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

[Totally_Baffled]

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?

I think you are right - we can do this without inflation if money created = money destroyed by defaults.

However, it strikes me getting these two to match each other must be nigh on impossible!

We are bound to over cook it (inflation) or under cook it (deflation). Take your pick!

[Hairyloon]

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%

But the system includes the $100 that the bank owes to the original lender.

[biffvernon]

Not quite the same theme but Robert Peston's blog (he's in China just now) is as insightful as ever:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/

[SunnyJim]

The media would have us belive that 75 billion isn't even scratching the surface of what has gone missing.

I'm not sure you can trust the media though. It would be mighty convenient to inflate the country out of debt would it not?

[Neily at the peak]

The trouble is no-one knows at the moment what has actually gone missing. Commentators on the world at one were suggesting that the effects of interest rate changes can take 18 months to get into the system, so it seems to me we are playing with fire, all be it a small match to start with or maybe it's a blow torch and we don't know it yet. btw I am a borrower so deflation scares me.

Neil

[Andy Hunt]

I saw a guy from the Motley Fool on Sky News tonight and he was saying that now is a good time to pay off debts, your mortgage etc.

[grinu]

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%

My understanding is that, if you deposit $100 in the bank, the bank uses that as the 20% reserve holding and can loan out $400 based on that, so a 100% results in 500%.

Second major issue is that there is never going to be enough money in the system to service debt because money is created as debt, but then interest is added to the repayments, so there is never enough money available to pay off all the debt within an economy. Hence, there is a need for either inflation of debt default.

The money that is being removed from the system is a result of people not servicing their debts - it has already been spent on goods and services.

[2 As and a B]

My understanding is that, if you deposit $100 in the bank, the bank uses that as the 20% reserve holding and can loan out $400 based on that, so a 100% results in 500%.

This rings a bell with me and I'm confused now. Can a bank really loan out more than it takes in?

[contadino]

Can a bank really loan out more than it takes in?

AFAIK, yes.

However, isn't the level of debt, particularly household and small business debt, actually a bit of a red herring?

The institutions that governments are propping up are all large international banks. Their losses aren't necessarily caused by bad debts, but more the snowballing of losses on complex speculation - derivatives & CDSs? Even where the losses are blamed on large, unsuccessful mergers, isn't it a question of poor due diligence?

I haven't yet got my head around how this "quantitive easing" is going to work, but reading between the lines it looks like a way for the government to raise inflation without affecting the headline inflation figure.

[2 As and a B]

Can a bank really loan out more than it takes in?

AFAIK, yes.

But that would mean that high street banks have control over the currency by inflating the money supply as £100 can be made into £500 can be made into £2,500 can be made into £12,500 and before we know it inflation is through the roof.

[Blue Peter]

Can a bank really loan out more than it takes in?

AFAIK, yes.

But that would mean that high street banks have control over the currency by inflating the money supply as £100 can be made into £500 can be made into £2,500 can be made into £12,500 and before we know it inflation is through the roof.

No, banks can't lend out more than they take in, or their books wouldn't balance,


Peter.

[PS_RalphW]

But when the bank lends out £500 with only £100 in the vault,it counts the £500 as an asset - money it will get back eventually. It also charges interest, so in fact it will get back £750 eventually. It also gives interest on the £100 - £25. As long as inflation, overheads and bad debts stay low, the end result is big fat profits and big fat bankers. Of course it only works in an expanding economy, and some poor sod ends up with £750 in debt which he can only repay by putting someone else in £1000 of debt....

Eventually someone gets their fingers burnt.

[DominicJ]

My understanding is that, if you deposit $100 in the bank, the bank uses that as the 20% reserve holding and can loan out $400 based on that, so a 100% results in 500%.

This rings a bell with me and I'm confused now. Can a bank really loan out more than it takes in?

No, despite what that blasted cartoon says
If a bank has £100 its vaults (or the CB's) then yes, it might have issued loans of £2000, but only if it had received deposits totaling £2100.
Having £100 in its vaults doesnt give it some special legal power to print £20 notes.

I cant open the Bank of Dominic, deposit £100, lend myself £2000, deposit that, and lend myself another £40,000.
I can open the bank of Dominic, deposit £100, lend myself £95, deposit it and so forth, but I end up with £1000 on deposit with the bank, I owe the bank £900, and the bank has £100 in a vault.

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.).

The last bit is where it falls apart, the IOU, which is what I have on deposit - what the bank has in reserve, IS NOT equivilant to central bank money nor can it be transfered to another bank or spent.

If I were to transfer my bank balance from Lloyds into Barclays, Lloyds actualy has to transfer that as Central Bank money, if it cant, because it has ran out of reserves, it defaults.

[PS_RalphW]

I guess this is where the confusion comes in.

Fractional-reserve banking is an inherently bankrupt system. It allows a bank to lend $9 for every $10 it has on deposit. The borrower can then deposit his $9 check with a second bank, which can then lend $8.10 of it, etc. Each time the bank issues a fractional-reserve loan, it is effectively creating new money out of thin air. Ultimately, as much as $90 can be created for every $10 on deposit in the banking system.

http://citizeneconomists.com/blogs/2009 ... with-fdic/

Although any one bank can only lend 90% of it's deposits out, that 90% can be deposited in another bank as real money, from where it can be lent out again.... until 900% of the original money is in circulation, almost all of it being debt owed to one bank or another.

In fact, for every $ of real money, there are at least 10 banks that lay claim to it.

[biffvernon]

So when the banks lost the confidence to lend to each other, the whole house of cards crumbled and governments had to step in to keep the system going.