What is money? Where does our money come from?

[Martinghoul]

I would also say that debt growth is assured (as i currently understand it). As money is loaned into existance + interest. Further loans will be always be needed to service the interest.

Let's address this first. I am not sure I understand. As a borrower I would only take a loan out if I know that the return on the project I am intending to finance is sufficient to cover the interest costs. So I really don't see how you come up with this self-perpetuating debt. I don't need more loans to service the interest. If I do, I go bankrupt.

 

[darktone]

Let's address this first. I am not sure I understand. As a borrower I would only take a loan out if I know that the return on the project I am intending to finance is sufficient to cover the interest costs. So I really don't see how you come up with this self-perpetuating debt. I don't need more loans to service the interest. If I do, I go bankrupt.

Picture it starting from point zero,no money in the system then go from there.if i understand you your talking about taking on a personal debt (which you would be earning money from the existing supply to pay the interest to the bank).

In fact watch the first video i posted as it does explain it. Im not sure i could do a better job.

 

[Martinghoul]

Picture it starting from point zero,no money in the system then go from there.if i understand you your talking about taking on a personal debt (which you would be earning money from the existing supply to pay the interest to the bank).

In fact watch the first video i posted as it does explain it. Im not sure i could do a better job.

OKI-DOKI, lemme go watch the ole video...

 

[Martinghoul]

Picture it starting from point zero,no money in the system then go from there.if i understand you your talking about taking on a personal debt (which you would be earning money from the existing supply to pay the interest to the bank).

In fact watch the first video i posted as it does explain it. Im not sure i could do a better job.

I am afraid the video is silly... Are they seriously advocating that the Bank of England makes decisions that determine whether and to whom to lend money? That's absurd. As I said before, isn't it the whole point of capitalist society that capital allocation decsisions are supposed to be made by the free private market, which, in this case, is a bunch of banks? A private bank lends money to individuals and firms. If this bank makes poor decisions (i.e. lends money to individuals/firms who are already overly indebted), this bank, as a private institution, goes bankrupt. In theory, the private credit system works and it doesn't matter what you're lending and where the money comes from.

So I'm afraid it's a rather silly video that betrays a glaring lack of understanding of how the system actually operates, in spite of them, supposedly, going through all these BoE docs.

 

[darktone]

I am afraid the video is silly... Are they seriously advocating that the Bank of England makes decisions that determine whether and to whom to lend money? That's absurd. As I said before, isn't it the whole point of capitalist society that capital allocation decsisions are supposed to be made by the free private market, which, in this case, is a bunch of banks? A private bank lends money to individuals and firms. If this bank makes poor decisions (i.e. lends money to individuals/firms who are already overly indebted), this bank, as a private institution, goes bankrupt. In theory, the private credit system works and it doesn't matter what you're lending and where the money comes from.

So I'm afraid it's a rather silly video that betrays a glaring lack of understanding of how the system actually operates, in spite of them, supposedly, going through all these BoE docs.

With all respect, I think it might be you who doesnt understand things fully.
What they are suggesting is nothing new, Bill Stills work will show you that, the 1844 bank charter act that restricted private banks issuing their own notes, (Banks found a way around this via personnal cheques and later with electronic money creation)
Credit creation and 'lending' are two seperate subjects imo, banks engage in the former.

http://www.youtube.com/watch?v=l7L3ZtCSKKs&list=HL1320095249&feature=mh_lolz

In the above video by the new economics foundation, the book detailed at the end was co authored by one of the guys from positive money. I cant imagine Prof Charles Goodhart (17 years teaching at LSE / 3 years on BoE monetary policy commitee) would have written the foreword if the contents were nonsense! I mean, he is a respected man in the field to say the very least!

Ive recently been to a conference on the subject with Michael Meacher mp /Steve Baker mp speaking. Both applaude the efforts of the above.

Here is their draft proposal, you might wana read it before calling it stupid:-
Our Proposals | Positive Money

I havent come here for a verbal punch up, i dont have the energy. i just wanna create some debate and awareness of the unfarirness of our current system. I believe its the subject of our time.

 

[darktone]

Interview with Bill starts at 13,00.

Keiser Report: Dollar-Trapped! (E186) - YouTube

 

[Martinghoul]

First of all, I don't think it makes a difference which particular "authority figure" endorses it. These people are not infallible and, in fact, are known to be often wrong. So, without any name-dropping, can you pls talk me through in detail how you envision "money creation" as implemented by the central bank? Also, pls tell me how "credit creation" differs from "lending".

I am not here for a verbal punch up either. I like to engage in a sensible debate on these matters. My view is certainly that the current system is flawed in a variety of important ways. However, I am yet to hear anyone come up with a logical framework that offers anything better.

 

[darktone]

First of all, I don't think it makes a difference which particular "authority figure" endorses it. These people are not infallible and, in fact, are known to be often wrong. So, without any name-dropping, can you pls talk me through in detail how you envision "money creation" as implemented by the central bank? Also, pls tell me how "credit creation" differs from "lending".

Well if you dont want 'name dropping' then please do some research before you dismiss something as "silly" and undermine the work of others. Deal?

I dont think im qualified to talk you through in detail. I have a good basic understanding of how our money is currently created and im aware of what it costs the majority. Obviously there is more than one solution to any problem.
FYI
Our Proposals | Positive Money
The Money Masters
The most important point in both Is who gets to control the quantity of our money!

The difference imo between credit creation and lending is simple.
If I were to lend a friend £20, most folks would rightly think that i had the £20 to lend in the first place. This £20 loan would come from the existing money supply as would the repayment / interest. The money supply remains unchanged.

If i were to 'lend' (create credit) as banks currently do i would create this £20 from nothing (outside of the existing supply). Whilst the loan is outstanding the money supply has been increased by £20.

Even though this as a direct quote has been proved bogus, its no less potent imo.
Give me control of a nation's money and I care not who makes her laws!
Mayer Amschel Rothschild

 

[VielGeld]

Think of it this way. Money deposited into banks = margin (they call it capital requirements).

From this margin they leverage loans. These loans create the money you see today. Of course, they can also just print money, but that devalues the currency.

The reason this technically works is that everyone who loans money will put this money into their own bank account. So money always gets back into the system in good times and refills the margin.

One reason for the collapse of banks in 2008 was that they leveraged too much as said earlier. Pushing for higher capital requirements reduces the leverage, but there's more assurance that banks have enough capital to fulfill their obligation of giving customers back their money.

 

[Martinghoul]

Well if you dont want 'name dropping' then please do some research before you dismiss something as "silly" and undermine the work of others. Deal?

Why shouldn't I call it silly if, in my view, it's silly? I have done a lot of research and I have thought a lot on the subject. In my view, all the proposed alternatives I have seen so far are heavy on the slogans and very light on relevant detail. And the devil is in the details, as usual.

I dont think im qualified to talk you through in detail. I have a good basic understanding of how our money is currently created and im aware of what it costs the majority. Obviously there is more than one solution to any problem.
FYI
Our Proposals | Positive Money
The Money Masters
The most important point in both Is who gets to control the quantity of our money!

Let me watch this video as well and see if there's more substance there.

The difference imo between credit creation and lending is simple.
If I were to lend a friend £20, most folks would rightly think that i had the £20 to lend in the first place. This £20 loan would come from the existing money supply as would the repayment / interest. The money supply remains unchanged.

If i were to 'lend' (create credit) as banks currently do i would create this £20 from nothing (outside of the existing supply). Whilst the loan is outstanding the money supply has been increased by £20.

Well, how about if you borrow the £20 from another friend and you now "have it" to lend. Does that qualify as credit creation or lending? 'Cause that's actually what happens in the modern economy. The money that the commerical banks "lend" doesn't actually get created out of thin air. It's, effectively, lent to them by the central bank and show up on the CB's balance sheet. This way the central bank controls (or tries to, at any rate) the total amount of "wide money" in the system.

Even though this as a direct quote has been proved bogus, its no less potent imo.
Give me control of a nation's money and I care not who makes her laws!
Mayer Amschel Rothschild

I don't really understand what this means.

 

[Club]

In some years time (10, 20, 30 or whatever) we wont have "money" as we know it.

PayPal, Google or some other large institution will create their own "money" and we will need little else, the company will be worldwide and we will all hold "money" in that company. "Money" will become international and a standard, you will be paid in "money" that will be knowns as "paypal credit or credits". All people will be paid the same rate for the same job type around the world, there will be no international rates, different currencies or exchange.

For the rest of this example we will use the company PayPal and the number of credits are numbers just as an example.

You will be paid for work in PayPal credits, 1 hour for your job will pay you 10 credits, if you do a more skilled / harder job you will be paid more hourly credits.

Things cost credits, not "money", credits are worldwide and universal. A Chocolate bar costs 1 credit, to pay for that chocolate bar you swipe your phone across the payment device and the 1 credit is deducted from your PayPal account.

Want to lend your friend some "money", you tap the number of credits into your phone and you transfer the credits by touching phones.

You house rent costs 200 credits a month and can be paid for by Direct Debit from your paypal account.

A chocolate bar costs the same in Sudan as it does in the USA.

People "trade" credits to make money, but not against other credits (as the old style foreign exchange) but they trade credits against physical goods / equities. Today 1 tonne of coal costs 20 credits, buy and sell later for 22 credits (standard supply demand trading)

Anyway, I'm just rambling...but is the world of foreign exchange slowly coming to an end?

Quick...you only have X amount of years to make your millions!

 

[VielGeld]

Anyway, I'm just rambling...but is the world of foreign exchange slowly coming to an end?

Umm... no? Interesting ideas in there, but it's all utopian hogwash for the most part. Why would countries abandon their currencies to trade in one company's vision of its currency?

Holding a currency means you hold power over the flow and amount of said capital. Your scenario implies countries would accept to hand over control to single (American, to boot) entities. While I'm all for globalization and can see the world eventually unifying into one "world government", the matter of merging currencies is still very touchy.

 

[darktone]

Think of it this way. Money deposited into banks = margin (they call it capital requirements).

From this margin they leverage loans. These loans create the money you see today. Of course, they can also just print money, but that devalues the currency.

The reason this technically works is that everyone who loans money will put this money into their own bank account. So money always gets back into the system in good times and refills the margin.

One reason for the collapse of banks in 2008 was that they leveraged too much as said earlier. Pushing for higher capital requirements reduces the leverage, but there's more assurance that banks have enough capital to fulfill their obligation of giving customers back their money.

Yep i get the general jist of what your saying. Im pretty sure a bank doesnt need 'money deposited' to create bank credit though.
When a bank makes a loan (creates credit) it effectively prints money (allbeit a theoretical limited amount), this is certainly inflationary.
Agreed that bank loans create new deposits.

 

[darktone]

Why shouldn't I call it silly if, in my view, it's silly?

Hey i never said you couldnt but if I think its not silly expect some serious 'name dropping'!

Well, how about if you borrow the £20 from another friend and you now "have it" to lend. Does that qualify as credit creation or lending?

Id call that lending because the money he lent me would have come from 'inside' the existing money supply. Unless my mate had a money printing machine then i would call it mate credit!Or 15 years!

The money that the commerical banks "lend" doesn't actually get created out of thin air. It's, effectively, lent to them by the central bank and show up on the CB's balance sheet.

Im about 99% sure that is not the case.

I don't really understand what this means.

I take it to mean "If you let me control the money supply i dont give a monkeys about who is power because i control all! Mess with me and the people will starve!" Lol, a poor effort i know, but its late.

Edit:- Ooo how did you get on with the proposals btw?

 

[darktone]

In this video series Milton Friedman tells of how the money supply declined by 1/3 during the great depression and how preventable the situation was. He also makes reference to the fact that banks can create money (credit) despite most bankers do so unknowingly. He goes on the describe future problems (the one we have now),,, Infation!

Milton Friedman Debunking Myth Of The Great Depression part 1 - YouTube

Milton Friedman Debunking Myth Of The Great Depression part 2 - YouTube

Milton Friedman Debunking Myth Of The Great Depression part 3 - YouTube

The picture below charts the decline in buying power of the since 1987. Some 60%!. To make that a bit more meaningfull, £100 worth of bricks bought in 87 would cost £250 in todays money!

 

[darktone]

In some years time (10, 20, 30 or whatever) we wont have "money" as we know it.

PayPal, Google or some other large institution will create their own "money" and we will need little else, the company will be worldwide and we will all hold "money" in that company. "Money" will become international and a standard, you will be paid in "money" that will be knowns as "paypal credit or credits". All people will be paid the same rate for the same job type around the world, there will be no international rates, different currencies or exchange.

For the rest of this example we will use the company PayPal and the number of credits are numbers just as an example.

You will be paid for work in PayPal credits, 1 hour for your job will pay you 10 credits, if you do a more skilled / harder job you will be paid more hourly credits.

Things cost credits, not "money", credits are worldwide and universal. A Chocolate bar costs 1 credit, to pay for that chocolate bar you swipe your phone across the payment device and the 1 credit is deducted from your PayPal account.

Want to lend your friend some "money", you tap the number of credits into your phone and you transfer the credits by touching phones.

You house rent costs 200 credits a month and can be paid for by Direct Debit from your paypal account.

A chocolate bar costs the same in Sudan as it does in the USA.

People "trade" credits to make money, but not against other credits (as the old style foreign exchange) but they trade credits against physical goods / equities. Today 1 tonne of coal costs 20 credits, buy and sell later for 22 credits (standard supply demand trading)

Anyway, I'm just rambling...but is the world of foreign exchange slowly coming to an end?

Quick...you only have X amount of years to make your millions!

Hey all is possible, i dont think i know enough to have a view tbh. Maybe one day we wont even need credits. We just help eachother out!... Yeah, about those credits!? :whistling

 

[darktone]

This is part of one of the zietgeist films. Its based on the US system which is slightly different to the UK system (In the UK its less regulated and the expansion method is different to that shown in the clip)
All the same i include it because as far as im aware this is the textbook method in the UK! .. And i kinda like the clip.

Zeitgeist Addendum - Modern Money Mechanics - YouTube

Below is a couple of links to the modern money mechanics booklet. Pages 3 and 12 are of interest.
(reader friendly version)
http://www.rayservers.com/images/ModernMoneyMechanics.pdf

(the original booklet)
http://upload.wikimedia.org/wikipedia/commons/4/4a/Modern_Money_Mechanics.pdf

 

[Martinghoul]

Id call that lending because the money he lent me would have come from 'inside' the existing money supply. Unless my mate had a money printing machine then i would call it mate credit!Or 15 years!

Well, there suppose it's a mate who had the money lent to him by another mate, etc... The last mate in the chain actually has a printing press. Are all the links in the chain "credit creation" or are they all "lending" or is it some mixture?

Im about 99% sure that is not the case.

Well, you're 100% incorrect. You can see the relevant numbers on the balance sheet statements of the Fed balance sheet, the ECB, the BoE, to name a few. Or maybe you're referring to something else being not the case.

I haven't yet had a chance to go through the proposals, as it's been a very busy week.

Anyways, I think it's going to be difficult for us to continue this discussion, given that you always respond by posting what other people say and argue. With all the respect I have for Milton Friedman, a) I am not discussing the issue with him; b) the videos aren't exactly offering an interactive medium; c) the videos etc are edited products, with a lot of stuff taken out of context. I would very much prefer to have a discussion with you, a live person, in an interactive manner, rather than with a bunch of funny videos.

 

[darktone]

Well, there suppose it's a mate who had the money lent to him by another mate, etc... The last mate in the chain actually has a printing press. Are all the links in the chain "credit creation" or are they all "lending" or is it some mixture?

In this example id say that everyone is lending apart from the guy with the printing press who is creating credit/money.As I currently understand it thats not how our current monetary system works, the system we have is two stage. Central banks create the initial (base money), private commercial banks expand this money (create broad money).

Well, you're 100% incorrect.

Im always willing to be proved wrong. If we take the BoE sheet.
http://www.bankofengland.co.uk/publications/bankreturn/2011/111102cs.pdf
It shows a total balance of near 261billion. The government figure for our National debt is around 980billion atm (this doesnt include the bank bailouts which takes it well over 2 trillion)
Could you tell me where the other money came from to back this debt?

Anyways, I think it's going to be difficult for us to continue this discussion, given that you always respond by posting what other people say and argue. With all the respect I have for Milton Friedman, a) I am not discussing the issue with him; b) the videos aren't exactly offering an interactive medium; c) the videos etc are edited products, with a lot of stuff taken out of context. I would very much prefer to have a discussion with you, a live person, in an interactive manner, rather than with a bunch of funny videos.

I have my own view for sure, id argue that ive added a little more to this thread than just 'bunch of funny videos' and opinions of others.
Videos are great for folks new to the subject imo and are far more engaging than reading page after page of text. I also dont see the the harm of backing my view with reference to other material.
But thats just me.

 

[Splitlink]

Yep i get the general jist of what your saying. Im pretty sure a bank doesnt need 'money deposited' to create bank credit though.
When a bank makes a loan (creates credit) it effectively prints money (allbeit a theoretical limited amount), this is certainly inflationary.
Agreed that bank loans create new deposits.

I think that you are right but it should not be like that, should it? I do not want to see the end of capitalism because I cannot envisage life without it. Perhaps this is a way to make sure that we keep it and regulate it, at the same time.

Loans should only be made with deposit money and the banks own capital and assets. It, certainly, seems logical when one comes to think of it but I have the inpression that, in recent years, the banks have avoided this

If this rule had been followed it would not have been possible to get mortgages of more than 30% (?) because there would not have been enough money to go round.

Policing this would be controlled by the centrral banks or some other authority.

I do not profess to be an authority on this but the idea is a start, surely, and can be improved upon?