Under What Circs Do Interest Rates Rise?

[interestrateripoff]

http://www.chrismartenson.com/crashcourse/...-money-creation

That's not what's being said here.

[aliveandkicking]

Does world saving = total debt?

I think it must do.

But savings take many forms. A mortgage free house is a saving.

If you take your ownership papers to the bank they can monetize your savings to enable you to have a more convenient spendable savings that is spendable anywhere on earth. But we call this debt to the bank. And when the debt money is spent it creates savings for the seller.

The sellers can in turn buy a house with no debt if they have sufficient savings.

I think one of the issues today is that it is not clear who has savings and who has debt because many of the savers have debts and many of the debtors have savings It has all become rather muddled and will take a while to work out.

Edited April 27, 2009 by aliveandkicking

[interestrateripoff]

http://www.lewrockwell.com/rothbard/frb.html

Fractional Reserve Banking

Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

The nineteenth-century English economist Thomas Tooke correctly stated that "free trade in banking is tantamount to free trade in swindling." But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed "free banking." First: why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank? But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend it. Why else pay money for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit-pyramiding of its own. But, I, of course, can't pay the $10,000, so I'm finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply.

Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don't work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up.

http://wakeupfromyourslumber.blogspot.com/...ve-banking.html

In XVIth century England people who had gold would deposit it with goldsmiths for safekeeping. In exchange they got a signed receipt guaranteeing that they could retrieve it. The value assigned to that note backed by the gold in the goldsmith’s vault made it possible for one to use it in payment.

That means if A deposited £10 worth of gold and had in his possession a receipt he could settle his debt with it. That receipt, actually a promissory note, became money. The person who took it in payment could either use it as is, or at some later point retrieve the gold in the goldsmith’s keeping.

At the same time B borrows £10 worth of gold from the goldsmith but receives a promissory note. He settles his debt to C with that note. Now there are two notes in circulation for one amount of gold. The goldsmith being smart realizes that these notes can actually be in circulation for quite some time, several years even. He issues further notes knowing that all claims would not have to be honored at the same time.

According to contemporary economical calculations he can safely lend at least ten times the amounts deposited. If there is a run of two or more people who suddenly wish to retrieve their gold he can also rely on the fact that he has debtors who owe him gold, although they originally received nothing but a piece of paper. They have to pay him in gold. And should they default he could seize whatever possessions they had, sell these, buy gold and settle the claims. I might add that the goldsmith of course lent out promissory notes for non-existent gold at interest.

Today’s banks do the same:

“Because of the ‘fractional’ reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments”

(Federal Reserve Bank, New York: The Story of Banks, p.5).

Simply put every loan given is a deposit. You go to the bank, ask for a loan of say $1000 and they open and account for you to that amount. If you ask for it in cash to settle a debt someone else will eventually deposit that amount. You of course still owe your bank that money, which was created out of nothing the moment you opened your mouth. The money created is debt to which they add interest.

Again not what's being said here.

[Mr Nice]

Credit cannot be spent unless you create savings for the seller - otherwise it is not credit.

When it is not credit is is just a fully funded loan coming from excess cash reserves already existing.

Fractional reserve creates credit that is spendable by creating savings - there is no other way of doing it.

credit creation has nothing to do with savings, except by the laws we have created to maintain confidence.

I do not have to have any cash in my pocket in order to write you an iou.

all I need is your faith that I will make good.

the banking credit extended is nothing more than IOUs, no cash necessary.

we created the basel/basle laws that require certain amounts of reserves per amount of IOUs created in order to maintain stability.

Edited April 27, 2009 by Mr Nice

[interestrateripoff]

http://articles.moneycentral.msn.com/Inves...ket.aspx?page=2

Turning $1 into $20

The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.

These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.

According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.

Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

Edited April 27, 2009 by interestrateripoff

[aliveandkicking]

http://www.chrismartenson.com/crashcourse/...-money-creation

That's not what's being said here.

the private banks create their own private money that circulates amongst only their customers.

Think about it. You 'create some credit' and you have 1000. And importantly we know that all money flows in and out of the bank have to be cash. How can you as the bank 'create some credit' which can be spent as credit, unless the guy with the credit buys some stuff from one of your own customers?

The banks create the savings they lend to their credit debtors. The bank has not gained at all so far.

[interestrateripoff]

the private banks create their own private money that circulates amongst only their customers.

Think about it. You 'create some credit' and you have 1000. And importantly we know that all money flows in and out of the bank have to be cash. How can you as the bank 'create some credit' which can be spent as credit, unless the guy with the credit buys some stuff from one of your own customers?

The banks create the savings they lend to their credit debtors. The bank has not gained at all so far.

Can you describe what you mean by cash? Are you talking about printed money and coins?

[threetimesdead]

After general election - by latest

[Mr Nice]

I think it must do.

But savings take many forms. A mortgage free house is a saving.

If you take your ownership papers to the bank they can monetize your savings to enable you to have a more convenient spendable savings that is spendable anywhere on earth. But we call this debt to the bank. And when the debt money is spent it creates savings for the seller.

The sellers can in turn buy a house with no debt if they have sufficient savings.

I think one of the issues today is that it is not clear who has savings and who has debt because many of the savers have debts and many of the debtors have savings It has all become rather muddled and will take a while to work out.

a fully paid for house is an asset.

when you go to the bank for a mortgage, they aren't monetising your house, they are monetising your future income, the house is just collateral.

you don't have to have the house, the bank could if they wanted give you the same loan without any collateral.

they often do, it's called unsecured loans.

[aliveandkicking]

Can you describe what you mean by cash? Are you talking about printed money and coins?

Sorry by cash i mean actually reserves.

The fractional reserve system works by limiting the amount of private money the regulated banks can create when buyers and sellers are trading witht the banks 'help'. I say help because it should be a service to the community supported by the government but obviously banking has been poorly regulated as corporations and the government and the banks have become this fascist organisation deciding how we are to live our lives.

The banks should just be there to act as intermediatories between buyers and sellers who need the banks help to guarantee sellers will be paid where the bank takes the long term risk with the goverments assistance to encourage buyers and sellers to meet. The bank creates a saving for the seller and the bank is owed by the buyer - if there is no savings being created then it is simply effectively a cash transaction.

[Mr Nice]

Sorry by cash i mean actually reserves.

The fractional reserve system works by limiting the amount of private money the regulated banks can create when buyers and sellers are trading witht the banks 'help'. I say help because it should be a service to the community supported by the government but obviously banking has been poorly regulated as corporations and the government and the banks have become this fascist organisation deciding how we are to live our lives.

The banks should just be there to act as intermediatories between buyers and sellers who need the banks help to guarantee sellers will be paid where the bank takes the long term risk with the goverments assistance to encourage buyers and sellers to meet. The bank creates a saving for the seller and the bank is owed by the buyer - if there is no savings being created then it is simply effectively a cash transaction.

you are describing a full reserve banking system, and that is not what we have.

if it worked as you describe it, then m4 would always equal m0, and as is easy to see, that is not the case.

[aliveandkicking]

a fully paid for house is an asset.

when you go to the bank for a mortgage, they aren't monetising your house, they are monetising your future income, the house is just collateral.

you don't have to have the house, the bank could if they wanted give you the same loan without any collateral.

they often do, it's called unsecured loans.

If i have a mountain of savings and i buy a 10 bedroom house for cash then as far as i am concerned i still have savings. If i lend you all my money i still have savings. If i have all my money in the bank then i lend all my money to the bank and i still have 'savings in the bank'

My savings are an asset to me.

They most definately are not my liability. Assets balances liabilities

Yes?

[aliveandkicking]

you are describing a full reserve banking system, and that is not what we have.

if it worked as you describe it, then m4 would always equal m0, and as is easy to see, that is not the case.

100 cash deposited means 100 deposit money was created and 100 cash to the vault

100 lent out from the vault means the bank has no cash and has 100 deposit money or zero percent fractional reserve.

[Mr Nice]

100 cash deposited means 100 deposit money was created and 100 cash to the vault

100 lent out from the vault means the bank has no cash and has 100 deposit money or zero percent fractional reserve.

you are doing ok so far, but I think you are having trouble with the idea in thinking that someone has to deposit the 100 cash before the bank can create the 100 in the deposit account.

that just isn't the case.

[aliveandkicking]

you are doing ok so far, but I think you are having trouble with the idea in thinking that someone has to deposit the 100 cash before the bank can create the 100 in the deposit account.

that just isn't the case.

Yes the bank can out of thin air create 1000 of spendable money if it expects in the future to get 100 reserves

But what does that mean in reality?

It means either:

1. The bank has to borrow 1000 cash if the loan customer wants cash

or

2. it means one of the banks selling customers gets credited with 1000 of savings and the loan customer has no deposit money remaining.

It is the reality part that seems to confuse most people who read the internet stuff about money out of thin air.

[Mr Nice]

Yes the bank can out of thin air create 1000 of spendable money if it expects in the future to get 100 reserves

But what does that mean in reality?

It means either:

1. The bank has to borrow 1000 cash if the loan customer wants cash

or

2. it means one of the banks selling customers gets credited with 1000 of savings and the loan customer has no deposit money remaining.

It is the reality part that seems to confuse most people who read the internet stuff about money out of thin air.

the amount of money actually taken out in cash is negligible.

we the people, and businesses especially, tend to only deal with the banking credits as opposed to real cash.

so if a bank can create 1000 without a corresponding deposit of "real" 1000 cash, then the bank can effectively create money period.

the trend lately is to go towards a cashless society.

once that happens, then the only need for "savings" is whatever the law says must be held in reserves.

in theory that number could be zero, the only thing stopping that would be a loss of confidence in the currency.

[aliveandkicking]

the amount of money actually taken out in cash is negligible.

we the people, and businesses especially, tend to only deal with the banking credits as opposed to real cash.

so if a bank can create 1000 without a corresponding deposit of "real" 1000 cash, then the bank can effectively create money period.

the trend lately is to go towards a cashless society.

once that happens, then the only need for "savings" is whatever the law says must be held in reserves.

in theory that number could be zero, the only thing stopping that would be a loss of confidence in the currency.

A regulated bank is like an island surrounded by other islands. Each night when they settle their business they have to ferry the required cash to whatever island has gained the most reserves so that the bank losing the most reserves is poorer of that amount of reserves. Once it can no longer persuade anybody else to lend it reserves then it just closes down or gets swallowed up. Meanwhile the big daddy island watches over the children and helps them out if they stumble. Ultimately if they must fail he allows that while looking after the islanders interests.

Meanwhile anybody can run a private unregulated bank more or less. They work exactly the same except they can lever their cash 100% or infinitely....but that does not mean much in reality when a regulated bank in the UK only needs 3.5 retained as reserves and can lend out from 100 at a guess about 3000 of private money.

Just because we have a cashless society does not mean that back at big daddy HQ things are not being done the old fashioned way with trolleys and wheelbarrows full of cash to settle up at night.

[Mr Nice]

A regulated bank is like an island surrounded by other islands. Each night when they settle their business they have to ferry the required cash to whatever island has gained the most reserves so that the bank losing the most reserves is poorer of that amount of reserves. Once it can no longer persuade anybody else to lend it reserves then it just closes down or gets swallowed up. Meanwhile the big daddy island watches over the children and helps them out if they stumble. Ultimately if they must fail he allows that while looking after the islanders interests.

Meanwhile anybody can run a private unregulated bank more or less. They work exactly the same except they can lever their cash 100% or infinitely....but that does not mean much in reality when a regulated bank in the UK only needs 3.5 retained as reserves and can lend out from 100 at a guess about 3000 of private money.

Just because we have a cashless society does not mean that back at big daddy HQ things are not being done the old fashioned way with trolleys and wheelbarrows full of cash to settle up at night.

everything you are saying now is the opposite of what you were saying before.

where are the "savings must be had to lend money" proofs?

you can't have infinite leverage if you have to have savings before the loan.

in fact, you can't have any leverage at all.

[aliveandkicking]

everything you are saying now is the opposite of what you were saying before.

where are the "savings must be had to lend money" proofs?

you can't have infinite leverage if you have to have savings before the loan.

in fact, you can't have any leverage at all.

Earlier we established that if 100 cash is deposited and 100 cash lent out then infinite leverage is created. It must be infinite because if they left 1 penny in the bank and lent out 99.99 that would be 99.99 to .1 leverage. 1000 to 1. So as the penny approaches zero you get infinite leverage.

The bank can only do 0 deposit to create 1000 loans if no cash leaves the bank.

So we then ask the question how can the bank do that?

And the answer is very very simple. The bank creates a sellers savings when a buyer buys the sellers item using the banks services. the bank then wants the buyer to balance the banks liabilities to the seller.

We can make progress maybe if you focus on the realities rather than on the accountancy please.

[A.steve]

After general election - by latest

A sane response. I'm not convinced that any party that could plausibly win the next general election would want to raise interest rates - but, if it is going to happen, that's when it will. Whomever wins the next general election, I think that's when we will see whatever change there will be in the short to medium term.

[spivT]

A sane response. I'm not convinced that any party that could plausibly win the next general election would want to raise interest rates - but, if it is going to happen, that's when it will. Whomever wins the next general election, I think that's when we will see whatever change there will be in the short to medium term.

does that mean interest rates will be determined by an easing off or exit from monetary easing ?

Or, as i was contending earlier, improved health of the economy will precede an increase in interest rates.

[Mixle]

And the answer is very very simple. The bank creates a sellers savings when a buyer buys the sellers item using the banks services. the bank then wants the buyer to balance the banks liabilities to the seller.

That's interesting. So does the bank subtract something from its own saving when it creates the seller's saving?

[A.steve]

does that mean interest rates will be determined by an easing off or exit from monetary easing ?

Or, as i was contending earlier, improved health of the economy will precede an increase in interest rates.

I meant only what I said - I chose my words carefully.

The only reason we know that interest rates will eventually rise is that they can't (meaningfully) fall further than they already have. Of course, as quantitative easing measures show - even with near zero base rates, a central bank can still manipulate the cost of borrowing longer term - and work to establish a specific yield curve as monetary policy.

None of us know the future... but we can anticipate possible dilemmas. The one I see arising through QE is a preference for shorter and shorter maturity on sovereign debt... essentially because, over time, it becomes more and more likely that investments with significantly better returns will emerge - and investors will be most anxious not to be excluded. If/when that happens, it is likely to lead to investors dumping gilts (forcing down the value of longer dated government debt) - thus forcing up the cost of borrowing on the open market independently of central bank base rates. It is anyone's guess when, or to what extent this effect will materialise.

The logical investment for anyone denominated in a low yielding currency is to invest somewhere with a higher yielding currency. This, if it happens on a grand scale will likely lead to preposterous bubbles in emerging markets - and put extensive pressure on exchange rates.

[tomwatkins]

everything you are saying now is the opposite of what you were saying before.

where are the "savings must be had to lend money" proofs?

you can't have infinite leverage if you have to have savings before the loan.

in fact, you can't have any leverage at all.

You can end this argument once and for all. If I deposit 100 quid-that is a liability on the bank. It is a demand deposit call it what you will. The bank cannot lend a liability-in fact no business can. Therefore something else is going on. Someone earlier said that the DVD "Debt as Money" is misleading in parts-it is but the title is 100% correct. New money is created as debt, by and large.

[tomwatkins]

Apart from one or two essential services that are vital to a country, I am against Nationilisation in most of its forms. Banking, the creation of money and credit is one of the exceptions. Nobody can ever defend, at least to me, the creation of credit being in private hands for the enrichment of a few people (shareholders included). Money is too important for the national good. We need a new monetary syatem-period.