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


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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?

It can create infinite money, but no one has to accept it.

I can create infinite money but no one has to accept it.

People only hav to accept legal tender, bank money is carefully designed to resemble legal tender - the use of the £ sign, general 1 to 1 swapping of bank money for legal tender etc.

When people stop accepting bank money instead of legal tender, the bank has to find some from somewhere to keep going. This is what happened to Northern Rock. People stopped taking it's faux fiat and wanted real fiat, if there is such a thing.

Look at it this way -

I owe you £1,000. I offer you a piece of paper with £1,000 written on it instead of £1,000 in legal tender.

You accept it.

Viola and bassoon we have just created money.

Ok, carry this on for a few decades.

I owe you £1,000. I offer you a piece of paper with £1,000 written on it instead of legal tender.

You refuse it.

I am bankrupt if If I don't find legal tender from somewhere. This is the banks current problem in a nutshell.

Edited by Injin
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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.

I fear you are right. I find the psychology interesting. HPC posters tend to be on here because they are sceptical. They mostly seem to treat VI spin with the disdain it deserves. But many seem to have latched onto equally crazy ideas (like aforementioned little fat man cartoon). I can only think it is because those ideas suit their world view and they then turn off their otherwise sceptical attitude.

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I fear you are right. I find the psychology interesting. HPC posters tend to be on here because they are sceptical. They mostly seem to treat VI spin with the disdain it deserves. But many seem to have latched onto equally crazy ideas (like aforementioned little fat man cartoon). I can only think it is because those ideas suit their world view and they then turn off their otherwise sceptical attitude.

Funny this, because my explanations are based on my own personal experiences with banks.

Have £1,000,000 while you think about it some more.

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Funny this, because my explanations are based on my own personal experiences with banks.

Have £1,000,000 while you think about it some more.

Injin,

Not arguing that paper money isn't a pretty arbitrary concept. Nor that if you, personally, take a piece of paper and write 1000 Injin Dollars that isn't perfectly useful if someone else will accept it.

Arguing that banks need deposits to make loans, and can't magic money from nowhere.

Will that £1,000,000 Injin sterling work down at Tesco's? If so, yes please, otherwise, I'm fine without the £1m Injin sterling.

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Injin,

Not arguing that paper money isn't a pretty arbitrary concept. Nor that if you, personally, take a piece of paper and write 1000 Injin Dollars that isn't perfectly useful if someone else will accept it.

Arguing that banks need deposits to make loans, and can't magic money from nowhere.

Will that £1,000,000 Injin sterling work down at Tesco's? If so, yes please, otherwise, I'm fine without the £1m Injin sterling.

It's ridiculous to suggest that banks don't magic money from nowhere, when that is their primary function. It might not be legal tender, but to all intents and purposes, bank credit is as good as money. That why NR was saved... the world would collapse if the majority of people stopped trusting banks.

What I do find annoying is people claiming that the credit they create is interest free. It isn't, they pay interest on it, just less than what you are paying in interest payments.

Edited by dazednconfused
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People who think Private banks do not create money need to answer: Who does?

The Bonk of England sayPrivate Banks do.

Banks say they do.

As for NR just creating money to bail themselves out because they have depositors money, posters have the wrong idea.

Its the Banks CAPITAL that define how much Property they can monetise.

They CANNOT create money without making a loan. It cant just be created without a pledge.

If a Government decide to print money then we have ZImabwe, as there is no wealth to back it up.

Creating money is just a process of converting a persons immovable asset into movable notes.

Again the BoE says the privaye banks make money. They should know.

Edited by Bloo Loo
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I fear you are right. I find the psychology interesting. HPC posters tend to be on here because they are sceptical. They mostly seem to treat VI spin with the disdain it deserves. But many seem to have latched onto equally crazy ideas (like aforementioned little fat man cartoon). I can only think it is because those ideas suit their world view and they then turn off their otherwise sceptical attitude.

the psychology is interesting. they seem to come up with all sorts of weird and wonderful solutions to try and convince themselves it is true, eg: banks monetising houses or commercial banks depositing accounts in the royal mint.

#73 explains what 'creating' money is talking about.

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Injin,

Not arguing that paper money isn't a pretty arbitrary concept. Nor that if you, personally, take a piece of paper and write 1000 Injin Dollars that isn't perfectly useful if someone else will accept it.

Arguing that banks need deposits to make loans, and can't magic money from nowhere.

Will that £1,000,000 Injin sterling work down at Tesco's? If so, yes please, otherwise, I'm fine without the £1m Injin sterling.

It works because Joe Public conflates the £ sign + numbers with legal tender. If the general public were to lose this misconception, then the banking system would cease to function. It's exactly the same as previously, where people conflated gold certificates for gold. It works right up until the moment people want the gold. This system is the same, it works right up until the moment that peopel want the legal tender. The difference between providing gold and legal tender is simply that you can't provide gold, you can provide legal tender in unlimited amounts.

Banks offer pieces of paper with numbers on them or offer to show screen with numbers on them in lieu of providing legal tender. Generally people accept this because most people (sorry to say) don't think about things much. However, as most transactions involve NO legal tender then any claim that it has done so id fraud. That is, all banking is fraud.

The fractional reserve rate is just a measurement of how much non legal tender money people will fall for in relation to people wanting actual legal tender. It's got very little to do with anything else but the level of suckerdom within Joe Public.

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It can create infinite money, but no one has to accept it.

I can create infinite money but no one has to accept it.

People only hav to accept legal tender, bank money is carefully designed to resemble legal tender - the use of the £ sign, general 1 to 1 swapping of bank money for legal tender etc.

When people stop accepting bank money instead of legal tender, the bank has to find some from somewhere to keep going. This is what happened to Northern Rock. People stopped taking it's faux fiat and wanted real fiat, if there is such a thing.

Look at it this way -

I owe you £1,000. I offer you a piece of paper with £1,000 written on it instead of £1,000 in legal tender.

You accept it.

Viola and bassoon we have just created money.

Ok, carry this on for a few decades.

I owe you £1,000. I offer you a piece of paper with £1,000 written on it instead of legal tender.

You refuse it.

I am bankrupt if If I don't find legal tender from somewhere. This is the banks current problem in a nutshell.

bank money can be converted into legal tender.

if they need billions of £ in legal tender they will request billions of £ from the mint and the amount in their accounts is deducted accordingly so that it balances.

like it or not, rather than this runaway printing press you think there is, everything must balance and everything is accounted for.

you cannot beat the mechanics of mathematics no matter how hard you try.

Edited by mfp123
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bank money can be converted into legal tender.

if they need billions of £ in legal tender they will request billions of £ from the mint and the amount in their accounts is deducted accordingly so that it balances.

That's right, that's what is happening now and that is why we are going to see hyperinflation.

Imaginary money is going to become tenners. By the boatload.

like it or not, rather than this runaway printing press you think there is, everything must balance and everything is accounted for.

you cannot beat the mechanics of mathematics no matter how hard you try.

Balancing numbers is easy. You just add or subtract whatever you need. The banks liek to keep track of what frauds they are doing because it keeps the fraud alive for a longer time period.

Math, btw is a flawed model of reality. Just fwiw.

p.s. Can be isn't the same as actually doing it. An option to future action isn't performance, and any claim such is fraudulent.

Edited by Injin
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bank money can be converted into legal tender.

if they need billions of £ in legal tender they will request billions of £ from the mint and the amount in their accounts is deducted accordingly so that it balances.

like it or not, rather than this runaway printing press you think there is, everything must balance and everything is accounted for.

you cannot beat the mechanics of mathematics no matter how hard you try.

Agreed, it all must balance.

Thats why in the case of a mortgage, the Liability is the house, the asset is the mortgage. One is money, the other is not. The IOU value is based on the house value. The IOUs are created. They are not out of thin air but represent the wealth in the House in an easy to use and legally binding format.

If the mortgage is carried out in this way, the lent money is new money. Simple. These transactions are recorded and sent to the Bank of england, who ensure that the capital available at the bank is at the agreed capital adeqaucy.

Other mortgages are dealt in the money markets. they borrow money and lend it out. No money is created.

There are more £s in the world today than there were yesterday, in fact there will be about 14% more £s in the World in Feb 2009.

Somebody is making these.

Its not Injin

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Agreed, it all must balance.

Thats why in the case of a mortgage, the Liability is the house, the asset is the mortgage. One is money, the other is not. The IOU value is based on the house value. The IOUs are created. They are not out of thin air but represent the wealth in the House in an easy to use and legally binding format.

If the mortgage is carried out in this way, the lent money is new money. Simple. These transactions are recorded and sent to the Bank of england, who ensure that the capital available at the bank is at the agreed capital adeqaucy.

Other mortgages are dealt in the money markets. they borrow money and lend it out. No money is created.

There are more £s in the world today than there were yesterday, in fact there will be about 14% more £s in the World in Feb 2009.

Somebody is making these.

Its not Injin

There's two points to consider - firstly, is money actually created by debt and secondly, if so, how much and by who.

The answer to the first doesn't much matter in reality - whether you believe money has been literally created or whether you just view it as the velocity of money being increased by the existence of lenders, the effect is the same. That is, people believe they have more (forgetting that the bank might not actually be able to pay them back) and there's more of it sloshing around the economy.

The answer to the second does matter and, if I read your post above correctly, your opinion is rather different from Injin's. When a bank raises capital from somewhere (e.g. depositors, bondholders, shareholders etc) it can lend out no more than it takes in and, in practise, somewhat less - partly because it has to meet the reserve requirements for liquidity but mostly to meet capital adequacy requirements. Injin appears to be of the belief that it can actually lend out more than its taken in thus 'creating' money on which it does not have to pay interest. That's insanely incorrect and I don't imagine any amount of reason is going to persuade him out of that belief.

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There's two points to consider - firstly, is money actually created by debt and secondly, if so, how much and by who.

The answer to the first doesn't much matter in reality - whether you believe money has been literally created or whether you just view it as the velocity of money being increased by the existence of lenders, the effect is the same. That is, people believe they have more (forgetting that the bank might not actually be able to pay them back) and there's more of it sloshing around the economy.

The answer to the second does matter and, if I read your post above correctly, your opinion is rather different from Injin's. When a bank raises capital from somewhere (e.g. depositors, bondholders, shareholders etc) it can lend out no more than it takes in and, in practise, somewhat less - partly because it has to meet the reserve requirements for liquidity but mostly to meet capital adequacy requirements. Injin appears to be of the belief that it can actually lend out more than its taken in thus 'creating' money on which it does not have to pay interest. That's insanely incorrect and I don't imagine any amount of reason is going to persuade him out of that belief.

In theory, they could lend whatever they like, indeed this has happened in the past, hence the global banking agreements Basel 2 being the latest I beleive, limiting the banks lending capabilites with laws.

In the case of Northern Rock, while they were not a fully qualified bank, they had to create their mortgages much more than say, Barclays, on the money markets. None of these loans created any money at all.

If Banks could create money without regard to their capital, then there would be no lending crisis, there would be no need to take account of risk in lending, there would have been no need of SIV, CDOS CLOs etc etc, all devices to increase the amount of lending they could make by moving liabilities FROM their balance sheets.

It is the banks desire to explosively create more loans (money) and charge interest on them that they created the above devices to circumvent the laws.

This, as we have all seen is coming home to roost, as depleted balance sheets restricts, A any new loans they can make, and B puts an immediate requirement for them to replace the lost capital in order to meet capital adequacy for EXISTING LOANS.

IE fractional reserve bites back.

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In theory, they could lend whatever they like, indeed this has happened in the past, hence the global banking agreements Basel 2 being the latest I beleive, limiting the banks lending capabilites with laws.

In the case of Northern Rock, while they were not a fully qualified bank, they had to create their mortgages much more than say, Barclays, on the money markets. None of these loans created any money at all.

If Banks could create money without regard to their capital, then there would be no lending crisis, there would be no need to take account of risk in lending, there would have been no need of SIV, CDOS CLOs etc etc, all devices to increase the amount of lending they could make by moving liabilities FROM their balance sheets.

It is the banks desire to explosively create more loans (money) and charge interest on them that they created the above devices to circumvent the laws.

This, as we have all seen is coming home to roost, as depleted balance sheets restricts, A any new loans they can make, and B puts an immediate requirement for them to replace the lost capital in order to meet capital adequacy for EXISTING LOANS.

IE fractional reserve bites back.

Are you saying that Barclays don't need to match lending against deposits?

If so, why do they advertise all these savings products?

http://www.barclays.co.uk/savings/

Do they just take the money because they enjoy it, do they use bank notes to decorate the walls in their branches? Why do you think they need the deposits?

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Are you saying that Barclays don't need to match lending against deposits?

If so, why do they advertise all these savings products?

http://www.barclays.co.uk/savings/

Do they just take the money because they enjoy it, do they use bank notes to decorate the walls in their branches? Why do you think they need the deposits?

No they leverage lending on capital adequacy. Deposits with a bank form a part of their LIABILITIES, not assets.

Of course they do Invest ( loans, credit cards etc) your deposits and keep the margin, but this is just trading money. The Margin goes to increase their own capital.

What I am saying, is that a house is as much liability to a bank as your cash on deposit.

If they loan against the house, all they are doing is turning that item into a money equivalent. The books balance as they have the House as a liability and the loan is the asset. They profit from the interest they receive on the deal. They are limited as to howmuch they can do this with LAW, otherwise they could create as much as they liked.

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In theory, they could lend whatever they like, indeed this has happened in the past, hence the global banking agreements Basel 2 being the latest I beleive, limiting the banks lending capabilites with laws.

In the case of Northern Rock, while they were not a fully qualified bank, they had to create their mortgages much more than say, Barclays, on the money markets. None of these loans created any money at all.

If Banks could create money without regard to their capital, then there would be no lending crisis, there would be no need to take account of risk in lending, there would have been no need of SIV, CDOS CLOs etc etc, all devices to increase the amount of lending they could make by moving liabilities FROM their balance sheets.

It is the banks desire to explosively create more loans (money) and charge interest on them that they created the above devices to circumvent the laws.

This, as we have all seen is coming home to roost, as depleted balance sheets restricts, A any new loans they can make, and B puts an immediate requirement for them to replace the lost capital in order to meet capital adequacy for EXISTING LOANS.

IE fractional reserve bites back.

All those NR mortgages did create broad money. The money all went into the accounts of the people selling the houses and was spent again and redeposited again. it is exactly what is meant by 'money creation'.

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"But ignoring the flood of money - first created as credit and now stacked up in Treasury bonds across the emerging economies - would mean ignoring the connection between growth in the money supply and inflation in prices",

QUote from http://www.dailyreckoning.com/Writers/Moga...s/MG022508.html

Thanks to ONLYME for drawing attention

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All those NR mortgages did create broad money. The money all went into the accounts of the people selling the houses and was spent again and redeposited again. it is exactly what is meant by 'money creation'.

No, they borrowed x on the money markets, they took on a house as a pledge and gave x to the borrower.

No money created.

They were hoping to earn something in the deal by charging the borrower more than they paid :lol:

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No, they borrowed x on the money markets, they took on a house as a pledge and gave x to the borrower.

No money created.

They were hoping to earn something in the deal by charging the borrower more than they paid :lol:

The house is just security for a loan. If the borrower doesn't pay it back the house can be sold to recoup the money. It is why it is called a 'secured loan'

NR borrowed a 100K on the money market or from depositors or wherever (doesn't matter where) and lent it to MR A

MR A bought MR B's house

MR B put it in Lloyds

Lloyds lend 90% of it to MR C to buy a ferrari from MR D

MR D puts it in the bank.

That is what money creation is. MR D. has deposits MR B has deposits NR owes its depositors/money markets money.

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The house is just security for a loan. If the borrower doesn't pay it back the house can be sold to recoup the money. It is why it is called a 'secured loan'

NR borrowed a 100K on the money market or from depositors or wherever (doesn't matter where) and lent it to MR A

MR A bought MR B's house

MR B put it in Lloyds

Lloyds lend 90% of it to MR C to buy a ferrari from MR D

MR D puts it in the bank.

That is what money creation is. MR D. has deposits MR B has deposits NR owes its depositors/money markets money.

No money is created here. 100K comes from the money market, at the end of your scenario, Lloyds has 10K and Mr D has 90K

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MR B has a 100,000 deposit with lloyds

money market has a 100K deposit with NR

Mr A is also in debt in this scenario and that is where the Money market money is coming from, over time.

The lloyds part is interesting.

they receive a deposit off 100K.

they keep 10K and create a new loan to Mr C- Mr C also now owes Lloyds 90K

Mr D gets 90K from C and deposits with Lloyds

Lloyds now have liabilities if 190K and are owed 90K leaving them with 100K liability. This means their books are out of balance and they need to call on the central bank for a loan.

They either have capital reserve or a pledge from Mr C. . If neither, then they are open to a bank run if B and D demand their deposits. CALL THE CHANCELLOR!

This is why lending is based on CAPITAL and DEPOSITS as it leaves depositors at extreme risk.

Edited by Bloo Loo
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you dont even need to borrow from the money markets to issue mortgages. indeed you dont even need to be a bank to issue credit which has the same effect.

simply securitse your existing mortgage book off your balance sheet (to an SPV with no capital!!!) and start the mortgage issuance process again from scratch.

The central banks monetary tool of using reserve ratios to control the money supply has been completely shot since SIVs are non-regualted.

The excess debt will always go somewhere - this time its property - ill be looking out for where it flows next.

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Mr A is also in debt in this scenario and that is where the Money market money is coming from, over time.

The lloyds part is interesting.

they receive a deposit off 100K.

they keep 10K and create a new loan to Mr C- Mr C also now owes Lloyds 90K

Mr D gets 90K from C and deposits with Lloyds

Lloyds now have liabilities if 190K and are owed 90K leaving them with 100K liability.

They either have capital reserve or a pledge from Mr C. . If neither, then they are open to a bank run if B and D demand their deposits. CALL THE CHANCELLOR!

This is why lending is based on CAPITAL and DEPOSITS as it leaves depositors at extreme risk.

they have liabilities of 190K. they have 100K in cash and are owed 90K by MR C.

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you dont even need to borrow from the money markets to issue mortgages. indeed you dont even need to be a bank to issue credit which has the same effect.

simply securitse your existing mortgage book off your balance sheet (to an SPV with no capital!!!) and start the mortgage issuance process again from scratch.

The central banks monetary tool of using reserve ratios to control the money supply has been completely shot since SIVs are non-regualted.

The excess debt will always go somewhere - this time its property - ill be looking out for where it flows next.

spot on, the scan revealed. You should write to the BoE and explain it to them

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