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The Truth Is Out: Money Is Just An Iou, And The Banks Are Rolling In It

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This is not getting enough airtime in the media.

Nor are the things that follow, for example all debt must ultimately be forgiven, QE'd, defaulted on call it what you will. You could be out getting your free house now...

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This is not getting enough airtime in the media.

Nor are the things that follow, for example all debt must ultimately be forgiven, QE'd, defaulted on call it what you will. You could be out getting your free house now...

TBH there is something generically nonsensical in the article. One of the reasons we're in such trouble is precisely because money has no direct relationship to acts of wealth-creation in the real world, but the author seems to fall into the same trap of thinking un-backed money creation is fine - that money as an abstraction still has value. His only gripe seems to be who's getting it.

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Perhaps I'm missing something, but I really dont get why:

"banks take in money from savers, and use it as a capital base to cover reserve requirements when issuing loans"

is fundamentally different from:

"banks give out loans and when they do they need to find a certain amount of capital to cover these loans, which they partly do by attracting savers"

in any way that isnt basically just semantic. Money is fungible, it doesnt make sense to ask whether the money banks lend is 'the same' money that savers give them. The point is that bank lending is constrained by several things, which includes the credit-worthiness of borrowers, and the capital base that banks can raise (partly through attracting savers).

Basically this just seems like semantics to me

Edited by Smyth

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Perhaps I'm missing something, but I really dont get why:

I think someone in the comments pointed this out - the writer dismisses FRB in a single line, declaring that's not what happens, and then just describes FRB, but starting from the other end of the chain.

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I think someone in the comments pointed this out - the writer dismisses FRB in a single line, declaring that's not what happens, and then just describes FRB, but starting from the other end of the chain.

Yeah that was my impression too. The few sentences he cited in the article were vague but from skimming the actual BoE report and this, it basically just seems like FRB with a slightly different emphasis (unless I'm missing something, I dont know much/anything about monetary economics)

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FRB suggests banks need deposits which they the lend part of out, this part then get deposited again, then part of that gets lent out... So multiplying the deposit in the money supply.

In reality bank makes loan which creates deposit at the same time. There is no fractional reserve. Plenty of countries have zero reserve requirement too. They only need to worry about reserves if those deposits get withdrawn as cash or paid to another bank. And they dont really need to worry that much either, as ultimately the central bank will give them whatever they need to cover this, either through repoing one of their gilts or, if they're really desperate, via the discount window.

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FRB suggests banks need deposits which they the lend part of out, this part then get deposited again, then part of that gets lent out... So multiplying the deposit in the money supply.

In reality bank makes loan which creates deposit at the same time. There is no fractional reserve. Plenty of countries have zero reserve requirement too. They only need to worry about reserves if those deposits get withdrawn as cash or paid to another bank. And they dont really need to worry that much either, as ultimately the central bank will give them whatever they need to cover this, either through repoing one of their gilts or, if they're really desperate, via the discount window.

Right, but what is the practical implication of this? It surely means the same thing in practice; banks make money by issuing loans and charging interest, and they need to keep a certain amount of capital in order to cover their commitments and short term liquidity.

Im not being obtuse, I genuinely dont see what importance this distinction is meant to have.

Edited by Smyth

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Right, but what is the practical implication of this? It surely means the same thing in practice; banks make money by issuing loans and charging interest, and they need to keep a certain amount of capital in order to cover their commitments and short term liquidity.

Im not being obtuse, I genuinely dont see what importance this distinction is meant to have.

I know what you mean. I think a lot about this stuff and the practical implications of loans coming before deposits often send minimal.

I think one implication/point is in FRB banks need reserves to lend out and that the bank lends out those reserves. Therefore reserves are a limiting factor and you also might that if a bank had excess reserves it would have more to lend.

The reality is totally different. The banks do not need reserves to make loans as the central back will always supply any that are required after the event (otherwise they lose control of interest rate, that's an aside though). So in this, real world banks dont lend reserves so having more of them (ie QE) is zero incentive to lend. Hence QE not inflationary in the money supply sense, outside of its effect on lowering interest rates.

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I think for a bank it really doesnt matter that they create loans before deposits. They still need those deposits once they ve been created. The order not important once the banking system balance sheet has been increased.

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Yeah from reading the link I posted above, I think I vaguely understand why it has implications for the (non)inflationary aspect of QE - since banks arent usually constrained by lack of reserves, increasing reserves doesnt have an enormous impact (as you say). But I dont get why it bothers the currency sceptics any more than standard FRB does. The Graeber guy seems to think its a really big deal for some reason

Edited by Smyth

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FRB suggests banks need deposits which they the lend part of out, this part then get deposited again, then part of that gets lent out... So multiplying the deposit in the money supply.

In reality bank makes loan which creates deposit at the same time. There is no fractional reserve. Plenty of countries have zero reserve requirement too. They only need to worry about reserves if those deposits get withdrawn as cash or paid to another bank. And they dont really need to worry that much either, as ultimately the central bank will give them whatever they need to cover this, either through repoing one of their gilts or, if they're really desperate, via the discount window.

That's in the entire banking system as a whole. The bank which extends credit must have a suitable fraction of it covered by a deposits or other liquid assets in order to meet capital management requirements so an individual bank can't just fund itself. And ultimately, all the credit (in the entire banking system) should unwind back to a supply of base money as repayment comes due. Except of course since interest was charged, new money/credit needs to be created in order to make everything balance.

Of course, as long as all the bank credit isn't called in at the same time (the equivalent of the tide going out and showing us who wasn't wearing bathing suits), the smoke and mirrors can continue courtesy of new credit creation from the banking system itself.

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In reality bank makes loan which creates deposit at the same time.

Well, yes, but that's what FRB does. Lending out money, which is then deposited, which can then be leant out again is exactly the process described by FRB. Hence an intial deposit of £100 with a fractional reserve of 10% can generate £1000 of loans.

That aside, at least FRB created some connection with the underlying economic activity, albeit vastly magnified, but I was under the impression that FRB had become increasingly meaningless in terms of where banks funded their lending from (hence, to some degree, 2008).

Admittedly a commercial bank example, but aren't SPVs essentially a way of a bank creating a deposit for its own use by selling its own liability to itself? (and, usually, a tax dodge into the bargain)

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Right, but what is the practical implication of this? It surely means the same thing in practice; banks make money by issuing loans and charging interest, and they need to keep a certain amount of capital in order to cover their commitments and short term liquidity.

Im not being obtuse, I genuinely dont see what importance this distinction is meant to have.

The most important practical implication of endogenous money is that the money multiplier is a myth. Changes in the monetary base M0 or M1 do not lead the credit cycle, so increasing them dramatically won't automatically lead to a vigorous upturn in economic output. As Bernanke discovered to his obvious embarrassment in 2009-10.

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Yeah from reading the link I posted above, I think I vaguely understand why it has implications for the (non)inflationary aspect of QE - since banks arent usually constrained by lack of reserves, increasing reserves doesnt have an enormous impact (as you say). But I dont get why it bothers the currency sceptics any more than standard FRB does. The Graeber guy seems to think its a really big deal for some reason

Standard credit creation is assumed to be overall non-inflationary since the sum created by borrowing is ultimately destroyed on repayment.

QE represents entirely new base money. This is because not only did the money not exist before, it will almost certainly not ever be repaid and removed from the system as per a fractional reserve loan .. Unless anyone really thinks that the Bank of England is going to rock up to the doors of the treasury and demand three hundred and seventy five billion quid (as it currently stands) which will promptly be removed from circulation by cancelling the corresponding amount from their own bloated balance sheet, whenever it is hypothetically wound up. It will of course never be wound up - the clue is in the cash grab of the coupon back from the BoE to the Treasury.

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The most important practical implication of endogenous money is that the money multiplier is a myth. Changes in the monetary base M0 or M1 do not lead the credit cycle, so increasing them dramatically won't automatically lead to a vigorous upturn in economic output. As Bernanke discovered to his obvious embarrassment in 2009-10.

Can you clarify for the hard of thinking?

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Can you clarify for the hard of thinking?

I said the same thing above in more layman's terms

'I think one implication/point is in FRB banks need reserves to lend out and that the bank lends out those reserves. Therefore reserves are a limiting factor and you also might that if a bank had excess reserves it would have more to lend.

The reality is totally different. The banks do not need reserves to make loans as the central back will always supply any that are required after the event (otherwise they lose control of interest rate, that's an aside though). So in this, real world banks dont lend reserves so having more of them (ie QE) is zero incentive to lend. Hence QE not inflationary in the money supply sense, outside of its effect on lowering interest rates.'

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Standard credit creation is assumed to be overall non-inflationary since the sum created by borrowing is ultimately destroyed on repayment.

QE represents entirely new base money. This is because not only did the money not exist before, it will almost certainly not ever be repaid and removed from the system as per a fractional reserve loan .. Unless anyone really thinks that the Bank of England is going to rock up to the doors of the treasury and demand three hundred and seventy five billion quid (as it currently stands) which will promptly be removed from circulation by cancelling the corresponding amount from their own bloated balance sheet, whenever it is hypothetically wound up. It will of course never be wound up - the clue is in the cash grab of the coupon back from the BoE to the Treasury.

The other precedent set was the rollover of the money received by the APF (BoE) for maturing gilts - it was used to buy other gilts.

The size of the BoE's gilt holdings was thus maintained at around £375bn.

http://www.positivemoney.org/2013/07/some-further-thoughts-on-qe/

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The other precedent set was the rollover of the money received by the APF (BoE) for maturing gilts - it was used to buy other gilts.

The size of the BoE's gilt holdings was thus maintained at around £375bn.

http://www.positivemoney.org/2013/07/some-further-thoughts-on-qe/

I doubt that three hundred and seventy five billion pounds of new money will be the end of it, either.

Thanks to the 'low inflation' :rolleyes: being hyped in the media and the widely telegraphed 'rumours' of the Germans capitulating to the fever to print more Euro I'm sure the stage is being set for another round of BoE 'stimulus' to keep the plates spinning.

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The banks do not need reserves to make loans as the central back will always supply any that are required after the event (otherwise they lose control of interest rate, that's an aside though).

So the only real limit on the bankers ability to manufacture debt is the number of creditworthy borrowers whose signatures they can collateralize.

Combine this with the ability to repackage that debt and sell it on and you have the blueprint for a private money printing machine- you make profits by selling that debt in the form a security while having no liability if it fails to pay out. :D

All you need do now is reduce your lending standards to the point where you are giving loans to dead people (Yes- this did happen) and you are laughing- no shortage of borrowers need impede your journey to undreamed of wealth.

And when the whole scheme blows up you take the money home and the idiot taxpayer's and their idiot political leaders will bail out the system.

It's the perfect crime.

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If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos.

Can anyone offer any insight as to why we cannot trust our government with the nations money but we can apparently trust them to control the nations nuclear weapons?

One might think that the ability to destroy life on earth by starting a nuclear war might be of more concern than blowing up the money supply.

Following this logic Mark Carney should be only person in the country able to authorize the use of nuclear weapons- but he's not- we give that power to a man who is so lacking in self control that we can't trust him with the money supply.

Does anyone else find this set up a bit strange?

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Can anyone offer any insight as to why we cannot trust our government with the nations money but we can apparently trust them to control the nations nuclear weapons?

I would suggest that the government doesn't have "control" of the nations money - it can control M but not V. So its missing a rather important lever.

Whereas they have full control over the nukes.

If governments could control V as well as M that would indeed be quite a scary proposition. Of course they might be able to have some effect on V, even a possibly disastrous one. However that doesn't constitute control of V, since they can't make incremental and arbitrarily small changes to V, like they can to M.

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Yeah that was my impression too. The few sentences he cited in the article were vague but from skimming the actual BoE report and this, it basically just seems like FRB with a slightly different emphasis (unless I'm missing something, I dont know much/anything about monetary economics)

Money is created on the basis that it will be repaid from future earnings. This leads to the following assumptions:

1). If those earnings do not materialise then that money must be destroyed. This is what happened in the great recession, the banks stopped lending to each other as they realised that many promises would not be made good. Therefore money must be destroyed and asset prices will deflate. Hence QE to reflate asset prices...

2). If money is lent against an unproductive asset (a house that already exists) and there is no corresponding increase in goods and services in the economy, then this is inflationary in the purest sense of the word... an increase in the price due to an increase in the money supply

3). Now that the state is guaranteeing these over inflated asset prices. The state it is going to do its hardest to push us all to go out and work longer, for less money (more tax), to make good other peoples failed promises.

4). Most people are as thick as two short planks and think that flogging themselves to death for a single asset they cannot sell makes them "wealthier".

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However, people have lives to lead, shelters to inhabit, within the limited timescales of life: they need to compete for these things in a scarcity. The velocity in terms of asset buying is seemingly possible to stimulate which then goes into a natural rising asset prices phase where people want in.

But the stats for V are falling. See the MZMV chart at FRED.

Even the stats for the rate at which assets (like housing) are changing hands is falling.

What rising asset-velocity metric are you referring to?

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