Re: Money For Nothing : Thu Aug 23, 2012 7:18 pm  

DaveO wrote:

The interesting question is where does the money to pay the interest come from? Out of thin air?

The same place the money comes from to pay for any goods or services. Interest is simply the bank's mark up on the service it supplies just like a shop's mark up. There's nothing magical about interest or indeed about money which prevents it from being traded like anything else.

Ferocious Aardvark wrote:

No, they "gave" you 10K, you've returned it. The two cancel out, obviously.

Kosh wrote:

As FA says, the loan capital cancels out. Only the interest is added to the net worth of the bank.

Cheers, however I am aware of what happens in reality. I was just intrigued as to how it works in the fictional scenario of banks creating money from nothing.

[DaveO]

Re: Money For Nothing : Fri Aug 24, 2012 9:42 am  

Kosh wrote:

It's no wonder we got into bother if bankers use faulty maths like that.

Please explain. I was trying to show that despite the central bank only depositing £10K the two banks managed to lend a total to £17.1K so £7.1K had been "created" in economic terms.

I think what is deemed to be the "money supply" is actually greater than that as it includes the amounts held on reserve by the commercial banks (but I am not sure about that).

[DaveO]

Re: Money For Nothing : Fri Aug 24, 2012 9:55 am  

SBR wrote:

The same place the money comes from to pay for any goods or services. Interest is simply the bank's mark up on the service it supplies just like a shop's mark up. There's nothing magical about interest or indeed about money which prevents it from being traded like anything else.

I think you missed the point. The money that exists in the economy has to come from somewhere and by this I mean not your piggy bank or from your employer. All money in the economy is created in some way. Some of it is created by the mechanism I described.

While the o/p got it wrong for the reasons Cookridge_Rhino pointed out there are people who argue our fractional reserve banking system is a debt driven mechanism akin to a ponzi scheme because it relies on new borrowers perpetually entering the system.

Another argument against it is that it is inherently fraudulent because the banks promise to pay depositors their cash on demand but have not got a hope in hell of doing so. They rely on a run on the banks never happening but some economist argue that isn't such an unlikely event e.g. Northern Rock.

Cheers, however I am aware of what happens in reality. I was just intrigued as to how it works in the fictional scenario of banks creating money from nothing.

It is not fictional in that commercial banks do create money as I described which again as Cookridge_Rhino pointed out is not what the o/p meant.

[Kosh]

Re: Money For Nothing : Fri Aug 24, 2012 10:11 am  

DaveO wrote:

Please explain. I was trying to show that despite the central bank only depositing £10K the two banks managed to lend a total to £17.1K so £7.1K had been "created" in economic terms.

Nothing was created other than the original deposit of 10k. The amount of money available to the real economy is less than the amount originally created. Money has moved, and the amount has reduced on each move as some has been retained. Adding it all together as in your example is flawed maths.

BTW I'm not suggesting that accountants don't look at things the way you described. I'm stating that it's made-up nonsense and in no small part responsible for the mess we're in now.

[DaveO]

Re: Money For Nothing : Fri Aug 24, 2012 12:02 pm  

Kosh wrote:

Nothing was created other than the original deposit of 10k. The amount of money available to the real economy is less than the amount originally created.

Not in economic terms it isn't. The money supply available is the amount deposited. So that is the original £10K in my example plus the £9K loaned to the second bank. Increasing the money supply like this is said to "create money" because it is active in the economy.

If the second bank loaned its £8.1K out to me and I kept it al in cash that is where "money creation" stops but the money supply is still £19K )not £17.1K as my previous post may have implied).

Money has moved, and the amount has reduced on each move as some has been retained. Adding it all together as in your example is flawed maths.

BTW I'm not suggesting that accountants don't look at things the way you described. I'm stating that it's made-up nonsense and in no small part responsible for the mess we're in now.

Oh OK. It is certainly how economists look at it. Of course the money banks lend doesn't just come from the central bank (the original £10K in my example) but from ordinary depositors as well but the fact is they only keep a fraction of what is deposited in reserve and loan out the rest and when they do you get what I tried to illustrate.

I think an interesting thing about this is it shows what is supposed to happen when the Bank of England prints money. They deposit it with the commercial banks with the idea they will lend it on as explained. The trouble is they then tell the banks they need to hold bigger reserves and add to that no one wants to borrow at the moment hey, presto "quantitative easing" as they call it doesn't work. In fact what the banks often do is use the money to buy government bonds! So all this new money doesn't find its way into the economy which is why Alistair Darling said the other day the B of E needs to stop quantitative easing until the banks play ball.

Re: Money For Nothing : Fri Aug 24, 2012 7:28 pm  

DaveO wrote: I think you missed the point. The money that exists in the economy has to come from somewhere and by this I mean not your piggy bank or from your employer. All money in the economy is created in some way. Some of it is created by the mechanism I described. The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it. To come back to my original question, in reality where banks do not create money from nothing, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through). None of this makes interest in anyway special from any other charge any business makes for its products or services. DaveO wrote: Another argument against it is that it is inherently fraudulent because the banks promise to pay depositors their cash on demand but have not got a hope in hell of doing so. They rely on a run on the banks never happening but some economist argue that isn't such an unlikely event e.g. Northern Rock. They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves.

DaveO wrote: I think you missed the point. The money that exists in the economy has to come from somewhere and by this I mean not your piggy bank or from your employer. All money in the economy is created in some way. Some of it is created by the mechanism I described. The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it. To come back to my original question, in reality where banks do not create money from nothing, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through). None of this makes interest in anyway special from any other charge any business makes for its products or services. DaveO wrote: Another argument against it is that it is inherently fraudulent because the banks promise to pay depositors their cash on demand but have not got a hope in hell of doing so. They rely on a run on the banks never happening but some economist argue that isn't such an unlikely event e.g. Northern Rock. They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves.

[DaveO]

Re: Money For Nothing : Sat Aug 25, 2012 1:06 am  

SBR wrote: The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it. So how come the money supply increases as a result of all this? To come back to my original question, in reality where banks do not create money from nothing, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through). The drain on the money supply occurs when the money lent is not deposited or if in some way it is returned iti the central bank. None of this makes interest in anyway special from any other charge any business makes for its products or services. Interest is not special. It just requires money. The question is where does that money originate from? They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves. And? Yes you would just be renting their safe. That is what kind of what full reserve banking means which is similar to what you describe. With full reserve banking there can never be a run on a bank the bank can't meet. With fractional reserve banking there can be such a run and if it occurs then the "lender of last resort" has to bail the banks out i.e the taxpayer.

SBR wrote: The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it. So how come the money supply increases as a result of all this? To come back to my original question, in reality where banks do not create money from nothing, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through). The drain on the money supply occurs when the money lent is not deposited or if in some way it is returned iti the central bank. None of this makes interest in anyway special from any other charge any business makes for its products or services. Interest is not special. It just requires money. The question is where does that money originate from? They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves. And? Yes you would just be renting their safe. That is what kind of what full reserve banking means which is similar to what you describe. With full reserve banking there can never be a run on a bank the bank can't meet. With fractional reserve banking there can be such a run and if it occurs then the "lender of last resort" has to bail the banks out i.e the taxpayer.

[tb]

Re: Money For Nothing : Sat Aug 25, 2012 6:59 am  

Haven't we done the 'let's return to the 14th Century and pretend the Lombards never existed" to death now? Can we move on from "money for nothing" and discuss the more intriguing topic of chicks for free?

Re: Money For Nothing : Sat Aug 25, 2012 7:20 am  

DaveO wrote:

So how come the money supply increases as a result of all this?

Well because multiple people 'have' the same money.

DaveO wrote:

The drain on the money supply occurs when the money lent is not deposited or if in some way it is returned iti the central bank.

A deposit and loan are the same thing just viewed from a different perspective. When you deposit money in your bank account you are loaning that money to the bank. When a bank makes a loan they are depositing that money with you.

DaveO wrote:

Interest is not special. It just requires money. The question is where does that money originate from?

It requires money just as the mark-up in a shop requires money. This again doesn't require new money, it is simply money circulating through the economy funding economic activity. So the shop owner borrows money to buy stock. He adds a mark up to the cost of the stock that covers his costs and his profit. Part of his costs are the cost of borrowing the money. When he sells the stock he pays the interest on the loan. The bank then has its profit which it puts back into the economy via another loan, the money markets, dividends etc.

DaveO wrote:

And? Yes you would just be renting their safe. That is what kind of what full reserve banking means which is similar to what you describe.

And you'd have a massive decrease in economic activity as deposited money will just be sat there losing value. We are currently seeing the effects of banks having to maintain larger reserves and restricting lending. This has reduced the money supply.
The massive (and unprecedented) progress made over the last 20/30 has been funded by the financial industry. Moving money efficiently around the world to where it can be used most productively. This is pretty much the purpose of investment banks.

Re: Money For Nothing : Sat Aug 25, 2012 9:11 am  

tb wrote:

Haven't we done the 'let's return to the 14th Century and pretend the Lombards never existed" to death now? Can we move on from "money for nothing" and discuss the more intriguing topic of chicks for free?

Well you can if you wish but I've to move these refridgerators...