How the banks create money

[webb5]

Fractional Reserve Banking

A process that allows the banks to create money out of nothing.

Central Banks apart from creating new money as debt control the ratio of deposits the Commercial banks can lend. This ratio is called fractional reserve banking. This practice allows banks to lend very large sums of money they do not have. Fractional reserve banking allows banks to keep only a fraction of deposits in reserve and lend out the remainder.

For example if the reserve was set to twenty percent, $800 of a $1,000 deposit could be used to lend out to borrowers. This $800 lent out will then become a deposit in another bank. This other bank that receives this can lend out $600 of this $800 deposit as 20% is reserved.

This process will continue untill it reaches its maximum. The maximum amount of total deposits that can be created this way at 20 percent is $5,000 and the maximum increase in the money supply is $4,000. At this rate the banks have fraudulently created $4,000 out of thin air using a $1,000 deposit. The banks create a lot more than this as the reserve rates are much lower.

Over the years the ratio for fractional reserve banking has dropped, in most countries 3% or less is now the norm. This is a very deceitful and dangerous thing to do, as a run on the banks is very possible if large numbers of deposits are removed from banks. Although Central Banks can cover a certain number of withdrawals on behalf of some banks, it does however have a limit. A domino effect is a reality and can occur as banks do not have the money required because of very low fractional reserves. Banks will begin shutting down every where when this limit is passed.

Not many countries have a fractional reserve rate over 3%, interestingly the United States has 10%, China over 20%. When the run on the banks start and it will happen sometime in the future, less than 3% of the money people have deposited there will remain! And guess who is going to guarantee this money? tax payers will guarantee the banks! This way the commercial banks will remain blissfully in operation to continue without risk to themselves to continue to deceive us and to keep us in debt.

This action is most definitely a fraudulent practice and governments all over the world including Australia allow it to happen. It should be called fictional reserve banking. It should be banned! and replaced with Social Credit.

More about Social Credit later.

[lionking]

Welcome webb5.

But I must ask what this has to do with politics? There's an economics section you know.

[WildCat]

Welcome webb5.

But I must ask what this has to do with politics? There's an economics section you know.
I'm smelling Ron Paul...

[Spindrift]

I'm smelling Ron Paul...

Your personal life is best kept to yourself. But if sniffing 80 year old loonies does it for you, c'est le vie. :D

Welcome webb5.

You do realize that the FDIC is funded by the banks themselves?

[Brainster]

There ought to be some sort of rule about fractional reserve stupidity. If someone comes to a site and deposits their stupidity, and the site then lends out 80% of that stupidity, eventually there's a lot more stupidity in the world. The good news is that sites will never run out of stupidity.

[Francesca R]

[ . . . ] There's an economics section you know.Noooooooooooooo! The conspiracy theories section, please. . . .

[Sceptic-PK]

This action is most definitely a fraudulent practice and governments all over the world including Australia allow it to happen.

Am I right to infer from this comment that you are an Aussie? Please stop making us look stupid :(

[lionking]

Am I right to infer from this comment that you are an Aussie? Please stop making us look stupid :(
Yeah I wondered where he pulled "Australia" from. I mean the Reserve Bank and the government have been appalling of late keeping the country out of recession, the economy growing and unemployment low. :rolleyes:

[Sword_Of_Truth]

I'm smelling Ron Paul...

Or Social Credit if you're canuckian.

[timhau]

More about Social Credit later.

Please, no.

[Puppycow]

What is this 'Social Credit' of which you speak?

[aleCcowaN]

I didn't know you can open threads to advertise political ideas.

The opening post can be summarized as:

When I lend $100 to Jack, Jack believes he has $100 he borrowed and I believe I have $100 I lent. So we believe we have $200. Are we immoral? Not even an interest is involved in the loan.

Banks, as their business is borrowing and lending money, have it folded. But they charge a differential rate of interest, so something "bad" may be going on. It's that it, webb5? (Are you coming back to the forum ever again?)

[Francesca R]

Background reading (This subject has never come up here before . . . )

The Biggest Scam in History (http://forums.randi.org/showthread.php?t=180244&highlight=fractional+reserve+banking)

Where did the 'Fractional Reserve Banking' meme begin? (http://forums.randi.org/showthread.php?t=122309&highlight=fractional+reserve+banking)

The Federal Reserve is Monetizing Debt? (http://forums.randi.org/showthread.php?t=152123&highlight=fractional+reserve+banking)

Debunking fractional reserve conspiracies (http://forums.randi.org/showthread.php?t=134993&highlight=fractional+reserve+banking)

Who benefits and who loses from counterfeiting, and why should it be illegal? (http://forums.randi.org/showthread.php?t=145652&highlight=fractional+reserve+banking)

Government spending, debt and money creation (split thread) (http://forums.randi.org/showthread.php?t=132952&highlight=fractional+reserve+banking)

Money as debt (http://forums.randi.org/showthread.php?t=122003&highlight=fractional+reserve+banking)

[Giggywig]

For example if the reserve was set to twenty percent, $800 of a $1,000 deposit could be used to lend out to borrowers. This $800 lent out will then become a deposit in another bank. This other bank that receives this can lend out $600 of this $800 deposit as 20% is reserved.
Uhm, 600 is not 80% of 800, 640 is.

This process will continue untill it reaches its maximum. The maximum amount of total deposits that can be created this way at 20 percent is $5,000 and the maximum increase in the money supply is $4,000. At this rate the banks have fraudulently created $4,000 out of thin air using a $1,000 deposit. The banks create a lot more than this as the reserve rates are much lower.
Without bothering to check to see if your $4000 is right or not (and based on the previous paragraph it probably is not), this assumes that banks only lend to banks.

[drkitten]

Without bothering to check to see if your $4000 is right or not (and based on the previous paragraph it probably is not), this assumes that banks only lend to banks.

In the long run, they do. If I borrow $10k to buy a car, it goes to the dealer. But he's just going to bank the money, which means the money went from one bank to another (via two intermediaries). Even if he pays some of the money out in salaries, well, there's a reason it's called a paycheck; it went through the bank, first.

[Loss Leader]

A process that allows the banks to create money out of nothing.


They're not creating it out of nothing. They're borrowing it from the future on the premise that future labor will be more efficient and will create greater return than at present.

The last sentence I wrote may sound kooky, but it's true.

[Gord_in_Toronto]

They're not creating it out of nothing. They're borrowing it from the future on the premise that future labor will be more efficient and will create greater return than at present.

The last sentence I wrote may sound kooky, but it's true.

Why people find this so hard to understand I find utterly baffling. :boggled:

[drkitten]

Why people find this so hard to understand I find utterly baffling. :boggled:

Because people are dumb?

More seriously, because people dislike the idea of making money "doing nothing" (which is why the image of the demonized Fat Cat Banker is so powerful, so pervasive, and so long-lasting). Why should they make so much money from the sweat of my brow?

So it must be a conspiracy of some sort.

[aleCcowaN]

Although I mostly agree with all recent posts, what has to do the time value of money with the money multiplier in a fractional-reserve banking system?

The OPr is trying somewhat to say that banks make spurious money and benefit from that. He has mixed up my example in post #12 with some sort of pyramid scam legally sanctioned.

It's a pity because maybe Social Credit has its merits, I wouldn't know. But certainly trying to promote it telling lies and resorting to grotesque is not the way to attract my attention.

[AvalonXQ]

I'm not understanding how fractional reserve banking is creating money from nothing. The assets and liabilities still balance, right? Borrowing money from consumers at almost no interest and re-lending it at a higher interest rates doesn't "create" more money than was already in the system. What am I missing?

[Floyt]

They're not creating it out of nothing. They're borrowing it from the future on the premise that future labor will be more efficient and will create greater return than at present.


Which does not seem like a particularly resilient concept because it bets on perpetual economical growth. IANA economist, but (or probably rather that's why) this makes me uneasy.

ETA - I AM an ecologist, and we wallow in cycles and tipping points. Being part of an economy that believes in eternal increase makes me feel like early-succession stage species.

[aleCcowaN]

I'm not understanding how fractional reserve banking is creating money from nothing. The assets and liabilities still balance, right? Borrowing money from consumers at almost no interest and re-lending it at a higher interest rates doesn't "create" more money than was already in the system. What am I missing?

An extremely simplified artificial example, without interest rates and a 0% reserve.

-You go to the bank and deposit $100 for one year, that is, you can't ask your money for one year but you can transfer your deposit certificate.
-The bank knows Jack that needs to borrow $100 for one year the same day you deposit your money. The bank lends the money.
-Now Jack have a note of $100 and you have a certificate of $100 that can be used like cash (not really, but its negotiable). Then, there are $200 in the streets. The system created money. The system is not the bank; it includes the bank, Jack, you and your society.
-Suppose Jack wanted the money to buy some item that costs $100. Suppose you want the same item but you think "Bummer, I deposited my money ... wait a minute, I have my negotiable certificate" and you bid for the same item. The merchant sees the avid demand and says "the item is now $150"; you have inflation led by monetary creation -secondary creation-.

Of course you won't use your deposit certificate -or the system could prevent you from using it-, there are interest rates, fees, taxes and mainly there is delay in the system. Surely Jack will use the money he borrowed and the chap who got it will go to another bank to deposit the money again ... and the wheel is moving.

This can go on to the infinite, flooding the streets with means of payment. That's why "fractional": suppose the bank can lend 80%, the multiplier will be 100/(100-80) = 5, for each $100 note there will be another $400 created by the whole economic system. If $500 is too much, there will be inflation. The central bank -or federal reserve- by creating or destroyng a $100 bill regulates the system.

[Captain.Sassy]

An extremely simplified artificial example, without interest rates and a 0% reserve.

-You go to the bank and deposit $100 for one year, that is, you can't ask your money for one year but you can transfer your deposit certificate.
-The bank knows Jack that needs to borrow $100 for one year the same day you deposit your money. The bank lends the money.
-Now Jack have a note of $100 and you have a certificate of $100 that can be used like cash (not really, but its negotiable). Then, there are $200 in the streets. The system created money. The system is not the bank; it includes the bank, Jack, you and your society.


Neat. So say I lend you 5$ and you write me an IOU for 5$.

Now I have a 5$ IOU and you have a 5$ bill.

We just created money! You don't even need the bank.
:rolleyes:

[drkitten]

Which does not seem like a particularly resilient concept because it bets on perpetual economical growth. IANA economist, but (or probably rather that's why) this makes me uneasy.

Not really. It's not so much that the economy in particular will grow, but that your personal income will grow.

Which, unless your income is completely divorced from your skill level, it will. Even if you shine shoes for a living, you will be a more skilled shoeshine boy ten years from now than you are today, which means that you'll be able to service more customers faster, better anticipate and fill their needs, and earn more tips per customer with more customers.

But this doesn't mean that "shoeshine boy" as a career is growing, just that you yourself are better at it. The people who are the Grand Old Men of the field today are earning the big bucks, but ten years from now they'll be retired, and you'll be the big dog. (And twenty years from now you will be retired.)

[drkitten]

Although I mostly agree with all recent posts, what has to do the time value of money with the money multiplier in a fractional-reserve banking system?

The time value of money is what lets money be "created"; you're spending money NOW that you won't get until LATER.

Fractional reserve is what limits the process. Without some sort of fractional reserve requirement (remember that 1/1 is a fraction), banks could lend money out indefinitely and create limitless amounts of money. So could individual people, for that matter. I can lend out as much money as I have and then spend the IOUs.

Setting the reserve requirement to 100% would prevent banks from overlending by preventing them from lending at all. There's a bit of a baby-to-bathwater issue there, I agree.

[aleCcowaN]

The time value of money is what lets money be "created"; you're spending money NOW that you won't get until LATER.


What is before the semicolon is clearly not true; what is after, a non sequitur.

"The time value of money is what lets money be 'created' " = "Electricity is what lets theater to exist"

I don't think so. It's just mixing up secondary creation of money with the reason of having an interest rate. Creation of money follows its inherent ability to flow -if not, it wouldn't be "money"- while time value of money is related with an opportunity cost and there are as many values as people (including many market standards).

Of course, as it's all related within a system, anybody can torture economical concepts long enough for them to confess to be whatever.
:popcorn1

[drkitten]

What is before the semicolon is clearly not true; what is after, a non sequitur.

Money is created because you're picking your own pocket forward in time (with the help of the bank). You're spending money now that you won't have until later, but someone lends it to you with the expectation that you'll pay it off later. The money isn't so much created as moved backwards in time.

That's the time value of money. Money now is more valuable to you than money later, which is why you want a loan in the first place. We can quantify it (via interest rates), but you don't need to to see what's happening.

[marplots]

Would the people who are upset about fractional reserve feel better if we called it 'value added'?

A guy who mines limestone and turns it into cement is adding value. He sells the final product for more than he paid. If he's a good businessman, he sells it for quite a bit more. He has also added to the economy and increased the GDP by turning limestone into cement. He has created money in the form of cement.

How well does the analogy hold up for banks? I am willing, for instance, to pay for the convenience of getting a pile of money in my mitts -- so I pay interest. I also sell money to the banks and they pay me, although, in truth they are still doing me a service by keeping my money safe, but they do pay me to do it.

Now, say I am selling refrigerators and I extend you credit. I use that credit on my balance sheet to further finance other stuff. For instance, I show my books to my suppliers and they extend me credit as well. Am I doing the same thing the bank is doing? Am I creating money? Remember, this is all numbers I'm flipping around.

What about if I offer stock? Here I'm creating what is supposed to be a percentage of value in my company, but after the IPO, the price floats. Have I created money? I have created value out of thin air... somehow.

My point is that dissing the fractional reserve system as if it were some grand scheme/conspiracy seems too easy a target. Let's get all the buggers!!

[drkitten]

Would the people who are upset about fractional reserve feel better if we called it 'value added'?

Not really. They're not generally upset about the fact that interest is charged on loans. They're generally upset about the fact that interest is charged on the loan of other people's money.

I mean, you don't object to paying taxi drivers for their services. But you'd be pretty upset if an airport parking lot valet took your car and used it as part of a limousine service.

A lot of people are pretty annoyed at middlemen in general; they seem to offer nothing and charge enormously for it. For example, temp agencies charge a huge fee for work that I do for you, without lifting a finger themselves. And everyone's got a horror story about a real estate agent that did absolutely nothing and still insisted on being paid a percentage when the homeowner found a buyer him/herself. I've even seen people annoyed at stockbrokers -- why should I need to pay a third party if I want to buy stock in a company? Why not just deal directly with the company?

[Sword_Of_Truth]

What is this 'Social Credit' of which you speak?

Part economic theory/part anti-banking conspiracy (http://en.wikipedia.org/wiki/Social_credit) theory first espoused by Clifford Hugh Douglas. Various political movements have sprung up around social credit, the most successful of which was the Alberta Social Credit Party (http://en.wikipedia.org/wiki/Alberta_Social_Credit_Party).

I sat on the board of the Alberta socreds from 1996 to 1998, ran for the party in the 1997 provincial general election and left when the looney-tunes faction won control of the party from its mainstream conservative faction ending its brief resurgence in the 90's.

[Captain.Sassy]

Fractional reserve is what limits the process. Without some sort of fractional reserve requirement (remember that 1/1 is a fraction), banks could lend money out indefinitely and create limitless amounts of money.

I thought fractional reserve meant that the bank had to have cash on hand to meet that fraction of its deposits; so if the fraction was 10%, the bank could lend out 90% of the value of deposits made with the bank; if the fraction was 0%, the bank could lend out 100% of the value of deposits. I don't see how the bank 'makes limitless amounts of money' in this circumstance.

[drkitten]

I thought fractional reserve meant that the bank had to have cash on hand to meet that fraction of its deposits; so if the fraction was 10%, the bank could lend out 90% of the value of deposits made with the bank; if the fraction was 0%, the bank could lend out 100% of the value of deposits. I don't see how the bank 'makes limitless amounts of money' in this circumstance.

Fractional reserve requirements are what limits the amount that the bank can lend out. Without fractional reserve requirements, there would be no reserve requirements whatsoever, and banks could lend the same dollars out until the numbers wore off.

With a 0% limit (which is what you get without fractional reserve requirements, as there is no actual requirement), the bank could lend $1000, accept a re-deposited $1000 and lend it out, repeated without limit. $1000 in deposits could support hundreds of billions of dollars in loans.

And then the bank would crash and burn the first time anyone defaulted on any debt whatsoever.

[Captain.Sassy]

They're not creating it out of nothing. They're borrowing it from the future on the premise that future labor will be more efficient and will create greater return than at present.

The last sentence I wrote may sound kooky, but it's true.

This is the basis of interest and has nothing to do with fractional reserve banking.

[Captain.Sassy]

Fractional reserve requirements are what limits the amount that the bank can lend out. Without fractional reserve requirements, there would be no reserve requirements whatsoever, and banks could lend the same dollars out until the numbers wore off.

With a 0% limit (which is what you get without fractional reserve requirements, as there is no actual requirement), the bank could lend $1000, accept a re-deposited $1000 and lend it out, repeated without limit. $1000 in deposits could support hundreds of billions of dollars in loans.

And then the bank would crash and burn the first time anyone defaulted on any debt whatsoever.

So if I lent you 100$, which you then lent out to someone else, you're saying there would be 200$ of loans of which 100$ would be 'new' money?

[Loss Leader]

Which does not seem like a particularly resilient concept because it bets on perpetual economical growth. IANA economist, but (or probably rather that's why) this makes me uneasy.

ETA - I AM an ecologist, and we wallow in cycles and tipping points. Being part of an economy that believes in eternal increase makes me feel like early-succession stage species.


You're not totally wrong about the fact that it is a bet and not a sure thing. However, given what we know of history, it's a good bet. The total value in the system has been increasing for thousands of years.

Some of it is slow and steady - each individual day of labor adds value and there are more people contributing their labor every day.

Some of it comes in leaps - The invention of the steam engine, and of electricity, multiplied the amount of labor an individual could do by many, many times.

Some of it comes in simple investment - spending capital on a larger or faster machine means that more goods can be made in the same amount of time. But the capital must be borrowed. Where is it borrowed from? A future where the machine is already producing more goods and creating more profit.

Ecology may not be the best way to think about the system. A tree or an entire forest of trees really can't promise their future production to obtain current benefits.

[drkitten]

So if I lent you 100$, which you then lent out to someone else, you're saying there would be 200$ of loans of which 100$ would be 'new' money?

Yup. Or at least, new since my lending it out. You hold my IOU for $100, which is worth $100 by assumption.

I hold someone else's IOU for $100, which is also worth $100 by assumption.

And, of course, that someone else has $100 cash money.

So there's $300 in circulation.

If that someone else lent his cash money to his sister, he'd have yet another $100 IOU, and she'd have the cash money, and there's $400 in circulation. Et cetera.

[Captain.Sassy]

Yup. Or at least, new since my lending it out. You hold my IOU for $100, which is worth $100 by assumption.

I hold someone else's IOU for $100, which is also worth $100 by assumption.

And, of course, that someone else has $100 cash money.

So there's $300 in circulation.

If that someone else lent his cash money to his sister, he'd have yet another $100 IOU, and she'd have the cash money, and there's $400 in circulation. Et cetera.

Kinda new money but more like the same money's circulating around.

If A lends B 100$, then B lends C 100$, the ious cancel out. At the end of the day, if A uses the iou as money they're just transferring the debt that B owes them. If new money is created then it's destroyed whenever the debt is paid back.

[drkitten]

Kinda new money but more like the same money's circulating around.

Yeah, but it spends like new money.

All four of us can show up at the Quik-E-Mart and offer up to $100 for the last case of beer.


If A lends B 100$, then B lends C 100$, the ious cancel out. At the end of the day, if A uses the iou as money they're just transferring the debt that B owes them. If new money is created then it's destroyed whenever the debt is paid back.

Yes. And?

[Loss Leader]

Kinda new money but more like the same money's circulating around.


Since money is a tangible expression of value, nothing new has been created at all. We've just found a way to express value inherent in the system.

A tree has very little value to an individual as a source of food - wood is inedible. But the invention of fire lets us exploit a value of the tree - its ability to help cook other food - that we had no access to before.

I really don't see why anybody should think that banking, in and of itself, is in any way bad.

[Captain.Sassy]

Yeah, but it spends like new money.

All four of us can show up at the Quik-E-Mart and offer up to $100 for the last case of beer.


not prudently... three of us still owe that 100$ to someone else.

I get that the 'money supply' increases in that the money has circulated around to more people, but in terms of 'money' as a claim on the economy's output there's no new money.

[Loss Leader]

not prudently... three of us still owe that 100$ to someone else.

I get that the 'money supply' increases in that the money has circulated around to more people, but in terms of 'money' as a claim on the economy's output there's no new money.


Not yet, but if I use my $100 to help pay for my tuition, or to buy myself a warmer jacket so I can deliver more papers, or to pay a man to paint my car, which is labor he wouldn't have done otherwise, then I've improved the economy's output, staved off inflation, and created something new.

Don't ask me why I place value in having my car be a different color. That's the kind of question economics can't answer.

[Captain.Sassy]

Not yet, but if I use my $100 to help pay for my tuition, or to buy myself a warmer jacket so I can deliver more papers, or to pay a man to paint my car, which is labor he wouldn't have done otherwise, then I've improved the economy's output, staved off inflation, and created something new.

Don't ask me why I place value in having my car be a different color. That's the kind of question economics can't answer.

yes, if you take that 100$ and buy a jacket so you can work in the winter, then you are increasing your output and the economy grows by however much your output increased.

[drkitten]

Since money is a tangible expression of value, nothing new has been created at all. We've just found a way to express value inherent in the system.

A tree has very little value to an individual as a source of food - wood is inedible. But the invention of fire lets us exploit a value of the tree - its ability to help cook other food - that we had no access to before.

I really don't see why anybody should think that banking, in and of itself, is in any way bad.

Because there's a long history of dislike of the middleman.

Look at some of the portrayals of the medieval miller (http://www.engr.psu.edu/mtah/articles/mills_millers.htm) if you want to see how this works (Chaucer's Reeve's Tale as well as the description of the miller in the General Prologue is a good example.) Even when millers operated honestly, the peasants still generally resented the cut that they took of the final product.

The miller is in the same position as the banker; flour is more valuable than grain, but the process of adding value isn't free and the miller charges what he can for it. Since the miller generally is in a position of some power over your average peasant (there are lots of farmers, but only one mill), he can charge "fees" that your average peasant considers extortionate, but has little choice to pay. He's enriching himself by taking an unjust share of what the peasant has labored for, and typically lives much better than that peasant by virtue of that share.

Does this sound like modern banker envy to you?

[Floyt]

Not really. It's not so much that the economy in particular will grow, but that your personal income will grow.

Which, unless your income is completely divorced from your skill level, it will. Even if you shine shoes for a living, you will be a more skilled shoeshine boy ten years from now than you are today, which means that you'll be able to service more customers faster, better anticipate and fill their needs, and earn more tips per customer with more customers.

But this doesn't mean that "shoeshine boy" as a career is growing, just that you yourself are better at it. The people who are the Grand Old Men of the field today are earning the big bucks, but ten years from now they'll be retired, and you'll be the big dog. (And twenty years from now you will be retired.)

Okay, makes sense. But it seems in the case of the really large money movements (or the ones that come in bundles large enough to have economic impact), the "person" is a nation, i.e. the personal growth in income is just said national economic growth. And when a nation "retires", we deem it a catastrophe for all involved.

You're not totally wrong about the fact that it is a bet and not a sure thing. However, given what we know of history, it's a good bet. The total value in the system has been increasing for thousands of years.

Some of it is slow and steady - each individual day of labor adds value and there are more people contributing their labor every day.

Some of it comes in leaps - The invention of the steam engine, and of electricity, multiplied the amount of labor an individual could do by many, many times.

Some of it comes in simple investment - spending capital on a larger or faster machine means that more goods can be made in the same amount of time. But the capital must be borrowed. Where is it borrowed from? A future where the machine is already producing more goods and creating more profit.

Ecology may not be the best way to think about the system. A tree or an entire forest of trees really can't promise their future production to obtain current benefits.

Borrowing from the future has been a good bet historically in that for most of that time we were only starting to make a dent into the resources that enabled the future to do what was expected of it.

The population-ecological view is applicable insofar as this bending of all efforts towards growth is a wonderful strategy as long as there are plenty of resources to tear into, but for the organism involved, it invariably means live fast, crash hard (usually when the space runs out). Then the equilibrium communities take over. Humans have been having splendid success as first-stage colonizers, but what we want to be (because we don't fancy crashing) is a long-term, equilibrium species. I.e., we have to switch life histories at some point. A case can be made that that point is approaching or already here, because we can see the resource-gobbling lifestyle getting harder to sustain. (This is just the practical phrasing of what every environmentalist agenda is getting at.)

In that case the growth-acceleration techniques are no longer appropriate, and to keep promoting them because "it worked fine in the past" seems to miss the point.

The optimistic approach is of course to think that we can keep doing so because we will manage to boldly find new space to expand into. E.g., develop cold fusion, breed Hi-Octane Oil Trees, and colonize Mars. Which is another bet, and a bit more risky.

All of this might seem like unnecessary doomsday drama when we were just talking about some financial practices. But what concerns me is that underlying philosophy (I couldn't care less, and couldn't judge, whether a bank is technically fraudulent or not when it snaps virtual greenbacks into existence).

[drkitten]

not prudently... three of us still owe that 100$ to someone else.

I get that the 'money supply' increases in that the money has circulated around to more people, but in terms of 'money' as a claim on the economy's output there's no new money.

Except that there is new money, which is why the price of beer rises. Before, you could have bought the last case of beer in the store for next to nothing, because you were the only one with any claim to it. Now there are four of us with equal claim.

[drkitten]

Okay, makes sense. But it seems in the case of the really large money movements (or the ones that come in bundles large enough to have economic impact), the "person" is a nation, i.e. the personal growth in income is just said national economic growth. And when a nation "retires", we deem it a catastrophe for all involved.

Shrug. Macro vs. micro. It doesn't even have to be national-level; when a company "retires" we get things like the collapse of Bethlehem Steel, which couldn't compete with the new upstarts.

But while it's a catastrophe for those personally involved, it's not generally a disaster for the economy as a whole. In a no-growth economy, growth is a zero-sum game (for every winner, there is an equal and opposite loser), which makes borrowing an inherently risky proposition since you've basically got a 50/50 shot of being in an improved position to pay it back. Which is why bankers want to see stuff like business plans before they make business loans, so they can judge whether you'll be a winner or a loser down the road.


Borrowing from the future has been a good bet historically in that for most of that time we were only starting to make a dent into the resources that enabled the future to do what was expected of it.

The population-ecological view is applicable insofar as this bending of all efforts towards growth is a wonderful strategy as long as there are plenty of resources to tear into, but for the organism involved, it invariably means live fast, crash hard (usually when the space runs out). Then the equilibrium communities take over. Humans have been having splendid effect as first-stage colonizers, but what we want to be (because we don't fancy crashing) is a long-term, equilibrium species. I.e., we have to switch life histories at some point. A case can be made that that point is approaching or already here, because we can see the resource-gobbling lifestyle getting harder to sustain. (This is just the practical phrasing of what every environmentalist agenda is getting at.)

Yeah. The problem is that scientists, historically, keep finding more resources for us to gobble. Just as an example, the amount of energy available from the uranium in coal ash dwarfs the amount of energy in the coal in the first place; the garbage of the 19th century could more than power the 21st.



All of this might seem like unnecessary doomsday drama when we were just talking about some financial practices. But what concerns me is that underlying philosophy (I couldn't care less, and couldn't judge, whether a bank is technically fraudulent or not when it snaps virtual greenbacks into existence).

Well, yes, it seems like unnecessary doomsday drama.

But beyond that, I'm not even sure what "technically fraudulent" means. "Fraudulent" is a legal term, which means that we as a society can define any activity we like as being "fraudulent" or not.

Snapping virtual greenbacks into existence "simply" devalues the ones that already exist. Since the value of a greenback is also "whatever we want it to be," there's no problem with this, either. Society, in general, likes a steady growth of money, even in a no-growth economy, because inflation encourages investment which in turn is more likely to produce growth. (Yes, investment is a bet, but it's a bet where we can shift the odds in our favor by how we set it up.) If we didn't let banks inflate the currency via virtual greenbacks, we could also do it simply by printing more money at the mint, but it's a lot cheaper and easier to put it in the hands of the bankers....

[tkmikkelsen]

Let me come with a little scenario.

If I where to start a new country and we start out with having 1000 money. I get my first citizen, but he/she needs some starting cash so he/she goes to me and say; "Hey, can I borrow 1000 money?". I borrow him/her the 1000 money at 5% interest rate per year over 1 year. Which means that in a year he owes me 1050 money, but my country only have 1000 money, so where do the 50 money come from. Are we going to get them from abroad?
In order for him/her to make some sort of good use out of the money I borrowed him/her. The economic growth in my country has to be over 5%.

In most countries today the economic growth is usually lower than the average interest rates for loans. Doesn't that propose a problem or is there something I am completely missing?

[aleCcowaN]

Money is created because you're picking your own pocket forward in time (with the help of the bank). You're spending money now that you won't have until later, but someone lends it to you with the expectation that you'll pay it off later. The money isn't so much created as moved backwards in time.

That's the time value of money. Money now is more valuable to you than money later, which is why you want a loan in the first place. We can quantify it (via interest rates), but you don't need to to see what's happening.

Again, not true, non sequitur.

The first paragraph speaks about time value of money in general, the attitude of many loan subscribers, and why some people lend money. In the sentence "Money is created because you're picking your own pocket forward in time (with the help of the bank)" that because can be parallel to "We'll win because God is great", and the sentence "The money isn't so much created as moved backwards in time" reveals lack of a proper definition of money.

The second paragraph stirs pretty much the same stew. The epistemology here seems to be something like "as you are hungry you hunt a bunch of deers and kill one so the ones which escape are clearly future hunger".

First, decide what is money, then explain how is created. You seem to disregard the reality check of a system creating exactly the same money in a context of time value zero or at a rate of 50% a month. Maybe you can explain how is created the money to pay the interests (and while doing, you'd realize why you're wrong)

[aleCcowaN]

Let me come with a little scenario.

If I where to start a new country and we start out with having 1000 money. I get my first citizen, but he/she needs some starting cash so he/she goes to me and say; "Hey, can I borrow 1000 money?". I borrow him/her the 1000 money at 5% interest rate per year over 1 year. Which means that in a year he owes me 1050 money, but my country only have 1000 money, so where do the 50 money come from. Are we going to get them from abroad?


From the same source that makes yours a, say, $350,000 home (show me the money). Most of economical questions can't be answered without imparting some propaedeutics and according uniform understanding of terminology.

There's not an instant match for M1, M2, M3 and M4 nor for anything that has a nominal value or a market plausible value. So this thread is going astray as not only all money is not made equal but people shouldn't make a salad from money as a mean of exchange, money as a temporary deposit for value and money as a countable unit. Dressing the salad with mechanism for money creation, economical growth and even international commerce (that is the way $100 magically disappeared in a previous post, while the debate centered in the remaining IOUs) makes it a completely indigestible one.

There's a saying among economy teachers that says something like this -in English- "if you have to resort to all of the economical science to explain how a part of the system works or what it is, you don't know neither the part nor the science".

[Captain.Sassy]

Except that there is new money, which is why the price of beer rises. Before, you could have bought the last case of beer in the store for next to nothing, because you were the only one with any claim to it. Now there are four of us with equal claim.

If there's four times the amount of money and the amount of goods that money can be traded for stays the same (one case of beer), the price of a case of beer should increase four times, no? And if we all spend our 100$ IOU on a 1/4 case of beer, then how do we each pay back the debt we owe?

[aleCcowaN]

If there's four times the amount of money and the amount of goods that money can be traded for stays the same (one case of beer), the price of a case of beer should increase four times, no? And if we all spend our 100$ IOU on a 1/4 case of beer, then how do we each pay back the debt we owe?

A close system with a case of beer and four people in it, without any other resources, nor means of production and thus no labour, is not meant to be a monetary economy. No bank note nor IOU has value within that system.

[Loss Leader]

In most countries today the economic growth is usually lower than the average interest rates for loans. Doesn't that propose a problem or is there something I am completely missing?


If that were true, economies would be shrinking. Instead, economies are almost always growing in almost all situations almost all of the time. The individual's labor adds value to the system.

[Loss Leader]

A case can be made that that point is approaching or already here, because we can see the resource-gobbling lifestyle getting harder to sustain. (This is just the practical phrasing of what every environmentalist agenda is getting at.)

In that case the growth-acceleration techniques are no longer appropriate, and to keep promoting them because "it worked fine in the past" seems to miss the point.

The optimistic approach is of course to think that we can keep doing so because we will manage to boldly find new space to expand into. E.g., develop cold fusion, breed Hi-Octane Oil Trees, and colonize Mars. Which is another bet, and a bit more risky.

All of this might seem like unnecessary doomsday drama when we were just talking about some financial practices. But what concerns me is that underlying philosophy


I agree with you. There has to come a point where resources will not allow any greater efficiency or total work in the system. I have no idea when that point will be.

You point out that we're seeing signs of it now and you may be right. However, a fuel shortage in London 500 years ago led people to believe that the city had grown as much as it could. Technical innovations allowed them to switch their fuel from trees to coal and, suddenly, there was more fuel than people knew what to do with.

You are right that we cannot blindly assume that we'll always experience this kind of last minute save. What should be done about it, though, is an open question.

What happens when a species reaches its tipping point? I imagine that the highest-consuming members die out and the careful, conservative members take over. Perhaps we'll see an evolution into a species of human that doesn't try to eat and burn everything we see the moment we see it. That'd be cool.

[stevea]

Why people find this so hard to understand I find utterly baffling. :boggled:

Fractional reserve banking is where the anti-government paranoia of the right and anti-business paranoia of the left meet. Like all paranoiacs there can be no attempt to understand - it's just unreasoned fear. Perhaps you missed Brainster's comment ....

There ought to be some sort of rule about fractional reserve stupidity. If someone comes to a site and deposits their stupidity, and the site then lends out 80% of that stupidity, eventually there's a lot more stupidity in the world. The good news is that sites will never run out of stupidity.

Further, because of the principle of compounded stupidity, we can never reduce the fraction of stupidity in existence. One stupid comment made 2000 years ago will compound to a Palin-Bernanke unit of stupidity today.

[...]Fractional reserve is what limits the process. Without some sort of fractional reserve requirement (remember that 1/1 is a fraction), banks could lend money out indefinitely and create limitless amounts of money.

Well - Canada and the UK have no reserve requirement while China and the US do. So a specific fractional reserve req is not the only means of asserting control.

==

I think the blind spot in the vision of the "banks create money" meme is that people don't understand the difference between "high powered money" deposit vs circulating money deposit.
http://en.wikipedia.org/wiki/Monetary_base
At a 10% reserve rates, when the Fed creates $1 of high powered "new money" it can create up to $10 of credit in circulation. OTOH when your employer transfers 1K from their bank to yours as a paycheck, there is no net effect on total reserves and no new creation of circulating money. One bank can decrease their reserve by just as much as the other must increase it.

This same multiplier effect can exist in a barter society without any banks. p I give you 10 fish, and you give me an IOU for 10 fish. You save one fish, and trade the other 9 for 9 fish_IOUs. The new holder saves one fish and trades 8 for IOUs ... eventually we have 10 ppl with one of the original "high powered fish" and also there are 55 fish_IOUs magically created by those evil fish mongers. Assuming we all trust each other for the IOUs then the 55 "low powered fish" are actually worth one fish each in trade too. If you can't understand how we got from 10 fish to 65 tradable fish equivalents then you are too dumb to understand fractional reserve banking.

[drkitten]

If there's four times the amount of money and the amount of goods that money can be traded for stays the same (one case of beer), the price of a case of beer should increase four times, no?

Yes. An increase in the money supply is generally inflationary.

And if we all spend our 100$ IOU on a 1/4 case of beer, then how do we each pay back the debt we owe?

We won't/can't. This is one way that people (and economies) get into trouble. What we should have done is invest the money in something more productive than a case of beer. But having money isn't the same as having brains or even common sense.

Actually, what the first person should have done is figured out what the first borrower wanted to do with the money and made sure that he was a good credit risk. Because if you lend your money out to idiots, you're likely to lose it.

[tkmikkelsen]

If that were true, economies would be shrinking. Instead, economies are almost always growing in almost all situations almost all of the time. The individual's labor adds value to the system.

It is true that economies are growing, but say that an economy grows by say 3% per year. Meaning this year we have 100 money next year we have 103 money in our BNP. Now say that on average private loans are given out at 5% per year and for the sake of argument lets just say that all our money was loaned out the previous year, then we started out with a 100 money in debt and a 100 money in BNP, sounds fair enough we can actually pay off our debt. Now we have 103 money in BNP, but a debt of 105 money. Now there is no way we can pay off the debt. Does that mean someone has to foreclose?
And what if our population increased at the same time. Say we started out with 100 people and 100 money, making it 1 money per person. Population grew by 4% so now we have a 104 people, but only 103 money under one money per person. Our economy grew, but our people are poorer than the year before on average.

I think fractional reserves and giving credit is part of why the western world has grown so fast, but I have never understood interests on money, because it is value adding without creating value. Basically you are hoping that if you buy this house for 100 money then the next will somewhere down the line buy it from you for more than 100 money, if they are not willing to do that then the system is left with false value added, because the value only exist in the form of interests, which is of no value in itself.

[drkitten]

It is true that economies are growing, but say that an economy grows by say 3% per year. Meaning this year we have 100 money next year we have 103 money in our BNP. Now say that on average private loans are given out at 5% per year and for the sake of argument lets just say that all our money was loaned out the previous year, then we started out with a 100 money in debt and a 100 money in BNP, sounds fair enough we can actually pay off our debt. Now we have 103 money in BNP, but a debt of 105 money. Now there is no way we can pay off the debt.

Sure there is. Just pay it off in installments. Pay off 55 money today, wait until that money circulates back to you, and pay off the remaining 50.

[drkitten]

I think fractional reserves and giving credit is part of why the western world has grown so fast, but I have never understood interests on money, because it is value adding without creating value.

This is simply wrong. The value is added by moving money forward in time.

Do you value the convenience of being able to drive wherever/whenever you like instead of having to take the bus? Do you value being able to transport more goods than you can carry in your arms? That's the 'value added' by owning a car, and most Americans (and a substantial fraction of Europeans) consider this to be worth the price of the car.

The next question becomes : do you value having that car today instead of five years from now? That's the value added by banking. You can take out a loan for the money which allows you to spend future dollars today.

But since future dollars are worth less than present dollars (in part because of expected inflation, in part because of expected risk, in part because of opportunity costs), you need to pay more future dollars than present dollars. Translation : interest.

Basically you are hoping that if you buy this house for 100 money then the next will somewhere down the line buy it from you for more than 100 money,

Not at all. Houses are unusual, and even historically, most people didn't expect houses to appreciate. The idea of "investing" in your house is largely a (late) 20th century idea.

Think of it like a car loan instead. You're not buying a car with an eye to resale value. You're buying a car because you like driving over taking the bus. You buy a large-screen TV because you like watching movies. You buy a house because you like living indoors and not being at the mercy of a landlord. In all of those cases, you can (if you like) save up for the money and buy them with cash eventually, or you can buy them now with future dollars that you pay for with interest.

[Captain.Sassy]

Apparently, I need to work on my understanding of the money supply. whoops.

Regarding the Bank of Canada and the lack of reserve rates here, this paper seems to address how monetary policy works in this country:
http://www.bankofcanada.ca/en/monetary_mod/reduce/index.html
(will be reading this as part of my effort to understand things better)

Regarding stevea's fish example, it seems to me that for a GDP of 10 fish you have a money supply that is several times larger than the GDP. You don't usually find this in the world, how come?

[GreyArea]

On a hunch I searched for part of the original post. Sure enough, it's copied almost exactly from a webpage touting Social Credit. The specific page is here (http://bleedingindebt.com/how-the-banks-create-money.html).

Isn't it a violation of JREF rules to cut and paste?

Part economic theory/part anti-banking conspiracy (http://en.wikipedia.org/wiki/Social_credit) theory first espoused by Clifford Hugh Douglas. Various political movements have sprung up around social credit, the most successful of which was the Alberta Social Credit Party (http://en.wikipedia.org/wiki/Alberta_Social_Credit_Party).

The website's main page begins with a brief explanation of Social Credit and names C.H. Douglas specifically. The introduction is also signed "AC Webb", the same surname as used as the OP's handle.

Am I right to infer from this comment that you are an Aussie? Please stop making us look stupid :(

The domain appears to have been registered (http://www.whois.net/whois/bleedingindebt.com) in Australia, and the original page goes into more detail about the Labour Party. So, you may be right.

[drkitten]

Apparently, I need to work on my understanding of the money supply. whoops.

Regarding the Bank of Canada and the lack of reserve rates here, this paper seems to address how monetary policy works in this country:
http://www.bankofcanada.ca/en/monetary_mod/reduce/index.html
(will be reading this as part of my effort to understand things better)

Regarding stevea's fish example, it seems to me that for a GDP of 10 fish you have a money supply that is several times larger than the GDP. You don't usually find this in the world, how come?

Because most of the time you don't borrow to the hilt.

[Captain.Sassy]

So demand for borrowing drives the money supply?

[drkitten]

So demand for borrowing drives the money supply?

Borrowing is one of the major things that creates new money, yes. If there's no demand, there's no new money created.

[Captain.Sassy]

So then this is why they refer to monetary policy as a string, i.e. it's easier to pull on the string and cool the economy by reducing money supply than it is to push on the string and generate demand?

[drkitten]

So then this is why they refer to monetary policy as a string, i.e. it's easier to pull on the string and cool the economy by reducing money supply than it is to push on the string and generate demand?


More or less. You've just defined a "liquidity trap," which is why Bernanke and his friends are trying so hard to stimulate the economy and get us out of the deflationary stagnation we're now in. Because merely making cheap money available is demonstrably not doing it....

[webb5]

Hi guys sorry to take so long to reply. Yep Australia has been lucky so far. We have survived this crash from trading with China. China is Australia largest trading partner we export large amounts of commodities especially from the mining sector.

By the way we have a housing bubble of our own in Australia. Houses are well and truly over priced and the housing market could go any time. Demand on housing from high immigration and incentives to first home buyers and investment incentives have artificially raised house prices to record levels. Will it go? Who knows?

Any way back to fractional reserve banking. The banks do froudently create money and lend it out to us as debt. Did you ever wonder where all this money comes from?

All money created by the banks is created as debt. This has put us in an impossible position as the ability to pay both debt and interest is just not possible. There is never enough money in the world to cover the combined debt with interest as the banks did not create the interest part. This leads to spiral debt. Economies around the world continue to borrow further to cover this missing sum of money over and over again. If they did not borrow more, the money supply would simply run out.

[tkmikkelsen]

All money created by the banks is created as debt. This has put us in an impossible position as the ability to pay both debt and interest is just not possible. There is never enough money in the world to cover the combined debt with interest as the banks did not create the interest part. This leads to spiral debt. Economies around the world continue to borrow further to cover this missing sum of money over and over again. If they did not borrow more, the money supply would simply run out.

This is pretty much what I tried to illustrate in my little scenario earlier. It has since I was teenager always baffled me how interest works, because it is value added out of nothing.

[Sceptic-PK]

All money created by the banks is created as debt. This has put us in an impossible position as the ability to pay both debt and interest is just not possible.

Oh really? How did I pay off my car loan? How do I pay off my credit cards? How am I paying off my houses?

[timhau]

Oh really? How did I pay off my car loan? How do I pay off my credit cards? How am I paying off my houses?

You're faking it.

[tkmikkelsen]

This is simply wrong. The value is added by moving money forward in time.

Do you value the convenience of being able to drive wherever/whenever you like instead of having to take the bus? Do you value being able to transport more goods than you can carry in your arms? That's the 'value added' by owning a car, and most Americans (and a substantial fraction of Europeans) consider this to be worth the price of the car.

The next question becomes : do you value having that car today instead of five years from now? That's the value added by banking. You can take out a loan for the money which allows you to spend future dollars today.

But since future dollars are worth less than present dollars (in part because of expected inflation, in part because of expected risk, in part because of opportunity costs), you need to pay more future dollars than present dollars. Translation : interest.

The problem with all of the value you added here is that it is of no value. It is all conveniences that could be nice to have. Value added would be buying a tractor, because then I can harvest more crops, so I can sell more and therefor make more money.
Inflation is good if it is due to more productivity, meaning we are getting better and more efficient at producing stuff so we can sell more stuff.
Inflation is not good if it is just due to interests. Interest creates artificial inflation, there is no way they can not, because you have to pay back more than you took out. Only way to do that is to sell more or sell more expensive. Inflation driven by selling more expensive in order to pay off your interest rates is not economic progress, that is stagnation.





Not at all. Houses are unusual, and even historically, most people didn't expect houses to appreciate. The idea of "investing" in your house is largely a (late) 20th century idea.

Think of it like a car loan instead. You're not buying a car with an eye to resale value. You're buying a car because you like driving over taking the bus. You buy a large-screen TV because you like watching movies. You buy a house because you like living indoors and not being at the mercy of a landlord. In all of those cases, you can (if you like) save up for the money and buy them with cash eventually, or you can buy them now with future dollars that you pay for with interest.

Then again you would never sell a car until the resale value is great than the amount owed would you?
I know I wouldn't. Again interest is not need in order to loan out money against future.

Let me put it to you in a way that most people tend to understand. Say that you are down on your luck one month and can't pay your rent. You ask your dad (or some other relative) if you can borrow the money from. They say sure, but there is a 5% interest on the loan, so you borrow $1000 for your rent, but have to pay back $1050 to your relative. How would you feel about that?
That is exactly what the banks are doing.

[tkmikkelsen]

Oh really? How did I pay off my car loan? How do I pay off my credit cards? How am I paying off my houses?

I take it that you have never seen a foreclosed house or a car that was repossessed or a credit card that was closed.

Stop thinking of these things on a personal level. You might be able to pay off everything you owe and might be able to do that right now, but not everyone can do that and it is not possible that everyone do that, because our debt is higher than our total amount of money, thanks to interests.

[Sceptic-PK]

I take it that you have never seen a foreclosed house or a car that was repossessed or a credit card that was closed.

Of course I've seen those things. Completely and utterly irrelevant.


Stop thinking of these things on a personal level. You might be able to pay off everything you owe and might be able to do that right now, but not everyone can do that and it is not possible that everyone do that, because our debt is higher than our total amount of money, thanks to interests.

I'm off to bed now and I hope someone deals with this by the time I get to work tomorrow, but I just wanted to say that this is complete and utter nonsense.

[AvalonXQ]

Let me put it to you in a way that most people tend to understand. Say that you are down on your luck one month and can't pay your rent. You ask your dad (or some other relative) if you can borrow the money from. They say sure, but there is a 5% interest on the loan, so you borrow $1000 for your rent, but have to pay back $1050 to your relative. How would you feel about that?

I've lent money this way, and I've borrowed money this way. So I feel pretty good about it -- it allows a close friend or relative to help you out while still giving them some of the opportunity costs of them tying up cash for you. What's your problem with this?

[drkitten]

The problem with all of the value you added here is that it is of no value. It is all conveniences that could be nice to have.

Well, value is defined in economics as "how much people want something." Whether you want it because you need it or simply because it could be nice to have is irrelevant, as long as you're willing to pay money for it.

But you're also missing the point entirely.


Value added would be buying a tractor, because then I can harvest more crops, so I can sell more and therefor make more money.

This, in turn, means that having a tractor now is more valuable than having a tractor five years from now. If I can earn an extra $5000 over and above the costs of operating the tractor, then it's worth nearly $25,000 to me if I'm able to buy the tractor this season instead of in 2015. (I say "nearly" because future money is worth less than current money -- the tractor might break next year and I'd lose all the expected value.)


Inflation is good if it is due to more productivity,

Inflation is never due to more productivity. More productivity means more stuff being made, meaning a greater supply of the stuff, meaning lowered prices.

Interest creates artificial inflation, there is no way they can not, because you have to pay back more than you took out. Only way to do that is to sell more or sell more expensive. Inflation driven by selling more expensive in order to pay off your interest rates is not economic progress, that is stagnation.

:notm


Then again you would never sell a car until the resale value is great than the amount owed would you?

I might. Depends on opportunity costs.



Let me put it to you in a way that most people tend to understand. Say that you are down on your luck one month and can't pay your rent. You ask your dad (or some other relative) if you can borrow the money from. They say sure, but there is a 5% interest on the loan, so you borrow $1000 for your rent, but have to pay back $1050 to your relative. How would you feel about that?

I'd be fine with that. Presumably there's a reason that I'm borrowing the money instead of simply moving back in with Dad; I have an expectation that I will be able to make more money in a little bit of time once my new startup business starts rolling or once I can sell my house and tap the equity in it, or whatever. Dad's giving me money NOW so I can pay him back with less valuable money LATER.


That is exactly what the banks are doing.

And good for them.

[drkitten]

Stop thinking of these things on a personal level. You might be able to pay off everything you owe and might be able to do that right now, but not everyone can do that and it is not possible that everyone do that, because our debt is higher than our total amount of money, thanks to interests.

That's simply ridiculous. That's like saying there's no way a dentist can have 500 patients because he's only got two dental chairs.

Let's go back to our little isolated island with 100 money in total. I need 1000 money to build a boat. Can I do it?

Sure. I establish a 1000 money loan with the bank and I pull the money out on 100 money chunks. Today I take out 100 money and pay to have the keel laid. The keel-layer takes his payment and deposits it back in the bank. Tomorrow I take out 100 money and pay to have the ribs installed. The rib-installer takes her payment and deposits it back in the bank. Two weeks from now, I'll have a boat.

And now I have a loan to pay back. Let's make it a really usurious loan -- I have to pay back 1200 money, and there's still only 100 on the island. Can I do it?

Of course I can. That's why I wanted the boat in the first place. I go out every night and catch a fish. I sell that fish to the banker for 5 money. I then pay him back that 5 money against my loan. In 240 days, I'll have paid back the loan, five money at a time. It takes me less than a year to pay back a loan twelve times greater than the total amount of money in circulation on the island.

[Loss Leader]

There is never enough money in the world to cover the combined debt with interest as the banks did not create the interest part.


That's ... not true.

[tkmikkelsen]

That's simply ridiculous. That's like saying there's no way a dentist can have 500 patients because he's only got two dental chairs.

Let's go back to our little isolated island with 100 money in total. I need 1000 money to build a boat. Can I do it?

Sure. I establish a 1000 money loan with the bank and I pull the money out on 100 money chunks. Today I take out 100 money and pay to have the keel laid. The keel-layer takes his payment and deposits it back in the bank. Tomorrow I take out 100 money and pay to have the ribs installed. The rib-installer takes her payment and deposits it back in the bank. Two weeks from now, I'll have a boat.

So far so good and I agree.

And now I have a loan to pay back. Let's make it a really usurious loan -- I have to pay back 1200 money, and there's still only 100 on the island. Can I do it?

Actually there is 1100 money on the island the bank just created 1000 money plus the initial 100 money.

Of course I can. That's why I wanted the boat in the first place. I go out every night and catch a fish. I sell that fish to the banker for 5 money. I then pay him back that 5 money against my loan. In 240 days, I'll have paid back the loan, five money at a time. It takes me less than a year to pay back a loan twelve times greater than the total amount of money in circulation on the island.

The bank only have 1100 money, so where does it get the last 100 money from in order to buy fish of the total value of 1200 money from you?

[tkmikkelsen]

Inflation is never due to more productivity. More productivity means more stuff being made, meaning a greater supply of the stuff, meaning lowered prices.


Sorry, my bad got inflation and economic growth mixed up in my head.

Inflation = A general increase in prices on goods and services.

Economic Growth = Increase in the amount of money being produced.

They are 2 different things and I was using them wrong, my bad and I apologize. :blush:

[Roboramma]

So far so good and I agree.



Actually there is 1100 money on the island the bank just created 1000 money plus the initial 100 money. Um, if there were only a single 100 money NOTE, the example would still work exactly as laid out, so how is there 1100?



The bank only have 1100 money, so where does it get the last 100 money from in order to buy fish of the total value of 1200 money from you?
At what point are they not going to have the 5 money to give you? Every day you give back the five against what you already owed, so he still has it. At what point does the back look in it's drawer and say, "Oh, ****, we don't have 5 money left!"? Because I can't see any point at which that would happen.

[aleCcowaN]

<snip, snip>

Any way back to fractional reserve banking. The banks do froudently create money and lend it out to us as debt. Did you ever wonder where all this money comes from?

All money created by the banks is created as debt. This has put us in an impossible position as the ability to pay both debt and interest is just not possible. There is never enough money in the world to cover the combined debt with interest as the banks did not create the interest part. This leads to spiral debt.

<snip, snip>

So, pal, why don't you propose the creation of the Bank of The People's Republic so any thing it creates would be the people's. As you say banks are creating money surely to earn money -the interest part?-, the same way your People's Republic only needs to cover costs and any benefit will be distributed to the people.

As the state creates money, be it People's Republic, Republic or Kingdom, the money created by People's Republic Bank is just more state money so the state can destroy it at will, for example, by canceling all debts.

Then people can reach their dreams of having their own home and be "a peasant in the morning, a banker in the afternoon, a philosopher or artist in the evening" and everybody will be able to sing "heigh-ho! heigh-ho! heigh-ho, heigh-ho, heigh-ho!" like the dwarfs in Snowwhite and the seven midget economical concepts.

[tkmikkelsen]

Um, if there were only a single 100 money NOTE, the example would still work exactly as laid out, so how is there 1100?

Money is very different from money notes. There is never enough money notes to pay out all the money in the world. Most money only exist as a number.
So the 1100 comes from the fact that we already had 100 floating around, perhaps owned by the shipbuilder. In order for the bank to loan the fisherman 1000 money they have to create them. These money are create against future value generated. This is more or less what credit is. The 1000 money still exist though and therefor there is 1100 money on the island now.




At what point are they not going to have the 5 money to give you? Every day you give back the five against what you already owed, so he still has it. At what point does the back look in it's drawer and say, "Oh, ****, we don't have 5 money left!"? Because I can't see any point at which that would happen.

Ok, maybe it is bad to say that the bank buys the fish as that clouds things a bit, because the bank has the money that the shipbuilder deposited. Which is actually only 1000. They give the fisherman 5 money every week for his fish and fisherman pays off a 5 money every week. Until he have done so for 240 weeks and paid back 1200 money to the bank. The bank still only holds 1000 money and there is a 100 money somewhere else on the Island, so 1200 money is paid back, but the island only have 1100 money. So the high interest rate is this scenario did not create the imaginary 100 money that interest created. Only thing it did was to ensure that the fisherman had spend some extra weeks paying off his debt. They didn't create more value, because in the end there is still only 1100 money on the island and not 1200 money as the bank wanted back.

Now add a few more people and another bank and quickly you get to the point where this is so clouded that it is not easy to look through, but as long as you use this model there will always be a portion of money that is simply hot air. The more people banks you enter into the fray the more hot air money you create.

[bluesjnr]

God forbid if two people on the island wanted to spend 100 money at the same time.

[AvalonXQ]

Money is very different from money notes. There is never enough money notes to pay out all the money in the world. Most money only exist as a number.
So the 1100 comes from the fact that we already had 100 floating around, perhaps owned by the shipbuilder. In order for the bank to loan the fisherman 1000 money they have to create them. These money are create against future value generated. This is more or less what credit is. The 1000 money still exist though and therefor there is 1100 money on the island now.

Read drkitten's set up again. There is only $100 on the island; the bank has it. His example works without ever increasing beyond that $100.

[drkitten]

Money is very different from money notes. There is never enough money notes to pay out all the money in the world. Most money only exist as a number.
So the 1100 comes from the fact that we already had 100 floating around, perhaps owned by the shipbuilder. In order for the bank to loan the fisherman 1000 money they have to create them. These money are create against future value generated. This is more or less what credit is. The 1000 money still exist though and therefor there is 1100 money on the island now.


No. As soon as I pay back the loan, the money that was created via lending disappears.

So at the end of the period, there's 300 money on the island. There's the original 100 money, and there's the 200 money that was created as "wealth" via the lending process. And, of course, the island as a whole is also wealthier by one boat and one deep-sea fisherman, which gives the island access to more and different fish.



Ok, maybe it is bad to say that the bank buys the fish as that clouds things a bit, because the bank has the money that the shipbuilder deposited.

Well, that's the whole point. I can pay off the loan by trading "wealth" for "money," just as I used the loan itself by trading "money" for "wealth. I used the bank's money to increase my wealth (the boat), I use the boat to produce more wealth (the fish I can catch with it), and then I trade my newfound wealth for money which I use to retire the debt.

The system works as long as I can continue to produce wealth. If instead of building a fishing boat, I had built a pleasure yacht, then I would indeed be in trouble -- the bank would eventually have repossessed my yacht, but it would still be out the money it created as clients asked for their deposits back. Of course, that also assumes a certain degree of stupidity both on my part and on the bank's; I should never have applied for that loan and the bank certainly shouldn't have approved it.

[drkitten]

Sorry, my bad got inflation and economic growth mixed up in my head.

Inflation = A general increase in prices on goods and services.

Economic Growth = Increase in the amount of money being produced.

They are 2 different things and I was using them wrong, my bad and I apologize. :blush:

No. Economic growth is an increase in the amount of wealth produced, which is entirely different from the amount of money. Again, economic growth is deflationary, because if I find a way to make twice as much bread from the same amount of ingredients, that increases the supply of bread and lowers the price.

You get inflation when the supply of money increases faster than the economy grows. (Or when production shrinks and the supply of money doesn't, as in the 1970s.) Left to itself, a fixed money supply will almost always be deflationary because the general tendency of the economy is to grow; deflation will also end up restricting economic growth because it retards the investment that drives economic growth.

Which is why a sensible government tries to increase the money supply to keep up with growth. The easiest and safest way to do this is via the banks, because the banks that supply investment capital can also supply new money to keep the two quantities roughly in-line. The alternative would be to have a bunch of out-of-touch research economists at the Mint decide how much to increase the money supply.....

[drkitten]

Read drkitten's set up again. There is only $100 on the island; the bank has it. His example works without ever increasing beyond that $100.

No, tk's correct that the loan creates new money. The IOU I signed to get the loan is itself an asset that the bank can trade or sell for something valuable. if the bank needs to buy land near the soon-to-be-built fish market, the banker could simply sign the IOU over to the builder as payment.

Of course, the IOU is worth something only as long as I am paying it off. The value in the IOU is created when I take out the loan, and systematically destroyed as I pay it off. 240 days from now, when I've paid it off, it's just a piece of waste paper.

[marplots]

Now add a few more people and another bank and quickly you get to the point where this is so clouded that it is not easy to look through, but as long as you use this model there will always be a portion of money that is simply hot air. The more people banks you enter into the fray the more hot air money you create.

Now you've hit on it. All money is hot air. I have money in my wallet that says, "this note is legal tender for all debts, public and private" which is as tautological as the Bible being true because it says it is true. So, yeah. It's all hot air.

On the other hand, a great deal of what we think of as firm and fixed is also hot air. The system of laws in the U.S. is, in the end, just an agreement we have in place to follow the rules -- pretty much like money, marriage, and a hundred other conceits. Not as big a deal as some make it out to be.

[drkitten]

Now you've hit on it. All money is hot air. I have money in my wallet that says, "this note is legal tender for all debts, public and private" which is as tautological as the Bible being true because it says it is true. So, yeah. It's all hot air.

Yup, even gold -- beloved of the anti-bank conspiracists -- is hot air. It has value only because I think I can give this lump of soft, shiny, useless metal to someone else in exchange for something I actually want, like food or shelter or a new car. If no one else wanted the soft useless metal, it's of no use to me either.

[GreyArea]

It has value only because I think I can give this lump of soft, shiny, useless metal to someone else in exchange for something I actually want, like food or shelter or a new car. If no one else wanted the soft useless metal, it's of no use to me either.

I thought that many societies chose to prefer gold because it doesn't tarnish. It's good for crowns. Later we found out it's a good conductor, too, so I wouldn't say it's completely useless.

[drkitten]

I thought that many societies chose to prefer gold because it doesn't tarnish. It's good for crowns.

Yes, but follow that path a little longer.

Gold is valuable because it's shiny, so the king wants to make his crown out of it.

So the king wants your gold.

Who's the person who's going to be the king (and get to wear the shiny gold crown)? Historically, the kind of person who becomes the king is not the king of person who would simply ask "pretty please, may I have some of your gold?"

[marplots]

Historically, the kind of person who becomes the king is not the kind of person who would simply ask "pretty please, may I have some of your gold?"

You are right, that other person is the Pope.

[Skeptic Ginger]

An interesting story about the latest 600 billion the Fed is infusing into the banking system:

New $600B Fed Stimulus Fuels Fears of US Currency War (http://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears)

It's this economist's opinion [former Wall Street economist and University of Missouri professor Michael Hudson] that the fed desires to increase the money supply so the banks will lend it and stabilize the housing market. Instead, the banks are buying foreign currency speculating the dollar will fall and the banks can then reap a profit. China will no doubt see it as an attempt to decrease the cost of exports and increase the cost of imports.

the Fed has said, we want to give the banks so much money that they will lend it out so you can begin to bid up prices on real estate again and pull the banks out of the real estate negative equity that it’s in. So the purpose, according to the Fed, is to raise the price of real estate, to inflate asset prices. But that’s not happening. The actual banks have lent less today than they did in 2007. So the money is going abroad. And it’s going abroad not really to buy foreign companies so much, but to speculate in currency.

Now, the Fed and the Congress, two weeks ago, said, "We want China to raise its currency by 20 percent." This would create billions and billions of dollars of bonanza for Wall Street banks, and it would enable them to earn their way out of debt by essentially looting the China central bank, the Brazilian central bank, the Turkish central bank and the other central banks, because you can now borrow money in America at one percent. So you’d put down, let’s say, a billion dollars of your own—a million dollars of your own money, borrow $99 million of the bank’s money—that’s $100 million. You would buy Chinese currency, RMB, for $100 million. You then say, "Raise your currency by 20 percent," which is what the Fed has asked them to do. That means that your million dollars now has turned into a $20 million gain, because $100 million is now worth $120 million. You’ve made a 200 percent profit. And for Wall Street, they deal in billions, not millions. And so, this would enable the banks to make up their money by buying out, essentially, foreign currency. They’re doing the same in Australia. It’s currency gamble.What a tangled web they weave....

[drkitten]

An interesting story about the latest 600 billion the Fed is infusing into the banking system:

You say "interesting," I say "line-your-hat-with-tinfoil wrong." Potato, poTAHto, I guess.

Just a few of the gems in it:

Turning $1 million into $20 million is a 200 percent profit.
Increasing the money supply will have a deflationary effect
Easy credit will force people to buy houses at exorbitant prices (I guess because there's nothing else available for people to buy?)
Easy credit will raise interest rates (I guess he's repealed the law of supply and demand?)
The Asian currency crisis was engineered by George Soros

[timhau]

It's this economist's opinion [former Wall Street economist and University of Missouri professor Michael Hudson] ...

I've seen more impressive credentials than "former Wall Street economist" and "U. of Missouri professor" slapped on people who were dead wrong.

[Skeptic Ginger]

You say "interesting," I say "line-your-hat-with-tinfoil wrong." Potato, poTAHto, I guess.

Just a few of the gems in it:

Turning $1 million into $20 million is a 200 percent profit.
Increasing the money supply will have a deflationary effect
Easy credit will force people to buy houses at exorbitant prices (I guess because there's nothing else available for people to buy?)
Easy credit will raise interest rates (I guess he's repealed the law of supply and demand?)
The Asian currency crisis was engineered by George Soros
I listened to the interview and that's not even close to what I heard. There could be a typo on the 200%, I don't know. And people do misspeak, that doesn't mean they can't do basic math.

The mechanisms for the rest was explained and you've ignored the mechanisms involved in what looks counterintuitive.


As for the professor's qualifications, (timhau's post), let's look instead of guessing. Here's his CV (http://cas.umkc.edu/econ/economics/faculty/Hudson/HudsonCV.htm) and I suspect he's more qualified than anyone posting in this thread. Correct me if any of you are PhD economists.

I do not claim to know if Dr Hudson's opinion is correct. It's my understanding well qualified economists have trouble agreeing with each other. I did, however, find the interview very interesting. Of course the fact he worked with Dennis Kucinich and is being interviewed on Democracy Now means certain people will dismiss his opinions without any thought. But I don't have that issue.

[Skeptic Ginger]

Re "the Asian currency crisis engineered by George Soros", Hudson said:Yes, there is only one country that did that, and that was Malaysia under Prime Minister Tun Mohamad Mahathir. He would not sell the domestic currency to the foreign speculators, so George Soros and the others who sold the currency short, hoping that the central bank would use all of its money just to defend its currency and then be emptied out, they couldn’t cover their position, so they were squeezed. But countries like Korea, where the meetings, the G20 meetings, are this week—the IMF went and said, "You owe money you can’t pay. George Soros has raided you. You have to sell Americans your electric companies. You have to sell Americans your car companies." And this was a grab that, in the past, in past centuries, there would have had to be a military invasion to take over. And now they’re doing it financially. And they’re angry over there.Do you have evidence this description of events is not correct?

It's not like the IMF does not take these kinds of actions. "Confessions of an Economic Hitman" (http://www.amazon.com/Confessions-Economic-Hit-John-Perkins/dp/1576753018) has corroborating revelations in the book. It seems to be a common practice to manipulate third world countries via economic extortion.

[Francesca R]

Re "the Asian currency crisis engineered by George Soros", Hudson said. Do you have evidence this description of events is not correct?Sure, some people think Soros and other "western speculators" engineered the East Asian crisis. For a while Soros's Quantum Fund was blamed for forcing the British pound out of the pre-Euro exchange rate mechanism. But it was quite a short while, and it did not take long to get re-cast as rescuing the economy from the most doomed policy of John Major's government.

Asia has done rather well since its large FX devaluations of the 1990s. Politically as well as economically in Indonesia's case (getting rid of Suharto).

(PS--Mahathir Mohammed is not really someone to rush to the defence of)

[drkitten]

I listened to the interview and that's not even close to what I heard. There could be a typo on the 200%, I don't know. And people do misspeak, that doesn't mean they can't do basic math.

The mechanisms for the rest was explained and you've ignored the mechanisms involved in what looks counterintuitive.

I haven't ignored them. They're simply wrong.

Here's the explanation provided.


The idea is to flood the economy with credit so the banks will lend out more debt. And if the Fed’s policy works, then housing prices are going to go back up so high that most consumers are going to have to pay 40 percent of their income for housing. They’re going to have to pay more money for credit card debt. The purpose is to help the banks make money at the expense of the economy. It’s not to help the economy at all. That’s the really important thing. When they say the economy, they mean—the Fed means its constituency: the banks. And the banks’ product is debt. And that’s what they’re trying to produce.

[...] It will inflate asset prices. It won’t inflate consumer prices. It’s actually deflationary for consumer prices, because if you’re an American consumer and you spend 40 percent of your income for housing, 15 percent for debt service to the bank, 11 percent goes out in your FICA wage withholding, and about ten to 15 percent in actual income taxes, that means that the average American has maybe one-third or a quarter of their salary to actually spend on goods and services. So they have to spend so much on debt service and finance and insurance and real estate that there’s no money to buy goods and services, so that’s why so many stores are closing throughout the cities on the big shopping streets.

The idea is, with debt cheap, people will pay more for their housing and have nothing left over for consumer goods. The problem, of course, is that that exact same argument suggests that, with debt cheap, people will pay more for consumer goods and have nothing left over for housing. Flooding the market with credit makes credit cheaper, which in turn encourages spending of all types. The idea that cheap credit makes consumer spending drop is not just counterintuitive.

It's tinfoil-hat wrong.


I do not claim to know if Dr Hudson's opinion is correct.

Then why are you defending it?


Of course the fact he worked with Dennis Kucinich and is being interviewed on Democracy Now means certain people will dismiss his opinions without any thought.

Believe me, his association with Kucinich is not the reason I dismissed his opinion as wrong.

[webb5]

You don't under stand do you. I will try to explain it this way.

Every single dollar in existence has been created as debt, and this must be paid back with interest. So say at 10% interest how much money would you have paid the banks after 10 years? The money you pay back to the banks must come from some one else such as your employer. Guess where this money comes from.

If the banks stop creating money right now the economy would collapse as there is not enough money in circulation. The interest part that the banks charge reduces the money supply. In ten years time at 10% interest the money supply would be zero if all borrowing was stopped. So we must continue to borrow an ever growing amount of debt to maintain enough money in the system.

When the banks reduce the money supply we have recessions and even depressions. We are at the mercy of the banks.

Ever played the monopoly game? In real life you borrow at the start of the game just like all the other players and each time you pass go you pay interest. The money supply that each player borrowed at the start of the game will dwindle each time they pass go as yearly interest is paid. Each player can earn money from other players but this from the money already owed. What ever the players do the game will end before the players go round the board 10 times. The bank is the winner here.

This is how the world runs right now. You and just every one else in this world has been conned! You are talking about a fairy tale I'm talking about a real night mare. Poverty in this world is getting worse. People are dying every day from poverty.

There is a solution, but it means people must wake up. The private banks must be replaced by people banks that control the supply of money. It can work, Australia used this system before it was shut down by the private banks. I have a website that explains all this, unfortunately I cannot link this site here. Please do some research on this very important subject.

[drkitten]

Every single dollar in existence has been created as debt, and this must be paid back with interest. So say at 10% interest how much money would you have paid the banks after 10 years?

About $3.00 per dollar borrowed.

But if I've created $8.00 in wealth with that borrowed dollar, I'm still better off than I was before -- and better off even than the bank is from the money I borrow.

The money you pay back to the banks must come from some one else such as your employer. Guess where this money comes from.

From the wealth I've created through my work, via the employer.

That seems to be your basic problem; you don't understand the difference between creating money and creating wealth.

[The_Animus]

Let's go back to our little isolated island with 100 money in total. I need 1000 money to build a boat. Can I do it?

Sure. I establish a 1000 money loan with the bank and I pull the money out on 100 money chunks. Today I take out 100 money and pay to have the keel laid. The keel-layer takes his payment and deposits it back in the bank. Tomorrow I take out 100 money and pay to have the ribs installed. The rib-installer takes her payment and deposits it back in the bank. Two weeks from now, I'll have a boat.

And now I have a loan to pay back. Let's make it a really usurious loan -- I have to pay back 1200 money, and there's still only 100 on the island. Can I do it?

Of course I can. That's why I wanted the boat in the first place. I go out every night and catch a fish. I sell that fish to the banker for 5 money. I then pay him back that 5 money against my loan. In 240 days, I'll have paid back the loan, five money at a time. It takes me less than a year to pay back a loan twelve times greater than the total amount of money in circulation on the island.

No. As soon as I pay back the loan, the money that was created via lending disappears.

So at the end of the period, there's 300 money on the island. There's the original 100 money, and there's the 200 money that was created as "wealth" via the lending process. And, of course, the island as a whole is also wealthier by one boat and one deep-sea fisherman, which gives the island access to more and different fish.

In drawing out this scenario this is not what I came up with. So allow me to present your scenario as well as alternatives scenarios of a similar nature.

First off, at the completion of the fishing boat we have the following.
1. The bank has in its possession $100 as Skilled Craftsman#10 (from here on called SC10) deposited it in the bank.
2. You owe the bank $1200
3. The bank owes SC1 through SC10 $100 each, as they have each deposited their $100 in the bank after completing their portion of the work on the fishing boat.

*Alternative Scenario*
You go out to catch fish, hit a terrible storm, your boat sinks, and you die a terrible loanly (get it!) and cold death.

Now the bank cannot and will not ever get its $1200. So the current situation is:
1. The bank has $100.
2. The bank owes a total of $1000 ($100 each to SC1 through SC10)

Christmas is coming and the skilled workers wish to buy their daughters expensive imported gifts. They go to the bank, find out that it doesn't have money to cover what it owes them and they crucify the bank owner.
*End Alternative Scenario*

Back to your original scenario. You catch fish and each day sell one to the banker for $5. After 20 days the banker has no money left, so let us assume every 20 days you repay $100 of your loan. After the final $100 dollars is paid off the situation is as follows.

1. The bank has in its possession $100
2. You have a fishing boat and no money
3. The bank owes SC1 through SC10 $100 each for a total of $1000

Ahoy! You have had a good day of fishing and have caught 100 fish in a single day and are selling each one for $5.
SC1, SC2, SC3, SC4, and SC5 are all staring at your marvelous catch and decide they each want 20 fish. SC1 goes to the bank and gets his $100 dollars and buys the fish. SC2 through SC4 go to the bank asking for their money so they can buy fish as well. Upon learning the bank has no more they cut off each of the bankers limbs and hit you over the head with a rock, killing you, before taking your fish.

*Alternative Scenario*
As above except SC1 pays $100 for 20 fish. You deposit that $100 in the bank. SC2 withdraws his $100 and buys 20 fish. You deposit the money and so on through SC5.

Now the situation is
1. The bank has $100
2. The bank owes $1000, $100 each to SC6 through SC10, and $500 to you

SC1's daughter has turned 18 and decided to offer one night of sexual fun with her for $500. You go to the bank and ask for $500. The bank doesn't have $500 to lend you and the daughter will not take 5 payments of $100. In a fit of rage you kill the banker and the daughter, grind them up into chunks of flesh, and use them as bait in catching further fish.
*End Alternative Scenario*

The moral of this hypothetical experiment is that lending more money than actually exists will at some point result in someone dying a horrible death. Oh and it results in a constant owing of more money (debt) than actually exists.

[webb5]

That personal wealth you have created has come from some one else's debt. That is the part you do not understand. re- read the Monopoly Game

As a citizen in your country, you indeed may do well in life, but what ever money you accumellate will always come from debt weather direct or indirect. But what ever the country owes you will owe.

[webb5]

That personal wealth you have created has come from some one else's debt. That is the part you do not understand. Re- read the Monopoly Game

As a citizen in your country, you indeed may do well in life, but what ever money you accumulate will always come from debt weather direct or indirect. But what ever your country owes you will owe.

[drkitten]

In drawing out this scenario this is not what I came up with. So allow me to present your scenario as well as alternatives scenarios of a similar nature.

Rather silly alternatives, but whatever....



First off, at the completion of the fishing boat we have the following.
1. The bank has in its possession $100 as Skilled Craftsman#10 (from here on called SC10) deposited it in the bank.
2. You owe the bank $1200
3. The bank owes SC1 through SC10 $100 each, as they have each deposited their $100 in the bank after completing their portion of the work on the fishing boat.

*Alternative Scenario*
You go out to catch fish, hit a terrible storm, your boat sinks, and you die a terrible loanly (get it!) and cold death.

That's right. Lending is risky, and the bank arguably should not have lent out as much of it's capital to a single borrower as it did. Of course, in a more realistic situation, the bank could and would have lent to dozens of potential fishermen, enough that the loss of any single fisherman would not cause a catastrophic failure, and would also have insisted that I carry insurance that could pay the bank off in the event of a terrible storm. The cost of the insurance would probably end up eating in to my profits; instead of making $5/fish, I'd only make $4/fish (and pay $1 to the insurance company) and would take 20% about 270 days instead of 240 to pay the loan off.


Christmas is coming and the skilled workers wish to buy their daughters expensive imported gifts. They go to the bank, find out that it doesn't have money to cover what it owes them and they crucify the bank owner.


That's not the banker's problem, but a problem with the national mint. The banker can issue a cashier's check to the workers that they can use to buy their daughters whatever they want. You'd have the same problem in the real world if you decided, for whatever reason, that you insisted in being paid in cash instead of with a cashier's check when you sold your house.


Back to your original scenario. You catch fish and each day sell one to the banker for $5. After 20 days the banker has no money left, so let us assume every 20 days you repay $100 of your loan.

That's not my original scenario. My original scenario paid the banker $ daily.

But, continuing....
After the final $100 dollars is paid off the situation is as follows.

1. The bank has in its possession $100
2. You have a fishing boat and no money
3. The bank owes SC1 through SC10 $100 each for a total of $1000

Ahoy! You have had a good day of fishing and have caught 100 fish in a single day and are selling each one for $5.


SC1, SC2, SC3, SC4, and SC5 are all staring at your marvelous catch and decide they each want 20 fish. SC1 goes to the bank and gets his $100 dollars and buys the fish. SC2 through SC4 go to the bank asking for their money so they can buy fish as well.

And they get cashier's checks, which I accept, knowing the bank will redeem them.



As above except SC1 pays $100 for 20 fish. You deposit that $100 in the bank. SC2 withdraws his $100 and buys 20 fish. You deposit the money and so on through SC5.

Now the situation is
1. The bank has $100
2. The bank owes $1000, $100 each to SC6 through SC10, and $500 to you

SC1's daughter has turned 18 and decided to offer one night of sexual fun with her for $500. You go to the bank and ask for $500.

Which I get in a cashier's check and sign over to SC1's daughter.


The moral of this hypothetical experiment is that lending more money than actually exists will at some point result in someone dying a horrible death. Oh and it results in a constant owing of more money (debt) than actually exists.

And both of those morals are wrong.

You're confusing the money supply of a society with the amount of currency in a society. The money supply is usually vastly larger than the amount of currency, precisely because it's so much easier to use checks and whatnot. As of April 2008, (http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html) for example, there was about $800 billion in US currency floating around, about $600 billion in checking accounts and traveller's checks, for a total M1 money supply of about $1.4 billion. The M2 money supply, which includes savings accounts, money market funds, and whatnot, was about five times larger. So we're actually in the situation you feel is so horrid here in the real world; there's more money in the savings accounts of American citizens than there is currency to redeem the balances.

The problems that causes? None whatsoever. If you want to spend the money out of your savings account, you don't need to convert it into currency. You can simply arrange a transfer to your checking account and write a check for any amount you like. You can withdraw however much you like in a cashier's check. You can even get an ATM card that draws from your savings or money market account and spend what you like as with a credit card. Currency is neither needed nor expected,... nor even in many cases wanted; I just had some repair work done on my car and the mechanic wouldn't take cash, because of the security hassles.....

[drkitten]

That personal wealth you have created has come from some one else's debt. That is the part you do not understand.

There's a very good reason I don't understand it. It'w wrong. Wealth creation does not rely on debt. If I stick a pan in a river and find gold dust, or chop down a tree and make a picnic table out of it, no one has gone into debt for the wealth I've created.

[The_Animus]

That's right. Lending is risky, and the bank arguably should not have lent out as much of it's capital to a single borrower as it did.

That's not the banker's problem, but a problem with the national mint. The banker can issue a cashier's check to the workers that they can use to buy their daughters whatever they want. You'd have the same problem in the real world if you decided, for whatever reason, that you insisted in being paid in cash instead of with a cashier's check when you sold your house.

And they get cashier's checks, which I accept, knowing the bank will redeem them.

Which I get in a cashier's check and sign over to SC1's daughter.


Whoa there. First you started a scenario in which only spending and lending of that $100 was taking place. Now you want to suddenly throw in cashier's checks? Can you solve the issues presented in the scenarios while maintaining the same types of transactions as within the original scenario?

Next, if we did use cashier's checks, with what will the bank redeem those cashier's checks? The bank will never, ever have enough money to redeem them all because the money does not exist to redeem it. This was the point of looking at the example. This system only works so long as
1. Everyone is willing to accept payment in the form of I.O.U's or other deferred payment such as cashiers checks.
2. A large majority of people don't need/wish to wishdraw their money at the same time
and
3. That no one ever defaults on their payments.

If any of these happens then someone gets screwed.


You're confusing the money supply of a society with the amount of currency in a society. The money supply is usually vastly larger than the amount of currency, precisely because it's so much easier to use checks and whatnot. As of April 2008, (http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html) for example, there was about $800 billion in US currency floating around, about $600 billion in checking accounts and traveller's checks, for a total M1 money supply of about $1.4 billion. The M2 money supply, which includes savings accounts, money market funds, and whatnot, was about five times larger. So we're actually in the situation you feel is so horrid here in the real world; there's more money in the savings accounts of American citizens than there is currency to redeem the balances.

The problems that causes? None whatsoever. If you want to spend the money out of your savings account, you don't need to convert it into currency. You can simply arrange a transfer to your checking account and write a check for any amount you like. You can withdraw however much you like in a cashier's check. You can even get an ATM card that draws from your savings or money market account and spend what you like as with a credit card. Currency is neither needed nor expected,... nor even in many cases wanted; I just had some repair work done on my car and the mechanic wouldn't take cash, because of the security hassles.....

I know we are in that situation. That was my point. If there was a bank run a hell of a lot of people would be screwed. If there were a large amount of money that couldn't be repaid, like the recent housing bubble, then it causes a ton of problems.

[psionl0]

So at the end of the period, there's 300 money on the island. There's the original 100 money, and there's the 200 money that was created as "wealth" via the lending process.
Therein lies the problem with having a banker decide who gets money and how much they have to pay for it - inflation and overproduction. Multiply this "little isolated island" by the whole world and you can see how this planet is being consumed at an ever increasing frenetic rate in an attempt to match the growth in money caused by banks charging interest on money THEY created.

This "little isolated island" example is tailor-made for a L.E.T.S. (http://www.gmlets.u-net.com/home.html) style community. Instead of waiting for the banker to "approve" his plans, the boat builder pays each worker 100 money from his OWN credit (sort of like writing IOUs). The negative balance on the boat builders ledger will be evened out as he sells his fish (redeems his IOUs). Since everybody knows this money is good for buying fish, they have no problem with it. Since the boat builder doesn't need to pay interest on the money he paid out (it's his own credit - not the bank's) the inflationary pressures don't exist.

L.E.T.S. communities are operating successfully all over the world. I don't know if a global (or even national) L.E.T.S. system could supersede the banking system but there are variants of this scheme being devised with this object in mind. Digital Coin (http://www.digitalcoin.info/) is one such example.

[webb5]

There's a very good reason I don't understand it. It'w wrong. Wealth creation does not rely on debt. If I stick a pan in a river and find gold dust, or chop down a tree and make a picnic table out of it, no one has gone into debt for the wealth I've created.

The real wealth in this world is in the land and what we make of it, ie farming, building, mining, etc. You are correct in this part only. A monetary value is added to all these things. Which takes us to the role of money.

The role of money is to provide and easy medium to buy and sell things. The only problem here is that this medium is controlled by the banks. Thus the wealth of this world is being manipulated by the banks. That bit of gold dust and that table you made did not cause debt but the money you make from it will come from debt. Maybe one day you will understand.

[Mashuna]

Maybe one day you will understand.

I don't think it's very kind of you to hope that Dr Kitten suffers some kind of brain injury.

[soylent]

It has since I was teenager always baffled me how interest works, because it is value added out of nothing.

Where's the mystery?

Is it that interest rates can be much higher than GDP growth? There's no great mystery there; some businesses fail, some mortgages default, some credit cards are never repaid and this has to be compensated for by demanding a higher rate of interest.

Is it that interest exists at all? Well, why would anyone lend anything to anyone other than friends and family if there's no interest?

Is it why anyone would take a loan, knowing they'll have to pay interest? That's easy too; that's just time value of money. People value having things now more than they value having the same thing in the future. Sometimes this is merely short sighted(borrowing at a high rate of interest to buy a new TV, say). Sometimes it is a good business decision; imagine a pizzeria that borrows to buy a pizza oven; with this additional oven they bring in enough revenue to pay for the principal, the intrest, the additional pizza ingredients, labour and still come out ahead.

Is it some vague unease at how debt can be paid back if the sum of all debt is greater than the monetary base? Money is reusable; it doesn't just disappear when it is used to pay interest to a bank. The bank pays its employees and owners; it uses the money to make more loans.

[drkitten]

Whoa there. First you started a scenario in which only spending and lending of that $100 was taking place. Now you want to suddenly throw in cashier's checks? Can you solve the issues presented in the scenarios while maintaining the same types of transactions as within the original scenario?

No. The bank would have gone bankrupt as soon as it lent out more than its cash reserves in a single transaction if it wasn't permitted to use non-cash transactions. That's one of the inevitable simplifications you need if you're going to have a system small enough to describe in a 300 word forum post.




Next, if we did use cashier's checks, with what will the bank redeem those cashier's checks?

Deposits or loan forgiveness. I accept cashier's checks because I can redeem them against my loan balance. Everyone else accepts cashiers checks because they can deposit them directly into the bank. In a worst-case scenario, people accept them because they can buy fish with them -- or any other goods sold by someone who deals with the bank.

The bank will never, ever have enough money to redeem them all because the money does not exist to redeem it.

Wrong. The only reason your scenarios didn't work is because people wanted all their money right now. Given a realistic time horizon, that's not an issue.


This system only works so long as
1. Everyone A large majority is willing to accept payment in the form of I.O.U's or other deferred payment such as cashiers checks.
2. A large majority of people don't need/wish to wishdraw their money at the same time

since those are, in fact, realistic assumptions that hold in the real world, I have no issue with assuming they hold in our toy one.




and
3. That no one ever defaults on their payments.

Nope. The system is moderately default resistant. The bank has two hundred dollars in spare "money" once I've paid off my debt that it can use to cushion the effects of default; it could write off a debt for 100 money at that point without going bankrupt.

Again, look at a larger scale system. The bank lends to ten wannabe-fishers, charging each of them 20% interest. One fisherman hits a storm and dies with his boat, but the other nine pay off their boats plus interest, for a total of 180% of the cost of a boat. They've created enough wealth to pay for the new boat nearly twice over, and give it to the bank as interest to make the bank not only whole, but profitable despite the default.

There is no problem.

[drkitten]

The real wealth in this world is in the land and what we make of it, ie farming, building, mining, etc. You are correct in this part only.

Is this going to turn into a labor-theory-of-value nonsense?

A monetary value is added to all these things. Which takes us to the role of money.

Well, value is certainly added to it. I can use a picnic table in ways that I prefer to ways that I can use a tree. Since I want a picnic table more than I want a tree, it's more valuable to me. Presumably that's true for you as well, or you wouldn't want the table.

What's a "monetary" value versus any other kind of value in this context?


The role of money is to provide and easy medium to buy and sell things.

That's right. Because if you need my picnic table and I need warm blankets, it's much easier for us to trade with money than via barter, especially if you don't have any blankets going spare, but you do have a supply of cheese.


The only problem here is that this medium is controlled by the banks. Thus the wealth of this world is being manipulated by the banks.

In the same sense that the shoes of this world are by definition manipulated by the cobblers, perhaps. If I need shoes, I go to a cobbler, and I pay him for his time and trouble, because I can't make very good shoes myself. If I need money, I go to a banker, because I can't make very good money myself. But that hardly makes our feet into the stuff of conspiracy.

That bit of gold dust and that table you made did not cause debt but the money you make from it will come from debt.

Perhaps. If I sell the picnic table to a moneylender, almost certainly. That's how he makes his money. If I sell it to a sheepherder, it will come from sheep. If I sell it to a cobbler, it will come from shoes.


Maybe one day you will understand.

I certainly hope not. I try very hard not to "understand" things that are not only dead wrong, but stupidly and ignorantly so.

[drkitten]

This "little isolated island" example is tailor-made for a L.E.T.S. (http://www.gmlets.u-net.com/home.html) style community. Instead of waiting for the banker to "approve" his plans, the boat builder pays each worker 100 money from his OWN credit (sort of like writing IOUs). The negative balance on the boat builders ledger will be evened out as he sells his fish (redeems his IOUs). Since everybody knows this money is good for buying fish, they have no problem with it. Since the boat builder doesn't need to pay interest on the money he paid out (it's his own credit - not the bank's) the inflationary pressures don't exist.

No, it won't.

Oh, wait. You think that inflationary pressure is a bad thing, don't you?

What you'll see instead in this situation is a deflationary spiral. Since there's more fish available now, with the same amount of "credit," the price of fish will drop, and I won't be able to redeem my IOUs and will go bankrupt. Other people will see this and decide not to invest in boat building, and the economy of the island will stagnate. No investment, no improvements in productivity, no improvements in quality of life,.... heck, no investments, no investments in maintenance, and quality of life will drop like a paralyzed eagle.


L.E.T.S. communities are operating successfully all over the world.

Not in isolated systems. Without an external market to provide increases in the money supply, you'll end up in a deflationary crash that makes the Great Depression look fun.

I don't know if a global (or even national) L.E.T.S. system could supersede the banking system

I hope not. It seems kind of odd to be trying to devise something that, if successful, would be Fall-of-Rome devastating to everyone including the designer.

[Loss Leader]

Every single dollar in existence has been created as debt


This is wrong.

The money we use today has its roots hundreds and hundreds of years ago. When a person gave his gold to a Medici family in Florence in exchange for a certificate, traveled with that certificate to Venice and then, instead of showing up and getting gold from the Venice Medici family, traded his certificate for the services of a scribe (who had expended labor to scribble things), nothing was created by debt.

And those Medici dollars have changed and evolved greatly, but that labor of that service provided by the Medicis and that labor of that scribe is still in the system today. Wealth is created through labor. And labor is not a Ponzi scheme.

[psionl0]

What you'll see instead in this situation is a deflationary spiral. Since there's more fish available now, with the same amount of "credit," the price of fish will drop, and I won't be able to redeem my IOUs and will go bankrupt. Other people will see this and decide not to invest in boat building, and the economy of the island will stagnate. No investment, no improvements in productivity, no improvements in quality of life,.... heck, no investments, no investments in maintenance, and quality of life will drop like a paralyzed eagle.
From these remarks, I'm guessing that you have not studied the L.E.T.S. system in any sort of detail. No matter, it will take a radical rethink of the concept of money before something like this could replace banking. Not to mention that the banks might not go along with it.

There is another more mundane possibility for this "little isolated island". The island's government prints enough money to meet the island's needs and spends the money into the community. Some of the islanders will have money to spare (assuming the island is heterogeneous) and invest it in lending institutions. Now the boat builder can borrow money to build the boat and repay the loan and interest by selling fish. The difference is that the overall supply of money will not be affected. The interest will go to the investors who spend it back into the community. The problem is that it won't do the banks much good unless they have a stake in the lending institutions.

[psionl0]

When a person gave his gold to a Medici family in Florence in exchange for a certificate, traveled with that certificate to Venice and then, instead of showing up and getting gold from the Venice Medici family, traded his certificate for the services of a scribe (who had expended labor to scribble things), nothing was created by debt.
This is true in the example that you give. However, the goldsmiths also found that they could lend certificates without getting any gold for them. This is most assuredly debt.

[drkitten]

This is true in the example that you give. However, the goldsmiths also found that they could lend certificates without getting any gold for them. This is most assuredly debt.

So, in other words, webb's claim that "every single dollar in existence was created by debt" is entirely wrong, and you acknowledge that?

No one disputes that some dollars have been created by debt; lending is one way of creating wealth just as cobbling, mining, or carving picnic tables is. By lending my money to someone, I enable him to use his other resources more productively and thereby create wealth. And, of course, lending is one of the primary method of increasing the money supply, which is necessary to avoid the deflation effect that stifles wealth creation.

[psionl0]

So, in other words, webb's claim that "every single dollar in existence was created by debt" is entirely wrong, and you acknowledge that?
A simple statement is either right or wrong. In webb's case, we only need to find a single dollar that was not created out of debt to prove him "wrong" (are there still any greenbacks in circulation?)

The phrase "entirely wrong" is meaningless in this context unless you are arguing that NO money has been created out of debt. Most estimates that I have seen suggest that 90% to 97% of our money has been created out of debt. So it would seem that webb is 90% to 97% correct.

[drkitten]

A simple statement is either right or wrong. In webb's case, we only need to find a single dollar that was not created out of debt to prove him "wrong" (are there still any greenbacks in circulation?)

Then we're in agreement. Webb is wrong.

[The_Animus]

No. The bank would have gone bankrupt as soon as it lent out more than its cash reserves in a single transaction if it wasn't permitted to use non-cash transactions. That's one of the inevitable simplifications you need if you're going to have a system small enough to describe in a 300 word forum post.

At what point in the scenario(s) did the bank lend out more than its cash reserves in a single transaction? All loans were in the amount of $100, which at the time of the loan it had thanks to a deposit by someone else.


Deposits or loan forgiveness. I accept cashier's checks because I can redeem them against my loan balance. Everyone else accepts cashiers checks because they can deposit them directly into the bank. In a worst-case scenario, people accept them because they can buy fish with them -- or any other goods sold by someone who deals with the bank.

In this scenario, printing and handing out cashier's checks is essentially printing money. The bank only has $100 but owes $1000 and so it prints cashier's checks as if they were $100 bills. Whether the bank just says it owes 10 people 100 dollars, gives them IOU's, gives them a cashier's check, or gives them $100 in monopoly money it is all the same. You may as well say the bank prints new real $100 bills and hands them out to the people it owes because that's exactly the same as using cashier's checks in these scenarios.


Wrong. The only reason your scenarios didn't work is because people wanted all their money right now. Given a realistic time horizon, that's not an issue.

You mean it didn't work because 2 out of the 12 people wanted their money right now? It didn't work because the bank lent out more money than it had and more money than even exists. You can sit and shuffle stuff around for a long time but at some point if any of those 3 conditions fails (and failure at some point is inevitable) then there is a problem.


Nope. The system is moderately default resistant. The bank has two hundred dollars in spare "money" once I've paid off my debt that it can use to cushion the effects of default; it could write off a debt for 100 money at that point without going bankrupt.

At the end of paying back the loans used to build the boat the bank has $100 and owes $1000. Please show me where the bank's spare $200 is.


Again, look at a larger scale system. The bank lends to ten wannabe-fishers, charging each of them 20% interest. One fisherman hits a storm and dies with his boat, but the other nine pay off their boats plus interest, for a total of 180% of the cost of a boat. They've created enough wealth to pay for the new boat nearly twice over, and give it to the bank as interest to make the bank not only whole, but profitable despite the default.

There is no problem.

If you would care to play out this scenario in further detail I'd be happy to discuss it.

[drkitten]

At what point in the scenario(s) did the bank lend out more than its cash reserves in a single transaction?

At the point where it approved a $1000 loan to me to build a boat, which created a $1000 draw-down account for me, despite only having $100 cash on hand.


In this scenario, printing and handing out cashier's checks is essentially printing money.

No. There's a fundamental difference; the bank doesn't have to redeem money, but does need to redeem cashier's checks.



At the end of paying back the loans used to build the boat the bank has $100 and owes $1000. Please show me where the bank's spare $200 is.

In deposits of the bank. It received $1200 in deposits from me and used $1000 of them to retire $1000 in liabilities. It also has a total of $1000 in depository receipts and a corresponding liability of $1000. Don't confuse "money" with "currency"; money on deposit in the bank is still money.

[psionl0]

Then we're in agreement. Webb is wrong.

Yes. It was just the phrase "entirely wrong" I had a problem with.

[webb5]

Is this going to turn into a labor-theory-of-value nonsense?



Well, value is certainly added to it. I can use a picnic table in ways that I prefer to ways that I can use a tree. Since I want a picnic table more than I want a tree, it's more valuable to me. Presumably that's true for you as well, or you wouldn't want the table.

What's a "monetary" value versus any other kind of value in this context?



That's right. Because if you need my picnic table and I need warm blankets, it's much easier for us to trade with money than via barter, especially if you don't have any blankets going spare, but you do have a supply of cheese.




In the same sense that the shoes of this world are by definition manipulated by the cobblers, perhaps. If I need shoes, I go to a cobbler, and I pay him for his time and trouble, because I can't make very good shoes myself. If I need money, I go to a banker, because I can't make very good money myself. But that hardly makes our feet into the stuff of conspiracy.



Perhaps. If I sell the picnic table to a moneylender, almost certainly. That's how he makes his money. If I sell it to a sheepherder, it will come from sheep. If I sell it to a cobbler, it will come from shoes.




I certainly hope not. I try very hard not to "understand" things that are not only dead wrong, but stupidly and ignorantly so.

What a load of drible! You will never understand

[Sceptic-PK]

What a load of drible! You will never understand

Oh yes, the last retort of the uneducated and ignorant. You're the one that doesn't understand. Almost everything you've written in this thread is utterly wrong. Go take some economics classes and stop believing every crackpot site you find on the net.

[webb5]

Oh yes, the last retort of the uneducated and ignorant. You're the one that doesn't understand. Almost everything you've written in this thread is utterly wrong. Go take some economics classes and stop believing every crackpot site you find on the net.

I think it should be the other way. It's time you woke up. Did you take an economics degree or something? Did you really read all my posts and come out thinking i'm utterly wrong. I think you should re analize what I have written particully on the monopoly bit I used.

The Global financial crises we are now experiencing was caused by the banks.
Fractional reserve banking should be called Fictional Reserve Banking
because that is what it is It's fiction. There is not enough money reserves in the banks. A run on all the banks is a very possible, the Centrol banks can only cover so much.

Clearly the great economists of this world have got it wrong. Let's find the solution do you see it yet? Can we really allow the banks to manipulate our financial system and really believe nothing but good can come from it?

You need to re analyze every thing you have memorized as fact and look for any facts that don't add up.

[soylent]

If a bank isn't close to being insolvent it can weather a bank-run. A loan is a revenue generating asset from the perspective of the bank; the bank can borrow with these loans as collateral, or in the worst case convert them to money by selling them.

Banks become insolvent by issuing bad loans. There's nothing inherently insolvent about fractional reserve lending.

Imagine a bank that has £10 in capital, gets £100 in deposits, lends out a £90 to and keeps a tenner in reserve. Absent fraud(see control fraud) the bank wouldn't intentionally make bad loans. The bank makes the loan expecting a return of £90 + interest.

If the loan is good it is worth £90 and the bank can sell it. It still has £110 on the asset side of the ledger after making the loan, it has just converted £90 worth of reserves into £90 worth of loan.

If the loan was prudently made, with collateral and down payment, even if it defaults the bank can recoup enough to money that it doesn't wipe out it's capital.

If the bank keeps making successful loans it can grow its capital from retained earnings and expand its operation. If it keeps making losses it will shrink and eventually be unwound.

To get a spectacular blow-up like the housing bubble requires fraud, such as deliberately making spectactularly bad loans at high rates of interest, recording massive short-term accounting profits and paying yourself out a huge bonus. When cash flow(lack there of) catches up to you the bank may fail, but if you're the CEO you made out like a bandit.

[soylent]

Webb, you have this entirely backwards. Fractional reserve requirements are a limitation imposed by governments, not a priviledge. Absent such requirements, what do you think will happen?

Well, we know what will happen; see the free banking system in Scotland, which held ~2% reserves in gold.

[drkitten]

I think it should be the other way. It's time you woke up. Did you take an economics degree or something? Did you really read all my posts and come out thinking i'm utterly wrong.

One of the sure signs of the crackpot -- when you consider it a handicap to true understanding of your theory for someone to know something of the subject of the theory.

If my physics theory makes sense to everyone except trained physicists, that's a marker of a stupid theory, not of a conspiracy among physics departments.

[The_Animus]

In deposits of the bank. It received $1200 in deposits from me and used $1000 of them to retire $1000 in liabilities. It also has a total of $1000 in depository receipts and a corresponding liability of $1000. Don't confuse "money" with "currency"; money on deposit in the bank is still money.

The bank has $100 and owes $1000. You did not specifically point out where the $200 of 'created wealth' exists.

It received $1200 from you and used it to buy $1200 of fish. It did not retire the $1000 in liabilities which is why it still owes $1000 to SC1 through SC10 and yet only has the original $100.

Or if you'd like we can say that it retired the $1000 in liabilities only to spend $1200 on fish for itself. In this case it used $200 of its own money from interest and $1000 of other peoples money. As a result the bank is now in debt and can only repay what it owes if it can charge more interest on future transactions.

The only way this scenario ends up without debt or someone getting screwed is if there is uniform and unilateral buying among the participants. By this I mean since you purchased $100 of labor from SC1, SC1 would purchase $100 from you in fish. This includes indirect methods of uniform purchasing such as if SC1 purchased a table from SC2 for $100 and then SC2 bought $200 of fish from you.

This is the only way in the scenario to achieve a no debt balance where no one gets screwed and yet new wealth in the form of boats or fish is created.

[The_Animus]

One of the sure signs of the crackpot -- when you consider it a handicap to true understanding of your theory for someone to know something of the subject of the theory.

If my physics theory makes sense to everyone except trained physicists, that's a marker of a stupid theory, not of a conspiracy among physics departments.

Generally this is true, but to be fair there is a difference between concepts in physics and concepts in economics. Physics theories are based upon immutable laws of the universe, whereas economic theories/laws/workings are made up dependent upon human behavior and the systems which make up our current society. For example, if we found an intelligent civilization on a planet far far away, their economic theories/laws/workings could be completely different from our own. Their physics however, not so much.

[Sceptic-PK]

Did you take an economics degree or something?

No, but I dabble in the basics (the basics you get repeatedly wrong).


Did you really read all my posts and come out thinking i'm utterly wrong.

Yes.


The Global financial crises we are now experiencing was caused by the banks.

Wrong. The crisis had a number of important causes, none of which necessarily more important than the other. This is why it has been referred to as “the perfect storm”. The fact you think it was all down to the banks just shows how little you understand about the topic you’re preaching about.


Fractional reserve banking should be called Fictional Reserve Banking
because that is what it is It's fiction. There is not enough money reserves in the banks. A run on all the banks is a very possible, the Centrol banks can only cover so much.

Yawn.


Clearly the great economists of this world have got it wrong. Let's find the solution do you see it yet? Can we really allow the banks to manipulate our financial system and really believe nothing but good can come from it?

They don’t “manipulate” anything; they provide credit to those who ask for it. If you have a problem with banks, don’t use them.


You need to re analyze every thing you have memorized as fact and look for any facts that don't add up.

You need to go to school and stop wasting everyone’s time with your adolescent nonsense.

[The_Animus]

If you have a problem with banks, don’t use them.


As if you can just not use them. Good luck paying your electric bill by mailing them cash.

[Sceptic-PK]

As if you can just not use them. Good luck paying your electric bill by mailing them cash.

Don’t use them for borrowing if they’re so evil and manipulative I meant.

[marplots]

As if you can just not use them. Good luck paying your electric bill by mailing them cash.

Legal tender for all debts public and private. Cash works.

[webb5]

If a bank isn't close to being insolvent it can weather a bank-run. A loan is a revenue generating asset from the perspective of the bank; the bank can borrow with these loans as collateral, or in the worst case convert them to money by selling them.

Banks become insolvent by issuing bad loans. There's nothing inherently insolvent about fractional reserve lending
Only full reserve is solvent

Imagine a bank that has £10 in capital, gets £100 in deposits, lends out a £90 to and keeps a tenner in reserve. Absent fraud(see control fraud) the bank wouldn't intentionally make bad loans. The bank makes the loan expecting a return of £90 + interest.

$100 deposit $10 as a reserve requirement $90 of new money froudently created out of thin air! $90 becomes debt when lent out to customer. Customer uses $90 to purchase a product. Seller of product puts $90 in bank and fractional reserve process continues

This Bank now has $90 in deposit
$90 deposit $9 as a reserve requirement $81 of new money froudently created out of thin air

If the loan is good it is worth £90 and the bank can sell it. It still has £110 on the asset side of the ledger after making the loan, it has just converted £90 worth of reserves into £90 worth of loan.
froudently

If the loan was prudently made, with collateral and down payment, even if it defaults the bank can recoup enough to money that it doesn't wipe out it's capital.
The bank will use your assets as collateral and if you the borrower fails, they will sell them to cover your debt that the bank created out of nothing

If the bank keeps making successful loans it can grow its capital from retained earnings and expand its operation. If it keeps making losses it will shrink and eventually be unwound.

To get a spectacular blow-up like the housing bubble requires fraud, such as deliberately making spectactularly bad loans at high rates of interest, recording massive short-term accounting profits and paying yourself out a huge bonus. When cash flow(lack there of) catches up to you the bank may fail, but if you're the CEO you made out like a bandit.
The CEO new about this but continued to promote it

[webb5]

Webb, you have this entirely backwards. Fractional reserve requirements are a limitation imposed by governments, not a priviledge. Absent such requirements, what do you think will happen?

Well, we know what will happen; see the free banking system in Scotland, which held ~2% reserves in gold.

Wow! Being allowed to create new money out of fractional reserve banking is not a priviledge. You must be kidding! AT 10% rate the banks can create $900 out of thin air using the limitation imposed by our governments from a $1,000 deposit.

[Sceptic-PK]

froudently

I think you should sue your english teacher(s) for froud.

[drkitten]

Wow! Being allowed to create new money out of fractional reserve banking is not a priviledge.

That's right.

You yourself can create new money out of thin air by simply writing an IOU.

The difference is that you can, legally, write an IOU for any amount you choose; banks are legally limited to writing IOUs for less than the amount they have on deposit.

[drkitten]

The only way this scenario ends up without debt or someone getting screwed is if there is uniform and unilateral buying among the participants. By this I mean since you purchased $100 of labor from SC1, SC1 would purchase $100 from you in fish. This includes indirect methods of uniform purchasing such as if SC1 purchased a table from SC2 for $100 and then SC2 bought $200 of fish from you.

Well, that's the general idea behind wealth creation, yes. I'm going to continue to sell fish into the general economy for as long as the boat exists and the fish exists. By creating the boat, I've created a new and valuable good -- wealth -- that I can continue to harvest indefinitely, to the general benefit of everyone in society.

But that's true for almost all investments; the blacksmith gets a similar benefit when he invests in a new forge that lets him shoe horses twice as fast, making horseshoes cheaper and everyone better off for the rest of time. The cleaner's new vacuum allows everyone to spend less time on housekeeping and more time doing other things, increasing the supply of "other things" done.

Since debt is inherently limited (you need only pay back what you borrowed plus the agreed-upon interest) but new wealth is limitless, there's no problem.



This is the only way in the scenario to achieve a no debt balance where no one gets screwed and yet new wealth in the form of boats or fish is created.

Yes. But since that's both the designed and the most likely end, this is hardly a problem.

[CORed]

No. Economic growth is an increase in the amount of wealth produced, which is entirely different from the amount of money. Again, economic growth is deflationary, because if I find a way to make twice as much bread from the same amount of ingredients, that increases the supply of bread and lowers the price.

You get inflation when the supply of money increases faster than the economy grows. (Or when production shrinks and the supply of money doesn't, as in the 1970s.) Left to itself, a fixed money supply will almost always be deflationary because the general tendency of the economy is to grow; deflation will also end up restricting economic growth because it retards the investment that drives economic growth.

Which is why a sensible government tries to increase the money supply to keep up with growth. The easiest and safest way to do this is via the banks, because the banks that supply investment capital can also supply new money to keep the two quantities roughly in-line. The alternative would be to have a bunch of out-of-touch research economists at the Mint decide how much to increase the money supply.....

Which, as I understand it, is how Social Credit is supposed to work. The role of creating new money is assigned to the government. I'm a little hazy on the details, but IIRC, the government is supposed to pay new money out to the people in a dividend or something. I don't know whether it's really a viable system or not, as it's never actually been implemented. In this regard, the social credit people aren't quite as bad as the Austrian School, who think that the money supply should be constant and think a completely free market allowing prices and wages to fall will cope with deflation. I think with contracts for future goods at a set price, it would be nearly impossible to make a fixed money supply with falling prices work.

IMO, fractional reserve banking is the engine that drives all modern economies. It is not fraudulent at all. However, it does have an element of risk: If too many people default on loans, an economic crash can happen (as has happened recently with the US housing bubble, and as happened in the early '30's after the stock market crash). If the money supply is allowed to expand faster than the economy grows, inflation can result. It is the function of the Federal Reserve, and other central banks to try to manage the money supply so that neither of these things happen. Sometimes they aren't successful.

[psionl0]

Good luck paying your electric bill by mailing them cash.
Bitcoin is a proposed peer to peer network that allows money to be transferred from one person to another without the need for a central authority (banks). You can find the specification for this at http://www.bitcoin.org/sites/default/files/bitcoin.pdf. Beta software for this is also available at http://www.bitcoin.org/.

If banks are not needed for transferring money then the only use for banks would be for creating money - unless there is an alternative.

[Tippit]

Which, as I understand it, is how Social Credit is supposed to work. The role of creating new money is assigned to the government. I'm a little hazy on the details, but IIRC, the government is supposed to pay new money out to the people in a dividend or something. I don't know whether it's really a viable system or not, as it's never actually been implemented. In this regard, the social credit people aren't quite as bad as the Austrian School, who think that the money supply should be constant and think a completely free market allowing prices and wages to fall will cope with deflation. I think with contracts for future goods at a set price, it would be nearly impossible to make a fixed money supply with falling prices work.



The efficiency of fixed nominal contracts depends on the stability of nominal spending, not the general price level. Read Selgin on Deflation (http://www.terry.uga.edu/~selgin/deflation.html) to understand why. Your understanding of social credit is essentially correct. As society reaps the benefits of productivity, under the Austrian school the gains accrue to the currency holder/saver - your money buys more as prices fall due to deflation which is the result of the productivity norm. Social credit seeks to distribute these gains equitably via monetary inflation, perhaps in the form of a dividend, while at the same time keeping prices stable. This would be a significant reform in light of the current system, in which the gains are taxed away (http://en.wikipedia.org/wiki/Inflation_tax)by bankers, government, and other friends of the Federal Reserve.



IMO, fractional reserve banking is the engine that drives all modern economies. It is not fraudulent at all. However, it does have an element of risk: If too many people default on loans, an economic crash can happen (as has happened recently with the US housing bubble, and as happened in the early '30's after the stock market crash). If the money supply is allowed to expand faster than the economy grows, inflation can result. It is the function of the Federal Reserve, and other central banks to try to manage the money supply so that neither of these things happen. Sometimes they aren't successful.

The driver of modern economies isn't fractional reserve banking, it's entrepreneurship and private risk taking. FRB is the source of systemic risk, and the essence of "too big to fail". Of course, FRB wasn't the sole cause of the financial crisis, which is and was the Fed's long term and persistent monetary inflation that resulted in asset price inflation (http://en.wikipedia.org/wiki/Asset_price_inflation) of the housing market. But the bank bailouts were justified by all the counterparties that would lose if some of the biggest Wall Street banks were allowed to fail, a direct result of FRB. Note that credit itself isn't dependent on fractional banking, it would still exist in the form of time deposits, private loans, and banks loaning their own paid-in capital. While this would result in a contraction of credit, it would also be sustainable, and there would be fewer bad loans overall.

Finally, the biggest bonus of abolishing FRB would be the ability to abolish the central bank entirely, as it would have no excuse to monetize and socialize the theft, fraud, and mistakes of Wall Street.

[webb5]

That's right.

You yourself can create new money out of thin air by simply writing an IOU.
An iou is not money, it is only a promise to pay note. More importantly when you do pay its from money already in circullation.

The difference is that you can, legally, write an IOU for any amount you choose; banks are legally limited to writing IOUs for less than the amount they have on deposit.

???

[Finn McR]

Borrowing from the future is a good bet???

WTF?

Are the "borrow from the future" advocates here unaware that many Americans borrowed money against the future value of their homes, which were vastly overrated? Yeah, that has worked out extremely well... for the banks.

[webb5]

Which, as I understand it, is how Social Credit is supposed to work. The role of creating new money is assigned to the government. I'm a little hazy on the details, but IIRC, the government is supposed to pay new money out to the people in a dividend or something. I don't know whether it's really a viable system or not, as it's never actually been implemented. In this regard, the social credit people aren't quite as bad as the Austrian School, who think that the money supply should be constant and think a completely free market allowing prices and wages to fall will cope with deflation. I think with contracts for future goods at a set price, it would be nearly impossible to make a fixed money supply with falling prices work.

IMO, fractional reserve banking is the engine that drives all modern economies. It is not fraudulent at all. However, it does have an element of risk: If too many people default on loans, an economic crash can happen (as has happened recently with the US housing bubble, and as happened in the early '30's after the stock market crash). If the money supply is allowed to expand faster than the economy grows, inflation can result. It is the function of the Federal Reserve, and other central banks to try to manage the money supply so that neither of these things happen. Sometimes they aren't successful.

Social Credit does not use fractional reserve banking. Fractional reserve banking is the engine the banks use to create new money from nothing. It increases the money supply as debt. The prime reason the banks charge interest, is to reduce the money supply and to further increase the need to borrow. Social Credit when used wisely maintains an economy without inflation or deflation. and the interest reduces it.

[Sceptic-PK]

Borrowing from the future is a good bet???

WTF?

Are the "borrow from the future" advocates here unaware that many Americans borrowed money against the future value of their homes, which were vastly overrated? Yeah, that has worked out extremely well... for the banks.

So what? Capitalism is anarchic, no matter what model you think is best. You can't prevent people from losing money or making poor choices. There have been in excess of 100 US bank collapses since 2008, I would hardly deem that working extremely well "for the banks".

[timhau]

There have been in excess of 100 US bank collapses since 2008, I would hardly deem that working extremely well "for the banks".

Oh, but see, it has worked well for THE banks (wink wink, nudge nudge).

[Blue Mountain]

Borrowing from the future is a good bet???

WTF?

Are the "borrow from the future" advocates here unaware that many Americans borrowed money against the future value of their homes, which were vastly overrated?
Canadians didn't have that problem. Our housing market is still doing well, although I have heard some express concern that it's in a bubble too. I know I'm really happy my place is all paid for by now.

Yeah, that has worked out extremely well... for the banks.
True, to a degree ... not a single Canadian bank has failed in the recent economic turmoil. But I shudder to think of what might have happened if the Canadian regulators gave the banks everything they wanted in the 1990s and early 2000s.

Oh, Canada has a fractional reserve system too. How come we're not in a crisis?

[drkitten]

Canadians didn't have that problem. Our housing market is still doing well, although I have heard some express concern that it's in a bubble too. I know I'm really happy my place is all paid for by now.

True, to a degree ... not a single Canadian bank has failed in the recent economic turmoil. But I shudder to think of what might have happened if the Canadian regulators gave the banks everything they wanted in the 1990s and early 2000s.

Oh, Canada has a fractional reserve system too. How come we're not in a crisis?

Oh, you're in a crisis as well.

It's just that you're too polite as a group to mention it, so no one really knows about it. Including a lot of Canadians, I guess. Don't you know that one of the immediate results of fractional reserve banking is that people start eating babies? Haven't you noticed how high the infant death rate is in Canada?

(And how cheap veal is in the store?)

[psionl0]

It looks like Money Morning Australia (an investment magazine website) has found out what fractional reserve banking is all about and concluded that this is not a good thing.

In an article titled A Very Brief History of Australian Privatisations (http://www.moneymorning.com.au/20101112/a-very-brief-history-of-australian-privatisations.html#more-4124), editor Kris Sayce had this to say regarding the Commonwealth Bank:. . .The Commonwealth Bank can create money from thin air which it can then lend to suckers who want to buy an overpriced house.

The last we looked, it isn’t yet possible for rail companies to create coal from thin air without a mining company first digging the stuff out of the ground.

And don’t forget the banks are in the kind of privileged position that no other business in Australia is in. And that’s the explicit guarantee from the government that it will underwrite all and any losses a bank is in danger of making.

Of course that ultimately won’t be possible without the massive devaluation of your wealth through inflation, but it’s accepted by the mainstream that that is what will happen and therefore banks are a good investment.

Make no mistake, the Commonwealth Bank was gifted a power that only it and other banks have, the ability to create its own assets from nothing.

Remember, it’s not a house or a business that is the asset on a bank’s balance sheet, it’s the loan against the house or business that’s the asset. Banks don’t actually create or build anything when they create an asset, they simply use a depositor’s savings as security and then create additional money which they credit to the borrower’s account.

Put simply, Customer A deposits $100,000 into the CBA. That’s an asset for the customer and a liability for the bank.

Then the CBA receives a loan application from Customer B for $90,000.

The CBA creates $90,000 which it deposits into Customer B’s account. That’s a liability for the customer and an asset for the bank.

$10,000 remains as equity in the bank. You can call it the bank’s reserves.

Yet both Customer A and B believe they are able to withdraw the full amount of cash in notes from their accounts – one from a deposit account, the other in a loan account – yet there’s only $100,000 of that money actually held in notes.

The bank is taking a punt that both customers won’t ask for the cash at the same time. In the world of banking that’s called banking. In any other business it’s called trading while insolvent.

So where does the remaining $90,000 come from? From thin air. The bank created it from nothing. It was able to create an asset for its balance sheet simply by making a book entry.

Now do you see why the banks are always so keen to offer you credit? Every time you accept an offer for a credit card or a home loan and draw down on it, that creates an asset for the bank.

It’s a good business. If you’re into counterfeiting and fraud that is. Ultimately – as you’ve seen over the last couple of years – the current financial system is unsustainable.

Yet the politicians and central bankers are determined to not only ensure it’s maintained, but they’re determined to return it back to where it was in 2008 before the bubble popped.

You don’t need me to tell you what the result of doing that will be.

Therefore, we’d be very wary about comparing the success of the Commonwealth Bank float to that of the QR float. The businesses, and how they make money are completely different.

The success or failure of one by no means ensures the success or failure of the other. . . .

[marplots]

It looks like Money Morning Australia (an investment magazine website) has found out what fractional reserve banking is all about and concluded that this is not a good thing.

I think I finally understand the reason why this bothers people. It's a confusion between money as a concept and money as actual, physical notes.

It would be the same if you thought that having more 2s on paper was any better than the concept of the digit 2. When I do math, I certainly 'create numbers out of thin air' as I need them. Digits handled this way do not surprise us and no one complains that I made too many 2s. They understand that 2 is just a way to measure other things.

Money, and dollar bills, are like this also. At one level, they are tactile and mean something -- a wad of cash in my pocket. But at another level, they are just an abstract concept, created and destroyed to keep track of the movement of value. Take the example from Australia and remove the bank. Have the person just loan out the money and then use the debt as an asset to sell to someone else. Keep it all conceptual and you'll see the same thing if you want to get 'physical cash' at some point. The bank has no special role here except as middle man.

You might also look at how stocks rise and fall in value, creating 'new money' as well as destroying it.

[webb5]

It must be stated here that money is only a tool; it is used as a means to exchange goods of value. Its value is only recognised by the accepted faith, the people have on money– without this, it is worthless. Money therefore has no real value. The real things of value are in the land and what we make of it. Everything around us, the land, trees, water ect, was created for our use, it is God’s creation.

Therefore if we use money as an exchange, it must be produced in correct quantities without cost. What man is physically able to produce, grow, build, and invent, must not be limited by lack of money but rather by the lack of resources. Trade need not be restricted by lack of money.


Below is a fictional story that we can relate to and learn from. Its about an island that came up with a solution, to the money problem.


In a remote island in the South Pacific, thousands of people could feed themselves, clothe them selves in fact supply everything they ever needed. The people lived in almost paradise and never went without. This was the case until a dark day arrived in their lives. It was discovered that almost two thirds of the island’s supply of shells (money) had disappeared and also it seems their chief banker. A crisis meeting was held with all the important chiefs in attendance. It was declared that the main supply of shells had disappeared which would put the economy in a perilous position. New shells were needed desperately or trading would come to a halt.

Bankers from Europe offered the islanders printed-paper (money). But this came at a great cost, Interest would be charged at a rate of ten percent and one third of the island’s assets were needed as insurance for the banker’s big risk. They were told this would bring them up to date with the modern world.

The islanders thought long and hard about this and almost agreed with the banks to borrow the printed-paper. Luckily a man from another island had seen this very thing happen to his own island. He told them that the banks now owned their island because they did not have the money to pay them back. They found too late that only the banks could supply this printed paper (money).

The banks forced them to give up their property and required that one third of the food they grew would now go to the banks for the next twenty years. There was much bloodshed lost over this until the united islands came in and ordered them to fulfill their agreements. The world islands bank offered them more money but this action made things worse (the interest was killing them!) The people no longer have a home, island or any possessions. They now owe more printed paper (money) than they did before.

The islanders took note of this and decided to revert back to bartering for six months until all the shells needed were collected. Although bartering was very cumbersome they thought it was a much better thing to do. A ton of wood for example was used as an exchange for six weeks supply of meat. After the shells were collected everything went back to normal.

The islanders in this story were self-sufficient and had every thing they could ever need. The shells they used for trade could easily of been replaced by rare feathers. They could also of printed their own debt-free money (If they had a printing press!) There was never any need to go into debt.

[Mashuna]

From your fictional story, I've learned that the chief banker was an idiot who ran off with a load of worthless shells.

[psionl0]

From your fictional story, I've learned that the chief banker was an idiot who ran off with a load of worthless shells.
Do you think the island's chief banker would have made off with the shells if the bankers from Europe hadn't offered him an inducement?

[drkitten]

Below is a fictional story that we can relate to and learn from.

Yes, but what we learn is that the author doesn't know much about banking, law, or public policy.


Bankers from Europe offered the islanders printed-paper (money). But this came at a great cost, Interest would be charged at a rate of ten percent and one third of the island’s assets were needed as insurance for the banker’s big risk. They were told this would bring them up to date with the modern world.

The islanders thought long and hard about this and almost agreed with the banks to borrow the printed-paper. Luckily a man from another island had seen this very thing happen to his own island. He told them that the banks now owned their island because they did not have the money to pay them back. They found too late that only the banks could supply this printed paper (money).

Evidently in antibank conspiracy fairy tale land, you're on the hook for your entire property when you pledge collateral for a loan.

Not just the amount of the collateral.

You default on your car loan, the banker doesn't just repossess your car, but it claims your house. And your neighbor's car. And your neighbor's house.

[drkitten]

Do you think the island's chief banker would have made off with the shells if the bankers from Europe hadn't offered him an inducement?

I don't know. Do you think Frodo would have gone to Mordor if Gandalf had offered him a ride on an eagle?

Part of what makes this particular fairy tale so uncompelling as an argument is that it's so unrealistic. It sounds to me like the islanders got rooked by a slick-talking salesman from the other island who lied to them about what the effects of creating a modern banking system would be. There's no explanation of how a patently impossible consequence is supposed to fall out of this story -- we're just supposed to take his word for it that this is what happened on the other island.

As far as I can tell, this is just like "don't wear short skirts or God will send you to hell," only without the plausibility.

[timhau]

It looks like Money Morning Australia (an investment magazine website) has found out what fractional reserve banking is all about and concluded that this is not a good thing.

I certainly wouldn't subscribe an investment magazine that has just recently figured out what fractional reserve banking is.

[psionl0]

I certainly wouldn't subscribe an investment magazine that has just recently figured out what fractional reserve banking is.
Investment analysts tend to be a rather conservative bunch. They frequently bemoan fiat currencies or the lack of a gold standard without recognizing the role that banks play in the overall money supply. (A bit like Ron Paul).

For an investment analyst to actually point out that banks are creating money . . . . .

[psionl0]

Evidently in antibank conspiracy fairy tale land, you're on the hook for your entire property when you pledge collateral for a loan.
A lot of third world nations are victims of this "antibank conspiracy fairy tale land".

[drkitten]

A lot of third world nations are victims of this "antibank conspiracy fairy tale land".

Yes, third world countries like Narnia, Gondor, Rohan, and Sans Serif.

[psionl0]

Evidently in antibank conspiracy fairy tale land, you're on the hook for your entire property when you pledge collateral for a loan.

A lot of third world nations are victims of this "antibank conspiracy fairy tale land".

Yes, third world countries like Narnia, Gondor, Rohan, and Sans Serif.
Don't forget some of the real countries like the Republic of Congo and Zambia (to name but two).

For a reality check, have a look at this IPS article:"Vulture Funds" Prey on Poor Debtor Nations
By Eli Clifton

WASHINGTON, Aug 19, 2009 (IPS) - Fifty advocacy organisations are calling on the U.S. Congress to put a stop to investment funds which purchase heavily indebted countries' debt and jeopardise the impact of bilateral and multilateral debt cancellation to over 30 countries.

The groups - which include the NAACP, the Jubilee USA Network, TransAfrica Forum, the American Jewish World Service, the United Methodist Church and Africa Action –are seeking a stop to what they have dubbed "Very Unscrupulous Loan Transfers from Underprivileged countries to Rich, Exploitive Funds".

These so-called VULTURE funds purchase heavily indebted countries debt at pennies to the dollar and then "aggressively pursu(e) their claims through the seizure of assets, litigation and political pressure, seeking repayments that are far in excess of the amount that they paid for the debt," the groups say.
Further details at http://ipsnews.net/news.asp?idnews=48147

[webb5]

From your fictional story, I've learned that the chief banker was an idiot who ran off with a load of worthless shells.

In this story this chief banker took these shells that we call worthless to another island that thought it had value. Very much like our paper money.

I will repeat this for your ignorance. It must be stated here that money is only a tool; it is used as a means to exchange goods of value. Its value is only recognised by the accepted faith, the people have on money– without this, it is worthless. Money therefore has no real value.

[Mashuna]

Oh, I didn't realise the whole archipelago was on the shell standard. Weren't they the people that suffered from massive hyperinflation following the rain of clams in 1897? The subsequent conch wars just about finished them off.

[webb5]

I don't know. Do you think Frodo would have gone to Mordor if Gandalf had offered him a ride on an eagle?

Part of what makes this particular fairy tale so uncompelling as an argument is that it's so unrealistic. It sounds to me like the islanders got rooked by a slick-talking salesman from the other island who lied to them about what the effects of creating a modern banking system would be. There's no explanation of how a patently impossible consequence is supposed to fall out of this story -- we're just supposed to take his word for it that this is what happened on the other island.

As far as I can tell, this is just like "don't wear short skirts or God will send you to hell," only without the plausibility.

A bank lover like you will never understand.

You could relate this story to any country in the world. The slick talking salesmen here are the international bankers. They continue to sell modern banking to us as debt. Every country in the world is massively in debt. Some how economists around the world think that we can trade our selves out of debt. This is irrational thinking. Any way this story is not a fairy tale its a nightmare for many countries of the world. Be glad you are not living in a third world country wandering where your next meal will come from.

[Sceptic-PK]

Its value is only recognised by the accepted faith

Ie, just like everything else we put "value" on.

[marplots]

A bank lover like you will never understand.

You could relate this story to any country in the world. The slick talking salesmen here are the international bankers. They continue to sell modern banking to us as debt. Every country in the world is massively in debt. Some how economists around the world think that we can trade our selves out of debt. This is irrational thinking. Any way this story is not a fairy tale its a nightmare for many countries of the world. Be glad you are not living in a third world country wandering where your next meal will come from.

Here's a list of 'external debt' by country (although some of the figures are old) at CIA: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html

There are a few at the bottom at zero, but note the top on the list are not those nations you are worried about, but the U.S., U.K., Germany and France.

You should also note that the reasons countries take on foreign debt (when it isn't used for bribes) is to improve infrastructure to make money beyond the interest payments. This isn't always successful. And countries can and do default. I like the homespun flavor of the shells story, but it really is cartoonish. What, for instance, would happen if the banker who stole all the shells originally managed to sneak his hoard back into the island economy at the end of the story?

[webb5]

Here's a list of 'external debt' by country (although some of the figures are old) at CIA: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html

There are a few at the bottom at zero, but note the top on the list are not those nations you are worried about, but the U.S., U.K., Germany and France.

Yes the world is crippled with debt. The nations on the top of this list will go into third world status if uncontrollable debt created by the banks is not removed soon. I am concerned about world debt. Not sure why you think I do not care about nations on top of list.
You should also note that the reasons countries take on foreign debt (when it isn't used for bribes) is to improve infrastructure to make money beyond the interest payments. This isn't always successful. And countries can and do default.

This is what I am trying to get at. Why borrow money from international banks as foreign debt when you can create your own money to improve infrastructure.

Social Credit can release us from this bondage of everlasting debt. Using social credit, a country may create debt-free money on the basis of its real physical wealth such as oil, minerals and land, and on its ability to create new physical wealth in areas such as farming, building, and industry. Social credit then, when used wisely, can turn a debt-ridden nation into a vibrant wealthy nation free of debt. It is an essential tool of any nation.

I like the homespun flavor of the shells story, but it really is cartoonish. What, for instance, would happen if the banker who stole all the shells originally managed to sneak his hoard back into the island economy at the end of the story?

Inflation would proberly be the case. But I'm sure the natives here would
eat him alive when they find out.

[psionl0]

I like the homespun flavor of the shells story, but it really is cartoonish. What, for instance, would happen if the banker who stole all the shells originally managed to sneak his hoard back into the island economy at the end of the story?
The message here is that it is a mistake to view money as a "physical" substance.

I am reminded of a recent episode of The Waltons. One family was in a position to supply timber and another family had a car they wanted to get rid of. Because there was no "money" around, a trade was impossible. It's a classical example of what happens when we allow money rule over commerce.

And we want the banks to dictate who gets to trade?

[marplots]

This is what I am trying to get at. Why borrow money from international banks as foreign debt when you can create your own money to improve infrastructure.

Social Credit can release us from this bondage of everlasting debt. Using social credit, a country may create debt-free money on the basis of its real physical wealth such as oil, minerals and land, and on its ability to create new physical wealth in areas such as farming, building, and industry. Social credit then, when used wisely, can turn a debt-ridden nation into a vibrant wealthy nation free of debt. It is an essential tool of any nation.

This is true, except the countries we are worried about seem to want to interact with the larger world. Perhaps they yearn for those things that foreign currency can provide. You can model this yourself with the notion of "going off the grid" and living on a cash basis with money you generate from your own resources.

I may be wrong, but I think people tend to interact with a larger marketplace because they see opportunities to come out ahead. They take risks and make mistakes as well.

I am curious though. Do you see the current situation as unethical or perhaps criminal? I only ask because it seems to denigrate the smaller nations if we take the position that they were mere financial 'children' taken advantage of by unscrupulous international bankers. Aren't they a bit more intelligent and savvy than that?

If I had to lay blame, I think I would look hard at the governmental systems that allow bribery and fraud as a matter of course. It would help your island parable if there were a scheming, charismatic, popular leader who ended up with a fat bank account.

[The_Animus]

Yes. But since that's both the designed and the most likely end, this is hardly a problem.

Are you honestly telling me you believe uniform and unilateral buying occurs in the real world? That isn't even remotely the case on either a person to person level or on a national level. The sheer differences in wealth between individuals, the poverty that exists, and the amount of debt both individuals and nations have should disprove this notion utterly.

[drkitten]

Are you honestly telling me you believe uniform and unilateral buying occurs in the real world?

Well, uniform isn't necessary. If I buy twice as much fish as someone else, that doesn't hurt the economy.

And almost all buying is unilateral. I want fish, I buy fish. If someone else wants fish, they can buy it -- or not, if they don't like the price. It's very rare for me to buy fish only if someone else buys something else from me (the only time I really see this is with houses and contingent offers).

All that's really necessary for this to work is for people to buy what they need to create wealth. I need fish in order to make fish tacos. Other people need fish tacos because they need something to eat while weaving nets. The fisherman needs nets for his boat, so he can catch more fish and sell to me. We all get richer as we all add wealth to the process.

[webb5]

This is true, except the countries we are worried about seem to want to interact with the larger world. Perhaps they yearn for those things that foreign currency can provide. You can model this yourself with the notion of "going off the grid" and living on a cash basis with money you generate from your own resources.
I think these countries you are talking about are also stuck in the debt trap.
They are doing exactly what the larger richer nations are doing, trying o remove debt by trading with other nations. Of course this helps no one as everyone is deep in debt. The I.M.F and the world bank is not helping

I may be wrong, but I think people tend to interact with a larger marketplace because they see opportunities to come out ahead. They take risks and make mistakes as well.
These risks are forced on them. Debt tends to do this when you got no other options.

I am curious though. Do you see the current situation as unethical or perhaps criminal? I call it crimes against humanity. There are 24 thousand children dying every day globally from poverty. The world media is very silent on this.

I only ask because it seems to denigrate the smaller nations if we take the position that they were mere financial 'children' taken advantage of by unscrupulous international bankers. Aren't they a bit more intelligent and savvy than that?
The international bankers have just about got, every country in the world in unrepayable debt. They control the finance and thus control all the parliaments of the world. If we asked the avarage person on the street, if this was so they would give the negative. Aren't they a bit more intelligent and savy than that?

If I had to lay blame, I think I would look hard at the governmental systems that allow bribery and fraud as a matter of course.
Our democratic systems have continually been degraded for a long time. The media has not helped. People need to get involved again. Citizens Initiated Referendums is a process that would allow the voice of the people to be heard.

It would help your island parable if there were a scheming, charismatic, popular leader who ended up with a fat bank account.
possibly but I think the message is there

[Sceptic-PK]

You talk an overwhelming amount of nonsense. Pick up an economics textbook and stop wasting our time with your childish, poorly-written scribble.

[psionl0]

There are more economic theories than there are people. Any particular book you have in mind?

[Sceptic-PK]

http://photo.goodreads.com/books/1175884987l/570206.jpg

[psionl0]

Looks too complicated for me ;)

EDIT: found an online version (http://www.strom.clemson.edu/becker/prtm320/economics_primer.html) of the book. It says nothing about the use of credit, fractional reserve banking or other ways that money can exist based on nothing but promises. Nor does it discuss the effect of charging interest on money.

[Sceptic-PK]

1. It was a joke.
2. That isn't an online version of the book.

[psionl0]

That tends to prove my point.
There are so many different books on economics that they have had to start recycling the titles. :D

[drkitten]

That tends to prove my point.
There are so many different books on economics that they have had to start recycling the titles. :D

There are also so many calculus books they have to recycle the titles. That doesn't give you license to make up equations at random and expect us to believe them.

[psionl0]

Calculus is something I happen to know something about. Anyhow, I think we agree on what fractional reserve banking is. The main difference is that I am not as in favour of it as you are.

EDIT: Look at that. I am now a "Thinker"! Now I can never be accused of BS anymore.

[AvalonXQ]

Calculus is something I happen to know something about. Anyhow, I think we agree on what fractional reserve banking is. The main difference is that I am not as in favour of it as you are.

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers).
In a free market environment, some banks will be able to earn more money with a riskier fractional reserve, while others will have more business from those who prefer a safer ratio. Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again. Each of these models can survive according to consumer preference and business fitness.

[drkitten]

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers).

Well, that's more or less what we have now; the government establishes minimum standards, but banks are free to exceed those standards and keep larger cash reserves. (Actually, that's been a problem since about 2008-9, and part of why stimulus plans like Cash for Clunkers were necessary; too many people, including banks, were sitting on cash instead of investing it.)

The problem, of course, is that no one with any money wants to put it in the banks with a "safer" ratio, or the market would have supplied such banks already.

Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again.

Not if no bank is willing to do that. It's an unsurvivable business model. People simply can't pay enough in fees to offset the lack of income from re-lending capital. If I deposit $1000 in my local bank and it turns into $10,000 in loans, the bank gets something like $500/year lending it out, and pays out only about $100 in interest on the deposits. So that's $400 a year in net income that I'd have to be willing to pay the bank to forgo reinvesting deposits.

So,... pay the bank $400/year in fees to hold $1000 in deposits? What kind of an idiot would be willing to do that?

[Sceptic-PK]

So,... pay the bank $400/year in fees to hold $1000 in deposits? What kind of an idiot would be willing to do that?

Gold investors? ;)

[webb5]

You talk an overwhelming amount of nonsense. Pick up an economics textbook and stop wasting our time with your childish, poorly-written scribble.

Obviously I am wasting my time with you. You think there is nothing wrong with the banking system. You believe it's a privelege to pay interest on money created from nothing and the fact that there are not enough money reserves in the banking system doesn't mater either. You also think the global recession or possible depression is not the fault of the banks.

You are a fool, you have been brainwashed for so long by the media. You cannot see the truth when you see it. You have blinkers on when any one comes up with a different version of what you have been told to believe. Its also very easy to follow majority thought, even when it is wrong. Im sure you believe just about any thing the media throws at you. Its time you opened your eyes to the real world.

[Sceptic-PK]

So I take it that's a 'no' to picking up a textbook and trying to understand the complexities of economics?

[webb5]

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. This doen not happen
I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers). For you to say this, you obviously think it's ok for the banks to create money from nothing and sell it to us as debt.
In a free market environment, some banks will be able to earn more money with a riskier fractional reserve, while others will have more business from those who prefer a safer ratio. Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again. Each of these models can survive according to consumer preference and business fitness.

The gruby commercial banks you are talking about, will not be able to compete against a People's Bank (A national bank reresenting the wealth of the nation) Money will not be created from fraudellent means but created on behalf of the wealth of the nation. You need to understand that fractionional reserve banking process is fraudellent

[Sceptic-PK]

To quote one Arnold J Rimmer- brimming over with wrongability.

[webb5]

So I take it that's a 'no' to picking up a textbook and trying to understand the complexities of economics?

The complexities of debt you mean. Dont't worry the stimulas packages will fix everything. The banks will look after you. They have Your interest at heart. Go back to sleep!

[BobTheCoward]

My first post...YAY! Right now, I am a senior in economics at a business school. Before that, I was an ELT on a fast-attack submarine (now, no one can accuse me of keeping secrets).

I had this exact conversation with a good friend of mine. He told me that he opposed fractional reserve banking. Like many who responded to Webb, I was shocked. Then I realized his concerns were ethical. At that point, there is nothing to discuss. I think in the evidence and theory of efficiency in an economy. I can't answer questions on ethics.

It doesn't take more than a few sentences into Webb's post to see the word fraud. As it is apparent FRB is not viewed as fraud in any legal sense, Webb's complaint is a moral one. It must be part of the "business and finance" part of the forum because that certainly isn't economics.

So, I concede to you, Webb, that social credit is more moral than fractional reserve banking. Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

[AvalonXQ]

I don't see how FRB is immoral as long as you're transparent about it. I'm reminded of the bank run scene in It's a Wonderful Life.

[drkitten]

I don't see how FRB is immoral as long as you're transparent about it. I'm reminded of the bank run scene in It's a Wonderful Life.

It's based on a fundamental misconception about the nature of "earning" money; the anti-FRB folks object to the idea that some banker somewhere is enriching himself off "my" money.

I admit to a certain hefty distrust of the middleman myself; when I worked as a contract temporary employee (in college), for example, the contracting company made more per hour than I did. I didn't really think that it was fair that they would bill me out at $20/hour and pay me $8, or whatever the number was. But, of course, the reason that I was working as a temporary employee in the first place was because I couldn't find a job myself. Both the job site and I were "paying" Manpower for the convenience of being able to find something more quickly and easily than we could without a central clearinghouse.

Similarly, if I need money for a new house, I can borrow it more easily from a bank than I can from a rich relative I don't have, or by asking several thousand friends for a few hundred each. The bank already has a few hundred from several thousand people that it can pool and lend, but it wants its cut. So it uses the money people deposit to make money, passing some back to the depositors as interest, but keeping the bulk for itself. But I'm generally happy with that arrangement -- as a depositor, I get some money instead of none, and as a borrower, I have a new house that I wouldn't otherwise have.

[lomiller]

Gold investors? ;)

I lol’ed

There was a gold/silver/gems infomercial on the radio a while back. The first part of their pitch was on how gold always held it’s value, this was followed by a description of their 4:1 leveraging plan where you “control” $40K worth of gold for only $10K. They didn’t mention that if the price of gold drops by 25% you get a margin call and they take all the gold leaving you with nothing.

[marplots]

My first post...YAY! Right now, I am a senior in economics at a business school. Before that, I was an ELT on a fast-attack submarine (now, no one can accuse me of keeping secrets).

I had this exact conversation with a good friend of mine. He told me that he opposed fractional reserve banking. Like many who responded to Webb, I was shocked. Then I realized his concerns were ethical. At that point, there is nothing to discuss. I think in the evidence and theory of efficiency in an economy. I can't answer questions on ethics.

It doesn't take more than a few sentences into Webb's post to see the word fraud. As it is apparent FRB is not viewed as fraud in any legal sense, Webb's complaint is a moral one. It must be part of the "business and finance" part of the forum because that certainly isn't economics.

So, I concede to you, Webb, that social credit is more moral than fractional reserve banking. Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

Good first post!

I seem to remember the idea of charging interest is poo-pooed by various religions -- perhaps because it is seen as immoral? I'm also shaky about it, but thought that Islamic systems which didn't allow the charging of interest had several clever ways to technically get around the rules -- such as a 'home loan' being recast as 'rent to own' and student loans handled a different way -- necessary and practical solutions.

[Kestrel]

I lol’ed

There was a gold/silver/gems infomercial on the radio a while back. The first part of their pitch was on how gold always held it’s value, this was followed by a description of their 4:1 leveraging plan where you “control” $40K worth of gold for only $10K. They didn’t mention that if the price of gold drops by 25% you get a margin call and they take all the gold leaving you with nothing.

How do we know this infomercial isn't just part of a Ponzi scheme? :rolleyes:

[psionl0]

Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

This is not just a moral issue. You have to remember that we are not talking about a closed economy where bank profits are spent back into the community. Vast amounts of money are going overseas as interest payments. The only way this can be achieved is either by allowing the banks to create more money (as debt) meaning inflation or allowing people/businesses to go bankrupt. We really need to ask if it is necessary to give the banks a monopoly on money creation for which everybody (either directly or indirectly) has to pay for its use.

Thomas Edison probably put it better than I can:If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also...It is absurd to say that our country can issue 30 million dollars in bonds and not 30 million dollars in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.

[Sceptic-PK]

We really need to ask if it is necessary to give the banks a monopoly on money creation for which everybody (either directly or indirectly) has to pay for its use.

1. How can you call it a "monopoly" when there is a central bank that can issue currency, that is run by the government?
2. How is "everybody" paying for the use of money if they themselves haven't borrowed it?

[psionl0]

1. How can you call it a "monopoly" when there is a central bank that can issue currency, that is run by the government?
2. How is "everybody" paying for the use of money if they themselves haven't borrowed it?
1. Surely you have studied Modern Money Mechanics (http://www.rayservers.com/images/ModernMoneyMechanics.pdf). Just in case you are labouring under the misapprehension that this is a totally internal issue, have a look at the pie chart from U.S. National Debt Clock FAQ (http://www.brillig.com/debt_clock/faq.html):
http://www.brillig.com/debt_clock/owed.gif

2. Everybody pays in the same way they pay for the actions of shoplifters and insurance scammers - through higher prices (or reduced wages).

Note that I don't think that there is anything immoral about lending money and charging interest for it. However, non-bank financial institutions (eg pay day lenders, pawn brokers) actually have to have the money to lend out while banks can simply type numbers into a computer. It is also a fact that this practice has an adverse effect on the whole community.

Surely there is nothing wrong with examining alternatives to the banking system.

[Sceptic-PK]

1. Surely you have studied Modern Money Mechanics (http://www.rayservers.com/images/ModernMoneyMechanics.pdf). Just in case you are labouring under the misapprehension that this is a totally internal issue, have a look at the pie chart from U.S. National Debt Clock FAQ (http://www.brillig.com/debt_clock/faq.html):
http://www.brillig.com/debt_clock/owed.gif

I have no idea what you're trying to say here. In no way did you support your assertion that the banks have a monopoly on money creation.


2. Everybody pays in the same way they pay for the actions of shoplifters and insurance scammers - through higher prices (or reduced wages).

What does this have to do with fractional reserve lending or the creation of money via commercial banks? Are you asserting that there is a perfect system that is immune to price fluctuation?


Note that I don't think that there is anything immoral about lending money and charging interest for it. However, non-bank financial institutions (eg pay day lenders, pawn brokers) actually have to have the money to lend out while banks can simply type numbers into a computer.

So?


It is also a fact that this practice has an adverse effect on the whole community.

It is hardly "fact" at all. There is nothing wrong with a small amount of inflation, it creates risk and spurs investment and spending, both of which capitalism depends upon. What does it matter if we're paying 10x the price for goods we were 100 years ago, if we're earning 20x the salary?


Surely there is nothing wrong with examining alternatives to the banking system.

When a valid alternative is suggested that doesn't sound incredibly silly, and isn't supported by fallacious reasoning and empty assertions, I'm all ears. The OP for instance is complete nonsense, as is his continued reference to "fraud".

[psionl0]

I'm beginning to think that the only thing you are not skeptical about is the "official line". You evidently denied everything I put in my last post without reading any of it.

Perhaps, as a "senior in economics at a business school", BobTheCoward (http://forums.randi.org/member.php?u=44729) might be able to point out the flaws in such concepts as L.E.T.S. (http://communityexchange.ning.com/), Digital Coin (http://www.digitalcoin.info/), Bitcoin (http://www.bitcoin.org/), and FULL RESERVE BANKING without resorting to meaningless phrases like "CT-woo".

[BobTheCoward]

Perhaps, as a "senior in economics at a business school", and FULL RESERVE BANKING without resorting to meaningless phrases like "CT-woo".

Gladly.

First. Flaw is not the right word. From dictionary.com....

1. a feature that mars the perfection of something; defect; fault: beauty without flaw; the flaws in our plan.
2. a defect impairing legal soundness or validity.
3. a crack, break, breach, or rent.

A system for organizing capital is not something that can be perfect. Also, any system short of magical pixie dust will probably be sound or valid. What the systems do have are general tradeoffs.

So, I will list some negative consequences of your proposals. I am not measuring the size of the negative aspects nor comparing them to the positives. That should be a big enough disclaimer.

Let us do full reserve banking. I mostly will assume a commodity currency. That is just more fun.

1) Assume a global world, there are some theories that foreign countries with central banks can economic rape a country with no monetary control.

2) Assume that is not an issue. As the economy grows, without inflation, prices will need to deflate. Humans do not deflate prices well and they tend to be sticky. Wages (a price like any other) tend to be sticky and more likely to lead to firings and depress economic growth. Also, it may cause economic growth to stall as people wait for prices to fall lower (perception that their wages will stick longer than the prices).

If not a commodity currency, there may be ways for the mint to put money in the economy. The methods have various issues with efficiency, welfare losses, transparency, etc. Another option is assuming that people may learn to renegotiate their wages every day. There are efficiency issues with that. Not to mention, it may involve people thinking beyond their monkey DNA, something not very common.

3) A bank would have to fund its operations. Fees would have to be assessed on depositors. People could use mattresses and we are back to ancient banking practices. The equilibrium price for banking services in this hypothetical world is giving me a hard-on. This thread has discussed that putting money in a bank leads to inflation reducing your wealth. In this scenario, putting money in a bank leads to fees reducing your wealth.

4) We still need a way to provide investment capital (or no investment capital allowed at all, another method for organizing our economy). So many options. The most obvious is the I-cant-believe-its-not-a-bank. Same setup we have now, just not called a bank.

[Sceptic-PK]

I'm beginning to think that the only thing you are not skeptical about is the "official line". You evidently denied everything I put in my last post without reading any of it.

I asked you to clarify what you were trying to say, because nothing you quoted seemed to be related to the questions I asked or assertions you made. So, I am still waiting for answers to my questions.

[webb5]

My first post...YAY! Right now, I am a senior in economics at a business school. Before that, I was an ELT on a fast-attack submarine (now, no one can accuse me of keeping secrets).

I had this exact conversation with a good friend of mine. He told me that he opposed fractional reserve banking. Like many who responded to Webb, I was shocked. Then I realized his concerns were ethical. At that point, there is nothing to discuss. I think in the evidence and theory of efficiency in an economy. I can't answer questions on ethics.

It doesn't take more than a few sentences into Webb's post to see the word fraud. As it is apparent FRB is not viewed as fraud in any legal sense, Webb's complaint is a moral one. It must be part of the "business and finance" part of the forum because that certainly isn't economics.

So, I concede to you, Webb, that social credit is more moral than fractional reserve banking. Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does. In Australia for example common wealth resources and such was used as a fine example how money could be correctly created. An Australian bank owned by the people did this. It was called the Commonwealth Bank of Australia

The banks did not always control Australia. The Commonwealth Bank of Australia the “Peoples Bank “as it was once called, supplied Australia with enough money to fund the first world war at a rate less than one percent. It also financed the Indian Pacific Railway system at a slightly higher rate; both loans were paid within months of completion. The bank continued to offer it services after the war. The bank opened in1913 and played an invaluable part to the country’s economy. But in doing so it posed a major threat to the private banks. Enormous pressure was placed on government members and by 1924 the Bruce Page Government surrendered the peoples bank. The Commonwealth Bank was no longer the people’s bank it used to be, it was no longer allowed to compete effectively against the private banks.

Remarkably, if the People’s bank remained in its former glory, the Great Depression would have had very little effect on Australia and this country would have remained debt-free today.

[BobTheCoward]

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does.

What? Nothing is obvious. What are you talking about? What are these certain goals? What are you citing that it doesn't work? What past history?

[psionl0]

Webb5 did post more than 1 sentence you know.

[Sceptic-PK]

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does. In Australia for example common wealth resources and such was used as a fine example how money could be correctly created. An Australian bank owned by the people did this. It was called the Commonwealth Bank of Australia

The banks did not always control Australia. The Commonwealth Bank of Australia the “Peoples Bank “as it was once called, supplied Australia with enough money to fund the first world war at a rate less than one percent. It also financed the Indian Pacific Railway system at a slightly higher rate; both loans were paid within months of completion. The bank continued to offer it services after the war. The bank opened in1913 and played an invaluable part to the country’s economy. But in doing so it posed a major threat to the private banks. Enormous pressure was placed on government members and by 1924 the Bruce Page Government surrendered the peoples bank. The Commonwealth Bank was no longer the people’s bank it used to be, it was no longer allowed to compete effectively against the private banks.

Remarkably, if the People’s bank remained in its former glory, the Great Depression would have had very little effect on Australia and this country would have remained debt-free today.

This is, of course, almost completely wrong. Webb can't even get the simple facts straight, the CBA was created in 1911 and opened in 1912. The private banks did not exert any pressure on the government or CBA, and the CBA remained government owned and controlled until the 1990s when it was privatised by the Labor government.

Not only did it not lose its "peoples bank" status, but it started to become Australia's central bank in the 20s. It's role in the Depression was related to its reluctance to expand the supply of credit, which had absolutely nothing to do with pressure from private banking interests, and everything to do with the prevailing economic attitudes/experience at the time.

Australia was debt free during the early years of the 2000s, until the recent global economic crisis gutted tax receipts and the Rudd government's fiscal stimulus added to expenditure. Of course, neither of these facts are at all relevant to the privitisation of the CBA. The deregulation of the financial markets, banking constrictions and the selling off of CBA, flooded Australia with investment capital and contributed to Australia's excellent economic performance over the last 15 years. It also contributed to the over-heating and subsequent recession of the Australian economy during the previous decade, but nothing in life is free!

[webb5]

What? Nothing is obvious. What are you talking about? What are these certain goals? What are you citing that it doesn't work? What past history?

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.

The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

[Sceptic-PK]

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.


Social Credit will release us from this bondage of everlasting debt. Using social credit, a country may create debt-free money on the basis of its real physical wealth such as oil, minerals and land, and on its ability to create new physical wealth in areas such as farming, building, and industry.

http://www.bleedingindebt.com/

Webb, of course, does not seem to understand why commodity-like currencies are a bad idea. His assertion that a system with contractionary-bias is magically immune to recession or depression is quite laughable.

What happens when the 'real physical wealth' jumps around in price? What happens to your stream 'social credit' then? Or are we fixing the price of an arbitrary asset, with a gold exchange standard's ugly cousin? What happens when all these social-credit-backed assets have been loaned out, because we have an un-moving supply of credit or currency? No more loans for you next generation, haha! I have read 3 pages on that useless site and it still doesn't explain how it is all supposed to work. Sophistry of the highest order.

It is puzzling how Webb understands that recessions can be related to drops in the money supply, yet refuses to grasp that central banks can increase the money supply when it chooses.


The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

So, let's get something straight. The FRB system not only 'artificially increases' the price of everything, through inflationary lending multipliers, whilst simulteanously 'reducing the money supply' by charging interest? So it's doing both things at the same time?

Also, for someone that complains about fraud an awful lot you don't know how to spell its variants.

[webb5]

This is, of course, almost completely wrong. Webb can't even get the simple facts straight, the CBA was created in 1911 and opened in 1912. The private banks did not exert any pressure on the government or CBA, and the CBA remained government owned and controlled until the 1990s when it was privatised by the Labor government. Which bank site are you getting these lies from.

Not only did it not lose its "peoples bank" status, but it started to become Australia's central bank in the 20s. It's role in the Depression was related to its reluctance to expand the supply of credit, which had absolutely nothing to do with pressure from private banking interests, and everything to do with the prevailing economic attitudes/experience at the time. In 1924 the bankers took control of the activities of the Commonwealth Bank and preventing it from saving Australians from the ravages of the 1930s Depression.

Australia was debt free during the early years of the 2000s,What a load of rubbish, where did you get this crap from!:cool: until the recent global economic crisis gutted tax receipts and the Rudd government's fiscal stimulus added to expenditure. Of course, neither of these facts are at all relevant to the privitisation of the CBA. The deregulation of the financial markets, banking constrictions and the selling off of CBA, flooded Australia with investment capital and contributed to Australia's excellent economic performance over the last 15 years. It also contributed to the over-heating and subsequent recession of the Australian economy during the previous decade, but nothing in life is free!

The great sell off of Australia's farms and industries to foreign ownership you are relating to as flooded investment was never good for Australia. The taxes and profits that used to stay in Australia is now lost and is going overseas. Our excellent performance is more to do with our expanding trade with China. China being our major trading partner has protected us well from the global recession. This link will help you get the facts right http://www.huffingtonpost.com/ellen-brown/escaping-the-sovereign-de_b_669564.html

[webb5]

http://www.bleedingindebt.com/

Webb, of course, does not seem to understand why commodity-like currencies are a bad idea. His assertion that a system with contractionary-bias is magically immune to recession or depression is quite laughable.

What happens when the 'real physical wealth' jumps around in price? What happens to your stream 'social credit' then? Or are we fixing the price of an arbitrary asset, with a gold exchange standard's ugly cousin? What happens when all these social-credit-backed assets have been loaned out, because we have an un-moving supply of credit or currency? No more loans for you next generation, haha! I have read 3 pages on that useless site and it still doesn't explain how it is all supposed to work. Sophistry of the highest order.

That explains it then doen't it. You have failed to understand how Social Credit works. Your written words prove this. Try checking the whole site first before you make any more dum comments. Your ignorence here is very impressive!

It is puzzling how Webb understands that recessions can be related to drops in the money supply, yet refuses to grasp that central banks can increase the money supply when it chooses.



So, let's get something straight. The FRB system not only 'artificially increases' the price of everything, through inflationary lending multipliers, whilst simulteanously 'reducing the money supply' by charging interest? So it's doing both things at the same time? Do you find anything wrong with this?

Also, for someone that complains about fraud an awful lot you don't know how to spell its variants.
Really! I didn't now spelling was part of this forum.

[Sceptic-PK]

Which bank site are you getting these lies from

Reading books, rather than dubious internet sites. The CBA acted as Australia's central bank for much of the century, before being sold in the 1990s. This is a matter of public record. At some stage during this process, I believe it was the 60s or 70s, the Reserve Bank of Australia was created in order to act as the country's central bank, and this role shifted away from the CBA. The CBA remained owned by the government until privatised by Hawke or Keating. The Reserve Bank achieved full independence within the government during Howard's years.


In 1924 the bankers took control of the activities of the Commonwealth Bank and preventing it from saving Australians from the ravages of the 1930s Depression.

Wrong again. The CBA, acting as Australia's central bank, made a decision not to increase credit due to the circumstances/experience at the time. I think this decision was probably in error, but it had absolutely nothing to do with nefarious "bankers" taking control of the bank. During the Great Depression, the CBA was a government agency just as the Reserve Bank is a government agency now. At no stage was it taken over by "bankers", anymore than it already had bankers/economists as part of its government-appointed board. You don't understand central banking.


What a load of rubbish, where did you get this crap from!

Anyone who has any knowledge whatsoever understands the reasonably extreme austerity measures taken by the Howard government in order to pay Australia's debt off. Costello made the announcement in 2006:


As best as we can tell, tomorrow, the Commonwealth of Australia will eliminate its net debt.

That makes tomorrow:- April 21, 2006:- Debt Free Day.

It is the day we pay off the mortgage. From tomorrow our Government will no longer be a net borrower. In fact from tomorrow we will start to save to save for some of the big challenges of the future.

As you can imagine in a large and complex operation with many Government Departments and many contracts, the Government is being invoiced and making payments on a constant basis. The Government is borrowing from some and lending to others all the time. But when you take into account all of the Commonwealth borrowing and all of its lending, in net terms, from tomorrow the Commonwealth will owe nothing.

This is a far cry from the $96 billion the Commonwealth owed, in net terms, in 1996.

http://www.treasurer.gov.au/DisplayDocs.aspx?pageID=&doc=speeches/2006/008.htm&min=phc

Again, it seems you don't have a cursory knowledge of even recent Australian history.


The great sell off of Australia's farms and industries to foreign ownership you are relating to as flooded investment was never good for Australia. The taxes and profits that used to stay in Australia is now lost and is going overseas. Our excellent performance is more to do with our expanding trade with China. China being our major trading partner has protected us well from the global recession. This link will help you get the facts right


You don't know what you are talking about. Take a class in Australian history and learn what the Hawke/Keating/Howard governments did to modernise the Australian economy, which started with with financial services and deregulation of the sector. The book, "Unfinished Business: Paul Keating's interrupted revolution" by David Love is a good place to start. Yes, China plays its part currently but I am talking about the last 30 odd years of financial reform. Pick up a book.


Do you find anything wrong with this?

Yes, it doesn't make any sense.


That explains it then doen't it. You have failed to understand how Social Credit works. Your written words prove this. Try checking the whole site first before you make any more dum comments. Your ignorence here is very impressive!

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.

[psionl0]

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.


Hmmm, Who do I believe? Ellen Brown's article on Escaping the Sovereign Debt Trap: The Remarkable Model of the Commonwealth Bank of Australia (http://www.huffingtonpost.com/ellen-brown/escaping-the-sovereign-de_b_669564.html) or Sceptic-PK's instant dismissal of that article as "full of errors and nonsense"?

Boy, that's a toughie (NOT).

[Sceptic-PK]

Hmmm, Who do I believe? Ellen Brown's article on Escaping the Sovereign Debt Trap: The Remarkable Model of the Commonwealth Bank of Australia (http://www.huffingtonpost.com/ellen-brown/escaping-the-sovereign-de_b_669564.html) or Sceptic-PK's instant dismissal of that article as "full of errors and nonsense"?

Boy, that's a toughie (NOT).

At no stage have I denied that a government may choose to create a so-called “people’s bank” if it wants to. I am denying the fallacious history lesson provided by Webb and his erroneous assertion that the CBA stopped being the “people’s bank” and was taken over by nefarious private “bankers” in the 1920s. Also note that having a bank act as a commercial lender AND a central bank could cause similar levels of systemic risk as we saw in the recent economic meltdown. Also note that if the government wants private banks to lend at low levels of interest, it just reduces the cash rate as part of its monetary policy decisions. Additionally, providing relatively cheap credit for long periods of time can cause severe economic problems, such as inflation, bubbles and recessions, so Webb’s argument that a government-run bank could issue tons of easy credit ad nauseum is demonstrably false.

FYI your article in the Huffington substantiates all of my claims made thus far on the history of Australia’s banking system:


King O'Malley insisted that the Commonwealth Bank had to control the issue of its own notes, but he lost on that point – until 1920, when the Bank did take over the issuance of the national currency, just as the U.S. Federal Reserve was authorized to do in 1913…The Commonwealth Bank received almost all of the powers of a central bank in emergency legislation passed during World War II, and at the end of the war it used this power to begin a dramatic expansion of the economy. In just five years, it opened hundreds of branches throughout Australia. In 1958 and 1959, the government split the bank, giving the central bank function to the Reserve Bank of Australia, with the Commonwealth Banking Corporation retaining its commercial banking functions. Both banks, however, remained publicly-owned…It [the CBA] functioned as a wholly owned state bank until the 1990s, when it was privatized.

Thanks for playing.

[psionl0]

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it.
FYI your article in the Huffington substantiates all of my claims made thus far on the history of Australia’s banking system:

Thanks for playing.

I won't comment on these two contradictory statements.

The original www.bleedingindebt.com/ (http://www.bleedingindebt.com/) showed that we don't need to have banks create money out of debt to thrive. In relation to Australia it said:Money did not build Australia; it was the resourcefulness and skills of hard working people that built Australia. The use of Money, which was in short supply, only served the people as a means to exchange and as a means to establish value.

*The Australians of the first 100 years, to say the least, were resourceful. The economy to them was the physical environment around them, and what it could be made to produce. Real or imagined shortages of money had little to do with the challenge. The shortage of money was solved for a while by the use of rum and promissory notes (also known as ”Calabash“ money), which became accepted as currency (social credit in action!)
A similar story applies in the American colonies which used "colonial script" until it was outlawed by the Currency Act of 1764.

As I have pointed out many times, the government can create all the money we need interest free. Yet for some reason, it is believed that governments have to BORROW the money instead. Furthermore, more than 90% of the money we have has to be borrowed into existence from the banks which then charge interest on it. WHY?

[Sceptic-PK]

As I have pointed out many times, the government can create all the money we need interest free.

Government can already create all the money it needs and charge itself whatever it likes. The reason this isn't common practice is because it is inherently inflationary. You guys keep talking about the supposed evils of an expanding money supply, yet post comments like this? I am truly confused.

You're under the misconception that governments pay interest on currency created, when interest and profits collected by a central bank are returned (minus expenses) to their relevant Treasury departments. I think the most recent Fed return was 97% of its profits? I'd have to check that... Yes, governments pay interest to those that buy government debt, but this is due to an elected government spending more than it generates in tax receipts, and has little to do with the actual banking sector charging governments for its own currency.

Repeat after me: The pointy end of central banks are run by independent government agencies. They are designed to be independent from elected government so they can make effective monetary policy decisions with regards to what is best for the country's economy, rather than what's best for whomever is holding sway in the halls of power.

No, they don't always get things right. But they are not a nefarious institution responsible for a nation's lack of fiscal discipline and ensuing IOUs.


Yet for some reason, it is believed that governments have to BORROW the money instead.

See above.

They borrow money because just making new money to lend out for near nothing forever and a day is a terrible idea and I can't think of any credible economic theory that advocates it.


Furthermore, more than 90% of the money we have has to be borrowed into existence from the banks which then charge interest on it. WHY?

You're conflating the issues now. The reason there is a high amount of supposed "borrowed" money in the money supply is because we just love borrowing money. We don't rely upon commercial banks to create new money, we rely upon them to give us money now when we don't have as much as we want. If you don't like how much interest they are charging you for your money, don't borrow it. Save your money 'til you have as much as you want/need.

Governments rely upon commercial banks to disseminate currency at an efficient rate at market prices. Part of that market price is determined by the country's central bank (ie the cash rate). The reason it has a market price and isn't normally lent out for free should be obvious to anyone. Yes, a government-run bank could act as a commercial lender I suppose, just as the CBA did for much of its life, but the prevailing wisdom has been to let these activities be run by the private sector. Buying money has a cost, just like everything else.

I think you mean well but have been confused by bad information, and I probably haven't done as good a job as many in here could have in explaining small parts of the monetary system, but it is late and I am tired and I am not an expert by any stretch of the imagination.

http://en.wikipedia.org/wiki/Central_bank is as good a place to start as any in order to clear a few things up.

[psionl0]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

[BobTheCoward]

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.

The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

I'm sorry. My post was much simpler than read into it. I literally meant, what are the assumptions we are making about what are desired and undesired outcomes. You say it is obvious that it failed, but never hint at what are the metrics we are to judge it by or how we have arrived at those being the right metrics.

[marplots]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

I do not want to be under ensorcellment. And I am sorry for asking a question you probably already answered. But if banks are not allowed some fractional reserve, what is their business model and how do they make money?

My guess is that they would have to accumulate a great deal of their own money -- free and clear from depositors -- and exclusively lend that out and only lend that out. All deposits must be kept at the ready to release when requested and could not be lent out.

Is this what you envision when you say no fractional reserve?

[psionl0]

I should point out that banks charge account keeping fees on transaction accounts. An average seems to be about $5 per month which is far more than they would get by lending the money out in your account (unless you consistently had more than about $10,000 sitting in your account). Credit card charges can even be higher (not including interest). Banks also have a habit of sneaking in stiff penalty fees for such things as bounced checks, overdrawn accounts and using other banks' atms. So banks are not about to fold if they can't lend out your deposits.

It should also be noted that "fixed term" deposits do not count as fractional reserve banking because the depositor and the borrower don't have access to the same money at the same time.

I posted more about how this would work in the A peculiar view of money (http://forums.randi.org/showthread.php?postid=6327798#post6327798) thread starting at post #65 (http://forums.randi.org/showthread.php?postid=6425117#post6425117)

[Sceptic-PK]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

Thank you for confirming any attempted discussion with you is a waste of time. You don’t understand banking, you don’t respond to questions and your ideas are stupid. I am out of here.

[marplots]

I posted more about how this would work in the A peculiar view of money (http://forums.randi.org/showthread.php?postid=6327798#post6327798) thread starting at post #65 (http://forums.randi.org/showthread.php?postid=6425117#post6425117)

Thank you for the quick and informative answer.

[psionl0]

Just agree to disagree Sceptic-PK. This is starting to turn into a flame war which I suspect violates the rules of this forum.

Let's face it, all sources of information are biased - especially historical information (which is one thing that makes the study of history interesting).

[drkitten]

I should point out that banks charge account keeping fees on transaction accounts. An average seems to be about $5 per month which is far more than they would get by lending the money out in your account (unless you consistently had more than about $10,000 sitting in your account).

You either need to find a better bank, or you need to have more money to play with. All of my banking is fee-free, including my credit cards.

[Kepp]

It's amusing to watch federal reserve CT'ers debating people who actually understand economics.

[psionl0]

You either need to find a better bank, or you need to have more money to play with. All of my banking is fee-free, including my credit cards.
I too have a "no annual fee" mastercard but it has no interest-free period so I don't use it to borrow money. (American Express seems to be one of the more expensive cards around).

At least transaction fees are no longer a problem. Banks found that customers were withdrawing large sums of cash to carry them through the week and limit their exposure to these fees. This must have paid havoc with the banks' reserves. Unfortunately there is nowhere I can turn to if I don't want to pay account keeping fees.

As for the "you need to have more money to play with", don't we all?

[webb5]

Reading books, rather than dubious internet sites. The CBA acted as Australia's central bank for much of the century, before being sold in the 1990s. This is a matter of public record. At some stage during this process, I believe it was the 60s or 70s, the Reserve Bank of Australia was created in order to act as the country's central bank, and this role shifted away from the CBA. The CBA remained owned by the government until privatised by Hawke or Keating. The Reserve Bank achieved full independence within the government during Howard's years.
this part is correct!



Wrong again. The CBA, acting as Australia's central bank, made a decision not to increase credit due to the circumstances/experience at the time. I think this decision was probably in error, but it had absolutely nothing to do with nefarious "bankers" taking control of the bank. During the Great Depression, the CBA was a government agency just as the Reserve Bank is a government agency now. At no stage was it taken over by "bankers", anymore than it already had bankers/economists as part of its government-appointed board. You don't understand central banking.
this part is wrong!


Anyone who has any knowledge whatsoever understands the reasonably extreme austerity measures taken by the Howard government in order to pay Australia's debt off. Costello made the announcement in 2006:

Wrong again

Opposition treasury spokesman Wayne Swan said the government had nothing to be proud of, with Australia's foreign debt expected to hit half a trillion dollars.

"To pompously declare tomorrow Australia's debt-free day on the day our foreign debt hits half a trillion dollars requires a level of complacency that is verging dangerously close to delusion," Mr Swan said.

"To start reducing our foreign debt Australia needs to lift exports and to do so we have to become more competitive.
http://www.theage.com.au/news/Business/Government-to-pay-off-national-debt/2006/04/20/1145344197792.html

Again, it seems you don't have a cursory knowledge of even recent Australian history. ?

You don't know what you are talking about. Take a class in Australian history and learn what the Hawke/Keating/Howard governments did to modernise the Australian economy, which started with with financial services and deregulation of the sector. The book, "Unfinished Business: Paul Keating's interrupted revolution" by David Love is a good place to start. Yes, China plays its part currently but I am talking about the last 30 odd years of financial reform. Pick up a book.

Over the last 30 yrs these governments removed our tarrifs which protected our industries agaist unfair trading. Many industries and farms have closed down; almost one in three Australians live in poverty (The Age 14/3/98), we have 20% unemployment (refer to the television station Channel 9 news on 14/7/98 where the Government admits to "fudging" the unemployment figures; 70% youth unemployment in certain areas (Ch. 10, 23/6/98 and HS 22/6/97); hospitals in filthy, third world conditions in Victoria (Ch. 7, 22/6/98); a 300% increase in bankruptcies in the last 19 years (Australian National Review (ANR) May/June 1998, p. 40; family breakdown; the 2nd worst level of child poverty in the industrialised world (The Age, 17/11/96). Our rural towns are de-populating and dying because our industries cannot compete with cheap imports and the Government removes essential services. One could go on

Yes, it doesn't make any sense.

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.

You trully have no understanding

[psionl0]

Over the last 30 yrs these governments removed our tarrifs which protected our industries agaist unfair trading. Many industries and farms have closed down; almost one in three Australians live in poverty (The Age 14/3/98), we have 20% unemployment (refer to the television station Channel 9 news on 14/7/98 where the Government admits to "fudging" the unemployment figures; 70% youth unemployment in certain areas (Ch. 10, 23/6/98 and HS 22/6/97); hospitals in filthy, third world conditions in Victoria (Ch. 7, 22/6/98); a 300% increase in bankruptcies in the last 19 years (Australian National Review (ANR) May/June 1998, p. 40; family breakdown; the 2nd worst level of child poverty in the industrialised world (The Age, 17/11/96). Our rural towns are de-populating and dying because our industries cannot compete with cheap imports and the Government removes essential services. One could go on

These are rather ancient sources you are quoting. Do you know how these figures have been moving in the last 5 years or so? (This would include the boom years).

[Sceptic-PK]

If you want a proper response Webb, learn how to quote properly. Your gibberish is annoying enough without having to cut and paste everything you spit on the page.

[drkitten]

I too have a "no annual fee" mastercard but it has no interest-free period so I don't use it to borrow money. (American Express seems to be one of the more expensive cards around).

Right. You need a better bank.


At least transaction fees are no longer a problem. Banks found that customers were withdrawing large sums of cash to carry them through the week and limit their exposure to these fees.

Actually, that wasn't a problem at all.

The problem is that charging excessive fees tends to drive people to cheaper banks.



This must have paid havoc with the banks' reserves.

Not at all. The amount of money that banks keep in their reserve accounts at the central bank usually dwarfs the amount their customers need for walking-around money.

Unfortunately there is nowhere I can turn to if I don't want to pay account keeping fees.

Try "a better bank." It took me ten minutes on the Interwebz to find that B&E doesn't charge account keeping fees. (http://www.infochoice.com.au/banking/savings-account/be-ltd/home-advantage/16621)


As for the "you need to have more money to play with", don't we all?

No. I have enough money to play with that all my banking is fee-free.

[psionl0]

It took me ten minutes on the Interwebz to find that B&E doesn't charge account keeping fees. (http://www.infochoice.com.au/banking/savings-account/be-ltd/home-advantage/16621)

Thank you for the research drkitten. I have bookmarked that website.

[webb5]

These are rather ancient sources you are quoting. Do you know how these figures have been moving in the last 5 years or so? (This would include the boom years).

Actually the figures in Australia are a lot better in the last years (the boom years) despite persistant current account deficits. But at what cost?

No one seems to be talking about the stragedy of selling Australia to prop up the economy and ensure that public debt is minimised.

The sales of Telstra, CBA, airports and Qantas raised $63 billion for the Australian governments of the day. The CBA sold for $6.8 billion. Its profit this year was more than $5 billion. One estimate is that Australia (not just the various governments) has sold $400 billion of assets since 2007.

Property, business, residential and other asset sales, augmented by the mining boom, have been the major strategy used to avoid the consequences of our chronic current account deficit, which keeps on churning out negative numbers. Don't be fooled by the false dawn of merchandise credit surpluses fuelled by our mining raw material exports.

We are succeeding by selling the Australian farm. That cannot be a successful long-term policy if we have any regard for the future of our children and their children. Political posturing about how great the strategy is can only be regarded as a complete failure in government economic management and the political spin of the century.

[Captain.Sassy]

Dr. Kitten,

A question:

In futures markets, do the value of the put and call contracts exceed the value of the actual commodities being produced? I have been reading a bit about monetary policy and money creation since I was last in this thread, and it occurred to me that a similar process might also exist for commodities.

I could go and look it up on my own I suppose but I figured this would be faster since you've been pretty good about explaining stuff in here in the past.

So, if you could either confirm my hunch or disabuse me of this notion, it would be appreciated.

Kind regards, and thank you for your time,

CS

[Captain.Sassy]

(Others welcome to chime in too, btw.)

[webb5]

Basic modern economic thinking is un sound because it's foundation relies on new money created as debt. It does not matter how much you play with the complex matra of modern economic theries because the engine that fire's the economy has been compromised by permanent and unrepayable debt.

Be warned. The banking system all over the world has succeeded in pulling the wool over the eyes of most people including politicians for hundreds of years, with an odd exception such as Abraham Lincoln.

With their immense interest at stake and their all pervading influence in the media, and in the community in general, the supporters of the present banking system will almost certainly continue to hoodwink the people and governments.

They may eventually destroy the economies of rich and prosperous nations. Debt and the taxation needed for interest could be the cause of their destruction.

If that happens, it will be due, in the final analysis, to the ignorance and apathy of ordinary people.

Remember, the question is not whether there will be new money created in the future. That is inevitable. The crucial question is:

Will it be created by the banks as interest bearing debt for their own profit or will it be issued debt free on behalf of the state for national good?

Will you do something about it?

[Sceptic-PK]

Will it be created at market prices, allowing for efficient provision of funds to borrowers at terms they freely agree to, or shall it be printed willy-nilly for free to create massive asset bubbles, hyperinflation and the destruction of a country’s currency?

I’ll take free money for national destruction thanks!

[webb5]

I’ll take free money for national destruction thanks!

If goods are scarce, no amount of money can automatically produce them, although a promise of ample money can drive people to make considerable efforts to produce what is wanted.

If a land is barren and its inhabitants lazy and unskilled, the printing press could turn out money day and night without raising people out of their poverty. The only result would be to destroy the purchasing power of the money previously in existance there.

In some countries runaway inflation has, in the past, reduced paper money to less value than same quolity of unprinted paper. It has also left economists and politicians with a well justified fear of uncontrolled money creation. This fear has been carried o extremes, so that even controled money creation has been opposed.

It is vital to remember money is not wealth. It only represents real wealth. Goods and services comprise the substance. Money is only the substitute, symbol or token, used as a medium of exchange for the real thing.

This emphasis on the diference between wealth and money is not merely a debating point. It is intended to make crystal clear that the primary need of a nation is to produce ample real wealth, i.e food, clothing, housing and all other necessities of life. That is the real part and the hardest part.

If that is done, the secondary and easier task should be for the government to ensure a sufficient supply of the means of exchange, the money, to permit the distribution of the goods produced. This money should be created free of debt.

[Sceptic-PK]

Congratulations on saying absolutely nothing.

[webb5]

Congratulations on saying absolutely nothing.

It's a great shame if it means absolutly nothing to you. The banking system loves people like you. How can you defend a system that is so dishonest.

[Sceptic-PK]

It's a great shame if it means absolutly nothing to you.

This is your fault by the way. Your lack of clarity and your inability to respond properly to the crux of questions causes confusion.


How can you defend a system that is so dishonest.

There is nothing dishonest about it. You just don’t understand how things work. I am more than happy to appraise a new system should one be designed. Unfortunately so far all you’ve been able to do is provide nonsense sophistry. Even after all these pages, and people taking the time to read your sources, we still don’t understand what it is you’re trying to say about social credit. This is not our fault. You rail against things you don’t quite grasp and then fail to explain the alternatives.

[drkitten]

Dr. Kitten,

A question:

In futures markets, do the value of the put and call contracts exceed the value of the actual commodities being produced? I have been reading a bit about monetary policy and money creation since I was last in this thread, and it occurred to me that a similar process might also exist for commodities.

I honestly have no idea. In fact, I'm not even entirely sure what you mean by "the value of the put and call contracts"; if I buy a far out of the money call option for one hundred shares of INTC, I might pay only $1 per share for a nominal "value" of $150 a share. Is the "value" of that contract $100, or $15,000?

But as to the bigger question, there's no money created in a call/put contract, although there is "wealth" created. Essentially, (99% of) options are bets. In the case above, I would be betting that Intel is going to increase tenfold in the next short period of time, and someone else is betting that it's not. One of us is right and one of us is wrong and we'll settle up come Memorial Day.

So this doesn't create money any more than a casino does. It does, however, create wealth in that one of us has created/found a genuine, dyed in the wool, double-breasted twenty-four carat sucker -- and we can both resell our end of the bet for more money to even greater fools that we.

But money creation? No. No more than the Casino de Monaco creates money when it accepts a bet on red.

And this also shows that your question about the size of options is largely irrelevant. The same casino can have $100,000 hanging on the turn of a card from a fifty-cent deck. The value of the cards doesn't have any influence on the value of the bets placed at the table. Most options are simply cash-settled bets on the movement of stock. I think that gold, for example, is in a bubble, and is going down. Many of the gold bugs here think that gold will continue to go up, up, up, and up. So I bought a put option for one of the gold mutual funds (GLD), and I found a sucker counterparty who was willing to accept my put and take the risk of being forced to buy gold from me at substantially over market value.

Of course, there is information in the options trade. If Bill and Warren both decide that gold is overpriced and they want to buy the same puts I did, they're probably going to be able to buy enough puts to shift the price. Which means that the price for puts is going to be going up, and gold traders will notice there's some Big Money that's thinking the price of gold will be going down. This may or may not adjust their willingness to buy gold at current prices....

[drkitten]

It's a great shame if it means absolutly nothing to you.

I'm afraid I have to side with Skeptic on this one. Telepathy failure is never the recipient's fault, and your complete lack of any ability to express yourself clearly and coherently may simply be masking system that is fundamentally broken and dishonest.

But the casual reader will never infer it from what you've written. The casual reader will instead infer from your writings that opposition to the current banking system is incoherent and irrational, and that no sensible person could oppose the system in any way other than minor tweaks such as putting maximum fees for overdrafts and whatnot.

[psionl0]

(Others welcome to chime in too, btw.)
Are you talking about short selling? In "Naked" short selling, "phantom" shares are traded - a sort of "fractional reserve stockbroking". Of course, the short-seller would have to buy real shares sometime in the future to make everybody whole. drkitten described this process in the A peculiar view of money (http://forums.randi.org/showpost.php?p=6354252&postcount=41) thread.

EDIT: He also had an analogy in which it could appear that 10 lawnmowers existed when in fact there was only one. I can't find the link to that anymore.

[Captain.Sassy]

/\/\/\
This sounds kind of like what I'm talking about, but my terminology probably lacks lustre.

I honestly have no idea. In fact, I'm not even entirely sure what you mean by "the value of the put and call contracts"; if I buy a far out of the money call option for one hundred shares of INTC, I might pay only $1 per share for a nominal "value" of $150 a share. Is the "value" of that contract $100, or $15,000?

But as to the bigger question, there's no money created in a call/put contract, although there is "wealth" created. Essentially, (99% of) options are bets. In the case above, I would be betting that Intel is going to increase tenfold in the next short period of time, and someone else is betting that it's not. One of us is right and one of us is wrong and we'll settle up come Memorial Day.


Yeah I didn't mean money creation per se. What I meant was, take copper... two guys agree on a price of copper in 10 days, and sign a contract for delivery of one ton of copper. 10 days later, they look at the going price of copper, and one guy generally gives the other guy money to cover the difference in the agreed price for settlement of the contract vs. the market price, right?

The number of tons of copper accounted for in these contracts could easily outweigh the number of tons of copper actually in existence and tradeable right? I guess that's confirmed when you say 99% of options are bets, with the remaining 1% being contracts for delivery of the actual commodities.

[drkitten]

Yeah I didn't mean money creation per se. What I meant was, take copper... two guys agree on a price of copper in 10 days, and sign a contract for delivery of one ton of copper. 10 days later, they look at the going price of copper, and one guy generally gives the other guy money to cover the difference in the agreed price for settlement of the contract vs. the market price, right?

Spot on.


The number of tons of copper accounted for in these contracts could easily outweigh the number of tons of copper actually in existence and tradeable right?

Right.

I guess that's confirmed when you say 99% of options are bets, with the remaining 1% being contracts for delivery of the actual commodities.

But a lot of people who need the actual commodities simply buy the commodity at spot prices. You need a fairly substantial and fairly predictable need before you bother with options for actual goods.

[Captain.Sassy]

Thanks for clearing that up for me. You too, psion. Appreciate taking the time.

also lol @ "spot" on

[drkitten]

EDIT: He also had an analogy in which it could appear that 10 lawnmowers existed when in fact there was only one. I can't find the link to that anymore.

Is this (http://forums.randi.org/showthread.php?postid=5972504#post5972504) the post you're talking about?

[psionl0]

Is this (http://forums.randi.org/showthread.php?postid=5972504#post5972504) the post you're talking about?
Yes, that's where I saw it.

[webb5]

I'm afraid I have to side with Skeptic on this one. Telepathy failure is never the recipient's fault, and your complete lack of any ability to express yourself clearly and coherently may simply be masking system that is fundamentally broken and dishonest.

But the casual reader will never infer it from what you've written. The casual reader will instead infer from your writings that opposition to the current banking system is incoherent and irrational, and that no sensible person could oppose the system in any way other than minor tweaks such as putting maximum fees for overdrafts and whatnot.

I have to agree that I am not the best person to explain how Social Credit works. How ever You and psion would have to be the most ignorant I have ever come across. Your beliefs in a system that is so corrupt is beyond belief.

There is something dreadfully and fundamentally wrong with the financial systems of the world. Why should nations rich in minerals, food production capabilities, power generating resourses and most of the essentials of life have staggering internal debts and foreign debts? Why should our debts grow as our production grows?

It is due to the international banks permited practice of creating most of the world's money In The Form Of Debt. Debt on which crippling interest must be paid, in effect, for ever.

Banks should not have the power to create our money. They are simply commercial enterprises like McDonalds or any corner milkbar, that are concerned only with profits for their owners. For that reason they are unsuited to exercise the power to create the nation's money.

Governments have the responsibility to aim for the greatest good for the greatest number. The power to create the nation's money is an essential tool that all governments must have in doing this.

But of course this is too difficult for you to understand!

[psionl0]

You and psion would have to be the most ignorant I have ever come across. Your beliefs in a system that is so corrupt is beyond belief.


!!LOL!! You haven't been reading the Starve the Bankers (http://forums.randi.org/showthread.php?postid=6595952#post6595952) thread lately.

[webb5]

H.G.Wells once wrote that, in a mythical land of the blind, the inhabitants regarded a man who claimed to be able to see, as suffering from delusions and being potentially dangerous. Some politicians and economists seem to think the same of any man who claims to see faults in the bank created credit system. If they had grown up in a country where new money was always issued debt free, they would probably would not comprehend a suggestion that it be issued as debt. Why should they? Why should it be? As it is, they seemingly accept the situation where the private banks create billions of dollars of credit money for profit. Surely they can accept that the Government, in the interest of the nation, can do the same.

This system keeps us in the bondage of debt and, like the slaves of old, we may struggle to escape from our bonds, but we do not query our (financial) masters’ right to impose those bonds. Strange Apparently people who have grown up from childhood in a particular system find it hard to comprehend any other. It was probably the same in the slave owning countries of long ago.

We the people, produce the real wealth of the country, the goods and services. Why should we need to be bogged down for ever in interest- bearing debt to the banking system, which does nothing but produce, handle and deal in money, the symbols of the real wealth that we produce? Why is this not done? Perhaps the best answer to this question comes from this quote:

‘The few who understand the system will either be so interested in its profits or so dependant on its favours that there will be no opposition from that class, while on the other hand, the great body of the people, mentally incapable of comprehending the tremendous advantages that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests’

This quote comes from a letter written in 1863 from the European banking powers to their American associates.

I understand that many of you will be confused about these issues. I have attempted to explain this through a web site I recently launched www.bleedingindebt.com . It’s far from perfect, but at least it is a start. It contains videos and explanation graphs to compare present system to alternative system. It describes Social Credit as a solution. It comes from an Australian perspective first but it applies just as much for the rest of the world.

There is a better way!

[Sceptic-PK]

I love how delusional people always paint themselves as great revolutionaries, and if we only appreciated their keen insights, together we could cure all the world's ills. In reality of course, they simply don't understand what they're talking about.