Bank to 'print' £75bn of new money as it cuts rate

Aurora · Post by **Aurora** » 05 Mar 2009, 12:34

Times OnLine - 05/03/09

The Bank of England today embarked on radical moves to “print money” in an aggressive new phase of its battle to combat Britain’s economic slump.

In a landmark decision that marks a determined stepping-up of its fight to end recession and secure a recovery, the Bank confirmed it is beginning a strategy of so-called “quantitative easing”. It is to pump £75 billion of newly created money into the economy over three months.

The ground-breaking step came as the Bank’s rate-setting Monetary Policy Committee also pushed interest rates to yet another historic low.

Article continues ...

DominicJ · Post by **DominicJ** » 05 Mar 2009, 13:24

£1250 per person, just think what you could do with it

2 As and a B · Post by **2 As and a B** » 05 Mar 2009, 13:30

Probably a lot less next year than you could this year, and a lot less the following year when they're pumping that much every day...

biffvernon · Post by **biffvernon** » 05 Mar 2009, 18:22

How does this £75 billion compare with the amount of 'money' that was created by the fractional banking system but has vanished again?

Neily at the peak · Post by **Neily at the peak** » 05 Mar 2009, 19:34

I am still not convinced that over here at Powerswitch we understand fractional reserve banking properly. I have looked at the wikipedia (

)
article on it and this supports my view that it does not create money, what it means is that banks have to keep a fraction of their deposits as a reserve to repay depositors, still a low figure I admit, but they can only lend out what they have on deposit or what others have lent them which amounts to the same thing.

Neil

Catweazle · Post by **Catweazle** » 05 Mar 2009, 19:46

I'm not convinced that I actually understand money at all. For the life of me I can't see how a currency that isn't backed up directly with something tangible can work long-term.

I spend ages collecting some of this "money" stuff, then they go and print a load more

Andy Hunt · Post by **Andy Hunt** » 05 Mar 2009, 20:09

Good timing, I've finished buying everything expensive that I need or might need.

Just sit back, watch the veg grow and my mortgage disappear now hopefully!!

Post by **clv101** » 05 Mar 2009, 20:21

Neily at the peak wrote:I am still not convinced that over here at Powerswitch we understand fractional reserve banking properly. I have looked at the wikipedia ( )
article on it and this supports my view that it does not create money, what it means is that banks have to keep a fraction of their deposits as a reserve to repay depositors, still a low figure I admit, but they can only lend out what they have on deposit or what others have lent them which amounts to the same thing.

Neil

Did you read the money creation part of the Wikipedia page?
http://en.wikipedia.org/wiki/Fractional ... y_creation

biffvernon · Post by **biffvernon** » 05 Mar 2009, 20:26

This being the key sentence:

The process of fractional-reserve banking has a cumulative effect of money creation by banks, essentially expanding the money supply of the economy.

Neily at the peak · Post by **Neily at the peak** » 05 Mar 2009, 20:40

Clv101

Yes I did and the following is where it falls apart.

The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A then takes 20 percent of it, or $20, and sets it aside as reserves and then loans out the remaining 80 percent, or $80. At this point there is actually a total of $180 in the system, not $100; because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve, and substituted a newly created $80 IOU claim for the depositor that acts equivalent to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, etc.).

This is tosh, there is not $180 dollars in the system just $100 if you lend out 80% of something and retain %20 overall there is still 100%

I am not absolutely certain of my arguments but I am still trying to figure this out, as I have doubt in what is the accepted wisdom on this forum. Also if what some on here suggest is true then we would have had a much bigger money supply growth than we have had in recent years.

Neil

Neily at the peak · Post by **Neily at the peak** » 05 Mar 2009, 20:59

I have looked at this a bit further and I think I have finally got it. The problem is we are not looking at it from a balance sheet point of view. Does anyone know how to post tables in the forum because I think I could explain with a table.

Each of those banks mentioned in the example that is shown on Chris's link has a balance sheet, an asset on one balance sheet is a liability on another, therefore whilst it looks like it is expanding the money supply it actually isn't as all the balance sheets must balance and the assets and liabilities still total only 100.

Neil

Totally_Baffled · Post by **Totally_Baffled** » 05 Mar 2009, 21:23

Ok, if new money isnt lent into existence then how has all the extra money got into the system?

There is quite clearly more $'s and £'s om the system now than there was 100 years ago!

2 As and a B · Post by **2 As and a B** » 05 Mar 2009, 21:24

Neily at the peak wrote:I am still not convinced that over here at Powerswitch we understand fractional reserve banking properly. I have looked at the wikipedia ( )
article on it and this supports my view that it does not create money, what it means is that banks have to keep a fraction of their deposits as a reserve to repay depositors, still a low figure I admit, but they can only lend out what they have on deposit or what others have lent them which amounts to the same thing.

No FRB does not create money. It creates debt. £1,000 of money can be converted into £9,000 of debts on a 10% fractional reserve of each deposit. (I'm willing to be corrected on exactly how much debt can be created in the above example though.)

It is the central bank that creates the money in the first place.

Check out The Crash Course or Money As Debt.

Totally_Baffled · Post by **Totally_Baffled** » 05 Mar 2009, 21:31

foodinistar wrote:
Neily at the peak wrote:I am still not convinced that over here at Powerswitch we understand fractional reserve banking properly. I have looked at the wikipedia ( )
article on it and this supports my view that it does not create money, what it means is that banks have to keep a fraction of their deposits as a reserve to repay depositors, still a low figure I admit, but they can only lend out what they have on deposit or what others have lent them which amounts to the same thing.
No FRB does not create money. It creates debt. £1,000 of money can be converted into £9,000 of debts on a 10% fractional reserve of each deposit. (I'm willing to be corrected on exactly how much debt can be created in the above example though.)

It is the central bank that creates the money in the first place.

Check out The Crash Course or Money As Debt.

This is how I understand it too!

Bank:Bank 1 Bank 2 Bank 3 Bank 4 Bank 5
Loans: 1000 900 810 729 656.1
Retained: 100 90 81 72.9 65.61

This is your example foodinstar. I have only done upto bank 5, but if you carry on upto bank 105 (lets assume there is 105 different banks in this example).

You end up with £1000 in deposits (the sum of all 105 banks retaining 10% of the money deposited)

You also end up with £9000 in debt, the sum of the loans lent by each bank which ends up in the next bank as a deposit.

etc etc

biffvernon · Post by **biffvernon** » 05 Mar 2009, 21:35

Yeah but money is debt (ish) and a whole lot went pouff in the last few months. The question is how much? And how near is the £75 billion that got magicked into existance this afternoon to replacing it. I guess it's a long way short?