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


the_austrian

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HOLA441
Guest tbatst2000
I am given £100 pounds cash for my services to the government as a fireploddog. I give that to any private bank, in exchange for this promise of 5% extra a year. The bank then holds onto this cash, and 32 people come in and ask to borrow £100 pounds. The bank says "sure, why not" and credits each of their accounts with £100 it_does_not_have at interest.

Sigh, what a load of crap.

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To anyone who doesn't know what he's getting at, I wrote about this extensively in the economics subforum some time ago. Maybe I should repost it on the main one?

I know exactly what he is getting at. In your article you fail to mention where the £100 comes from originally.

Its no conspiracy, its the way it works, somewhere a bank has created the money to start of the chain of assets and liabilities.

The extra "money" that appears from this original deposit is simply a function of the amount of risk a bank judges of who is going to call in their money. If they think half the joes will call it in, they wont lend so much, the "money" goes down.

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All very interesting really.

I know from personal experience that the banks create money - I had a fairly large debt and my entire history with a bank simply vanish when I asked a few questions to validate my alleged debt with them.

It's a con. I think the problem is for some that the con is so enormous, it can't be coped with. Like a man who buys a very obvious ginger wig, everyone then assumes it's his own hair because no one would buy a wig that bad, surely?

So it is with this.

All banking is a con, fraud. The fact that it's so huge doesn't change anything but people's ability to accept this I guess.

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To all those that think that banks create money out of thin air, go buy some bank shares.

Welcome, and which chest of money do YOU think it comes from?

Why are there laws to stop banks just printing money?

If they couldnt do it, there wouldnt be any need for laws, now would there ( this is not all aimed at you earl)

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Welcome, and which chest of money do YOU think it comes from?

Why are there laws to stop banks just printing money?

If they couldnt do it, there wouldnt be any need for laws, now would there ( this is not all aimed at you earl)

no probs.

there are many wiser than me who have put forward their ideas.

i merely suggest that if you believe they can invent free money, they'd probably be worth a punt on the stock market.

however looking at the share prices it seems more likely that they do not have printing presses in the basement.

the law is there precisely to prevent money printing.

do you think this goes on behind people's backs?

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HOLA4410
no probs.

there are many wiser than me who have put forward their ideas.

i merely suggest that if you believe they can invent free money, they'd probably be worth a punt on the stock market.

however looking at the share prices it seems more likely that they do not have printing presses in the basement.

the law is there precisely to prevent money printing.

do you think this goes on behind people's backs?

so you accept that they can do it?

By the way, there is no printing press, banks cant print money, that IS a myth.

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Guest tbatst2000
To all those that think that banks create money out of thin air, go buy some bank shares.

:) Yes, and I have a great idea for a new trading strategy for my employer (a bank):

We'll create a new regulated banking entity called, say, Money Machine Ltd. That'll cost around 100K for legal work, initial ante to the BoE etc. We'll then go and borrow 3M at LIBOR by issuing some commercial paper (we do lots of this already so 1M more won't be hard to get) which we'll deposit with Money Machine Ltd who'll pay us, say, 3% interest. We'll then create 100 new legal entities - standard UK limited companies at 100 GBP a shot give or take will do fine - each of which will borrow 1M off Money Machine at 4%. They'll then use that money to buy 1 year gilts - which yield around 4.4% right now - which will allow them to pay the interest they owe to MM. So, the net result for MM will be:

startup costs - ~110K

interest receivable - 4% x 100M (i.e. all the interest due from the 100 companies) - 4M per year.

interest payable by MM - 3% x 1M (i.e. all the interest due to my bank) - 30K per year.

interest payable by us - ~5.3% (1 year libor) - ~53K per year.

The remaining ~3.9M will be paid out as a dividend to the shareholders (i.e. my employer). That's not a bad zero risk return. And, of course, it could scale up a long way from there - I doubt we'd had much trouble borrowing 5-10B from the money markets if we wanted to although we might just exhaust the UK government's appetite for bond issuance at some point before that. But then there's plenty more sovereign debt out there, so no worries!

What do you suppose our new products committee would say if I proposed that to them?

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HOLA4414
open your wallet and you will see money that has been printed.

i think you know where and how. (and it isnt at your local branch).

That's legal tender, fiat money.

Banks can also make their own money, which they make sure carefully resembles legal tender.

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

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:) Yes, and I have a great idea for a new trading strategy for my employer (a bank):

We'll create a new regulated banking entity called, say, Money Machine Ltd. That'll cost around 100K for legal work, initial ante to the BoE etc. We'll then go and borrow 3M at LIBOR by issuing some commercial paper (we do lots of this already so 1M more won't be hard to get) which we'll deposit with Money Machine Ltd who'll pay us, say, 3% interest. We'll then create 100 new legal entities - standard UK limited companies at 100 GBP a shot give or take will do fine - each of which will borrow 1M off Money Machine at 4%. They'll then use that money to buy 1 year gilts - which yield around 4.4% right now - which will allow them to pay the interest they owe to MM. So, the net result for MM will be:

startup costs - ~110K

interest receivable - 4% x 100M (i.e. all the interest due from the 100 companies) - 4M per year.

interest payable by MM - 3% x 1M (i.e. all the interest due to my bank) - 30K per year.

interest payable by us - ~5.3% (1 year libor) - ~53K per year.

The remaining ~3.9M will be paid out as a dividend to the shareholders (i.e. my employer). That's not a bad zero risk return. And, of course, it could scale up a long way from there - I doubt we'd had much trouble borrowing 5-10B from the money markets if we wanted to although we might just exhaust the UK government's appetite for bond issuance at some point before that. But then there's plenty more sovereign debt out there, so no worries!

What do you suppose our new products committee would say if I proposed that to them?

Its a prudent miracle

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for the "banks don't create money " people, a few questions.

they have already been asked, but the answers keep getting skipped, and they are kind of important.

1. Where does the 100 pounds that ges used in our exacmples come from originally?

I don't mean "another bank" or "from the BoE" etc, I mean how was that 100 created in the first place?

2. why are there laws to limit the amount of money that banks can create?

Mcdonald's doesnt have special laws about it's money creation. or Harrod's etc.

So if banks can't create money, why make laws to limit their non-ability?

the idea that the banks borrow 100k say, then lend it out to someone else at higher interest is lovely in a gold standard world,, but it isn't the anwer for modern banking.

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yes they are very important questions, where a man could have got 100 quid from anywhere

and why a beefburger retailer doesn't have special laws about their money creation.

very important questions indeed.

Iasked how the 100 was originally created, not who was holding it before the recipient in the examples.

if you don't know, thats OK, we won't judge. :)

as for the second, you say that the banks use basic arbitrage, borrow low rent high, but lots of people do that, they don't have money creation laws tailored to them however.

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HOLA4422
yes they are very important questions, where a man could have got 100 quid from anywhere

and why a beefburger retailer doesn't have special laws about their money creation.

very important questions indeed.

Got that definition of money yet?

I can identify a beefburger pretty easily, but the mad synonym money eludes me in your posts. First it's cash, then it's records of cash having been there, then it's accountancy - in fact it seems to be anything you like as long as you don't have to define it or prove anything.

But it's not created, oh no, and the 12% inflation we currently have is made by elves. Or something.

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HOLA4423
Iasked how the 100 was originally created, not who was holding it before the recipient in the examples.

if you don't know, thats OK, we won't judge. :)

as for the second, you say that the banks use basic arbitrage, borrow low rent high, but lots of people do that, they don't have money creation laws tailored to them however.

what do you mean? the money was printed and he got have got it as wages or sold something or a gift.

well i've never been to mcdonalds for a loan and wasn't aware you get one. can you get one at those drive thru ones? just ask for it on the way in and pick the cash up at the window with a milk shake and a big mac?

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HOLA4424
Got that definition of money yet?

I can identify a beefburger pretty easily, but the mad synonym money eludes me in your posts. First it's cash, then it's records of cash having been there, then it's accountancy - in fact it seems to be anything you like as long as you don't have to define it or prove anything.

But it's not created, oh no, and the 12% inflation we currently have is made by elves. Or something.

if you want a definition of money, go look it up in an encyclopaedia or somewhere, i'm not a dog.

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