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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

#221

Post by eru »

zimablue wrote: post #180
eru wrote: post #54

Earlier quoted context omitted.

Well, legal barriers aside, Amazon could print their own currency and be in the same position as the Fed. Though to make it absolutely the same position, Amazon's currency should not be tied to the dollar but freely floating. Then there can be no run on Amazon's currency, just like there can be no run on the dollar. However, of course, both Amazon's currency and the dollar can lose in value compared to goods and serv…

"legal barriers aside" is insane, legal barriers aside I'm off to rob a bank. There's only really two or three things that could possibly make banks different: the law, de facto capital requirements to enter the market and hidden knowledge, and you can normally buy hidden knowledge so the thing distinguishing banks from anyone else is either the law or money, and it's mostly the law.

> "legal barriers aside" is insane, legal barriers aside I'm off to rob a bank.

Well, that's not just a legal barrier there, but also that the people on the other side of that transaction don't like to be robbed.

People deal in currency blackmarkets all the time, and all participants are willing. Obviously, being able to do business out in the open is much more efficient and productive. And especially eg Amazon as an above board organisation could not engage in blackmarket operations without endangering their legal activities.

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

#222

Post by rags2riches »

jonplackett wrote: post #131

I’d recommend ‘Money As Debt’ if you’re interested in this subject. It’s done as a cartoon but makes it really easy to understand why the world works like this and what the big problems are with it. Namely that if money is created only when you lend it to people, but they have to pay back what you created + interest, there is never enough money to pay all debts back. So bankruptcy is built into the system. It’s like…

Paying back all debt would mean there was no more money! What would that even look like?

It was years since I saw 'Money as Debt' but I remember it as quite flawed in its arguments.

Let's say there's a silly town with a single evil bank. The good people borrow a hundred dollars in total. Horror! The evil bank is now owed one hundred and ten dollars. This can never be repayed, there is not enough money!

Except the good janitor at the bank has his wage of ten dollars credited to his account by the bank for the value created by his labour. He pays the grocer, the landlord and so on and now the silly town people can pay all their loans, should they ever want to.

And then the old grocer dies and his estate defaults on its debts. And it turns out the bank overvalued his house. The banks is now down ten dollars on its loan assets. But the bank still has its liabilities to the other good town people the grocer paid when he took out the loan. Suddenly the town can pay back all their debts and still have ten dollars left owed to them by the bank! The evil bankers are foiled.

'Money as Debt' goes to all this trouble to explain that money is debt. Then we are supposed to be shocked by the fact that debt can be created by no more than signing a paper! It's stupid.

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

#223

Post by justinzollars »

FinanceAnon wrote: post #95
justinzollars wrote: post #74

I recommend reading "The creature from Jekyll Island". This book opened my eyes up to the question "what is money?" and it's especially relevant today, given we are living through the largest wealth transfer in human history. But it also talks about how smaller banks work, and this notion of IOUs, credit and loans.

From wikipedia, about the author: 'He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[2] He also believes that the Biblical Noah's Ark is located at the Durupınar site in Turkey.[6]'. I would recommend learning from different sources.

That's an Ad hominem attack by Media Matters and doesn't effect my strong recommendation that this book explains the banking system and how the federal reserve functions.

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

#224

Post by sandGorgon »

bobthepanda wrote: post #64
sandGorgon wrote: post #61

Is this the US way of defining assets & liabilities? In india, all deposits are considered liabilities (since you need to pay the customer interest on it). All loans are considered assets (since you make money on them)

TFA says the same. Rather what's considered assets are the book value of the loan and the cash the bank actually has on hand.

Cash at hand is generally also not considered an asset. Because you're paying interest on it.

It's usually raised using deposits. Unless I'm missing something

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

#225

Post by jonplackett »

rags2riches wrote: post #222
jonplackett wrote: post #131

I’d recommend ‘Money As Debt’ if you’re interested in this subject. It’s done as a cartoon but makes it really easy to understand why the world works like this and what the big problems are with it. Namely that if money is created only when you lend it to people, but they have to pay back what you created + interest, there is never enough money to pay all debts back. So bankruptcy is built into the system. It’s like…

Paying back all debt would mean there was no more money! What would that even look like? It was years since I saw 'Money as Debt' but I remember it as quite flawed in its arguments. Let's say there's a silly town with a single evil bank. The good people borrow a hundred dollars in total. Horror! The evil bank is now owed one hundred and ten dollars. This can never be repayed, there is not enough money! Except the goo…

Well I, like many people. was very surprised money is created that way. And your fictional town doesn’t seem to work much like anywhere else. All the banks seem to be doing fine just fine. Houses usually go up in value not down so when someone defaults on a loan the bank makes money rather than loses it. With the exception of the credit crunch (where we all just gave the banks our hard earned money instead)

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

#226

Post by dwd »

kgwgk wrote: post #77
dwd wrote: post #76

Earlier quoted context omitted.

According to Steve Keen[1] based on research by Kydland & Prescott[2] it's up to a year before the fractional reserve catches up. [1] https://www.deflation.com/Articles/The-Roving-Cavaliers-of-C... [2] https://researchdatabase.minneapolisfed.org/concern/parent/b...

Thanks for the reference. Edit: I've just briefly skimmed it [1], but "The creation of credit money should happen after the creation of government money." would be true if the system was working at capacity. The fractional reserve requirements are not really a limiting factor, the banking system in aggregate is operating well below that limit if I remember correctly. [1] The 2012 article, for a few seconds; I didn't…

He first published that article in 2009 right after the markets imploded with the GFC. He's also generally acknowledged as one of the few who predicted the crash which he predicated on the buildup of private debt.

His articles make for interesting reading even now given his general rejection of mainstream models being inadequate.

https://theconversation.com/i-predicted-the-last-financial-c...

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

#227

Post by kakwa_ »

thescriptkiddie wrote: post #218
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…

Gold itself only became worth something because the government says it is. Or rather, it became worth far more once governments started demanding that taxes be paid in gold. Before that it probably wasn't worth all that much, because despite its rarity it wasn't useful for much in the ancient world. Gold isn't some magic substance with intrinsic value. See Debt: The First 5,000 Years by David Graeber.

Also, a key idea of Graeber's book is that money is in fact debt (the example with English soldiers checks being used as bills in Hong Kong bars is quite striking in my opinion).

Money is basically a small abstraction over explicit debt bonds linked to material goods, making it more easily exchangeable.

This comes from the fact most economic chains are far from synchronous (example: a farmer needing tools to prepare his field, but being able to pay for said tools only after the harvest, the blacksmith needing coal and iron ore to produce said tools, but not being able to pay until the farmer has paid him, etc).

In this context, the banker (or any other lender) acts as an intermediary, evaluating if the debt can be repaid and bearing the risk instead of the creditor for a fee.

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

#228

Post by vmception »

zimablue wrote: post #187
vmception wrote: post #4

I've done extremely well obtaining goods and services by operating under my unpopular perceptions of the world, including how banks make money and the purpose of money and currency. My unpopular perceptions have consensus with the people that matter (banks, lawyers, accountants, regulators, courts) but they just won't get very far on web forums if you try to tell people something that doesn't match their understandin…

https://xkcd.com/1570/ I think you haved to be careful about attributing your success or ability in one field to a generalized philosophy that you have. Just looking around empirically, "successful" and "unsuccessful" people seem to vary wildly in ideology. Stallman, Thiel and Bill Gates have pretty wildly varying ideologies and are all successful, I'm sure you could find 3 unsuccessful people with similar ideologies…

There is luck, I throw darts at the wall and see what sticks

I also make the darts and choose the walls

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

#229

Post by rags2riches »

jonplackett wrote: post #225
rags2riches wrote: post #222

Earlier quoted context omitted.

Paying back all debt would mean there was no more money! What would that even look like? It was years since I saw 'Money as Debt' but I remember it as quite flawed in its arguments. Let's say there's a silly town with a single evil bank. The good people borrow a hundred dollars in total. Horror! The evil bank is now owed one hundred and ten dollars. This can never be repayed, there is not enough money! Except the goo…

Well I, like many people. was very surprised money is created that way. And your fictional town doesn’t seem to work much like anywhere else. All the banks seem to be doing fine just fine. Houses usually go up in value not down so when someone defaults on a loan the bank makes money rather than loses it. With the exception of the credit crunch (where we all just gave the banks our hard earned money instead)

Yes, it's quite strange at first when you come to this topic with the understanding of money as something more tangible. I really struggled with the concept at first, but there are good resources to help with this. It clicked for me with the help of Khan Academy unit on Money, banking and central banks. The Bank of England paper linked elsewhere in this thread is also good. I had to draw up balance sheets and make examples for myself to really get it.

And regarding the silly example, don't sweat the details. Try to think of the concept of what my example is trying to get across. Let's say the grocer died and a house fire and he hadn't payed for his insurance.

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

#230

Post by golergka »

rusk wrote: post #150
golergka wrote: post #143

Earlier quoted context omitted.

> The government only accepts their preferred currency for payment of taxes. By "transactions" I also meant tax collection, yes. > Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it. Usually, at the point where society as a whole loses confidence in government-issued currency, it no longer has resources to stop you from using alternative currencies.

I think you’re receiving a strange response because people think you’re advocating some sore of crypto-anarchist freeman position, and HN as a community is very much weighted against that point of view ... I can identify with what you’re saying and there are some very well known examples of local currency being subverted. You can see Bolivia in the news recently, or Argentina or everybody’s favourite trillion dollar…

Strange. I think I made no value judgements or what-ought-to-be statements, just what-is observations.
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