Money is debt, debt is money
Discussion
Something that I've long wondered is where does 'interest' on debt come from? And how are price rises accounted for by the money supply? Assuming there's a finite amount of money in circulation where then can the 'extra' money for interest actually come from? And as prices rise (reducing the buying power of the money kicking about - inflation), how can the price rises be afforded?
The "fractional reserve banking system" appears to be the answer. Read/Google Modern Money Mechanics, published by the Fed in 1961.
The money supply works by the Government calling up, say, $50bn from the central bank. The central bank "buys" $50bn of Government bonds with central bank notes. The Government then puts these notes in a bank account and - voila! - $50bn is added to the money supply and the government (er, the taxpayers) owe the central bank $50bn for.... what? $50bn created out of exactly, er, nothing. Money is actually created from worse than nothing, it's created from DEBT. Banking rules in the US state that banks must keep on deposit 10% of the amount they can then lend. So they keep $5bn on deposit and loan $45bn? No.... They keep the $50bn and loan $45bn because the loan contracts mean the $45bn can be added to bank reserves as it's an amount due to return. So now $95bn of thin air, debt-based money has been "created". It gets worse because people borrow the $45bn, promising to repay it, and deposit it in another bank - adding to that bank's reserves. Which enables the process to repeat. 90% of the $45bn is now available for lending from the second bank ....and so it goes on (and has until the Credit Crunch). It can go on infinitely but, on average, nine times the Government Bond issue is "created" - so $50bn rolls up to $450bn.
How's that paid for by the population? It can't be but, more profoundly, why SHOULD it be?
The effect of issuing new money is to devalue a currency. Inflation from increased money supply since the Fed was established in 1913 has devalued the US dollar by 96%. It means taxpayers perpetually work harder for less. "Slaves"?
Every bank note is owed by somebody to somebody. If all debt was paid off, there would be no money in circulation. But there is only enough money in the system for the actual amounts (the "principal") of the loans. There is no money in the system for 'interest'. So the money owed is always greater than the money loaned which means there is a perpetual demand to issue more money (which is inflationary). It is IMPOSSIBLE for all debts to be paid off so bankruptcies are guaranteed to happen - which is a transfer of individual worth to the banks when they foreclose on a mortgage and seize the property. "Homeless slaves"?
So the government's "thin air" money is a tool for the banks (private sector) to acquire assets from the population that elected the government... Lab/Con, Dem/Rep... it's all the same.
Our government and others have just injected a load more money into the money supply (up to £700bn, capable of rolling up to £6300bn) and dropped interest rates to encourage more borrowing to restore the expansion of the money supply. The government has taken on a £700bn debt but in addition to the £5,000/head share of this debt every UK taxpayer now bears, we are being encouraged to gorge on MULTIPLES of that with the offer of low interest rates.
The expansion of money supply, fueled by loans to people who could never pay it back (sub-prime), has rendered thousands homeless and transferred ownership of their homes to the banks. The next wave is to encourage more people to take on more debt to get the money supply/expansion going again. All that can happen is that a higher income stratum of society turns sub-prime when it too ends up with more debt rammed up its fundament than it could ever hope to repay. The ability of banks to lend multiples of what they've got and apply interest for which there is no currency in existence to pay has to implode some day. The way the current system (Modern Money Mechanics) works, the only ultimate winners are banks - but then it was a bank idea.... In the last few weeks the possibility that the banks could be the losers has been arrested by government at the population's expense with the supporting argument that "it would cost the population more if the banks collapsed".
Really? The money that came into the system was created from thin air as a government DEBT. Governments collect taxes from us so it's OUR DEBT. This money is put into a [private sector] bank account with rules that enable banks to lend MULTIPLES of that money to us - and charge interest for which no currency exists, more often than not secured against our homes and an increasing proportion of us are GUARANTEED to lose our homes as a result.
Montgomery vs Daly
The "fractional reserve banking system" appears to be the answer. Read/Google Modern Money Mechanics, published by the Fed in 1961.
The money supply works by the Government calling up, say, $50bn from the central bank. The central bank "buys" $50bn of Government bonds with central bank notes. The Government then puts these notes in a bank account and - voila! - $50bn is added to the money supply and the government (er, the taxpayers) owe the central bank $50bn for.... what? $50bn created out of exactly, er, nothing. Money is actually created from worse than nothing, it's created from DEBT. Banking rules in the US state that banks must keep on deposit 10% of the amount they can then lend. So they keep $5bn on deposit and loan $45bn? No.... They keep the $50bn and loan $45bn because the loan contracts mean the $45bn can be added to bank reserves as it's an amount due to return. So now $95bn of thin air, debt-based money has been "created". It gets worse because people borrow the $45bn, promising to repay it, and deposit it in another bank - adding to that bank's reserves. Which enables the process to repeat. 90% of the $45bn is now available for lending from the second bank ....and so it goes on (and has until the Credit Crunch). It can go on infinitely but, on average, nine times the Government Bond issue is "created" - so $50bn rolls up to $450bn.
How's that paid for by the population? It can't be but, more profoundly, why SHOULD it be?
The effect of issuing new money is to devalue a currency. Inflation from increased money supply since the Fed was established in 1913 has devalued the US dollar by 96%. It means taxpayers perpetually work harder for less. "Slaves"?
Every bank note is owed by somebody to somebody. If all debt was paid off, there would be no money in circulation. But there is only enough money in the system for the actual amounts (the "principal") of the loans. There is no money in the system for 'interest'. So the money owed is always greater than the money loaned which means there is a perpetual demand to issue more money (which is inflationary). It is IMPOSSIBLE for all debts to be paid off so bankruptcies are guaranteed to happen - which is a transfer of individual worth to the banks when they foreclose on a mortgage and seize the property. "Homeless slaves"?
So the government's "thin air" money is a tool for the banks (private sector) to acquire assets from the population that elected the government... Lab/Con, Dem/Rep... it's all the same.
Our government and others have just injected a load more money into the money supply (up to £700bn, capable of rolling up to £6300bn) and dropped interest rates to encourage more borrowing to restore the expansion of the money supply. The government has taken on a £700bn debt but in addition to the £5,000/head share of this debt every UK taxpayer now bears, we are being encouraged to gorge on MULTIPLES of that with the offer of low interest rates.
The expansion of money supply, fueled by loans to people who could never pay it back (sub-prime), has rendered thousands homeless and transferred ownership of their homes to the banks. The next wave is to encourage more people to take on more debt to get the money supply/expansion going again. All that can happen is that a higher income stratum of society turns sub-prime when it too ends up with more debt rammed up its fundament than it could ever hope to repay. The ability of banks to lend multiples of what they've got and apply interest for which there is no currency in existence to pay has to implode some day. The way the current system (Modern Money Mechanics) works, the only ultimate winners are banks - but then it was a bank idea.... In the last few weeks the possibility that the banks could be the losers has been arrested by government at the population's expense with the supporting argument that "it would cost the population more if the banks collapsed".
Really? The money that came into the system was created from thin air as a government DEBT. Governments collect taxes from us so it's OUR DEBT. This money is put into a [private sector] bank account with rules that enable banks to lend MULTIPLES of that money to us - and charge interest for which no currency exists, more often than not secured against our homes and an increasing proportion of us are GUARANTEED to lose our homes as a result.
Montgomery vs Daly
bosscerbera said:
the only ultimate winners are banks
So how much have you got invested in banks? 
If you, truely, believe that the rewards outweigh the risks you can start your own bank.Edit: And the banks have to lend against an asset of equal(ish) value, the problem is at the moment the assets you have are over valued (If you borrowed against your house). It's a liability to them, if it all goes wrong they are back at square 1 (as are you) because they'll sell the house and (hopefully for them) end up where they started. They get the house they own and you will have a reduced outstanding debt. No one really ends up any better off in the end.
Lending is mutually beneficial when it goes right as the bank ends up with lots of your money and you end up with some neatly arranged bricks, tiles and land of your own.
Edited by speedy_thrills on Monday 20th October 00:40
speedy_thrills said:
bosscerbera said:
the only ultimate winners are banks
So how much have you got invested in banks? If you, truely, believe that the rewards outweigh the risks you can start your own bank.Edit: And the banks have to lend against an asset of equal(ish) value, the problem is at the moment the assets you have are over valued (If you borrowed against your house). It's a liability to them, if it all goes wrong they are back at square 1 (as are you) because they'll sell the house and (hopefully for them) end up where they started. They get the house they own and you will have a reduced outstanding debt. No one really ends up any better off in the end.
Lending is mutually beneficial when it goes right as the bank ends up with lots of your money and you end up with some neatly arranged bricks, tiles and land of your own.
Edited by speedy_thrills on Monday 20th October 00:40
speedy_thrills said:
bosscerbera said:
the only ultimate winners are banks
So how much have you got invested in banks? If you, truely, believe that the rewards outweigh the risks you can start your own bank.Edit: And the banks have to lend against an asset of equal(ish) value, the problem is at the moment the assets you have are over valued (If you borrowed against your house). It's a liability to them, if it all goes wrong they are back at square 1 (as are you) because they'll sell the house and (hopefully for them) end up where they started. They get the house they own and you will have a reduced outstanding debt. No one really ends up any better off in the end.
Lending is mutually beneficial when it goes right as the bank ends up with lots of your money and you end up with some neatly arranged bricks, tiles and land of your own.
t - adding more debt per capita via intervention does not deal with bad loans or asset values. It's not a solution. 
if the banks are fraudulently printing money they havn't got, why is it illegal to print your own??Fittster said:
Try this: The Money Masters
We looked at that at work the other day, at the time I thought it had some anti semitic undertones of the national socialist bent.A bit of googling by a colleague revealed it to have been made by a scientologist, and (some of) the quotes to be false.
bosscerbera said:
speedy_thrills said:
bosscerbera said:
the only ultimate winners are banks
So how much have you got invested in banks? If you, truely, believe that the rewards outweigh the risks you can start your own bank.Edit: And the banks have to lend against an asset of equal(ish) value, the problem is at the moment the assets you have are over valued (If you borrowed against your house). It's a liability to them, if it all goes wrong they are back at square 1 (as are you) because they'll sell the house and (hopefully for them) end up where they started. They get the house they own and you will have a reduced outstanding debt. No one really ends up any better off in the end.
Lending is mutually beneficial when it goes right as the bank ends up with lots of your money and you end up with some neatly arranged bricks, tiles and land of your own.
t - adding more debt per capita via intervention does not deal with bad loans or asset values. It's not a solution..Fittster said:
Surely the problem is the creation of money by the banks.
They have created too much, in this regard the market is self-regulating in that it re-values. I'm not an economist but I'd imagine this is one reason why economies grow in leaps rather than a linear fashion, which is why I laugh at Brown with his "End of market cycles" comment. You can reduce the severity or prolong a fall/rise (as he is doing now by propping up banks that would otherwise have to be valued more realistically at a market rate) but in the end the value of the bits of paper/plastic/metal/cotton we call money must come to reflect the value of the asset to individuals in society.
All these mistakes have been made before (even within living memmory for most people), times change but people remain the same.
Leadfoot said:
Fittster said:
Try this: The Money Masters
We looked at that at work the other day, at the time I thought it had some anti semitic undertones of the national socialist bent.A bit of googling by a colleague revealed it to have been made by a scientologist, and (some of) the quotes to be false.
speedy_thrills said:
Leadfoot said:
Fittster said:
Try this: The Money Masters
We looked at that at work the other day, at the time I thought it had some anti semitic undertones of the national socialist bent.A bit of googling by a colleague revealed it to have been made by a scientologist, and (some of) the quotes to be false.
Fittster said:
speedy_thrills said:
Leadfoot said:
Fittster said:
Try this: The Money Masters
We looked at that at work the other day, at the time I thought it had some anti semitic undertones of the national socialist bent.A bit of googling by a colleague revealed it to have been made by a scientologist, and (some of) the quotes to be false.
There are more but it's been a long time since I watched it.
If your question is where does int and debt come from, is it created.
The answer is no.
Basic accounting, the bank pays you $10 interest. It credits your account $10 and debits itself. Nothing is created.
Similar is true for debt, they lend you 10K. They credit your account and debit their own.
Only central banks can print.
The answer is no.
Basic accounting, the bank pays you $10 interest. It credits your account $10 and debits itself. Nothing is created.
Similar is true for debt, they lend you 10K. They credit your account and debit their own.
Only central banks can print.
Edited by jeff m on Monday 20th October 09:03
jeff m said:
If your question is where does int and debt come from, is it created.
The answer is no.
Basic accounting, the bank pays you $10 interest. It credits your account $10 and debits itself. Nothing is created.
Similar is true for debt, they lend you 10K. They credit your account and debit their own.
Only central banks can print.
Thanks.... but I think you've entirely missed the point. I don't need a lesson in double-entry book-keeping at the micro level. The answer is no.
Basic accounting, the bank pays you $10 interest. It credits your account $10 and debits itself. Nothing is created.
Similar is true for debt, they lend you 10K. They credit your account and debit their own.
Only central banks can print.
The observation I made was that central banks 'create' money from nothing so, yeah "nothing is created", or rather "nothing is turned into currency". This shows up as a government debt as its 'balancing' book entry. But the fact remains, the central banks - which are private enterprises, not state-owned - make money from NOTHING.
Fractional reserve banking then enables that government debt to multiply by nine in the money supply.
For a tenner raised as government bond and deposited in a bank, £9 can be loaned out. Because of double-entry book-keeping, it's not £9 from the tenner that's loaned out because the borrower's promise to repay the £9 gets ADDED to, not subtracted from, the tenner on deposit ....and so on and so on. So although only central banks can print, other banks are still 'creating' - just without printing.
As for interest, that's not created by anybody which begs the question how/why it should be paid to banks - apart from the fact that 'money' created by ordinary banks doesn't really exist, interest certainly doesn't because no currency was created to pay it. Consequently, the system ONLY works because somebody - like a game of musical chairs - has to go bankrupt to 'remove' debt from the equation. Why not let some banks fall over?
That governments have recently generated hundreds of billions more debt to stabilise the banks (which can multiply what they've got by lending it), and encouraged people to borrow more with lower interest rates, is a cause for real concern.
Wealth is not created by debt, it's diminished by it.
Oh great another person who'd never heard the term "fractional reserve banking" until a few weeks ago and is now a financial sage. 
"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
Zod said:
Oh great another person who'd never heard the term "fractional reserve banking" until a few weeks ago and is now a financial sage.
"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
How is that an example of "fractional reserve banking", just looks like inflation to me?"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
Fittster said:
Zod said:
Oh great another person who'd never heard the term "fractional reserve banking" until a few weeks ago and is now a financial sage.
"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
How is that an example of "fractional reserve banking", just looks like inflation to me?"Wealth is not created by debt, it's diminished by it." This is such a stupid statement that it doesn't deserve rebuttal, but I'm feeling generous:
if I bought a house for £80000 with a 90% mortgage twenty years ago and finished paying off that mortgage today, I would have an asset worth probably £150000 today. Say the mortgage cost £160000 over 20 years, the house has cost me a net £10000 over 20 years or £500 per year. To rent the same house would have cost me rather more than £500 per year. I am therefore richer because of debt.
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