How the banks create money

[lomiller]

That's just it, there isn't more value in the economy, just more invented money. Money represents debt, not resources, but let's pretend it represents resources. There is a finite amount of resources, and $100 to represent it all. The bank has none of the resources, just the $100 deposited, the customer owns the $100. The bank invents an extra $5 that goes in its pocket, now there is $105 representing all the resources, the bank owns $5, the customer owns $100..

If it’s still a factional reserve system the bank can’t have more loans issued then it has assets backing them. The extra $5 the bank has at the end isn’t cash it’s a deposit based asset. Instead of increasing the money the bank has to lend it counts against the money they can lend out based on their $100 reserve.

Now if you have an asset bubble collapse like realestate, housing or stocks bought on margin, then yes the system can run into trouble. This is where the Fed comes in and makes sure there is enough cash in the economy.



You are mixing up cash and higher order money.

That's just it, the banks provide no service, other than keeping track of (their) money.

Utterly false. Banks allow you to take advantage of wealth creating opportunities you would otherwise have to pass up by exchanging you money now for money in the future and collect a small fee for the service. Without banks the vast majority of wealth creating opportunities would simply be wasted.

Now the bank for some reason has a claim on 1/25th of the wealth. Even if part of it goes back to the customer as interest, let's say $4, or 4% interest, the bank then gets a claim on 1/105th of the resources. As this cycle repeats, the bank's portion of the wealth steadily and only ever increases..

Nope, as I said the bank only lends money where they expect the person can get a higher return then what they pay in interest. IOW the banks share of the newly created wealth from exploiting economic opportunities is always less then the total wealth created from those opportunities.

 

[psionl0]

"At the end, of the original $100 in our economy, Art has $99, the Bank has $1 and Chuck has $0." (Money divided).

That's a pretty fair description of our monetary system, but you left out one part: interest.

No I didn't. In the original example (post #253), Chuck owed the bank $2 in interest (which he got by selling Art something) and the bank owed Art $1. That is why the money is divided as above.

In your example, let's say the bank charged Chuck 10% interest, a reasonable rate for a loan. Now Chuck owed $55, and remember, we still only have $100 in this little economy. So Chuck gets his $55 together and pays the bank. The bank subtracts $50 from Chuck's debt and pockets the $5. Now the score is

• Art $100
• Bank $5
• Chuck $0

So now we have $105 in the economy. The bank invented and gave itself the "interest".

That's the flaw in your reasoning. Money is not created by interest - it is merely transferred. Money was only created when Chuck got his loan (there was an extra $50 in the economy). It got destroyed again when Chuck repaid his loan. In a larger example, as some loans get repaid, new loans get created so the total supply of money is in a "steady state".

It is the fact that FRB creates money but interest doesn't that causes problems. It means that the money supply must constantly be expanded or else some borrowers must necessarily default and the money available to bank depositors will bleed away to the bank.

On the other hand, lending money is a risky business so interest (and the resultant need for inflation) becomes a necessary evil.

FRB is not however. Allowing depositors and borrowers access to the same money at the same time means that there is a risk that depositors will lose their money - unless the taxpayer guarantees these deposits.

 

[Sceptic-PK]

It means that the money supply must constantly be expanded or else some borrowers must necessarily default and the money available to bank depositors will bleed away to the bank.

(Again) this is nonsense. The ability for a borrower to pay back their loan has nothing to do with the money supply, except perhaps in (extreme) cases where there’s an economic collapse and the borrower loses their job.

FRB is not however. Allowing depositors and borrowers access to the same money at the same time means that there is a risk that depositors will lose their money - unless the taxpayer guarantees these deposits.

A tiny, inconsequential risk that is never a concern under normal economic conditions.

 

[psionl0]

(Again) this is nonsense. The ability for a borrower to pay back their loan has nothing to do with the money supply, except perhaps in (extreme) cases where there’s an economic collapse and the borrower loses their job.

A tiny, inconsequential risk that is never a concern under normal economic conditions.

Faith like that belongs to the "Religion and Philosophy" thread.

 

[Arthur Mann]

Says who? Maybe I borrowed that money to build a widget factory and start selling widgets? I am adding value to the economy by building something "out of thin air".

Maybe you're borrowing the money to buy crack and never intend to pay it back. The basic point is the same, that banks merely invent money and drop it into their own pockets, at the expense of everyone else.

Any country's central bank can create money for free, and do whatever it likes with it. This has nothing to do with debt.

The process you describe is often termed "fiat money", and is universally recognized as worthless. Through clever marketing campaigns, however, banksters have convinced everyone that their money, while not based on absolutely nothing as is fiat currency, is based on debt, which is even worse. With fiat money you start at zero, with debt money you start well below zero.

So, when I go to the bank and they give me money so I can buy a car or a house (years before I would be able to save enough), that isn't providing a service?

If you consider a pickpocket stealing your gold watch while pretending to help you up off the ground a service, then yes, banking is a "service".

With an attitude like that you will be forever poor.

I don't measure wealth in terms of money. Even so, I have no problem collecting money. In just one of my chosen trades I recently employed I earned about $300 per hour. I only do that because I consider it honest work. I own my own land and am borderline self-sufficient. I have no real need for money, except to pay my property taxes. All my electricity is solar, I drink and cook and clean with rainwater, I cook and heat with wood. I haven't voluntarily subjected myself to enslavement for money in many decades. Can you make any of these claims? People who can not, but scream loudly against any suggestion their social conditioning is bunk, are nothing but noisy parasites of society.

Not your fault of course, those evil banks are responsible.

People also bear responsibility. If people use money, they have no reason to gripe about being poor. Money is designed to make people poor, that's why they have the debt paradigm of banks inventing money to drop into their own pockets to further the siphoning off of wealth from the economy. That's why we have cyclical consumption and planned obsolescence and an advertising "industry" that cycles billions if not trillions of dollars yearly (and consequent squandering of resources) trying to convince people to buy the newest version of the same old plastic toy.

 

[Sceptic-PK]

Faith like that belongs to the "Religion and Philosophy" thread.

Faith? We have ~100 years of evidence you clown. Ignorance like this shows you belong back in school.

 

[Sceptic-PK]

Maybe you're borrowing the money to buy crack and never intend to pay it back. The basic point is the same, that banks merely invent money and drop it into their own pockets, at the expense of everyone else.

Incorrect. If you borrow money and abscond into the night, the bank must finance that loan from somewhere else. They cannot “invent” money to cover it.

The process you describe is often termed "fiat money", and is universally recognized as worthless.

Again, incorrect. Fiat money is worth something in the same way anything else has worth- because we believe it does. That you can satisfy all debts and expenses with the relevant currency makes it obvious that it isn’t worthless.

Through clever marketing campaigns, however, banksters have convinced everyone that their money, while not based on absolutely nothing as is fiat currency, is based on debt, which is even worse. With fiat money you start at zero, with debt money you start well below zero.

There is nothing wrong with debt. If somebody chooses to borrow money it is no business of yours, and all things being equal, has no impact on you. Your CTists always ignore the other side of the voluntary transaction.

If you consider a pickpocket stealing your gold watch while pretending to help you up off the ground a service, then yes, banking is a "service".

Oh I see, I am arguing with a child.

I don't measure wealth in terms of money. Even so, I have no problem collecting money. In just one of my chosen trades I recently employed I earned about $300 per hour. I only do that because I consider it honest work. I own my own land and am borderline self-sufficient. I have no real need for money, except to pay my property taxes. All my electricity is solar, I drink and cook and clean with rainwater, I cook and heat with wood. I haven't voluntarily subjected myself to enslavement for money in many decades. Can you make any of these claims? People who can not, but scream loudly against any suggestion their social conditioning is bunk, are nothing but noisy parasites of society.

You have a radiation-proof bunker too I presume?

People also bear responsibility. If people use money, they have no reason to gripe about being poor. Money is designed to make people poor, that's why they have the debt paradigm of banks inventing money to drop into their own pockets to further the siphoning off of wealth from the economy. That's why we have cyclical consumption and planned obsolescence and an advertising "industry" that cycles billions if not trillions of dollars yearly (and consequent squandering of resources) trying to convince people to buy the newest version of the same old plastic toy.

All aboard the woo train.

 

[psionl0]

Faith? We have ~100 years of evidence you clown. Ignorance like this shows you belong back in school.

Actually we have several hundred years of evidence and it is not pretty. Sure an insurance policy like the FDIC reduces the risk of a run but it does not eliminate it and it makes the taxpayer guarantor for the banks.

If you were to examine the examples in this thread instead of just attacking those who question the current system then your opinions might have more credibility.

 

[Sceptic-PK]

Actually we have several hundred years of evidence and it is not pretty. Sure an insurance policy like the FDIC reduces the risk of a run but it does not eliminate it and it makes the taxpayer guarantor for the banks.

FRB has been in use for several hundred years?

If you were to examine the examples in this thread

What examples? Nobody here has provided an example of FRB causing any issues at all, outside possibly the GFC and Depression, neither of which represent normal market activities or were insurmountable in their fallout. So yeah please, give me an example from real life.

instead of just attacking those who question the current system then your opinions might have more credibility.

I’ll give more care to my perception from the CT crew when you guys stop getting almost everything completely wrong.

 

[Arthur Mann]

If you borrow money and abscond into the night, the bank must finance that loan from somewhere else.

The money the banks loan out is created by ledger entry, as outlined in Modern Money Mechanics. It never existed in the first place, so banks don't have to "finance" the loans at all. If there's a default, the bank has lost nothing.

They cannot “invent” money to cover it.

The money they loaned out was invented by ledger entry in the first place, so they don't have to "cover" it.

Again, incorrect. Fiat money is worth something in the same way anything else has worth- because we believe it does.

if you're saying that money is like voodoo, that it only works on you if you believe in it, then I agree.

That you can satisfy all debts and expenses with the relevant currency makes it obvious that it isn’t worthless.

I think I explained how all debt can never be repaid, because there is never enough currency invented to cover it, only the loaned money is invented, the banks don't invent the money to cover the interest and then hand it out.

 

[Sceptic-PK]

The money the banks loan out is created by ledger entry, as outlined in Modern Money Mechanics. It never existed in the first place, so banks don't have to "finance" the loans at all. If there's a default, the bank has lost nothing.

The money they loaned out was invented by ledger entry in the first place, so they don't have to "cover" it.

Wrong. They have a liability on their balance sheet that must be paid. If banks could just “invent” money whenever they chose, explained the GFC or Depression to me.

if you're saying that money is like voodoo, that it only works on you if you believe in it, then I agree.

No, I said it only has worth because people believe it does. Just like almost everything else.

I think I explained how all debt can never be repaid, because there is never enough currency invented to cover it

This is complete nonsense. The total value of money owed in loans might outstrip the current supply of money, but who is paying their house loan off over night? Such loans are paid off with money that is earned or created in the future. The idea that debt can never be repaid is categorically and demonstrably wrong.

 

[psionl0]

FRB has been in use for several hundred years?

Didn't you know? Why are you acting like you know something?

 

[Arthur Mann]

Wrong. They have a liability on their balance sheet that must be paid.

This is just sleight-of-hand. It doesn't escape the fact that the loan was created by ledger entry in the first place. Banks don't loan out deposits, they loan out money they invent with ledger entry as outlined in Modern Money Mechanics. That's a small book, I suggest you read it.

If banks could just “invent” money whenever they chose, explained the GFC or Depression to me.

I'm under no obligation to explain these events you obliquely reference. If i were inclined to give an answer to this vague and overly-simplified challenge, I'd give an equally vague and overly-simplified answer, like "Banks did it."

No, I said it only has worth because people believe it does. Just like almost everything else.

For money to "work" it has to have value. For money to have value people have to believe in it. For money to work you have to believe in it. Hmm, that seems indistinguishable from voodoo to me.

The total value of money owed in loans might outstrip the current supply of money, but who is paying their house loan off over night? Such loans are paid off with money that is earned or created in the future.

And you've hit on the reason for the cyclical collapses of the monetary system. The collapses are built into it. Unlike a steel frame skyscraper, the monetary system was designed to fail. It can only continue if there is a rapidly increasing money supply. It spirals out of control and hyperinflation brings the system to its knees if a "depression" is not allowed to happen from time to time, accompanied by a humongous debt amnesty (bailouts).

The idea that debt can never be repaid is categorically and demonstrably wrong.

The banks invent money, when debt is paid down the money vanishes, but somebody still owes the bank the "interest". No money was ever created to cover that interest, it's above and beyond the total money supply, it can never be repaid. It has to be forgiven somewhere down the line, and it will always be this way, as long as banks operate at a profit. If they started paying out as much or more interest than they collect, and only loan out a portion of what's been deposited instead of inventing ten times that amount in debtbacks, then all their invented money would stay in the economy instead of going into their pockets. Debt would then be a good thing, the more debt we went into, the more money we'd have, the more we could convince hoodoos to get done by waving magic money in their faces.

Their scam is exceedingly simple and fantastically effective. It's easy to dupe people who lack critical thinking skills, and that's the majority of the population, if the statistical incidence of atheism is any indication.

 

[Sceptic-PK]

Didn't you know? Why are you acting like you know something?

I don’t know the long history of FRB. Knowing how FRB works isn’t the same thing as knowing it’s history. So please, give me a history lesson. Don't let that prevent you from answering my previous question however- provide evidence from the last century of FRB causing major issues.

 

[Sceptic-PK]

This is just sleight-of-hand. It doesn't escape the fact that the loan was created by ledger entry in the first place.

We all acknowledge this.

Banks don't loan out deposits

This of course, is wrong. They can and they do loan out deposits.

they loan out money they invent with ledger entry as outlined in Modern Money Mechanics. That's a small book, I suggest you read it.

I read it long before you CT clowns began lying on JREF.

I'm under no obligation to explain these events you obliquely reference. If i were inclined to give an answer to this vague and overly-simplified challenge, I'd give an equally vague and overly-simplified answer, like "Banks did it."

10 characteristics of conspiracy theorists
A useful guide by Donna Ferentes

3. Inability to answer questions.
For people who loudly advertise their determination to the principle of questioning everything, they're pretty poor at answering direct questions from sceptics about the claims that they make.

The banks invent money, when debt is paid down the money vanishes, but somebody still owes the bank the "interest". No money was ever created to cover that interest, it's above and beyond the total money supply, it can never be repaid.

Again you’re making the fundamental error that all money is created as debt. It isn’t. If you refuse to get the basics right I don’t see any point in discussing this further.

Their scam is exceedingly simple and fantastically effective. It's easy to dupe people who lack critical thinking skills, and that's the majority of the population, if the statistical incidence of atheism is any indication.

10 characteristics of conspiracy theorists
A useful guide by Donna Ferentes

1. Arrogance. They are always fact-seekers, questioners, people who are trying to discover the truth: sceptics are always "sheep", patsies for Messrs Bush and Blair etc.

 

[Arthur Mann]

Don't let that prevent you from answering my previous question however- provide evidence from the last century of FRB causing major issues.

Unless I misunderstand you're talking about the Federal Reserve system?

If you understand how it works, as you suggest, it should be apparent how it is the root of most economic woes over the last century. The twentieth century. Bear that it mind. Last century wasn't the nineteenth century, it was the twentieth century. Feeding people is not a major technological challenge, yet along with the automation of agriculture and the constant influx of energy from fertilizers, we see a billion people starving on this planet. This is only down to money and the system that requires it. We need to change these systems so we can really live like this is the twenty-first century.

 

[Arthur Mann]

This of course, is wrong. They can and they do loan out deposits.

I'd refer you to Modern Money Mechanics. It's not long or a difficult read, I promise.

I read it long before you CT clowns began lying on JREF.

If you're going to call me a clown I'm not inclined to continue this discussion with you.

[ETA -

pseudoskeptic - one who claims agnosticism while pronouncing the negative and demanding proof
e.g., "That idea is dead wrong, I'm not convinced because I'm a skeptic, prove what I say is wrong."

]

 

[lomiller]

I'd refer you to Modern Money Mechanics. It's not long or a difficult read, I promise.

Perhaps you should read it and provide excerpts you think support your position, because fractional reserve banking just doesn't work the way you think it does. Banks cannot and do not loan out "invented" money.

 

[Sceptic-PK]

Unless I misunderstand you're talking about the Federal Reserve system?

We're talking about fractional lending, not the Federal Reserve system. Which I might add, despite a few fairly serious issues in its infancy, has been a resounding success compared to the panics of the 19th Century.

I'd refer you to Modern Money Mechanics. It's not long or a difficult read, I promise.

As already pointed out, I read it years ago before dealing with anti Fed/banking conspiratorial cretins. I suggest perhaps you didn't understand it properly, which makes sense given your mischaracterisation(s) of banking. There is nothing that prevents a bank from lending out deposits. The whole expansion of the money supply via fractional lending works on the basis of lending out of deposits made by successive customers. If I spend $10K and buy a car off you and you deposit that payment in your account, your bank may then lend $9K (in the US) to someone else.

You can read all about it in MMM under "Deposit Expansion", sections 3-10. Happy reading

pseudoskeptic - one who claims agnosticism while pronouncing the negative and demanding proof
e.g., "That idea is dead wrong, I'm not convinced because I'm a skeptic, prove what I say is wrong."

Still waiting for you to reconcile your assertion that banks can invent money and it doesn't matter if people don't pay it back, with the fact that banking collapses have occurred several times over the last 100 years. I thought they could just invent more money, right?

 

[Arthur Mann]

Banks cannot and do not loan out "invented" money.

On page 6 of Modern Money Mechanics, the Federal Reserve Bank of Chicago tells us that the banks DO NOT "pay out" the funds for loans from money they received from other depositor's accounts. What they do is "accept" promissory notes in "exchange" for, credits to the "borrower's" transaction accounts - called "liabilities." Can the bank legally create money? You bet. If anyone ever asks you if it is legal for the banks to create money, the answer is yes. By the transactional method of mere "bookkeeping" entries (debits and credits), the bank is
able to create money (or what is called money today.) And here's how they do it.

When the bank receives a deposit of funds, either in federal reserve notes (cash) or some other form of a promise to pay, like a "check", or a "promissory note", they will open a "demand deposit account", or make a deposit in an account already opened, in the name of the "depositor." Once the bank obtains that promise to pay, they own it. It's theirs. It is how they obtained that "promissory note, and how they "create money" with that "promise to pay", that is of special interest to you. The following is the example from the fed publication, Modern Money Mechanics, and reflects a typical bank deposit transaction.

The source material for these claims? Modern Money Mechanics, page 6.