The debt hoax ...

[Anders Lindman]

I suppose that if a run on the banks happened, and the banks had to somehow shut down their websites, it would mean some sort of economic collapse would be in progress. I guess then we'd have more to worry about than esoteric discussions about the nature of banking and whether money is "real" or not

Yikes. You're right. And maybe fractional reserve banking is not a problem unless the central banks pump in too much new money into the system. Things like peak oil are probably the real problem in the economy. Say hello to the Mad Max society! Not really I think. The progress of technology will save us I believe.

 

[cwalner]

I suppose that if a run on the banks happened, and the banks had to somehow shut down their websites, it would mean some sort of economic collapse would be in progress. I guess then we'd have more to worry about than esoteric discussions about the nature of banking and whether money is "real" or not

Heck if you want to take it far enough, money itself has never been 'real'. It is simply an (extremely useful) construct to represent the value of goods and services to facility complex bartering of such.

the idea that debt is a current phenomenon is ludicrous, as I would not be surprised if it predates money in some form.

Ugh the artisan makes a flint knife and spear and gives it to Krag the hunter. Krag then uses that spear and knife to kill something. Krag then gives a portion of the meat to Ugh in exchange for the spear. He also gives the skin to Olaf the furrier. Olaf uses the fur (and his own tools from Ugh) to fashion several sets of winter clothes. He gives some to Ugh and Krag but keeps the rest for his family or for trading for other goods/services in the future.

Without even the existence of money or currency, debts were incurred and paid off.

 

[Horatius]

Is runs on banks impossible these days? Because most money is electronic! To get actual cash is time-consuming. So in practice maybe runs on banks cannot happen.

I wouldn't say "impossible", just, "very unlikely". Needing cash in hand is only an issue if you need that cash to buy things right now, like food. We could get problems if something happened that shut down our electronic banking over a very wide area (like all of North America, say), but in that case, the catastrophic event that caused that shut down would likely overshadow the problems caused by a lack of physical cash.

ETA: How the heck are transactions between banks done? If I move money from one bank to another bank electronically, then where is the control structure to make sure that the money is actual money? Maybe a run on a bank could happen very quickly electronically if many people started to move their money out from a bank via the Internet for example. Of course, the bank could then shut down its website before too many people had made their withdrawals.

Well, the control structure is partly legal, in that banks are quite heavily governed and audited, and just making money bits appear out of nowhere would be found out quite quickly, and partly pragmatic self-interest, in that banks monitor their interactions with other banks, and also with their customers, to ensure they don't end up holding the bag if/when a fraudulent transaction is made/discovered.

As an example of the latter, my bank allows me to make deposits via banking machines, and credits that amount to me immediately. Based on my history of banking with them, they trust that I'm actually depositing what I say I am depositing. So I could, in theory, make a fake deposit, and then immediately withdraw money from my account, thus effectively stealing it. However, that would be discovered as soon as they actually checked what had been deposited in the actual machine, and they would take action against me - by freezing my account, debiting the amount stolen for what money I really have on deposit, and/or reporting me to the police for fraud.

 

[LSSBB]

I wouldn't say "impossible", just, "very unlikely". Needing cash in hand is only an issue if you need that cash to buy things right now, like food. We could get problems if something happened that shut down our electronic banking over a very wide area (like all of North America, say), but in that case, the catastrophic event that caused that shut down would likely overshadow the problems caused by a lack of physical cash.






Well, the control structure is partly legal, in that banks are quite heavily governed and audited, and just making money bits appear out of nowhere would be found out quite quickly, and partly pragmatic self-interest, in that banks monitor their interactions with other banks, and also with their customers, to ensure they don't end up holding the bag if/when a fraudulent transaction is made/discovered.

As an example of the latter, my bank allows me to make deposits via banking machines, and credits that amount to me immediately. Based on my history of banking with them, they trust that I'm actually depositing what I say I am depositing. So I could, in theory, make a fake deposit, and then immediately withdraw money from my account, thus effectively stealing it. However, that would be discovered as soon as they actually checked what had been deposited in the actual machine, and they would take action against me - by freezing my account, debiting the amount stolen for what money I really have on deposit, and/or reporting me to the police for fraud.

One of the better illustrations of how the whole thing works, is in the movie "It's a Wonderful Life". There is a bank run, and George tries to explain to the panicked depositors why they can't just take their money:

No, but you... you... you're thinking
of this place all wrong. As if I had
the money back in a safe. The money's
not here. Your money's in Joe's
house...
(to one of the men)
...right next to yours. And in the
Kennedy house, and Mrs. Macklin's
house, and a hundred others. Why,
you're lending them the money to
build, and then, they're going to
pay it back to you as best they can.
Now what are you going to do?
Foreclose on them?

 

[Horatius]

One of the better illustrations of how the whole thing works, is in the movie "It's a Wonderful Life". There is a bank run, and George tries to explain to the panicked depositors why they can't just take their money:

No, but you... you... you're thinking
of this place all wrong. As if I had
the money back in a safe. The money's
not here. Your money's in Joe's
house...
(to one of the men)
...right next to yours. And in the
Kennedy house, and Mrs. Macklin's
house, and a hundred others. Why,
you're lending them the money to
build, and then, they're going to
pay it back to you as best they can.
Now what are you going to do?
Foreclose on them?

Yes, that's what I was talking about in my earlier post about using the borrowed money to produce new real wealth.

You could have a system in which banks were required to have a 100% reserve fraction, but that system would be almost worthless. A Giant Cube Of Cash (GCOC) sitting in a vault does very little good. If you limited people to only making purchases for which they had actual, physical cash, then hoarders of physical cash would quite quickly shut down the economy. "Gee, Bob, I'd love to pay you $10 000 cash to build my bakery, but Old Man Smith has all the money locked up in his GCOC vault. How about I pay you with 10 000 loaves of bread, instead?" "WTF am I supposed to do with 10 000 loaves of bread?"

Having fractional reserve banking, and charging interest on loans made with deposited cash, provides an incentive for those who would otherwise have all the cash locked away in their GCOCs to actually lend it out, so it can circulate, and facilitate other people's interactions, like Bob building a bakery for the local baker.

 

[Anders Lindman]

banks monitor their interactions with other banks, and also with their customers, to ensure they don't end up holding the bag if/when a fraudulent transaction is made/discovered.

But the bank can only monitor its own transactions. How does one bank know that money sent electronically from another competing bank is real money?

 

[Horatius]

But the bank can only monitor its own transactions. How does one bank know that money sent electronically from another competing bank is real money?

Well, you'd have to ask them that. Don't you imagine that they've considered the possibility of fraud when they're routinely transferring millions of dollars between banks?

 

[Anders Lindman]

Well, you'd have to ask them that. Don't you imagine that they've considered the possibility of fraud when they're routinely transferring millions of dollars between banks?

Since the money is only information on a computer the bank can manipulate the software to send money without reducing the amount in the bank's deposit. Probably not, because there must be some control structure preventing that, but anyway it would be funny (and scary) if the banks could do that.

 

[nomuse]

As an example of the latter, my bank allows me to make deposits via banking machines, and credits that amount to me immediately. Based on my history of banking with them, they trust that I'm actually depositing what I say I am depositing. So I could, in theory, make a fake deposit, and then immediately withdraw money from my account, thus effectively stealing it. However, that would be discovered as soon as they actually checked what had been deposited in the actual machine, and they would take action against me - by freezing my account, debiting the amount stolen for what money I really have on deposit, and/or reporting me to the police for fraud.

Been there and came close to doing that. Knew a couple people who did; stick a blank sheet of paper in an envelope, tell the ATM it was a check, and draw out some much-needed cash.

Being really poor is all too often about short-term cash flow. You simply don't have the overhead to wait until payday, even though it costs you more in the long run to cash out now. If you can't afford bus fare to get to work, the potential cost (a lost job) is huge compared to the short-term cost.

And your capitalization options are all bad; loan sharks, payday advance places (with ruinous rates). Against those options, paying the overdraft fee when your bank discovers you neglected to actually give them a check is actually a pretty good deal.

 

[KDLarsen]

Even with Anders on my ignore list, I can tell he has been reading the Grauniad. A shame he missed the comments section, where the author had his atrocious understanding of money and fractional reserve banking called out.

 

[Anders Lindman]

Even with Anders on my ignore list, I can tell he has been reading the Grauniad. A shame he missed the comments section, where the author had his atrocious understanding of money and fractional reserve banking called out.

That was pretty interesting actually. Here is one quote from that article:

"Here's how it works. When you ask the bank for the money to buy a one-bedroom box in London, the money that appears in your account isn't borrowed from some prudent grandmother's life savings. In fact, the bank simply types those numbers into your account, creating brand new money that you can now spend. As other banks do exactly the same, the amount of money in the economy grows and grows. Every new mortgage creates new money, which pushes up house prices just a little more and forces the next buyer to borrow even more from the banks."

I have heard that banks nowadays have ways of avoiding the fractional reserve requirement altogether. Zero reserves! Could be just a false conspiracy theory but could perhaps be something to look into.

 

[Robrob]

But the bank can only monitor its own transactions. How does one bank know that money sent electronically from another competing bank is real money?

Same way anyone does, credit card companies, businesses and the like. It's essentially an IOU.

 

[Hans]

That was pretty interesting actually. Here is one quote from that article:

"Here's how it works. When you ask the bank for the money to buy a one-bedroom box in London, the money that appears in your account isn't borrowed from some prudent grandmother's life savings. In fact, the bank simply types those numbers into your account, creating brand new money that you can now spend. As other banks do exactly the same, the amount of money in the economy grows and grows. Every new mortgage creates new money, which pushes up house prices just a little more and forces the next buyer to borrow even more from the banks."

I have heard that banks nowadays have ways of avoiding the fractional reserve requirement altogether. Zero reserves! Could be just a false conspiracy theory but could perhaps be something to look into.

If you think they can create money out of nothing - how come they ran out of it? lol

 

[Anders Lindman]

If you think they can create money out of nothing - how come they ran out of it? lol

The Fed actually creates money by buying bonds from the U.S. government, so it's money as debt rather than money out of thin air. And the tax payers have to pay that debt (plus interest?). Here is a short video about that: http://www.youtube.com/watch?v=99DYh8Zpkpw

 

[Patrick1000]

I like your point of view saggy......

The world is being turned upside down by the debt hoax ... here's a summary, every nation is burdened by unsupportable debt, the US, Britain, all the European countries, with the possible exception of Germany, etc., etc. As a result economies are collapsing and with the collapse of the paper financial economy the real economy of goods and services is also contracting.

So, what is the hoax? The hoax is that debt is a burden only to the debtor, on the other hand it is money in the bank to the debtee. Every nation is in debt, every individual is in debt, but, somehow there is no one who benefits from this debt, no one to whom it is owed. At least, that is what one must assume from reading the reports.

The solution to the debt problem is to recognize the hoax, and then identify the debtees, and then give them, in financial terms, a haircut. Just erase the debt so that the real economy of goods and services can return to normal.

Think of it as bankruptcy in mirror image. This time the debtees have to give up their claims on the eternal output of the output of nations. Even after a massive 90% haircut they will still be on top of the heap, their relative positions in society unchanged, and their lifestyles unaffected.

I like your point of view saggy......Seems to be one of the few viable solutions. I guess you could slowly(or quickly) inflate your way out, which is in a sense does the same thing as that which you suggest. It would devalue present claims.

It's all very sad though, this mess is, and maddening too boot. Seeing people who took advantage "getting off" without the realization of appropriate consequences.

 

[twinstead]

I like your point of view saggy......Seems to be one of the few viable solutions. I guess you could slowly(or quickly) inflate your way out, which is in a sense does the same thing as that which you suggest. It would devalue present claims.

It's all very sad though, this mess is, and maddening too boot. Seeing people who took advantage "getting off" without the realization of appropriate consequences.

What's maddening is seeing people who really don't understand the system try to criticize it. The last person I want reforming the system is somebody who has a distorted view of it. But you wouldn't do that, would you?

Do you believe banks create money out of "thin air", patrick?

 

[Foolmewunz]

I think there's a long contentious thread on Fractional Banking in Economics. Saggy, Anders, Patrick... you might want to do some reeading. You really have the most pathetic and incredulous views of finance that I've encountered in some time.

This discussion is getting to be like, "Magnets? How do they work? I don't get it!"

 

[Hans]

The Fed actually creates money by buying bonds from the U.S. government, so it's money as debt rather than money out of thin air. And the tax payers have to pay that debt (plus interest?). Here is a short video about that: http://www.youtube.com/watch?v=99DYh8Zpkpw

That's nice - but wrong - you avoided answering the question. It was about the banks not the Fed, please try again.

Oh would you care to list the countries that don't have a central bank and don't use fractional banking?

Explain to us if you would the paradise that existed before the world switched to fractional banking and central banks...

What's maddening is seeing people who really don't understand the system try to criticize it. The last person I want reforming the system is somebody who has a distorted view of it. But you wouldn't do that, would you?

lol, so true

 

[Saggy]

I think there's a long contentious thread on Fractional Banking in Economics.

Wrong, at least from here. Fractional banking is not the problem, the bankers are the problem ... but don't take my word for it ... here is 15 minutes of analysis from William Black, one of the prosecutors in the Savings and Loan hoax ... he spells it out for you.

http://www.youtube.com/watch?v=N_AuvLTJNh0

 

[Sceptic-PK]

Basically all money is created as debt, which means that the total debt cannot ever be repaid since there is never enough money to pay both the debt and the interest.

Nonsense.