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The Largest Heist In History

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Nice one picked up from the hpc homepage. The concept of money created from nothing is underlined again, but this time from a different source. I know some of you just can't seem to accept this is possible; this might help open your eyes.

I don't think this was posted before but if it has, accept my apologies, I hadn't seen it.

http://gregpytel.blogspot.com/2009/04/larg...in-history.html

October - December 2008

Building the Great Pyramid: The Global Financial Crisis Explained

This article was accepted as evidence and published by the British Parliament Treasury Select Committee, page 90.

Financial_pyramid.jpg When the financial crisis erupted at the end of September 2008, there was an unusual sense of incredible panic among banking executives and government officials. These two establishment groups are known for their conservative, understated approach and, above all, their stiff upper lip. Yet at the time they appeared to the public running about like headless chickens. It was chaos. A state of complete chaos. Within a few weeks, however, decisions were made and everything seemed to returned to normal and back under control. The British Prime Minister Gordon Brown even famously remarked that the government “saved the world.â€

But what really caused such an incredible panic in the establishment well known for its resilience? Maybe there are root causes that were not examined publicly and the government actions are nothing more than a temporary reprieve and a cover-up? Throwing good money after bad money, maybe?

Money Making Machine

In order to answer these questions we have to examine the basic principles on which the banking system operates and the mechanisms that caused the current crisis. Students at the A-level are taught about “multiple deposit creation,†It is the most rudimentary money creation mechanism for banks, which if administered properly serves the economy and public at-large very well. In the deposit creation process a bank accepts deposits and lends them out. But almost every lending returns soon to the bank as a deposit and is lent again. In essence, when people borrow money they do not keep it at home as cash, but spend it, so this money finds its way back to a bank quite quickly. It is not necessarily the same bank, but as the number of banks is limited (indeed very small) and there is — or was — a very active interbank lending. In terms of deposit creation the system works like one large bank.

...

It's too big to post in full but worth reading in its entirety, including tables and appendices, and even the comments.

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It doesn't work like that.

There is only a certain amount of money.

All credit does is push it round the system increasing its velocity.

:lol: Right on target!!! I just can't believe it.

This bait was just for you hotairmail.

And the article is correct. ;)

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Guest Steve Cook
It doesn't work like that.

There is only a certain amount of money.

All credit does is push it round the system increasing its velocity.

I'm not sure I follow this hotairmail. I have thought about this quite a bit and had come to an understanding that "credit" was indeed created when it was lent. Since credit can be subsequently spent and can then circulate in an economy no more or less than legal tender, I fail to see the functional difference between the two. The only time that it becomes an issue is when people start to default on their credit. At which point,the credit is extinguished. In other words, it disappears in a puff of smoke. Which is to say we get deflation of the "credit" supply.

From the above perspective, deflation is a de facto proof that credit is indeed used as money. If the units of exchange in the economy were only legal tender, then organic "deflation" would not be possible. It could only happen if a government pulled some of the legal tender off the streets, so to speak. People could, of course, still default on their loans under such a regime. However, this could not produce deflation. It would simply mean that the money remained elsewhere in the economy.

However, deflation is what we have got. Which is why the Western governments have been busily trying to monetize the bad credit via QE. Which serves to illustrate that credit-as-money must represent a significant portion of the total "money supply". Otherwise, our governments would have not deemed it necessary to monetize it.

Where have I got it wrong, above?

Edited by Steve Cook

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It doesn't work like that.

There is only a certain amount of money.

All credit does is push it round the system increasing its velocity.

Do the Keynesians have an explanation for why increased velocity would make prices go higher? I can't see it myself.

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Guest Steve Cook
Do the Keynesians have an explanation for why increased velocity would make prices go higher? I can't see it myself.

Increased velocity means a pound coin is available for use in transactions for more of the time. This is functionally equivalent to the velocity remaining constant whilst at the same time increasing the absolute number of coins in circulation.

The functional effect is the same.

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Guest Steve Cook
:lol:

It is right - there is only one banking system. It does create credit as though it were one beast from available reserves. But it is only central bank money (reserves) that can settle transactions. And yes the central bank can create new base money.

Based on that Timm was showing us a different way of looking at the issue - that credit is just a way of pushing those reserves around the system increasing its velocity - and he is right too. Tell me he is not.

So, you are saying the CB "money" is the first "lent-into existence-credit". Because it is lent into existence by the CB's we call it "legal tender money". The banks just futher lend this out and about in the economy.

Is that what you are saying?

What is fractional reserve lending then?

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Guest Steve Cook
Have you ever been to an auction? If money is not bidding it does not affect the price. It is only when money moves, when it has velocity, does it affect prices. That's whether you are a Keynesian or a Misean.

It is only when money is available does it affect price.

Availability is effected by either velocity and/or absolute supply

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:lol:

It is right - there is only one banking system. It does create credit as though it were one beast from available reserves. But it is only central bank money (reserves) that can settle transactions. And yes the central bank can create new base money.

Based on that Timm was showing us a different way of looking at the issue - that credit is just a way of pushing those reserves around the system increasing its velocity - and he is right too. Tell me he is not.

Yeah, Timms way of thinking about it is very good.

Shows what a croc it is really well.

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Increased velocity means a pound coin is available for use in transactions for more of the time. This is functionally equivalent to the velocity remaining constant whilst at the same time increasing the absolute number of coins in circulation.

The functional effect is the same.

Yes.

From what I can understand, the current policy framework is trying to counteract the decrease in the velocity of the pound coins in circulation by increasing the number of pound coins in circulation so keep the MV side of the equation constant.

People fear that an eventual increase in velocity accompanied by and increase in supply will result in inflation.

To HotAirMail's point, it is the demand for credit that will determine whether this happens or not rather than the supply of credit.

In a violent, long term recession, it is unlikely that the supply of credit at any price will result in an increase in the demand for credit.

Some argue that supply creates its own demand. I am not yet ready to accept that point of view.

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I'm not sure I follow this hotairmail. I have thought about this quite a bit and had come to an understanding that "credit" was indeed created when it was lent. Since credit can be subsequently spent and can then circulate in an economy no more or less than legal tender, I fail to see the functional difference between the two. The only time that it becomes an issue is when people start to default on their credit. At which point,the credit is extinguished. In other words, it disappears in a puff of smoke. Which is to say we get deflation of the "credit" supply.

From the above perspective, deflation is a de facto proof that credit is indeed used as money. If the units of exchange in the economy were only legal tender, then organic "deflation" would not be possible. It could only happen if a government pulled some of the legal tender off the streets, so to speak. People could, of course, still default on their loans under such a regime. However, this could not produce deflation. It would simply mean that the money remained elsewhere in the economy.

However, deflation is what we have got. Which is why the Western governments have been busily trying to monetize the bad credit via QE. Which serves to illustrate that credit-as-money must represent a significant portion of the total "money supply". Otherwise, our governments would have not deemed it necessary to monetize it.

Where have I got it wrong, above?

Can't see much wrong, neither can I see others pulling it apart. So is this right (hotairmail)?

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:lol:

It is right - there is only one banking system. It does create credit as though it were one beast from available reserves. But it is only central bank money (reserves) that can settle transactions. And yes the central bank can create new base money.

Based on that Timm was showing us a different way of looking at the issue - that credit is just a way of pushing those reserves around the system increasing its velocity - and he is right too. Tell me he is not.

He is not. Nobody settles transactions with central bank money/reserves. We all settle transactionh with commercil bank money. It's only the netting off of all these transactions that will involve, on a tiny scale, central bank reserves.

The word 'velocity' is highly misleading; it is too one dimensional when the reality is necessarily multi-dimensional (think warp speed, same money in different places at the same time). You put £100 in the bank. Those £100 are available for you to settle transactions. Bank lends your £100 to Mr X. Now he's got £100 he can settle transactions with, and so do you. Money available: X2. Assuming neither of you spend the money the velocity is 0 but the amount of money has still doubled.

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Guest Steve Cook
Both factors in reality affect it - you are right.

But of course regardless of the amount of money - if it is stationary it will not affect prices.

I think that you may be conflating velocity with availability here hotairmail. Forgive me if I am misunderstanding this as I don't wish to appear arrogant. My confidence in what I am saying is not high enough for that..... ;)

I define these terms in the following ways:

Supply = How much money there is potentially available for use in transactions in the economy. This will only effect prices if it is made available. In other words, if it remains in bank's vaults and is not used in transactions, prices will not rise.

Availability = How much of the above supply is made available to be utilised in any given transaction within the economy.

Velocity = How rapidly such transactions may be carried out, in turn making the money once more available for use in another transaction

Prices are affected by a complex interplay between the above variables.

Edited by Steve Cook

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Have you ever been to an auction? If money is not bidding it does not affect the price. It is only when money moves, when it has velocity, does it affect prices. That's whether you are a Keynesian or a Misean.

All money affects the price unless it has been lost, or forgotten about...

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Increased velocity means a pound coin is available for use in transactions for more of the time. This is functionally equivalent to the velocity remaining constant whilst at the same time increasing the absolute number of coins in circulation.

The functional effect is the same.

All money that has not been lost or forgotten about is available for use in transactions. No, increased velocity is not the same as increased supply because it does not make prices go higher.

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Can you explain the process of settling a transaction using credit?

I'll try to avoid the credit/lending/borrowing minefiled by answering this:

The bank lends me £100, th result is I have £100 of _money_ I can spend on my bank account. And those £100 are still sitting on your account ready to be spent too.

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How? If someone has a million pounds but is not bidding - how does that get reflected in the auction price?

EDIT: Every transaction you make is a 'bid'. If you're not spending, your money is not bidding.

Because their having a million pounds affects the price of money, they want other things... which feeds into the price of the object being sold at auction.

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You have in the 2nd paragraph described exactly where the velocity of money concept may be misplaced - is it the velocity of base ('real') money that is important or broad money.

This one is trickier. I'd say don't bother making a difference between the two, they are one and the same (interchangeable if you insist on being a purist).

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How? If someone has a million pounds but is not bidding - how does that get reflected in the auction price?

EDIT: Every transaction you make is a 'bid'. If you're not spending, your money is not bidding.

It affects human behaviour.

A person with £1 million in savings acts differently then one with nothing.

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Oh yeah - look at it this way -

The state went bankrupt some time around 1929/33 and is now operating as a receiver - with the population being owed.

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Guest Steve Cook
Because their having a million pounds affects the price of money, they want other things... which feeds into the price of the object being sold at auction.

As long as money is not involved in a transaction it cannot effect the price of those things it may be exchanged for.

In other words, money only has exchange value (and therefore will effect the exchange value of the things that are being exchanged for money) when it is exchanged

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Since credit can be subsequently spent and can then circulate in an economy no more or less than legal tender, I fail to see the functional difference between the two. The only time that it becomes an issue is when people start to default on their credit. At which point,the credit is extinguished. In other words, it disappears in a puff of smoke. Which is to say we get deflation of the "credit" supply.

The electronic positive numbers in bank accounts are, as you say Steve, money to all intents and purposes in the general economy. They jump from account to account and bank to bank as trade is conducted.

These positive numbers come into existence in tandem with initially equal and opposite negative numbers which are loan accounts, mortgage accounts, credit card debt etc.

When there is no chance of a loan ever being repaid, it "defaults" and is "written off". The negative number then effectively dissappears from the banking system and the corresponding creditor loses wealth.

What does not dissappear however is the corresponding positive number money which was co-created initially with the defaulting loan - it remains somewhere in the banking system.

So in this sense money does not dissappear when a loan defaults.

Do we agree on this?

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How? If someone has a million pounds but is not bidding - how does that get reflected in the auction price?

EDIT: Every transaction you make is a 'bid'. If you're not spending, your money is not bidding.

It's reflected because outside of mathematical models there's always a bid, in particular for essential items like food.

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Guest Steve Cook
If you don't want to spend your money, it stops in your pocket and your account. It cannot increase prices as the market is not aware of its existence.

supply = does the money exist

The price may drift lower until it reaches a point where you are happy to 'bid' or spend it. That becomes the price.

availability = am I prepared to exchange it for something

Velocity is merely the number of times money changes hand each year. If you've held onto it, the velocity has slowed until you are happy at a price to release it.

velocity = how many times is it possible for the money be exchanged within a given time frame

supply, in and of itself, does not effect price. Though I do concede injin's point about the effect on behaviour.

both availability and/or velocity do affect price

Edited by Steve Cook

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That's the point. What you describe is the fact that multiple people think they have money. The velocity of real money is a factor of the velocity of broad money. If there was originally £100 but thru the process of frb, 5 people think they have £100 then that original 'base' £100 may have to move 5 times as fast to settle transactions. The netting process reduces this of course.

Do you get now why we are going to have hyperinflation?

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As long as money is not involved in a transaction it cannot effect the price of those things it may be exchanged for.

In other words, money only has exchange value (and therefore will effect the exchange value of the things that are being exchanged for money) when it is exchanged

Doesn't Zimbabwe, or any of the other examples of printing money demonstrate that more money does affect prices? Is it only money that is exempt from this law or is the price of all things independent of their quantity?

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