising to double their money too.

The problem of course is that eventually you run out of poor fools willing to risk $100, and the scheme collapses.

I find this analogous here:

The bank is loaning me $100. It gets that money based on the value of my promise to repay. The money I use to repay that debt is also created by this same process of loaning other people money.

If, for whatever reason, people stopped taking loans, the entire system would collapse. There would not be enough currency in circulation for me to repay my loan.

It seems an awful lot like a ponzi scheme to me. But- like I have said- I expect I am missing a component here. A system based on 100% debt-money, with a > 0% interest rate, is mathematically impossible- it would demand a growing money supply just to cover interest. I have to think our system addresses this in some way- and that this factor is being omitted from the CT version of banking.

[zaphod2016]

The word jew is never uttered in the entire video. Whats with the assumptions? Watch it and make up yer own mind.

Forgive my prejudice- I am making the same mistake antisemites do. After several rants by moon1969 about the evil Joos, I have become a bit defensive and paranoid of losing another thread to woo.

Does this video address the mechanics of the US money supply? That is what I am trying to discuss with this thread.

[Slayhamlet]

I'm trying to follow this logic here. I'm not getting it...

Let's follow this step by step. I'll write numbers as x/y, where x=money in reserve at the bank, y=money out on loan

Initial deposit: 100/0
Bank loans Joe $90: 10/90
Joe pays someone $90, who then has to deposit it back in the bank before the bank can loan out 90% of that: 100/0

Nope. Joe still owes the bank $90 dollars at this point, so it should be 100/90. It doesn't matter that Joe payed someone else the $90, or that that someone deposited it back into the bank. Joe's still in debt to the bank.

Bank now loans out 90% of that $90: 19/81
etc...

19/81+90(171).

The bank "creates" new money in the sense that it lends out more money than it has available to pay off all the loans from its creditors at the time of the transaction, money which was itself acquired from these loans. This is why a bank run is such a bad thing: if too many creditors withdraw at once, the bank defaults. Fractional reserve is simply a regulation that demands the bank keep a certain percentage (fraction) of all the money they currently have on loan from creditors in a reserve of liquid assets ready to be given to any creditors who should happen to withdraw. The rest they can loan out as they please. So it's basically a safety measure, but it only provides protection insofar as the reserve is sufficient to pay off a certain number of creditors at any one time. If every single creditor were to withdraw at once, no fractional reserve would be enough to save the bank from defaulting (unless they reserve all of it, in which case it's no longer a fractional reserve). But the greater the fractional reserve, the better the bank is protected.

At least that's my understanding.

[zaphod2016]

As far as I know, Slayhamlet is 100% correct. The "reserve" part of "fractional reserve" is actually a good thing in so far as it limits the extent of this practice.

[Trojan_Jockey]

The word jew is never uttered in the entire video. Whats with the assumptions? Watch it and make up yer own mind.

When people start using the term 'usury' alarm bells should surely start ringing. The whole objection to this 'creating money from debt' scenario is that the bankers get rich. Throw in a few Rothchilds here and there and it's just the modern day equivalent of the Protocols.

[maxpower1227]

Nope. Joe still owes the bank $90 dollars at this point, so it should be 100/90. It doesn't matter that Joe payed someone else the $90, or that that someone deposited it back into the bank. Joe's still in debt to the bank.



19/81+90(171).

The bank "creates" new money in the sense that it lends out more money than it has available to pay off all the loans from its creditors at the time of the transaction, money which was itself acquired from these loans. This is why a bank run is such a bad thing: if too many creditors withdraw at once, the bank defaults. Fractional reserve is simply a regulation that demands the bank keep a certain percentage (fraction) of all the money they currently have on loan from creditors in a reserve of liquid assets ready to be given to any creditors who should happen to withdraw. The rest they can loan out as they please. So it's basically a safety measure, but it only provides protection insofar as the reserve is sufficient to pay off a certain number of creditors at any one time. If every single creditor were to withdraw at once, no fractional reserve would be enough to save the bank from defaulting (unless they reserve all of it, in which case it's no longer a fractional reserve). But the greater the fractional reserve, the better the bank is protected.

At least that's my understanding.


I still don't completely agree with the logic. When the $90 is deposited back into the bank, the bank's assets grow (we're treating it as the "same" $90, but that's not necessarily meaningful), so the amount of credit that they can offer grows proportionately. It's still the same ratio. Whether it's 90 credit for 100 in assets, or 171 in credit for 190 in assets, it's still a 90/10 ratio between the amount of outstanding credit that the bank is owed, and the amount of assets on hand. This summing of a geometric series to get some obscene leverage ratio is a bit disingenuous.

[Edx]

Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

But if you gain more wealth WHERE are you getting that extra wealth from?

Other people are paying you for goods or services you are providing, correct?

So where are THEY getting the money from? They are getting it from people THEY are providing goods or services to, and so on...

So where does ALL money come from? The money supply.

You say above... "Paying back a loan with interest doesn't require the creation of more money it requires the creation of more wealth".... So if you take out a loan, invest it in a business venture which generates more wealth and pay back the loan with the interest does this seem like money creation to you? Well it shouldnt, because someone had to give you that extra wealth and they had to get it from somewhere. If you used the loan to start a construction business your clients in all likelyhood would have had to take out their OWN loan in order to purchase your services. So they now have their own loans to pay back + interest. So if we keep working it back, where do THEY get the money to pay back the interest?

When the bank loans you money it doesnt come from its deposits and its reserve requirements are unchanged. The money doesnt yet exist until you take out that loan, yet when it is it is then added to the money supply; expanding it.All money in the money supply has a certain amount of debt attached to it, somewhere someone needs that money to pay off their own debt + interest, So therefore without more debt and more loans how is it possible to pay off all the principle and interest? For a while you can just keep generating more loans and so more money, but exponentially how can the system continue without crashing eventually? On an individual level I can see how you can think it can work.

I am like Zaphod on this issue, if I am wrong I do not understand why.

Ed

[maxpower1227]

So if you take out a loan, invest it in a business venture which generates more wealth and pay back the loan with the interest does this seem like money creation to you? Well it shouldnt, because someone had to give you that extra wealth and they had to get it from somewhere.

The way I see it, wealth is created through work. If you take raw materials which have a market value of $2 and create a product that has a market value of $10, you have created wealth. Of course, it came with a price, and that was your labor.

[Edx]

Wallenberg family probaly has more money then the Rothschild family so does the Wallenberg family own the Federal Reserve? House of Morgan is also alot more powerful then the House of Rothschild. Point is that all of these people are not apart of some big conspiracy by the central bankers and they are not shape-shifting reptilians like David Icke claims.


Eh? Who are you replying to with all these posts? Are you some kind of skeptic-CT bot programmed to post this stuff to all threads dealing with money? lol :D

[Edx]

The way I see it, wealth is created through work. If you take raw materials which have a market value of $2 and create a product that has a market value of $10, you have created wealth. Of course, it came with a price, and that was your labor.

Thats true, but as I say someone that paid you for yoru labour had to get that money from somewhere. And where did they get it from?

[maxpower1227]

Thats true, but as I say someone that paid you for yoru labour had to get that money from somewhere. And where did they get it from?

Their wallet?

Seriously though, if they paid in bills that were printed that day, or bills that had been in circulation for 70 years, what difference does it make for my example? Wealth can still be created without altering the money supply.

Maybe I'm missing your point.

[Edx]

Their wallet?

Seriously though, if they paid in bills that were printed that day, or bills that had been in circulation for 70 years, what difference does it make for my example? Wealth can still be created without altering the money supply.

Maybe I'm missing your point.

:) Yes it does seem like you are missing my point, which is probably my fault.

Wealth as defined by an accumulation of money which I assume is the definition you are using, can be created without altering the money supply. Correct. But moving money around, or having one person end up with more money than others is not generating more money. If that person in your example gets paid for their work the person paying them must get the money from somewhere. Most likely, as per your example, from selling the item to his customers. But where do his customers get the money from? From work, or they borrow the money. If you keep going back far enough someone will be left holding the bill for the interest and cannot afford to pay back their loans.

HOWEVER, the way they stop this from happening is by expanding the money supply. The way the money supply is expanded is through loans themselves. So when you take out a $1000 loan, the money supply expands as it still recognises this as real money being created. The loan didnt come from the banks desposits and their reserves are unchanged, the loan can be created because there is a demand for it and because they have a 10% reserve to satisfy the reserve requirement. But what happens now is that because you now deposited that $1000 loan into your account that $1000 now becomes apart of the banks reserves, and as they are only required to keep a reserve of 10% they can go on to use that $1000 as a basis for new loans to more people.

What it requires then is more money and therefore more debt to be in the system continually so that people can pay off their principle and interest in the system. On an individual scale its possible to become wealthy, its possible to even make some money using the debt based money system. But you need to look at the system as a whole.

[Tin Foil Timothy]

If not for my extreme dislike of the anti-semites among the anti-banking crowd, I might have given up trying to reach an agreement on this.

This thread shouldn't even be in the CT Forum as there's no conspiracy. The problem is really that it's been upto those like Zeitgesit, etc who are opposed ( for good reason) to the current monetary system to educate people about how the system works. If the banking world hadn't been so secretive about Fractional Reserve Banking in the first place we wouldn't even be discussing this. Everyone would already know how it works. It's basic economics.


Tim, thank you for your patience.

You're welcome :)


After thinking about it a while until my head started to hurt, maybe I begin to see the common ground. I come at this from the background of trying to teach myself (from knowledgable sources, university textbooks etc.) about finance. The books I've read talk about credit as a way of managing money over time.

For example, as a lender I give someone $1000 in return for his promise of $1100 in the future. An exchange takes places in a legal sense, but not in a real sense. He has given me nothing but his word, and he probably doesn't yet have the money he's going to give me in the future.


Well that's kind of how it started. It was the goldsmiths who started playing the role of banks when they started a service to keep peoples gold safe in their own vaults. Then promissory notes were used instead of the physical gold

It was when they realised that it was rare for people to actually come in and demand their physical gold they started to lend out gold on the back of IOUs promissory notes to a value of more than they actually had in the vault. And fractional reserve banking was born. All lent out with interest of course.

And once those who kept their gold safe in the vaults of the goldsmiths realised they were lending it ( and more ) out with interest they also wanted a cut and thus interest on savings was born.



What I'm getting at is that while the idea of money travelling through time is a useful for analysis and valuable for commerce, only the present is real. It's up to banker to come up with some present money to get the time-travel illusion started. I can see how crediting the same deposit to two accounts as part of a larger plan over time is a reasonable way to accomplish that.

Am I getting warm?

Well the deposit is only credited to two accounts in the sense of double entry bookkeeping as an asset(Loan)and a liability(deposit)

The actual deposit multiplier creates complete new money which is only in one place at once

[Tin Foil Timothy]

But if you gain more wealth WHERE are you getting that extra wealth from?

Other people are paying you for goods or services you are providing, correct?

So where are THEY getting the money from? They are getting it from people THEY are providing goods or services to, and so on...

Yes and if you follow the trail of money back you'll find the origin is a loan. Somebody somewhere is paying interest on every dollar in your wallet.



So where does ALL money come from? The money supply.

You say above... "Paying back a loan with interest doesn't require the creation of more money it requires the creation of more wealth".... So if you take out a loan, invest it in a business venture which generates more wealth and pay back the loan with the interest does this seem like money creation to you? Well it shouldnt, because someone had to give you that extra wealth and they had to get it from somewhere. If you used the loan to start a construction business your clients in all likelyhood would have had to take out their OWN loan in order to purchase your services. So they now have their own loans to pay back + interest. So if we keep working it back, where do THEY get the money to pay back the interest?

And that's the point. The interest means there's always more to pay back than is created.



When the bank loans you money it doesnt come from its deposits and its reserve requirements are unchanged. The money doesnt yet exist until you take out that loan,

Correct

yet when it is it is then added to the money supply; expanding it.

Correct

All money in the money supply has a certain amount of debt attached to it, somewhere someone needs that money to pay off their own debt + interest, So therefore without more debt and more loans how is it possible to pay off all the principle and interest? For a while you can just keep generating more loans and so more money, but exponentially how can the system continue without crashing eventually?

Well on a purely monetary basis it can keep on expanding infinitely. As long as your book keeping equipment has enough digits. Didn't they just have to add another digit to the NYC Debt clock? :)

The problem comes when people keep on using up the earth's resources in order to create more goods and serves in order to keep up with the requirements of the expanding economy.

And that's one of the biggest problems of the system. It adds an unnecessary need on the usage of the Earth's resources

[Edx]

But money still just represents wealth.

People are always creating new wealth. That's what interest reflects: The new wealth you created with my wealth, which you borrowed. When you give my wealth back to me, I expect you to give me a piece of the new wealth you created, as appreciation for my willingness to let you make use of wealth you hadn't earned yourself.

Yes on an individual scale thats how it works. My money represents my labour that I had to work in order to get paid that money. So my money is based on labour. Consequently if I choose to lend that money to someone that wants to use it to make more money from it, I may expect some form of interest. But the banks do not "lend" money the same way you or I might lend money.

[Tin Foil Timothy]

Yes on an individual scale thats how it works. My money represents my labour that I had to work in order to get paid that money. So my money is based on labour. Consequently if I choose to lend that money to someone that wants to use it to make more money from it, I may expect some form of interest.

And that's called an investment. You're investing your wealth in someone else so that they may create more wealth for themselves and yourself.

Plenty of people invest wealth on the expectation of a return on that investment. This process doesn't create any new money though. It just shifts it around from one place to another.



But the banks do not "lend" money the same way you or I might lend money.

Yes, they create money to be loaned out.

[Tin Foil Timothy]

Money as Debt (http://www.youtube.com/watch?v=_yvRZoM-2r8#t=3m5s) 3:05-4:48

Basically, this section is working on the assumption that ALL money is fractional-reserve "debt money"; and if this is true, the video is mathematically accurate. We are dealing with a classic ponzi scheme.

But my inner skeptic is screaming: BS! For example, the problems of perpetual debt only exist if interest is being paid with other debt money.

There's no BS with that section of the video. Although it doesn't say All money is Fractional Reserve Debt, just most of it. And that's true. The central bank creates the initial reserve,but that's also debt anyway.


If there is some source of money equal to the amount of total outstanding interest, that is not itself debt-based, we have no problem at all.

I am a math-nerd who makes a living as a programmer, so please, speak to me in math. What is the variable missing from the above video?

There some variables missing, but in the grand scheme of things they don't really make any difference.

On a national level the variable missing is money obtained from overseas in the guise of foreign sales or investments. And therefore increasing exports or attracting foreign investment is one way to make up for the shortfall of money created by the interest.

But in a globalist economy that factor is irrelevent. Pretty much the whole world uses the Fractional Reserve system to create money with interest.

So the only way to pay of the interest is to create more money, i,e more debt. Which of course has even more interest attached. An infinitely expanding system

[moon1969]

FED system or the European Central Bank don"t make the financial crisis worse only the wrong policy and flaws and problems in the system do. The Rothschild family doesn"t own the European Central Bank or the FED. Ben Bernanke and Jean-Claude Trichet don"t work for the Rothschild family, The Rockefeller family, The Wallenberg family or House of Morgan. There is no conspiracy. Why would Alan Greenspan admit that he was wrong in his policy of there was a conspiracy?

[theprestige]

But if you gain more wealth WHERE are you getting that extra wealth from?
They are getting that wealth from Working. Doing Things. Making Themselves Useful.

That's what we--you, me, the banks, the Fed, the government, the fast food fry clerk--that's what all of us use money for: To measure the value of the work we're all doing.

Now, maybe you don't do enough work to pay for all the money you borrowed. If so, you're a fool for borrowing, and the lender is a fool for lending to you.

But neither you or the lender is creating money. You're creating value by doing work, and other people are using money to represent how valuable they think your work is.

[Tin Foil Timothy]

They are getting that wealth from Working. Doing Things. Making Themselves Useful.

That's what we--you, me, the banks, the Fed, the government, the fast food fry clerk--that's what all of us use money for: To measure the value of the work we're all doing.

Now, maybe you don't do enough work to pay for all the money you borrowed. If so, you're a fool for borrowing, and the lender is a fool for lending to you.

But neither you or the lender is creating money. You're creating value by doing work, and other people are using money to represent how valuable they think your work is.

Sorry but you are wrong. Well half wrong. It depends on who you mean by 'lender'

If you lend your buddy $100 then you haven't' created any money. You've simply temporarily (hopefully) transferred some of your money to your buddy so he can use it.

But Banks do create money. thyecreate at least 90% of the money in existence by fractional reserve banking. The central bank creates the rest as and deposits it in an account at the bank and the bank can then use that to create more money. This is how the system works and is well documented by the Fed itself

[zaphod2016]

I am still stuck on one aspect of this system.

Please note: it doesn't matter who gets the interest, or if the interest was donated to orphaned kittens. I am not making a moral argument, I'm making a math argument.

We create $100 as a 1 year loan at 10%. A year later, $110 must be repaid.

Assuming the $10 used for interest is also backed by a 1 year loan at 10%, a year later, someone will owe $11.

Assuming the $1 used for interest is also backed by a 1 year loan at 10%, a year later, someone will owe $0.10.

Here it is in table/graph form:

http://zaphodforpresident.com/images/graph.png

As you see, the result is an inverse exponential curve- there is always a remaining debt somewhere in the system. Using this system, the debt can never return to $0, because each debt demands additional interest, which is also generated by debt.

This doesn't add up- literally. Either I am missing a component, or this system demands inflation proportionate to whatever rate of interest is used.

As I said, those ranting about "evil Joos" or "bankers concentrating wealth" are missing my point entirely. Assume the 10% interest is donated to charity- you will still need a perpetually smaller chunk of money to pay for each subsequent interest payment.

Like a Russian doll, with a smaller doll inside. Note: the above graph does not reach 0. It will never reach zero, because to repay the 10% interest on 1/1000 cent requires another 1/10000 cent, so on to infinity.

What is the missing component? I must be missing a piece of this.

Here is the same thing, assuming a 50% interest rate across the board:

http://zaphodforpresident.com/images/graph2.png

Note- it doesn't matter how much interest is charged, nor does it matter who gets the interest- this will NEVER reach 0, so long as all "interest money" is also debt-based.

It doesn't matter if we lower interest rates-

http://zaphodforpresident.com/images/graph3.png

It doesn't matter if we raise interest rates-

http://zaphodforpresident.com/images/graph4.png

So long as interest > 0%, and all new money is debt-based, the total outstanding debt can never reach $0.

It seems to me that those who argue "fractional reserve banking demands inflation" are mathematically correct. Please correct me if I am wrong.

[Tin Foil Timothy]

I am still stuck on one aspect of this system.

I don't know why you are still stuck?

your computations have answered your question. The interset will ever reach zero.


Note- it doesn't matter how much interest is charged, nor does it matter who gets the interest- this will NEVER reach 0, so long as all "interest money" is also debt-based.

And consider that probably the biggest loan for an individual is their mortgage and then consider how much interest is added onto the principle over say a 25 year mortgage and that adds up to a big shortfall of money in the system to pay it back.

And there's the extra borrowing in lieu of inflation in terms of pure numbers ( rather than value)

[Pi_314]

And consider that probably the biggest loan for an individual is their mortgage and then consider how much interest is added onto the principle over say a 25 year mortgage and that adds up to a big shortfall of money in the system to pay it back.The current system requires continually more debt to exist, but eventually it's all gonna hit the fan. There is a buffer zone of lag time to these loans to stave off the shortfall of money in the system, buttressed by greater debt, which is absolutely required. The current system cannot be maintained long term, it must fail eventually.

[ArmillarySphere]

You're still hung up on interest. Rhetorical question: What do you think interest is used for?

Answer: It goes to pay salaries, power bills, invest in companies etc etc. A bank is a business, and has expenses and profit - which goes to its shareholders. And all that money re-enters into circulation

Money paid as interest does not vanish into a black hole or Scrooge McDuck's personal swimming pool - it goes straight back into the economy.

With your scenario: A borrows $100 from bank B. At the end of the year, he pays $10 in interest.
Bank B buys services from A for those $10, enabling him to pay the mortgage.

[plumjam]

What's this about the money 'going straight back into the economy'? That's really no defence at all.
If I were to rob old Mrs Sporran from down the street of her life savings then I'd probably spend quite a bit of it and invest the rest.. thus putting it straight back into the economy. But that doesn't affect the basic injustice of the act of robbing Mrs Sporran.

[CurtC]

So you view charging interest on loans the same as robbery? That's a new twist.

[Trojan_Jockey]

You're still hung up on interest. Rhetorical question: What do you think interest is used for?

Answer: It goes to pay salaries, power bills, invest in companies etc etc. A bank is a business, and has expenses and profit - which goes to its shareholders. And all that money re-enters into circulation

Money paid as interest does not vanish into a black hole or Scrooge McDuck's personal swimming pool - it goes straight back into the economy.

With your scenario: A borrows $100 from bank B. At the end of the year, he pays $10 in interest.
Bank B buys services from A for those $10, enabling him to pay the mortgage.

Exactly. Just beacuse Mr X has to pay $110 on his $100 dollar loan it does not mean the money is lost from the economy!

The problem is that some people still have a Third Reich view of bankers as greedy parasites who smoke big cigars whilst swilling port. This is why the whole idea of interest is so outrageous to them, and why, may I add, they use telling and loaded terms like "Usury". It all comes back to too much power and the wealth in the hands of Je...I mean Zionists. Smash the financial system and we can destroy Zionist power etc. etc.

[zaphod2016]

Exactly. Just beacuse Mr X has to pay $110 on his $100 dollar loan it does not mean the money is lost from the economy!

Let me make sure I have this right-

$100 is created as a new loan

A year later $110 is repaid

Not all of the $110 is destroyed, rather, a portion circles back through the economy. Therefore, the "Russian doll" paradox I explained above is not accurate.

This means it is worse.

For the last time: my concern is inflation, not evil Joos, or the banker cabal. I am trying to understand the math of inflation.

Also: this model doesn't assume the bank keeps anything- it assumes the bank destroys the entire loan once it is repaid. So the model I described above can't be right, because banks keep at least some profit.

In the above graphs, I assume the goal is to minimize inflation, and that the most logical way to do that is to destroy loans as they are repaid, and attempt to maintain some sort of homeostasis between demand and money supply. But this is impossible because each increment of money demands an ever smaller increment of money.

You reply: nope, they don't destroy the loan, they allow it to stay in the general money supply.

Ok, fine. But doesn't this make inflation much worse than the model I described above?

LightinDarkness- have you given up on me? I'm really trying to understand this, and you seem to know whats up. Please help.

[Tin Foil Timothy]

What a few of you seem to be missing is that this is nothing to do with what happens to the interest after it's paid.

In fact it's not even so much to do with the charging of interest on the loan of money. Although there's a separate topic which would involve discussing netter methods of loaning people the money to buy a house for example.

The problem is charging interest on the creation of money. The money to pay the principle does exist as it's just been created but the money to pay the interest that interest doesn't exist. Therefore even more money is has to be created to pay of the interest and so on and so on.

Few would complain about someone investing their hard earned money int oa business venture and earning a return( Interest) on it. But private banks can earn a profit on basically nothing more than a few keystrokes on a keyboard to credit someone's account with new money created out of nothing. And because of the way money is created the private banks are earning a profit on 90% ( and more ) of all money ever created. I can understand why people complain about that.

And because private bankers create money they have control over the money supply. And that's a power that affects us all and again I can understand why people complain about that.

[Edx]

They are getting that wealth from Working. Doing Things. Making Themselves Useful.

I already explained this. If you work you get paid, someone has to pay you. That someone gets their money from somewhere too, maybe they work for someone as well but whatever the case someone has to pay them and so on.

That's what we--you, me, the banks, the Fed, the government, the fast food fry clerk--that's what all of us use money for: To measure the value of the work we're all doing.

Now, maybe you don't do enough work to pay for all the money you borrowed. If so, you're a fool for borrowing, and the lender is a fool for lending to you.

You dont seem to understand what we are getting at. You keep looking at this on an individual level. You CAN get wealthy in this system and you CAN pay back your loans. The problem is, if no new money were introduced into the system then there would be no way to pay off the principle + interest since the total amount of principle in the money pool is less than the interest charged by the banks. The banks create new money to "solve" this problem, but that money is created by more loans and therefore more debt with its OWN debt attached to it and so it goes on.

But neither you or the lender is creating money. You're creating value by doing work, and other people are using money to represent how valuable they think your work is.

Yes the banks do create money. I expalined this before but I wil briefly explain again. When you take out a $1000 loan this money is NOT coming out of the banks deposits and its NOT changing their reserves. The reason they can create this money is because there is a demand for it, and because they have a 10% reserve requirement to back it. When your account is credited with that NEW $1000 it now becomes part of the banks reserves and they can then use that as the basis for new loans to others. Because of your $1000 they can now loan out 10x more than that to more people and the cycle continues.

[Pi_314]

I am trying to understand the math of inflation. Pretty tough to put a math handle on this. To much money in the system, oil goes up 100%, everybody trying to carve out their piece of pie. Can it be controlled? To a certain degree ... yes, just decrease the money supply, or spread gloom and doom around enough to slow the economy.

[Tin Foil Timothy]

Pretty tough to put a math handle on this. To much money in the system, oil goes up 100%, everybody trying to carve out their piece of pie. Can it be controlled? To a certain degree ... yes, just decrease the money supply, or spread gloom and doom around enough to slow the economy.

With the monetary system we have got decreasing the money supply is exactly what not to do.

[moon1969]

Cornerstone of the conspiracy is that the Rothschild family rules the world and controls the banking system. Funny how Adolf Hitler believed in that conspiracy because in those conspiracies the Rothschild family is often used as proof that the jews rule thw world. I just don"t like it when all these conspiracy theories talk about the Rothschild family. There is a difference between legitimate criticism and antisemitism. If Larry Silverstein was a muslim nobody would say that he is apart of some big conspiracy.

[Tin Foil Timothy]

Cornerstone of the conspiracy is that the Rothschild family rules the world and controls the banking system. Funny how Adolf Hitler believed in that conspiracy because in those conspiracies the Rothschild family is often used as proof that the jews rule thw world. I just don"t like it when all these conspiracy theories talk about the Rothschild family. There is a difference between legitimate criticism and antisemitism. If Larry Silverstein was a muslim nobody would say that he is apart of some big conspiracy.

Unfortunately there are many that don't understand that. But please, this thread isn't about conspiracy theories it's about the monetary system.

[Edx]

Cornerstone of the conspiracy is that the Rothschild family rules the world and controls the banking system. Funny how Adolf Hitler believed in that conspiracy because in those conspiracies the Rothschild family is often used as proof that the jews rule thw world. I just don"t like it when all these conspiracy theories talk about the Rothschild family. There is a difference between legitimate criticism and antisemitism. If Larry Silverstein was a muslim nobody would say that he is apart of some big conspiracy.

I think its pretty funny how frustrating it must be to really want to argue about something but have no one to disagree with you. :rolleyes:

[Edx]

You're still hung up on interest. Rhetorical question: What do you think interest is used for?

Answer: It goes to pay salaries, power bills, invest in companies etc etc. A bank is a business, and has expenses and profit - which goes to its shareholders. And all that money re-enters into circulation
.

You said "all that money", but that isnt true. If banks were a public service you could say that, but banks are a corporation run for profit. Do correct me if Im wrong but in America Hospitals are a corporation run for profit, but in the UK we have the NHS. Many would say poorly run and underfunded, but the point being is that they arent trying to make any money and if they ever did they would put it straight back into funding itself. This is not how banks work.

Perhaps my previous idea of getting rid of interest wouldnt work, but to make banking a public service where ALL the interest goes back into the economy and/or helping to fund themselves would be a better way of working the same system.

[Tin Foil Timothy]

You said "all that money", but that isnt true. If banks were a public service you could say that, but banks are a corporation run for profit. Do correct me if Im wrong but in America Hospitals are a corporation run for profit, but in the UK we have the NHS. Many would say poorly run and underfunded, but the point being is that they arent trying to make any money and if they ever did they would put it straight back into funding itself. This is not how banks work.

Perhaps my previous idea of getting rid of interest wouldnt work, but to make banking a public service where ALL the interest goes back into the economy and/or helping to fund themselves would be a better way of working the same system.

But as I mentioned earlier it's the attachment of interest on the creation of money that's the problem. Why can't the creation of money be put into public hands ( Government) and created by spending it into the economy debt free.

Banks can still provide a loan service and charge interest, but not actually create money.

Although I'd like to see a public mortgage service that was interest free. Housing is basic human shelter and the private mortgage schemes work there's a ridiculous amount of profit being made on simply being allowed to create money out of nothing.

[moon1969]

I also wonder why people always talk about the Rothschild family being apart of some conspiracy. Silvio Berlusconi sounds like a guy who would be really involved with some bad things. I don"t like Silvio Berlusconi. Silvio Berlusconi seems like an evil man and I don"t know why Bush and Putin support Silvio Berlusconi.

[Gazpacho]

I also wonder why people always talk about the Rothschild family being apart of some conspiracy. Silvio Berlusconi sounds like a guy who would be really involved with some bad things. I don"t like Silvio Berlusconi. Silvio Berlusconi seems like an evil man and I don"t know why Bush and Putin support Silvio Berlusconi.
Looks like you still don't quite understand the "posting on topic" concept.

[Edx]

But as I mentioned earlier it's the attachment of interest on the creation of money that's the problem. Why can't the creation of money be put into public hands ( Government) and created by spending it into the economy debt free.

Banks can still provide a loan service and charge interest, but not actually create money.

Well the system is based on money creation, so yes I'd like to see a system that worked without that. But my point was simply that with having private banks run for profit charge interest on money they create is what creates such a big problem, as you pointed out. I think the way you could "easily" change the system (in that it wouldnt much of a radical departure) would be to keep the system essentially the same but allow ALL the interest to go back into the money supply. The banks wouldnt be trying to "make money" with their services, you see. I know it wont solve everything, not by a long shot, but I cant see why it wouldnt help a great deal.

Although I'd like to see a public mortgage service that was interest free. Housing is basic human shelter and the private mortgage schemes work there's a ridiculous amount of profit being made on simply being allowed to create money out of nothing.

Yes that is true, but as someone pointed out to me before the interest also goes to getting the money back from people who default on their loans or skip the country or something. The money was created from nothing originally, but as its now been spent on material goods I would guess it would be bad for the economy to simply not have any backup (ie. interest). What should happen I believe is that the interest should be added entirely for this reason, instead of making money.

I have a similar feeling towards the privatisation of the transport industry in the UK. What you have now is a system where these companies are trying to make money instead of just providing a public service. Its not really "public" transport. They go on about how we should leave our cars at home yet the busses suck (usually) and the trains are expensive.

Ed

[Edx]

I also wonder why people always talk about the Rothschild family being apart of some conspiracy. Silvio Berlusconi sounds like a guy who would be really involved with some bad things. I don"t like Silvio Berlusconi. Silvio Berlusconi seems like an evil man and I don"t know why Bush and Putin support Silvio Berlusconi.

Alright, I will make you happy. The Rothschilds are a family of reptilian aliens and Greenspan is a jew working for the NWO. (All jews are evil btw) Bush is also a reptilian, who has a pet snake who he plays the tuba to at night. The tuba is the reptilians favourite instrument. They want to make us their slaves and they enjoy milk baths.

:boxedin:

[Tin Foil Timothy]

Well the system is based on money creation, so yes I'd like to see a system that worked without that. But my point was simply that with having private banks run for profit charge interest on money they create is what creates such a big problem, as you pointed out. I think the way you could "easily" change the system (in that it wouldnt much of a radical departure) would be to keep the system essentially the same but allow ALL the interest to go back into the money supply. The banks wouldnt be trying to "make money" with their services, you see. I know it wont solve everything, not by a long shot, but I cant see why it wouldnt help a great deal.


But most/much of the interest goes back in the money supply already. It's the adding of interest on all money created that's one of the big problems, not where the interest goes once it's paid.

Most people are under the false illusion that banks only lend out money they have as deposits. i.e Full Reserve Banking.

Maybe the banks should actually use that system and leave money creation (Without debt or interest) to the hands of the people. The creation of money is too powerful a force to leave in the hands of a few private individuals






Yes that is true, but as someone pointed out to me before the interest also goes to getting the money back from people who default on their loans or skip the country or something.

That's a common argument but lenders make 100% profit on mortgages. 50% of people don't default on their mortgage.

And the level of interest has nothing to do with any measures to recover unpaid loans.



The money was created from nothing originally, but as its now been spent on material goods I would guess it would be bad for the economy to simply not have any backup (ie. interest). What should happen I believe is that the interest should be added entirely for this reason, instead of making money.

On a mortgage why should interest be added at all? If mortgages were served from a public, and not private, organisation then each house buying household would have a much bigger amount to spend into the economy.

[Trojan_Jockey]

On a mortgage why should interest be added at all? If mortgages were served from a public, and not private, organisation then each house buying household would have a much bigger amount to spend into the economy.

I think that has been explained before. The extra money that a householder has to pay to the lender DOES go into the economy. It pays the wages of the clerks and the accountants, it goes to shareholders and it is invested in other businesses. The money IS in the economy.

Where do you actually think it goes?

[moon1969]

What about the Central Bank of Russia and the Central Bank of China? Are Bank of China and Bank of Russia part of the NWO? Do the Rothschild family, Rockefeller family, Wallenberg family or House of Morgan control and own those banks just like the CT people say that the central bankers own the FED, ECB and Bank of England?

[Tin Foil Timothy]

What about the Central Bank of Russia and the Central Bank of China? Are Bank of China and Bank of Russia part of the NWO? Do the Rothschild family, Rockefeller family, Wallenberg family or House of Morgan control and own those banks just like the CT people say that the central bankers own the FED, ECB and Bank of England?

Why don't you start a thread about it?

[Gazpacho]

So anyway, instead of "banks create money as debt," would it be more accurate to say that banks create present money in exchange for a debt to be paid from expected future money?

Then, the money and the debt would be created at the same time, and would offset each other, but they're not the same thing. If the borrower defaults, the money that was created doesn't disappear from the accounts of whoever received it; money disappears from the account of the lending bank.

[Tin Foil Timothy]

So anyway, instead of "banks create money as debt," would it be more accurate to say that banks create present money in exchange for a debt to be paid from expected future money?

not really.

The debt doesn't have to be ( all ) paid from future money anyway.

"banks create money as debt," is simple and accurate

[Tin Foil Timothy]

I think that has been explained before. The extra money that a householder has to pay to the lender DOES go into the economy. It pays the wages of the clerks and the accountants, it goes to shareholders and it is invested in other businesses. The money IS in the economy.

Where do you actually think it goes?

If you read my previous post [#109] you'll see that I'm already fully aware of where the interest currently goes.

[soylent]

Debt is not monetized when banks lend; it is monetized when you lend to the bank and then use the banks promise that it will pay you back(backed up by FDIC and reserve ratio requirements etc.) in lieu of money.

You can transfer the banks obligation to pay you back to someone elses account as a means of payment instead of giving them federal reserve paper money and in that way debt may act as though it were money. Banks cannot monetize debt this way unless both parties to any trade agree that bank debt is acceptable payment.

This is not a special priviledge bestowed on banks. If your friend Paul owes you $14 in beer money, you could in principle transfer $10 of this debt to someone else as a means of payment. Most likely it won't work too well unless the people trading are both friends of Paul; banks are generally seen as more trustworthy.

[Tin Foil Timothy]

Debt is not monetized when banks lend; it is monetized when you lend to the bank and then use the banks promise that it will pay you back(backed up by FDIC and reserve ratio requirements etc.) in lieu of money.

You can transfer the banks obligation to pay you back to someone elses account as a means of payment instead of giving them federal reserve paper money and in that way debt may act as though it were money. Banks cannot monetize debt this way unless both parties to any trade agree that bank debt is acceptable payment.

This is not a special privilege bestowed on banks. If your friend Paul owes you $14 in beer money, you could in principle transfer $10 of this debt to someone else as a means of payment. Most likely it won't work too well unless the people trading are both friends of Paul; banks are generally seen as more trustworthy.

Right, but how is this relevant to creation of money by fractional reserve banking?

[Trojan_Jockey]

Right, but how is this relevant to creation of money by fractional reserve banking?

I don't know, but I think the point is that there is nothing sinister about creating money as debt, and nothing sinister about charging interest (even if you try and call it usury to make it seem nastier). Nobody really seems to think it is a big deal, neither on the right or left of the political system. I don't hear any left-wingers claiming the banking system is responsible for the inequalities in wealth. I just think its old fashioned Third-Reich woo that's been reborn again in the internet age. There are problems with inequalities in wealth across the globe, but its due to employers making profits. If you actually care, you'd be better off protesting for better wages.

[Tin Foil Timothy]

I don't know, but I think the point is that there is nothing sinister about creating money as debt, and nothing sinister about charging interest (even if you try and call it usury to make it seem nastier). Nobody really seems to think it is a big deal, neither on the right or left of the political system. I don't hear any left-wingers claiming the banking system is responsible for the inequalities in wealth. I just think its old fashioned Third-Reich woo that's been reborn again in the internet age. There are problems with inequalities in wealth across the globe, but its due to employers making profits. If you actually care, you'd be better off protesting for better wages.

I'm not sure 'sinister' is the right description.

And it's not true that no one thinks it's a big deal.

James Garfield, Woodrow Wilson, Thomas Jefferson, Andrew Jackson. Thomas Edison, Henry Cabot Lodge Sr, John Danforth and many others have been outspoken about it.


Even members of the Fed themselves have been outspoken. Robert H. Hamphill from the Atlanta Federal Reserve Bank once said:

"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."


I don't know if you've seen the Zeitgiest Addendum film or not but it explains the caveats of creating money by private banks through the fractional reserve system with the addition of interest. You can't resolve it to inequalities of wealth, you'll always get inequalities of wealth and there's nothing wrong with that. People should be rewarded for their extra toil.

Once you understand the system you can see the caveats. It's nothing to do with 'woo' of any 'Reich'

[Father Dagon]

We're getting away with it in the Western world because we're buying and profiting from the rich resources in poorer countries. But what happens when those resources run out? The whole thing is unsustainable.That's a static perspective. There will always be new technologies and therefore new resources. E.g. what fiber optics did for telecom.And the other major problem with private banks creating the money is that they also have control over it's supply. Which means they have control over whether we have jobs a roof over our heads and food on the tableWell, the track record for state banks creating money is worse. Germany, for instance.

[Tin Foil Timothy]

That's a static perspective. There will always be new technologies and therefore new resources. E.g. what fiber optics did for telecom.Well, the track record for state banks creating money is worse. Germany, for instance.

if you're talking about a period of hyper-inflation then that was a one off.

[moon1969]

Are banks controlled by freemasons? :D Freemasons are good people. There is no conspiracy. Franco and Hitler both said that freemasons were part of some conspiracy. What happend to freemasons in Nazi Germany and in Franco"s Spain?

[JamesB]

Wow, that is so whacked I don't know where to begin. Yes, banks do create money, in the sense that money in this context is simply an obligation for a future good or service. If I have $20 it just means I can give it to someone sometime in the future and they will give me something, or do something for me. Yes, I could also have you mow my lawn, and I would give you an IOU for $20, and in the same sense I am also creating money. You would have an obligation on a future good or service from me. It is of limited utility though as it would only be accepted among the small circle of people who know and trust me. As far as "cash" though, the only entity that can create that is the Fed through the FOMC. Banks cannot create their own cash.

Your graph is screwed up, for starters is it based on false assumptions. The Fed doesn't really set the amount of money in the economy so much as the change in the amount of money. There already was money before it came along. It monitors various indicators such as the amount of money and its velocity and tries to keep it tied to economic growth, to prevent inflation. Now whether it does a good job of that is of course open for debate. Since there is already money in the system which is not tied to debt, and they are continously adding new supplies in connection with economic growth, this shrinking effect you are claiming is entirely fictitious.

[Tin Foil Timothy]

Since there is already money in the system which is not tied to debt,

The creation of money by the central banks and Fractional Reserve banking has been going on for so long now that the amount of debt free money in the system is negligible enough to be of no consequence.


and they are continously adding new supplies in connection with economic growth

New supplies of debt free money? Where is this coming from? I'd like some.

[JamesB]

The creation of money by the central banks and Fractional Reserve banking has been going on for so long now that the amount of debt free money in the system is negligible enough to be of no consequence.

I would have to sit down and do the math to figure it out exactly, but the money supply (M1+M2+M3) is well north of $10 trillion, while the primary vehicle the Fed uses for increasing the money supply, treasury securities, is only around $500 billion, so this is far from negligible.



New supplies of debt free money? Where is this coming from? I'd like some.

I never said it was debt free. It doesn't make any difference, new money is new money. This "loss" is illusory anyway. No money is being destroyed, interest paid goes towards bank expenses and profits, while principle being paid back allows them to free up capital to loan out again.

[JamesB]

Also I should point out that when the Fed increases the money supply, it does not primarily do this by creating debt. It buys up government securities from banks through the FOMC, and then credits the banks with a deposit. It then takes that security and throws it in a vault somewhere. If it wants to decrease the money supply it does the opposite.

For example if it buys $50 billion in securities, it creates $50 billion in new deposits. That is the bank's money, they are not paying interest on it, although obviously they had to give up $50 billion in securities for it. That money is now cash, and only then does it enter the fractional reserve system. So with a 10% reserve requirement it would theoretically become $500 billion in money supply. Only $450 million of that is tied to new debt though.

[Tippit]

Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town? :D



No, gold limits monetary expansion, not economic expansion. Measuring the economy in terms of the money stock is meaningless. What is important is purchasing power, and what you can buy with a given unit of money. The post-Civil War era demonstrated that you can have brisk economic growth coupled with declining prices. This would be the norm if not for the perpetual inflation courtesy of the Fed.

GDP is similarly meaningless. If all economic activity consisted of the government commissioning the building of giant pyramids financed by fiat money, nominal GDP would be high, but how "wealthy" would we be?



Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.



For the same reason we shouldn't create debt-based fiat money - it's a surreptitious and regressive flat-tax on currency holders. Why should the government confiscate productivity advances and economic growth that would otherwise accrue to currency holders in the form of perpetually lower prices?

[Tippit]

Also I should point out that when the Fed increases the money supply, it does not primarily do this by creating debt. It buys up government securities from banks through the FOMC, and then credits the banks with a deposit. It then takes that security and throws it in a vault somewhere. If it wants to decrease the money supply it does the opposite.



No, the Fed doesn't create the debt, Congress does. However, you would have to be naive to believe that Congress doesn't place debt with the Fed, given that the Fed and various government agencies are by far the largest holders of treasury securities:

http://en.wikipedia.org/wiki/United_States_public_debt

The fact of the matter is, Congress finances a huge share of their deficits by the Fed's ability to create money out of thin-air. It doesn't matter whether the bonds go through a wall street intermediary or not.

It's also worth pointing out that if the Fed were simply to purchase other non-debt related assets in the open market, then that proportion of the money supply would be credit-based. In practice the Fed can only push on a string, it can't force banks to borrow and lend. It relies on the US Government and fiscal policy to purchase assets and "stimulate" (or socialize, depending on your PoV) the economy.

[JamesB]

No, the Fed doesn't create the debt, Congress does. However, you would have to be naive to believe that Congress doesn't place debt with the Fed, given that the Fed and various government agencies are by far the largest holders of treasury securities:

I never said they did, I said they did NOT.



The fact of the matter is, Congress finances a huge share of their deficits by the Fed's ability to create money out of thin-air. It doesn't matter whether the bonds go through a wall street intermediary or not.



Fed holdings are only about 5% of the total debt. While not inconsequential, I would not characterize that as huge.

[Tin Foil Timothy]

Also I should point out that when the Fed increases the money supply, it does not primarily do this by creating debt. It buys up government securities from banks through the FOMC, and then credits the banks with a deposit. It then takes that security and throws it in a vault somewhere. If it wants to decrease the money supply it does the opposite.

Yup, but what are securities? IOUs, i.e debt


For example if it buys $50 billion in securities, it creates $50 billion in new deposits. That is the bank's money, they are not paying interest on it, although obviously they had to give up $50 billion in securities for it. That money is now cash, and only then does it enter the fractional reserve system. So with a 10% reserve requirement it would theoretically become $500 billion in money supply. Only $450 million of that is tied to new debt though.

So we've got $450 billion of fractional reserve debt and $50 billion of securities debt. And the taxpayers money that those government securities will be backed by will have been paid by most fractional reserve debt money somewhere down the line

[JamesB]

It is not debt for the Fed or the banking system. Take a class on double entry bookkeeping for God's sake.

[Tin Foil Timothy]

It is not debt for the Fed or the banking system.

Who said it was debt for the Fed or banking system?

Take a class on double entry bookkeeping for God's sake.

classy :rolleyes:

[Tin Foil Timothy]

No money is being destroyed, interest paid goes towards bank expenses and profits, while principle being paid back allows them to free up capital to loan out again.

The principal is extinguished upon repayment of the loan. Of course the bank will have more excess reserves and can create new money again through a new loan if it has somebody wishing to borrow. Not always the case if the amount of people taking out new loans is decreasing due to economic pressures.

[JamesB]

The principal is extinguished upon repayment of the loan. Of course the bank will have more excess reserves and can create new money again through a new loan if it has somebody wishing to borrow. Not always the case if the amount of people taking out new loans is decreasing due to economic pressures.

No it isn't. If it were banks would never be able to pay out to depositors.

[Tin Foil Timothy]

No it isn't. If it were banks would never be able to pay out to depositors.

Oh yes it is.

You don't seem to understand fractional reserve banking. Fractional reserve banking works on the basis that all depositors will never ask for their cash all at the same time. If there's a bank run however the system collapses and that has indeed happened.

Further: When a bank loans out money through fractional reserve it's not actually paying out from current deposits, it's creating entirely new money. When this money is paid back the money is extinguished and the Bank has excess reserves in place again to which it can create further new money as loans.

The Federal Reserve has an excellent publication called Modern Money Mechanics which although out of print now, if you google it you can download it as a PDF. It explains deposit multiplication and how it creates new money. You might find it useful.

[JamesB]

Oh yes it is.

You don't seem to understand fractional reserve banking. Fractional reserve banking works on the basis that all depositors will never ask for their cash all at the same time. If there's a bank run however the system collapses and that has indeed happened.

Further: When a bank loans out money through fractional reserve it's not actually paying out from current deposits, it's creating entirely new money. When this money is paid back the money is extinguished and the Bank has excess reserves in place again to which it can create further new money as loans.

The Federal Reserve has an excellent publication called Modern Money Mechanics which although out of print now, if you google it you can download it as a PDF. It explains deposit multiplication and how it creates new money. You might find it useful.


My macro prof in b-school worked for years at the Fed, I think I have a pretty decent understanding of how it works.

Hey, let's see what the Fed itself has to say about this! (emphasis added)

http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf

Myth:
The Fed is not a good supervisor of banks because it allows banks to keep only a fraction of their deposits on hand.

REALITY:
The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money.

For the economy and banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to “create” money.

So yes, it "creates" money in the sense of both having a liability on its books for its deposits, as well as having up to 90% of that as an asset (a loan) but it has to have the original deposit on hand in the first place, either from capital or by borrowing it from someone.

[zaphod2016]

Source: Federal Reserve Bank of New York (http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html)

Reserve Requirements and Money Creation
Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

James B: I read this as "money as debt". Please correct me if I am mistaken.

[JamesB]

Source: Federal Reserve Bank of New York (http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html)



James B: I read this as "money as debt". Please correct me if I am mistaken.

I don't know if you are mistaken, but I don't get your point. Yes, let's say a bank receives $100 in deposits from Joe at 5%. It takes $10 of that and puts it into reserves. It then turns around and loans out $90 to Jim at 10%.

It then adds $100 onto it's books as a liability, $90 as an asset as a loan to Jim, and $10 as an asset as cash reserves to balance everything out in double entry bookkeeping. So yes it has "created" money in the sense that Joe has $100 in his savings accounts and Jim has $90 in cash, offset by an equal loan. It has not created any new total wealth though.

At the end of the year, let's say Jim pays back his loan. The bank now has $99 in cash, it credits Joe $5 in interest, and it can keep $4 in profit, pay out as dividends, operating expenses etc. and then turn around and loan out the $90 again, or if Joe wants his money back then it pays out to him, and takes both the asset and liability off of its books.

Look at the balance sheet for a bank to see how this works.

http://www.citigroup.com/citi/fin/data/qer083s.pdf?ieNocache=384

I still don't get your point. How would you have this work? Should we just keep our money in a coffee can under the bed, or shall we just pay banks to store it for us? I don't see the benefit of that.

[zaphod2016]

I don't know if you are mistaken, but I don't get your point. Yes, let's say a bank receives $100 in deposits from Joe at 5%. It takes $10 of that and puts it into reserves. It then turns around and loans out $90 to Jim at 10%.

Joe deposits $100 in "original money" in Bank A.

Bank A loans $90 to Adam

Adam buys something from Barry, Barry deposits $90 in Bank B

Bank B loans $81 to Cindy

Cindy buys from Cathy who deposits in Bank C

Bank C loans $72.90 to David

David buys from Danny who deposits in Bank D

I'll stop here, but obviously, it continues like this through the economy.

At this point, we have the following cash balances:

Joe has $100 in A
Barry has $90 in B
Cathy has $81 in C
Danny has $72.90 in D

These are balanced by these debts:

David owes $72.90 C
Cindy owes $81 to B
Adam owes $90 to A
Bank A "owes" $100 to Joe

Balance Sheet looks perfectly fine to me.

Here is where I get *really* confused:

We now have $343.90 in circulation, based on $100 of "original" money. This simple example exceeds a 1:3 ratio.

I was taught that when money supply expands without equal expansion in productivity, we will have inflation. In this example, we have tripled the money supply. Aren't we dooming ourselves to massive inflation down the line?

Furthermore, should Joe, Barry, Cathy and Danny all withdrawal on the same day, the FDIC will be forced to create the money to cover the 90% gone from all of these accounts. This will create more inflation.

To use a real-world example: loose credit led to a housing boom, and this boom pushed the corresponding equity of these debts, so for awhile, there was no problem. But since there was no significant gain in productivity (i.e. "real" value ), eventually, prices corrected, and the boom ended. However, trillions of dollars in mortgages had already been created, and the equity backing that debt was now only 70-90%. So, not only does all this "mortgage money" exist (on a balance sheet somewhere), it takes an additional $1T USD to stave off a total collapse.

How can so much money be created, at a time when corresponding "real" value (land, wages, etc) remains stagnant, without resulting in massive inflation?

And- most important- what alternatives do we have?

After the past month, it seems to me something is seriously wrong- perhaps fundamentally wrong with our banking system. But Tippit/Tin Foil Tim- if we had 100% reserve requirements- how would banks be able to make loans?

[JamesB]

We now have $343.90 in circulation, based on $100 of "original" money. This simple example exceeds a 1:3 ratio.

I was taught that when money supply expands without equal expansion in productivity, we will have inflation. In this example, we have tripled the money supply. Aren't we dooming ourselves to massive inflation down the line?





It can, and some would argue it frequently does. The Fed obviously is quite aware of the effect though so they build it into their models. This part is actually rather simple mathematically, m=1/R, called the money multiplier. With the current 10% ratio, money is then multiplied 10 times, with 100% i.e. no loans, it would be simply 1.

So central banks can technically change the money supply simply by changing R, but they have given that up in the US as it is too disruptive to banking practices.

The main problem is just that this all takes time to happen, about 18 months by most estimates. If I knew how to predict the economy in 18 months I would be a very rich man, not working as a bureaucrat at the Fed. So they often end up overshooting or undershooting. Too much money, and you have inflation, but likewise if they contract money too much, you get deflation. This is essentially was caused the Great Depression. See A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna Schwartz, which conveniently just came out in a new edition.

As far as the mortgage meltdown question, while I think the Fed contributed to this, I don't believe that they caused it. For starters the Fed doesn't set long term rates, such as 30 year bonds, they only set short term rates, so they can only have an indirect effect on mortgage rates.

[Tin Foil Timothy]

I don't know if you are mistaken, but I don't get your point. Yes, let's say a bank receives $100 in deposits from Joe at 5%. It takes $10 of that and puts it into reserves. It then turns around and loans out $90 to Jim at 10%.

It then adds $100 onto it's books as a liability, $90 as an asset as a loan to Jim, and $10 as an asset as cash reserves to balance everything out in double entry bookkeeping. So yes it has "created" money in the sense that Joe has $100 in his savings accounts and Jim has $90 in cash, offset by an equal loan. It has not created any new total wealth though.




If a bank recieves $100 deposits, under it's 10% reserve ratio it has $90 excess reserves. This allows it to loan out $90.

So customer A borrows $90 and the bank credits Customer A's account with $90

The banks's books now stand as ...

Assets: $100 Reserves + $90 loan = $190
Liabilities: $100 initial deposit + $90 borrower deposit = $190

Because the bank now has an increase in deposits of $90 it now has, from the 10% reserve ratio, an extra $81 of excess reserves. it can then lend this $81 out. So Stage 2 of deposit expansion process would be

Assets: $100 Reserves + $90 loan + $81 loan = $271
Liabilities: $100 initial deposit + $90 borrower deposit + $81 borrower deposit = $271

Of course this would normally happen over multipel banks as Customer A would normally withdraw his $90 and spend it. This $90 would then be deposited in another bank by the seller giving the other bank an increase in doposits and thus excess reserves to lend out


The federal reserve's litte pdf explains it well.

http://www.federalreserveeducation.org/fed101_html/policy/frtoday_depositCreation.pdf

[Tin Foil Timothy]

I was taught that when money supply expands without equal expansion in productivity, we will have inflation. In this example, we have tripled the money supply. Aren't we dooming ourselves to massive inflation down the line?


It's already happened..

Compare the price of an average basket of goods in 1913 when the Fed was created to the cost of the same goods in 2008

[Trojan_Jockey]

It's already happened..

Compare the price of an average basket of goods in 1913 when the Fed was created to the cost of the same goods in 2008

:confused: Whats the Fed got to do with it? Compare the price of a basket of goods in 1813 with one in 1913, before the Fed existed. Notice a similar pattern?

[JamesB]

If a bank recieves $100 deposits, under it's 10% reserve ratio it has $90 excess reserves. This allows it to loan out $90.

So customer A borrows $90 and the bank credits Customer A's account with $90

The banks's books now stand as ...

Assets: $100 Reserves + $90 loan = $190
Liabilities: $100 initial deposit + $90 borrower deposit = $190

Because the bank now has an increase in deposits of $90 it now has, from the 10% reserve ratio, an extra $81 of excess reserves. it can then lend this $81 out. So Stage 2 of deposit expansion process would be

Assets: $100 Reserves + $90 loan + $81 loan = $271
Liabilities: $100 initial deposit + $90 borrower deposit + $81 borrower deposit = $271

Of course this would normally happen over multipel banks as Customer A would normally withdraw his $90 and spend it. This $90 would then be deposited in another bank by the seller giving the other bank an increase in doposits and thus excess reserves to lend out


The federal reserve's litte pdf explains it well.

http://www.federalreserveeducation.org/fed101_html/policy/frtoday_depositCreation.pdf


Why do you keep saying the same thing over and over again. Yes, we realize what fractional reserve banking is. Now what is your point?

[Tin Foil Timothy]

:confused: Whats the Fed got to do with it? Compare the price of a basket of goods in 1813 with one in 1913, before the Fed existed. Notice a similar pattern?

Not at all. You are the guy/gal who thinks the UN created Israel and that Israel has existed for 100 years. Failing on such basics means I'm not surprised you messed up here as well.

So let's see...

From http://www.measuringworth.com/ppowerus/

Purchasing Power of Money in the United States from 1774 to 2007

it's got a nice calculator where you can enter initial and desired years.

Let's start with 1913 to 2007 using $1

answer: $21.60 in the year 2007 has the same "purchase power" as $1 in the year 1913.

Pretty inflationary wouldn't you say? 2160%

Now let's compute from 1813 to 1913

answer: $0.62 in the year 1913 has the same "purchase power" as $1 in the year 1813.

Not only is there ZERO inflation there's deflation. The purchasing power is nearly 40% stronger in 1913 than 1813

[Tin Foil Timothy]

Why do you keep saying the same thing over and over again. Yes, we realize what fractional reserve banking is. Now what is your point?

You might but the poll in this thread shows that far too many do not. I'm a bit unsure of your point in the thread to be honest.

[JamesB]

You might but the poll in this thread shows that far too many do not. I'm a bit unsure of your point in the thread to be honest.

Correcting your misconceptions for the most part.

[Tin Foil Timothy]

Correcting your misconceptions for the most part.

Which are?

[JamesB]

Which are?

Mostly that a bank does not loan out of its own deposits, even though the example you have posted a dozen times clearly shows it does.

[Tin Foil Timothy]

Mostly that a bank does not loan out of its own deposits, even though the example you have posted a dozen times clearly shows it does.

You're misunderstanding what I'm saying. The bank doesn't loan out the deposits it receives. No new money would be created if it did. Adnthe example i posted above shows that to be the case.

And in fact that's exactly what the Federal Reserve itself says in it's publication Modern Money Mechanics.

I quote from page 7:

If business is active, the banks with excess reserves probably will have opportunities to loan the $9,000. Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.

In fact the biggest misconception people have is that the banks don't create money but simply loan out the money they receive from depositors. I'm posting those examples to show that it isn't the case.

What were my other misconceptions?

[JamesB]

OK, I see what you mean. All this is saying is that the loan money is created as credit with the deposit as its backing. I was thinking it was the other way around. It makes no difference really, as it balances out the same either way, we are just arguing accounting semantics. The bank still has to have the deposit to back its credit either way.

Actually it makes sense that is should work that way, as this practice dates back to the original banks started by goldsmiths who would issues certificates based on gold that they held in their vaults. Same practice, different medium.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

As the notes were used directly in trade, the goldsmiths noted that people would not usually redeem all their notes at the same time, and saw the opportunity to invest coin reserves in interest-bearing loans and bills. This left the goldsmiths with more notes on issue than reserves to pay them with. This generated income—a process that altered their role from passive guardians of bullion charging fees for safe storage, to interest-paying and earning banks. Fractional-reserve banking was born.

[Tin Foil Timothy]

OK, I see what you mean.

Cool. :)

Most people I run into have no clue that money is created out of nothing through fractional reserve. In fact it's so misunderstood it's why Zaphod started the thread to get to the bottom of it.

The added problem is that the eduction of fractional reserve seems to come from what people term deem as CT sources. Which only serves to encourage people to think of fractional reserve as a myth.

8 people have currently voted that Money is not created as debt. That's a bit scary.

[theprestige]

I think the main thing is not that people don't know what fractional reserve banking is or how it works, but rather that they don't agree with you that it's some frightening process that will inevitably doom us all.

[CriticalThinking]

I think the main thing is not that people don't know what fractional reserve banking is or how it works, but rather that they are in denial that it's some frightening process that will inevitably doom us all.

Fixed your post. :)

[JamesB]

Cool. :)

Most people I run into have no clue that money is created out of nothing through fractional reserve. In fact it's so misunderstood it's why Zaphod started the thread to get to the bottom of it.

The added problem is that the eduction of fractional reserve seems to come from what people term deem as CT sources. Which only serves to encourage people to think of fractional reserve as a myth.

8 people have currently voted that Money is not created as debt. That's a bit scary.

It is not created out of nothing, it is created as a credit to cash deposits in a federally regulated banking system.

While I agree with you that understanding of finance is quite low in this country, especially among our politicians unfortunately, the anti-Federal reserve conspiracy theorists and their loose grasp of reality have pretty much tainted it for anyone who wants to have a legitimate discussion of banking practices.

As someone once said of democracy, it is the worst form of government, except for all possible alternatives, I would have to say the same for the current system. It is by no means perfect, but nobody has come up with a better system.

[CriticalThinking]

It is not created out of nothing, it is created as a credit to cash deposits in a federally regulated banking system.

While I agree with you that understanding of finance is quite low in this country, especially among our politicians unfortunately, the anti-Federal reserve conspiracy theorists and their loose grasp of reality have pretty much tainted it for anyone who wants to have a legitimate discussion of banking practices.

As someone once said of democracy, it is the worst form of government, except for all possible alternatives, I would have to say the same for the current system. It is by no means perfect, but nobody has come up with a better system.

It is LITERALLY created out of nothing at all. There is no new goods or services that compensate for extra credit.

For example, the money supply between 1913 and 1920 was increased by 100%. Did the economy increase by 100%? Heck no.

And for your second quote. You are absolutely correct. democracy is the best form of government. And nobody has come up with a better form of government.

What you severely made a mistake on is on your last sentence when you replaced "form of government" with "system." The current system is the monetary system, specifically capitalism. If you think capitalism is the best we can do, you are greatly ignorant. If you think a system that benefits a few is good enough you have serious problems. You are blinded by the major flaws of this "system" because you didn't draw the short stick. Which is really sad. Which is the reason for Zeitgeist and all these other movies that try to inform you that it's not the best we can do, and how corrupt it is.


Side note: Why can't we copy/paste?

[Tin Foil Timothy]

It is not created out of nothing, it is created as a credit to cash deposits in a federally regulated banking system.
.

In other words money is created out of nothing. The amount that can be created out of nothing is regulated but it's still created out of nothing.

[JamesB]

If you think capitalism is the best we can do, you are greatly ignorant.

LOL OK, then please tell me what you know that has escaped the rest of us?

Adam Smith wrote the Wealth of Nations in 1776, and nobody has improved on him thus far, let's see what some guy in an Internet forum can come up with.

[Tin Foil Timothy]

I think the main thing is not that people don't know what fractional reserve banking is or how it works, but rather that they don't agree with you that it's some frightening process that will inevitably doom us all.

Ok then. You walk down any street and ask a reasonably sized random sample of people how they think money is created and do they know what fractional reserve is. And then report back and tell us the results of your survey.

I've even spoken to accountants who don't know. :eye-poppi :jaw-dropp

Anyone who properly understands the system knows it's shortfalls and anyone denying them can only be protecting it because they are benefiting from it.

The reason the population isn't officially educated about the system is precisely because if the people knew about the system it would no longer become politically tenable.

However that is changing and I've seen a growth in grass roots education, including threads like this, which are exposing it.

Unfortunately the system isn't easily understood by many and you have the added handicap of people finding it difficult to believe that money really is created out of nothing.

[CriticalThinking]

LOL OK, then please tell me what you know that has escaped the rest of us?

Adam Smith wrote the Wealth of Nations in 1776, and nobody has improved on him thus far, let's see what some guy in an Internet forum can come up with.

You did it again. :D

Key words here: "1776", "the rest of us"

Were you trying to make yourself look more ignorant by talking about a book written 250 years ago by a powerful, rich white man who owned many slaves with a extremely dated value system.

And to "the rest of us." Who's with you? That's my question.

[JamesB]

Were you trying to make yourself look more ignorant by talking about a book written 250 years ago by a powerful, rich white man who owned many slaves with a extremely dated value system.


You have no idea who Adam Smith is, do you?

ETA: Can I nominate that for a Stundie?

[CriticalThinking]

You have no idea who Adam Smith is, do you?

ETA: Can I nominate that for a Stundie?

Haha, what is a stundie? Are you telling the teacher on me? :eek:

[Hokulele]

Were you trying to make yourself look more ignorant by talking about a book written 250 years ago by a powerful, rich white man who owned many slaves with a extremely dated value system.


??

That is probably the most bizarre description of Adam Smith I have ever read. Have you read The Wealth of Nations?

[theprestige]

Fixed your post. :)
Not really. As far as I can tell, the only way your viewpoint even begins to make sense is if you ignore the underlying creation of wealth through work that all this money-stuff represents.

The entire concept of charging interest is based on the assumption that people can create new wealth through work. All that new money you say is being created isn't just being created for its own sake. It's being created to represent the wealth that's being created.

I'd thank you kindly to leave post-fixing shenanigans out of it, and stick to arguing your case, refuting mine, or politely agreeing to disagree.

[zaphod2016]

Modern Money Mechanics. page 7:

If business is active, the banks with excess reserves probably will have opportunities to loan the $9,000. Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.

I understand the theory that says this is taken into account when modeling the economy, but as JamesB said:

The main problem is just that this all takes time to happen, about 18 months by most estimates. If I knew how to predict the economy in 18 months I would be a very rich man, not working as a bureaucrat at the Fed. So they often end up overshooting or undershooting.

So the obvious question is: what alternatives do we have?

Also: Adam Smith, like John Adams, was an ardent opponent of slavery, and did not own slaves himself. Also, he is the father of modern economics, so its kinda hard to discuss the issue without bumping into his "outdated worldview". :boggled: Civil rights leaders like Booker T. Washington would later argue that economic growth was a key prerequisite for political and civil growth, and I think its safe to say, hindsight being 20/20, that he was right.

[CriticalThinking]

So the obvious question is: what alternatives do we have?


Quick reads: http://www.thevenusproject.com/intro_main/whatis_tvp.htm
http://www.thevenusproject.com/resource_eco.htm


Longer, recommended read: http://www.thevenusproject.com/intro_main/essay.htm

[JamesB]

Ahh, impractical utopian societies, virtually all of which have ended either in mass suicide, or millions condemned to die in labor camps as enemies of the people.

Yeah, thanks, I'll pass on this one.

[Tin Foil Timothy]

As far as I can tell, the only way your viewpoint even begins to make sense is if you ignore the underlying creation of wealth through work that all this money-stuff represents.

Not really. The system is not good. The creation of wealth by work is no excuse for the system. Wealth can still be created with a different system.


The entire concept of charging interest is based on the assumption that people can create new wealth through work. All that new money you say is being created isn't just being created for its own sake. It's being created to represent the wealth that's being created.

.

No it's not. The entire concept of interest is to earn a profit on lending out money. There's nothing wrong with earning interest on lending out wealth so that someone else can use it to create more wealth and give the lender a share of that wealth in the guise of interest.

But when a bank lends out money it's not lending out wealth. It's certainly not creating wealth. The money was created from nothing, a keystroke on a keyboard.

Adding interest to all money created means a constant shortfall of money and there fore an infinite cycle of debt must be created in order to pay off the interest. And it's also inflationary. Look at the purchasing power of the dollar from the 100 years up to 1913 ( when the Fed was created ). Not only was there no infalation the purchasing power the dollar got nearly 40% better. Compare that from 1913 to present day and we've had enormous inflation. So NO it's NOT proportional to wealth creation!

And it's one thing saying most of the Interest is spent back into the economy, but it's the bankers that are spending it in return for wealth. Which means they earned that interest for creating something out of nothing are essentially getting wealth for nothing. Why shouldn't people who have worked be able to spend that money in return for wealth.

It's an awfully powerful position to be in that you can profit from every dollar in existence and not only that have control over the money supply. And if you have control over the supply you can also profit from the manipulation of the supply as in the 'business cycle', not to mention control over the economy.

This means you are more powerful than the government. And that's why government's will never vote to change the system while those with control over the money creation and it's supply have the power.


But look, I'm not saying we should get rid of Bankers. I'm saying we should remove the creation of money and it's supply from the debt+interest process. By all means let banks loan out money with interest. But make sure the money they loan out is derived from wealth and not created from nothing. I.e Full Reserve Banking.


So how would we create money? We should remove the creation and supply of money out of private hands and put it into the hands of the public. i.e the Government. The government can 'print' money and spend it into circulation. People who earn money directly or indirectly from this will then deposit that into banks and they can use it on Full Reserve to lend out to others with interest.

I would repeat... There's nothing wrong with interest. And there's nothing wrong with creating money out of nothing. We have to create money out of nothing unless we go back to using natural substances like gold, and that's not really a good idea.

It's the creation of money as debt with interest and in private hands which is the problem

We need to split up the creation of money with the debt+interest part and certainly take the creation of money out of private hands. Putting so much power in the hands of so few is creating enormous injustices in the world.

[soylent]

Right, but how is this relevant to creation of money by fractional reserve banking?

Everything. That's how fractional reserve banking creates "money".

You deposit money into a bank, the bank lends that money out and keeps that which it is legally obliged to keep in reserves. That money still appears to be in your account(because your bank account is not money, it's an obligation for the bank to repay, an I.O.U. backed up by certain reserve requirements and federal guarantees).

When you then transfer some amount from your account to someone elses account as a means of payment you've taken something which is not money(bank debt) and you've used this to pay someone as if the banks obligation to pay you back was money. Tada, you've just created "money" by taking the banks I.O.U. and trading it for goods and services. The bank is complicit in this creation of "money" because it offers the services that allow you to monetize its debt and it offers solid guarantees that it will behave as though it was money.

But when a bank lends out money it's not lending out wealth. It's certainly not creating wealth. The money was created from nothing, a keystroke on a keyboard.

At no point does the bank get any special abillity to poof money into existance. The bank can create only debt(deposits and loans). And so could you; heck, you could assume even more leverage than 10:1(achievable with 10% reserve requirement) because you're not required to keep any reserves. If people then start to trade your I.O.U.s they've created "money". If people lose faith in your abillity to repay and try to turn their I.O.U.s into money all at once you've created a run on the "bank". If you find someone willing to guarantee your debt in return for some premium you've created an equivalent guarantee to FDIC. None of this is a special privilege only banks get.

[CriticalThinking]

Did the 700 Billion Dollar credit injection into the money markets last October not "poof" into existance? Where did the other 700 Billion Dollar bailout come from?

Who gives a flying flip "who" creates the money. Artifical money is created out of thin air and takes value away from other money which means lower purchasing power for the people, and free money for the international bankers. Not to mention, every dollar that comes out of the Fed is debt, an impossible debt to pay back. Total enslavement.

[Travis]

Haha, what is a stundie? Are you telling the teacher on me? :eek:

It's in the same sub-forum but for a shortcut just look to my signature.

[Tin Foil Timothy]

Everything. That's how fractional reserve banking creates "money".

You deposit money into a bank, the bank lends that money out and keeps that which it is legally obliged to keep in reserves. That money still appears to be in your account(because your bank account is not money, it's an obligation for the bank to repay, an I.O.U. backed up by certain reserve requirements and federal guarantees).

When you then transfer some amount from your account to someone elses account as a means of payment you've taken something which is not money(bank debt) and you've used this to pay someone as if the banks obligation to pay you back was money. Tada, you've just created "money" by taking the banks I.O.U. and trading it for goods and services. The bank is complicit in this creation of "money" because it offers the services that allow you to monetize its debt and it offers solid guarantees that it will behave as though it was money.

The deposit has multiplied through fractional reserve and exactly where the money has been created the money has still been created. The number in the account of the borrower is also a promise to pay.

[Slayhamlet]

Why is this thread in the Conspiracy Theories sub-forum, anyway? Is anyone really positing a conspiracy here? Wouldn't it get a wider range of opinions and expertise if it were moved to the Economics, Business and Finance section?

[Tin Foil Timothy]

Why is this thread in the Conspiracy Theories sub-forum, anyway? Is anyone really positing a conspiracy here? Wouldn't it get a wider range of opinions and expertise if it were moved to the Economics, Business and Finance section?

I agree, it's nothing to do with conspiracy. But the thread was born out of the discussion about Zeitgeist:Addendum which was in this sub-forum. Ironically the film isn't a CT film either ( even if it's predecessor was considered such )

[se7ensnakes]

The basic problem with the Fractional Reserve System is that
1) the Fed guarantees the deposit
2) The Fed is a lender of last resort.
3) Most people don't understand that when they deposit money in banks, it is actually an unsecured loan to the bank.
If for some reason the banking system collapses, the only venue to stabilize the system is by inflation.