How the banks create money

[psionl0]

Just agree to disagree Sceptic-PK. This is starting to turn into a flame war which I suspect violates the rules of this forum.

Let's face it, all sources of information are biased - especially historical information (which is one thing that makes the study of history interesting).

 

[drkitten]

I should point out that banks charge account keeping fees on transaction accounts. An average seems to be about $5 per month which is far more than they would get by lending the money out in your account (unless you consistently had more than about $10,000 sitting in your account).

You either need to find a better bank, or you need to have more money to play with. All of my banking is fee-free, including my credit cards.

 

[Kepp]

It's amusing to watch federal reserve CT'ers debating people who actually understand economics.

 

[psionl0]

You either need to find a better bank, or you need to have more money to play with. All of my banking is fee-free, including my credit cards.

I too have a "no annual fee" mastercard but it has no interest-free period so I don't use it to borrow money. (American Express seems to be one of the more expensive cards around).

At least transaction fees are no longer a problem. Banks found that customers were withdrawing large sums of cash to carry them through the week and limit their exposure to these fees. This must have paid havoc with the banks' reserves. Unfortunately there is nowhere I can turn to if I don't want to pay account keeping fees.

As for the "you need to have more money to play with", don't we all?

 

[webb5]

Reading books, rather than dubious internet sites. The CBA acted as Australia's central bank for much of the century, before being sold in the 1990s. This is a matter of public record. At some stage during this process, I believe it was the 60s or 70s, the Reserve Bank of Australia was created in order to act as the country's central bank, and this role shifted away from the CBA. The CBA remained owned by the government until privatised by Hawke or Keating. The Reserve Bank achieved full independence within the government during Howard's years.
this part is correct!



Wrong again. The CBA, acting as Australia's central bank, made a decision not to increase credit due to the circumstances/experience at the time. I think this decision was probably in error, but it had absolutely nothing to do with nefarious "bankers" taking control of the bank. During the Great Depression, the CBA was a government agency just as the Reserve Bank is a government agency now. At no stage was it taken over by "bankers", anymore than it already had bankers/economists as part of its government-appointed board. You don't understand central banking.
this part is wrong!


Anyone who has any knowledge whatsoever understands the reasonably extreme austerity measures taken by the Howard government in order to pay Australia's debt off. Costello made the announcement in 2006:

Wrong again

Opposition treasury spokesman Wayne Swan said the government had nothing to be proud of, with Australia's foreign debt expected to hit half a trillion dollars.

"To pompously declare tomorrow Australia's debt-free day on the day our foreign debt hits half a trillion dollars requires a level of complacency that is verging dangerously close to delusion," Mr Swan said.

"To start reducing our foreign debt Australia needs to lift exports and to do so we have to become more competitive.
http://www.theage.com.au/news/Business/Government-to-pay-off-national-debt/2006/04/20/1145344197792.html

Again, it seems you don't have a cursory knowledge of even recent Australian history. ?

You don't know what you are talking about. Take a class in Australian history and learn what the Hawke/Keating/Howard governments did to modernise the Australian economy, which started with with financial services and deregulation of the sector. The book, "Unfinished Business: Paul Keating's interrupted revolution" by David Love is a good place to start. Yes, China plays its part currently but I am talking about the last 30 odd years of financial reform. Pick up a book.

Over the last 30 yrs these governments removed our tarrifs which protected our industries agaist unfair trading. Many industries and farms have closed down; almost one in three Australians live in poverty (The Age 14/3/98), we have 20% unemployment (refer to the television station Channel 9 news on 14/7/98 where the Government admits to "fudging" the unemployment figures; 70% youth unemployment in certain areas (Ch. 10, 23/6/98 and HS 22/6/97); hospitals in filthy, third world conditions in Victoria (Ch. 7, 22/6/98); a 300% increase in bankruptcies in the last 19 years (Australian National Review (ANR) May/June 1998, p. 40; family breakdown; the 2nd worst level of child poverty in the industrialised world (The Age, 17/11/96). Our rural towns are de-populating and dying because our industries cannot compete with cheap imports and the Government removes essential services. One could go on

Yes, it doesn't make any sense.

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.

You trully have no understanding

 

[psionl0]

Over the last 30 yrs these governments removed our tarrifs which protected our industries agaist unfair trading. Many industries and farms have closed down; almost one in three Australians live in poverty (The Age 14/3/98), we have 20% unemployment (refer to the television station Channel 9 news on 14/7/98 where the Government admits to "fudging" the unemployment figures; 70% youth unemployment in certain areas (Ch. 10, 23/6/98 and HS 22/6/97); hospitals in filthy, third world conditions in Victoria (Ch. 7, 22/6/98); a 300% increase in bankruptcies in the last 19 years (Australian National Review (ANR) May/June 1998, p. 40; family breakdown; the 2nd worst level of child poverty in the industrialised world (The Age, 17/11/96). Our rural towns are de-populating and dying because our industries cannot compete with cheap imports and the Government removes essential services. One could go on

These are rather ancient sources you are quoting. Do you know how these figures have been moving in the last 5 years or so? (This would include the boom years).

 

[Sceptic-PK]

If you want a proper response Webb, learn how to quote properly. Your gibberish is annoying enough without having to cut and paste everything you spit on the page.

 

[drkitten]

I too have a "no annual fee" mastercard but it has no interest-free period so I don't use it to borrow money. (American Express seems to be one of the more expensive cards around).

Right. You need a better bank.

At least transaction fees are no longer a problem. Banks found that customers were withdrawing large sums of cash to carry them through the week and limit their exposure to these fees.

Actually, that wasn't a problem at all.

The problem is that charging excessive fees tends to drive people to cheaper banks.

This must have paid havoc with the banks' reserves.

Not at all. The amount of money that banks keep in their reserve accounts at the central bank usually dwarfs the amount their customers need for walking-around money.

Unfortunately there is nowhere I can turn to if I don't want to pay account keeping fees.

Try "a better bank." It took me ten minutes on the Interwebz to find that B&E doesn't charge account keeping fees.

As for the "you need to have more money to play with", don't we all?

No. I have enough money to play with that all my banking is fee-free.

 

[psionl0]

It took me ten minutes on the Interwebz to find that B&E doesn't charge account keeping fees.

Thank you for the research drkitten. I have bookmarked that website.

 

[webb5]

These are rather ancient sources you are quoting. Do you know how these figures have been moving in the last 5 years or so? (This would include the boom years).

Actually the figures in Australia are a lot better in the last years (the boom years) despite persistant current account deficits. But at what cost?

No one seems to be talking about the stragedy of selling Australia to prop up the economy and ensure that public debt is minimised.

The sales of Telstra, CBA, airports and Qantas raised $63 billion for the Australian governments of the day. The CBA sold for $6.8 billion. Its profit this year was more than $5 billion. One estimate is that Australia (not just the various governments) has sold $400 billion of assets since 2007.

Property, business, residential and other asset sales, augmented by the mining boom, have been the major strategy used to avoid the consequences of our chronic current account deficit, which keeps on churning out negative numbers. Don't be fooled by the false dawn of merchandise credit surpluses fuelled by our mining raw material exports.

We are succeeding by selling the Australian farm. That cannot be a successful long-term policy if we have any regard for the future of our children and their children. Political posturing about how great the strategy is can only be regarded as a complete failure in government economic management and the political spin of the century.

 

[Captain.Sassy]

Dr. Kitten,

A question:

In futures markets, do the value of the put and call contracts exceed the value of the actual commodities being produced? I have been reading a bit about monetary policy and money creation since I was last in this thread, and it occurred to me that a similar process might also exist for commodities.

I could go and look it up on my own I suppose but I figured this would be faster since you've been pretty good about explaining stuff in here in the past.

So, if you could either confirm my hunch or disabuse me of this notion, it would be appreciated.

Kind regards, and thank you for your time,

CS

 

[Captain.Sassy]

(Others welcome to chime in too, btw.)

 

[webb5]

Basic modern economic thinking is un sound because it's foundation relies on new money created as debt. It does not matter how much you play with the complex matra of modern economic theries because the engine that fire's the economy has been compromised by permanent and unrepayable debt.

Be warned. The banking system all over the world has succeeded in pulling the wool over the eyes of most people including politicians for hundreds of years, with an odd exception such as Abraham Lincoln.

With their immense interest at stake and their all pervading influence in the media, and in the community in general, the supporters of the present banking system will almost certainly continue to hoodwink the people and governments.

They may eventually destroy the economies of rich and prosperous nations. Debt and the taxation needed for interest could be the cause of their destruction.

If that happens, it will be due, in the final analysis, to the ignorance and apathy of ordinary people.

Remember, the question is not whether there will be new money created in the future. That is inevitable. The crucial question is:

Will it be created by the banks as interest bearing debt for their own profit or will it be issued debt free on behalf of the state for national good?

Will you do something about it?

 

[Sceptic-PK]

Will it be created at market prices, allowing for efficient provision of funds to borrowers at terms they freely agree to, or shall it be printed willy-nilly for free to create massive asset bubbles, hyperinflation and the destruction of a country’s currency?

I’ll take free money for national destruction thanks!

 

[webb5]

I’ll take free money for national destruction thanks!

If goods are scarce, no amount of money can automatically produce them, although a promise of ample money can drive people to make considerable efforts to produce what is wanted.

If a land is barren and its inhabitants lazy and unskilled, the printing press could turn out money day and night without raising people out of their poverty. The only result would be to destroy the purchasing power of the money previously in existance there.

In some countries runaway inflation has, in the past, reduced paper money to less value than same quolity of unprinted paper. It has also left economists and politicians with a well justified fear of uncontrolled money creation. This fear has been carried o extremes, so that even controled money creation has been opposed.

It is vital to remember money is not wealth. It only represents real wealth. Goods and services comprise the substance. Money is only the substitute, symbol or token, used as a medium of exchange for the real thing.

This emphasis on the diference between wealth and money is not merely a debating point. It is intended to make crystal clear that the primary need of a nation is to produce ample real wealth, i.e food, clothing, housing and all other necessities of life. That is the real part and the hardest part.

If that is done, the secondary and easier task should be for the government to ensure a sufficient supply of the means of exchange, the money, to permit the distribution of the goods produced. This money should be created free of debt.

 

[Sceptic-PK]

Congratulations on saying absolutely nothing.

 

[webb5]

Congratulations on saying absolutely nothing.

It's a great shame if it means absolutly nothing to you. The banking system loves people like you. How can you defend a system that is so dishonest.

 

[Sceptic-PK]

It's a great shame if it means absolutly nothing to you.

This is your fault by the way. Your lack of clarity and your inability to respond properly to the crux of questions causes confusion.

How can you defend a system that is so dishonest.

There is nothing dishonest about it. You just don’t understand how things work. I am more than happy to appraise a new system should one be designed. Unfortunately so far all you’ve been able to do is provide nonsense sophistry. Even after all these pages, and people taking the time to read your sources, we still don’t understand what it is you’re trying to say about social credit. This is not our fault. You rail against things you don’t quite grasp and then fail to explain the alternatives.

 

[drkitten]

Dr. Kitten,

A question:

In futures markets, do the value of the put and call contracts exceed the value of the actual commodities being produced? I have been reading a bit about monetary policy and money creation since I was last in this thread, and it occurred to me that a similar process might also exist for commodities.

I honestly have no idea. In fact, I'm not even entirely sure what you mean by "the value of the put and call contracts"; if I buy a far out of the money call option for one hundred shares of INTC, I might pay only $1 per share for a nominal "value" of $150 a share. Is the "value" of that contract $100, or $15,000?

But as to the bigger question, there's no money created in a call/put contract, although there is "wealth" created. Essentially, (99% of) options are bets. In the case above, I would be betting that Intel is going to increase tenfold in the next short period of time, and someone else is betting that it's not. One of us is right and one of us is wrong and we'll settle up come Memorial Day.

So this doesn't create money any more than a casino does. It does, however, create wealth in that one of us has created/found a genuine, dyed in the wool, double-breasted twenty-four carat sucker -- and we can both resell our end of the bet for more money to even greater fools that we.

But money creation? No. No more than the Casino de Monaco creates money when it accepts a bet on red.

And this also shows that your question about the size of options is largely irrelevant. The same casino can have $100,000 hanging on the turn of a card from a fifty-cent deck. The value of the cards doesn't have any influence on the value of the bets placed at the table. Most options are simply cash-settled bets on the movement of stock. I think that gold, for example, is in a bubble, and is going down. Many of the gold bugs here think that gold will continue to go up, up, up, and up. So I bought a put option for one of the gold mutual funds (GLD), and I found a sucker counterparty who was willing to accept my put and take the risk of being forced to buy gold from me at substantially over market value.

Of course, there is information in the options trade. If Bill and Warren both decide that gold is overpriced and they want to buy the same puts I did, they're probably going to be able to buy enough puts to shift the price. Which means that the price for puts is going to be going up, and gold traders will notice there's some Big Money that's thinking the price of gold will be going down. This may or may not adjust their willingness to buy gold at current prices....

 

[drkitten]

It's a great shame if it means absolutly nothing to you.

I'm afraid I have to side with Skeptic on this one. Telepathy failure is never the recipient's fault, and your complete lack of any ability to express yourself clearly and coherently may simply be masking system that is fundamentally broken and dishonest.

But the casual reader will never infer it from what you've written. The casual reader will instead infer from your writings that opposition to the current banking system is incoherent and irrational, and that no sensible person could oppose the system in any way other than minor tweaks such as putting maximum fees for overdrafts and whatnot.