Can banks predict (control) the future?

MrChips

Joined Oct 2, 2009
21,400
What you may be experiencing is the failure to understand the difference between micro-economics and macro-economics, the failure to see the forest because of the leaves.

What individuals, households, businesses, and governments have to deal with on a daily basis in trying to balance their budgets is micro-economics.

It is like imagining ten glasses each half filled with water and having to keep track of each glass as we pour water from one glass into another. This is fiscal management and micro-economics. What we fail to see is one guy dipping his glass into the swimming pool beside him. This is what interest and loan creation does. It opens up an infinite supply of money created from nothing that affects monetary policy and macro-economics.
 

MrChips

Joined Oct 2, 2009
21,400
You may wonder if the world finances, governments and banking institutions are being run by the world's financial experts from the top economics schools, how come the world is in such a financial mess?

Some of these answers can be found in:

http://toxictextbooks.com/

There are many folks out there who deeply understand the financial crisis we face and here is a short list. They have appeared in public bringing this to the attention of any who care to listen:

Michael Hudson
David Korten
Nicole Foss
Ellen Brown
Chris Martenson
Tim Jackson
Paul Ekins
Herman Daly
James Gustave Speth
Peter Victor
Aaron Wissner
Brian Czech - CASSE - http://steadystate.org/

These folks have published books and articles and also have websites that elaborate on the subject of steady state economics and sustainability.
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
What you may be experiencing is the failure to understand the difference between micro-economics and macro-economics, the failure to see the forest because of the leaves.

What individuals, households, businesses, and governments have to deal with on a daily basis in trying to balance their budgets is micro-economics.

It is like imagining ten glasses each half filled with water and having to keep track of each glass as we pour water from one glass into another. This is fiscal management and micro-economics. What we fail to see is one guy dipping his glass into the swimming pool beside him. This is what interest and loan creation does. It opens up an infinite supply of money created from nothing that affects monetary policy and macro-economics.
you're probably absolutely right. I'm trying to grasp it. The anaolgy of water in glasses is good. What'm trying to prove to this guy (and myself) is that the creation of the loan in the first place is cup being dipped into the pool. Right now I'm losing that argument. I'm currently rearranging the numbers in his scenario to show a different outcome when realistic interest rates are applied, and compound interest payments are made on the loan, and when more than one person takes out a loan.
 

MrChips

Joined Oct 2, 2009
21,400
There is no such thing as a realistic interest rate. Any rate of interest is an exponential function. The whole problem with economic growth is that it is a pyramid scheme. Creating a loan using other people's money is ok. Creating a loan from thin air and charging interest is all a smoke and mirrors game. This is a fundamental flaw of the fractional reserve banking system. We need to go to 100% reserve.

Our entire monetary system depends on continuous growth. Without growth to pay back the interests the whole system collapses. And that is what we are seeing right now.

I would back away from your argument. I cannot find anything wrong with the way it is stated.
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
I would back away from your argument. I cannot find anything wrong with the way it is stated.
oops, too late. this what I just replied:
Thank you for your lengthy and thorough reply. I really appreciate you taking the time to write that. I went through the whole thing several times. I even drew it out and moved the coins around physically and it works out. I think the key to it though is the ratios of interest to the ratios of people who took out loans. 1 person took out a loan @ 20% and 2 people loaned to the bank @ 10%, so they effectively cancelled each other out, leaving the net money the same. now if you change the interest rates to something more like real life, and/or change the number of people who take out loans, the system no longer remains balanced. For example I went through your exercise exactly as you wrote it, only I changed the interest rates to 1% on deposits and 10% on loans, and I came out with 34.2 coins in the end. That says to me that either someone wasn't able to repay their loan, or someone wound up with a bank note of 4.2 coins that wasn't backed by gold and inflation took place. Are either of those the correct conclusion?
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
I would back away from your argument. I cannot find anything wrong with the way it is stated.
Ok, I have gone back through his little exercise and found my error. even with 1% interest on deposits and 10% on loans, no money is created. The banker makes a profit, but no money generated. The reason I have realized from this example is that at the same time that the bank "creates money out of thin air", they also create a negative money "out of thin air" in the form of a promisory note that cancels it out. So I having difficulty merging these two ideas together; the idea that the banks create money out of debt, and the idea that the money they create comes along with a negative money that cancels it out. So, tell me again how it is that banks create money from debt? who is the guy dipping his cup in the pool? Is it just the FED? or is there still a way that private banks create money?
thanks
 

MrChips

Joined Oct 2, 2009
21,400
Banks create money out of thin air by issuing loans that they do not have. They create a loan by adding numbers to a client's account. Then they record the same amount in their own books as liability. When the loan is eventually repaid the numbers cancel.

The problem is the interest incurred on the loans. The client has to come up with the interest. This has to come from more loans being created. The whole concept of economic growth requires more loans being created which is a pyramid scheme. The amount of coins and notes in circulation is less that 5% of the total money supply. The rest are loans which will never be repaid. Loans created is debt on workers. My simple analogy of the guy dipping his cup in the pool is simply to understand that there is a huge pool of money being created by the banks as loans and this distorts the micro-economics. The banks themselves become the beneficiary of the interest on loans being created. So if you are looking for demons, the banks would be the first place to start looking.

Remember the Fed is not owned by the US government. The Fed is a private consortium of the privately own banks. The US govt gets money from the Fed at interest by selling Treasury Bills. The US govt does not have to do this. The US govt can issue its own money interest free but does not do so.

A similar situation happens in Canada, except that the Bank of Canada is owned by the Canadian people:

Bank of Canada Challenged in Legal Action: "Restore the Use of the Bank of Canada for Canadians"

http://globalresearch.ca/index.php?context=va&aid=28292
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
The problem is the interest incurred on the loans. The client has to come up with the interest. This has to come from more loans being created.
Please pardon my continued reference back to the simplified example provided by the other guy, but it is helpful for my understanding. here are the numbers I came up with when I changed his interest rates from 10% on deposits & 20% on loans to 1% on deposits & 10% on loans:

Now the bank needs to settle its interest payments, and for simplicity leaves town to wrap up this example. It needs to collect a 10 coin loan from the Baker, and 1 coin in interest (10%). It needs to pay out a 5 coin deposit to the butcher, and 0.05 coins in interest (1%). And it needs to pay out a 15 coin deposit to the baker, and .15 coins in interest (1%).

So it collects 11 coins from the Baker. The baker has 15 coins at present, so no problem. Banker now has 21 coins in his vault.

He pays out his best creditor first - 15 coins, plus 1% interest for .15 coins, that's 15.15 credits plus the 5 coins he had under his bed, for a total 20.15 coins

Finally, he pays out the butcher, who gets 5 coins from his deposit, 0.05 coins as interest. He spent the money under his bed, so that's all he gets, 5.05 coins.

Let's add it all up. The banker now has .8 coins. The butcher now has 5.05 coins, the baker has 4 coins (and a bright shiny new candle driven bakery) and the candlestick maker goes into semi-retirement on the Amalfi coast with a whopping 20.15 coins.

So that's Banker .8, Butcher 5.05, baker 4, candlestick maker, 20.15 for a total of... 30 coins.
So, everybody was able to pay back their loans. no money was created, and the money for the interest did exist. The baker did not have to take out another loan to pay the original loan back. The banker walked away with a small percentage of the economy, but this is the opposite of inflation. He took money out of the economy. This example only represents one payment, so no compounded interest; if compound interest were throw in, the banker would have taken even more out of the economy. Even more if more than one person had taken out a loan. So I see that the banker would eventually end up with the majority of the money some years down the road if people were to continue taking out loans, but I don't see where money creation happens.

My simple analogy of the guy dipping his cup in the pool is simply to understand that there is a huge pool of money being created by the banks as loans and this distorts the micro-economics.
So are you saying that the problem is in the sheer volumes of people who take out loans? For example, if 90% of the people in the country currently have a loan out that is equal to 2 years of their pay, then despite the fact that there is an equal amount of negative money associated with these loans in the bank's log, the fact remains that all these "generated dollars" are still floating around in the economy?
 

MrChips

Joined Oct 2, 2009
21,400
The actual percentages do not matter. The difference between what the bank earns on loans and what it pays on deposits is called the spread and that is the bank's profit. This profit can come from the public's purse or it can come from new money created as loans. Once the loan is created and placed in the system (the large pool of water) there is no differentiating one from the other.

If we had a 100% reserve system, then the interest would have to come from the public purse. Someone has to lose to pay the bank. The problem is we have a 10% fractional reserve system that allows banks to lend out $9 for every $1 they hold on deposit. In this case, the interest comes out of this imaginary pool of money. It is all an illusion. To make matters worse, the bank is making a profit on something imaginary.

We are all spectators and players in the "Emperor's Magic Clothes".

So are you saying that the problem is in the sheer volumes of people who take out loans? For example, if 90% of the people in the country currently have a loan out that is equal to 2 years of their pay, then despite the fact that there is an equal amount of negative money associated with these loans in the bank's log, the fact remains that all these "generated dollars" are still floating around in the economy?
Yes.
 

MrChips

Joined Oct 2, 2009
21,400
If we had a 100% reserve system, how would the banks loan money? would they loan money? Would we borrow from the government?
If the banks were limited to 100% reserve, they could only lend out depositors' money or money that investors ante up to the bank. What they do now is lend money they do not have.
 

MrChips

Joined Oct 2, 2009
21,400
Oh. I forgot to mention in our discussion on the US govt gets its money from the Fed which is a private consortium. North Dakota is the only state that owns its own bank, the Bank of North Dakota.
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
If the banks were limited to 100% reserve, they could only lend out depositors' money or money that investors ante up to the bank. What they do now is lend money they do not have.
Ok, so I must admit, I'm still confused by this.
we have a 10% fractional reserve system that allows banks to lend out $9 for every $1 they hold on deposit.
does this mean that with a 10% reserve, for example someone deposts 10$:
A. the bank must hold 10% of the 10$ and is allowed to loan out 9$ to meet the requirement.
-or-
B. The bank must hold the 10$ but is allowed to create however much money they want, as long as 10% of what they lend out does not exceed what they have on deposit. (they can lend 100$ if someone deposits 10$)
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
The answer is not exactly B, but close enough for this discussion.
That's not what I'm being told on the other forum:
Banks can't create money, they must borrow it to on-lend. In fact, they can't even lend everything they borrow - which is why its called fractional reserve - they need to keep a fraction in reserve in case the people they borrowed off want their money back.
strantor wrote:...We'll just say for the sake of arguement, it's a fixed 10%.
So a new bank opens, I put in 10,000$. That's an asset. they are now allowed to loan out 100,000$ while still meeting the requirement of keeping 10% on hand. You go into the bank and take out a loan of 100,000$. they type it into your account; where did it come from?
Sorry, but that is wrong. With a 10% reserve requirement, and only a single $10,000 deposit, the bank would only be able to lend out $9,000, as they must keep 10% ($1000) in reserve. With thousands of depositors, the reserve needs to be large enough to allow depositors to make expected withdrawals. That means that with millions deposited, the first depositor of $10,000 will have no problem getting his/her money back.
I have yet to find a credible reference that spells this out for me. I know you have given me several references of books and such, but I have not had time to find the books or read them. Do you know somewhere I can find this officially in writing online?
thanks
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
OK, I am wrong.
Oh. Well, in light of that, I don't feel so bad about the misunderstanding. So does this change anything in regards to the way you feel about fractional reserve banking?

This is what I've boiled it down to (going back once again to the scenario put forth by the other guy):
...Despite the fact that the bank does not loan more than they have on deposit...Does the 10 coins put into the economy by the loan not constitute inflation? The way I'm looking at it now, the -10 coins (promisory note from the baker) exists only behind the doors of the bank, yet the bank notes exist in the hands of the populace as money. So, until the baker repaid the 10 coin loan, there were 40 coins worth of coin & bank notes floating around as money. The existence of the promisory note means nothing the rest of the participants of the economy; so in the grand scheme it is effectively nonexistent (until paid back), especially if the baker pays it back in installments over a long period. In the example there were a fixed amount of people but in our real economy, where people take out loans repaid over 30 years, and with the population ever expanding (more and more people available to take out the loans), the loans are being taken out faster than they will ever be repaid. So does that not cause an ever increasing amount of money to injected into the economy? -yes
I think the fractional reserve system does cause inflation, but to a much lesser extent than I did previously.
 

MrChips

Joined Oct 2, 2009
21,400
Sorry, I retract what I said. I am not wrong and the answer to your question is both A and B. The results are the same.

The examples in the two references both use the assumption of "A" and the loans are deposited at another bank.

The article quoted:
http://en.wikipedia.org/wiki/Fractional_reserve_banking
makes the following statement:

"To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out."

So the effect is as your answer "B".

Here is a calculator to show the effects of different lending and borrowing rates along with different reserve requirements.

http://www.novapoly.com/articles/finance/fractional-reserve-banking-model/
 

Thread Starter

strantor

Joined Oct 3, 2010
5,291
Have you read about velocity of money? This guy keeps going back to velocity of money, and it makes sense, but I cannot tell if what I'm looking at here is velocity of money or money multiplication. check out what he says here:
strantor wrote:What I'm getting at here is money multiplication.
consider the following example I have written:

The banks don't print money, true. But they do create money in the form of loans. Let's say that you are a brand new bank's only customer. you deposit for example 10,000$ in your account; the bank is allowed to loan out 9000$ of that money. That's their fractional reserve limit, 10%. So, you hold 10,000$ in your hand, you walk into the bank and hand it over. Now you walk out with a debit card. The debit card is as good as the bills that you walked in with; it is money. So joe blow walks into the bank right after you leave and asks for a car loan; the bank says "sure joe, we can loan you up to 9000$" - Joe agrees, and walks out with a bank check for 9000$. So now your 10,000$ just turned into 19,000$. Now, TECHNICALLY, the 9000$ doesn't exist, because when joe signed on the line, his promisory note became a negative number in the bank's books. If the auditor came around and looked at their books, the auditor would see that they had the promisory note, which is just as good as money also. the bank traded your 9000$ for a promisory note valued at 9000$, no harm, no foul. But the fact that the 9000$ doesn't TECHNICALLY exist (because it is cancelled out in the bank's books by the promisory note), doesn't matter to the economy. The promisory note only exists in a filing cabinet down at the bank. it does not exist out there in the economy. Out there in the economy, there is IN FACT 9000$ more than there was 10 minutes ago. The bank created it. Now, here's the kicker. Joe blow goes down to the dealership and hands the check over Jim Bob the car dealer for a used mustang. Jim Bob thinks, hey, I think I'll go open an account at that new bank, they have good interest rates. So, Jim Bob walks in there 6 hours after you left and deposits the 9000$ that Joe Blow gave him. Guess what, a deposit is a deposit. They are allowed to loan out 90% of every deposit. So, now they can use Jim Bob's 9000$ deposit and loan out 8100$ of it (10%, just like before). So Jane blow is jealous of Joe's new car and decides to get her own. She walks into the bank right after Jim Bob walks out, and she takes out a loan for 8100$. So your initial deposit of 10,000$ has now turned into 27,100$. The phenomenon is called money multiplication, and the total amount of money a bank can generate from a single deposit is equal to the inverse of the reserve ratio. so if the reserve ratio is 10% and your deposit is 10,000$, then the bank can generate up to (1/10% = 10) 10X your deposit. 100,000$ from your 10,000$ created by relending 90% of every deposit that comes back. (more info here http://en.wikipedia.org/wiki/Money_multiplier)

is that fiction? or is it again velocity of money?
It's not fiction: Money is multiplied by being reloaned - but you're seeing it in the wrong context. You think it's new money being created, but it's the same old money being spent multiple times. It is a velocity of money thing.

Consider this scenario instead.

Rather than you depositing your money in the bank, you buy a new kitchen from Joe Blow, and pay him $10,000

Joe Blow then goes to Jim Bob, and buys a second hand mustang car for $10,000

Jim Bob, rather than depositing the money in the bank, decides to go out and spend it on a new interior design, and hires Jane Blow to do it for $10,000

Jane Blow then uses here new money to buy a second hand Toyota Prius for $10,000.

Question. How much money has been spent in the economy?

$10,000 new kitchen
$10,000 on a Mustang
$10,000 on an Interior Design
$10,000 on a Prius.

How much money was spent - $40,000. How much money existed? $10,000. Now a question for you. Think about this in a real time frame. How much money would be spent in a year, if each person spent their $10,000 the day after they got paid, and this chain continued to happen all day, every day for a year. Question part 2: How much money would be spent in a year, if each person, after getting paid, held on to their money for a month (Without depositing it or doing anything else with it) before spending it? If you come up with the right numbers, you're starting to grasp the idea of the velocity of money.

Consider the alternative scenario 2: I don't trust banks. So instead of depositing money in the bank, I put it under my mattress. What happens now?

Joe Blow can't borrow $9,000.
Jim Bob can't deposit $9,000
As a result Jane Blow can't borrow $8,100

How much money was spent? Zilch. Stop. Recession time. How much money exists? $10,000

Do you see what is happening? In neither of the two extremes, no new money been created or destroyed. But in the first case, you're relying on people spending to keep the money moving to create new demand. In the second case, someone has decided to not spend AND not to lend it to the bank who then can't lend it out, and therefore, no new demand is created - which has a downchain effect. If someone isn't spending money, someone else isn't earning money. And if that someone else isn't earning money, then that someone else isn't spending money, which causes the next person in the chain to not be earning any money.

That's why in times of recession, the government will often start stimulus projects. Do we need a new Highway? Not yet, but hey, we employ 10,000 engineers, construction workers and labourers, and they'll spend money on food and clothes, which will employ store staff, bakers, fruit pickers, etc. These people will spend, who will buy cars, etc etc etc.

 
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