I have been trying to get my head round for whole economy thing
Public spending
Taxes
Why we borrow so much (credit cards, mortgages)
how money is created

So I have spent today reading various sites

I have been shocked by what i have been reading,
The Government creates money by borrowing it from banks (but the money doesn't actually exist, the banks just make it) and our taxes are purely to pay off some of the interest.
Trouble is its been hapening for 311 years and borrowing more each year. The compound interest on it is getting stupid (£25 billion a year)

do some searches on the subject yourself (google money creation and national debt etc)

heres one site I think sums it up rather well

The Great Money scam

what do you guys think?

I can't believe this is how it been happening, surely its going to fall apart eventually (we all know the effects of compound interest)

Kam (now very disillusioned with the world)

PS Thanks DrBubb for getting me thinking and waking me from my blinkered life,
I feel like I'm in The Matrix wishing I'd taken the Blue pill instead.

only a costly world war can save us now.........

Yes, it's fractional reserve banking. If I recall, a bank needs only to keep 8% on reserve. The rest is essentially thin air money.

That's why there's a fetish for rampant economic growth of any quality at any cost. That thin-air money only becomes something tangible when converted into goods and services via our labour. Otherwise, with more money chasing the same pool of goods and services inflation becomes huge problem. Housing inflation a question of supply? Immigration? I don't think so. It's this cheap easy money, and to FTBs seeing their savings wiped out by houseprice inflation, well, it's legalised theft.

It gets even more hillarious when Gordon Brown tells employers to keep a lid on 'inflationary' pay rises, while he's presiding over joke inflation figures that exclude anything that inflates and artificially low interest rates.

Eventually, in a monetarist system, the debt burden gets to high and a period of consolidation takes place to wring out the excess cash, which is equally sick as people lose their jobs and the inflation-devalued money now flows away from their grasp.

As Woody Guthrie said, 'Some will rob you with a six-gun, others with a fountain pen'.

Very scary article. It does worry me that our current monetary system isn't really all that old and I think the jury is still out on whether it is stable. For example the last gold goins to be struck for general circulation in the UK was in 1932 - ie within living memory (just!). The Bretton Woods system ended in 1971 - not that long before I was born! I enjoyed an article on a similar theme by Jim Puplava:
The Great Inflation

The solution proposed by the author in your link is pretty scary in itself. He is basically advocating that the government prints its way out the problem, which is effectively another way of partially defaulting on its debts and taxing everyones savings.

I would like to read more about economics and monetary systems. If anyone knows a good book, preferably by someone who doesn't have an 'end of the world is nigh' placard on his chest and who won't bore me to tears - please let me know.

Well, the end of the world is nigh may already be here. With housing costs of high that a generation feels enomically sterilised by high housing costs, well, that's pretty bad.

Two thirds of money in circulation was created by mortage lending. The more banks throw out there to BTLers, or to 6x multiple sacrificial FTBs, the more the houseprice inflation hutrs and that all new money adds to inflationary pressures elsewhere.

Anyway, here's your book on how modern money operates - an excellent read:

http://www.amazon.co.uk/exec/obidos/ASIN/1...1901571-4229229

I'm not sure the jury is even out. No fiat currency in the history of the world has _ever_ been 'stable'... unless this is another of those 'new paradigm' things, ours won't be either. Give the governemnt the power to print money at will, and they will use it as much as they can get away with.

Certainly the US dollar lost over 90% of its purchasing power over the last century and the pound even more... and the only ways to regain some kind of stability in a world where the pound and dollar are ten times overpriced relative to the yuan are to devalue the currencies even further, or greatly reduce wages in the West.

I have been inspired to write a short story about one dystopian outcome to our current situation.

It is a work in progress (grammar and all that jazz is bad) but any comments will be apprecaited.

Any body elses view of how it might all pan out would also be of interest.

The Government creates money by borrowing it from banks (but the money doesn't actually exist, the banks just make it) and our taxes are purely to pay off some of the interest.

Chill. There is a lot of hysteria around about money, basically because no one understands it. It really isn't that bad, if there was a better system we'd use it.

As for how it works, imagine this:

It is a time where there was no money and no banks. Say I open the first bank in the world. You come to me because you want a loan to buy a house, I write you a cheque. The guy who sells the house has to deposit the check - in a account owned by me. The whole world now has one deposit account with 100 pounds and one loan with 100 pounds. Money is created. It isn't a bad thing.

Except when the Bank's interest on the 'Loan' is £25 billion each year which could pay for 1 million police/nurses or 250,000 affordable homes. Instead it's going to the Banks Shareholders.

In that case money isn't created, because the only way the depositor can use their money is to demand it from the bank, who will have to demand it back from the borrower.

In the real world, though, I believe it's more like one person deposits 100 pounds and the bank are then allowed to lend 100 pounds to each of twenty or more people... huge amounts of money are just created from nowhere.

The "opening of the mind" to alternative points of view,
beyond what's in the media,
can be good for your economic health.

Here's another eye-opener:

"Segment 3 and Segment 4 are spent with John Perkins, author of the controversial “Confessions of an Economic Hit Man.” John says the United States and other developed nations use international credit institutions to fund projects in emerging nations, leaving big corporations with profits, but leaving small countries buried in debts they cannot repay. John says the behavior of this “corporatocracy” is what drives ill will toward the US, and that he knows, because he used to be part of the problem."

Seg.3: http://www.voiceswest.com/kor/0312-03.mp3
Seg.4: http://www.voiceswest.com/kor/0312-04.mp3

Source: http://www.kereport.com/

"The US consumes 25% of the World's Resources, creates 25% of pollution"

Heres another up to date little read to give food for thought.

Bit on the expensive side. But you get what you pay for.

Road map for the future contraction of credit

Make me an offer and I'll sell you my copy. Its in perfect condition.

BAB

Banks are't immune either, one event could cause a panic with people making a run on the bank. with something like 3% of money actually existing now, it wouldn't take a lot of people withdrawing their cash to destablise such a fragile system

And what about the HPC, if houses are ovrpriced 30% then surely that means that 30% more money has been created than it should have been. If it crashes back to long term price levels then theres still more money then there should be. which leads too............?

No. You don't need the same amount of money that the total value of houses. Imagine a row of houses. If one house sells for 1 million dollars (was 100k), the buyer gives the seller the money. Every other house is now worth 1mill, but there wasn't any extra money generated.

Like I said, don't worry too much. Find out how the money system works, it really isn't that bad. Once you know what you are talking about you wont be worried any more.

Ok so say Fred had 2 house he bought for 100k and sells for 1million each, he now has 2million in his account, He doesn't like the UK anymore and wants to leave so he goes to bank to withdraw his money, but bank says he can't because it does really exist

Crunch Time for Credit?: An Inquiry into the State of the Credit System in the United States and Great Britain
Edward Chancellor

Synopsis
US and UK economies 'badly corrupted' by massive growth in debt, according to new independent report by a leading UK financial historian. The credit bubble that has developed in the UK and US economies over recent years is unsustainable and has 'badly corrupted' the economies of the two countries, with potentially serious destabilising results, says a major new study of the economic and investment implications of the build-up of debt in the two countries.

Housing markets look particularly vulnerable in both countries. The 200-page report, Crunch Time for Credit? by Edward Chancellor, is based on research originally commissioned by Odey Asset Management, the London hedge fund management company. Chancellor's authoritative history of financial speculation, Devil Take The Hindmost (published in 1999), correctly identified the collapse of the stock market in 2000 and was named one of six "indispensable investment classics" by Money magazine.

In the new report, Chancellor analyses the massive build up of debt in the US and UK, and compares it to several episodes from history, including the Great Depression of the 1930s and recent experience in Japan and Korea. He also chronicles the way that intellectual understanding of credit has developed over the past 300 years. He concludes: "The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies...When credit ceases to grow, the weakened state of these economies will become apparent." "It will also become clear that the credit boom, by inflating asset prices and boosting profits, has lead to inappropriate balance sheets (both for the private sector and in general). At some stage, balance sheets will have to be adjusted to face a new reality. The process of adjustment is likely to be painful. It may well end in either an extraordinary deflation...or an extraordinary inflation."

Among the report's main findings are: On the global financial system - The Federal Reserve's consistent intervention to maintain financial stability and provide liquidity during recent crises has created "moral hazard on a grand scale' and 'one asset bubble after another". As a result, the credit system is now "dominated by leveraged short-term speculators" to an unprecedented degree. - A revolution in the financial system, including credit derivatives, has shifted risk throughout the financial system, but risk cannot be destroyed, only redistributed. The modern credit system has never been stress-tested by a severe recession. - Low inflation and the perception that central banks know how to prevent cyclical downturns has been used to justify higher asset prices and yet more debt. Investors, says Chancellor, "have failed to consider that lower inflation also implies lower future growth rates for profits and income". - More and more borrowers, both corporations and households, have become what economist Hyman Minsky called 'Ponzi finance units'. They are dependent on rising asset prices and the refinancing of their liabilities to remain solvent. - The Federal Reserve's 'easy money' response to the technology bubble in 2000 has helped create a "new investment bubble" in China, surging commodity prices and threatens to accelerate the "de-industrialisation of the West". It has also created a global housing bubble, with mortgage debt at dangerously high levels. - Home-owners, consumers and financial markets will all feel the consequences of the bubble bursting, though whether the outcome is renewed inflation or deflation cannot yet be foretold. Relevant parallels include the slump of the 1930s, the stagflation of the mid-1970s and the debt deflation in Japan since 1990. On The UK Housing Market In the section on credit in the UK, the report provides an exhaustive analysis of the UK housing market, and argues that, as in the United States, it is virtually impossible to accept the Bank of England's view that the recent debt-fuelled rise in house prices is a benign and sustainable event. The UK economy has become "increasingly vulnerable" to a credit crunch, he says. In a foreword to the report, Crispin Odey, CEO of Odey Asset Management, says: "Not only does he [Chancellor] make a cogent and persuasive case that current trends are unsustainable, but his unique knowledge of the hinterland of previous periods of speculative credit excess also illuminates the range of potential outcomes...There is no question that financial markets are not priced for the sorts of risks that Chancellor identifies."

About the Author
Edward Chancellor is the author of 'Devil Take the Hindmost: A History of Financial Speculation' (Farrar Straus & Giroux, NY, and Macmillan, London, 1999). This book, a New York Times 'Notable Book of the Year,' was subsequently translated into nine languages. 'Devil Take the Hindmost' has recently been ranked as one of six indispensable investment classics by Money magazine. Chancellor is also the editor of 'Capital Account: A money manager's reports from a turbulent decade' (Thomson Texere, 2004).

Chancellor was formerly employed by Lazard Brothers and has since written for a variety of publications, including The Economist, The Financial Times, The New York Times, Washington Post and the Wall Street Journal. He is a former assistant editor of Breakingviews, the financial commentary service, which won the prestigious Harold Wincott award (financial journal of the year) for its coverage of the collapse of the technology bubble in 2000. He currently writes a column for Breakingviews.

@: http://www.amazon.co.uk/exec/obidos/tg/sto...9952338-0788605

He wont withdraw it, he would exchange it for USD, EUR, AUD whatever. For a foreign 'exchange' you swap your pounds for the other currency. That means there has to be someone on the other side who wants the GBP.

Perhaps there is a Russian who wants to buy the house or an American who wants to buy a new Jaguar, or a Japanese investor that wants to buy Gilts paying 5% interest.

Hey Dr Bubb we must think alike. Take a look at post#12 above.

Have you read the book?

I am looking to sell my copy second hand after I have finished reading it to defray the cost.

Want to make an offer?

BAB

But if someone wanted to pay 1 million for one of the other houses and the bank was willing to lend, new money would come into circulation. It's the supply of continual credit that we've seen increase dramatically over the past few years that are forcing up prices. In Japan, where prices in some areas increased ten-fold during the eighties, special intergenerational mortgages were created to keep the bubble ballooning along. We know what happened then.

As so much money sloshing around at the moment was created out of huge mortgages, without the continual willingness for people to take on evermore debt and the banks to lend it, the money would dry up dramtically. In fact, it's happening already - car sales plunging, retail figures nosediving, jobs being slashed.

Do you have a good resource we could read to show how money doesn't actually work in this way, Wiseman? Then we needn't get too worried about the credit crunch.

The bank would say "Yes, sir, why certainly. Would you like your £2 million in £5 or £10 notes?".


The bank would simply borrow the amount on the short-term money markets to satisfy his demand.

The bubble in Japan was much much bigger than here. The banks actually owned property and stocks themselves. They lent their money to themselves and then rigged the markets to make profits. Their reserves were much lower than today, it was the Basel agreement that required higher reserves that really kicked off the Japan depression.

As for the UK, yes there has been a bubble, yes it is a problem and there is a very big risk of a recession and mini credit crunch. However UK rates haven't been nearly as low as US, Europe or Japan.

Money isn't 'drying up'. It is growing at a slower rate than it was which is a good. thing.

The main point I was trying to make is that modern fractional banking is not fundamentally unstable, it is not the cause of the current property bubble and is not the evil incarnation of a elite group of bankers who manipulate the world's workers (as you hear so many conspiracy theories).

BTW 100 year mortgages aren't a big deal as they sound. They are effectively interest only mortgages.

I told my friend:
" I bought this dog for Pds.10,000"

He said:
" Are you mad? How could you think about paying so much for such a mangy creature? And, ah, where did you get so much cash?"

I responded:
" Oh, I didn't pay for it with cash. I bought it with two Pds.5,000 cats."

Inflation feeds inflation, my friends.

If your Pds.1 million home collapses in value, so will all the other homes valued at silly levels.

If the easy credit is no longer available to feed the house price inflation, prices will collapse. Unfortunately, the big debts will still be around... until theya re written off.

Yep the house price is an estimate, the debt is real.

Which is why the fractional banking system is safer than bricks and mortar.

Mmmm

Wonder what would happen if people started moving their money in to Sharia complaint banks, who have slightly better morals about overstretching people and debt.

Better yet, you can "bank" in Gold:

http://www.goldMoney.com

Turk's Dollar chart:

Do you think they actually have the amount of gold in their vault that everybody has purchased?
Or do you think maybe they work on the 8% retained to amount sold and if everybody wanted to cash in they would go bust?
I personally am a bit sceptical of that one, rather be able to lay my hands on it!!

In the UK 27 Million are currently employed and pay income tax, because of Government borrowing therefore we each pay on average £925 a year to the banks to service the loans they've borrowed through taxation, this amounts to 4.5p of every pound we earn. mm makes you think.

Sorry govt debt is in the form of gilts (bonds), the govt does not borrow money from banks.

And someone owns all the gilts (and bonds and debt). For every person/company/govt paying interest there is someone on the other side receiving interest. Quite likely some STR with their money in ING. :-)

21 downloads and not one comment was it really that bad?

I have been informed that they are trading 5 times more gold futures than actually exists or will exist.

Excellent title - LOL !!!
Thanks for the recommendation. Given the title, I doubt it will bore me to tears.

I will read this thread more carefully and hopefully the book when I have more time - I am seriously in the poo with work this week! If you see me posting then give me a scolding!

"I have been informed that they are trading 5 times more gold futures than actually exists or will exist."

That is completely normal. Few futures contracts result in delivery

Independent central banking systems in general are aspects of the so-called European systems of liberal parliamentary democracy. The central bank is in fact a private "for-profit" institution operating on a charter arrangment or by other international treaty law.

In the liberal system, the central bank controls the only source of credit for the host economy, "lending" fiat money created out of thin air to the government at self determined rates of interest.

Clearly, in such an arrangement, the notion of democracy is somewhat illusory. In fact, in times of acute monetary-financial crisis (such as the current, global systemic breakdown crisis), the central bank asserts a higher degree of authority than the national government upon which it is a parasite.

This leads directly to the phenomenon of fascist dictatorships in Europe over the last century, whereby private financial interests run coups against recalcitrant governments to prevent them from adopting economic policy measures in defense of the general welfare, as against the authority of the central bank.

The only way out of our current global crisis is a return to the American system economic model adopted by FDR, whereby, the government issues state credit backed by national banking institutions for the purpose of long term capial formation for development of essential basic economic infrastructure, such as power, transportation, education and healthcare. In a functioning economy, government regulation ensures at least 50% of national economic product is reinvested in basic economic infrastructure, to ensure a net increase of productivity for current and future generations required to operate the economy as a whole above breakeven levels.

The original US system is the mortal enemy of the private financier elite, having been the cause of the American revolution and the ongoing battle between Republican and Oligarchical forces within European civilization globally.

I can now say I understand inflation... This is a frustrating subject as I have just tried to have a conversation about this with my mother, and she totally failed to understand!

However, i think I have come to a conclusion:

Fractional Reserve banking is fine if the inflation figure used to increase peoples wages/income equals the real inflation, i.e. how much extra money has entered into the economy (in simple terms).

However, in recent years people have invested in assets (i.e. house prices and other assets) which have seriously pushed up "real" inflation, but this super high amounts of inflation isn't considered when getting a pay rise. This is mainly because Gordon Brown says official inflation is 2-3% (ish) via the BoE and so pay rises are of similar levels.

So in hind-sight, if the inflation figures included all assets (i.e. house prices) there wouldn't be huge bubbles like there is with the housing market. This would be because as asset inflation rose the BoE would increase interest rates to curb inflation.

The major problem we now are faced with is if asset inflation is included into the inflation figure it would articially bring them down (as house prices are falling), which in turn would reduce interest rates.

I believe it was recently mentioned about house price inflation being included into inflation figures, and I wouldn't be surprised if Gordon Brown let this happen.

I'm not sure where this will end up tho? Will my savings be worth less and less?? And as a saver, will there be enough of us (savers being a minority) to pursade the government not to let this happen (by voting labour out)?

Any thoughts on this?

-----------------
Maybe I should have taken the other pill?

Inflation is a measure of the net decrease of purchasing power resulting from an increased rate of monetary emission that is not correlated to an increase in economic productivity. Hence, it is a direct result of the usurious policies of the independent central banking system itself.

The current housing and other asset price bubbles came into being due to the "wall of money", low interest rate, liquidity pumping exercise conducted by the US Fed in response to the 1998 LTCM crisis.

As such, there is no cure for such recessionary cycles without recourse to a fundamental change in economic and monetary policy, hinging on government regulation of the money supply to ensure that monetary emission expands in line with increasing productivity.

'Government regulation of the money supply' is the PROBLEM, not the solution. So long as the government controls money supply rather than the market, you'll get huge booms and huge busts due to rates being set for political or otherwise irrational reasons: there's no way a small group of people meeting once a month can possibly set interest rates as accurately as six billion people making trades all year long.

Booms and busts would still occur, but they'd be damped out pretty quickly by the markets, not run on for years to make politicians look good.

Are you sure about that? a conspiracy theory is the theory that there may be a conspiracy. Wheras a conspiracy is the actual.

You may all find The Secrets Of The Fedaral Reseve quite interesting.

It is interesting to understand how monetary freedom and freedom of choice are taken away or altered for the greater profit of others.

Fencedancer - I love the story, problem is this thread is so interesting I think by the time we've got to the bottom to post a reply, our brains are full of economics, not literary criticism!! Don't know how it should turn out, though. Do you have a plan?

Tip of the iceberg at best. This is a case where ignorance is bliss. Wish i had never started digging.

For me it's like seeing ghosts of the past!
2004 onwards was a really fascinating time to be on HPC.
A number of free-thinking peeps descended on here and through combined skills and knowledge worked out areas the scams eg "Liar loans" etc were being perpetrated by the banks, Government, EA's and their stooges the Media - whilst being hounded by the bulls.
It took months of read/learn financial/economic/?/? etc data to get up to speed.

We are seeing our hunches proved right as day after day as they are being exposed or admitted to by EA'S, Govt, Bankers Etc!

Great plot - I think you should turn it into a screenplay! Let me know if you finish it, I want to know what happens.

Hi D.W. - you are replying to a comment made in 2005 - check top of the thread for date when replying - or maybe thats your thing.
Whatever, enjoy your stint on HPC!
I'm pretty sure that a regular poster on here called 'The Masked Tulip' is looking for a 'dangerous woman'