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How Banks Create Money


Setantii
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The home currency that you obtain in exchange for your foreign currency will have been borrowed into existence by someone else.

If you use it to repay your home currency bank debt then the money will dissappear (together with an equal and opposite amount of debt.)

It is impossible for the whole community of users of a debt-based commercially issued currency collectively to be free of debt in that currency.

Total debt to the money/credit issuing banking cartel must always exceed the total money supply.

I agree, in practice. But it is in theory possible to pay off a loan and interest without taking out another loan.

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And without printing money?

two savers have $100 each in cash = $200 cash.

They deposit at bank A. Bank A had no money.

Money Supply = $400.

I take a loan of $100. I am required to pay $10 in interest.

Money Supply = $500

I trade abroad and receive foreign currency. I buy the home currency with the foreign currency from bank A. It is $10. worth.

I pay off my loan with the $100 in my deposit account and the $10.

Loan Repaid.

Money Supply = $400

(Bank A also has some foreign currency).

Edited by Hancial
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$100 each held by two savers in cash = $200 cash.

They deposit at bank A. Bank A had no money.

Money Supply = $400.

I take a loan of $100. I am required to pay $10 in interest.

Money Supply = $500

I trade abroad and receive foreign currency. I buy the home currency with the foreign currency from bank A. It is $10. worth.

I pay off my loan with the $100 in my deposit account and the $10.

Loan Repaid.

Money Supply = $400

(Bank A also has some foreign currency).

Is it possible to pay off the debt without recourse to a foreign currency?

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FORGET WHAT YOU SAW IN ALL THOSE WEIRD YOUTUBE OR GOOGLE VIDEOS. THEY ARE WRONG.

The depositors' income, the workers' income, the shareholders' income and the government's tax income all eventually gets circulated in the economy buying things.

Trade creates liabilities all the time even if they only exist for a very short time. You work a day for someone, they owe you money for it. You sell something to someone, they must pay you for it. And, wait for it, if you lend someone money, they pay you that back and for the benefit of having the money for some time. So you can see, INTEREST LIVES ON THE GDP SIDE OF THE EQUATION. It is trade itself that clears debts.

Indeed, that is why in the long run it best that there is a balance of trade so that both parties can repay their debts. There is no point a bank hoarding all the money in the world, just as there is no point a country hoarding all the money in the world. Or it will end in tears (oh, it just has :( ).

Thanks for your explanation I'll look at the links critically with your reasoning in mind. I must say I have previously agreed with other posters that "Money is Debt". The banks create it as an asset that is the borrowers promise to repay.

That's how the money supply is expanded. There are a series of videos on youtube from an outfit called "Khan Academy". Their logic and reasoning seems correct to me.

The point I think isn't stressed enough is that at source money is a representation of an individuals promise to engage in an activity for someone else. We're a social animal and because of the size and complexity of our society we need a mechanism to encourage and facilitate the swapping of our activities. We lose sight of that and become bogged down in the mechanics of money. To my simplistic mind the amounts needed by individuals I can make sense of but when the figures get to Billions and Trillions then they become nothing more to me than a nonsensical concept.

Can anyone explain why its not a nonsensical concept.

Thanks Spaniard for the link to the earlier posting and the explanations and discussion therein. So the Billions and Trillions are the accumulation of all the stored promises still to be performed. Still think its a nonsense concept.

Edited by sleepwello'nights
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It is because money has to represent an asset. The asset has to a value or it is worthless.

The asset may be physical or just a promise to pay.

The bank can create money for you to spend on a holiday. Their asset is your promise to pay it back.

I still dont see why money=debt doesn't hold true (excluding the 3% or so of debt-free moey). However, I can see that "money supply" can mean just about anything.

I fear that if enough people understand the answers, the whole system will suddenly cease to exist. (and Injin will disappear in a puff of imaginary smoke).

VMR.

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Is it possible to pay off the debt without recourse to a foreign currency?

not sure i understand the problem here.

If loans are creating more interest as profits than deposits as costs then the money supply will shrink if the banks are savers in the home currency.

But it is the central banks job to ensure the money supply does not shrink. They can supply all the money necessary to ensure the money supply does not shrink and do so at below market value cost.

They can if they want issue free money

What is the problem here?

Are we saying there is some impossible to solve riddle about modern banking that means the system must collapse due to the interest??????

Can somebody bring me up to speed on this please.

Edited by aliveandkicking
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I agree, in practice. But it is in theory possible to pay off a loan and interest without taking out another loan.

It is possible both in theory and in practice for any individual user of the currency to acquire sufficient money to pay off all debt without further loans.

In theory this is possible serially for all users but not simultaneously, not for the whole community of users at the same time.

At any point in time the aggregate bank debt within the currency system must necessarily exceed the total money supply.

This is a straightforward arithmetic property of how the money-number system operates, of how the money-numbers change through banking transactions.

Please see from post #78 onwards of this previous thread:

http://www.housepricecrash.co.uk/forum/ind...75440&st=75

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I ask the bank to borrow £100,000 of it'sexisting money.

It takes the form I sign and chooses to record this as an asset worth £100,000

Then it returns that to me.

At no point does any "borrowing" take place. It's a flat like for like trade and the bank is lying about it.

By signing the form, the borrower consents to being charged interest on the returned money, because it is illegal for the bank to do so without that signature.

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By signing the form, the borrower consents to being charged interest on the returned money, because it is illegal for the bank to do so without that signature.

There isn't a contract -

No meeting of minds

No true consent

No understanding

No two party signatures (banks are corporations and don't really exist so therefore can't sign)

No consideration on the banks part - the "borrower" supplies everything.

Basicalky, he might as well be doodling his name on the back of an envelope

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Well thanks for the replies people, much appreciated.

Many of the posts have given me food for thought and I will get back to this thread as soon as I have the time.

Can I just add that we need new terminology?

Too many synonyms in banking. Borrowing isn't borrowing, saving isn't saving, deposits aren't deposits etc They all mean something in banking than they do in general life, to eliminate that confusion would be a good first step.

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The thing is the governments lie, cheat and generally make a bloody mess of things the only reason it sounds so complicated to create money is because well if it was easy everyone would be doing it. This is how the few control the many "With a medium" such as money.

Think about, Really think about it. Since when does the worker need money to work??? The worker works to earn money so he can feed his children, get them clothes and put a roof overhead now if everyone helped everyone build their houses make clothes etc. Give each other food not trade but just give, as it does not cost anything to grow. As for the particle accelerator example you could in theory build ANYTHING with no money. Look at the Egyptian pyramids, Stone henge etc. etc. I'm guessing these things were not built with cash yet they are almighty buildings that have lasted thousands of years. Do you really see most of our current "modern" buildings lasting as long as the ancient pyramids?? I don't!

On the assumption that the Egyptians did build the great pyramid, it was done so using slave labour, not currency.

Your utopia sounds marvelous. However we are by nature selfish beings, and sooner or later someone (or group) would take advantage and claim ownership. The resulting dispute will escalate into war and.. well you get the rest.

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Yeah I know, another thread about banking but I really need to get to the bottom of this.

Even though the banking system is in meltdown I've yet to see any mention in the mainstream media of how our debt based economy actually works. Of course I'm talking about the system known as Fractional Reserve banking. For a mere mortal like me with a basic education the idea that banks create money from nothing seems absurd. In fact until a few years back I stupidly assumed that a £ note equated to an amount of gold in the Bank of England!

So I researched this system to try and understand what it's all about and my current conclusion is that banking is just one huge pyramid scam. I'll explain why.

I was also quite shocked when I realised how money is created a few years ago, it's a tricky concept to get your head round for any normal person, but it isn't such a bad system really.

It is and it isn't a like 'pyramid scam' here is why.

Under your original assumption that £1 means there is 1 pound of gold sitting in a vault then banks creating money out of thin air would be fraudulent. You have to remove this idea from your model of the world in order to understand how it works, economies simply don't work that way.

When you take out a mortgage and the bank creates the money with a magic wand you are correct that the £250,000 did not exist before that point in time and the bank did not have to go begging to an oil rich sheikh for a loan of £250,000 before they could approve your mortgage.

The person you are borrowing from is effectively your future self. You are borrowing from your own future earnings and your debt is a promise to pay that amount to the bank over the agreed period of time. It doesn't matter that the money doesn't exist now because it will at some point in the future, you will have earned it. As long as almost everyone will realistically be able pay the money back, the system isn't a giant ponzi scheme. If the system goes mad and assumes that everyone will be earning huge multiples of what they do today, then yes just like a pyramid scheme, the whole system catastrophically fails at some point.

This doesn't really seem to be a fair or nice system, but the alternatives are much worse.

For example, if you had to borrow existing money to buy a house you would have to be very good friends with someone very rich in order to get favourable terms for a loan. If the rich Sheikh didn't love you and trust you like a brother than you would effectively have to become his slave in order to get somewhere to live. Many slaves in roman times were in fact free men that couldn't pay their debts so instead had to work for free, for life, for the person they owed money to after falling on hard times.

If you decided that you would only deal in cash and never get in debt then that is also a problem. You would need to live with your parents till the age of 45 to get a house or alternatively build a house by buying £500 worth of bricks a month for 25 years until you eventually had a finished house 25 years after starting... So the current system isn't that bad, when done sensibly.

The problem that exists at the moment is the banks decided to lend staggering amounts of money to people who have no hope of ever earning enough to pay it back. The mortgage market is not driven by supply and demand in normal non war times, it is driven by the availability of credit as the nation is starting to understand at the moment. When the banks throw money around the prices of houses go up as people can get bigger mortgages, when the credit dries up the price of houses goes down as people can't get big mortgages.

While there may be some movers and shakers during the boom and bust cycle, when averaged out people with high incomes still live in nicer houses than people on the average wage who in turn live in nicer houses than people on a less than average wage.

The only thing that has really changed is that everyone now has to give much, much more money to the banks until they have finished paying off the mortgage.

If you have a big mortgage you really shouldn't be happy about it, you are not rich, you are not 'earning money' on an appreciating asset, you have in fact just hung a giant millstone round your neck for the next 25 years.

Don't forget to tell your kids this. They can figure out how to have sex on their own, they won't understand money unless you teach them.

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Can I just add that we need new terminology?

Too many synonyms in banking. Borrowing isn't borrowing, saving isn't saving, deposits aren't deposits etc They all mean something in banking than they do in general life, to eliminate that confusion would be a good first step.

Quote ironic since it seems to me that the views of the financial system that you express here seem largely consistent with reality and without contradiction, yet they result in endless arguments with other posters because you choose to use different definitions of common terms than most posters (e.g. money supply, inflation).

;)

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Quote ironic since it seems to me that the views of the financial system that you express here seem largely consistent with reality and without contradiction, yet they result in endless arguments with other posters because you choose to use different definitions of common terms than most posters (e.g. money supply, inflation).

;)

:lol:

Indeed!

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