How the banks create money

[psionl0]

Why do you take exception to that?

"It led to disastrous inflation and was devastating to the common man;" ..... caused ..... "by England forcing the colonies to STOP the practice!" Do you think that accurately represents what the money masters video is saying?

Seriously?

 

[tensordyne]

And Knowing is Half the Battle!

If I had commented on your mathematics you might have a point. As it stands I merely refer to the nonsense you've put into words. I sincerely hope that your mathematical skills are where your true talents lie.

Haha. Your signature is a perfect illustration of you doing precisely this- a handful of sentences that you still don't understand, you won't understand, because it satisfies your anti-banking world view. You're just the ugly step-child of the discredited left. At least they got some things right though.

You just don't get it Sceptic-PK, I feel bad for you. I feel bad for you the same way you might feel bad if a mentally handicapped person where to try and play some sport against you. They just stumble around and try their hardest but sometimes it is just too altogether painful to bear continuing to play.

Perhaps though you do not want my pity. If such is the case, I meant to give a sort of general overview of the whole line of debate anyway. Perhaps I should do that now. I will stick to words and sentences in deference to your most natural mode of thought. I hope that I can assume that you can do basic arithmetic, no? Otherwise what comes next will be pointless.

You have one point Sceptic-PK that I think is correct (if stated not in isolation). Barring any actions from a central bank like the Fed, the total reserves of all banks remains constant. On the other hand, banks do create new money in the form of additions to deposit accounts in order that loans may be repaid. These two statements are not in contradiction.

Say a bank has 10,000 in reserves and 10,000 in deposits. After a loan of 9,000 the bank will have 10,000 in reserves and 19,000 in deposits, plus a new asset of a 9,000 loan. Whenever money is moved around it subtracts from both deposits and reserves in equal measure (your point). On the other hand, in order to repay the 9,000 loan asset, that is why there is the additional 9,000 in deposits (as per my signature quote, what psionl0 and I have been saying, and so on).

The reserves is 10,000, which is equal to the deposits 19,000 minus the loan 9,000.

10,000 = 19,000 - 9,000.

What I am saying Sceptic-PK is that there are two things going on here. I took it before you agreed with my mathematics. I guess that was an incorrect conclusion. Let me put it this way, your point about reserves being constant (barring actions from "The Fed") is correct, but it is half the story.

As for my anti-banking views... I think that is more appropriate for another time.

I really mean this Sceptic-PK, all the best to you! My heart goes out to you.

 

[tensordyne]

Counter-factual Facts

"It led to disastrous inflation and was devastating to the common man;" ..... caused ..... "by England forcing the colonies to STOP the practice!" Do you think that accurately represents what the money masters video is saying?

Seriously?

Yeah, it is pretty funny and so counter-factual it shows why the Austrians are so brain-dead (of course the Austrians believe in Axiomatic Economic Theory that has no need for the grubby facts from history).

On the other hand if the contention of the author of that article is that The Lords of Commerce tried to stop the Colonies from printing their own money because they cared so much about the Colonies having inflation, I would like to see some evidence. The evidence presented by Zarlenga shows pretty well that the Lords decided to make it a policy to make the Colonies have no money so that they could treat the Colonies according to Mercantilism.

They did not want the Colonies independent and thus trading amongst themselves because the only thing they wanted the Colonies to do is send back raw material to be used in the Factories in the UK (it was considered the UK back then right??? King James and all that).

Your post up next psionl0, I promise!

 

[Tippit]

"It led to disastrous inflation and was devastating to the common man;" ..... caused ..... "by England forcing the colonies to STOP the practice!" Do you think that accurately represents what the money masters video is saying?

Seriously?

Why are you answering my question with questions while at the same time ignoring my question about the Continental being oversupplied? No, I don't think it accurately represents what the Oz video said. Not only didn't Still say that (to the best of my recollection) what he actually said was that it failed because of British Counterfeiting.

I think Still's purported reason for the failure of the fiat Continental is wrong, but that doesn't invalidate everything else he's said. Neither was Griffin's comment correct, nor does it invalidate everything else he's said.

 

[tensordyne]

Why are you answering my question with questions while at the same time ignoring my question about the Continental being oversupplied? No, I don't think it accurately represents what the Oz video said. Not only didn't Still say that (to the best of my recollection) what he actually said was that it failed because of British Counterfeiting.

I think Still's purported reason for the failure of the fiat Continental is wrong, but that doesn't invalidate everything else he's said. Neither was Griffin's comment correct, nor does it invalidate everything else he's said.

The Continental was oversupplied but not over-issued. I thought I covered this myself. The Continental was counterfeited (the real kind of counterfeiting, not the kind you always allude to) by various parties far in excess to how much the Continental Government issued. It was a form of Economic Warfare that the Brits have used before. Two of the counterfeiters even sued each other in British Court, which is part of the reason why it is known this happened in the first place!

If you want more specifics I can look them up. I do not know what psionl0's response to this would or will be, but that is my response.

Congratz Tippit on at least faithfully representing other people's arguments. It is a good step.

 

[tensordyne]

Note: I messed up on my widget example in post #1220. 1 widget worth $1 when $10 exists means that 10 widgets is worth $1 when $100 exists, not $10 each. Sorry about that. The rough reasoning goes like so.

1 widget / $10 = (10 * 1 widget) / $100. In other words the widget to price ratio stays the same.

 

[psionl0]

Why are you answering my question with questions while at the same time ignoring my question about the Continental being oversupplied?

I didn't think I would need to remind you of what was in the video. According to Still, colonial scrip worked out very well until Ben Franklin explained how it worked during a speech in England in 1763. The following year the currency act of 1764 outlawed the scrip. Since there was no gold in the colonies that spelled out instant depression.

The hyper-inflation took place during the war for independence and was the result of printing money to fund the war and the supply of counterfeit scrip by the British.

Griffin doesn't mention any of that in his article. Instead he twists what Still has said in an attempt to make him look ridiculous.

If Griffin is going to do an entire article about Still's views then he should represent them properly if he wants to be taken seriously.

 

[tensordyne]

I didn't think I would need to remind you of what was in the video. According to Still, colonial scrip worked out very well until Ben Franklin explained how it worked during a speech in England in 1763. The following year the currency act of 1764 outlawed the scrip. Since there was no gold in the colonies that spelled out instant depression.

The hyper-inflation took place during the war for independence and was the result of printing money to fund the war and the supply of counterfeit scrip by the British.

Griffin doesn't mention any of that in his article. Instead he twists what Still has said in an attempt to make him look ridiculous.

If Griffin is going to do an entire article about Still's views then he should represent them properly if he wants to be taken seriously.

Here, here!

 

[psionl0]

You have one point Sceptic-PK that I think is correct (if stated not in isolation).

That's a lot of intelligence to attribute to somebody who essentially just makes random statements.

Actually it would appear that Sceptic-PK thinks he has found a novel way to "prove" his case. In Sceptic-PK-land, the act of crediting a bank account with a loan and the act of withdrawing (or transferring) the money from the bank account occur simultaneously. That's why he thinks that banks are "lending from their reserves".

Of course, anybody with the slightest bit of critical thinking skills would realize that you have to borrow the money before you can withdraw it from your bank account. Since that doesn't apply to Sceptic-PK, expect him to repeat this argument ad nauseum while the rest of the world waits in vain for him to grow up.

 

[Sceptic-PK]

That's a lot of intelligence to attribute to somebody who essentially just makes random statements.

Actually it would appear that Sceptic-PK thinks he has found a novel way to "prove" his case. In Sceptic-PK-land, the act of crediting a bank account with a loan and the act of withdrawing (or transferring) the money from the bank account occur simultaneously. That's why he thinks that banks are "lending from their reserves".

Of course, anybody with the slightest bit of critical thinking skills would realize that you have to borrow the money before you can withdraw it from your bank account. Since that doesn't apply to Sceptic-PK, expect him to repeat this argument ad nauseum while the rest of the world waits in vain for him to grow up.

Your reading comprehension skills are terrible. You’re like those mature-aged students at uni we all used to laugh at. Never shut up, but never quite got it either.

At no stage have I said the process is simultaneous; indeed I stated the exact opposite in the other thread, which you commented on before writing this BS. It is a two-step processs- loan creation & loan funding. The loan creation part is irrelevant. Where the money comes from is what matters. The money comes from excess reserves.

You just don't get it Sceptic-PK, I feel bad for you. I feel bad for you the same way you might feel bad if a mentally handicapped person where to try and play some sport against you. They just stumble around and try their hardest but sometimes it is just too altogether painful to bear continuing to play.

The only thing you should feel bad for me about, is wasting my time with your condescending nonsense.

You have one point Sceptic-PK that I think is correct (if stated not in isolation). Barring any actions from a central bank like the Fed, the total reserves of all banks remains constant. On the other hand, banks do create new money in the form of additions to deposit accounts in order that loans may be repaid. These two statements are not in contradiction.

Say a bank has 10,000 in reserves and 10,000 in deposits. After a loan of 9,000 the bank will have 10,000 in reserves and 19,000 in deposits, plus a new asset of a 9,000 loan. Whenever money is moved around it subtracts from both deposits and reserves in equal measure (your point). On the other hand, in order to repay the 9,000 loan asset, that is why there is the additional 9,000 in deposits (as per my signature quote, what psionl0 and I have been saying, and so on).

The reserves is 10,000, which is equal to the deposits 19,000 minus the loan 9,000.

10,000 = 19,000 - 9,000.

What I am saying Sceptic-PK is that there are two things going on here. I took it before you agreed with my mathematics. I guess that was an incorrect conclusion. Let me put it this way, your point about reserves being constant (barring actions from "The Fed") is correct, but it is half the story.

As for my anti-banking views... I think that is more appropriate for another time.

I really mean this Sceptic-PK, all the best to you! My heart goes out to you.

I think we might actually agree on something, thank Christ. Of course, even psi the middle-aged buffoon admits that deposits are worthless without reserves. And (once again) there is nothing going on here specific to banks. Anyone may create new deposits by lending money.

 

[Startz]

I really don't want to pour oil on fire, but I'm curious as to why the participants here think it matters what the source of funds are for making a loan. Does it affect the money supply? Does it affect the circumstances under which loans can be expanded? Something else? Is some distinction being made between what happens instantaneously and what happens in full equilibrium?

I'm pretty sure I understand how this stuff works, but I've been having considerable trouble understanding what the consequences of the disagreements are.

 

[Sceptic-PK]

I really don't want to pour oil on fire, but I'm curious as to why the participants here think it matters what the source of funds are for making a loan. Does it affect the money supply? Does it affect the circumstances under which loans can be expanded? Something else? Is some distinction being made between what happens instantaneously and what happens in full equilibrium?

I'm pretty sure I understand how this stuff works, but I've been having considerable trouble understanding what the consequences of the disagreements are.

Because these clowns are of the opinion that banks magically invent the money they loan, when all evidence suggests that banks loan the money they have on deposit from their customers. Putting your money into a bank is effectively loaning that money to the bank, which they will loan to others. It’s important because they (the clowns) claim that banks can create money from nothing, and then charge interest on it and this forms a central point of their quaint anti-banking mantra.

 

[Startz]

I really don't want to pour oil on fire, but I'm curious as to why the participants here think it matters what the source of funds are for making a loan. Does it affect the money supply? Does it affect the circumstances under which loans can be expanded? Something else? Is some distinction being made between what happens instantaneously and what happens in full equilibrium?

I'm pretty sure I understand how this stuff works, but I've been having considerable trouble understanding what the consequences of the disagreements are.

Because these clowns are of the opinion that banks magically invent the money they loan, when all evidence suggests that banks loan the money they have on deposit from their customers. Putting your money into a bank is effectively loaning that money to the bank, which they will loan to others. It’s important because they (the clowns) claim that banks can create money from nothing, and then charge interest on it and this forms a central point of their quaint anti-banking mantra.

Does some part of this argument rest on whether the bank is holding excess reserves when they make the loan?

 

[psionl0]

Does some part of this argument rest on whether the bank is holding excess reserves when they make the loan?

Since a borrower is likely to withdraw the money he borrows, a bank needs to have sufficient reserves on hand to allow this to happen if it makes a loan.

However, reserves only get involved when someone is spending money. The act of creating the money that is loaned is done by a bookkeeping entry and has nothing to do with the bank's reserves.

 

[Sceptic-PK]

Which of course is no different to saying “I’ll loan you $10” before you actually give that person $10.

 

[Startz]

Does some part of this argument rest on whether the bank is holding excess reserves when they make the loan?

Since a borrower is likely to withdraw the money he borrows, a bank needs to have sufficient reserves on hand to allow this to happen if it makes a loan.

However, reserves only get involved when someone is spending money. The act of creating the money that is loaned is done by a bookkeeping entry and has nothing to do with the bank's reserves.

Suppose that required reserves are 10% and that the bank balance sheet is $9,000 in loans, $1,000 in reserves, and $10,000 in deposits. The bank can't make any loans by increasing deposits or giving out reserves, since that would put it out of compliance.

But I'm still curious as to your view as to what would be determined by some understanding of the source of funds that banks loan out.

 

[psionl0]

Which of course is no different to saying “I’ll loan you $10” before you actually give that person $10.

It's a little more than that. It is giving someone an IOU for $10 who later exchanges the IOU for cash or something else of value (ie he spends it just as he does with other forms of money).

 

[tensordyne]

FRB Hell...

I really don't want to pour oil on fire, but I'm curious as to why the participants here think it matters what the source of funds are for making a loan. Does it affect the money supply? Does it affect the circumstances under which loans can be expanded? Something else? Is some distinction being made between what happens instantaneously and what happens in full equilibrium?

I'm pretty sure I understand how this stuff works, but I've been having considerable trouble understanding what the consequences of the disagreements are.

Since I do not like making fun of retarded people, I am pretty much done with Sceptic-PK for now. Pour on whatever amount of oil is to your liking.

I am curious though how you think Fractional Reserve Banking works Startz. Your second sentence should have in it effect and not affect (as far as I understand the difference of meaning in the two words...). I for instance have been trying to affect a greater understanding of FRB in Sceptic-PK and have found the task futile with the effect that nothing has changed.

I am actually starting to tire of this subject now that I really know how FRB works. I guess now I understand how you must have felt psionl0 reading all those previous posts.
Sorry I did not answer your questions Startz. Perhaps psionl0 can be of more help. Explaining in words, concepts I find easier to think of in mathematical equations, is a bit of a gruesome affair, I am afraid. Words often have an imprecision that formulas do not have.

Suffice it to say, loans do not come from deposits, they are limited by what deposits and reserves are according to reserve requirements. Loans create new money. This new money is used to pay off the amount of the loan once a borrower has gone out and earned it back from the general economy from whence the borrower first spent it into.

Loan principal gets extinguished, just like the new loan money gets extinguished, when the principal on a loan is repaid This is the part that Sceptic-PK does not seem to have the foggiest understanding of. There is one action banks do that is the same as to how Sceptic-PK thinks of loans working, and that is a transfer.

 

[Startz]

It's a little more than that. It is giving someone an IOU for $10 who later exchanges the IOU for cash or something else of value (ie he spends it just as he does with other forms of money).

Sorry. I just don't understand. (Really.) Are you saying that if a bank has no excess reserves it can nonethless give someone a loan in the form of a deposit?

 

[Sceptic-PK]

It's a little more than that. It is giving someone an IOU for $10 who later exchanges the IOU for cash or something else of value (ie he spends it just as he does with other forms of money).

It’s the same issue, neither the IOU nor the “I will loan you $10” is actually worth anything until “reserves” are accessed.