Where Is All The Money Coming From?

[cynic]

You're still mixing up deposits and reserves. I wouldn't mind, but you are misleading people.

Ouch! I'm still suffering occasional dizzy spells of incomprehension but here's to a continuation of this fine thread, a Darwinian outcome and hopefully a searching test with marks out of 100 at the end.

[ImA20SomethingGetMeOutOfHere]

You're still mixing up deposits and reserves. I wouldn't mind, but you are misleading people.

JY

But deposits can be used as part of a bank's reserve, no?

From the Fed:

Reserve requirements are the portion of deposits that banks may not lend and have to keep either on hand or on deposit at a Federal Reserve Bank

and

Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

http://www.ny.frb.org/aboutthefed/fedpoint/fed45.html

[Guest Charlie The Tramp]

This could be the reason they are slow increasing rates for savers and pretty quick on cutting rates when the BoE base rate changes.

The privately owned high street banks do not lend out their saver's deposits as loans to those customers who wish to borrow. They never have. Instead these deposits act as a reserve on any calls that banks have on their money over and above the normal in-flow of funds. It is called their fractional reserve.

Instead of lending actual cash money to borrowers, the banks have only ever lent 'credit'. However, this credit is used by individuals to buy homes and to spend through their credit cards, overdraft facilities and arranged loans. It is also used to run businesses, to pay employees and suppliers, who further use it to run their own finances. Governments borrow it for public spending when income from taxation is insufficient.

This bank-created credit now forms some 97% of the British money supply (with similar ratios affecting all the world's major economies), and it has effectively become money. If a person borrows, say, £100,000 from a bank to buy a house, they regard that sum as money. It gets paid into the vendor's own bank account and they also regard it as money and spend it as money.

The amount of credit lent as a proportion of money held on deposit has always been a matter for nice judgement by the individual banks. The more they lend the more profit they make, but the more exposed they become, if too many customers want their money back in the short term. During the 18th and 19th centuries, private banks often collapsed due to a 'run on the bank'. Nowadays, the banking system as a whole tends to rally round to prevent any one bank collapsing, if only because they are all so bound up with each other.

[JustYield]

But deposits can be used as part of a bank's reserve, no?

From the Fed:

and

http://www.ny.frb.org/aboutthefed/fedpoint/fed45.html

Deposits are the bank's liabilities. Cash is set aside by each bank for liquidity requirements (to prevent a 'run' under normal conditions) and this cash is what goes into the central reserve (in the US system). That Fed article is somewhat misleading, IMO, and the use of the terms reserves and deposits does create confusion, I concede. They are missing some vital steps which are assumed to be understood by the audience. All Basel (BIS) capital adequacy requirements are based on, well as the name implies: capital i.e. shareholders equity, basically. Ultimately it is these ratios which determine how much a bank can lend. Of course banks are highly leveraged, that's their business model!

I don't understand why people have an issue with fractional reserve banking per se when the expansion of the money supply is a direct result of economic activity - the multiplier takes effect over time as the money is circulated and spent/invested in distinct, presumably value-adding transactions. It's not as if I deposit £1,000 and "Kazaam!" by the magic of FRB there is £10,000 (or whatever) more money around - economic activity has to occur in between each deposit.

This is not to say that I am complacent about the money supply growth we have seen recently, it just worries me when people go off on one about FRB without mentally balancing their books. I've read some real garbage on this subject and unfortunately it suckers people in to thinking it's all one big conspiracy. Well it may be, but not because of FRB. By the way, anyone can become a banker if they are smart enough (and so inclined), it is not some secret society.

Let me know if you feel I am missing something because it could seriously shatter my Weltanschauung/ if I am significantly wrong about any of this.

JY

[Dr Doom]

I don't understand why people have an issue with fractional reserve banking per se when the expansion of the money supply is a direct result of economic activity - the multiplier takes effect over time as the money is circulated and spent/invested in distinct, presumably value-adding transactions. It's not as if I deposit £1,000 and "Kazaam!" by the magic of FRB there is £10,000 (or whatever) more money around - economic activity has to occur in between each deposit.

I actually take issue with this idea that a growing economy needs ever more

money to be printed or lent into circulation. If the money supply was actually

stable we might actually start to see prices go down over time as productivity

increased.

I don't know which FRB theory you subscribe to, the one where banks do actually

lend money into existence with this method, or the one where banks simply

lend out most of the money they have, and then relend it when it recirculates

back to them. It really muddies that water that there doesn't seem to be a definitive

answer which one is actually true. If you go back and study the origins of fractional

reserve banking it would point to the first one.

A common criticism of FRB is that because the banks are always owed more

money than they have actually created, it requires the economy to be constantly

growing in order for peoples standard of living to stay the same. Some would go

as far as saying allowing the banks to create money out of thin air and charge

interest on it is usury pretty much.

This is not to say that I am complacent about the money supply growth we have seen recently, it just worries me when people go off on one about FRB without mentally balancing their books. I've read some real garbage on this subject and unfortunately it suckers people in to thinking it's all one big conspiracy. Well it may be, but not because of FRB. By the way, anyone can become a banker if they are smart enough (and so inclined), it is not some secret society.

Let me know if you feel I am missing something because it could seriously shatter my Weltanschauung/ if I am significantly wrong about any of this.

'anyone' can become a banker, but not anyone can set up a bank. Banking is

in effect a government supported monopoly.

[ImA20SomethingGetMeOutOfHere]

JY,

Thank you for taking the time to respond to my post. I am finding this debate most interesting and enjoyable.

I totally agree that there is a great deal of rubbish posted about FRB, including the notion that if I put £100 in a bank then that bank alone can instantly create £100/3.1% of money by magic. This is incorrect as I'm sure you'd agree.

First of all, see another page from the Fed.

Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

According to the Investor Dictionary website (you'll get the same definition on any other page as well), vault cash is:

Currency that is held by banks and is stored overnight in their vaults in order to meet the business needs of the bank.

So presumably, if you go to the bank and put £10 into your account, it goes into the vault and is then part of the reserve.

A depositing £1,000, say, in a bank thus represents both an asset and a liability for the bank. The bank has gained £1,000 of assets in cash, say, but also has a £1,000 liability in that it has written an IOU to the person who deposited the money. If this were not the case then money would simply vanish when you put it into the bank and the bank would now have a £1,000 liability with nothing to meet it.

Not all of a bank's reserve has to be made up of deposits. It can deposit its own money with the fed, and can, for example, use money it has made in profit to deposit cash or buy assets at the central bank to increase its reserve.

The second point I'd like to make is in relation to this comment:

I don't understand why people have an issue with fractional reserve banking per se when the expansion of the money supply is a direct result of economic activity - the multiplier takes effect over time as the money is circulated and spent/invested in distinct, presumably value-adding transactions. It's not as if I deposit £1,000 and "Kazaam!" by the magic of FRB there is £10,000 (or whatever) more money around - economic activity has to occur in between each deposit.

Consider this scenario:

Joe Punter wins £100,000 on the horsies which he collects in the form of a suitcase full of ten pound notes (run with me for a minute on this please!). He takes this suitcase straight to the bank and deposits it in his account. The teller runs off and puts this money straight into the vault and voila! £100,000 of new reserves. The bank has a 10% reserve requirement as this makes the numbers easier to deal with. It can now lend £90,000 to somebody. Coincidentally, Harry B.T. Letter has just seen a fabulous flat on the market that he wants to invest in. He needs to borrow £90,000 which the bank is happy to lend him. Harry gives the £90,000 to a Mr. P. Guru in exchange for the flat who runs off to put it straight into another bank, chuckling to himself all the way. This bank can now lend £81,000 to another enterprising homebuyer who wants a 100% mortgage to buy a rather attractive toilet block he/she has just seen up for sale in Fishponds. And so on.

Now, please find for me some useful economic activity in there.

Edited October 1, 2006 by ImA20SomethingGetMeOutOfHere

[BrickingIt]

Has anyone mentioned the velocity of circulation?.

Stuff the banks reserves etc. Lets say there is £1000 in money and 2 people in the economy.

Money changes hands once a year.

They both have an income of £1,000. Hence can afford a house for £3,500 (3.5x).

But they want a house for £350,000.

Hence they change hands with there money 100 times a year. Wallop £100,000 of income and a flash house at 3.5x.

But as there are only 2 people, consequently there are only 2 houses, hence its really just an inflationary effect.

It makes you think

[ImA20SomethingGetMeOutOfHere]

Has anyone mentioned the velocity of circulation?.

Stuff the banks reserves etc. Lets say there is £1000 in money and 2 people in the economy.

Money changes hands once a year.

They both have an income of £1,000. Hence can afford a house for £3,500 (3.5x).

But they want a house for £350,000.

Hence they change hands with there money 100 times a year. Wallop £100,000 of income and a flash house at 3.5x.

But as there are only 2 people, consequently there are only 2 houses, hence its really just an inflationary effect.

It makes you think

Indeed it does! So the more frantically we trade houses back and forth and call it income, the faster the money supply goes up. Sounds about right.

[cynic]

Joe Punter wins £100,000 on the horsies which he collects in the form of a suitcase full of ten pound notes (run with me for a minute on this please!). He takes this suitcase straight to the bank and deposits it in his account. The teller runs off and puts this money straight into the vault and voila! £100,000 of new reserves. The bank has a 10% reserve requirement as this makes the numbers easier to deal with. It can now lend £90,000 to somebody. Coincidentally, Harry B.T. Letter has just seen a fabulous flat on the market that he wants to invest in. He needs to borrow £90,000 which the bank is happy to lend him. Harry gives the £90,000 to a Mr. P. Guru in exchange for the flat who runs off to put it straight into another bank, chuckling to himself all the way. This bank can now lend £81,000 to another enterprising homebuyer who wants a 100% mortgage to buy a rather attractive toilet block he/she has just seen up for sale in Fishponds. And so on.

Now, please find for me some useful economic activity in there.

May I have a stab at this? - and feel free to rain down with insults if I'm wrong.

Isn't this where the 'future' turns up to rescue us? Aren't both of those loans an advance on the labour (value?) that will repay them?

Do I go to the bottom of the class for that?

Edited October 1, 2006 by cynic

[BrickingIt]

Indeed it does! So the more frantically we trade houses back and forth and call it income, the faster the money supply goes up. Sounds about right.

I'm not sure it does, but the velocity of circulation is in the equation somewhere.

[laurejon]

The whole system is supported by Natural Resources, that feed the chain and provide the catalyst for business and therefore the Economy.

In the past we could look forward to helping ourselves to other nations natural resources, unfortunately these days are over.

The ultimate winner in the struggle for global superiority will be those left holding the worlds natural resources en mass.

Watch this space, nations will be changing hands in the very near future, its already happening.

[ImA20SomethingGetMeOutOfHere]

May I have a stab at this? - and feel free to rain down with insults if I'm wrong.

Isn't this where the 'future' turns up to rescue us? Aren't both of those loans an advance on the labour (value?) that will repay them?

Do I go to the bottom of the class for that?

The comparison I was trying to make is with a situation where at each stage of the process, somebody uses the money to build a factory, or make something, or design something new which will make a fortune. All of these things add value into the economy which ultimately is used to pay back the loans at some point in the future. Another way of thinking about it is that the increase in value eventually matches (more or less) the increase in money. The bank provides a service whereby it allows access to that future value from the present and so charges a fee in the form of interest.

In the example I posted, nothing is of any value is actually being created and no value is added into the economy but the money supply has still increased. Value has to be found from somewhere to pay back the bank's money + interest and so the economy suffers and the banks get richer as value is exchanged for paper money. Alternatively if we can keep inflating and finding ever more creative ways to create more money we can try to stave off the inevitable collapse, but we can't do this for ever if nothing of value is being created so eventually the whole thing falls apart.

The whole system is supported by Natural Resources, that feed the chain and provide the catalyst for business and therefore the Economy.

In the past we could look forward to helping ourselves to other nations natural resources, unfortunately these days are over.

The ultimate winner in the struggle for global superiority will be those left holding the worlds natural resources en mass.

Watch this space, nations will be changing hands in the very near future, its already happening.

It's not just about resources - ideas have value too. It doesn't take many natural resources to create a piece of software, but software (some of it anyway) has value. For nations to succeed against a background of declining natural resources, they can either try and grab as many natural resources as possible or try and come up with good ideas.

The US for example, seems increasingly devoid of ideas and seems to be going down the resource grab route. Many other western nations are also becoming devoid of ideas but lack the clout to try the resource grab idea (see the UK).

[cynic]

The comparison I was trying to make is with a situation where at each stage of the process, somebody uses the money to build a factory, or make something, or design something new which will make a fortune. All of these things add value into the economy which ultimately is used to pay back the loans at some point in the future. Another way of thinking about it is that the increase in value eventually matches (more or less) the increase in money. The bank provides a service whereby it allows access to that future value from the present and so charges a fee in the form of interest.

In the example I posted, nothing is of any value is actually being created and no value is added into the economy but the money supply has still increased. Value has to be found from somewhere to pay back the bank's money + interest and so the economy suffers and the banks get richer as value is exchanged for paper money. Alternatively if we can keep inflating and finding ever more creative ways to create more money we can try to stave off the inevitable collapse, but we can't do this for ever if nothing of value is being created so eventually the whole thing falls apart.

Isn't a BTLer, in exchange for rent, providing an essential background service for 'someone else' who is being productive elsewhere and perhaps working in one of those factories you mention? There is value of a kind flowing from the business of landlordery.

Please put me out of my misery...

[ImA20SomethingGetMeOutOfHere]

Isn't a BTLer, in exchange for rent, providing an essential background service for 'someone else' who is being productive elsewhere and perhaps working in one of those factories you mention? There is value of a kind flowing from the business of landlordery.

Please put me out of my misery...

Not really, IMO, but before this degenerates into a BTL bashing thread imagine that everybody uses the money to buy gold or oil or tulip bulbs instead and compare the 2 situations.

EDIT (then time for bed):

What I am trying to do is compare a situation where money creation feeds economic growth and one where it feeds an asset bubble. One is useful, the other is not.

Edited October 1, 2006 by ImA20SomethingGetMeOutOfHere

[cynic]

Not really, IMO, but before this degenerates into a BTL bashing thread imagine that everybody uses the money to buy gold or oil or tulip bulbs instead and compare the 2 situations.

For sure, gold and tulips - especially tulips! - seem a tad frivolous. BTW, though I'm vehemently opposed to BTL - at least the structure of it in the UK - I'm still not entirely sure that private rented property 'services' are not an essential part of the GDP whole. What are your thoughts?

Edit to correspond with your edit: Yes, I agree about the asset bubble and that is the problem - perhaps the ONLY problem with BTL in the UK; housing is a scarce social resource and the business of private rented accomadation should be predicated on a surplus of housing stock, not a shortage. Perhaps then it could be seen as a benign component of a productive economy?

Edited October 1, 2006 by cynic

[ImA20SomethingGetMeOutOfHere]

For sure, gold and tulips - especially tulips! - seem a tad frivolous. BTW, though I'm vehemently opposed to BTL - at least the structure of it in the UK - I'm still not entirely sure that private rented property 'services' are not an essential part of the GDP whole. What are your thoughts?

That this is best discussed on another thread to keep the banking thread 'pure'? I'm also not trying to slag off renting/landlords per se, more the phenomenon of house price inflation. Harry B.T. Letter in my example could have easily been Joe F.T. Buyer instead.

The tulip thing actually happened in Holland a few hundred years ago.

Edited October 1, 2006 by ImA20SomethingGetMeOutOfHere

[RussellF]

OK, it's late and my breain hurts now, but here are a few more thoughts for the pot:

1) Money is bunkum. We're all trading something for something. Time for money, money for food, effluent handling facilities for the treatment of the product of the food (go with me on this). Money is just a convenient middle thing so that I don't have to configure the firewall of the bloke that takes my sh1t away

2) There is no money. It's all just numbers on computers as has been said. If we they all sold their homes tomorrow and demanded shiny £ coins for them, there wouldn't be enough.

3) Money (like house prices) is only an issue when you spend it (sell them). If I had a bank balance of £42 trillion, so long as I can take out a tenner for a couple of pints and some fags (I'd probably start smoking again if I was disgustingly loaded), then I'd be happy.

4) So long as house prices increase, and IOUs in terms of mortgages go up, then more money is created from thin air from the future. At some point it will all fall over and we'll adjust. Hey, there'll always be a reason to smile

[JustYield]

I actually take issue with this idea that a growing economy needs ever more

money to be printed or lent into circulation. If the money supply was actually

stable we might actually start to see prices go down over time as productivity

increased.

The ideal would be for money supply to increase exactly proportionately to value-added economic activity. In reality it does not and so we have inflation. But there does not seem to be a better system for generating growth and deploying capital efficiently to where it can be put to best use. Whether unfettered growth is desirable is another question entirely and the system does fall down every so often and we get recessions from which we rise again leaner, hungrier and perhaps fitter.

I don't know which FRB theory you subscribe to, the one where banks do actually

lend money into existence with this method, or the one where banks simply

lend out most of the money they have, and then relend it when it recirculates

back to them. It really muddies that water that there doesn't seem to be a definitive

answer which one is actually true. If you go back and study the origins of fractional

reserve banking it would point to the first one.

The first one, subject to capital adequacy requirements.

Banks lend money into existence - this is one of their roles. They cannot lend some crazy multiple of deposits though, only a multiple of their shareholders equity (a much smaller amount - look at some banks balance sheets - deposits and loans more or less balance, equity or near equity is a thinnish sliver of risk capital that can be levered up to create loans according to the capital adequacy requirements. Cash is kept in 'reserve' to fund day to day liquidity requirements).

A common criticism of FRB is that because the banks are always owed more

money than they have actually created, it requires the economy to be constantly

growing in order for peoples standard of living to stay the same. Some would go

as far as saying allowing the banks to create money out of thin air and charge

interest on it is usury pretty much.

Yes. It's depressing isn't it - but this is due to the quality of much of the supposed growth seen in the UK which is not real, it is mainly paper shuffling.

I don't think the facility and empowerment provided by lending can be considered usury, it's generally a fair deal. They are taking a risk in lending and they need to be compensated for that, plus the opportunity cost of course. Although the money has been lent into existence, if you default the bank's shareholders take a hit in real cash terms. Actually I think that last point is worth hilighting again:

Although the money has been lent into existence, if you default the bank's shareholders take a hit in real cash terms.

'anyone' can become a banker, but not anyone can set up a bank. Banking is

in effect a government supported monopoly.

I'm not really interested in arguing this point, but I think anyone CAN set up a bank subject to fulfilling the relevant legal requirements (no monopoly). There are a lot more banks in existence than the household names, as I'm sure you know.

JY

The comparison I was trying to make is with a situation where at each stage of the process, somebody uses the money to build a factory, or make something, or design something new which will make a fortune. All of these things add value into the economy which ultimately is used to pay back the loans at some point in the future. Another way of thinking about it is that the increase in value eventually matches (more or less) the increase in money. The bank provides a service whereby it allows access to that future value from the present and so charges a fee in the form of interest.

In the example I posted, nothing is of any value is actually being created and no value is added into the economy but the money supply has still increased. Value has to be found from somewhere to pay back the bank's money + interest and so the economy suffers and the banks get richer as value is exchanged for paper money. Alternatively if we can keep inflating and finding ever more creative ways to create more money we can try to stave off the inevitable collapse, but we can't do this for ever if nothing of value is being created so eventually the whole thing falls apart.

Yes.

JY

[cynic]

The tulip thing actually happened in Holland a few hundred years ago.

Yes I knew about the tulips - the mind boggles.

I think - hope - I'm getting a grip on this but would like someone to confirm (or not) that a loan is no more or less than an advance on a feasible 'promise' of future productivity. This would seem to make some sort of sense to me because I can dredge up a 'real world' example of this from someone I met who'd splashed out and bought a second home in france on a loan he'd negotiated. He told me he was a freelance accountant who worked on contracts of varying length and now that he'd bought this place he was going to carefully calculate what his net outgoings would be (he planned to let the house in summer for income and reduce the mortgage pain) and from this he'd knew how hard he was going to have to work - he wanted to do enough and no more. Looked at this way, lending as an advance on productivity is surely a catalyst for effective capitalism? Of course, bubbles can't be allowed to go unchecked indefinitely but maybe they can be useful as turbochargers switched on just here and there? If so, there's an argument in favour of the explosion of house-prices over the last 8 or 9 years or so providing the brakes are now applied and everyone gets on with beavering away to pay off the mortgages and the MEW.

Was the tulip bubble sustained on the back of loans or was this principally a wealth-exchanging phenomenon, a flow of cash from the winners to the losers? Wouldn't that make it quite distinct - in it's wider effect - from the house price bubble?

Edited October 2, 2006 by cynic

[assetpriceinflation]

What I was getting at, is whoever controls the money, can buy both parties,

buy the media, buy the education system,

they can finance other people to go around the world and

control strategic resources on their behalf, Cecil Rhodes with diamonds,

Carnegie Steel, Rockefeller Oil / Banking Interests. Certainly JP Morgan

bank on wall street.

It's an incestuous relationship between banking and government,

and politicians don't do too badly out of it. But the politicians have very

little power to change it.

I suppose I could mention those that have tried have generally been assasinated,

JFK, Lincoln, etc. But I don't want to bore you with more conspiracy theories.

To paraphrase Henry Kissinger

" He who controls the food supply controls the population, he who controls the oil supply controls continents, but he who controls the money controls the whole world."

[Guest mattsta1964]

Take the whole lot and blow it all on a holiday. Somewhere like Thailand or Australia. If there is any left buy a new car. Release all the equity in your house and buy some BTL proprties and a plasma screen TV. Get some credit cards. Buy a new kitchen on credit. Get some store cards and go on a spending binge. When interest rates go up or you over extend yourself, get yourself declared bankrupt. It's not that hard and you'll be able to get a new credit card after 12 months. Also, if you have no savings then the government will be forced to look after you when you retire or lose your job.

Seriously, don't ask me! I don't want my amateur investment advice causing somebody problems for somebody. What I would suggest is to find yourself a good financial adviser (if one even suggests BTL then leave and never come back) or an investment company that is talking bearish about housing (see interviews with Peter Schiff posted on here a week or so ago. His company was called Euro Pacific Capital I think). Make sure your investments are well diversified (which you seem to have done already). Remember that in a recession cash is king and that where there is inflation then somewhere there will be a bubble to invest in.

Sure, why not? The Bank of England was originally created to help the government print inflationary paper money to fund an unpopular war. Countless governments have benefited from debt/inflation fueled booms and few countries could exist without public borrowing.

Forgive my naivety and ignorance but this seems to be a contradiction. Cash obviously gives you a lot of flexibility in a recession but if there is high inflatin, how do you prevent your cash becoming worthless. You'd have to convert that cash into assets as quickly as possible to prevent it inflating away I suppose. Is that what you are saying here?

[Guest mattsta1964]

Take the whole lot and blow it all on a holiday. Somewhere like Thailand or Australia. If there is any left buy a new car. Release all the equity in your house and buy some BTL proprties and a plasma screen TV. Get some credit cards. Buy a new kitchen on credit. Get some store cards and go on a spending binge. When interest rates go up or you over extend yourself, get yourself declared bankrupt. It's not that hard and you'll be able to get a new credit card after 12 months. Also, if you have no savings then the government will be forced to look after you when you retire or lose your job.

You know! This is very nearly sounding like a fantastic idea!

Here I am, trying desperately hard to conduct my life as honestly and as sensibly as possible. I have no credit cards, no loans, and I slave away, living away from home during the week to service a modest by todays standards but by no means inconsequential mortgage of around 85K. I drive a 10 year old car, I buy clothes once a year, I have no central heating and my house needs about 15K spent on it to make it a comfortable place to live, but I'm terrified to borrow anymore money to do it.

And suddenly the penny dropped when I read 1m20something's post!

If the banks are printing worthless money, the value of your cash savings is being inflated away and the entire global financial system has become totally debauched by the removal of the shackles that control money supply then why not just max out your credit on every credit card you can get your hands on, get the biggest bank loan you can and just go totally bezerk! Holidays, nice cars, new wardrobe, u bloody name it!

And then I thought..........Hang on! This is exactly what everybody else is doing anyway, albeit subconsciously because peoples' spending power has been so decimated, they are forced to borrow evermore stellar sums of money to finance their lifestyles.

Why have I been so sensible!?????? I should have been utterly irresponsible like everyone else. The banks create utterly worthless money so why not borrow as much of it as possible, spunk the whole lot and then declare myself bankrupt. It almost seems like the best option! At the very least you could say on your death bed that for a year or so, you had an absolutely amazing time!

I'll stop binning all that junk mail right away! Ocean finance! HERE I COME!

[JustYield]

To paraphrase Henry Kissinger

" He who controls the food supply controls the population, he who controls the oil supply controls continents, but he who controls the money controls the whole world."

To paraphrase Tony Montana (a.k.a. Scarface):

"In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, then you get the women."

Which I always remember as, "First you get the money. Then you get the power. Then you get the girls."

I prefer mine.

JY

[ImA20SomethingGetMeOutOfHere]

I hope nobody minds me bringing this thread back from the dead again, but there are a couple more points I'd like to make.

JY, I'm not trying to be provocative or arguementative, but I'm going to have to stand by my assertion that deposits in a bank make up part of its reserves. To try and prove this, I'd like to quote a slightly lengthy passsage from an old favourite, the mystery of banking by Murray Rothbard (it's in chapter 7 if anybody has the book).

The first fateful case was

decided in 1811, in Carr v. Carr. The court had to decide whether the term “debts” mentioned in a will

included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled

that it did. Grant maintained that since the money had been paid generally into the bank, and was not

earmarked in a sealed bag, it had become a loan rather than a bailment.6 Five years later, in the key follow-up

case of Devaynes v. Noble, one of the counsel argued, correctly, that “a banker is rather a bailee of his

customer’s funds than his debtor, . . . because the money in . . . [his] hands is rather a deposit than a debt, and

may therefore be instantly demanded and taken up.” But the same Judge Grant again insisted—in contrast to

what would be happening later in grain warehouse law—that “money paid into a banker’s becomes

immediately a part of his general assets; and he is merely a debtor for the amount.”7

The classic case occurred in 1848 in the House of Lords, in Foley v. Hill and Others. Asserting that

the bank customer is only its creditor, “with a superadded obligation arising out of the custom (sic?) of the

bankers to honour the customer’s cheques,” Lord Cottenham made his decision, lucidly if incorrectly and even

disastrously: [p. 94]

Money, when paid into a bank, ceases altogether to be the money of the principal; it is

then the money of the banker, who is bound to an equivalent by paying a similar sum

to that deposited with him when he is asked for it . . . . The money placed in the

custody of a banker is, to all intents and purposes, the money of the banker, to do with

it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable

to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he

is not bound to keep it or deal with it as the property of his principal; but he is, of

course, answerable for the mount, because he has contracted . . . .8

This has some rather disturbing implications. The key phrase is perhaps this: "Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker". In other words, when you pay money into a bank, it ceases to belong to you. It now belongs to the bank which can do anything it likes with it, including use it as a reserve for inflationary lending. This is how deposits can be counted as assets on the bank's balance sheet.

The above is a great example of how at best ethically dubious, at worst outright fraudulant practices have over the years become an everyday part of the wonderful wacky world of banking.

Edited October 2, 2006 by ImA20SomethingGetMeOutOfHere

[Once in a lifetime]

UK debt is at record levels. Does it also mean that savings are at record levels? Where does the money come from?