How the banks create money

[psionl0]

After highschool, I attended the University of Florida where I received a Bachelors and Masters in Accounting. Afterwards, I joined the Army where I served 8 years in Germany, with a brief stay in Kuwait, and in the states, with a second brief stay in Kuwait. After I got out, I started a business with a couple of partners making environmental air monitors and supplies. Just a couple of years after starting the business, I decided to attend Miami University and received a Master of Economics degree. That was 14 years ago. I sold my share of the business in 2009 and retired at the age of 44.

I am a college dropout with a background in computer science, and a sucessful stock market investor, retired at 29. I am 41 now.

LOL This reminds me of a Dilbert comic strip I just read:

http://dilbert.com/strips/2011-10-01/

 

[psionl0]

I think you are not debating in good faith anymore, so this just seems like pointless bickering. Truth is the first casualty in these types of "debates". This is unfortunate, as I would actually like to resolve these types of questions once and for all (and I think I have, at least in my own mind). I don't post on forums to insult others or engage in typing contests, I post in order to learn, or possibly teach, maybe at the same time. Obviously that isn't happening here.

It's a pity that you found post #1141 too nonsensical to look at then. It highlighted an important difference between a business and a human being:

A bank is like any other business - its assets and liabilities must match. The reason for this is that everything a business makes it owes to its owners. The net of assets over liabilities (the capital account) shows how much the business owes its owners.​

Since a human being is not owned by anyone he doesn't have to record how much he owes his "owner" and his "balance sheet" doesn't have to balance. (On his death, you would need to add a balancing entry such as "net owed to beneficiaries" to the balance sheet because "you can't take it with you").

You are correct in that I have never seen a company balance sheet that showed a company having equity in itself and I can't think of how such an entry would arise. "Shareholder equity" is exactly what it says - the amount of equity that the shareholders own in a company (which is why it appears as a liability in the company's books). If a company buys back some shares it doesn't gain equity in itself. Its assets and shareholder equity both go down by the same amount. The reverse is true if a company increases its share issue.

Of course a company can build up a "capital reserve" (I hope you don't equate this with shareholder equity) which is definitely a liability to the company but matched by an increase in assets.

The nearest analogy to the human case that I can think of where the word "equity" appears would be in a situation where I jointly own property with somebody else but I have sole possession of the property. In that case I would list the value of the property as an asset and the other guy's equity in the property as a liability. (The other guy would list his equity in the property as an asset). The difference between the two is, of course, my equity in the property but I don't have to record this as a liability while I am alive.

 

[psionl0]

I wonder what the four entries would be for average people.

But a human being is not owned by anybody so who does he owe his net worth to?

I like your questions tensordyne. I learn something new every time I try to come up with an answer to them.

This example highlights an important principle here: "Get the mathematics right then worry about what it means". This is what I have been doing since my first response to your question.

I now realize that since we are all under a death sentence, no-one can actually own anything on this planet. All we can do is have exclusive access to something while we are alive. Then it becomes someone else's turn.

So, I have concluded that the best way to describe an individual's "net worth" so that it makes sense on a balance sheet is to say that "net worth" is what someone owes to the beneficiaries on his will (or who the government declares the beneficiaries are in the absence of a will).

 

[The Fallen Serpent]

I like your questions tensordyne. I learn something new every time I try to come up with an answer to them.

This example highlights an important principle here: "Get the mathematics right then worry about what it means". This is what I have been doing since my first response to your question.

I now realize that since we are all under a death sentence, no-one can actually own anything on this planet. All we can do is have exclusive access to something while we are alive. Then it becomes someone else's turn.

So, I have concluded that the best way to describe an individual's "net worth" so that it makes sense on a balance sheet is to say that "net worth" is what someone owes to the beneficiaries on his will (or who the government declares the beneficiaries are in the absence of a will).

Perhaps the proper term would then be "estate." Who ultimately makes up the estate changes depending on the country and economic system, but the term could apply broadly. A person's net worth belongs to his estate. While alive the estate is generally just the one person, though sometimes two depending on marriage laws or other forms of power of estate. Upon death the estate generally is generally controlled by some combination of government, family and named beneficiaries requiring the estate to be split up in accordance with the will and laws.

 

[tensordyne]

nonsense piled higher and deeper.

I like your questions tensordyne. I learn something new every time I try to come up with an answer to them.

This example highlights an important principle here: "Get the mathematics right then worry about what it means". This is what I have been doing since my first response to your question.

I now realize that since we are all under a death sentence, no-one can actually own anything on this planet. All we can do is have exclusive access to something while we are alive. Then it becomes someone else's turn.

So, I have concluded that the best way to describe an individual's "net worth" so that it makes sense on a balance sheet is to say that "net worth" is what someone owes to the beneficiaries on his will (or who the government declares the beneficiaries are in the absence of a will).

Cool. I am glad I can ask interesting questions. I agree with the general idea of getting the mathematics correct first and then worrying about interpretation. I am about done watching the link that Finsend gave of a series of youtube videos by the CBC (Canadian Broadcasting Corporation) on the crash called 'Meltdown'. So I guess the Queen of the UK went to the London School of Economics and asked, "why did nobody notice it coming?" One response, "it was a failure of imagination." Martin Wolfe of the Financial Times of London had his own response, "you will never foresee these things because the system is ultimately too complicated for anybody to really understand."

!!LOL!! Straight from a head Neoliberal Economist, 'we do not really understand how economics really works!' I guess when the founders of neoliberal economics decided that Herman Minsky was full of it, reality showed instead that they are full of it (◊◊◊◊ that is).

Yeah, I don't know. It is interesting this balance sheet idea. It looks to me like it can be used to hide what otherwise would be clearly imbalanced situations. Perhaps I will go into that later. So Tippit is getting into it with ngc6205. ngc6205, you look like a person who thinks that the current system is pretty much a good idea (I would say apologist, but that is inflamatory in nature), but maybe with some kinks in it? You two are ripe opponents in terms of this debate, since Tippit would like to get rid of the current system wholesale (to be replaced possibly by Molech! Or is it Serapis? The Golden Calf God of commerce.).

One of the things covered in the 'Meltdown' documentary was factory closings. It seems to me that the problem with Capitalism, as it is currently understood, is this idea of other people owning businesses. A factory town has a factory close because the factory owner is not seeing enough of a profit. Not that the business is even going under, just not enough of a profit. But who are they to close the factory? They put up X money to get it started, OK, pay them back X from the company in some timely way but unless they work at the factory their interests are inimical to the survival of the community that allowed the factory in the first place. And yet, on it goes.

The factory owners do not do the work, the workers do. If it was up to the workers, they would just as happily limp along, if that is what it took. Owning a business in this sense is like a form of proxy slavery, except that a slave owner at least has to provide for the upkeep of the slaves. Even that luxury is not afforded modern workers. Instead, some laws are supposedly in place to make sure workers get something like their just due (even that is often circumvented in myriad ways).

When the Russian Revolution happened, there was the possibility that the government could have been formulated in such a way that the only businesses allowed would be the equivalent of co-ops. Instead, the government went the down the path of state run central planning. Too bad. It seems to me that co-ops are the real form of capitalism. I have no problem with bonds, but owning stocks in perpetuity, really does seem like a form of proxy slavery to me, regardless of whatever arguments one wants to make about companies needing capital.

The financial side of what is termed 'Capitalism' is another form of craziness all it's own, it seems.

I am really working on a response to your 2nd and 3rd equation posts psionl0. I have it in a text editor and am going over it now. Should be interesting to see if Tippit and ngc6205 continue to debate or not. I hope they do myself. It makes for a good laugh every now and then.


All the best to you all!

 

[Finsend]

Some QUOTES

Thanks every-body!

For the good humor, geheh. I always have some good laughs when I drop in here! And of course thanx for the interesting and extremely high and way- beyond-me level discussions and other points of view shared here!

Sometimes I read back and I seem to start to understand more and more about money, the FED, FRB, and economy.

Maybe... Truth has many faces?
Probably a quote of someone?

A QUOTE! YES! Let's do THAT:
AaachWTH, let's do a whole bunch of em!!

Some Nice QUOTES overhere, about Capitalism 100% random of course, geheh:

Advocates of capitalism are very apt to appeal to the sacred principles of liberty, which are embodied in one maxim: The fortunate must not be restrained in the exercise of tyranny over the unfortunate.
- Bertrand Russell

Capitalism has socialized production. It has brought thousands of people together in the factory and involved them in new social relationships.
- C. L. R. James

Capitalism and the market are presented as synonymous, but they are not. Capitalism is both the enemy of the market and democracy.
- David Korten

Capitalism has destroyed our belief in any effective power but that of self interest backed by force.
- George Bernard Shaw

Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.
- John Maynard Keynes

Capitalism should not be condemned, since we haven't had capitalism.
- Ron Paul

Capitalism without bankruptcy is like Christianity without hell.
- Frank Borman

 

[psionl0]

Perhaps the proper term would then be "estate." Who ultimately makes up the estate changes depending on the country and economic system, but the term could apply broadly. A person's net worth belongs to his estate.

As I understand it, a person's estate consists of all of his assets and liabilities combined. The individual "balance sheet" just lists the contents of the estate in T form while his "net worth" (I don't know if there is a correct term here) is the net value of his estate.

I don't think it is correct to say that a person's net worth "belongs" to the estate - it is just the balance of assets over liabilities of the estate. It is a liability for the person because he owes it to whoever inherits the estate.

While alive the estate is generally just the one person, though sometimes two depending on marriage laws or other forms of power of estate. Upon death the estate generally is generally controlled by some combination of government, family and named beneficiaries requiring the estate to be split up in accordance with the will and laws.

I will leave this part of the discussion to the lawyers.

 

[Finsend]

Cool.
<knipknip>

All the best to you all!

Good piece, imho, on several levels.

It is good to think about several problems "we" have in our Western world, financial and others. And possible improvements or changes that might work better. Since most (all?) things are related, imho, and migh have some interconnectedness it is good to think out of a box/paradigm once in a while, imho.

Money needs to be some kind of realistic reflection of reality, imho, otherwise you get what you see now. Terribly vague of course, but ehm well.. it is my middle name after all.


I want to think and write a lot more, but I don't have time (now).
Hopefully later.

cheers,
finsend

 

[psionl0]

I am about done watching the link that Finsend gave of a series of youtube videos by the CBC (Canadian Broadcasting Corporation) on the crash called 'Meltdown'.

If you can tear yourself away from my equations for about an hour you might like to view A PHONE CALL TO THE BANK OF ENGLAND.

While I'm at it, I found a page in the People for a mathematically perfected economy website that discusses changes to the constitution to implement a usury-free system. It's a slight improvement on the sea of words that his other pages are but Mike Montagne has some way to go before he sounds convincing.

Here it is: http://www.perfecteconomy.com/pg-amendment.html.

One of the things covered in the 'Meltdown' documentary was factory closings. . . . . .

Don't forget that rising levels of debt are making a lot of industries unviable. Blaming private ownership or excessive wages (we mustn't blame the banks) is a bit of a smokescreen to me.

I am really working on a response to your 2nd and 3rd equation posts psionl0. I have it in a text editor and am going over it now. Should be interesting to see if Tippit and ngc6205 continue to debate or not. I hope they do myself. It makes for a good laugh every now and then.

Well Tippit isn't posting here ATM (my constant stupidity really made him mad) and I think that ngc6205 is too clever to state an opinion on banking reform in a contentious forum like this.

 

[tensordyne]

That phone call is absolutely hilarious! The guy asking the questions just does not stop. Yes, banks are involved in rentier profits. Yes, the way the economic system with fractional reserve banking (which inherently involves central banks) is currently structured is imbalanced. The guy asking the questions sounds like me from about 10 pages of posts ago.

Of course, now I realise it is a bit more complicated then I thought then, but the funny thing is that it is still essentially true about the problem of interest, in that because the banking process does not create the interest into the general economy, one still gets piling up debts. It is like as if a plumber designed a system that has more sources than there are sinks. Then this guy on the phone asks, 'why is it flooding all the time?' Plumber / Banker: 'well you know, it is people accepting the risk of putting in a new faucet...' Uhm, hello Banker / Plumber! Your freaking plumbing job sucks.

psionl0, let's work out the main outlines of the current system problems, in a mathematical sense. Why not, it should be a good exercise in logic, no?

 

[tensordyne]

phone call from hell

That phone call is absolutely hilarious! The guy asking the questions just does not stop. Yes, banks are involved in rentier profits. Yes, the way the economic system with fractional reserve banking (which inherently involves central banks) is currently structured is imbalanced. The guy asking the questions sounds like me from about 10 pages of posts ago.

Of course, now I realise it is a bit more complicated then I thought then, but the funny thing is that it is still essentially true about the problem of interest, in that because the banking process does not create the interest into the general economy, one still gets piling up debts. It is like as if a plumber designed a system that has more sources than there are sinks. Then this guy on the phone asks, 'why is it flooding all the time?' Plumber / Banker: 'well you know, it is people accepting the risk of putting in a new faucet...' Uhm, hello Banker / Plumber! Your freaking plumbing job sucks.

psionl0, let's work out the main outlines of the current system problems, in a mathematical sense. Why not, it should be a good exercise in logic, no?

 

[Finsend]

*RING RING ringhhh!*

Hello?
YES!

I just had a plan!
Let's start a bank with all the citizens and take loan of say 100 Trillion at the FED's or the ECB's!
At 0,25% interest!

And then we pay of all the debt and mortgages!
To everybody we need to pay!

The FED themselves would probably not even care about these boxes with lots of papers inside!
And all of this is OK, no problem!
16 Trillion = peanuts!
Just watch some TV!

The FEDand/orECB would not even want it back!
What would they want with 100 million boxes of papermoney or some lousy digits on a pc!?

Because they are our own government, aren't they? They serve us, don't they? And want to help us all the time! So we probably don't even have to pay it back. We would essentially be paying to ourselves, wouldn't we? After we paid all foreign debtors of course!

So... WE'RE THERE!
Problem solved, ALL OF THEM!
AND everybody HAPPY!
This is IT!

*BEEPBEEPBEEP*

PS
This could be done, couldn't it?
What do you pay for a mortgage?
More than 0.25%?

 

[Sceptic-PK]

but the funny thing is that it is still essentially true about the problem of interest, in that because the banking process does not create the interest into the general economy, one still gets piling up debts.

At least he’s right about it being “funny”.

 

[psionl0]

I just had a plan!
Let's start a bank with all the citizens and take loan of say 100 Trillion at the FED's or the ECB's!
At 0,25% interest!

And then we pay of all the debt and mortgages!
To everybody we need to pay!

​

That's one way to get rid of private banks but I would rather reform the banking system than nationalize it.

How long do you think it would take before politicians realized how much tax revenue they could get by jacking up the interest rates?

 

[Finsend]

​

<*WACK*>

That's one way to get rid of private banks but I would rather reform the banking system than nationalize it.

How long do you think it would take before politicians realized how much tax revenue they could get by jacking up the interest rates?

I think I prefer reforms as well, instead some wild-west reset-crash-thing, pumping-up-ad-infinitum , people going crazy all over the world, etc. But these reforms (what, maybe we should make a clear and understandable short list - for everybody - including me to understand! You maybe can/will do this? I think you can.) then need to be carried by people who are in business and we need political will and some ability to change current situations. And it might ask for involvement of (more) voters/people as well. Which I don't see very much around these days, sometimes a little maybe, I am a bit cynical, admitted.

Politicians should take their job (even more) serious, just as a lot of bankers should. We can talk long and short but everybody with 2 eyes can see what is going on, or did I put my lightblocker2000 sunglasses on again, by mistake, and again? Could be

If even I (GRIN) do hardly understand 10% of what is written here about money, FRB and the rest of it, how much do you think the average American understands of all of this? My bet is about the same, and then I am pretty optimistic I fear. So we have a system and things going on without most people understanding it add some of those nice election-commercials we see in the US and party-politics, personal issues and lobby-mechanics + the Big Tooo Fail Theory + Bailout Mechanics and how will we see these changes ever happen?

I was just wondering!
About this I mean:
http://www.pippamalmgren.com/77.html

 

[psionl0]

So we have a system and things going on without most people understanding it add some of those nice election-commercials we see in the US and party-politics, personal issues and lobby-mechanics + the Big Tooo Fail Theory + Bailout Mechanics and how will we see these changes ever happen?

I admit it - you finally stumped me.

Historically, populations don't appear to see disasters coming even when it's right on their doorstep. Even afterwards, they disagree about what happened. There is no reason to believe that history isn't about to repeat itself. (You might want to start investing in some belts^*).

The only glimmer of hope is that this time around, we are not limited to information that is put out by the main stream media (which never discusses FRB). Thanks to the internet, information which (although not secret) was not previously publicized is now available to anybody who cares to look for it.

Maybe, if enough people learn about the system, decisions about money and banking might not be the exclusive domain of banksters and their political puppets.

Cheers?

* The difference between a recession and a depression is that during a recession you have to tighten your belt. During a depression, you don't have a belt.

 

[ngc6205]

The only glimmer of hope is that this time around, we are not limited to information that is put out by the main stream media (which never discusses FRB). Thanks to the internet, information which (although not secret) was not previously publicized is now available to anybody who cares to look for it.

NYT May 3, 2008 - http://www.nytimes.com/2008/05/03/b...l=1&adxnnlx=1313778670-noRneFX3WXiiEhm1JiRB9Q

Forbes March 16, 2008 - http://www.forbes.com/feeds/afx/2008/03/16/afx4778831.html

Reuters Oct 8, 2008 - http://www.reuters.com/article/2008/10/08/us-financial-fed-idUSTRE4979AK20081008

Reuters Jul 8, 2008 - http://www.reuters.com/article/2008/07/08/usa-fed-idUSN0848712520080708

Boston.com (The Boston Globe) Dec. 3, 2008 - http://www.boston.com/business/articles/2008/12/03/fed_extends_3_emergency_loan_programs/

Bloomberg Oct. 30, 2008 - http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aViXCrX8Ikms

If people think the media wasn't reporting what the Fed was doing, they weren't paying attention.

 

[psionl0]

If people think the media wasn't reporting what the Fed was doing, they weren't paying attention.

I wasn't referring to the Federal Reserve Bank.

I know that the fed could hardly conceal any activity that affects the bottom line - especially in the 21st century when its reports are published online. Interest rates, QEs, bailouts etc affect most people in one way or another so one would expect the media to give a lot of attention to these activities.

The problem is that relatively few people have the means to adequately assess whether the fed's activities will be beneficial, detrimental or if the fed is just "re-arranging the decks on the Titanic". That aspect just doesn't get much attention by the mainstream media. (Actually, some economics correspondents do give opinion pieces on these activities but they tend to be so bland that they are effectively meaningless).

BTW as I have stated before, I have concluded that the fed is not the villain in the piece. By all appearances, the fed seems to be exercising its charter faithfully. There is no evidence that the fed is trying to deliberately crash the economy or that it has some other sinister woo-ish motive.

 

[ngc6205]

I wasn't referring to the Federal Reserve Bank.

I know that the fed could hardly conceal any activity that affects the bottom line - especially in the 21st century when its reports are published online. Interest rates, QEs, bailouts etc affect most people in one way or another so one would expect the media to give a lot of attention to these activities.

The problem is that relatively few people have the means to adequately assess whether the fed's activities will be beneficial, detrimental or if the fed is just "re-arranging the decks on the Titanic". That aspect just doesn't get much attention by the mainstream media. (Actually, some economics correspondents do give opinion pieces on these activities but they tend to be so bland that they are effectively meaningless).

BTW as I have stated before, I have concluded that the fed is not the villain in the piece. By all appearances, the fed seems to be exercising its charter faithfully. There is no evidence that the fed is trying to deliberately crash the economy or that it has some other sinister woo-ish motive.

Mea culpa, I misunderstood you.

 

[psionl0]

Mea culpa, I misunderstood you.

​