Writing the unthinkable in the Telegraph

[kenneal - lagger]

From SnowHope's tag line

The economic expansion was driven by financial capital as banks lent more than they had on deposit, confident that Tomorrow’s Economic Growth was collateral for To-day’s Debt. Dr. Colin Campbell.

Colin Campbell gets it as well!

[kenneal - lagger]

No Steve, the world rarely resolves to the artificial choices you offer. Perhaps it will be clearer if we go back to where we started?

If you run a bank you CANNOT add magic money to your balance sheet simply because someone wants to borrow it from you.

The contrary view was the crux of the statement ably put by UCE and seemingly agreed with by everyone apart from me.

I think I have managed to convince you all that it is just central banks that get to create money.

Once you have money deposited with you (we'll deal with the sources later) you can make loans to other entities. You CANNOT simply multiply your assets by X and decide to loan that out. You are also mandated to always retain a FRACTION of your total assets as your RESERVE. Hence the name Fractional Reserve Banking.

By the way, I agree with this



Now to the loans.

When a bank makes a loan it does so in expectation of a return. When somebody takes a loan they have to pay it back with interest. They also generally have a purchase plan for the money that involves the transfer of assets between parties. The loan amount will end up in a bank account but the asset has also changed hands. A transfer of wealth has occurred.
The bank loaned money out that was counted as part of its assets. The money was used to buy a thing and ended up as a deposit asset in another bank. The original bank is still owed the money by the borrower and that debt must be paid. The money that the borrower pays off the debt with comes, surprise, surprise, from the assets of another bank.

That is the bit that your tables don't show - you never account for where the money comes from to pay off the debts. Not the potentially unpayable original CB debt but the very real debt that comes in the shape of your mortgage.

Bank2, now with the loan value added to their assets can forget entirely where the money came from because it has just passed through the hands of bank1. Bank1 didn't make the money. The money had already been deposited in bank1 before it could lend it out. Bank2's tenure can even be viewed as completely separate from bank1 as though the money came direct from the CB. Bank1's interest in the money has ceased. Bank1 now has a loan on it's books that it being services by reducing some other bank's assets.

The multiplier effect of FRB is in liquidity. It allows capital on deposit in mostly static accounts to be leant back out into the economy.

What scared the banks to death and almost caused fiscal collapse was that the banks had foolishly invested in assets that were suddenly worthless. They were now unable to fulfill their FRB obligations and knew damn well that other banks were equally strapped for cash.

What you are suggesting is that if I loan you £20 then I still have that £20 as a loan asset and you have it as well as capital. You are forgetting that you have to pay it off and that I no longer have it.

In the scratch chart below there is only ever £1000. It looks like there is more money as the original £1000 is loaned down the chain but it is a mathematical mistake. You only see more money if you forget that the loans have to be repaid and if they aren't that represents a loss.
(R = reserves, L = Loans made, TA = Ttl Assets)

_R___L_____TA.........R___L____TA............R____L__TA
1000_0____1000.......0____0____0.............0____0___0
100__900__1000.......900__0____900..........0____0___0
100__900__1000.......90___810__900..........810__0___810

If you still believe that banks make money out of thin air when they make loans then try refusing to pay off your mortgage on the grounds that the money didn't ever exist and see how far you get.

<edited - damn graph spacings>

JSD's problem is that the system we, and Money As Debt, have described is so fantastical and unbelievable that he thinks it can't be true. He doesn't want to believe.

The problem for everybody is that it is true. How else can countries all over the world have many times their GNP in debt? How can the US be trillions of dollars in debt? How can we be billions of pounds in debt? How can the Greeks, Spanish, Irish, Italians and Portuguese be billions of euros in debt? Because banks can lend unlimited amounts of money by lending to each other, as well as us, and creating new money in the process. Because each new loan creates an asset that can be loaned against.

The banks don't want us to believe that this is true because if we all knew there would be such a huge clamour for the government to put a stop to it that governments would have to do something and the richest people in the world you lose their prime source of income. At one time the banks printed there own bank notes but they were getting greedy and the government had to put a stop to it. It's now time for the government to put a stop to the current abuse of the monetary system and take away from banks their current right to make magic money.

By the way, I agree with this

What scared the banks to death and almost caused fiscal collapse was that the banks had foolishly invested in assets that were suddenly worthless.

and it's because they are hopelessly over-leveraged, as they say in the US.

If you still believe that banks make money out of thin air when they make loans then try refusing to pay off your mortgage on the grounds that the money didn't ever exist and see how far you get.

You can't do that because you signed the legal credit agreement that effectively created the money. The law gives the banks power under various acts to create the money.

When TSHTF and no one can pay off their loans virtually all money will disappear, the banks will go broke and there will be a problem with trading until someone comes up with an alternative medium of exchange for trading with. If the government gets in quickly and sorts things out like the distribution of food and fuel we would all, excepting bankers, carry on quite happily. We might have to get used to carrying our cash around in wheel barrows for a while but life would soon sort itself out, without banks for a while.

[Catweazle]

Those of us who find some of these financial shenanigans difficult to follow can console ourselves with the fact that, in the enquiries after recent bank crashes, even the senior staff admitted that they didn't fully understand them.

[vtsnowedin]

[The problem for everybody is that it is true. How else can countries all over the world have many times their GNP in debt? How can the US be trillions of dollars in debt? How can we be billions of pounds in debt?.

One thing that many don't seem to understand is that GNP stands for "gross national product" "per Year". It is not the sum total of a countries assets it is the sum total of one years production. So they don't count all the coal in the ground just what was mined and sold this year. Same for oil, corn and other crops, factory production and even the value of songs down loaded and commercials aired.
So you can easily have a debt in excess of GNP though that doesn't make it a sound policy. It is no different then you having a mortgage for 200,000 while making 50,000 per year.
Now back to your regularly scheduled program.

[emordnilap]

Steve Keen on the IMF paper.

[Catweazle]

One thing that many don't seem to understand is that GNP stands for "gross national product" "per Year". It is not the sum total of a countries assets it is the sum total of one years production.

A headline figure we often see on our news is GDP, Gross Domestic Product. Our media seem to think it's an indicator of the state of our economy and get very excited when it goes up. Sadly they are missing the point. For example, the GDP went up recently because gas prices rose.

I believe the figure we should be looking at is the export / import ratio, balance of payments, because that's the indicator of whether we are earning our place in the world or just surviving by selling the family silver.

[Little John]

In the US, and possibly here too, you have the added stimulus of loans being packaged up and sold on as financial instruments. This enables the banks to lend even more money on the cash receipt and to get dodgy loans fraudulently off their books. That, and the fact that they were given the highest credit rating, is probably the biggest miss-selling scam ever and has not yet reached a court anywhere for some reason.

I don't know why we are trying to explain all this to ourselves when it is done brilliantly in the two Money As Debt films. Hopefully we have now managed to convert at least one Doubting Thomas.

I've not seen those films. I'm going to go and hunt them down now

[emordnilap]

This is a good site, Steve.

[Blue Peter]

One thing that many don't seem to understand is that GNP stands for "gross national product" "per Year". It is not the sum total of a countries assets it is the sum total of one years production.

A headline figure we often see on our news is GDP, Gross Domestic Product. Our media seem to think it's an indicator of the state of our economy and get very excited when it goes up. Sadly they are missing the point. For example, the GDP went up recently because gas prices rose.

I believe the figure we should be looking at is the export / import ratio, balance of payments, because that's the indicator of whether we are earning our place in the world or just surviving by selling the family silver.

The GDP figure already includes the balance of imports and exports. One of the formulae for it is:

GDP = private consumption + gross investment + government spending + (exports &#8722; imports)


Peter.

[Little John]

F--k me, I got it essentially right. The money is created by allowing banks to add to the deposit side of their own books the loan side of the books of other banks and perpetual growth is required to keep filling the hole created by interest on the loans.

It's a system of total slavery.

[kenneal - lagger]

Steve Keen on the IMF paper.

A post which vindicates the approach that many here have been taking against JSD. Ironically it seems the Fed wishes to obfuscate the issue so as not to annoy the public too much with the actual nature of banking and magic money!!

[Little John]

This is a good site, Steve.

Thanks E.

[emordnilap]

This is a good site, Steve.

Thanks E.

Tip: when you click on a film you might want, click on the 'download' button, then control-click (on a Mac) on the highlighted link to save the fillum to your drive under a sensible name.

[Little John]

**** me, I got it essentially right. The money is created by allowing banks to add to the deposit side of their own books the loan side of the books of other banks and perpetual growth is required to keep filling the hole created by interest on the loans.

It's a system of total slavery.

The more I think about this the more insane it becomes.

We basically all have to work ever harder to make ever more shit that we mostly don't need at an ever accelerating rate to be able to borrow the means of exchange (that never even existed prior to our borrowing of it into existence) that allows us to then buy back all of the shit that we made and we don't need as well as the shit we do need.

I always had a vague understanding that we were getting shafted by our monetary system and that it was based on unsustainable debt. But, it is only in the last 48 hours that I have actually sat down and figured out exactly how it is done. No wonder people's minds are repelled by it when you try and explain it to them. It's so f***ing sick, so utterly dastardly, only the most evil of minds could devise such a system of slavery.

Yet, this is what we all labour under.

My head hurts.....

[extractorfan]

So does the loan borrowed by the bank that records it as a deposit never have to pay that loan back? It does have to one presumes and pay interest on whatever is outstanding on day 2.

However, it is indeed true that at some point whilst I was a nipper, possibly slightly earlier than that, our culture changed to one where we would borrow money for anything instead of save up. Borrow now off access, your flexible friend and pay a higher price for your purchase later. This lead to a situation a (once) young couple I know got into. They would buy a sofa, a big tv, new cooker etc all on debt, once the balance was paid off they'd throw it all out and "buy" new stuff, on debt and the cycle repeated forever. I don't know them any more but I doubt anything has changed. To me it was like they never actually owned anything, but they seemed perfectly happy.