Economy ' 'Dicier by the Day'

[Mr Davidson]

A short analysis of the state of the World economy as viewed from the US but there are similarities happening in the UK too...for those who are puzzled about the creation of money out of thin air see my posting about 'The Money Masters'. Past commentators who did nothing but ridicule without talking about the actual information need not apply

https://www.zerohedge.com/news/2018-05- ... dicier-day

[sophie]

Without wanting to appear stupid, I have to say that the more I learn about the economy of Turkey and in particular about TRNC, I really do feel I am aboard the Titanic and can hear the orchestra playing in the background. Sorry Mr Davidson for going off topic so soon in your thread but as Turkey is part of the "world economy" it did seem relevant.

[EnjoyingTheSun]

I don’t know about banks creating money but apparently the sages at zerohedge.com can make your money disappear;

http://noahpinionblog.blogspot.com.cy/2 ... anish.html

Is money multiplied or is the accounting of it multiplied through additional paperwork? Banks increase the velocity of money in circulation and the illusion they are creating it or multiplying it is an artefact of double entry bookkeeping. Its elementary accounting and balance sheet principles.

If you lend me £20 I will give you an IOU for £20. Does it mean there is now £40?

Banks can create credit but not money. Money is money and credit is credit.

The coins and paper that we carry in our pockets, is one component of the money supply, bank reserves on deposit at Central banks is the other. Together they make up the Monetary Base and are sometimes referred to as Base Money, or the Money Supply. The central bank can expand or contract the monetary base and add or subtract reserves from the banking system. Banks cannot.

If banks can create money how have some have gone bankrupt? Why not print some more by creating another bookkeeping entry?

It all reminds me of the riddle

Three people register at a hotel and are told that their rooms will cost £100 each so they pay a total of £300. Later the clerk realises that he made a mistake and should have only charged them £250.
He gives the porter £50 to return to them but the porter gives them £10 each and keeps £20 for himself.
So the men actually paid £90 each for a total of £270 and the porter kept £20.
What happened to the other £10?

[Hedge-fund]

Money is being created by the western Governments via the Central Banks via the banks.

Look up Quantitative Easing - this is how the bankrupt banks were kept open following the sub-prime crisis in 2008/9

https://www.bankofengland.co.uk/monetar ... ive-easing

[erol]

Banks can create credit but not money. Money is money and credit is credit.

I take a loan out from my bank. The bank credits me with the amount of the loan, say £1000. They do this simply within their own internal accounting systems as a 'ledger entry' saying my account with them increases by £1000. I then withdraw from my account £1000 in cash from my account. What do I have in my pocket ? Money or credit ? When the bank makes the entry in their systems saying I have an extra £1000 then the total amount of money in existence increases by £1000. Not the amount of base money but the amount of broad money. The point is in order to loan me £1000 the bank does not have to make a matching ledger entry in their systems that someone else now has -£1000, not themselves or anyone else. The £1000 they lend me is new broad money.

There is nothing particularly sinister or wrong in such a system per se, at least as I see it. The problem as I see it is a wider one and not really about private banks having the ability to create money 'out of thin air' but just the long standing issues of private interests vs communal / societal interests. When economies are booming what is best for society is actually that private banks lend (create new money) less and when the economy crashes, they lend (create new money) more. However that is not the same interests of the private banks themselves. As we saw in the lead up to the 2008 crash and the aftermath of the 'credit crunch' that followed , where long standing viable and productive businesses were undermined by a reluctance on the part of private banks to lend at all to anyone for anything. Where as before the crash the opposite was true.

The other problem with a system where by the main way the broad money supply is increased is by private banks creating credit, is that it requires ever more lending to keep up. This is because I do not just pay back the £1000 to my bank but some extra amount in interest. So I end up paying back £1100. This £100 has to come from somewhere and if the only or main way new broad money is created is by banks lending money, then it comes from lending, itself in turn requiring more lending and so and so on.

If banks can create money how have some have gone bankrupt? Why not print some more by creating another bookkeeping entry?

Because their ability to create new money is regulated. They can not create new money for themselves. They can only create it for other people and even then the amount of new money they can create (how much they can lend) is limited by the state.

[EnjoyingTheSun]

Erol,

This covers it better than I ever could;

http://www.jnani.org/money/

[Mr Davidson]

This covers it well...

https://www.youtube.com/watch?v=sILWEe6GD60

[erol]

Erol,

This covers it better than I ever could;

http://www.jnani.org/money/

Fore me the author of your link says about the same thing I am saying in broad terms. I do think he is more on the 'side' of the banks and I see that in his claims like

There is nothing a bank can do to ensure that any one loan it makes will create a net new deposit.

If a bank agrees to give me a loan of £20,000 to consolidate my debt on a range of credit cards for example, then there absolutely is something the bank can do to ensure that the £20,000 they lend me is used to pay of those loans and not used to go and spend it on sex and drugs and partying or just waste it.

There is nothing the banking sector can do to ensure that its lending will increase M4.

Again I do not buy this. It is, to my mind, an attempt to deny banks have a culpability in lending to people to use such money in activities that do not increase the over all wealth of the economy. I think they do have both a culpability and an ability to influence what money they lend is used for. Like i think those who make and sell guns have some culpability for how those guns are used. This denial of culpability is the problem for me. Banks did lend in the boom times essentially regardless of if such loans would be used to invest in economically positive activities or not . They made hay, a lot of it, whilst the sun was shinning and as private entities why would they not ? Similarly when the sun stopped shinning they refused to lend pretty much regardless of if such loans were to be used for economically productive activities or not,

For me a system where by private banks create new broad money by lending is not a problem but I think in such a system the state needs better and more effective means to limit their ability to do this in boom times and to increase their willingness to do it in bad times and to have some effective say in if money is lent (and created) for the objective of economically positive activities or just to be spent on activities that are not economically positive to the general economy.

[EnjoyingTheSun]

This covers it well...

https://www.youtube.com/watch?v=sILWEe6GD60

Which explains how the Federal reserve creates money through quantitative easing not private banks creating money out of thin air.

[EnjoyingTheSun]

Banks did lend in the boom times essentially regardless of if such loans would be used to invest in economically positive activities or not . They made hay, a lot of it, whilst the sun was shinning and as private entities why would they not ? Similarly when the sun stopped shinning they refused to lend pretty much regardless of if such loans were to be used for economically productive activities or not

The main problem is banks like any other business look for growth.
After you have leant money to people who can afford to repay it the only way to grow your business is to lend it to people who cannot. Dress it up or package it how you like that's what caused 2008 IMO.

[Mr Davidson]

Quantitative easing is 'printing' money out of thin air...

[EnjoyingTheSun]

Quantitative easing is 'printing' money out of thin air...

If you are being pedantic whilst cash money is more tangible than electronic transfers of money, dollars are just a piece of paper with a dead president on.
Lets look at the federal reserve as they are always a popular target given they apparently killed JFK.
If they simply printed money for the sake of it they would devalue the dollar, oil would cost more and they would get hyperinflation.
Macroeconomics is a balance of several factors you just can't pull at a thread.