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


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Thats easy, thats money from their stock. They got Billions in stock. they have to lend it out too, at interest otherwise inflation shags them as much as it does the rest of us.

As you will recall from a previous post, I said there were many ways to lend.

Some Banks like NR didnt have enough stock, so they borrowed it, having used up their ability (Under law) to create money under capital adequacy laws.

ok, so if a bank takes in 100quid in deposits and lends out 1000 quid. it has -900 quid in capital and 1000quid in loans. so it nowhere near meets its capital adequacy requirement, and would collapse.

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ok, so if a bank takes in 100quid in deposits and lends out 1000 quid. it has -900 quid in capital and 1000quid in loans. so it nowhere near meets its capital adequacy requirement, and would collapse.

That's right. That's why it takes in £100 and "lends" £90. And hopes no one wants more than £10 the next day. Or it's a run on the bank.

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That's right. That's why it takes in £100 and "lends" £90. And hopes no one wants more than £10 the next day. Or it's a run on the bank.

yes thats right, i agree 100%. so a bank lends out less than what is has on deposit and doesn't create loans from thin air. that, i agree with.

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yes thats right, i agree 100%. so a bank lends out less than what is has on deposit and doesn't create loans from thin air. that, i agree with.

But Dave has the £90 he borrowed in another bank, whilst Fred still has his £100. Weird, eh?

Don't take our word for it, read proper material. The Bank of England has all the info, but it's designed to be hard to get at.

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ok, so if a bank takes in 100quid in deposits and lends out 1000 quid. it has -900 quid in capital and 1000quid in loans. so it nowhere near meets its capital adequacy requirement, and would collapse.

Yes and its happening before our very eyes. it was called a bank run. Your above bank would not be in trouble until the depositors demanded their money back. I dont know what the CA requirement would be for your bank, as this is determined by the central banks somehow.

If they have no quick cash assets to pay the depositors, they would go to the central bank and get emergency money.

You will note that at the recent multi billion auctions held by the BoE, that the BoE accepted (at model value), CDOs that had a market value of near 0, as collateral for the loans at near the market value of the assets lodged.

They HAD to do this because banks had insufficient liquid assets that they could convert to cash to A pay depositors, and more importantly, B to maintain capital adequacy. the market value of these recently brought to balance sheet items was near 0 as they couldnt be sold on the open market.

The banks had to replenish their balance sheets in order to stay legal under capital adequacy, as a ton of loans they made that had gone bad also came back onto their books. Although the houses mortgaged on the bad loans would appear to be a good thing for the bank, in fact a house in possession by the bank is a LIABILITY on the books, so each one reduced the capital by the defaulted loan outstanding.

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But Dave has the £90 he borrowed in another bank, whilst Fred still has his £100. Weird, eh?

Don't take our word for it, read proper material. The Bank of England has all the info, but it's designed to be hard to get at.

that is correct, that is creating 'broad' money an example of which i posted pages and pages ago. unfortunately, you are agreeing with me.

the other guys are saying that the bank can take in a 100deposit and make a 1000 of loans from it without any more deposits.

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Yes and its happening before our very eyes. it was called a bank run. Your above bank would not be in trouble until the depositors demanded their money back. I dont know what the CA requirement would be for your bank, as this is determined by the central banks somehow.

If they have no quick cash assets to pay the depositors, they would go to the central bank and get emergency money.

You will note that at the recent multi billion auctions held by the BoE, that the BoE accepted (at model value), CDOs that had a market value of near 0, as collateral for the loans at near the market value of the assets lodged.

They HAD to do this because banks had insufficient liquid assets that they could convert to cash to A pay depositors, and more importantly, B to maintain capital adequacy. the market value of these recently brought to balance sheet items was near 0 as they couldnt be sold on the open market.

The banks had to replenish their balance sheets in order to stay legal under capital adequacy, as a ton of loans they made that had gone bad also came back onto their books. Although the houses mortgaged on the bad loans would appear to be a good thing for the bank, in fact a house in possession by the bank is a LIABILITY on the books, so each one reduced the capital by the defaulted loan outstanding.

it would be in trouble, it is 1000 quid short of meeting its 10x capital adequacy requirement. it would need to borrow, wait for it...... A 1000 QUID.... from somewhere to get its -900 balance back to +100 to ensure it had adequate capital to match the 1000 it had made in loans

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unfortunately, you are agreeing with me.

the other guys are saying that the bank can take in a 100deposit and make a 1000 of loans from it without any more deposits.

That's not unfortunate. It means we're both right :)

People's issue comes with the fact that when you then take the additional £90 and lend £81, take the £81 and lend £72 etc etc. Banks have too much scope to create money and the system is too unstable. You effectively get claims of £900 when there's only £100 around. That's riculously unstable and I don't see how anyone can think it's a good idea to base our economy and therefore welbeing on such a system.

Edited by dazednconfused
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that is correct, that is creating 'broad' money an example of which i posted pages and pages ago. unfortunately, you are agreeing with me.

the other guys are saying that the bank can take in a 100deposit and make a 1000 of loans from it without any more deposits.

No you are confusing Assets and liabilites with money.

If I buy 10 widgets from company A i get an invoice for £100. No money has changed hands. I have a liability on the books of £100, while company A have an Asset of £100.

To close the liability I need money to CONVERT my liability to A's Asset into something tradable. Same with the bank. They dont need any money until a demand is made on them.

Many could be and are inslovent in the event of huge damands on their clients deposits.

If this was not the case, the most feared thing a bank could suffer would NOT be a run on clients deposits. However, a run is the most dangerous thing, as evidenced by the chancellors insistence on saving NR in its run, as it would have casued a dominoe effect on other banks.

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No, it really doesn't. Banks can lend to you when the vaults are empty and they have nothing.

Go and ask your bank where the money from your loan (or any loan) came from.

(Oh and there is only one bank, the BOE, the rest are just branches of it.)

again, your money comes from other peoples deposits!

their deposit reserves are the money in their vaults. it doesnt necessarily need to be physical cash.

whether its £100,000 in cash in a vault, or £100,000 deposit on a screen makes no difference. the books must balance. so if there isnt a surplus in their reserves on the screen, they cant lend, any more than they can lend if they didnt have £100,000 in physical cash. its the same thing.

if they lent out £90,000 in pure cash, on the computer screen it would say that they would have £10,000 reserve left. if it they wired £90,000 out of the bank, their deposit reserve would still read as £10,000. same thing.

to make it easier for you to understand, just imagine that everytime you deposit money in a bank, the cash gets burned and your deposit is recorded on a screen. everytime you withdraw money from a bank, new physical cash is printed off, and your balance is adjusted accordingly.

ultimately everything is accounted for and recorded. it doesnt need to be physical cash as money in a bank can be converetd into legal tender at any time. the bank acts as an accountant and balances everything out.

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that is correct, that is creating 'broad' money an example of which i posted pages and pages ago. unfortunately, you are agreeing with me.

the other guys are saying that the bank can take in a 100deposit and make a 1000 of loans from it without any more deposits.

Still no definition. :lol:

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again, your money comes from other peoples deposits!

their deposit reserves are the money in their vaults. it doesnt necessarily need to be physical cash.

whether its £100,000 in cash in a vault, or £100,000 deposit on a screen makes no difference. the books must balance. so if there isnt a surplus in their reserves on the screen, they cant lend, any more than they can lend if they didnt have £100,000 in physical cash. its the same thing.

if they lent out £90,000 in pure cash, on the computer screen it would say that they would have £10,000 reserve left. if it they wired £90,000 out of the bank, their deposit reserve would still read as £10,000. same thing.

to make it easier for you to understand, just imagine that everytime you deposit money in a bank, the cash gets burned and your deposit is recorded on a screen. everytime you withdraw money from a bank, new physical cash is printed off, and your balance is adjusted accordingly.

ultimately everything is accounted for and recorded. it doesnt need to be physical cash as money in a bank can be converetd into legal tender at any time. the bank acts as an accountant and balances everything out.

:lol:

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That's not unfortunate. It means we're both right :)

People's issue comes with the fact that when you then take the additional £90 and lend £81, take the £81 and lend £72 etc etc. Banks have too much scope to create money and the system is too unstable. You effectively get claims of £900 when there's only £100 around. That's riculously unstable and I don't see how anyone can think it's a good idea to base our economy and therefore welbeing on such a system.

i am not arguing whether it is a good or bad thing, just trying to tell it like it is.

in fact, if you think about it, if there were no reserve or capital adequacy requirements, the banks could just relend the full 1000 and this could go on indefinitely. so those requirements actually restrict the system somewhat.

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But Dave has the £90 he borrowed in another bank, whilst Fred still has his £100. Weird, eh?

Don't take our word for it, read proper material. The Bank of England has all the info, but it's designed to be hard to get at.

this is where the confusion comes from. freds money is just an accounting principle. if he wants to withdraw it, the bank must obtain the money from someone elses deposits, not his original deposit, which has been lent out.

so the bank will always have a pot of 10% reserves consisting of everyone elses money which is where fred gets his money from.

e.g say a bank has £100,000 reserves.

fred deposits £10,000

banks reserves are now £110,000

banks lends £9000 to dave (from freds deposit)

banks reserves are now £110,000-£9000 = £101,000

if fred wants to withdraw all of his £10,000.

banks reserves would now be £101,000 -£10,000 = £91,000

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again, your money comes from other peoples deposits!

their deposit reserves are the money in their vaults. it doesnt necessarily need to be physical cash.

whether its £100,000 in cash in a vault, or £100,000 deposit on a screen makes no difference. the books must balance. so if there isnt a surplus in their reserves on the screen, they cant lend, any more than they can lend if they didnt have £100,000 in physical cash. its the same thing.

if they lent out £90,000 in pure cash, on the computer screen it would say that they would have £10,000 reserve left. if it they wired £90,000 out of the bank, their deposit reserve would still read as £10,000. same thing.

to make it easier for you to understand, just imagine that everytime you deposit money in a bank, the cash gets burned and your deposit is recorded on a screen. everytime you withdraw money from a bank, new physical cash is printed off, and your balance is adjusted accordingly.

ultimately everything is accounted for and recorded. it doesnt need to be physical cash as money in a bank can be converetd into legal tender at any time. the bank acts as an accountant and balances everything out.

so how is money supply advanced in this case?

I can see assets and liabilites going up and balancing, but I cant see any new money.

I can see the circumstances for a bank run, but it could be contained by pledging balance sheet assets to a central bank. Then I can see new money, created on the asset pledged by the bank, so that all liabilities to depositors are met.

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this is where the confusion comes from. freds money is just an accounting principle. if he wants to withdraw it, the bank must obtain the money from someone elses deposits, not his original deposit, which has been lent out.

so the bank will always have a pot of 10% reserves consisting of everyone elses money which is where fred gets his money from.

e.g say a bank has £100,000 reserves.

fred deposits £10,000

banks reserves are now £110,000

banks lends £9000 to dave (from freds deposit)

banks reserves are now £110,000-£9000 = £101,000

if fred wants to withdraw all of his £10,000.

banks reserves would now be £101,000 -£10,000 = £91,000

banks cant keep that type of ratio in reserve: they would soon be busted by inflation, hence they have to keep lending and earning interest. Its a vicious cycle that is tightly controlled and monitored by the central banks ( supposedly).

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so how is money supply advanced in this case?

I can see assets and liabilites going up and balancing, but I cant see any new money.

I can see the circumstances for a bank run, but it could be contained by pledging balance sheet assets to a central bank. Then I can see new money, created on the asset pledged by the bank, so that all liabilities to depositors are met.

because they start with my 100K deposited in a bank

Mr A borrows 90K and buys a ferrari from Mr B

Mr B deposits 90K in his bank

Mr C borrows 81K and buys a painting from Mr D

Mr D deposits it in his bank

so we started with just my 100K using that same 100K we now have people with bank deposits of 271K and have bought 171K worth of goods with the same 100K.

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banks cant keep that type of ratio in reserve: they would soon be busted by inflation, hence they have to keep lending and earning interest. Its a vicious cycle that is tightly controlled and monitored by the central banks ( supposedly).

its an example. if their reserves fell below say 10% then they require new deposits, or borrow money from someone else to boost it up, otherwise they cant continue to lend.

new money is created by the bank of england!

Edited by mfp123
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i am not arguing whether it is a good or bad thing, just trying to tell it like it is.

in fact, if you think about it, if there were no reserve or capital adequacy requirements, the banks could just relend the full 1000 and this could go on indefinitely. so those requirements actually restrict the system somewhat.

Not really. We'd just be a cash economy because nobody would ever put money in a bank.

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i am not arguing whether it is a good or bad thing, just trying to tell it like it is.

in fact, if you think about it, if there were no reserve or capital adequacy requirements, the banks could just relend the full 1000 and this could go on indefinitely. so those requirements actually restrict the system somewhat.

I think the issue people get stuck on is the phrase "out of thin air"

I dont beleive this is strictly true, but if you consider a car, they can be said to have appeared out of thin air. They dont appear in nature.

No, we all know a car is made out of bits we find in nature. Its the same with money. In this case the bits are items of value which we turn into money.

Imagine there was no money. how would you make the first lot and have it represent a value? Youd do exactly what a bank can and is licenced to do, convert a thing of value into that money. They do it with a loan as they dont want the thing of value.

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its an example. if their reserves fell below say 10% then they they require new deposits, or borrow money from someone else to boost it up, otherwise they cant continue to lend.

new money is created by the bank of england!

Yes, money is created by the BoE. They are a bank, a special bank that deal with the Crown. Even they create money based on pledges though- bonds from government, CDOS from Banks, anything of value that isnt money, they convert it, at a price

Private banks do the same, but not with the Crown.

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