SuperChimp Posted February 17, 2012 Share Posted February 17, 2012 we are talking high powered money...that is promises issued by the BoE.. Matters not which printer prints them, as long as they are "backed" by the BoE...they are the issuers, not De La Rue or the Mint. How is fiat currency 'backed' by anything? Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 17, 2012 Share Posted February 17, 2012 How is fiat currency 'backed' by anything? thats why I put it in quotation marks....my point was the builder is not the issuer, like buying tickets for a show...im sure the theatre doesnt mass produce the tickets...although, they might. Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 OH..THATS who you are!... anyway, just because it balances, as it must, doesnt mean the thing will work.. Greece has a perfectly balanced balance sheet...so did Northern Rock. I say bring back the polar bear and the penquin avatar. He changes his nickname more often than I change my undies! Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 17, 2012 Share Posted February 17, 2012 He changes his nickname more often than I change my undies! and with eight legs, thats a lot of undies! Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 The Bank of England does not print money. A private company called De La Rue prints all the bank notes in the UK (and for many other countries). All coins are created by a mint in Wales. On a slightly related note, it always annoys me when Quantitative Easing is called printing money when really it has nothing to do with it. Do you ever get called a pedant? Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 and with eight legs, thats a lot of undies! These claws ain't much use either! Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 17, 2012 Share Posted February 17, 2012 How is fiat currency 'backed' by anything? It's backed by your labour, your children's labour and your grandchildren's labour. We are slaves to the state. Quote Link to comment Share on other sites More sharing options...
admann Posted February 18, 2012 Share Posted February 18, 2012 Bank has 1000 units, and lends you 100. Bank has 900 units and an asset (your loan) worth >100 units. This asset is as good as cash and can be lent out against, so now they have >1000 units, but you have 100 units to spend in the economy. Repeat and rinse, and soon there is many times the original deposit of 1000 units in circulation. The bank has created money literally out of thin air, and can do so because the bank’s assets are not savings but other loans. If all the loans were repaid this new money would disappear, but because it bears interest new loans must be taken out to cover the interest and the amount of debt must always increase until pop. Why we are even debating that debt == money is beyond me. If you accept this simple fact everything makes sense, I mean everything....... How do you think the money supply got as big as it is, central banks have printed very little over the years. Inflation is a function of the increase of debt, if debt is paid off we necessarily have deflation as the money supply shrinks. True and obvious if debt == money. The actions of central banks and governments seem insane until you view them with a debt == money hat, and then they make perfect sense and are completely rational. Quote Link to comment Share on other sites More sharing options...
Guest spp Posted February 18, 2012 Share Posted February 18, 2012 (edited) It's backed by your labour, your children's labour and your grandchildren's labour. We are slaves to the state. Hard for many to take...but very true. DEBT servitude! Edit - We were warned (See a few lines below). Edited February 18, 2012 by spp Quote Link to comment Share on other sites More sharing options...
57percent Posted February 18, 2012 Share Posted February 18, 2012 Bank has 1000 units, and lends you 100. Bank has 900 units and an asset (your loan) worth >100 units. This asset is as good as cash and can be lent out against, so now they have >1000 units, but you have 100 units to spend in the economy. Repeat and rinse, and soon there is many times the original deposit of 1000 units in circulation. The bank has created money literally out of thin air, and can do so because the bank’s assets are not savings but other loans. If all the loans were repaid this new money would disappear, but because it bears interest new loans must be taken out to cover the interest and the amount of debt must always increase until pop. The act of creating a loan, increases the broad money supply. In this example the bank started with 1000 units (narrow money supply) and the person had 0. The loan means that the bank has 900, the person has 100. The bank also considers the loan an asset and is really double counted to make the and the total broad money supply 1100. The bank can never loan out money it does not have. In this case, it can only lend a further 900 (if 0% capital adequacy ratio). The only way it can lend out more than the original 1000 is if some of the money lent out, returns as deposits, which is where the multiplier comes in. Yes, debt == money, in that the process of creating a loan increases the broad money supply by double counting the loan and what is lent. At no point can the bank create money out of thin air. All the money it lends is either it's own, or on deposit (minus the capital reserve ratio) Quote Link to comment Share on other sites More sharing options...
Traktion Posted February 18, 2012 Share Posted February 18, 2012 Bank has 1000 units, and lends you 100. Bank has 900 units and an asset (your loan) worth >100 units. This asset is as good as cash and can be lent out against, so now they have >1000 units, but you have 100 units to spend in the economy. Repeat and rinse, and soon there is many times the original deposit of 1000 units in circulation. The bank has created money literally out of thin air, and can do so because the bank’s assets are not savings but other loans. If all the loans were repaid this new money would disappear, but because it bears interest new loans must be taken out to cover the interest and the amount of debt must always increase until pop. Why we are even debating that debt == money is beyond me. If you accept this simple fact everything makes sense, I mean everything....... How do you think the money supply got as big as it is, central banks have printed very little over the years. Inflation is a function of the increase of debt, if debt is paid off we necessarily have deflation as the money supply shrinks. True and obvious if debt == money. The actions of central banks and governments seem insane until you view them with a debt == money hat, and then they make perfect sense and are completely rational. It isn't he money supply which got so big, it is the credit (promises) supply. The banks told a lot of people they had more money than they did and people believed them. They left their money in the banks, even when the banks were blatantly creating more promises left, right and centre. The government said all this was fine. They told everyone not to worry. They said their money was guaranteed and the banks were well regulated! They were wrong of course, so now the government is printing up money to try to 'fix' it. I'm sure that will work out really well... Quote Link to comment Share on other sites More sharing options...
57percent Posted February 18, 2012 Share Posted February 18, 2012 Then you will remain in blissful ignorance. I've read your whole post now. Some of it is correct, but the initial premise is completely wrong. HSBC cannot create a loan for an amount they do not have. The 10k could be theirs, a deposit, investment, lent from another bank or borrowed from the government at ridiculously cheap rates ...... but they must have it. Quote Link to comment Share on other sites More sharing options...
57percent Posted February 18, 2012 Share Posted February 18, 2012 It isn't he money supply which got so big, it is the credit (promises) supply. The banks told a lot of people they had more money than they did and people believed them. They left their money in the banks, even when the banks were blatantly creating more promises left, right and centre. The government said all this was fine. They told everyone not to worry. They said their money was guaranteed and the banks were well regulated! They were wrong of course, so now the government is printing up money to try to 'fix' it. I'm sure that will work out really well... The capital reserve ratio was too low or fudged using SIVs. RBS reserve was 2%, so their balance sheet looked something like: Assets: 9.8tr Cash: 0.2tr Liabilities 10.0tr Of those assets (mostly money lent out) they only needed 2% default and they were insolvent. Quote Link to comment Share on other sites More sharing options...
billybong Posted February 18, 2012 Share Posted February 18, 2012 (edited) 32 minutes 39 seconds into the video - oh dear the picture of a banker having to slog away under heavy taxes saying "What's the point" - so why would they want to be in business? Well oh dearie me, the poor banker. They know of course that's just the reverse of the coin that more and more people are having to operate under now. The latest example of that is on another HPC thread about greedy corporates wanting free JSA workers - and paid for by the taxpayer. With the bankers, MPs and corporates thieving off everyone else and creating the daftest of house prices etc it's become the "What's the point economy" for vast numbers of people, especially the young. Edited February 18, 2012 by billybong Quote Link to comment Share on other sites More sharing options...
JustYield Posted February 18, 2012 Share Posted February 18, 2012 I've read your whole post now. Some of it is correct, but the initial premise is completely wrong. HSBC cannot create a loan for an amount they do not have. The 10k could be theirs, a deposit, investment, lent from another bank or borrowed from the government at ridiculously cheap rates ...... but they must have it. Actually Nationalist's description of what happens is close enough to the truth. My eyes normally glaze over when I see another "So let's say Bank A has GBP1000 in deposits..." but in this case I followed him to the end nodding in agreement. It's a bit naughty (disingenuous) to say the banks don't need to have [access to] the cash... but technically it's absolutely correct! Banks only need to keep cash on hand to meet demand for withdrawals (which is why runs can occur). New loans are made first and deposits follow. The new loan is indeed tapped into the borrower's account without too much concern from the lending officer about how much cash the bank has on hand at that instant. It's a great business model. Quote Link to comment Share on other sites More sharing options...
Police Posted February 18, 2012 Share Posted February 18, 2012 The capital reserve ratio was too low or fudged using SIVs. RBS reserve was 2%, so their balance sheet looked something like: Assets: 9.8tr Cash: 0.2tr Liabilities 10.0tr Of those assets (mostly money lent out) they only needed 2% default and they were insolvent. Not quite. Default writes down capital and capital is a liability. Quote Link to comment Share on other sites More sharing options...
Ah-so Posted February 18, 2012 Share Posted February 18, 2012 (edited) "The bank gets to conjure into existence the amount of loan..." Untrue and disingenuous as 57percent states above. Yes, the banking system creates money through debt, but banks CANNOT just create money. The banks must have the deposits to lend out initially. I am listening to this as we speak (after years of avoiding it) and the narrator keeps repeating this inaccuracy over and over again. It is extremely misleading and led to a lot of confusion about how the system works. It is illustrated in the section after 13:20, with the narrator blabbing on about "high powered money" which can multiply money by a ratio of 10:1. As far as I am aware, no bank is able to make a $10,000 loan against a $1,000 central bank deposit. I am not saying he is entirely wrong, but this "high powered money" thing is pulled out of the hat without explanation or reference.　I have hunted the maker's comments: The method of central banks injecting new money as described in Wikipedia (and Modern Money Mechanics) is not the same as the central bank cash reserve as described in the movie. I did not want to begin my "illustrate in a simple way" by explaining Open Market Operations. The general audience can only absorb so much of this information before they stop taking it in. To load them up with a complex explanation at the beginning would ultimately cause an overload of information and subsequent loss of attention later. Basically, we are too stupid to handle the truth, so we need a misleading fiction to help us. Unfortunately, if this information is actually misleading, it is rather late to correct it given that millions have already viewed the movie. Oh dear. Perhaps you could edit the video with a caption, like "This bit is a load of ********". However, the entire banking system operates on the calculated risk that we won't demand cash Thank you for this insight, but most of us knew that before watching your film. Link Edited February 18, 2012 by Ah-so Quote Link to comment Share on other sites More sharing options...
Ah-so Posted February 18, 2012 Share Posted February 18, 2012 Banks only need to keep cash on hand to meet demand for withdrawals (which is why runs can occur). New loans are made first and deposits follow. The new loan is indeed tapped into the borrower's account without too much concern from the lending officer about how much cash the bank has on hand at that instant. It's a great business model. Well, a loan (new asset) can be agreed but not funded, but at the time the money is poked into the customer's account, there must a corresponding deposit (liability) to pay for it. You state that the lending officer does not have too much concern about the cash, but what do you actually mean by this? John Smith who works in small loans at your branch will have a limit on how much he can lend against a given credit score. His manager may be given targets for the amount of money that should be lent. Neither know what cash the bank has. The senior management and group treasury will determine broadly how much the firm is able to lend at any given point, as well as setting targets for new deposits and therefore the rate (note that Santander seems to offer the best rates going). Due to the size of the banks' cash buffers, they have a degree of flexibility month on month as to how much gets lent out. Business units can be incentivised through a funds transfer policy to make sure that money is lent and borrowed in the right places. Inevitably there is a funding gap between loans (assets) and deposits (liabilities) from customers, so they tend to access the money markets to increase their liabilities. This is the most dangerous place, because if funding is lost from here, the whole thing falls apart very quickly e.g. Northern Rock. The more reliant a bank is on the money markets, the weaker it is financially. It is also not a good idea to keep offering best on the high street rates of interest. If you do not keep it up, you lose the rate tarts, so the banks have to fund the assets from elsewhere. In fact, probably best not to grow assets (loans) too much if the bank cannot keep a stable ratio of funding. Quote Link to comment Share on other sites More sharing options...
Ah-so Posted February 18, 2012 Share Posted February 18, 2012 Any shortfall is made up overnight by borrowing the 'excess deposits' at other banks. If one bank is 'short', by definition another bank must have excess. Then the Treasury Department try to match overall funding needs to borrowing using a mix of sources such as deposits, wholesale funds etc. But the interbank market operating each night is a large source of funds that enable any mismatches to be sorted out quite easily. As I said earlier, the only real constraint is capital requirements...unless in times of stress banks don't want to lend to each other because they fear the solvency of their counterparties or even for their own liquidity/solvency. No, a bank can sit on its cash resources and poke them in the asset column. It does not have to lend to another bank and it does not mean that it has "excess". You refer to the "Treasury Department". What's this? Do you mean HM Treasury? I presume you mean the Bank of England in reality. Nothing of note happens overnight. Anyway, neither of your first 2 points have anything to do with the post you replied to. The structural funding position is more important rather than the minor overnight flows, that banks in the UK are no allowed to lend against. However, you are right to state that capital requirements and solvency concerns are the only real limits. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 18, 2012 Share Posted February 18, 2012 It simply has to balance at the end of day...and that is when you realise that there really is only one ginormous bank...the deposits that left somewhere popped up somewhere else and there will always be sufficient to meet any loans as required in the economy and the money from those loans will be deposited somewhere. (with a certain % floating about in between banks in the form of cash of course but that limit is known....by the amount of cash in circulation) The only hindrance on that is the capital requirements. all fine and dandy, except, the funds stopped popping up elsewhere in 2007 for NR and shortly after for Bear Sterns and Lehmans....then in the shadow system, for AIG. the monolines and for Soveriegns, Iceland. Greece, Portugal, Spain and Ireland. With a very high risk of funds not popping up somewhere for Germany, France, UK and the USA. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 18, 2012 Share Posted February 18, 2012 (edited) I am referring to the Treasury Department at each bank. They are responsible for overall balance sheet management. And, together with the Finance Department undertake the day to day management of the bank's books. Of course a bank does not have to lend to another. That is why the rate fluctuates and why some banks cannot borrow at any price and have to use the BoE in exceptional circumstances as the lender of last resort. However, under normal day-to-day business... I agree that if the "system" issues £1b in units, then the units stay in the system. But these units will lead to promises of many times the units available, and banks count on this and assume that holding 10%ish in units held is a good risk against loans they have made and demand deposits being demanded upon. If banks stop lending, then we have a problem with such a scheme, as interest promises need to be fulfilled out of future borrowing...and if collateral ever fails to present for those future loans, then people are not going to get paid. Central Banks can "fix this", its just that if they fix it too well, we have the well known phenomenum of Moral Hazard....where bankers are not busted as they should be, and capital is not punished for being malinvested. The big problems of 2007 were caused by loose control by the regulators which led to promises based on promises based on promises, many of which were unaccounted for in the visible banking system. Each and every transaction balances....but future interest will appear on balance sheets on a day by day basis....not a penny of it having to be in existence at all anywhere...they just trust that when it comes time for payment, the debtor has some of the issued funds available to settle....and most players in the World do not have the option to borrow against their financial assets as banks do...indeed, if a bank was to ask for a loan as a normal business would, it would most likely be refused as too risky. Edited February 18, 2012 by Bloo Loo Quote Link to comment Share on other sites More sharing options...
mfp123 Posted February 18, 2012 Share Posted February 18, 2012 the shortest way to understand the banking system, without going into all the arguments again, is to understand the fact that when you deposit your money at a bank, all you get in return is an IOU. the bank can do whatever it want with your money once youve deposited it. your money isnt partitioned off, or sitting there just for you. all you have, all everyone has, is an IOU from your bank. the mistake is assuming that this IOU on your bank statement is "money" per se. Quote Link to comment Share on other sites More sharing options...
iamdamosuzuki Posted February 18, 2012 Share Posted February 18, 2012 Been posted a few times. At best, I'd call it disingenuous. It's simply not true that a bank creates money out of thin air. The process of lending out money does increase the the broad money supply, but the bank has to have the money to lend. A deposit, bond, equity or loan. The bank of England however..... RBS did, they lied. Quote Link to comment Share on other sites More sharing options...
Ah-so Posted February 18, 2012 Share Posted February 18, 2012 I am referring to the Treasury Department at each bank. They are responsible for overall balance sheet management. And, together with the Finance Department undertake the day to day management of the bank's books. Of course a bank does not have to lend to another. That is why the rate fluctuates and why some banks cannot borrow at any price and have to use the BoE in exceptional circumstances as the lender of last resort. However, under normal day-to-day business... OK, I see what you mean - misunderstanding. I was thrown by your use of capital letters for treasury, which would suggest that you are referring to (Her Majesty's) Treasury. Quote Link to comment Share on other sites More sharing options...
Ah-so Posted February 18, 2012 Share Posted February 18, 2012 RBS did, they lied. How? I thought RBS borrowed a load of money that spent it all on a mid-tier Dutch investment bank that was actually worth diddly-squat. Quote Link to comment Share on other sites More sharing options...
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