People vs The Banks

[Little John]

Yes the balance in your check book is money even though the bank doesn't have a stack of bills in the vault equal to all the deposits on the books....

That is factually wrong. Right now I don't have the time. But, I will be back in later today and will spell out why it is wrong. The "money" in your bank account is not money. It is at least 90% debt that has lent into existence by your bank and/or by other banks up the food chain. 10% or less of the money in that account has originated from the central bank. The rest has been conjured out of fresh air. I'm not kidding. If you don't believe me, what the bloody hell do you think all the bailouts were about? The only thing that stops the entire fraudulent ponzi-scheme from collapsing is economic growth. When that stops, the fraud is exposed. When that happens, the funny money has to be replaced with "real" money" or a real promise to replace it by a sovereign state at some point in the future. (ie, the taxpayer)

The whole process makes a complete mockery of the so-called "fractional reserve ratios".

Looking forward to it.

Ok V, sorry about the delay.

As I am sure you are aware, the banks must operate on a fractional reserve ratio. That is to say, they can only lend out a fraction of the deposits they hold. However, this only make sense of the deposits they hold are, themselves, real money. The problem is they are not. I need to include a few tables to show how this works.



The above is an example table showing how an initial £1000 created by a Central bank and then placed in Bank A, cascades down through the banking system being lent out over and over again. This is because the lendings of one bank are allowed to be used as the deposits of other banks. I have emboldened this last sentence because it is the key. Just think about it for a minute and you will realize why.

Of course, each time the money enters the next bank in the chain, a bit is shaved off the amount that can subsequently be lent out because some of the debt-based deposit must remain on the deposit side of a given bank's books. The process of re-lending out of the same money only stops when infinity is approached.

So, starting from a baseline figure of 1000 central bank money, we end up with a situation where the total amount of "money" in the system is £4000 (due to banks effectively using the debt side of other banks' balance sheet as the deposit side on their own balance sheet) and that the debt based monetary system must actually grow over the next 5 years by another £600 just to make the books balance at the end of that period. This is because of the compound interest applied to the loans.

The only way the above can be made to work is if the central bank continues to lend money into the system to cover the hole in the balance sheet implied by interest rates on loans. But, of course, the banks are simply going to multiply lend out any new money that comes into the system and so the problem keeps on growing.

All of the above is the reason why governments shit themselves when growth stops because, when that happens, the ponzi-scheme money-supply promptly collapses. However, they can't allow it to collapse and so they keep pushing money into the system regardless. The trouble is, this new money no longer has an economic home to go to (due to halted growth) and so merely has the effect of causing inflationary driven prices rises due to the oversupply of money. This is why recessions often bring inflationary price rises with them instead of deflationary collapses in prices, which is what one might have intuitively expected.

In the above example, the central bank base money supply will need to grow to £1150 in 5 year's time to cover the interest repayments on the loans and this means that there is a built-in requirement that the economy will grow by 3% per year for each of those 5 years to accommodate the extra money flowing into the system. Any growth less than that and you end up either with deflation (if the CB does not create enough base money) or inflation (if the CB does create the money). The only way you avoid either inflation or deflation is if the economy grows by just the right amount. Whatever happens, the economy must perpetually grow in order for this type of FRB-based money-supply to work.

In short, an FRB-based money-supply is always a car-crash waiting to happen and on a finite planet of finite resource you can be guaranteed it will happen (due to the limits to growth implied by those finite resources).

It's happening right now.

[vtsnowedin]

Steve your argument is all nice and tidy and I've heard it before but it fails to take into account that the borrowers don't just redeposit their loan but spend it on something productive. True the bank or some other bank will have most of it back within a few days but in that time a borrower will have bought seed and fertilizer and fuel for his tractor and planted a crop which more years then not will yield well enough to pay back the loan and it's interest plus pay the borrower for his time and risks taken. Even if all the loans were blown on cruises in the gulf of Mexico the owners of the $#!* boats would gain from their customers excesses and turn a profit. This constant worry about year on year growth is really only needed to keep up with the growth of the population. If the population was stable the same year on year productivity from each field ,mine or factory would be adequate.
The fact that the redeposited money is still owed to bank one does not make the money in bank two any less real. All FRB accomplishes is to let the maximum amount of money be used in a given period by the maximum number of borrowers. It is the foolish use of the borrowed money that is the problem as it was back in 1929.

[kenneal - lagger]

The world economy is many times bigger than it was say 50 years ago.

Where did all the extra money come from if it DIDN'T come from the fractional reserve banking?

Just wondering?

The rise in production of oil, such as now appears to be peaking?

Plus all the coal and metals mined, all the crops grown and the production of all the factories, the roads and bridges built and all the ships on the seas.

That only creates wealth when someone buys it and to buy it you need money in the first place; money that is created by banks lending in out. It is the same process as Quantitative Easing but in the bank's case they make the profit from creating the money. Being a bank is literally a license to print money.

The other way of introducing new money into the economy is for the government to print or loan the money themselves. All this new money is very inflationary but in the government case they can control the inflation by taxing the money back out of the system.

Why should a government department borrow money from a bank to build a new road or bridge or railway and then pay interest on the loan to a bank which didn't have the money in the first place. It is akin to the banks taxing the taxpayer. This is made even worse when the banks need bailing out and the taxpayer pays again.

[kenneal - lagger]

........ This constant worry about year on year growth is really only needed to keep up with the growth of the population. ........

That is not true. There is only ever enough money in existence to pay off the capital loaned. To pay the interest more money has to be earned so growth in the economy is essential. That is why there is so much concern when we go into negative growth, a recession. Negative growth means more defaults on loans and a loss of money from the economy as people stop borrowing new money and old money is cancelled out as people repay loans.

The increase in population helps with growth because there are more people to work and earn money and this stimulates growth. A better version of your statement would be "This constant worry about year on year growth in population is really only needed to keep up growth."

[Totally_Baffled]

The world economy is many times bigger than it was say 50 years ago.

Where did all the extra money come from if it DIDN'T come from the fractional reserve banking?

Just wondering?

The rise in production of oil, such as now appears to be peaking?

Plus all the coal and metals mined, all the crops grown and the production of all the factories, the roads and bridges built and all the ships on the seas.

And where did all the extra money come from to service all this economic activity?

All this extra stuff needs money to make it happen - where is this being created if not via FRB?

[Little John]

Steve your argument is all nice and tidy and I've heard it before but it fails to take into account that the borrowers don't just redeposit their loan but spend it on something productive. True the bank or some other bank will have most of it back within a few days but in that time a borrower will have bought seed and fertilizer and fuel for his tractor and planted a crop which more years then not will yield well enough to pay back the loan and it's interest plus pay the borrower for his time and risks taken. Even if all the loans were blown on cruises in the gulf of Mexico the owners of the $#!* boats would gain from their customers excesses and turn a profit. This constant worry about year on year growth is really only needed to keep up with the growth of the population. If the population was stable the same year on year productivity from each field ,mine or factory would be adequate.
The fact that the redeposited money is still owed to bank one does not make the money in bank two any less real. All FRB accomplishes is to let the maximum amount of money be used in a given period by the maximum number of borrowers. It is the foolish use of the borrowed money that is the problem as it was back in 1929.

I notice you no longer appear to be trying to assert that the vast majority of units of exchange in the economy are anything but lent into existence credit. Instead you now seem to be (by omission) admitting that this is exactly what they are and that you don't have a problem with it. You also appear to have completely failed to grasp how interest on loans absolutely requires that the money supply continue to grow.

In short, you are comfortable with an undemocratically privileged elite being allowed to completely monopolise the means of exchange such that they can conjure into existence units of exchange out of nowhere and then lend them into the economy and, in doing so, end up owning the vast majority of the assets of the economy for no other reason than they have sole rights to conjure the units of exchange into existence. They have not actually made anything. They have not actually done anything material in the economy. The have contributed nothing. Yet, they end up owning everything via this monstrous fraud. When you stop to think about it, it really is is quite fiendishly clever in it's construction. Each bank in the system can legitimately claim to have followed it's fractional reserve requirement and so have not committed any fraud. However, each bank, by using the debt side of other banks' balance sheets as part of the deposit side of its own balance sheet, is contributing to a massive systemic fraud. There is a word for processes such as this in the natural world. It's called parasitism. And it gets worse.

In a system of FRB, the debt-monster inevitably gets larger over time as more and more debt-money is pushed into the system to cover the interest payments on existing loans. This means there has to be a perpetually increasing demand for money by the people. Shorter lifespans, albeit with higher standards of production, on products is part of the process whereby that demand is kept at the artificially high level required to keep the monetary system from collapsing. Which is, of course, precisely not what is now needed by the world, given the resource buffers it is now hitting. To get a different outcome, we need a different system. It can't be reformed. It must be smashed. The problem is that those for whose benefit the current system is run are both unimaginably powerful and will no doubt wield that power in every way possible to maintain their position. This system will absolutely not be overturned without blood being spilt.

Anyway, to get back to the specifics of your reluctance to accept the fraud that FRB is, let's break this down into a series of easy to understand questions. I would be obliged if you were able to provide a clear answer to each of them. Let's take this one step at a time in order to establish precisely which bit you take specific issue with and when:

1) Do you accept that central banks create base money for our economy either by buying it in from outside the system via the issuance of government bonds or, if they wish, by directly creating it from scratch with mechanisms such as QE.

2) Do you accept that the banks who take out loans of base money from the CB can then lend out a proportion of it to other banks and/or non-banks customers based on their fractional reserve requirements?

3) Do you accept that either:

non-bank customers are either going to deposit the money they have borrowed into a bank or are they going to spend the money such that the recipient (or some recipient at some point down the chain of transactions) is going to deposit the money into a bank, thus allowing the recipient banks to declare that loaned money that has been deposited with them on their books as a part of their assets and thus increase their fractional reserve?

or

other banks who have directly borrowed the money from the first bank in the chain are going to be able to declare their loaned money as an asset on their books and thus increase their fractional reserves?

4) Do you accept that in either or both instances of (3), the increased fractional reserves of the banks having received previously loaned money means that they can now lend more money out than was the case prior to their receipt of it?

5) Do you accept that all of the above processes will, unless there is a direct regulatory intervention, continue until all capacity to wring a return out of deposits received (within the fractional reserve requirements) is exhausted. In other words, until infinity is approached?

No obfuscation or misdirection please V. Answer the questions.

[vtsnowedin]

Steve or should I say Senator McCarthy?
I don't recall conceding any point. It was the end of the evening and too late for point by point analysis.
Are we discussing fractional reserve banking FRB or quantitative easing QE? they are two entirely different things and my opinion of one does not carry over to the other.

I notice you no longer appear to be trying to assert that the vast majority of units of exchange in the economy are anything but lent into existence credit.

Not at all. What about corporate profits, cash raised by sale of stock, cash down payments etc. I don't know what the actual breakdown is and loans maybe more then half the economy but it is simplistic to assume every transaction involves a loan.

You also appear to have completely failed to grasp how interest on loans absolutely requires that the money supply continue to grow.

You seem to fail to grasp that loans are used to produce profits from which the interest is deducted. Was the farm crop analogy too complex?

In short, you are comfortable with an undemocratically privileged elite being allowed to completely monopolise the means of exchange such that they can conjure into existence units of exchange out of nowhere and then lend them into the economy and, in doing so, end up owning the vast majority of the assets of the economy for no other reason than they have sole rights to conjure the units of exchange into existence. They have not actually made anything. They have not actually done anything material in the economy. The have contributed nothing. Yet, they end up owning everything via this monstrous fraud. When you stop to think about it, it really is is quite fiendishly clever in it's construction. Each bank in the system can legitimately claim to have followed it's fractional reserve requirement and so have not committed any fraud. However, each bank, by using the debt side of other banks' balance sheets as part of the deposit side of its own balance sheet, is contributing to a massive systemic fraud. There is a word for processes such as this in the natural world. It's called parasitism. And it gets worse.

Bankers make money banking ?? Doouh!! They end up owning everything? How is that. I've borrowed money, used it, and paid it back plus the interest and I not the bank own the house etc.

In a system of FRB, the debt-monster inevitably gets larger over time as more and more debt-money is pushed into the system to cover the interest payments on existing loans. This means there has to be a perpetually increasing demand for money by the people. Shorter lifespans, albeit with higher standards of production, on products is part of the process whereby that demand is kept at the artificially high level required to keep the monetary system from collapsing. Which is, of course, precisely not what is now needed by the world, given the resource buffers it is now hitting. To get a different outcome, we need a different system. It can't be reformed. It must be smashed. The problem is that those for whose benefit the current system is run are both unimaginably powerful and will no doubt wield that power in every way possible to maintain their position. This system will absolutely not be overturned without blood being spilt.

Quite the call to arms there. Are you going to storm the banks and spill their blood? Planning on using a kitchen knife as I know you don't own a gun?

Now to your questions:
1. QE is going on today but that is not FRB. QE is very dangerous and is the real problem.
2. Yes thems the rules.
3. is a false choice and doesn't include all possibilities.
4. ignores the fact that not all deposits came from loaned money but the portion of the question about reserves growing is again the rules and how it works.
5. No the process will stop when the demand for loans decreases as potential borrowers see no profitable or worthwhile use for borrowed money.
Look to the decline in credit card debt in the US to see that this is true.

[Blue Peter]

My understanding is quite limited, but I'll have a go.

1) Do you accept that central banks create base money for our economy either by buying it in from outside the system via the issuance of government bonds or, if they wish, by directly creating it from scratch with mechanisms such as QE.

I think that CBs mainly do it by changing the amount of reserves they require commercial banks to keep with them. They also print and mint some, but that is a very small fraction of money.

2) Do you accept that the banks who take out loans of base money from the CB can then lend out a proportion of it to other banks and/or non-banks customers based on their fractional reserve requirements?

I think that FRB is a distraction. We use capital adequacy i.e. all deposits will be loaned out upto a certain multiple of the bank’s capital.

3) Do you accept that either:

non-bank customers are either going to deposit the money they have borrowed into a bank or are they going to spend the money such that the recipient (or some recipient at some point down the chain of transactions) is going to deposit the money into a bank, thus allowing the recipient banks to declare that loaned money that has been deposited with them on their books as a part of their assets and thus increase their fractional reserve?

or

other banks who have directly borrowed the money from the first bank in the chain are going to be able to declare their loaned money as an asset on their books and thus increase their fractional reserves?

Again, FRB is a distraction. But, yes, a bank will loan out all its deposits.

4) Do you accept that in either or both instances of (3), the increased fractional reserves of the banks having received previously loaned money means that they can now lend more money out than was the case prior to their receipt of it?

The amount they can lend is ultimately determined by their capital. There will also be various risk, interest rate and currency limits. Collateral is very important here, and was a big mechanism in the financial crash. Collateralized loans are less risky, so more can be made; and then if this leads to an increase in the value of collateral, then more loans can be made and so on.

5) Do you accept that all of the above processes will, unless there is a direct regulatory intervention, continue until all capacity to wring a return out of deposits received (within the fractional reserve requirements) is exhausted. In other words, until infinity is approached?

There is direct regulatory intervention all the time. And you can’t approach infinity. The amount of money won’t continue to grow for evermore, because the system will break. And money as part of this system will break, but I don’t see money per se as being what breaks the system. Neither our current money system nor any other money system can prevent it breaking.

No obfuscation or misdirection please V. Answer the questions.

Peter.

[frank_begbie]

http://youtu.be/FPKOa-5GPPg - about 20 minutes long.

Great video.

So I wonder if this will apply to council tenants when the bedroom tax comes into force?

[frank_begbie]

To get a different outcome, we need a different system. It can't be reformed. It must be smashed. The problem is that those for whose benefit the current system is run are both unimaginably powerful and will no doubt wield that power in every way possible to maintain their position. This system will absolutely not be overturned without blood being spilt.

Why do they want to carry on with this system when it is doomed to failure?

And by the looks of things we're on the brink of collapse.

[clv101]

Why do they want to carry on with this system when it is doomed to failure?

Because it's working, for them, today. And will probably be working tomorrow as well. We are short-sighted creatures, with steep discounts rates. We value today, tomorrow and this year, far higher than the next decade.

[the_lyniezian]

The world economy is many times bigger than it was say 50 years ago.

Where did all the extra money come from if it DIDN'T come from the fractional reserve banking?

Just wondering?

The rise in production of oil, such as now appears to be peaking?

Plus all the coal and metals mined, all the crops grown and the production of all the factories, the roads and bridges built and all the ships on the seas.

That as well.

It is the increased exploitation of resources which could be said to represent an increase in value, but is that sustainable?

And how much of that value is questionably subjective? People assign value to all sorts of things for bizarre reasons, but when it comes to the crunch, such things may end up being worthless, or of no more value than another item which doesn't have the magic property attached. Much like money, over-valued shares, etc., it may be only so much phantom capital.

[frank_begbie]

Why do they want to carry on with this system when it is doomed to failure?

Because it's working, for them, today. And will probably be working tomorrow as well. We are short-sighted creatures, with steep discounts rates. We value today, tomorrow and this year, far higher than the next decade.

Yes, its working today and probably tomorrow, as long as we keep the plates spinning.

But what good is owning everything when it has no value because the money system has been smashed?

Its like Lemmings running towards the cliff.

[JavaScriptDonkey]

I've explained all this before but here we go again.

Once you add up all the debts and liabilities in your chart there is still only £1000. For instance bank 3 owes bank 2 £640. It is required to keep £128 on deposit in its vaults to offer some protection to its creditors and can lend out the other £512
But 512 + 128 = 640. No money has been created. It is required to pay interest to its investors and so charges interest to its debtors. That interest charge requires growth or inflation to satisfy but that is entirely separate to the question of FRB.

I think you are confusing FRB treatment of capital with the creation of credit backed by securities.
FRB is there to protect the bank's investors by ensuring liquidity. Security backed credit was there to make massive profits at what was thought to be very small risk.

Banks didn't need to have the capital to actually underwrite the loans they wrote as they would have to have under FRB but instead they issued credit based on insurance contracts written with other institutions.

These insurance contracts were written based not on the capital power of the bank but on the expectation of continued growth. When that growth buckled in the face of rising oil prices so it all fell apart as the institutions that wrote them didn't have the capital to honour them.

[Little John]

I've explained all this before but here we go again.

Once you add up all the debts and liabilities in your chart there is still only £1000. For instance bank 3 owes bank 2 £640. It is required to keep £128 on deposit in its vaults to offer some protection to its creditors and can lend out the other £512
But 512 + 128 = 640. No money has been created. It is required to pay interest to its investors and so charges interest to its debtors. That interest charge requires growth or inflation to satisfy but that is entirely separate to the question of FRB.

I think you are confusing FRB treatment of capital with the creation of credit backed by securities.
FRB is there to protect the bank's investors by ensuring liquidity. Security backed credit was there to make massive profits at what was thought to be very small risk.

Banks didn't need to have the capital to actually underwrite the loans they wrote as they would have to have under FRB but instead they issued credit based on insurance contracts written with other institutions.

These insurance contracts were written based not on the capital power of the bank but on the expectation of continued growth. When that growth buckled in the face of rising oil prices so it all fell apart as the institutions that wrote them didn't have the capital to honour them.

Firstly, irrespective of any FRB considerations, regarding the balancing of the books, when you add up all of the liabilities and assets in the chart, it does not add up to £1000 due to the interest that has been added to the loans. So, on that alone, you are quite simply arithmetically wrong.

Secondly, if you add up the fractional reserve held by all of the banks put together, it is there that you will find the original £1000 issued by the CB, spread out over the entire banking system's deposits held on account in the form of required fractional reserves. That being the case, where the F--k do you think the £3000 in circulation came from? Oh, and of course, there is the interest of £600 that is due to be paid back as well. There has actually been £4000 lent out but, given that some of that money in circulation on that table ends back up as fractional reserves held on deposit account, if we subtract the £1000 held in the form of fractional reserves from the total amount of £4000 that has been lent out, this leaves £3000 actually in circulation being used by people as if it was real money with the CB's name on it, which it is not.

Anyone here can confirm all of the above by simply adding those numbers up. Either you are arithmetically illiterate or you are deliberately trying to obfuscate for reasons unknown or, quite possibly, your mind is so repulsed by the truth that it is incapable of countenancing it. No matter, since we have the table above for everyone to see and so all of the above can be confirmed by anyone who chooses to add the columns up.

In lieu of all of the above, I will ask you the same question I have asked you on previous occasions and which I have also just asked V, but which neither of you have yet directly answered:

Do you deny that a given lender can add on to the deposit-side of its balance sheet, the debt-side of another lender's balance sheet and that the net consequence of this is that the same money gets re-lent out several times (in the example I have provided, based on the given fractional reserve ratio, three times. However, this will vary in real life depending on the fractional reserve ratio used) and that if anyone tried this stunt in any other walk of life, they would get sent to jail for double-accounting fraud?