How the banks create money

[psionl0]

Right. I already knew that. I was curious about the accounting details, and now I know the answer. Unlike every other bank which records its depositors money itself both as a liability and an asset, the Fed is an exception to the rule. It simply fails to account for deposits this way, instead using sleight-of-hand to list the bond that was monetized as the corresponding asset.

Only correct when it makes a purchase on the open market. Depository institutions can and do make deposits at the Fed. Those deposits are accounted for similar to any other bank.

* Say what?? *
How are they similar? When a bank customer deposits FRNs at his bank, the bank gets an increase in assets (more reserves) and an increase in liabilities (more credits in the customer's bank account). However, FRNs and reserve credits (equivalent to a customer's bank account) are both liabilities for the fed. When a bank "deposits" FRNs with the fed it is merely exchanging FRNs for an increase in its reserve account with the fed. So the fed gets a decreased FRN liability (it now holds the notes) and an increased reserve liability. That doesn't sound similar to me. Am I missing something?

 

[Finsend]

Hi psion,

Just think! A few months ago the only thing you would have been able to post was "Say what?" and now you are telling us about money creation and destruction. Well done.

Thanx, although I do not understand everything I seem the get more of the big(ger) picture now and then! Which also scares me a bit sometimes, because I start to wonder whether all this pumping, easing and bailing-out will solve any problems. I think it might keep things going for a while, but I do not see how this solves more fundamental issues.

Am I correct in assuming that these policies (like QE/pump/bail/etc) are (ONLY?) done to keep this system from collapsing? And thus hoping that our economies (US/ENG/EU) will start to be more productive so "we" (countries/banks/etc) can be able to pay of our debt (eventually)? So we need more growth, productivity and profit - again?

I understand that a (financial) collapse of the current system (banks/countries) is not very desirable. But we also need to find more and better solutions, real ones, don't we? And I still have this feeling that FRB and some policies done by FED/ECB are not really helping, but might even contribute to our current problems. And I am talking about the past decades or even longer in case of the FED. Maybe I am mistaken, but I think that (some) these policies (QEBailOutPumping) are no real solution and might even make things worse. Especially for people in poor countries for example, won't they get hurt by (dollar)inflation the hardest, like with the foodprices, etc? And these policies also indicate that banks did not make mistakes, they get rewarded (because they are to big2fail) for bad behavior, immoral and unethical behavior even sometimes. We all see how some people "work" and live and we also see how others work and live.

AND I wonder, why not bail "normal people" out? I mean the banks get all these (almost free) loans all the time, because they are too big to fail. But what if society as a whole collapses? I hear about billion here billion there here in Europa - as if it is nothing - but I wonder how much this will benefit ordinary people, which are the real motor of most economies, imho...

And while reading more and more, I really wonder if FED/ECB are very smart and also if they are very sincere. I think they might be sincere, but missing some crucial points. But sometimes I also read about all the people in these organisation and then I see a lot of people who worked for Goldmansachs(other banks) and then I wonder if this is all that scientific, etc, or just about the money and helping eachother out, etc...

Anyway, GOOD DISCUSSIONS HERE!
Hopefully we might be able to fix all of our (financial) problems and input from people like you and others is very interesting and I think it is important all voters in US and EU start to learn and understand (a little bit) more about money/debt/FRB/etc!

So thanx all of you and keep it up!

finsend

 

[ngc6205]

* Say what?? *
How are they similar? When a bank customer deposits FRNs at his bank, the bank gets an increase in assets (more reserves) and an increase in liabilities (more credits in the customer's bank account). However, FRNs and reserve credits (equivalent to a customer's bank account) are both liabilities for the fed. When a bank "deposits" FRNs with the fed it is merely exchanging FRNs for an increase in its reserve account with the fed. So the fed gets a decreased FRN liability (it now holds the notes) and an increased reserve liability. That doesn't sound similar to me. Am I missing something?

Well, it is similar when responding to Tippit's "sleight of hand" comment. You are correct in saying that when a member bank deposits physical FRNs at the district bank that one liability decreases and another increases. OTOH, if a member bank deposits a security with the Fed, then an asset account increases and a liability account increases.

 

[ngc6205]

Feel free to have the last word, troll.

I would bet that many people on this forum believe that term better fits you.

 

[psionl0]

Well, it is similar when responding to Tippit's "sleight of hand" comment.

Say no more.

You are correct in saying that when a member bank deposits physical FRNs at the district bank that one liability decreases and another increases. OTOH, if a member bank deposits a security with the Fed, then an asset account increases and a liability account increases.

Yes, I follow your example. Of course, this is money creation rather than a straight out "deposit".

ETA Isn't it funny how the fed's FRN liability decreases when it receives FRNs. That is suspiciously similar to the way IOUs work.

 

[tensordyne]

Finsend, I think I like you a lot as a person. I think you were brutally honest in the following note, about, what you are thinking about, how you are thinking about it, and so on. I am gonna give you editing advice, only so that others who read the below can fully understand who speak English. Please don't take it as a slight, I just think it is a good idea... so here goes... right when I get back...

First though, below is what I will be editing.

Hi psion,


Thanx, although I do not understand everything I seem the get more of the big(ger) picture now and then! Which also scares me a bit sometimes, because I start to wonder whether all this pumping, easing and bailing-out will solve any problems. I think it might keep things going for a while, but I do not see how this solves more fundamental issues.

Am I correct in assuming that these policies (like QE/pump/bail/etc) are (ONLY?) done to keep this system from collapsing? And thus hoping that our economies (US/ENG/EU) will start to be more productive so "we" (countries/banks/etc) can be able to pay of our debt (eventually)? So we need more growth, productivity and profit - again?

I understand that a (financial) collapse of the current system (banks/countries) is not very desirable. But we also need to find more and better solutions, real ones, don't we? And I still have this feeling that FRB and some policies done by FED/ECB are not really helping, but might even contribute to our current problems. And I am talking about the past decades or even longer in case of the FED. Maybe I am mistaken, but I think that (some) these policies (QEBailOutPumping) are no real solution and might even make things worse. Especially for people in poor countries for example, won't they get hurt by (dollar)inflation the hardest, like with the foodprices, etc? And these policies also indicate that banks did not make mistakes, they get rewarded (because they are to big2fail) for bad behavior, immoral and unethical behavior even sometimes. We all see how some people "work" and live and we also see how others work and live.

AND I wonder, why not bail "normal people" out? I mean the banks get all these (almost free) loans all the time, because they are too big to fail. But what if society as a whole collapses? I hear about billion here billion there here in Europa - as if it is nothing - but I wonder how much this will benefit ordinary people, which are the real motor of most economies, imho...

And while reading more and more, I really wonder if FED/ECB are very smart and also if they are very sincere. I think they might be sincere, but missing some crucial points. But sometimes I also read about all the people in these organisation and then I see a lot of people who worked for Goldmansachs(other banks) and then I wonder if this is all that scientific, etc, or just about the money and helping eachother out, etc...

Anyway, GOOD DISCUSSIONS HERE!
Hopefully we might be able to fix all of our (financial) problems and input from people like you and others is very interesting and I think it is important all voters in US and EU start to learn and understand (a little bit) more about money/debt/FRB/etc!

So thanx all of you and keep it up!

finsend

 

[psionl0]

Am I correct in assuming that these policies (like QE/pump/bail/etc) are (ONLY?) done to keep this system from collapsing? And thus hoping that our economies (US/ENG/EU) will start to be more productive so "we" (countries/banks/etc) can be able to pay of our debt (eventually)? So we need more growth, productivity and profit - again?

Yes, that is the theory.

But notice that nobody is saying that Greece should pay down its debt nor even to stop borrowing money. They are saying, "keep borrowing but a little bit less than you have been" (the situation in the US is the same). Essentially, they are trying to delay the economic collapse so that it becomes a problem that the next generation has to deal with.

Under the existing system it is almost impossible for governments to pay off their debts. If they tax the population to pay off the debt then not only are they removing money from the economy but they are making it more difficult for individuals to service their own debts.

If they print money to pay off their debts then they enable the banks to make new loans to the people. In effect, the government would just be transferring its debt to the people. (That is assuming that the economy could cope with the massive inflation that such a policy would bring).

Clearly, if we don't stop treating FRB as a sacred cow, we will end up with a huge global depression (this is just the system self-correcting) or many countries will be owned lock stock and barrel by the top one percenters.

 

[Sceptic-PK]

Don't listen to psionl0, Finsend, he's a paranoid old man. The only thing that prevents governments paying off debts is politics. There is nothing inherernt to "the system" that makes this impossible. And FRB has absolutely nothing to do with deficit spending or governments borrowing money. psi has the tendency to see FRB as the cause of all the world's ills, when in reality it increases productivity and efficiently provides capital for investment.

 

[psionl0]

How much are the banks paying you to defend their system?
Or are you just an unpaid shill?

 

[Sceptic-PK]

How much are the banks paying you to defend their system?

And here you have the conspiracy theorist's usual retort. If somebody disagrees with them, they must be getting paid by The Man. I wish I had a dollar for every time some wingnut made such accusations. Yeah, that's right psi, The Man pays me to keep tabs on your stupid ideas because you're just about to change the world, lol.

 

[psionl0]

So, unpaid shill then.

 

[Sceptic-PK]

"Shill" implies that your quaint idiotic notions are important to someone.

 

[Finsend]

Nice Graphs, Colors and numbers here:

http://occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq111.pdf

Stuff like this:
The nation’s four largest banks — JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs — hold nearly 95 percent of the industry’s total exposure to derivatives contracts, the report found.

JPMorgan, topping all commercial banks, holds nearly $78 trillion of the industry’s $231 trillion in derivatives, according to the report by the comptroller, the federal agency that regulates national banks. Citi is next on the list, with more than $50 trillion in the insurancelike contracts.

Ehm...
ETC!

 

[Finsend]

Finsend, I think I like you a lot as a person. I think you were brutally honest in the following note, about, what you are thinking about, how you are thinking about it, and so on. I am gonna give you editing advice, only so that others who read the below can fully understand who speak English. Please don't take it as a slight, I just think it is a good idea... so here goes... right when I get back...

First though, below is what I will be editing.

Thank you! Same to you!

I know I write some sort of Esperanto-Gibberish most of the time.
That is why I eh... became a painter and not a writer!



Feel free to edit/rephrase/etc, I will take it as a Light!
Not a slight.

cheers
finsend

 

[Finsend]

hi psion,
<snipped some remark of myself about QE/Bailouts/Pumping/DEBT/GREECE/Banks/ETC here>

Yes, that is the theory.

But notice that nobody is saying that Greece should pay down its debt nor even to stop borrowing money. They are saying, "keep borrowing but a little bit less than you have been" (the situation in the US is the same). Essentially, they are trying to delay the economic collapse so that it becomes a problem that the next generation has to deal with.

Under the existing system it is almost impossible for governments to pay off their debts. If they tax the population to pay off the debt then not only are they removing money from the economy but they are making it more difficult for individuals to service their own debts.

If they print money to pay off their debts then they enable the banks to make new loans to the people. In effect, the government would just be transferring its debt to the people. (That is assuming that the economy could cope with the massive inflation that such a policy would bring).

Clearly, if we don't stop treating FRB as a sacred cow, we will end up with a huge global depression (this is just the system self-correcting) or many countries will be owned lock stock and barrel by the top one percenters.

Essentially, they are trying to delay the economic collapse so that it becomes a problem that the next generation has to deal with.

I'm not sure, but I am thinking more and more along these 'lines' as well, lately since I am a Critical Thinker (YES!) - nowadays.

To me it seems more or less like the way you described it. Large debt everywhere and the relation of money and other things (like labour/resources(oil+food for example)/and to a lesser degree "services") has changed and is changing even more (and faster) these days.

When I look at Belgium for exmple (in case of the Dexia-bank story) I notice that a lot of money/credit (whatever) AGAIN (see 2008) is needed, lots of billions... So much (maybe) that the whole country would have (some major) trouble to pay for (possible) losses. And this is only one bank, not even a very very big one in Europe, I think.

So I think I agree with you and thank you for writing it down in understandable and readable English!

cheers
finsend

 

[Finsend]

Don't listen to psionl0, Finsend, he's a paranoid old man. The only thing that prevents governments paying off debts is politics. There is nothing inherernt to "the system" that makes this impossible. And FRB has absolutely nothing to do with deficit spending or governments borrowing money. psi has the tendency to see FRB as the cause of all the world's ills, when in reality it increases productivity and efficiently provides capital for investment.

Gheheh, old paranoid man, geheheh. I don't care I listen to everybody most of the time/


And I agree that FRB (+some FED policies) has done some good things to boost productivity (mainly in the past, imho).

You wrote that only politics is preventing governments to pay of debts - what debts? national debts (only)? Also debts of people and (some) banks? How could Greece or the US (or pick another country/bank you like which is in big debts - Italy or whatever). pay off their debts (within say 10-20 years? or any "reasonable period of time" - or at least reduce debts substantially, with like 50% or so).

I'm not completely sure that there is nothing inherent to "the system" that makes paying off all these debts impossible. And I also am not sure that FRB has nothing to do with deficit spending or government borrowing. I just don't know enough about these things. I do have a feeling something si very "wrong" however and when I open the newspapers I see lots of people saying more or less the same things, I read about debt and money all the time... The FED/ECB, whole countries, QE123/Bailouts/etc... So I am just trying to figure it out some more and pretty soon I hope to get into some of the details as people - like yourself - overhere are able to do.

So I can see that in reality FRB (may have) increased productivity and efficiently provides capital for investment. I am just wondering lately if this will be the case in the future as well and/or if we might have reached some "limits" of this system of FRB and all the other stuff (FED/ECB policies, etc + even the derivatives and laws, etc the whole "financial system as we know it" + ethics as well!

Thanx for contributing here and I like the discussions between you and other people and read them with interest and try to understand different positions some more.

As you might have noticed I (and many people) do not know a lot about all of this, but I have a feeling something is not going well. So it might be false or incorrect (a lacj of understanding) to 'blame' the FED/ECB or FRB etc - and I am sure there is much more to this story - so please feel free to write some/much more about how to pay of (national and other) debts and get the system (more) stable (again)!

cheers
finsend

PS 2 every-one: I don't mind humor and/or even ad hominems (sometimes), quite funny - but I like more if people could really get to the bottom of this and come up with some solutions as well (if needed, iyo, etc)!

 

[Finsend]

ONE MORE!
About Normalcy Bias!
http://en.wikipedia.org/wiki/Normalcy_bias

 

[Finsend]

WHERE DOES ALL THIS DEBT COME FROM?

When I look at some (usa) graphs from 1990 to 2011, I see huge debts piling and rising pretty fast. National debts, mortgage debts, credit-card debts, etc.
Like this one (for example - but there are many many many more - just use Google and scare the cr*p out of yourself!)

http://www.dynamicdps.com/uploads/00510_One_Scary_Chart_-_TOTAL_US_DEBT.png

I am not sure all the graphs I see are correct, but I see some GENERAL PATTERN(s).
I see a pretty huge gap (growing wider) for example between INCOME and SPENDING (both for government and citizens).

SO where is all this money-credit/DEBT coming FROM?!
And how is it ever to be paid off, with interest of course?

Any ideas anyone?

DOES this have anything to do with FRB and/or the way (central) banks operate (in general)?

Yes, I do think so.

 

[Finsend]

Some Charts & Graphs

Here's some (random charts and graphs.
I do not know if they are all correct.
If one is incorrect let me know!

These graphs made me think. A lot.
Hope they do the same for you!

Demographics:
US Population pyramid:
http://econproph.files.wordpress.com/2011/01/populationpyramid-us2011.png
World Population:
http://www.theclimatehub.com/wp-content/uploads/2011/03/WorldPopulationGraphThrough-History1.jpg

Debt and Money, etc:
US National debt:
http://1.bp.blogspot.com/-0RqJ9tWvu...CvHyMk/s1600/us_national_debt_chart_20101.gif
Debt to GDP:
http://www.creditwritedowns.com/wp-content/uploads/2008/08/debt-to-gdp.png
Debt and GDP per person:
http://static.seekingalpha.com/uploads/2009/11/1/saupload_amts.png
US debt to GDP (components)
http://lawschooltuitionbubble.files.wordpress.com/2011/01/2011-01-12-components-of-total-us-debt.jpg
Monetary Base:
http://www.kitco.com/ind/Niehuser/images/jan132011_4.gif

Unemployment
Rate %:
http://www.theglobalfczone.com/images/Unemp-Unemployment-Rate_2001-2011.png
Duration:
http://www.mortgagesbymark.com/blog...n-duration-of-unemployment-as-of-may-2011.jpg

House Prices:
http://mysite.verizon.net/vodkajim/housingbubble/united_states_1890-2008.png

Metals and commodities:
Commodities (food):
http://www.tutor2u.net/blog/files/commodity_prices_may_08.gif
Metals Gen:
http://www.altenergystocks.com/assets/Metals Prices.png
Gold:
http://www.osd.com.hk/goldtrade_en/images/2011LongTermGoldPriceCharts/gold price 10 yr chart.png
Oil:
http://scienceblogs.com/casaubonsbook/oil_price_2011 (1).png

Markets and stocks:
DOW (long):
http://www.gold-speculator.com/atta...85-2011-credit-market-indicators-image001.gif
DAX (short):
http://static.incrediblecharts.com/images/2011/2011-10-04-uk.png
JP morgan
http://thewildinvestor.com/wp-content/uploads/2011/07/jp-morgan-stock-chart-analysis-070111.png
BNP
http://www.bloomberg.com/apps/chart...s=BNPQF:US&cfg=ChartBuilderVol_bw.xml&img=png
ETC.

So what does all of this have to do with FRB, money creation, bailouts, QE123adinfinitum, FED, ECB etc...
I think it is all related in some kind of way... but
No conclusions here.

Maybe later!
cheers
finsend

 

[psionl0]

So what does all of this have to do with FRB, money creation, bailouts, QE123adinfinitum, FED, ECB etc...
I think it is all related in some kind of way... but

Nice research there. Different people will of course draw different conclusions from these graphs but the Debt to GDP graph shows something interesting. Debt to GDP was compounding steadily since WW2 and - presumably - would have ended up being problematic at some time. (This is consistent with the "they create the principal but not the interest" theory). Richard Nixon's abandonment of gold in 1971 doesn't seem to have had much effect on the overall level of debt.

However, from 1984, we see a sudden jump in debt levels and thereafter, a faster compounding rate of debt. 1984 was the era of "Reaganomics" which saw a number of banking "reforms".
The Debt to GDP (components) graph shows that government borrowing is only part of the problem. The biggest contributors to rising debt are the banks themselves. Evidently it is cheaper (or less of a hassle) for banks to borrow from overseas sources than from the Fed.

The graphs only go up to 2008 so we don't see the GDP hiccuping yet. (Once overall debt becomes unsustainable you would expect it to have an adverse effect on GDP as increasing numbers of businesses become unprofitable).

You might like to look at Steve Keen's Debtwatch website for more information on this subject.

Here is a youtube from that site: