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Banks Borrow Money Into Existence, But Not At 0% Interest


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person A deposits £1000 at barclays.

barclays lends that £1000 to person B. it would appear that new money has been created on record:

A still has a £1000 deposit shown on his bank statement.

B has the actual £1000 in cash.

the actual money stays the same (£1000) but on record, it looks like £2000 now exists, which in reality it doesnt.

there isnt £2000 here. from the banks point of view we have is owed 1000 and owes 1000 which results in 0.

A is owed 1000

B owes 1000

this equates to 1000, being the original amount.

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no, we had money long before we had central banks.

read the article from the houses of parliament http://edmi.parliament.uk/EDMi/EDMDetails....amp;SESSION=681

money is just a piece of paper, or a record in a book or computer, that somebody owes something to somebody.

Banks create these IOUS "at will" subject to rules, which were themselves created to prevent the creation in itself having too much of an advantage for the creators (banks).

97% of all money created ( as at 2003) in the UK was created by private banks.

They said so in parliament.

there isnt £2000 here. from the banks point of view we have is owed 1000 and owes 1000 which results in 0.

A is owed 1000

B owes 1000

this equates to 1000, being the original amount.

my point exactly, two sides are arguing from a different point of view. actual money vs credit money.

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my point exactly, two sides are arguing from a different point of view. actual money vs credit money.

The fallacy of the official.

You have split humanity in two groups with no sound basis for doing so - those who can make money and those who cannot. Everyone can.

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my point exactly, two sides are arguing from a different point of view. actual money vs credit money.

I see no difference- actual money ( IOUS) or credit money (A build up of IOUS on top of what you already owe).

They are the same.

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quite simply, a bank doesnt have enough money to match all the money that it appears to owe to all its customers.

so although to an individual, a bank would have enough to cover your £1000 deposit - as a whole market, a bank would not have enough money to cover everyones deposits should they wish to withdraw their money at the same time.

If a banks total assets were less than the money it owed, it would be insolvent.

They are not as they have a variety of assets that could be cashed. Basel rules ensure this.

The problem is that many of their assets are NOT cash, and take time to cash in. Thats why a run hurts them bad, because their liquid assets are always smaller than their liquid liabilities.

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no, we had money long before we had central banks.

read the article from the houses of parliament http://edmi.parliament.uk/EDMi/EDMDetails....amp;SESSION=681

money is just a piece of paper, or a record in a book or computer, that somebody owes something to somebody.

Banks create these IOUS "at will" subject to rules, which were themselves created to prevent the creation in itself having too much of an advantage for the creators (banks).

97% of all money created ( as at 2003) in the UK was created by private banks.

They said so in parliament.

Wrong, wrong and thrice wrong.

Commercial banks cannot create money. The bank only gets to add to their store of money when someone makes a deposit (either a retail depositor or another commercial entity). The bank can then lend the money out to borrowers. When those borrowers spend the money it appears as real money, and gets redeposited, and relent, etc, and thus causes a large multiplier.

The link you gave was to an early day motion by an MP, not a statement of information by Parliament. It was talking about the ratio of direct government created money to money created through economic activity and the cycle of lending, redepositing by someone else, etc. The capital adequacy rules set a limit to how much can be lent by a given bank, and that limits what otherwise would be an infinite cycle.

If your interpretation were right, then banks wouldn't bother to pay you interest on your deposit account. They'd just magic it into existence when they wanted to lend. They can't do that, and that it why they need to attract deposits by offering interest.

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Wrong, wrong and thrice wrong.

Commercial banks cannot create money. The bank only gets to add to their store of money when someone makes a deposit (either a retail depositor or another commercial entity). The bank can then lend the money out to borrowers. When those borrowers spend the money it appears as real money, and gets redeposited, and relent, etc, and thus causes a large multiplier.

The link you gave was to an early day motion by an MP, not a statement of information by Parliament. It was talking about the ratio of direct government created money to money created through economic activity and the cycle of lending, redepositing by someone else, etc. The capital adequacy rules set a limit to how much can be lent by a given bank, and that limits what otherwise would be an infinite cycle.

If your interpretation were right, then banks wouldn't bother to pay you interest on your deposit account. They'd just magic it into existence when they wanted to lend. They can't do that, and that it why they need to attract deposits by offering interest.

Anyone can create money,

Only legal tender has to be accepted as payment.

Have £1,000 Injin dollars to spend while you think about it.

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If your interpretation were right, then banks wouldn't bother to pay you interest on your deposit account. They'd just magic it into existence when they wanted to lend. They can't do that, and that it why they need to attract deposits by offering interest.

Youve missed the point about the law: the law on capital adequacy is to prevent the scenario you mention.

If there was no law thats exactly what they'd do.. The existance of the law proves the existance of the system.

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"the bank pays interest on this money" How can the Bank pay interest on deposits when they are available for withdrawal on demand? The Bank can't loan the money out (to make interest to pay the depositor) because the money needs to be available for withdrawal (at all times).

"If A withdrew the money the bank would require overnight funds from the BoE and then funds from elsewhere - other depositors or lenders" Looks like the Bank would save a bit of money if the depositor A kept his/her money in the account!

"How can the Bank pay interest on deposits when they are available for withdrawal on demand?" I get interest on my current account (not very much) as I assume does everyone else.

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Wrong, wrong and thrice wrong.

Commercial banks cannot create money. The bank only gets to add to their store of money when someone makes a deposit (either a retail depositor or another commercial entity). The bank can then lend the money out to borrowers. When those borrowers spend the money it appears as real money, and gets redeposited, and relent, etc, and thus causes a large multiplier.

The link you gave was to an early day motion by an MP, not a statement of information by Parliament. It was talking about the ratio of direct government created money to money created through economic activity and the cycle of lending, redepositing by someone else, etc. The capital adequacy rules set a limit to how much can be lent by a given bank, and that limits what otherwise would be an infinite cycle.

If your interpretation were right, then banks wouldn't bother to pay you interest on your deposit account. They'd just magic it into existence when they wanted to lend. They can't do that, and that it why they need to attract deposits by offering interest.

this quote from the bank of England

The money-creating sector

Although the first element in any definition of broad money

is to determine which institutions are considered to be

creators of money, international statistical standards provide

little guidance on the precise definition of this sector. The

International Monetary Fund (2006) defines the

money-creating sector as those financial institutions that

issue liabilities that are included in the national definition of

broad money — in other words, as those institutions whose

liabilities are used as means of exchange in the economy.

The box on page 406 describes the current definitions of the

money-creating sector and of broad money in some major

economies. Given the current definition of M4, the

money-creating sector in the United Kingdom consists of

resident banks (including the Bank of England) and building

societies(2) — which together form the so-called monetary

financial institutions (MFIs) sector.(3)

The distinguishing feature of banks and building societies in

the United Kingdom is that they have been authorised by the

Financial Services Authority to accept deposits. In other

words, the UK money-creating sector is defined on an

institutional or legal basis. Such a definition provides clarity

from the outset with respect to the institutions from which

data need to be collected to construct broad monetary

aggregates. But an institutional definition may also appear

arbitrary and rigid from an economic point of view, as various

other financial intermediaries may undertake activities that are

similar to those of MFIs. In particular, some other

intermediaries may issue liabilities that are in practice close

substitutes for money but, because they do not (and may not

want to) have permission to accept deposits, they fall outside

the current UK definition of the money-creating sector.

In economies that have adopted a functional definition of the

money-creating sector, such as the euro area and the

United States, such financial intermediaries are part of the

money-creating sector. The functional approach focuses on

the specific roles of the liabilities issued by different types of

financial intermediaries, rather than the intermediaries’ legal

status. So in principle, any financial institution issuing

liabilities with similar characteristics to bank deposits (in the

sense of being easily transferable into a medium of exchange)

could be part of the money-creating sector. Those liabilities

would then be included in the national broad money measure.

For example, the European Central Bank’s functional definition

of the money-creating sector covers all financial institutions

whose business is to receive deposits and/or close substitutes

for deposits, and to grant credits and/or to invest in securities.

The main practical difference with the UK definition is that

money market funds (MMFs) are classified as MFIs (and

therefore money creators) in the euro area. MMFs are

financial intermediaries that do not have a licence to receive

deposits, and they issue shares or units that — just like some

deposits — can easily be converted into means of exchange,

although their nominal value can fluctuate. So units or shares

issued by MMFs are part of the euro area’s broad money

http://www.bankofengland.co.uk/publication...in/qb070304.pdf

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take an example of:

person A deposits £1000 at barclays.

barclays lends that £1000 to person B. it would appear that new money has been created on record:

A still has a £1000 deposit shown on his bank statement.

B has the actual £1000 in cash.

the actual money stays the same (£1000) but on record, it looks like £2000 now exists, which in reality it doesnt.

A's money is simply an accounting principle showing that the bank owes him £1000. person B actually has the £1000 in cash.

however, this arguement goes a lot further as people could say "but credit money is pretty much as good as actual money" - which essentially is true, as long as a bank run never occurs. but this is a seperate issue, and again dependant on how you define money.

one side is looking at the mechanics of actual money, the other side is looking at the everyday effects of credit money.

Person A can still spend his £1000 on demand e.g. through using a bank card. £1000 is as accessible to A as it would be if he still had £1000 in his pocket. B also has £1000 to spend as he chooses. The total amount of money at these two peoples immediate disposal is £2000, where previously it was only £1000.

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Person A can still spend his £1000 on demand e.g. through using a bank card. £1000 is as accessible to A as it would be if he still had £1000 in his pocket. B also has £1000 to spend as he chooses. The total amount of money at these two peoples immediate disposal is £2000, where previously it was only £1000.

This would be a run on the bank. the bank would need emergency funding. There is only £1000 in the system, but to an onlooker, there is £2000, the guy with cash in his hand, and the guy with a deposit at the bank. £2000 only appears to exist because of the trickery at the bank.

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Youve missed the point about the law: the law on capital adequacy is to prevent the scenario you mention.

If there was no law thats exactly what they'd do.. The existance of the law proves the existance of the system.

Why do you think there is a law to prevent infinite money creation?

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Why do you think there is a law to prevent infinite money creation?

Lets say its more of a legally binding agreement between banks. They know they are all greedy turds and need a leash to control them.

If a bank breaks the code, they lose the licence, they lose the credibility that keeps them able to do what they do.

Its all a sham. The law gives a credibility to the sham, whilsy comtrolling the charlatans runing the sham

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this quote from the bank of England

The money-creating sector

Although the first element in any definition of broad money

is to determine which institutions are considered to be

creators of money, international statistical standards provide

little guidance on the precise definition of this sector. The

International Monetary Fund (2006) defines the

money-creating sector as those financial institutions that

issue liabilities that are included in the national definition of

broad money — in other words, as those institutions whose

liabilities are used as means of exchange in the economy.

The box on page 406 describes the current definitions of the

money-creating sector and of broad money in some major

economies. Given the current definition of M4, the

money-creating sector in the United Kingdom consists of

resident banks (including the Bank of England) and building

societies(2) — which together form the so-called monetary

financial institutions (MFIs) sector.(3)

The distinguishing feature of banks and building societies in

the United Kingdom is that they have been authorised by the

Financial Services Authority to accept deposits. In other

words, the UK money-creating sector is defined on an

institutional or legal basis. Such a definition provides clarity

from the outset with respect to the institutions from which

data need to be collected to construct broad monetary

aggregates. But an institutional definition may also appear

arbitrary and rigid from an economic point of view, as various

other financial intermediaries may undertake activities that are

similar to those of MFIs. In particular, some other

intermediaries may issue liabilities that are in practice close

substitutes for money but, because they do not (and may not

want to) have permission to accept deposits, they fall outside

the current UK definition of the money-creating sector.

In economies that have adopted a functional definition of the

money-creating sector, such as the euro area and the

United States, such financial intermediaries are part of the

money-creating sector. The functional approach focuses on

the specific roles of the liabilities issued by different types of

financial intermediaries, rather than the intermediaries’ legal

status. So in principle, any financial institution issuing

liabilities with similar characteristics to bank deposits (in the

sense of being easily transferable into a medium of exchange)

could be part of the money-creating sector. Those liabilities

would then be included in the national broad money measure.

For example, the European Central Bank’s functional definition

of the money-creating sector covers all financial institutions

whose business is to receive deposits and/or close substitutes

for deposits, and to grant credits and/or to invest in securities.

The main practical difference with the UK definition is that

money market funds (MMFs) are classified as MFIs (and

therefore money creators) in the euro area. MMFs are

financial intermediaries that do not have a licence to receive

deposits, and they issue shares or units that — just like some

deposits — can easily be converted into means of exchange,

although their nominal value can fluctuate. So units or shares

issued by MMFs are part of the euro area’s broad money

http://www.bankofengland.co.uk/publication...in/qb070304.pdf

All of those relate to "deposit takers".

They need to take deposits. The Capital Adequacy rules relate how much a bank can lend out compared to its retained earnings and shareholder's assets. It is designed to prevent the infinite growth of the money, and also to make sure banks can generally avoid runs. They also protect (or more accurately provide a cushion) against bad debts.

Banks can't just create money to make loans.

They make their money on the difference between the rate they pay on deposits and the rate they lend out at. It is very simple.

I'm not sure what else I can say on the subject?

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Lets say its more of a legally binding agreement between banks. They know they are all greedy turds and need a leash to control them.

If a bank breaks the code, they lose the licence, they lose the credibility that keeps them able to do what they do.

Its all a sham. The law gives a credibility to the sham, whilsy comtrolling the charlatans runing the sham

It's to keep everybody else out. The financial system is athe major form of control in peope's lives. Without it, they would soon sort themelves out, so it is vital that it's maintained if they are to remain enslaved.

If anyone can make money, then wealth creation can carry on into the natural limits of the earth and human resourcefulness, and then there is no elite.

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This would be a run on the bank. the bank would need emergency funding. There is only £1000 in the system, but to an onlooker, there is £2000, the guy with cash in his hand, and the guy with a deposit at the bank. £2000 only appears to exist because of the trickery at the bank.

There is no trickery, look at this link

http://www.fool.com/investing/general/2007...ance-sheet.aspx

It explains how a bank's balance sheet works. You'll see that deposits are a liability, and loans are assets. The shareholder's equity makes up the balance. It is the part that relates to capital adequacy.

I used to work for a major UK bank on consulting projects, and was involved in a big project on the issue of how it measured performance based on risk and use of regulatory capital, so I know a little about this topic.

The whole reason for the Northern Rock mess was

1) They had a mismatch between their funding timescales (liabilities side - borrowed mostly short term from the money markets) and their loan book (asset side - mortgages with much longer timescales)

2) They moved most of their loans "off-balance sheet", which meant they netted off a parcel of loans (assets) against securitised funding (liabilities). The reason for this was firstly to get plenty of money to lend out so they could build market share, but also because once netted-off via the securitisation process they no longer sit on the balance sheet, and so don't affect the capital adequacy requirements.

When credit dried up, they had nowhere near enough of their own resources (capital) to persuade anyone that they could pay back the institutions who had lent them the money, and so there was a run. If they hadn't used the securitisation process they would have been much smaller and would not have been vulnerable in that way. They also would have made less profit.

Unfortunately the regulators didn't understand the implications of securitisation - they just saw the good times as making London full of big office buildings containing international banks. They didn't realise that it was stoked by the UK housing market, and it would suck in the whole UK economy.

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Commercial banks cannot create money. The bank only gets to add to their store of money when someone makes a deposit (either a retail depositor or another commercial entity). The bank can then lend the money out to borrowers. When those borrowers spend the money it appears as real money, and gets redeposited, and relent, etc, and thus causes a large multiplier.

Finally, someone using the multiplier effect in this argument.

Watching the economy to see when a negative multiplier effect kicks in as rising living costs reduce spending.

As for my 2 cents on the diagram, A & C persons are irrelevant to the equation as C has no transactions with the Bank and A is merely withdrawing his own savings deposited in the first place. Infact, depending on how long he had stored the funds as a deposit, he might even be owed interest on it, further complicating this model. :huh:

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f_lenderoflasm_3e768ce.png

Banks pay no interest on the money they lend because central banks will act as lender of last resort.

Hopefully this will be the last diagram ;)... Now A deposits the money as before and the Bank loans it to B. The deposits are available on demand so the Bank is only able to lend to B in the knowledge that the Bank of England will step in as Lender of Last Resort if required. When A asks for his/her money back the Bank is able to borrow from the central bank and give cash to A. A is then able to buy the Car from C.

The significant point is that (whilst they may earn a small fee) depositors do not earn interest on their deposits. Interest is compensation for the inability to have access to money for a period of time which is not the case for deposits which are available for withdrawal on demand.

The money supply is increased by Bank lending because it increases the amount the Bank of England would need to lend (as Lender of Last resort) if everyone took their money out. Also if B wasn't able to pay back the Loan, the Bank would be bankrupt and the Bank of England would need to print money to pay the Depositor A.

Thoughts?

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f_lenderoflasm_3e768ce.png

Banks pay no interest on the money they lend because central banks will act as lender of last resort.

Hopefully this will be the last diagram ;)... Now A deposits the money as before and the Bank loans it to B. The deposits are available on demand so the Bank is only able to lend to B in the knowledge that the Bank of England will step in as Lender of Last Resort if required. When A asks for his/her money back the Bank is able to borrow from the central bank and give cash to A. A is then able to buy the Car from C.

The significant point is that (whilst they may earn a small fee) depositors do not earn interest on their deposits. Interest is compensation for the inability to have access to money for a period of time which is not the case for deposits which are available for withdrawal on demand.

The money supply is increased by Bank lending because it increases the amount the Bank of England would need to lend (as Lender of Last resort) if everyone took their money out. Also if B wasn't able to pay back the Loan, the Bank would be bankrupt and the Bank of England would need to print money to pay the Depositor A.

Thoughts?

Id start here if I were you ;)http://www.amazon.co.uk/Economics-Dummies-...iews/0470057955

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All of those relate to "deposit takers".

They need to take deposits. The Capital Adequacy rules relate how much a bank can lend out compared to its retained earnings and shareholder's assets. It is designed to prevent the infinite growth of the money, and also to make sure banks can generally avoid runs. They also protect (or more accurately provide a cushion) against bad debts.

Banks can't just create money to make loans.

They make their money on the difference between the rate they pay on deposits and the rate they lend out at. It is very simple.

I'm not sure what else I can say on the subject?

Yes, I've tried to make this point in threads before.

The problem is that people get fixated on the word "creation" because it sounds like somebody is getting something for nothing.

It all comes down to what is meant by "creation" and it is not as black and white as some people would like it to be.

The money "creation" that banks engage in is purely a recognition of the mismatch between the terms of deposits received and loans made.

If a bank accepts a deposit with a fixed duration of ten years and then makes a loan on the exact same terms then no money is created.

If a bank accepts a deposit with little or no time limitations (called a demand deposit) but then makes a loan fixed at 10 years, then money has been created because there are two people who have the right to demand that cash (the person who has it and the holder of the demand deposit receipt). No money has been created in an absolute sense because assets remain balanced by liabilities, but in terms of monetary measures like M4 there is money creation.

Once the loan is repaid (or when a combination of deposits and loans is made with opposite terms to the previous example) then the "created" money disappears.

Now I can understand why some people might consider this fraud, as the bank has made a commitment which it may not be able to honour. But this is the function of the bank it accepts and manages the risk of a bank run and if things do go badly wrong then the first to suffer will be the shareholders of the bank a la Northern Rock.

The amount of "created" money in existence effectively defines the maximum exposure to a bank run, as by definition, it is the amount of money that can be demanded by depositors but which cannot be immediately recovered from borrowers.

In order to see that banks are not simply creating money for themselves and lending it out, we need only look at the assets and liabilities, they remain balanced. The bank is paying the depositor and charging the borrower, and as you correctly point out, this is how they make their money.

Japhy

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you're wasting your time mate. they have seen a cartoon with little fat men on it that has duped them into believing banks can just create money to give to people.

Too true, and very sad. I thought of a new tack to take recently, not that I think it'll make any difference, but here it is:

Northern Rock is a bank and therefore must be able to 'create' money. According to the money as debt video - which seems to be the bible of some people around these parts - it will be able to create some multiple of the deposits it takes. The reserve requirement is set per bank in the UK but is generally less than 5%. For the sake of argument, let's say it's actually 10%. This would imply, by the logic of the M.A.D. video, that it can create at least 9 GBP of interest free money for every 1 GBP deposited with it. It currently has around 20B in deposits, which means it should be able to create 180B of interest free money to lend to people. Its mortgage book is only around 50B I think. Can one of the believers answer this: if Northern Rock can create over 3 times as much free - as in 0% interest - money as it needs to fund its mortgages, why did it ever have to borrow money at LIBOR+ in the money markets?

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