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Banks create money, but it's less impressive than it sounds

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Re: Banks create money, but it's less impressive than it sounds

#191

Post by alasdair_ »

squiggleblaz wrote: post #169
aronpye wrote: post #144

Earlier quoted context omitted.

That’s where the term legal tender comes from. Society is legally mandated to accept whatever is determined by the government as legal tender for the settlement of debts. However, this does not include everyday transactions, only the settlement of debt. A trader can accept or deny any currency or form of barter as long as it is not for the settlement of debt. This is why the Scots are wrong to get in a fuss about sho…

>That’s where the term legal tender comes from. Society is legally mandated to accept whatever is determined by the government as legal tender for the settlement of debts. This entirely depends on the legal framework in a given country. Some countries have legal tender but no necessary obligation, absent a contract, to accept coins or notes in general as payment of the contract. Moreover, in the context that a person…

> No English person would be hurt if every English person accepted Scottish notes at par;

This is true up until the point one of the banks goes bankrupt, especially if they were found to have printed a whole lot of notes not backed by central bank reserves.

In practice, I strongly suspect the government would step in and accept the notes directly if that ever happened.

Re: Banks create money, but it's less impressive than it sounds

#192

Post by alasdair_ »

jacobush wrote: post #158
TheBobinator wrote: post #132

Earlier quoted context omitted.

Loaning money drives inflation; when a loan check is created, it spends just like cash, except the banks, behind the scene's, trade the loan checks so everyone has enough cash on hand to appear solvent. Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people t…

What empirical evidence is supposed to sway me in favour of genocide?

I assume the poster meant “evidence that genocide is happening” and not “evidence that genocide is a good thing”

Re: Banks create money, but it's less impressive than it sounds

#193

Post by alasdair_ »

mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Seems like a great scam. Create a bank, go through the many many steps to obtain FDIC backing, pay out enormous loans to insiders, have a run on the bank, then everyone is made whole again while the fraudster skips town.

I understand that this is basically insurance fraud, but the money is gone long before the fraud occurs and the government must pay out, unlike a single insurer.

Re: Banks create money, but it's less impressive than it sounds

#194

Post by baobabKoodaa »

gridlockd wrote: post #182
baobabKoodaa wrote: post #100

Earlier quoted context omitted.

It sounds like you are referring to "claim one", not "claim two". I noted in the article that Werner is (only) technically correct on claim 1, essentially due to the reasons you described. Claim two is about presenting empirical evidence for claim one. You might think that empirical evidence is not needed. That's fine. It still was not presented, so claiming to have presented it was a false statement.

You ask for empirical evidence that "private entities have the inability to create money out of thin air", but this rests on a definition of "money". You brought up the example of a private IOU (the Poker Site). If we remove the distinction between private IOUs and bank IOUs, indeed you would have an example of a private entity creating money out of thin air, for a more loose definition of money. However, as we estab…

> I believe the empirical evidence for private non-bank entities not being able to create bank IOUs is that they're not banks. Am I missing something?

That's not what "empirical evidence" means. Empirical evidence is something we observe in the world. If we set a definition "all murder is illegal" and then we conclude "legal murders do not exist", do we have "empirical evidence" that legal murders can not exist? Of course not. We can conclude the claim is true by definition. That's not empirical evidence.

> You ask for empirical evidence ...

I never asked for empirical evidence for non-banks' inability to create money out of thin air. Werner claimed to have empirical evidence for this, and I merely pointed out that he does not have empirical evidence for this, contrary to his claim. If Werner had instead said "due to accounting conventions, we declare banks' IOUs to be money and non banks' IOUs to not be money", I wouldn't have any problem with that.

Re: Banks create money, but it's less impressive than it sounds

#195

Post by markjenkinswpg »

captn3m0 wrote: post #163
baobabKoodaa wrote: post #119

Earlier quoted context omitted.

> So I suppose I put it to you that there is something special about the IOUs created by banks - they are legally allowed to used. IANAL, but the IOUs created by Full Tilt Poker were also legal to use. When the government eventually pressed charges in the debacle, no charges were pressed against regular players of the poker site, including those who used these IOUs for small economic activity. If using these IOUs wou…

Would gift-card-economy work as another example? When I give a Amazon gift-card to someone, it is an IOU against Amazon, and most people will gladly accept it as money.

There's even a technical name for this kind of money, scrip.

Re: Banks create money, but it's less impressive than it sounds

#196

Post by sunshinerag »

alasdair_ wrote: post #193
mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Seems like a great scam. Create a bank, go through the many many steps to obtain FDIC backing, pay out enormous loans to insiders, have a run on the bank, then everyone is made whole again while the fraudster skips town. I understand that this is basically insurance fraud, but the money is gone long before the fraud occurs and the government must pay out, unlike a single insurer.

I think it would not be shocking anymore to know that you discovered the operating model of the bank. Business as Usual.

Re: Banks create money, but it's less impressive than it sounds

#197

Post by jariel »

aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

"something because the government says it is."

This is misleading. Gold was replaced by other assets, notably 'T-Bills'.

Basically, USD are backed by Government debt, instead of Gold.

To imply the Fed just 'says it is' is misleading.

Since 2008 a lot of the assets on Fed balance sheets are mortgages = notably, underwater mortgages bought by the Fed at face value from banks that were going bankrupt.

But I think the point about Gold->Other Assets is important.

Euros are backed by assets as well.

RMB is the major currency based on the magic will of one man, Xi, who can effectively control currency with the press of a button. We think that is 'bad' because money should be separate from governance, but they look at it differently apparently.

So imagine if Johnson, Macron, Trudeau, Trump etc. could literally decide how much money to 'print', to which banks it goes, and to whom the loans would be made, and under what terms.

This is they key limitation on RMB becoming a truly 'global currency'.

The article is a very worthwhile read though, so as to dispel a lot of conspiracy theories about banking.

Funny enough, there is a lot of shady activity in banking, but it takes a good understanding I think to make sense of it.

Re: Banks create money, but it's less impressive than it sounds

#198

Post by yxhuvud »

anticristi wrote: post #154
mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

I love the IOU vs WeOU differentiation. Banks need to have licenses and adhere to strict regulations, which are checked at least yearly by auditors. (Joke: Unless you are a German bank, in which case you get checked only once-a-decade.) That is what makes banks special: They have legal backing, but also legal responsibility. Side note regarding non-bank IOU: I found the idea of having a payment card from my grocery s…

> The grocery entity and the banking entity need to be separated

Quite a few of the grocery chain cards here in Sweden have accounts backed by chain-owned banks. So at least here, the separation is not all that great.

Re: Banks create money, but it's less impressive than it sounds

#199

Post by yxhuvud »

danybittel wrote: post #107

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next…

It is also a feedback loop where many of the steps are used to invest in the economy and create more value. So as long as the investments pay off it is a virtuous feedback loop.

Re: Banks create money, but it's less impressive than it sounds

#200

Post by irln »

baobabKoodaa wrote: post #157
irln wrote: post #138

Earlier quoted context omitted.

> Deposit insurance is a fundamental difference between bank IOUs and non-bank IOUs. Deposit insurance is a fundamental difference but it's not the main difference. Individuals and most non-banks don't have access to Federal Reserve accounts and therefore access to reserves. The main distinction between a bank and a non-bank is the ability to create IOUs ultimately backed by reserves (whether they have sufficient amo…

This is not entirely accurate. Suppose a fraudulent bank decided to credit my account with a trillion dollars. The federal reserve would not honor this IOU with actual dollars. This is in stark contrast to federal reserve's ability to create a trillion dollars. They could create an actual trillion dollars and give it to a corrupt politician. A regular bank does not possess this ability.

What does a fraudulent bank have to do with the fact that the FR is the ultimate backstop to loans (IOUs) created by a bank...a "power" you claim is the same as a non-bank created IOU or a an individual IOU? Further not sure how your example refutes my previous reply's accuracy, regardless, if a bank makes a bunch of fraudulent loans adding up to a Trillion dollars and it isn't discovered until those loans are cross-collateralized sufficiently to cause systemic risk, you can bet the FR will back those loans. Finally, given a bit of time a single Trillion dollar loan may not seem as large as it does now. :)
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