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Into Thin Air

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Can (and do) banks create money out of thin air (when they lend)?

I understand the role irresponsible lending has had in fueling the housing bubble - in general, lax credit inevitably leads to asset bubbles. In time banks may suffer from these dubious credit decisions as more and more loans go bad. The banks shareholders will take a hit. (Whether individual lending officers in banks will suffer is another question.)

Now, some people on this board, on the web (and a curious Canadian class-action suit) are arguing that bank lending is a massive con-trick, perpetuated SOLELY to make banks lots of money. They claim that the money lent to customers NEVER EXISTED, that it has been created OUT OF THIN AIR and is often nothing more than a LEDGER ENTRY in the bank's books. They claim that fractional reserve banking means banks can loan out money they don't have.

I have attempted to argue money supply increases step-wise with economic activity. Banks decide who to lend to based on the likelihood of the loan being repaid (they decide the credit risk in other words) and the money lent is therefore credited against FUTURE economic activity. When the money lent is invested or spent it returns to the banking system as somebody else's deposit. In the meantime, the loan is being serviced by hopefully profitable economic activity, which covers the interest and principal repayments.

Nobody forces anyone to take out a loan, but when they do they get the advantage of being able to buy something today in return for committing to servicing the debt over some time-frame. It's a simple trade-off which the lenders make possible - what's wrong with that?

This is a big topic, with lots of confused thinking out there about what money is, how it is circulated and how new wealth can be created by debt funded economic activity.

Some heavy-weight clear thinking would be appreciated, from anyone who has given this serious thought.

JY

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its known as fractional reserve banking, and is the basis of the whole paper credit economy.

Its is indeed created out of thin air (thats why some banks can print there own notes)

And it has to fail becuase it depends on perpetual growth to sustain itself.

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its known as fractional reserve banking, and is the basis of the whole paper credit economy.

Its is indeed created out of thin air (thats why some banks can print there own notes)

And it has to fail becuase it depends on perpetual growth to sustain itself.

Well, perpetual economic growth too is unlikely.

Anyone else?

JY

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Banks decide who to lend to based on the likelihood of the loan being repaid (they decide the credit risk in other words) and the money lent is therefore credited against FUTURE economic activity. When the money lent is invested or spent it returns to the banking system as somebody else's deposit. In the meantime, the loan is being serviced by hopefully profitable economic activity, which covers the interest and principal repayments. 

JY

You stated the crux of the issue there. The money lent is not credited against anything that currently exists. It is credited against "FUTURE economic activity". Therefore, it has indeed been plucked out of thin air. They have effectively allowed people to promise to pay them back a sum of money which has yet to be created economically, and charge them interest on this currently non-existent money.

Another way to look at it is like this. You have 100 £10 notes (i.e. £1000). You mark them all with your initals using a red marker pen. You go to the bank, and deposit the notes in your account.

Mr A goes to the bank for a loan. They lend him 91.5% of your deposit, i.e. £915, and charge him interest. He receives the bank notes you deposited, with your signature on them. He spends them in shop 1. The shopkeeper from shop 1 takes them to the bank and deposits them.

Mr B comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 1. This is £837. He receives the notes that you deposited, with your signature on them. He spends them in shop 2. The shopkeeper from shop 2 takes them to the bank and deposits them.

Mr C comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 2. This is £766. He receives the notes that you deposited, with your signature on them. He spends them in shop 3. The shopkeeper from shop 3 takes them to the bank and deposits them.

Mr D comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 3. This is £701. He receives the notes that you deposited, with your signature on them. He spends them in shop 4. The shopkeeper from shop 4 takes them to the bank and deposits them.

Ok, you get the idea now. The bank have lent the money you deposited with them a number of times. The process continues to the point where there is no money left to lend out again, because it is only a fraction of a penny, and much as they would like us to, nobody really wants to borrow that!

The marked bank notes serve to illustrate the point. They lend your money 11.5 times when this system is taken to its conclusion. They charge interest on your money 11.5 times. They also pay interest to everyone who has redeposited your money, but they pay less than they charge. The difference is their income.

So, from your original deposit of £1000, there now exists a sum of £11,500 in the economy. The bank has multiplied your deposit.

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Guest consa

There has been discussions about this a while ago now, the banks have to hold 8% of deposits as security, they can lend the rest out.

also of interest:-

Fiat money, "Money that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves."

http://en.wikipedia.org/wiki/Fiat_money

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Yes they do make money out of thin air and, yes, it's the the only reason the entire planet is forced into cancerous growth at any cost. It's why you can't afford a home. It's why you work harder to get less. It's good all-round insanity.

http://www.lowbudgetlife.com/content/view/44/2/

Then buy the book:

http://www.amazon.co.uk/exec/obidos/ASIN/1...0365751-7490275

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http://www.wwdemocracy.nildram.co.uk/democ..._debt_banks.htm

Money, Debt and Banks

Richard Greeves, Dr. John Courtneidge and David Soori

If you want to be the slaves of banks and pay the cost of your own slavery, then let the banks create money - Josiah Stamp, Governor of the Bank of England, 1920

The popular misconception is that, when a bank lends, it is simply lending money that other people have deposited. This is very misleading; the money loaned by banks is in fact new money created out of nothing. Professor J.K. Galbraith has described the process as “so simple that the mind is repelled”.

After all, when an overdraft or loan is made to someone, nothing is transferred from the accounts of those who have made deposits. All that happens is a note is made on the borrower’s account that he can spend up to, say, £5000. There may have been nothing in his account before that, but suddenly the borrower is allowed to make out cheques and draw cash to pay for goods and services up to £5000. As he does so, this is actually new money being introduced into the economy. The people he pays will in turn use that money to pay for goods and services. Today in the developed world more than 95% of the total money supply has come into existence in this way as personal and business loans, mortgages, overdrafts etc. provided by commercial banks and financial institutions. However, borrowers must eventually repay the loans and pay interest to the banks in the meantime. So today’s money is in fact created by private interests for private profit. It is ironic that criticism is levelled at the privatisation of railways, health, education etc., yet the private control of the means that enables the entire economy to function is something that most people are not even aware of and thus it is never challenged.

Only cash, which is provided by the government and now accounts for just 3% of the total money supply in Britain, (having fallen from nearly 50% just fifty years ago) is provided interest free.

Since the money supply is now almost entirely made up of loans, more money must be lent out to keep the economy going. This is why most of us are inundated with offers of loans, credit cards and so on. If people don’t borrow there will be a fall in the amount of money circulating, resulting in a reduction in buying and selling - a recession, slump or total collapse will follow depending on how severe the shortage is.

The increase in loans created by banks over the years is conclusive proof that banks do create “money” out of nothing – in Britain it was £1.2 billion in 1948 up to £14 billion by 1963 up to £680 billion by 1997 and now, bolstered by the boom in property prices and increase in mortgages to support them, it has reached close to £1200 billion. These are big increases in real terms, even allowing for inflation; they have enabled the economy to expand enormously, and as a result, living standards for many people have improved substantially - but it has been done on borrowed money. What is credit to the bank is debt to the rest of us.

This has some pretty far reaching implications - after all banks are businesses out to make profits from the interest on the loans they make. Since they decide to whom they will lend, they effectively decide what is produced, where it is produced and who produces it, all on the basis of profitability to the bank, rather than what is beneficial to the community as a whole. With bank created credit now at more than 95% of money supply, entire economies are effectively run for the profit of financial institutions. This is the real power, rarely recognised or acknowledged, to which all of us including governments the world over are subject. Our money, instead of being supplied interest free as a means of exchange, now comes as a debt owed to banks providing them with big profits, power and control, as the rest of us struggle with an increasing burden of debt. There is much less risk to making loans than investing in a business. Interest is payable regardless of the success of the venture. If it fails or cannot meet the interest payments, the bank may seize and later sell the borrower’s property. Borrowing is extremely costly to borrowers who may end up paying back two or three times the sum lent. The banks are acquiring an ever-increasing stake in our land, housing and other assets through the indebtedness of individuals, industry, agriculture, services and government - to the extent that Britain and the world are today effectively owned by them.

Furthermore, central banks such as the U.S. Federal Reserve and the European Central Bank, which regulate the commercial banks and set interest rates, are controlled not by elected governments but largely by private interests from the world of commercial banking; they are basically private banks. Even the Bank of England, although nationalised in 1946, is still largely under private control by virtue of the fact that its Court of Directors, the Monetary Policy Committee and its executive directors, who are responsible for the day to day running of the bank, are all dominated by bankers and conventional economists.

The debt burden on individuals and businesses is always going to increase under this system, because when a bank creates money by making a new loan, no extra money is created and fed into the economy to pay the interest on that loan. The existing money supply would soon be depleted by interest payments to the banks, if more money were not found from somewhere. The only way for interest payments to be kept up therefore is for more loans to be taken out. Although some individuals and businesses may pay off their debts or get by without additional borrowing, overall people and industry must keep borrowing more and more to create the money in the economy required to service the overall burden of debt. We are borrowing at least £60 billion of new “money” into existence each year just to cover interest payments. However, people and industry can’t go on increasing their debt indefinitely, even with the lower interest rates that have come about in recent years as a response to the ever growing debt burden. Nevertheless, even with these much lower interest rates, ultimately there must come a point when people will no longer be able to afford to borrow and that point may now be getting very close. When the crunch comes, the economy will go into decline. The system ultimately contains the seeds of its own destruction.

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Guest Riser
If a bank borrows £10 from the BofE and then loans out £100 to the general public, why aren't the interest rates they charge (BaseRate/10)+RiskPremium?

Fingers

That lead into something I don't understand:

If I was running a company where I could lend out roughly 10 times more than I have on deposit I should be making massive profits, why aren't the banks ?

Deposit £100 pay 10% interest -£10

Lend £1000 get 10% interest earn +£100

Total return on every £100 deposited £90, 90% profit per year on deposited, money, where do the banks hide their profits ??

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That lead into something I don't understand:

If I was running a company where I could lend out roughly 10 times more than I have on deposit I should be making massive profits, why aren't the banks ?

Deposit £100 pay 10% interest  -£10

Lend £1000 get 10% interest earn +£100

Total return on every £100 deposited £90, 90% profit per year on deposited, money, where do the banks hide their profits ??

Just a thought, but perhaps the profits are consumed by the "jobs for the boys" culture which exists in banking. There can be no other industry where so many people earn so much money. Competition is an illusion for the most part. They all pay similar amounts.

Any large bank will have hundreds, if not thousands of members of staff at "director" grade (n.b. this does not mean they are on the board) across the business, from sales to trading to corporate lending to finance to IT to human resources. These individuals typically earn several hundred thousand pounds per year, plus very nice benefits (healthcare, cars, subsidised restaurants, gyms, share option schemes, "special" investment schemes that turn out to be very profitable for some reason, relocation packages, golden handcuffs, final salary pension schemes and much more).

At the highest levels, several people will be paid tens of millions for their efforts.

And then, there is the board to pay!

Banks have extremely hierarchical structures, and every little chief in his fiefdom insists on having the latest toys. Top of the range pcs upgraded regularly, expensive IT projects, blackberries, business class travel, corporate entertainment budgets, massive Christmas party budgets with top name stars performing etc. Much of it is in the name of vanity.

The cost to income ratios of many banks are laughable for this reason.

Some banks are much better than others at controlling the costs (e.g. Fred "the shred" Goodwin at RBS, allowing them to post massive profits).

edit: p.s. the reason they can get away with this is that many of them are clinically psychopathic and it is not wise for any mentally normal person to challenge them.

Psychos in Suits

Three Factor Model of Psychopathy

Cooke and Michie eliminated criteria related to criminal incarceration and juvenile delinquency and statistically analyzed three factors of psychopathy. This allows for a conception of the psychopathic personality that is better applicable outside forensic populations.

Arrogant/Deceitful Interpersonal Style

Glibness/superficial charm

Egocentricity/Grandiose sense of self-worth

Pathological lying

Cunning/Manipulative

Deficient Affective Experience

Lack of remorse or guilt

Callous/Lack of empathy

Shallow affect

Failure to accept responsibility for own actions

Impulsive/Irresponsible Behavioral Style

Need for stimulation/Proneness to boredom

Parasitic lifestyle

Lack of realistic, long-term goals

Impulsivity

Irresponsibility

Cooke D.J., Michie C. "Refining the construct of psychopathy: Towards a hierarchical model." Psychological Assessment (2001), 13 (2): 171-188.

Edited by Smell the Fear

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Supposing the bank has £1000 that it lends out @ 10% interest for 1 year, then once the loan is paid back there is now £1100 in existence. Therefore the economy has to grow by 10% in that year to balance the books.

Thats how it works. Totally illusory.

I also like the fact that the US federal reserve isn't owned by the US government - it is a privately owned company (mainly by the Rothschilds), who are there to make a profit. The government borrows "money" off them, they print it, deliver it to the US Gov, & then charge them interest on it !! Thats why you pay so much in taxes.

Josiah Stamp was great. He was the wealthiest man in England & governer of the bank of England - his full quote from above is:

"Banking was conceived in iniquity and was born in sin.

The Bankers own the earth. Take it away from them,

but leave them the power to create deposits,

and with the flick of the pen they will

create enough deposits to buy it back again.

However, take it away from them, and

all the great fortunes like mine

will disappear and they ought to disappear, for

this would be a happier and better world to live in.

But, if you wish to remain the slaves of Bankers

and pay the cost of your own slavery,

let them continue to create deposits."

Another is:"It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities."

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this is the reason people should start to use gold and silver again as currency, iot prevents the banks stealing all your hard work

Banks will do everything to stop the people reverting to a currency they dont control, and i mean anything at all.

People would then save for a couple years and buy there houses outright, they would do the same to buy a new car ect ect.

It realy does make a lot of sense

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Well, perpetual economic growth too is unlikely.

Anyone else?

JY

But on a world-wide basis economic growth has been perpetual.

[i stand to be corrected on this: I think the collapse following the end of the Roman empire in Europe was offset by growth in Asia. By I'm open to alternative arguments. Equally, I think we have to exclude very short periods, less than say 5 years]

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You stated the crux of the issue there. The money lent is not credited against anything that currently exists. It is credited against "FUTURE economic activity". Therefore, it has indeed been plucked out of thin air. They have effectively allowed people to promise to pay them back a sum of money which has yet to be created economically, and charge them interest on this currently non-existent money.

Another way to look at it is like this. You have 100 £10 notes (i.e. £1000). You mark them all with your initals using a red marker pen. You go to the bank, and deposit the notes in your account.

Mr A goes to the bank for a loan. They lend him 91.5% of your deposit, i.e. £915, and charge him interest. He receives the bank notes you deposited, with your signature on them. He spends them in shop 1. The shopkeeper from shop 1 takes them to the bank and deposits them.

Mr B comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 1. This is £837. He receives the notes that you deposited, with your signature on them. He spends them in shop 2. The shopkeeper from shop 2 takes them to the bank and deposits them.

Mr C comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 2. This is £766. He receives the notes that you deposited, with your signature on them. He spends them in shop 3. The shopkeeper from shop 3 takes them to the bank and deposits them.

Mr D comes to the bank for a loan. They lend him 91.5% of the money deposited by Shopkeeper 3. This is £701. He receives the notes that you deposited, with your signature on them. He spends them in shop 4. The shopkeeper from shop 4 takes them to the bank and deposits them.

Ok, you get the idea now. The bank have lent the money you deposited with them a number of times. The process continues to the point where there is no money left to lend out again, because it is only a fraction of a penny, and much as they would like us to, nobody really wants to borrow that!

The marked bank notes serve to illustrate the point. They lend your money 11.5 times when this system is taken to its conclusion. They charge interest on your money 11.5 times. They also pay interest to everyone who has redeposited your money, but they pay less than they charge. The difference is their income.

So, from your original deposit of £1000, there now exists a sum of £11,500 in the economy. The bank has multiplied your deposit.

Well thank god someone has finally explained to my satisfaction the basis of the 12.5 multiple (it comes out to precisely 12.5 if you take it down the the penny). It does raise the question of what happens when we hit the limit (as in probably about now!) It also means that for every job lost (based on an averagish wage 28K used) 350K is taken out of the economy, probably also explains the capitalist cycle very neatly and also how damned painful those 'economic adjustment periods' are. There must be an economic model out there somewhere. Has anyone seen one?

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But on a world-wide basis economic growth has been perpetual.

[i stand to be corrected on this: I think the collapse following the end of the Roman empire in Europe was offset by growth in Asia. By I'm open to alternative arguments. Equally, I think we have to exclude very short periods, less than say 5 years]

in terms of the human race alone, you're probably right. But that really does ignore the bigger picture and betray a classic human arrogance (which I too am guilty of) that we are at the centre of everything... the sun revolves around the earth, remember? ;) We have seen species rise and fall (eg dinosaurs) and civilisations rise and fall (Egypt/Rome etc)... historical bubbles in their own way. This civilisation is no different... there is no inate physical law that states we are on an infinite and exponential path to nirvana.

Back to the subject! The real currency of modern economies is *confidence* - so long as confidence remains, then the housing market will stay just fine... and fiat currencies will keep on keepin' on. As an earlier poster observed, fiat currencies demand constant growth to maintain their integrity... in that way they are also an engine of rapacious growth, and so we have a symbiotic relationship.

Sadly, when confidence is profoundly undermined, the consequences will be horrendous. The system is fundamentally flawed and it purely a question of when and not if. Of course, it could be centuries or millenia before this happens...

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But on a world-wide basis economic growth has been perpetual.

[i stand to be corrected on this: I think the collapse following the end of the Roman empire in Europe was offset by growth in Asia. By I'm open to alternative arguments. Equally, I think we have to exclude very short periods, less than say 5 years]

When the roman empire collapsed from a debt driven banking boom, soceity polarised into (largely state connected) landlords with equity and tenants working for increasingly worthless money as the banks carried on printing, followed by ID cards and taxation. Everything went backwards 1000 years, as people as land-slaves don't need to take up engineering..

The classics - skills over 1000 years old like mathematics where not rediscovered until the 14th century renassience due to Islamic preservation.

India was locked into the same rigid landlord and reglion based system which had become entrenched for 6000 years, and China was a series of warring feudal kingdoms from 400AD to 700AD - the Era of Disunity.

Its not true to say the collapse was offset by growth ni Asia!

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Interesting read, I remember thinking when looking at one of

Dr Bubbs cyclical historical graphs that the

boom/bustiness and amplitude of cycles seemed

to increase greatly around the time of the abandonment of

the gold standard early last century, and again after the breakdown of

the gold agreements (forgot the name) in the early seventies.

Mr Greenspan aprears to confirm that theory

ABB

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Canadian Class Action Suit Against Banks

Class Action Accuses Banks of Illegal Creation of Money

John Ruiz Dempsey, criminologist and forensic litigation specialist filed a class action suit on behalf of the People of Canada alleging that financial institutions are engaged in illegal creation of money, reports Tom Kennedy, a Canadian activist for economic reform.

One of the best kept secrets is the mechanism of money creation in today's economic system. Although not really a secret at all, the fact that money is created not by and for the people who use it and not even by the government, but is issued by commercial banks when giving loans to private persons or government, is hidden by what could be described as thick clouds of smoke, put out by economists and government departments.

The complaint was filed Friday April 15, 2005 in the Supreme Court of British Columbia at New Westminster. It alleges that all financial institutions who are in the business of lending money have engaged in a deliberate scheme to defraud the borrowers by lending non-existent money which are illegally created by the financial institutions out of "thin air."

The legal action brings to the fore one of the major economic "drag factors" - the interest charged by banks for money that technically and legally is not theirs to lend, because even governments end up paying interest to banks lending money for public spending, and they in turn charge tax payers. A large part of every country's tax revenue goes first and foremost - before any "internal" spending - to payment of interest, largely because of the basic flaw in our way of creating money by the rich and for the rich.

See Update of Class Action for more information on this groundbreaking attempt to challenge the banking system.

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http://news.goldseek.com/DailyReckoning/1126897199.php

"You are either long or short," said our old friend Mark Hulbert, 20 years ago. "There is no such thing as a hold."

What Hulbert was describing was the impossibility of inaction in the investment world. You may like to do nothing, but you can't. If you do not buy stocks, you buy something else. 'Nothing cannot exist; it has no meaning. If you have money, you must have it in some form. You must be 'long' something. You may be 'long' cash, as Buffett is, but that is just as much a something as being 'long' property or stocks.

The real question is not whether you will do something or nothing, but: What will you do? When all major asset classes are expensive, the sensible thing to do is nothing. But since you can't do nothing, our advice is to do as little as possible.

The trouble with cash is that it is much more something than nothing. Dollars are a gamble. They are IOUs issued by the world's biggest debtor. Despite nearly a hundred years of decline, the dollar is still expensive in our view. That is, they still buy something, but that they will buy less in the future is practically assured. Buffett hedges this gamble by buying foreign currencies. But it is still a gamble.

A more perfect 'nothing' is gold. It is a sort of anti-asset. It pays no interest. It issues no press releases. It offers no guidance on quarterly earnings; it has no earnings. It does no mergers, no acquisitions and it never restructures. It hires no celebrity CEOs. It offers no discounts. It makes no excuses. But it is the thing that goes up when other assets, including dollars, go down.

Gold is as close to 'nothing' as you can get. Buy it.

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Let me state once and for all that it is a FALLACY that a new deposit of £1000 will generate £12,500 of new loans in the banking system. This fallacy has been spread by "the money out of thin air" brigade, who do not seem to understand how the economy works or the difference between deposits, reserves and capital.

While the reserve requirements that the "thin air" brigade constantly regurgitate are a complete red herring, it is important to understand the theoretical money multiplier effects of a single deposit:

£100 deposited in a demand deposit account can in theory generate £1000 of new money in the banking system if it is all lent out to the maximum allowed (90% of deposit value lent out, 10% kept on reserve) - as has been explained by numerous posters. However, what they fail to mention is that if the money was put in a TERM deposit, the amount of new money in the banking system could be INFINITE because there is NO RESERVE REQUIREMENT for term deposits! So something is wrong in the "thin air" brigade's analysis of how banks behave.

So what does constrain lending and money creation? There are at least 3 things:

1. The Capital Adequacy requirements constraint:

Besides the economic activity constraint (below) - in essence rational people don't borrow unless they can pay back and benefit from the loan - the capital adequacy requirements limit how much lending banks are allowed to do.

Capital adequacy requirements ensure that a minimum level of capitalisation is maintained by banks to cover its risk adjusted loan book. Total capital should be a minimum of 8% of risk adjusted credit exposures under the BIS Basel agreement. Most UK banks keep this ratio to around 12%, they are therefore well capitalised, i.e. depositors are well protected.

A capital adequacy requirement of 8% does NOT mean that for every £1000 deposited in the bank £12,500 can be lent out in a new loan. The capital of the bank would have to increase by £1,000 before it could lend out that amount (£12,500, risk adjusted). This increase in capital could come from retained profits, from a new share issue, from an issue of subordinated debt: BUT, please, please, please it does not come from new deposits!

Reserve requirements are a red-herring: they are not relevant, but the theoretical money multiplier effect mesmerises people the first time they learn about it.

2. The profitable economic activity constraint:

The money supply increases in line with economic activity.

[Feel free to skip this example if the statement above is obvious :)]

Suppose a company has a new project to develop - it needs funding. It can either use its own cash, or issue some new shares, or take on some debt. The banks are called in and they decide that the company's project is bankable (i.e. if they lend, they are reasonably confident that the money will be repaid - but there are no certainties in life, so they add a bit of margin to the interest rate payable on the loan.) The money committed by the banks is within their lending limits, referring to capital adequacy and other financial ratios of the project (estimated debt coverage, for instance). Once the loan is agreed REAL CASH is deposited in the company's bank account and the company can go out and spend/invest what it needs to for its project. (All this money flows through its suppliers and eventually ends up back in the banking system, if it ever left). The project is up and running and hopefully generating an operating profit, so the debt can be serviced.

The point being that if the credit risk was estimated correctly, the money lent today returns to the lender in the future. The company benefits from being able to accelerate the development of the project and this should far outweigh the cost of the debt.

IF the money (debt) has been created out of thin air so too then has the FUTURE economic activity against which it has been credited.

[Note that the rational borrower would only take on the loan if the project was likely to add value (be profitable) - this is where any new money is generated. It is in marked contrast to an individual taking out an expensive loan to buy a car, say, which probably won't help him to generate a future income stream.]

3. Liquidity Constraint

The bank has to keep funds on hand to meet its obligations to depositors, so needs to keep a careful eye on its maturity transformation (borrowing short term / lending long term).

I know this will come across as unbelievably dull and technical to a lot of people, but I have been alarmed at the prevalence of "the money out of thin air" type thinking, most of which is muddled and confused.

JY

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JY, interesting post.

The profitable economic activity constraint:

The money supply increases in line with economic activity.

What happens if there is no real economic growth but the central bank simply decide to spike up the money supply? You get asset inflation or inflation leaking somewhere in the system, you get misallocation of capital and eventually you will get default. It may look like growth, the numbers will be rising, but growth it is not.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
      • up 2.5%
      • up 5%



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