How the banks create money

[Blue Mountain]

Ok, I understand this concept of "borrowing from the future" as you describe it (labour/business without security e.g), and the difference with the chattel loan (where there is physical object like house or car as security. It is a way of describing future expectations of the bank or something - but what I meant is you cannot borrow anything from the future literally can you? Or can you? So were does the bank get the money from to be able to make the loan?

AND who is really paying, I mean the bank takes the risk but uses the money of it's savers doesn't it?

The bank uses the money it has in it's accounts (those of savers/depositors) to create new loans, and it NEEDS this money - otherwise it is not able to create new loans - without any deposits/any money in their accounts/vaults/etc a bank cannot create new loans. 0 money means no new loans... That's what I understood (?)


So they (THE BANK) actually BORROWS MONEY FROM THEIR CUSTOMERS (the people who made deposits) and then lends this money out as credit/money/whatever to some-one else. This is why some banks get in trouble if they have lots of bad loans - they cannot pay the savers back / etc because they borrowed money from the savers and gave it out as loans to other people which didn't pay these loans back.

So the bank borrows money from the savers but does not discredit the account of this saver (the saver probably doesn't even notice all this happening, geheh) and the saver still sees his total amount at the ATM which he deposited and should be able to withdraw at least some of his cash - again if everybody does this at the same time, some banks will be in big trouble/etc like in Argentina, etc.

So this way a bank creates new money/credit - using the FRB system (it has to keep a certain % of the money of the savers in their vault/accounts/etc as reserve, and the rest it can write out as new loans (new credit/money/iou/etc/whatever) - NEW MONEY Is created from old money according to the FRB rules - so a bank can (sneakily use/borrow certain percentage (say 90% in some countries I think, 80 % in others) money from the savers/depositors and it can then use this money to create loans (new money).

That's the essence of the fractional reserve system: banks don't need to keep 100% of their customers' money squirreled away in its vaults. In a 10% fractional reserve scenario, they need keep only 10% of their customers' money in their vaults (or on deposit with a Reserve Bank), and loan out 90% to other customers. Or maybe even the same one who deposited the money in the first place ...

1 more example (just for myself

So I go to the bank deposit $100.

Bank has nothing, but it can now borrow $90 from me (without me noticing, or maybe this is written in small letters somewhere?) keep $10 in the vault as reserve (but my account still says $100) and pass this $90 as a loan to mrBorrower (who gets an account with $90 on it, but also has to pay back this $90 (with interest I guess

So now I have $100 and MrBorrower has $90 to spend ($190 money in circulation), bank has nothing, but will get interest form mrBorrower and has to pay me the saver some interest as well (probably less than it gets from mrBorrower Hopefully mrBorrower will do good business and make money to pay of the loan+interest an hopefully I will not demand my $100 bucks at once, this might be a problem for bank...

Ehm... Is this right, more or less? Maybe I am wrong but this is the (simple) way I understood this FRB thing...

Looks good. As for the highlighted part, the bank does have something: the right to demand its $90 from mrBorrower if you go to the bank and want all of your $100 back. If mrBorrower can't pay the bank its $90, the bank would be in trouble. (In this case, I think the bank can go to another bank or the Reserve Bank and borrow $90 from them to give to you, and then it has time to go after mrBorrower for its $90. Plus interest, because it's now paying interest0oin the $90 it borrowed from another source to pay you.)

In reality a bank has of course many customers (borrowers and depositors) and I think it does not literally borrow from me (I guess? but from all the depositors accounts in general (?))

But my point was a BANK needs money to create new money/loans by this multiplier formula (the % reserve fraction thing and the bank borrows this money from its customers... Or maybe if it has money of itself it could use that to create loans, could be I dunno (?).

This "borrowing from the future" is just a concept that states expectations that a borrower will do something with the money to be able to pay it back + INTEREST

So they don't create it out of nothing and they borrow it from their customers... That's what I think at this moment... Is that right? or terribly wrong?

Yes, that appears to be the way it works. I haven't sat down and invested the time required to plow through all of Modern Money Mechanics to understand it. You can get a copy here [PDF, 40 pages].

 

[Blue Mountain]

... and on it goes. Banks create money from nothing every time a loan is made. It is a fact (read my signature, coming from a publication of the Federal Reserve, the horses mouth itself).

I say they give the appearance of creating money from nothing, when in fact they are creating the money by investing it in the near-term future: the labour that will be used to create goods purchased with the money, or labour used to run a business, or assets grown in the Earth (crops) or recovered (mining, fishing), or even services bought and sold. They are most certainly not simply printing money and handing it out willy-nilly. (Or if they do, you end up like Zimbabwe.)

The problem with the system we have now is NOT that banks create money from nothing, it is that they also require back more then they create. The principal debt gets extinguished but the interest part of the debt does not, necessitating more loans.

A naive reading of that last part indicates it would be impossible for anyone ever to pay off a loan. Given that is most certainly not the case, what did you have in mind when you write that?

 

[psionl0]

Don't make it too complicated Finsend.

When banks lend money, they are essentially exchanging a liability for a liability. The borrower's liability is the promissory note (or credit card slip) he signed while the bank's liability is the credits in its depositors' transaction accounts. Both liabilities are created when the loan is approved. The only role the bank's reserves plays is in setting an upper limit to how much new liability the bank can take on.

Since bank account balances can be used to settle debts just as well as cash, we are justified in calling them money. The rest of the explanations are largely spin - people trying to describe it in terms they understand. (I think the term is "reasoning by analogy").

 

[Finsend]

Hi BM, thanx for reply, I am afraid I do not have so much time everyday so I hope you (and others) don't mind me droppin in once in a while, but not always everyday.

Looks good. As for the highlighted part, the bank does have something: the right to demand its $90 from mrBorrower if you go to the bank and want all of your $100 back. If mrBorrower can't pay the bank its $90, the bank would be in trouble. (In this case, I think the bank can go to another bank or the Reserve Bank and borrow $90 from them to give to you, and then it has time to go after mrBorrower for its $90. Plus interest, because it's now paying interest0oin the $90 it borrowed from another source to pay you.)


Yes, that appears to be the way it works. I haven't sat down and invested the time required to plow through all of Modern Money Mechanics to understand it. You can get a copy here [PDF, 40 pages].

Ok, I think I understand this now, about the bank having not completely nothing - it has a demand on money on mrBorrower. But I think I meant the bank does not have money, but you are right they have something (a promise to pay back from mrBorrower, something like that!

Ok so banks can (of course) also lend money from each other and the central banks, etc - if they are having trouble to pay out, etc...

But if mrborrower just dies (after burning the money he lend the bank has a loss, have they not? In their books/accounts? A financial problem, etc? they have to account for this don't they?

I myself did not read (and certainly did not understand MM) completely - yet! Just some bits I found on the net, so thanx for the link as well.

But maybe I will understand it (a bit more), sooner or later

cheers
F

 

[psionl0]

If mrBorrower can't pay the bank its $90, the bank would be in trouble.

But if mrborrower just dies (after burning the money he lend the bank has a loss, have they not? In their books/accounts? A financial problem, etc? they have to account for this don't they?

You are being misled here a little. There is not just one depositor and one borrower in the banking system - there are millions! One default is not going to force a bank to prevent a depositor from making a withdrawal. Individual deposits are not tied to any particular loan.

In any case, the interest the bank collects from unsecured loans (credit cards etc) is typically high enough to cover defaults. Banks are also able to partially cover their losses by selling "bad debts" to debt collectors. For other loans, banks usually require borrowers to put up collateral and even insure their debts so if mrBorrower kicks the bucket, the bank's back is covered.

 

[Finsend]

Hi psionI0,

Don't make it too complicated Finsend.

When banks lend money, they are essentially exchanging a liability for a liability. The borrower's liability is the promissory note (or credit card slip) he signed while the bank's liability is the credits in its depositors' transaction accounts. Both liabilities are created when the loan is approved. The only role the bank's reserves plays is in setting an upper limit to how much new liability the bank can take on.

Since bank account balances can be used to settle debts just as well as cash, we are justified in calling them money. The rest of the explanations are largely spin - people trying to describe it in terms they understand. (I think the term is "reasoning by analogy").

I think I understand most of this, I hope

A liability is some kind of obligation as I understand it (to pay back money/value (could be a house or gold? depending on contract?).

So what you say is mrBorrower signs contract and has obligation to pay back loan to bank.
Bank has obligation to depositors (to pay out if they want their money) and uses FRB to create the loan (and thus creates some obligation to depositors while creating loan).

Both liabilities/obligations are created when the loan is created/approved (by whom? by the bank itself? I guess, or do you mean the FED/gov? some other peoples?).

The RESERVES (depositor accounts - but does gold also count? or currency from say Japan? or is it done in $ only in US?) determine/set the maximum amount a bank count create loans by using FRB.

And you say we can call papermoney/cash money and also electronic money (in the accounts) that sounds logical to me!

This I do not understand very well:

psion: Q The rest of the explanations are largely spin - people trying to describe it in terms they understand. (I think the term is "reasoning by analogy"). UQ

What do you mean by that? You mean that we are trying to explain money and creation and do this in our own ways (and thus simplifying it and using our own words)? Or do you mean something else, I am not very sure.

Thanx again and I just saw some new post, I go read it now!
F

 

[Finsend]

Originally Posted by Finsend
Quote:
If mrBorrower can't pay the bank its $90, the bank would be in trouble.
But if mrborrower just dies (after burning the money he lend the bank has a loss, have they not? In their books/accounts? A financial problem, etc? they have to account for this don't they?

You are being misled here a little. There is not just one depositor and one borrower in the banking system - there are millions! One default is not going to force a bank to prevent a depositor from making a withdrawal. Individual deposits are not tied to any particular loan.

In any case, the interest the bank collects from unsecured loans (credit cards etc) is typically high enough to cover defaults. Banks are also able to partially cover their losses by selling "bad debts" to debt collectors. For other loans, banks usually require borrowers to put up collateral and even insure their debts so if mrBorrower kicks the bucket, the bank's back is covered.

Ok, I understand this, it makes it more complex but also more realistic.
The bank has a LOT OF CUSTOMERS and so the bank has to make sure that (at any time? or most of the time) it is able to pay out - so it manages many accounts and should makes sure to have always 10% in the vault, right?

If they cannot pay out is this a crime? I mean they can do FRB by law can't they, so government knows it could go wrong if everybody withdraws the money in one day, could they not? So this is legal and the risk is accepted by law or something, or is the bank just to blame when they cannot pay out because lots of people suddenly wanted all their money...?

As I understand the bank can also loan from FED or other bank if they have this problem, but still it happened in a way in Argentina did it not? I read this... somewhere.

So who is accountable if the money is not there? The government? But is not the government the people? I mean should they pay back themselves? or print lots of money if there is not enough? bad luck for the savers a risk they took? is that in contract when you open account? I should read these papers, gehehe, I never did up to now... very stupid maybe

The last part is difficult for me so I read that again and think about it!

Bye for now and have a nice day!
F

 

[Finsend]

In any case, the interest the bank collects from unsecured loans (credit cards etc) is typically high enough to cover defaults. Banks are also able to partially cover their losses by selling "bad debts" to debt collectors. For other loans, banks usually require borrowers to put up collateral and even insure their debts so if mrBorrower kicks the bucket, the bank's back is covered.

Ok, so the bank earns money (interest for example) and using this money (and maybe other income) they can have some borrower default once in a while... no problem

They also sell "bad debt" (I guess those who are unlikely to be paid off? or something risky?) to others (who thus take over the debt+interest/etc) so they get rid of this bad debts which were to risky. But then some one else has a problem, not? I mean why buy very bad debt from bank? This could go wrong not? But maybe people who like take risk do this (?)

Collateral - wiki

In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.

Ok with the house for example, I guess (?) I get loan for house but if I f*** up/die/or something like that bank gets house, right (?) I think so. This is also security.

I think I understand a lot more now

But still sometimes this FRB goes wrong does it not?
Like in Argentina or maybe Zimbabwe, other countries?
I should look this up

And now everybody is talking about debt here debt there big trouble... and greece and so on... and lehmans brothers bank fell, right?

So a QUESTION I like to ask ->>>

Have these debt problems now all over the place have anything to do with FRB according to you, or is something else the matter - or maybe more issues together?

I know I write a lot and bad English so please feel free to ignore/don't read most of what I write, I try to write better English and shorter, but I am not very good at it I guess... Maybe later

 

[UndercoverElephant]

Have these debt problems now all over the place have anything to do with FRB according to you, or is something else the matter - or maybe more issues together?

Yes, it couldn't have happened like this without FRB. But it is only part of a much bigger problem to do with unsustainable levels of resource consumption in the "developed" world and an economic system which depends on ever-increasing supplies of natural resources. The debt problems would be pretty terrible on their own, but they are made much worse by the fact that we are now entering a period of declining availability of resources (and therefore higher prices.) This means that it is going to be impossible to create the economic growth that would be necessary to pay off the debts. For this reason many countries, including the US, are now in a position where it is impossible for them to pay off the debts, ever.

FRB has made what was always going to be a very serious problem much worse and more immediate.

 

[Finsend]

Yes, it couldn't have happened like this without FRB. But it is only part of a much bigger problem to do with unsustainable levels of resource consumption in the "developed" world and an economic system which depends on ever-increasing supplies of natural resources. The debt problems would be pretty terrible on their own, but they are made much worse by the fact that we are now entering a period of declining availability of resources (and therefore higher prices.) This means that it is going to be impossible to create the economic growth that would be necessary to pay off the debts. For this reason many countries, including the US, are now in a position where it is impossible for them to pay off the debts, ever.

FRB has made what was always going to be a very serious problem much worse and more immediate.

Hi UE, thanx for this - I do not have much time now, got to go But I will think about this and reply later!

For now I think I agree (mostly?) and it sure seems to me that this financial-system (including FRB) has some big problems, things that are not OK-working 'good' /etc maybe even 'wrong' or a bit criminal in my opinion, some times... I post more later!

HAND,
F

 

[Sceptic-PK]

Hi UE, thanx for this - I do not have much time now, got to go But I will think about this and reply later!

For now I think I agree (mostly?) and it sure seems to me that this financial-system (including FRB) has some big problems, things that are not OK-working 'good' /etc maybe even 'wrong' or a bit criminal in my opinion, some times... I post more later!

HAND,
F

Don't let the fear-mongers scare you. There is nothing wrong with fractional lending. Yes, Elephant is correct in that FRB has increased the use of finite resources, but that's because FRB has drastically increased productivity. It is the productivity that has eaten resources, not FRB.

There is no relationship between a country's national debt and fractional lending. Countries don't borrow their money from a commercial bank the way you or I might. National debt is created by a government spending more than it generates in revenue, and could occur in any monetary system.

 

[psionl0]

A liability is some kind of obligation as I understand it (to pay back money/value (could be a house or gold? depending on contract?).

So what you say is mrBorrower signs contract and has obligation to pay back loan to bank.
Bank has obligation to depositors (to pay out if they want their money) and uses FRB to create the loan (and thus creates some obligation to depositors while creating loan).

Pretty much correct except that banks don't "use FRB". FRB is the name given to the mutual liability swapping process (or lending money straight from their reserves).

Both liabilities/obligations are created when the loan is created/approved (by whom? by the bank itself? I guess, or do you mean the FED/gov? some other peoples?).

"Approved" is probably the wrong word because it implies some regulatory authority is involved. The loan is "approved" once the borrower has signed the promissory note and the bank has credited the borrower's bank account.

BTW: When the bank credits the borrower's account, it doesn't take the credits away from anybody else's account. That's why we say that the money is "created".

The RESERVES (depositor accounts - but does gold also count? or currency from say Japan? or is it done in $ only in US?) determine/set the maximum amount a bank count create loans by using FRB.

Interesting question. I haven't considered how a bank's international holdings would count in its reserves. I imagine that any international payments would be converted into $US before the bank receives it. Banks might invest in gold but gold and money are two different things in this day and age.

A bank's reserves must exceed 10% of the total of its depositors' transactions accounts. Iff the reserves fall below this then the bank must bring the reserve ratio back to 10%. It could stop issuing new loans, sell some of its debt (or cash in some of its investments) or borrow from other banks or the fed.

And you say we can call papermoney/cash money and also electronic money (in the accounts) that sounds logical to me!

Yes, and payments can be made by transferring money from one bank account to another without touching any cash at all. This is why banks can get away with having liabilities much bigger than their reserves.

This I do not understand very well:

psion: Q The rest of the explanations are largely spin - people trying to describe it in terms they understand. (I think the term is "reasoning by analogy"). UQ

What do you mean by that? You mean that we are trying to explain money and creation and do this in our own ways (and thus simplifying it and using our own words)? Or do you mean something else, I am not very sure.

What I mean is that descriptions such as,
"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." or
"The bank is paying now for labour to be performed in the future." while not necessarily incorrect would be misleading if you weren't aware that the process was just about swapping liabilities.

 

[psionl0]

Ok, so the bank earns money (interest for example) and using this money (and maybe other income) they can have some borrower default once in a while... no problem

They also sell "bad debt" (I guess those who are unlikely to be paid off? or something risky?) to others (who thus take over the debt+interest/etc) so they get rid of this bad debts which were to risky. But then some one else has a problem, not? I mean why buy very bad debt from bank? This could go wrong not? But maybe people who like take risk do this (?)

If the bank sells a bad debt it is not going to get the full value of the loan. The debt collector believes he can collect some of the debt and that is the maximum he is willing to pay for the debt. So the bank still has a loss on its books.

I think I understand a lot more now

But still sometimes this FRB goes wrong does it not?
Like in Argentina or maybe Zimbabwe, other countries?
I should look this up

And now everybody is talking about debt here debt there big trouble... and greece and so on... and lehmans brothers bank fell, right?

So a QUESTION I like to ask ->>>

Have these debt problems now all over the place have anything to do with FRB according to you, or is something else the matter - or maybe more issues together?

The cause of most countries' debt troubles is governments spending more than they get in taxes etc. If you understand FRB you will realize that the government can't create money to cover the shortfall because if it did, the banks would create a lot more money and that is inflation. Instead, the government borrows the money without any thought of how to pay it back (that is a problem our children will have to solve).

 

[Finsend]

Don't let the fear-mongers scare you. There is nothing wrong with fractional lending. Yes, Elephant is correct in that FRB has increased the use of finite resources, but that's because FRB has drastically increased productivity. It is the productivity that has eaten resources, not FRB.

There is no relationship between a country's national debt and fractional lending. Countries don't borrow their money from a commercial bank the way you or I might. National debt is created by a government spending more than it generates in revenue, and could occur in any monetary system.

Thanx for this info.
I think I understand that FRB has benefits (as well? - or doesn't it have some 'bad sides' as well, in your opinion?). Money just sitting in the vault could help boost productivity (by lending/loans) so people can start a (productive) business without anything (money/tools/etc) - they take a loan and hopefully create a nice business (good for society et al)...

I think I also agree that FRB increased productivity (but also useless/harmful/etc - from my point of view of course) and thus helped to clear/mine/dig up/use up the resources (faster) / (coal/oil/forests/etc/etc). Maybe I see it indeed as some kind of booster, steroids maybe? But maybe just healthy (green) tea, I'm not (very) sure about that (yet)...

So I am not sure (yet) if FRB is bad or good or maybe both (depending on the situation/people/society/etc)... Maybe it is some kind of tool and it depends on the people and what they do with it... But I tend to think it sometimes gets out of hand, nowadays for example... For individuals and maybe governments as well (?).

You write that goverments do not have a relationship with FRB/lending - they do not borrow their money from commercial banks... that I do not know yet, do they borrow money? I guess they do? Or do they always just print it? They lend some money sometimes don't they, from investors or things like that? These state obligations or what are they called is that not some kind of loan?

I notice it gets to complicated very soon for me, geheh... Especially in English
Do you think that FRB is not one of the problems that we have now? I guess so, because you said so - I think I still have this feeling 'something is not right' with the banks and maybe also FRB, but I am not very sure and I cannot give good arguments... but just by watching TV I sometimes think 'hey these guys make a lot of money and sit on the exchange whole days, thinking about money making (and making it) etc and well that just does not 'feel' right all the time, geheheheheh (form my perspective) or something like that, thats one of the reasons I visit this thread and read some about this FRB and banks and money etc...


Cheers
F

 

[Finsend]

1.Pretty much correct except that banks don't "use FRB". FRB is the name given to the mutual liability swapping process (or lending money straight from their reserves).

2."Approved" is probably the wrong word because it implies some regulatory authority is involved. The loan is "approved" once the borrower has signed the promissory note and the bank has credited the borrower's bank account.

3.BTW: When the bank credits the borrower's account, it doesn't take the credits away from anybody else's account. That's why we say that the money is "created".

4.Interesting question. I haven't considered how a bank's international holdings would count in its reserves. I imagine that any international payments would be converted into $US before the bank receives it. Banks might invest in gold but gold and money are two different things in this day and age.

5.A bank's reserves must exceed 10% of the total of its depositors' transactions accounts. Iff the reserves fall below this then the bank must bring the reserve ratio back to 10%. It could stop issuing new loans, sell some of its debt (or cash in some of its investments) or borrow from other banks or the fed.

6.Yes, and payments can be made by transferring money from one bank account to another without touching any cash at all. This is why banks can get away with having liabilities much bigger than their reserves.

7.What I mean is that descriptions such as,
"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." or
"The bank is paying now for labour to be performed in the future." while not necessarily incorrect would be misleading if you weren't aware that the process was just about swapping liabilities.

I did the numbering

1.OK FRB is the name of the way the banks 'create' money/loans/etc - by law/etc.

2.OK, so the bank and the borrower both agree (on the contract) (no police/judge/authority needed - but within the law).

3.OK, I think I understand (with the help of some nice vids as well) - but still the bank has obligation to 'guarantee' to pay out to depositors at any time? (at least 10% - by law? or are they obligated to pay out 100% when asked for? They never can... can they (nowadays)? I mean, what do I don't understand here? I do I understand but is it just like that, a bit risky business maybe?).

So the more they loan out -->> the smaller the chance they can pay out (all of it) ---> so the greater the risk that (in case of bank-run) they get into trouble - although maybe still acting 'lawful'? Right? Wrong?

4. Ok, we/I should find this out then! I mean because the value of currencies can change (very) fast don't they? It could be the Yen or whatever is falling against the dollar or euro, right pretty quick? Or going up, etc... It seems important (to me) whether this has a relation with the amount a bank can lend out/the reserve/etc, does it not? If an American bank has lots of yen (as reserves) and Japan sinks into the ocean, well ehmmm ETC...

Maybe for now we stick to the accounts/vaults (and then only the dollars / numbers (in dollars))?
so they have to keep the reserve in dollars/euros depending on the country they ehm "live" in

5. Does it have to do this fast? I bet their are rules? I mean within a month or so? a (book)year? do you know?

6. I think I understand most of this) now - a bit That woud be a h*ll of a computersystem/program I would guess Very fast probably not on windows I'm not sure I understand the last sentence totally - 100% - yet... but I will try to go figure it out...

7. I think (hope) I understand this a bit, now(adays)... In the end it is about money and numbers and promises etc and matters of speaking (which do not count - at the end of the contract - if the bank wants it's money then, heheh - or maybe if the bank is nice and gives you some more "time" to pay of debt, extend the loan) etc... I work harder still I promise!! NO, you pay NOOOOW!!! Or else geheheh.. something like that I guess, based on 'risk' calculations

 

[Finsend]

1.If the bank sells a bad debt it is not going to get the full value of the loan. The debt collector believes he can collect some of the debt and that is the maximum he is willing to pay for the debt. So the bank still has a loss on its books.

2.The cause of most countries' debt troubles is governments spending more than they get in taxes etc. If you understand FRB you will realize that the government can't create money to cover the shortfall because if it did, the banks would create a lot more money and that is inflation. Instead, the government borrows the money without any thought of how to pay it back (that is a problem our children will have to solve).

1. Ok, that's clear. They (might) have a loss (not if they succeed in selling it for the total amount, but who would buy this?) but they got rid of the risk and have at least some of their money back, something like that I would guess... The badder/worse? the loan the less they get for it, but the happier they might be to get rid of it, I guess again

2. Ok, so government spending to much (of their own money? - they habe bankaccount somewhere? at the fed or state/national bank? - or just bookkeeping?) is trouble. Oh I just thought governments can of course borrow from other countries? Or maybe (foreign) banks/etc?

So they cannot create to much money all the time, because this would increase the money total because the banks would start lending out / creating new money, to much means inflation (is that always bad? I mean is there a number like 2% or 10% that is ok and 50%, 100% is bad, etc) ) and/or other bad things could happen as well?

Ehm... I do not understand this latest part very much...
IF the/a government (USA, China, Netherlands or Zimbabwe, etc) cannot create more money (because of this inflation thing, which is bad, because ehm... why is that so bad? I mean, is that because you have to print new papermonies all the time with higher numbers??? If every money was only electronic would that still be a problem? you could just raise the numbers could you not?)

BUT IF a government has to borrow money "without any thought of how to pay it back) then they would have a debt somewhere won't they? They have to pay this money to some-one, right? But they know this don't they? so they would not borrow to much then, would they? Because they (and so the whole country? the citizens or is it really from the government, this money?) would have to pay it back (to some guy?)? I mean why would they borrow much to much money? And not be able to pay off debt, if I do that, geheheheheh I get in trouble most of the time geheheheheh

So the same for a government, or not? Other peoples or countries would become pissed of would they not? And/or the children who have to pay this debt? - As you said. That's not pretty fair/good/wise is it? hmm... I have to think about it some more, I guess

 

[tensordyne]

First off, sorry for not responding until now. Finsend has moved on but maybe I will respond to the post given to my earlier post later.

I say they give the appearance of creating money from nothing, when in fact they are creating the money by investing it in the near-term future: the labour that will be used to create goods purchased with the money, or labour used to run a business, or assets grown in the Earth (crops) or recovered (mining, fishing), or even services bought and sold. They are most certainly not simply printing money and handing it out willy-nilly. (Or if they do, you end up like Zimbabwe.)

No, FRB banks really do create money from nothing. Read my signature which says as much (or give me your interpretation of the quote). Banks are required to make sure a loanee (is that even the right word?) can repay the loan. When they do not do this and make tons of loans to grow big and hide longterm losses we get what we have in the USA, control fraud (the recent housing bubble collapse). For that I suggest looking up Steven K. Black.

A naive reading of that last part indicates it would be impossible for anyone ever to pay off a loan. Given that is most certainly not the case, what did you have in mind when you write that?

It is perfectly possible for people to pay off loans (with respect to what I wrote and how I believe the system works), it is just mathematically impossible for everyone as a whole to pay off ALL loans. In general, the number of defaults will be proportional to the interest rate, although it is much more complicated then this. There is a time-lag between paying off old loan amounts and the creation of new loans to cover the previous unballanced debt created from previous loans.

ALL Debt > ALL New Money created by loans (always, at any point in time).

 

[Finsend]

Just some thoughts here...

It is perfectly possible for people to pay off loans (with respect to what I wrote and how I believe the system works), it is just mathematically impossible for everyone as a whole to pay off ALL loans. In general, the number of defaults will be proportional to the interest rate, although it is much more complicated then this. There is a time-lag between paying off old loan amounts and the creation of new loans to cover the previous unballanced debt created from previous loans.

ALL Debt > ALL New Money created by loans (always, at any point in time).

You said it is just mathematically impossible for everyone as a whole to pay off ALL loans.

But why?
Does that not depend on the interest rate and the creation of new money by the fed/gov, how much / how fast, etc?

I mean if the interest rate = 0 I see no problem?
I or everybody takes a loan does nothing and then brings it back and everything is fine isn't it?
The debts are uncreated.

But this is never the case (maybe in Islam countries, I dunno) so lets say banks ask interest on loans and pay it out on savings. So borrowers have to pay back more than they borrowed, this (interest) money has to come from somewhere -> but can't this be coming from the FED/Gov?

They can just print it, can't they? The extra money needed to pay of debts+interests?

So if I work for the gov as fireman or something, I take a loan with the bank+interest to uy stuff, but I get this salary (they print it for me) and I can pay of my loan/debt+interest at the bank with that money can't I? And everybdy else as well?

But then again, you might say, meanwhile the banks would also create new loans again... I guess... so the gov/fed has to print real fast and pump this money into the economy!

And we have to hope that less people take ehm loans in the mean time! Then maybe we reach a point that almost nobody takes a loan anymore and everybody can pay of the debts and the interest!

But this would give inflation, wouldn't it? And thats bad I heard.... but why is it? As long as my salary increases and the gov/fed

prints like mad there's no problem is there, only with the papermoney with the numbers, they havo to be changed... but digitally this is no problem is it on the computer? And most people get ther salary on the computer don't they? And the gov/fed could print some extra $1,000,0000 notes as well, thats just some extra zeroes...

But then we can all pay of our debts! But maybe the other countries get p*ssed off then... because they only have lots of $10 notes/etc... and a big mac would cost $100 maybe... so they cannot buy anything for their savings, just as the normal savers in the county... they would probably be p*ssed off as well... especially if they are not fireman but working not for the government, still having a lousy salary maybe...

Hmm... very weird all this money things... I just don't seem to really get it if to many things happen at the same time...

ALL Debt > ALL New Money created by loans (always, at any point in time).

This is because of the interest?
When a bank has $100 deposited from the savers.
It can create lets say 90% loans = $90 keep $10 in reserve.
Why is the debt always greater than the new money created by loans (if there was no interest I mean then it would not be, would it?) - the borrower has $90 and a debt of $90 that equals - if he has to pay rent ok, then there might be some problem, but doesn't the FED/Gov take care of that by printing new money?

If the interest is say 10% and this guy gets $100 printed salary from the fed/gov then there would be even more money than there is debt, or not? So the borrower could then easily pay of his debt+interest or not?

Anyway Ï think I have to let all of this sink in for a while

 

[Finsend]

Questions

I was wondering banks cannot create new loans based on old loans can they?
I mean if I take a loan at the bank, I get a debt/IOU/liability account and a credit account, but this credit account does not count as a new deposit for the bank to create new loans with, does it? I think not.

But when I goto the ATM and get the credit of my account and deposit into another bank, can this bank then can create new loans with that money I deposited? I think so.

 

[Finsend]

It is perfectly possible for people to pay off loans (with respect to what I wrote and how I believe the system works), it is just mathematically impossible for everyone as a whole to pay off ALL loans. In general, the number of defaults will be proportional to the interest rate, although it is much more complicated then this. There is a time-lag between paying off old loan amounts and the creation of new loans to cover the previous unballanced debt created from previous loans.

ALL Debt > ALL New Money created by loans (always, at any point in time).

IF the interest rate = 0.
And banks created loans - why could not everybody then just pay back all these loans?
I think they could?
This would be just a matter of bookkeeping?
Crossing out debt accounts/liabilities and assets/credit accounts against each other?

But if the banks asks interest on a loan and gives interest to savers then the people who borrowed have to pay the loan + interest. And this interest is a debt the borrowers have to pay to the bank, so this has to come from somewhere... In that case the Total Debt (owed to the bank) would be greater than the new money created by these loans... You cannot pay of the loan+interest with only the loan itself...

So back to the FED for more new money I guess
You could fo to some other bank but still they do the same thing, so for borrowers to be able to pay back this interest new money has to be created somewhere... Or maybe the bank is satisfied with a car or a house or something else, labour maybe even...

Hmm think I better goto sleep now!