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Money created by Banks and QE - thoughts from the MLMB

 
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CJ



Joined: 03 Aug 2012
Posts: 6
Location: UK

Post Post subject: Money created by Banks and QE - thoughts from the MLMB Reply with quote

The following is an extract of a Message Board discussion November 2012 which seems to crop up time and again so maybe worth preserving
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Thread 1:


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The Inequality Gap

Posted by Keith-264 [User Info] [Email User] on October 31, 2012, 9:23 pm

http://www.counterpunch.org/2012/10/31/the-inequality-gap/

The Inequality Gap
by DEAN BAKER

There is no serious dispute that the United States has seen a massive increase in inequality over the last three decades. However there is a major dispute over the causes of this rise in inequality.

The explanation most popular in elite and policy circles is that the rise in inequality was simply the natural working of the economy. Their story is that the explosion of information technology and globalization have increased demand for highly-skilled workers while sharply reducing the demand for less-educated workers.

While the first part of this story is at best questionable, the second part should invite ridicule and derision. It doesn’t pass the laugh test.

As far as the technology story, yes information technologies have displaced large amounts of less-skilled labor. So did the technologies that preceded them. There are hundreds of books and articles from the 1950s and 1960s that expressed grave concerns that automation would leave much of the workforce unemployed. Is there evidence that the displacement is taking place more rapidly today than in that era? If so, it is not showing up on our productivity data.

More germane to the issue at hand, unlike the earlier wave of technology, computerization offers the potential for displacing vast amounts of highly skilled labor. Legal research that might have previously required a highly skilled lawyer can now be done by an intelligent college grad and a good search engine. Medical diagnosis and the interpretation of test results that may have previously required a physician, and quite possibly a highly paid specialist, can now be done by technical specialists who may not even have a college education.

There is no reason to believe that current technologies are replacing comparatively more less-educated workers than highly educated workers. The fact that lawyers and doctors largely control how their professions are practiced almost certainly has much more to do with the demand for their services.

If the technology explanation for inequality is weak, the globalization part of the story is positively pernicious. The basic story is that globalization has integrated a huge labor force of billions of workers in developing countries into the world economy. These workers are able to fill many of the jobs that used to provide middle-class living standards to workers in the United States and will accept a fraction of the wage. This makes many formerly middle-class jobs uncompetitive in the world economy given current wages and currency values.

This part of the story is true. The part that our elite leave out is that there are tens of millions of bright and highly educated workers in the developing world who could fill most of the top-paying jobs in the U.S. economy: doctors, lawyers, accountants, etc. These workers are also willing to work for a small fraction of the wages of their U.S. counterparts since they come from poor countries with much lower standards of living.

The reason why the manufacturing workers, construction workers, and restaurant workers lose their jobs to low-paid workers from the developing world, and doctors and lawyers don’t, is that doctors and lawyers use their political power to limit the extent to which they are exposed to competition from their low-paid counterparts in the developing world. Our trade policy has been explicitly designed to remove barriers that prevent General Electric and other companies from moving their manufacturing operations to Mexico, China or other developing countries. By contrast, many of the barriers that make it difficult for foreign professionals to work in the United States have actually been strengthened in the last two decades.

If economics was an honest profession, economists would focus their efforts on documenting the waste associated with protectionist barriers for professionals. They devoted endless research studies to estimating the cost to consumers of tariffs on products like shoes and tires. It speaks to the incredible corruption of the economics profession that there are not hundreds of studies showing the loss to consumers from the barriers to trade in physicians’ services. If trade could bring down the wages of physicians in the United States just to European levels, it would save consumers close to $100 billion a year.

But economists are not rewarded for studying the economy. That is why almost everyone in the profession missed the $8 trillion housing bubble, the collapse of which stands to cost the country more than $7 trillion in lost output according to the Congressional Budget Office. (That comes to around $60,000 per household.)

Few if any economists lost their six-figure paychecks for this disastrous mistake. But most economists are not paid for knowing about the economy. They are paid for telling stories that justify giving more money to rich people. Hence we can look forward to many more people telling us that all the money going to the rich was just the natural workings of the economy. When it comes to all the government rules and regulations that shifted income upward, they just don’t know what you’re talking about.

264, the last working class hero in England.

Re: The Inequality Gap

Posted by CJ [User Info] [Email User] on November 1, 2012, 3:34 am, in reply to "The Inequality Gap"

I thought the main force behind the increase in the inequality gap since the 1970's has been the shift of rewards from workers to owners/directors. Workers have increased output but profits from this have mainly accrued to shareholders and bonuses for directors rather than increases in workers pay and reductions in workers hours.

Does anyone remember the BBC programme "Tomorrow's World" - we were shown a world where robots would be owned by each of us to improve our lives - well capitalists worked out pretty quickly that workers owning the means of production was not exactly in their top ten things on their to do list. So today, robots are owned by the few and have displaced the jobs of the many without a word of protest from anyone least of all trade unions! Go figure!


cheers

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"Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Rhisiart Gwilym [User Info] [Email User] on November 1, 2012, 6:47 am, in reply to "Re: The Inequality Gap"

- definition that I've seen yet of current Western economists. This, from the commenters' discussion of a current Oil Drum article, is also relevant (commenters on TOD are some of the best-informed and technically-competent whom I know; though still with a thin sprinkling of demi-trolls and the occasional briefly-visiting fool; those don't tend to last long though, before being buried by the competent people):

Chris Martenson on October 31, 2012 - 9:19am:

Question: Does training for the economic profession ruin a person's ability to separate facts from beliefs or are people prone to such confusion drawn to the profession?

The Carpe Diem 'blog' is useless to me because it is a singularly rose-tinted view of the world (nothing but good news or directionally irrelevant tidbits need apply) and, typical for an economist's view, parades these cherry picked items as if they were somehow more relevant and smarter than other offerings.

If the world was fair, and it might be again someday, Mr. Perry will have a long time to consider just how and where his profession got the limitless earth paradigm so wonderfully wrong from the security of his drab living room instead of rather expensively mis-informing future generations from the front of a classroom.

Art, Thank you for bringing some needed data and context to the conversation.

RalphW on October 31, 2012 - 10:07am:

I was brought up by a scientist to be a scientist. From a very early age I always found it impossible to understand economics until the light bulb finally went on - it doesn't make sense. It is a one giant ponzi scheme.

I have always followed very traditional and simple rules when it came to money. Without ever earning huge amounts or investing in questionable financial arrangements, I find myself owning far more real wealth in the terms of physical assets of post-peak value than most of my more 'affluent' neighbours. I seem to have successfully ridden the breaking wave of cheap fossil energy. Not that this guarantees I will survive the crashing surf.


Null Hypothesis on October 31, 2012 - 12:53pm:

Me too. I could never understand why I was so good at numbers and math and figuring things out, but something simple like money and economics remained such a mystery, even though I took all the requisite economics classes in university. I'll never forget that time in the 3rd year economics class we were forced to take, when a room full of hundreds of mechanical engineers was presented with the imaginary charts that economists use as a basis for their theories. We'd all just spent 4 years learning about real charts based on real world data, and then to see this joke ... the hall practically erupted in laughter. Don't remember a thing about the content of that course to this day, though.

The prof, who was an engineer who had moved over towards the economics side of things, agreed and said that when he first learned this stuff it seemed like it was all just "made up", but that's how the world of economics operates, and that's what was actually happening out there in the market.

Thanks to blogs like Chris Martenson's and others, the whole field of economics was then exposed as nothing more than smoke and mirrors, a sham. Then it became much easier to understand. If you are an engineer, an earth scientist, or anything related to that, then you are a much better economist than any official economist could ever be.

Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by ceemac666 [User Info] [Email User] on November 1, 2012, 9:42 am, in reply to ""Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

Of course "Economics" as we know it, is no more than Mumbo Jumbo,a conspiracy of the elite to retain their their own bloated status and that of their ideological masters.Friedman of course was the witchdoctor.
Three years of studying the "subject" at university made that quite clear to me.
Even Keynsianism ,in identifing the problems of inadequate aggregate demand could do no more than exhort the state to increase government expenditure (and with it aggregate demand),borrowed at interest from the banks,thereby enabling people to spend more of what they don,t have, in order to buy more STUFF they dont need.
To pay any interest bearing loan requires Income Growth (of which we are plenty short now and likely to see less of over time).
Without Growth,any payment of interest represents a reduction in the Principle initially borrowed.(after all where else can the interest payment come from)
The very suggestion that the Govt might print the money/issue loans,bypassing the banking sysem so as to itself increase expenditure is held to be ANATHEMA
Though doing so would pay no interest to banks, would incur no extra government debt or inflation since it owes the debt to itself,(as suggested by Michael Hudson,Ellen Brown etc), is treated like heresy and frozen out of public discussion.
When countries such as Iceland set out to change their constitution to remove this absurdity the media looks the other way and falls silent.
Where is the economist telling us the straghtforward logical fact that the Capitalist system cannot survive without growth?
Who would even attempt to refute it?

Should we try looking in the GUARDIAN?


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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by johnlilburne [User Info] [Email User] on November 1, 2012, 12:58 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

the Capitalist system cannot survive without growth?

And you cannot have ever increasing growth on a finite planet.

Q.E.D........

A couple more steps in this simple but deeply buried logic

Posted by nadimhanbury [User Info] [Email User] on November 1, 2012, 1:20 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

Capitalism exists as a means of keeping the richest richest, with the illusion of progress for all.


The Capitalist system cannot survive without growth

And you cannot have ever increasing growth on a finite planet.

So, either we continue to consume ouselves to death, fighting over the last resources taking much of this planet's life with us, or we wise up in sufficient numbers to effect change.

Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by ceemac666 [User Info] [Email User] on November 1, 2012, 1:54 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

As you say QED.

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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Stevo!! [User Info] on November 1, 2012, 4:29 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

"And you cannot have ever increasing growth on a finite planet."

True, but with NO GROWTH WHATSOEVER, we are condemned to get poorer and poorer and live in a constant state of depression. Further rises in the national debt would be curtailed by debt-free money and endless growth could be massively brought under control with the same method as you are not chasing massive interest payments and therefore amping up GDP in order to pay said interest payments.

However zero growth is not an option either, and it would be wrong to pretend that it was.

We would need:

Normal working hours slashed to around 30 or even 25 hours a week in order to help control environmental pollution

A living wage upgraded every year by some 4 or 5%

A citizens income provided to all! If, as will be the case, the country cannot provide employment for all, then a citizens income is necessary to take up the slack.

A government that provides its own debt free money and controls the amount of debt the private banking industry can dish out, that is, making the banks provide 100% reserve for every loan they make will ensure that it is not necessary to pursue endless growth in order to pay off billions of pounds in principal and interest.

Of course, the government could just simply fo the whole hog by nationalising the banks and ensuring much of the money and interest generated is distributed back into society.

If we can control debt, the battle to control endless growth is largely won.



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Stevo!! He's a broth of a boy!

Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Daniel [User Info] [Email User] on November 1, 2012, 5:26 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

I am quite involved with this crew, and highly recommend them:

http://www.positivemoney.org

They have been working tirelessly and are making great strides, having recently been on BBC Radio 4 and various other high-profile platforms.

Bear in mind, back in 2009 when I met up with Ben Dyson (who I am interviewing for the Occupied Times this month) we both shared the common experience of being laughed at for pointing out the facts of the banking industry and how it creates money (which are, frankly, beyond belief), and suggesting that it was deeply responsible for the crisis.

Now the Financial Times, Bank of England, The Economist and even the IMF (fercyinoutloud') are all on paper officially agreeing that this is, in fact, how it works.

If you can't see how ludicrous it is to have private profit-seeking banks responsible for creation of money ex-nihilo (97% of the 'money supply' is created this way - not by government, not democratically, but by profit seeking institutions - typically directed towards useless asset inflation, not productive investment, hence 'austerity') then you need to re-read the facts and really think it through.

First they ignore you, then they laugh at you, then they fight you...

...then you win.

Exelsior! Wink

Daniel

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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Daniel [User Info] [Email User] on November 1, 2012, 5:44 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

Have a look here:

http://realbusiness.co.uk/news/theres-still-something-rotten-in-the-state-of-banking

From RealBusiness website:

There's still something rotten in the state of banking
Despite the celebrations of economic growth, Barry E. James points to what seems to be a long forgotten root cause of the economic meltdown; it's time to review those banking licenses.
By Barry E. James
31 October 2012 @ 15:40.


In a previous article I mentioned how the FSA's clumsy intervention in the crowdfunding market had got me thinking, and digging, into the roots of the mess we're in - otherwise known as our economy. That's a deeply depressing activity, unless you have an inveterately optimistic nature - or think you can see a chink of light on the horizon. I count myself fortunate in both respects.

The picture that's emerged is grim indeed - but not entirely without hope.

So here's a suggestion to get us out of the mess we're in. Let's create money - out of thin-air. Lots of it. Completely unlimited and unregulated. Let's loan it to anyone who wants it, and who'll pay the price in interest.

Bonkers, right? Who in their right mind would even consider doing any such thing?

Well, it came as news to me too, but it's already being done. In fact it's been going on for years, and it's why we are in the state we're in. What I'm describing is not QE (quantitative easing), in case you were wondering. It's ordinary branch banking practice for the last four decades. This is what came home to roost in 2007, precipitating first the credit crunch, and now this long financial "nuclear winter", with no end in sight.

You don't need to take my word for it. I'll explain. In fact, I'll do better than that; I'm going to introduce you to a growing pool of mainstream, highly respected economists - some of whom even speak the kind of English non-economists like you and I can understand.

First though, let me explain one profoundly shocking fact that is provably true but most of the world's economists either don't know or completely ignore.

When you borrow money from a bank, we all know that it's saver's money that we are borrowing, right? Every pound borrowed is from a pound that's been deposited.

Wrong.

It's not savers money, and it's not the bank's own money either. It's credit; or, to put it another way, it's real money that you can spend, created right there, by the bank, and deposited into your account by just increasing the balance, changing a number on a ledger.

It's real money that you can draw out as cash, pay your taxes or other bills with, that didn't exist the moment before that loan or overdraft was granted. They're allowed to do that. They have a piece of paper, issued by the Bank of England, that says they - a private, for profit, (make that as-much-profit-as-possible) business - can do just that: lend money they don't have. It's just called a "banking license".

Now that can't really be true, can it? If that were true it would undermine the whole system, surely? They have to go get that money from the Bank of England, or someplace else, to balance their books, right? Sorry. Wrong again. I'll say it again: They've been licensed to create money as a loan to you - or strictly speaking, credit - and this has been virtually unrestricted since 1971.

They will charge you interest, of course. They also set the interest rate. So that's real money, that you probably laboured hard in the real economy to earn, paying to rent out the money that they just created - out of thin-air.

Little wonder they've spent the last two or three decades thinking up new ways of getting us to borrow more and more. All those tempting credit cards, loans, mortgages...

And "undermine the whole system" is precisely what it has done. For the first few years this power to create money was used fairly responsibly - old habits died hard. It was probably sustainable. But then came the "greed is good" Thatcher era. "There's no such thing as society", remember? Expectation and habits changed. How can one have any responsibility to a society one does not believe exists? So it let rip. And in 2007 - as predicted - the bill arrived, together with the realisation that there's no way to pay it. Which is why on 9th August 2007 banks stopped lending to each other and it all started to unravel; the credit crunch.

Who, I hear you ask, predicted it? Did they keep this quiet? Well, no, actually. A number of people did - with well reasoned arguments that pointed then to exactly what's happened since. Professor Steve Keen for one, plus Ann Pettifor, noted economist and habitue of BBC Newsnight, who wrote two books about it, the first in 2003 and another in 2006. She's one of the economists who are not afraid to talk about not just how and why this has happened, with real candour, but what it will take to sort it out.

To this day she, along with Positive Money's Ben Dyson, BankToThe Future's Simon Dixon, a slew of professors and many others are speaking and campaigning to bring attention to the fact that this is no longer a matter for bankers, economists or, especially, politicians - they're too in thrall to the banks. It will only change when "the balance of political convenience" changes. Their message: It will only change when the entire system collapses or when enough of us make our voices heard demanding fundamental change. Restricting, moving or removing the licence to create money. We need a new deal.

So why, you may well ask, can't I get a loan? Why can't my business get the finance it needs to get off the ground?

There are two reasons for this. Firstly you, like most people around you, are unlikely to be a good credit risk from the bank's viewpoint - for obvious reasons. As a result of all of the above, the economy is in shambles and there's a vast quantity of debt. Confidence is low and lending is risky.

And anyway, since the banks still have the power to create money (as credit), and can do as they choose with it, they've found a more profitable way to make yet more money: speculation. That is trading with each other globally, taking risks on derivatives and other exotic financial deals and "products" that yield much bigger returns. From each other's "created money". Or to put it another way, conjouring tricks with money.

It get's better: it's also a one-way bet. When they win their bets they get to take home a nice fat bonus. If they lose; no problem. They'll probably still get what would be, for almost anyone in the "real economy", an eye-watering bonus. The bank will pick up the losses, until it no longer can, and then... You guessed it; they'll need to be bailed out again. With money from the real economy.

We need a new deal. It's time to review those banking licenses.

You'd think this couldn't still be going on, wouldn't you. But look around. The government are trying to change the rules, and failing. They're being blocked. They've tried to force through ways of getting lending to SMEs - they've failed and given up to the extent they're now planning a business bank. But it's quickly ended up dependent on the existing ones.

Turkeys don't vote for christmas - so I don't suppose you can expect bankers (most of whom seem to be in denial or ignorant of all this, as far as I can tell) to do anything else but resist change that doesn't suit them.

We're holed and headed for another iceberg. What will it take to force the crew to change course? I'm afraid the answer is one of two things. An even bigger crisis - if that's imaginable - through which we cannot struggle. Or enough people cotton on to what's really happening and get riled enough to rattle the politicians sufficiently that this becomes more important for them than the pressure from the bankers.

This is not speculation. If you think it could hardly be worse, take a look at Iceland. Its economy was not just holed at the waterline - it was completely sunk. They are now in a stronger position than any state in Europe. After the initial huge jolt, their economy has recovered and has been consistently growing at above two per cent since 2010.

They could join the Euro now if they wanted to - but why would they want to?

What did they do? They took the keys to their economy away from the banks, kicked out the IMF prophets of austerity, and threw their top bankers in gaol for fraud. They forced the banks to take at least partial responsibility for their reckless behavior. They forced them to write off much of the debt they're been complicit in creating.

You can be very sure that their bankers, as ours, told them that they didn't understand what they were doing. They needed their bankers and their (almost) magical skills to manage in today's world. That disaster awaited.

So... apparently not. What are we going to do? Wait for the next iceberg?



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Thanks muchly, Daniel! Smile (NM)

Posted by Stevo!! [User Info] on November 1, 2012, 6:02 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"



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Stevo!! He's a broth of a boy!

If commercial banks can lend money they don't have why don't they just lend trillions to themselves?

Posted by CJ [User Info] [Email User] on November 2, 2012, 3:16 am, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

They could lend trillions to their subsidiaries which could pay trillions back to the parent bank in dividends and then the subsidiaries could just default on the loans and go bankrupt. The Bank has just gained profits worth trillions from the subsidiaries' dividends and since the subsidiaries were never worth anything in the first place ( since its assets would equal its liabilities after the trillions were lent) the Bank has not made an equal and opposite loss. Of course to cut out the Bank and shareholders the Directors of the Bank could be also the Directors of the subsidiaries and the trillions could just be paid out in bonuses to the Directors!

It's a nonsense of course this couldn't happen - but if a Bank could just create money out of thin air without a corresponding liability then in theory it could.

All Bank's have Treasury departments managing the funds of the Bank and one of the jobs will be to match assets and liabilities in amounts, currencies and maturities. The main purpose of the inter-bank market is to enable banks to lend surpluses and borrow shortfalls so that their books balance. When the inter-bank market ground to a halt so did lending to the public. If the Banks could just lend to customers without worrying about funding those loans there would be no need of an inter-bank market.

The banks have the ability to create funds by way of loan which can be immediately deposited back by the borrower with the bank. The Bank can then lend say 90% or so of this deposit on to someone else who could then redeposit it back with the Bank and again they could lend 90% or so of that 90% to a third borrower et seq until the redeposit was too small to lend on. In this way "money is created" - but if you look along the chain each borrower has no extra money, what they have is a loan and a deposit of the same amount with a net value of 0. The Bank has three assets and three equal and opposite liabilities with the three borrowers and so has a net value of 0.
If the deposits were withdrawn then the Bank would need to borrow sufficient funds to pay the deposits until the loans were repaid. If the first loan was deposited with a different Bank, the first Bank would need to fund the loan out of reserves or borrowed funds.
All that the Banks create is liquidity - they swap a promise to pay back in say a year for immediate cash now and of course they charge you through the nose for the pleasure.

Central Banks are of course completely free to print money or quantitatively ease. Quantitative easing always sounded to me like a major bowel movement and to my mind the way the Bank of England has done it that is exactly what they have done all over us! Instead of tracking and channeling the newly created money into sound UK job creating investments they just let the Banks run off and gamble with it on commodities and high paying Greek Bonds!

These are my own personal views fwiw - I am not an economist.

cheers

Re: If commercial banks can lend money they don't have why don't they just lend trillions to themselves?

Posted by Daniel [User Info] [Email User] on November 2, 2012, 10:33 am, in reply to "If commercial banks can lend money they don't have why don't they just lend trillions to themselves?"

Hi CJ

I'm glad you asked, it's a common one:

http://www.positivemoney.org.uk/2012/07/if-banks-can-create-money-how-come-northern-rock-went-bust/

---

Banks obviously can’t create money, say Tim Worstall in his blog ‘Ms Orr succumbs to the Positive Money loons‘, in response to Deborah Orr’s article in the Guardian.


Now, how to show that banks do not in fact just create money? Well, if they did then Northern Rock would not have gone bust, would it? … Think through this for a moment. If Northern Rock could just print money on its own computers then could they have gone bust in this manner?

Tim Worstall

Let’s see why it’s entirely possible for banks to be able to create money and still run out of the stuff in the style of Northern Rock.

The Different Types of Money Used in Banking

There are actually two types of money in the banking system.

Firstly, there’s the type of money that appears in your bank account – a number in a computer system, or in banking jargon, ‘bank credit’ or ‘bank deposits’. Banks can create this money through the accounting process they use when they make loans. A full explanation of this process showing balance sheets is available here, but for now let’s just see a couple of quotes from the Bank of England:


By far the largest role in creating broad money is played by the banking sector… When banks make loans they create additional deposits for those that have borrowed the money

Bank of England, Interpreting movements in broad money, p.377


Banks extend credit by simply increasing the borrowing customer’s current account … That is, banks extend credit [i.e. make loans] by creating money

Paul Tucker, Deputy Governor for Financial Stability, Bank of England. Speech: ‘Money and Credit: Banking and the Macroeconomy’


[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money.

Paul Tucker, Deputy Governor for Financial Stability, Bank of England. Speech: ‘Shadow Banking: thoughts for a possible policy agenda’

As the last quote explains, when a bank makes a loan it makes two balancing entries in its books: 1) the asset, which is the loan contract, and 2) a liability, which is the bank credit – or numbers in someone’s account – in the account of the borrower. This is newly-created bank credit, which functions as money and can be used to make payments.

There’s another form of money, known as ‘central bank money‘. This can either be physical cash, or an electronic equivalent held in accounts at the Bank of England. Cash is used mainly by the public, and considered to be ‘risk-free’:


Bank of England notes are a form of ‘central bank money’, which the public holds without incurring credit risk. This is because the central bank is backed by the government.

Bank of England, Quarterly Bulletin, 2010 Q4 (p302)’

The electronic equivalent of cash is known as ‘central bank reserves’, and in practice banks use this type of money to settle transactions between them:


Reserves accounts are effectively sterling current accounts for commercial banks – they are among the safest assets a bank can hold and are the ultimate means of payment between banks. Whenever payments are made between the accounts of customers at different commercial banks, they are ultimately settled by transferring central bank money (reserves) between the reserves accounts of those banks.

Bank of England

To recap:

Cash is issued by the state (via the Bank of England) and is used by the public to make payments.
Bank credit – the numbers in your account – is used by members of the public and businesses to make payments between each other. It is created by banks whenever they make loans. But most members of the public consider that the balance of their bank account represents ‘cash in the bank’, rather than being simply a number that can lose all its value if the bank goes bust.
Central bank reserves are an electronic equivalent of cash, held in accounts at the Bank of England. But central bank reserves can only be used by banks to make payments between themselves; no member of the public can get an account at the Bank of England.
Why Northern Rock Went Bust

In normal times, the payments between customers of different banks (using bank-created bank credit) tend to cancel each other out, and only a small amount of central bank money would be needed to settle the difference between banks at the end of each day. As a prime example of this, before quantitative easing, the total amount of central bank reserves that were used by the banks to settle between themselves was around the £20bn mark ((Bank of England figures for Central Bank sterling reserve balances)). This was enough to settle over £704billion of daily transactions((See the 2006 Payments Systems Oversight Report for figures on average payment flows)).

But Northern Rock went on a lending binge. Every new loan made created new money in the form of numbers in people’s accounts. These numbers could be used to make purchases, with payments using central bank reserves via payments systems such as Visa, Mastercard, BACS, direct debit, Faster Payments or any electronic funds transfer. Because Northern Rock was expanding its lending faster than other banks, at the end of each day it would find that it ends up with a net outflow of central bank reserves. That is why it would borrow money (in the form of central bank reserves) from other banks, and indirectly from pension funds and other large investors. The borrowing was a way of bringing in central bank reserves to settle the huge outflows that lending at such a rate would have caused.

Northern Rock eventually went bust when, for a variety of reasons, no-one would lend central bank reserves back to it, and it was unable to make its outward payments through the settlement system. In this situation, the Bank of England lent Northern Rock more central bank reserves, in its role as lender of last resort.

Had Northern Rock instead expanded its lending – and created the type of money used by the public - at the same rate as other banks, it would have found that its daily inflows of central bank reserves roughly matched its outflows (since the payments from its customers to other banks would be cancelled out by payments from other banks to customers of Northern Rock). It is unlikely that it would have become so dependent then on interbank lending to be able to make its payments. The very reason why Northern Rock went bust was the sheer speed at which it was creating money through issuing loans, which created a massive outflow of deposits which had to be settled by securing the reserves from somewhere.

Why Tim (and many others) get it wrong

Banking is a complex subject, especially when liquidity, inter-bank settlement, and solvency issues come into play. Not many economists – and even fewer journalists – actually understand it.

Because it is such a complex subject, facile thought experiments like the one Tim Worstall gives below can be completely misleading.


Think through this for a moment. If Northern Rock could just print money on its own computers then could they have gone bust in this manner?

No, clearly not.

Did Northern Rock go bust in this manner?

Yes, clearly so.

Therefore, Northern Rock could not print money on its own computers.

Death of the Positive Money thesis.

Tim Worstall

Misleading and logically flawed, but very convincing, especially to the slightly confused commentors who follow Tim’s post. One even goes to great lengths to argue that banks don’t create money, but concludes that ‘all electronic money that ordinary people use is FR bank-created leverage. Therfore 97% of the money used by ordinary people is indeed created by bank lending. But that’s not the same as the money supply.” Bizarre.

It’s worth considering who’s most likely to be accurate: a Daily Telegraph journalists and the commenters on his blog, or the Deputy Governor of the Bank of England and other banking officials quoted here.

One final quote relevant to the issue under discussion:


The world is flat.

Anyone, anywhere, before anyone checked

Where To Learn More

The book Where Does Money Come From? is the most accurate account of the UK monetary system available at the moment, with a foreword by Professor Charles Goodhart, one of the UK’s leading moentary economists. The rear cover includes recommendations from Prof Victoria Chick, Emeritus Professor at University College London, and Professor David Miles, current member of the Monetary Policy Committee. One has to wonder if Tim also considers these people to be ‘loons’.

And in a couple of days I’ll release a paper answering the common objections and questions to the idea that banks create money. Watch this space.

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Good discussion below at the link also

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Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by CJ [User Info] [Email User] on November 2, 2012, 12:01 pm, in reply to "Re: If commercial banks can lend money they don't have why don't they just lend trillions to themselves?"

This is all smoke and mirrors - if you define money as including credit you have to pay back then OK money is created by the banks. But really this is just a snake oil salesman's manipulation of words.

For me if all I have in the world is a £10 note in my right hand and a loan document saying I owe Bank X £10 to be paid back tomorrow, in my left, then my net worth is £0.
This is not different from my friendly corner shop saying to me : here y'go CJ take these beans for free today and give me the money for them at the weekend when you get paid. I get the beans on tick. I wouldn't say that the corner shop has suddenly become the hub of international settlements!

What's in a word - money or "broad money" :
"[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money."

Paul Tucker, Bank of England.

cheers

Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by ceemac666 [User Info] [Email User] on November 2, 2012, 12:25 pm, in reply to "Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

Credit as such is not money.Only when it is spent.See "multiplier effect".

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Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by CJ [User Info] [Email User] on November 2, 2012, 3:33 pm, in reply to "Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

I look at it more like a dividing effect:
credit is split into cash and debt when the credit is drawn down.

I'm not sure that I understand the "multiplier effect".

cheers


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Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by Daniel [User Info] [Email User] on November 2, 2012, 12:38 pm, in reply to "Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

Except the IOU will say £10 + interest. And you won't have a note, you will have a statement of an electronic account.

The interest does not yet exist. It has to be created, by a private bank, granting a loan to somebody else...at interest.

Only 3% of the money supply is as you describe, notes and legal tender promissory notes, the rest is ALL bank credit, created ex nihilo by a promise to repay.

What's that phrase? Gold is the currency of kings, silver is the currency of free men.

But debt is the currency of slaves.

Who are you suggesting is a snake-oil salesman?
Do you think the Positive Money analysis is incorrect?

http://www.neweconomics.org/publications/where-does-money-come-from

Daniel



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Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by Daniel [User Info] [Email User] on November 2, 2012, 12:40 pm, in reply to "Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

More to the point, using your own example:

The money given to you 'on tick' - where did it come from? WHO lent it to you, and where did they get it?

The beans exist in a material world. They have isness. They grew out of the ground, and were processed and packaged for your consumption.

The money given to you did not exist prior to your promise to repay it. It was created ex nihilo, at the moment you signed an IOU. It did not come from an investor, or somebody's savings.

Buggers the mind doesn't it?

Daniel

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Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by CJ [User Info] [Email User] on November 2, 2012, 3:20 pm, in reply to "Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

Actually the beans, not being "Magic" beans never made it into money until they were paid for at the weekend. The beans were grown by the corner shop owner in his garden and was a product of seed soil water and sun. The corner shop never gave me any money but said that I could defer, free of charge, payment for the beans until the weekend. All that happened was that I entered into a contract to buy beans and the "consideration" given for the beans was the oral promise to pay for them at the weekend. This was a credit contract. If I had promised to pay in potatoes would this have been a futures commodity transaction? Had I have paid in potatoes immediately that would have been a barter deal. Had I failed to pay at the weekend that would have been a bum deal!

I still think this is not creating money as we know it although it is creating a mountain out of a mole hill! However we define these things where does it get us?


cheers


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Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans"

Posted by CJ [User Info] [Email User] on November 2, 2012, 3:00 pm, in reply to "Re: Does my corner shop create Beans when I get them on tick, no it really creates "Broad Beans""

What I am saying is that:
A. If one defines money to include:
1.my cash and
2. my positive balances in a Bank account -
this is perfectly understandable by most people.

B. If one defines money to include :
1.my cash
2. my positive balances in a bank account, AND
3. my negative balances in another bank account i.e. an overdraft
- then I think most people would call this a different name - it is not the same thing and the main difference is that when you add up the value of items 1 to 3 it is less than the value of items 1 to 2.
This is my "Net money" or" Net Current Assets"

C. If you then define money to include :
1. my cash
2. my positive bank balance
3. my overdraft FACILITY (not yet drawn upon)
-then this is different from both A. and B. It has the same value as A. and yet gives the ability to increase either A1. or A2. or both by drawing now on a future potential position.
- most people would not call all of 1 to 3 "money".
This could be called my "liquidity position" or my credit position. The Bank of England clearly call this "broad money" - but I think this is a technical term which most people in general conversation would not recognise.

A B and C are all different and to use the same term to define them obfuscates the true position. This is the way a snake oil salesman uses and abuses words. It is of course also just a different use of language with no ill intent involved I would put you in this category, Daniel. The Bank of England is another kettle of fish !

cheers

Re: If commercial banks can lend money they don't have why don't they just lend trillions to themselves?

Posted by Stevo!! [User Info] on November 5, 2012, 7:24 pm, in reply to "If commercial banks can lend money they don't have why don't they just lend trillions to themselves?"

"If commercial banks can lend money they don't have why don't they just lend trillions to themselves?"

Im a round about way, they did! For the best explanation of how Credit Default Swaps and Collaterallised Debt Obligations work, I would recommend buying the DVD of "Inside Job."

Basically, investment banks bought other people's mortgages outright (this is perfectly legal) and other forms of debt, sliced and diced them and put all the debt tigether in the form of one bond, which was sold to investors. They both acted as a sort of insurance scheme against default for the banks. The more risky loans, especially the risky one's they could package off and sell off as a bond, the less collaterall the banks needed. Investors were paid a premium for insuring these debts. The investors also received the interest payments from the original mortgages and loans.

These could be used to borrow against or to use to bet against other companies. Some estimate there could be as many as one quadrillion (one thousand trillion) of these things still out there.

As risk was believed to have been taken out of the system, it was off to the races. Big banks borrowed hugely, as the returns were potentially huge, but so were the risks.

The banks risks became so high, they crashed the system! Joe publis is expected to unwind these debts and take on the losses.

Unfortunately, our moronic governments are doing just that!

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Re: If commercial banks can lend money they don't have why don't they just lend trillions to themselves?

Posted by CJ [User Info] [Email User] on November 5, 2012, 11:13 pm, in reply to "Re: If commercial banks can lend money they don't have why don't they just lend trillions to themselves?"

The collusion between Governments, Central Banks and Commercial Banks in the 2007 --- financial crash is clear.
I have no difficulty in seeing fraudulent activity in the whole arrangement of CDS and CDO transactions which undermined the inter-bank market and which led to Bank failures and the freezing of liquidity. The bailouts, QE and zero interest policies of central banks have indeed led to another massive rip off of Public funds and the powerless 99%.

This is a different point to whether Banks can create money out of nothing, imo fwiw.

cheers

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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Keith-264 [User Info] [Email User] on November 1, 2012, 6:04 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

That's a pretty good list, except for the mere 4%-5% pay rise, it describes the rich b'stards' welfare state.

264, the last working class hero in England.

A couple more steps in this simple but deeply buried logic

Posted by nadimhanbury [User Info] [Email User] on November 2, 2012, 2:55 am, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

Capitalism exists as a means of keeping the richest richest, with the illusion of progress for all.


The Capitalist system cannot survive without growth

And you cannot have ever increasing growth on a finite planet.

So, either we continue to consume ouselves to death, fighting over the last resources taking much of this planet's life with us, or we wise up in sufficient numbers to effect change.

Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Stevo!! [User Info] on November 1, 2012, 5:10 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

"Even Keynsianism ,in identifing the problems of inadequate aggregate demand could do no more than exhort the state to increase government expenditure (and with it aggregate demand),borrowed at interest from the banks,thereby enabling people to spend more of what they don,t have, in order to buy more STUFF they dont need."

I won't pretend there weren't flaws to Keynesianism. It's function was largely to protect the interests of capitalism via the state.

However, growth in Keynesianism is driven by real production and wages rather than financialisation, as has been the case for around 15-20 years, that is, GDP driven by people going into debt to obtain mortgages or consumer goods. Keynesianism is generally pumping up demand through the growth of real wages while amping up employment, usually through the building of big infrastructure projects like housing, dams, railways, laying drains, etc.

It certainly doesn't solve the problem of endless growth, but at least growth comes from real productive growth and investment, NOT the ponzi scheme of private debt.

In the past, it has also been the fastest route to real income distribution as well.

Updated for the needs of the 21st century, recycling, reclamation, renewable energy, there is no good reason why the best of Keynesianism could not be employed again.

It is more likely to be adopted via the debt-based monetary system we have at present as well, whereas there will be likely as not strong continual resistance to the concept of debt-free money.

Except for banks, of course.



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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by CJ [User Info] [Email User] on November 1, 2012, 4:35 pm, in reply to ""Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

The mass waste of human resources in so many areas in maintaining the capitalist system has never been counted.
Accountancy: to obfuscate all the moving parts of the machine and create a language operating under arcane rules to separate owners from serfs.
The Law: to protect the property and rights of the owners and hide within inscrutable minutiae the machinations of the ruling minority.
Banking & Finance: -- where do you start!
Military & Security : !!!
Party Politics:!!!!
The top layers of bureaucracy and quangos: the revolving door species!

The list of human activities which add so little if anything to the common good could go on and on.

Still mustn't grumble!

cheers

Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Stevo!! [User Info] on November 1, 2012, 4:51 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

That's why government's have to wrest back democracy from the lobbyists of the bankers and the corporations.

Don't hold your breath waiting though!


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Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -

Posted by Keith-264 [User Info] [Email User] on November 1, 2012, 6:13 pm, in reply to "Re: "Economists ... are paid for telling stories that justify giving more money to rich people." Best -"

It was governments what sold the pass in the first place. Get rid of government and problem solved.

Keith-264, the last working class hero in England.


Thread 2:



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For CJ - Re: Banks creating money.

Posted by Stevo!! [User Info] on November 5, 2012, 7:55 pm

In effect banks create money every time they make a loan. No existing money is lent out.

This goes back to the old goldsmiths in the middle ages. Gold would be kept in goldsmiths vaults for safekeeping. A claim cheque for this gold would be given and these came to be used as money in place of gold in the marketplace.

Then, golssmiths realised that the gold was rarely claimed back early and that it was kept stored in their vaulus for quite a long time. They came to realise that, as long as they kept enough gold in their vaults to cover anyone wanting their gold back, say 10 percent of the time, they could issue more claim cheques than there was actual gold to redeem it. They would lend these cheques out at interest and became ebormously wealthy on gold that did not really exist. Only if people became suspicious and claimed all their gold back en masse was the game up.

Banks essentially work the same way today. They are required to keep up to 8 pervent collaterall, that is, if they hold £100 in deposits, they can lend out £1250.

The money returning from loan payments provides the banks with their profits. The mnoey returns to the banking system and is continually re-loaned. If you lend out £1000, kept 100 and lent out £900, the banking system would have £900, then they supposedly keep £900 and keep £90, that is £900 plus £810 = £1710! Then 81 is subtracted from £810 to lend £729. £900 + £810 + £729 = £2438. And so the process carries on. Of course, no existing money is lent out. An assumed 10 percent reserve ratio would mean that up to £1000 of loans could be created out of a £100 reserve of actual cash, or even ious. In fact, laons are just balanced by incoming deposits, that is, loans being repaid or savers deposits or corporate and government debt.

This process was summed up best by the original governor of the BoE, William Patterson:

The bank hath benefit of interest on deposits created out of nothing!

Stevo!! He's a broth of a boy!

Re: For CJ - Re: Banks creating money.

Posted by CJ [User Info] [Email User] on November 5, 2012, 11:41 pm, in reply to "For CJ - Re: Banks creating money."


This is what I said further down the Board (http://members5.boardhost.com/medialens/msg/1351826218.html ):

“All Bank's have Treasury departments managing the funds of the Bank and one of the jobs will be to match assets and liabilities in amounts, currencies and maturities. The main purpose of the inter-bank market is to enable banks to lend surpluses and borrow shortfalls so that their books balance. When the inter-bank market ground to a halt so did lending to the public. If the Banks could just lend to customers without worrying about funding those loans there would be no need of an inter-bank market.

The banks have the ability to create funds by way of loan which can be immediately deposited back by the borrower with the bank. The Bank can then lend say 90% or so of this deposit on to someone else who could then redeposit it back with the Bank and again they could lend 90% or so of that 90% to a third borrower et seq until the redeposit was too small to lend on. In this way "money is created" - but if you look along the chain each borrower has no extra money, what they have is a loan and a deposit of the same amount with a net value of 0. The Bank has three assets and three equal and opposite liabilities with the three borrowers and so has a net value of 0.
If the deposits were withdrawn then the Bank would need to borrow sufficient funds to pay the deposits until the loans were repaid. If the first loan was deposited with a different Bank, the first Bank would need to fund the loan out of reserves or borrowed funds.
All that the Banks create is liquidity - they swap a promise to pay back in say a year for immediate cash now and of course they charge you through the nose for the pleasure.”

It is clearer if one imagines the first loan is not deposited back but used to purchase a property overseas in a country where the custom is to keep money under their bed rather than in a bank. The Bank has an asset – the loan, but to create it they must have either reduced reserves or borrowed from another – the cash transferred overseas was always physically in existence in some form or another, imo.

The wholesale failure of the inter-bank market in 2007 with the collapse of Northern Rock and Lehman's surely proves that the Banks cannot create money out of nothing.


cheers


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Re: For CJ - Re: Banks creating money.

Posted by ceemac666 [User Info] [Email User] on November 6, 2012, 12:42 am, in reply to "Re: For CJ - Re: Banks creating money."

What Stevo said is absolutely correct.It,s called Fractional Reserve Banking.
The important thing to understand is that as you say it,s initially only an accounting procedure,but when the credit gained is then used to extend a further credit and this process is repeated it generates economic activity no different to the printing of banknotes.It is called the Multiplier Effect.
The second important thing is that it generates interest.So where does the interest come from?
If the debtor pays 5% interest then in order to pay this "fee"his capital has to increase by the same 5% at least or else it represents a capital transfer to the lender.
To keep the process working requires GROWTH and without that GROWTH needed to pay the cost of interest the whole capitalist system will collapse.

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Re: For CJ - Re: Banks creating money.

Posted by Stevo!! [User Info] on November 6, 2012, 3:01 am, in reply to "Re: For CJ - Re: Banks creating money."

Where did the first deposit come from, CJ? Where do the funds come from when you use a credit card and the banks are closed?

Banks bank AGAINST interbank lending funds - interbank lending funds is not real cash to lend out. Yes, the same amount of money is loaned and re-loaned, but the first deposit loaned out literally did not exist except as numbers on a computer screen. As borrowed money is paid back, that becomes capital for new loans,

The money that comes back as payment for loans existsm but loaned money from banks is number money, as is all credit card activity and also corporate and government bonds, which are just IOU's that promise to pay money at a later date. Company shares are nothing other than a form of debt too. If you buy a share for £100, that is money that company owes you out of their dividends at a future date. The only money in shares exists on paper until the firms profits are returned to you or you cash them in.

When a bank makes a loan, nothing is lent; no deposits go down. The bank creates a new asset by literally writing it in on the positive side of the ledger. No existing money changes hands. When the money comes back as payment for the loan, that is used as collaterall to bank against - it is not existing money that is re-loaned.

Yes, they have to have a real asset to loan against, but that need only be 8 percent of deposits. That is, for every pound deposited, the bank can lend a phantom £12.50. These deposits are risk weighted, so depending how little the risk of your physical assets, (which can be just treasury bills, that is, money already owing) the less capital they need for loans.

Yes, the money that comes back to the bank for payment for loans exists. However, those deposits are not physically loaned back out again, they are banked agains to create more number money loans.

Banks literally do essentially create money every time they give you a mortgage, when a credit card is used or when they issue personal loans. That money circulates in the economy, ends up back into the banking system, then those deposits are banked against and the bank creates more money from money that was originally loaned in the first place.

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Re: For CJ - Re: Banks creating money.

Posted by Stevo!! [User Info] on November 6, 2012, 3:33 am, in reply to "Re: For CJ - Re: Banks creating money."

The process that causes the confusion is the apparent creation and destruction of a loan. The money is loaned out until all principal and interest are returned to the bank and the loan is "destroyed". But the money is not destroyed, it is just taken out of circulation.

For a bank to literally just get back the same amount it lent out, plus interest of course, would be if the bank were literally lending out real cash. Of £100 was lent, £100 was returned to the bank (plus interest) therefore the bank had no more than was originally lent out apart from the interest.

This doesn't happen though. There was no physical money at the start of this chain. When the real cash asset comes back, it is taken out of circulation, but it is not destroyed, it becomes a bank deposit. These deposits are banked against again, creating yet more number money to lend out. Therefore bank deposits swell, meaning that the banks have effectively created an asset out of something that never physically existed in the first place.

If I lend you £100 cash, and you return it to me (as well as maybe a 5 percent interest fee) I hve literally got my money back, plus £5. However, if I loaned you the money as number money backed by collaterall of, say £10, I am not getting my money back! For £10 of assets, my account has swelled by £105, giving me money I never physically had in the first place. Money created from nothing! The money paid back is real, the money lent out certainly was not.

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Re: For CJ - Re: Banks creating money.

Posted by Daniel [User Info] [Email User] on November 7, 2012, 11:51 am, in reply to "For CJ - Re: Banks creating money."

If you really want it from the horses mouth, here is Adair Turner, the chairman of the UK’s Financi
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Post Post subject: continuation of Thread 2 from page 1 Reply with quote

If you really want it from the horses mouth, here is Adair Turner, the chairman of the UK’s Financial Services Authority, member of the BoE’s Financial Policy Committee and one of the top candidates to become the next Bank of England governor, setting out the fundamental cause of the Financial Crisis in his speech to the South African Reserve Bank on Friday 2nd Nov 2012:

"The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money."

Creation of private credit and money. Ex nihilo. The money didn't exist, then *poof* it was brought into existence.

He continues:

“…the existence of banks as we know them today – fractional reserve banks – exacerbates these risks because banks can create credit and private money, and unless controlled, will tend to create sub-optimally large or sub-optimally unstable quantities of both credit and private money."

Do we really have to argue whether this is correct or not?

I am not so inclined to listen to people who are not the chairman of the FSA, or the Bank of England, or economists for the IMF, telling me I am wrong or mistaken in presenting the facts as they are clearly laid out by people who are chairman of the FSA, or the Bank of England, or economists for the IMF. It took them a long time to come clean, but these days, there is no doubt.

Private banks create credit, which is counted as money to all intents and purposes. This is what caused the financial crash, at its root.

Your mileage may vary, of course.

Daniel

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Re: For CJ - Re: Banks creating money - Adair Turner goes on...

Posted by Daniel [User Info] [Email User] on November 7, 2012, 11:56 am, in reply to "Re: For CJ - Re: Banks creating money."

Lord Turner further describes the negative impacts of fractional reserve banking:

“The impact of fractional reserve banks is thus to make the financial system and the overall economy inherently more vulnerable to instability, creating risks which have to be balanced against the economic advantages which can arise from the risk pooling and maturity transformation which banks perform.”

“Banks which can create credit and money to finance asset price booms are thus inherently dangerous institutions.“

He then gives a blisteringly clear description of what banks actually, really, honest guvnor, do:

"The banking system can thus create credit and create spending power – a reality not well captured by many apparently common sense descriptions of the functions which banks perform.

Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses). But in fact they don’t just allocate pre-existing savings; collectively they create both credit and the deposit money which appears to finance that credit.

Thus banks can create credit and private money."

Can we talk about how to get this changed and what to replace it with, rather than endlessly slugging out a finished debate? There is no question left to answer except: What next?

Daniel

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For Stevo!!, ceemac666 & Daniel - will reply soon Surprised) nm

Posted by CJ [User Info] [Email User] on November 7, 2012, 7:59 pm, in reply to "For CJ - Re: Banks creating money."

nm

Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw.

Posted by CJ [User Info] [Email User] on November 8, 2012, 4:45 am, in reply to "For Stevo!!, ceemac666 & Daniel - will reply soon Surprised) nm"

So Stevo!! is saying Banks create money when they create loans by just creating numbers electronically, that no existing money changes hands and that the real money that comes back as repayment of the loan becomes electronic deposits in some way which are used to back new loans to new customers. All loans need to be backed by some assets but that could be just 8% of deposits.


I would argue that when a loan is created and the funds are drawn down by the borrower the Bank has to have funds to transfer to the borrower – these funds can take the form of the Bank’s own reserves of accumulated profits, its share capital and 8% of its deposits plus any funds the Bank itself borrows from other Banks in the inter-bank market.

Most loans are taken for the purpose of buying goods or services – they are never for placing back on deposit with the Bank – so the customer deposit the bank creates at the same time as the loan is created is only a method of moving an electronic balance from the Bank’s own accounts to the Customer’s account. But the customer empties out the deposit account as soon as he pays for his goods and services with that balance if that payment is not capable of being converted into cash by his supplier then the customer has not received a loan.
He in fact is perfectly within his rights to ask for that amount in cash so he can pay in cash – for small loans this would happen. For credit card cash withdrawals it happens all the time. So when I am given a personal loan to buy a car for £500 and I draw that from my Bank in cash – where does this money come from – it must have existed somewhere before! When I draw £100 from the ATM with my credit card – where does this cash come from ? This is a draw down on a credit facility – the final act of lending by the Credit Card Bank –delivery of cash. This must have come from somewhere!


Daniel is saying exactly the same thing but quoting Bank of England or FSA personnel to support the principle : but when you look at what is quoted :
1. "[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money. "

Paul Tucker, Deputy Governor for Financial Stability, Bank of England. Speech: ‘Shadow Banking: thoughts for a possible policy agenda’

"As the last quote explains, when a bank makes a loan it makes two balancing entries in its books: 1) the asset, which is the loan contract, and 2) a liability, which is the bank credit – or numbers in someone’s account – in the account of the borrower. This is newly-created bank credit, which functions as money and can be used to make payments."

- he is talking about creating “BROAD money” and the creation of two balancing entries the loan contract and the credit to the customer’s account – I have no problem with this – my problem occurs at the point at which – as with all loans – the facility is used to pay someone else for goods and services whether by drawing out cash or by writing a cheque on his account. In either case at that point the Bank needs funds with which to make the transfer or provide the cash. That cash had to have existed before it is paid out; and I would argue that the Bank must have available funds to make electronic payments to customers of other Banks who may wish to draw out those funds in cash.


2) Turner : ““Banks which can create credit and money to finance asset price booms are thus inherently dangerous institutions.“

- he is saying Banks create 2 things credit and money – not just money on its own which is what I have been trying to say. – as I said in fact to ceemac666 “I look at it more like a dividing effect:
credit is split into cash and debt when the credit is drawn down.”

- He then goes on to explain that he is talking about the “banking system” that creates credit and money – that the banks “collectively” create credit and money.
Why run the words “credit and money” together all the time – he is talking about something different to just money on its own – to my mind it is the proverbial coin with two faces – the cash on one side and the debt on the other – this is not money as we know it. It is credit as we know it. It is debt as we know it! But not money as we know it!

Daniel quoted this earlier :

“Had Northern Rock instead expanded its lending – and created the type of money used by the public - at the same rate as other banks, it would have found that its daily inflows of central bank reserves roughly matched its outflows (since the payments from its customers to other banks would be cancelled out by payments from other banks to customers of Northern Rock). It is unlikely that it would have become so dependent then on interbank lending to be able to make its payments. The very reason why Northern Rock went bust was the sheer speed at which it was creating money through issuing loans, which created a massive outflow of deposits which had to be settled by securing the reserves from somewhere.”

This doesn’t look like a Bank that is creating money out of thin air!

Ceemac666 says:
“when the credit gained is then used to extend a further credit and this process is repeated it generates economic activity no different to the printing of banknotes.It is called the Multiplier Effect.”

The combination of the Fractional Reserve Banking rules and the circulation of money clearly generates economic activity at a far greater rate than printing banknotes. I use the term circulation of money rather than creation of money since there is always an equal and opposite to the credit created and that is the debts that are created. This is no more than saying there are loans granted to some people who need money now and can pay later and there are deposits made by others who don’t need the money now but may withdraw it later – the difference is usually just a function of time.
The fact that Banks use 8% of deposits to back loans is just an acceptance of the fact that less than 8% of depositors remove their deposits at any one time and so depositors permit Banks to speculate to this extent – although for the amounts up to £25,000 (?) each depositor is guaranteed repayment by an insurance system.

All of this analysis does not mean that I differ from any of the comments so far as to the nature of Banking today – it just seems to have worked out OK in Mr. Mannering’s day ( Dad’s Army – sorry to hear about Clive Dunn R.I.P.) before the Merchant Banks combined with the Stock jobbers and brokers and created Investment Banks whose sole purpose is to turn your gold into theirs by whatever new alchemical process they can – without of course any real regulation .

cheers

Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw.

Posted by Stevo!! [User Info] on November 8, 2012, 6:05 pm, in reply to "Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw. "

"I would argue that when a loan is created and the funds are drawn down by the borrower the Bank has to have funds to transfer to the borrower – these funds can take the form of the Bank’s own reserves of accumulated profits, its share capital and 8% of its deposits plus any funds the Bank itself borrows from other Banks in the inter-bank market."

No CJ...you are falling for the process desctibed as so simple, the mind is repelled. If indeed the bank were lending out real funds, the money supply would not rise exponentially as it does. The money supply would have to be more or les fixed as banks wait for the loan payments, depositors money or, as you believe, lendings from other banks. The banks would have to wait for that money to return before they could conceivably recycle it as loans again.

The fact is, the banks create new deposits to lend out simply by writing in the appropriae amount on the positive side of the ledger. This is "chequebook money" or "promise to pay" money.

This is number money that can be quite legally spent. This number money, either by cheque or debit card, is spent on goods and services and circulates in the economy which more ofen than not, find there way back to someone's bank account. The bank that made the original loan will of course receive the loan payments back but the circulated money will more than likely end up in another or several other banks.

The banking system is a closed loop and essentially acts as one bank. The banks recieve the benefut of loan and interest payments and of new deposits as this money comes back to bank accounts from businesses.

Any payment in cash to the business owner from the borrowers bank can easily be met as new cash deposits are flowing in all the time. More likely as not, the business will simply want a transfer of funds, so it would just simply a matter of transferring mumber money from the borrowers account to the businesses account.

The number money that is lent out is spent in the general economy and makes its way back to the banking system in the form of cash or cheques or debits. This becomes a NEW bank deposit! The bank does not distinguish it from loaned money. It is money that is now a deposit. Tihs deposit can be banked against, that is, used as collaterall for new loans.

Meanwhile, the banks deposits have swelled after essentially lending people money that did not physically exist.

Real assets for non existant ones! Money created from nothing!




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Stevo!! He's a broth of a boy!

Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw.

Posted by Stevo!! [User Info] on November 8, 2012, 6:45 pm, in reply to "Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw. "

How BANKS CREATE MONEY for PRIVATE & COMMERCIAL Needs



If a bank makes a loan, nothing is lent, for the simple reason
that there is nothing of substance to lend. The bank makes what
it terms a loan against the amount of money deposited with it at
that time. This is all done with the utmost ease. The bank has
simply to agree that a person may take out a loan of, say,
£5,000. The person taking out the loan can then spend £5,000 and
hey presto! £5,000 of new number-money has been created. No one
with a bank account is sent a letter telling them that the money
in their account is temporarily unavailable, because it has been
lent to someone else. None of the original accounts in the bank
has been touched, reduced or affected. Nobody else’s spending
power has been reduced, but £5,000 of new spending power has
been created; £5,000 of new number-money enters the economy at
the stroke of a bank managers pen, but £5,000 of debt has also
been created.

Thus, whoever takes out the loan will then make purchases and
payments to other people, who will pay that new money into their
bank accounts. Result: more bank deposits! As soon as the loan
in the example above is spent, £5,000 will find its way into the
bank account of a car dealer or DIY store; £5,000 of apparently
new money. This is money which has supposedly been loaned but
the banking system doesn’t distinguish this fact. It simply
registers a new deposit, and regards it as new money. Total
deposits in the banking system have therefore increased by
£5,000. This is the boomerang effect of a bank loan by which a
loan rapidly creates an equivalent amount of new bank deposits
in the banking system. This effect was neatly summarised in a
statement by Graham Towers, former Governor of the Central Bank
of Canada…. ” Each and every time a bank makes a loan, new bank
credit is created – new deposits – brand new money.”

The new money will provide the banking system with the
collateral for more lending. This is the bolstering effect of a
bank loan. As the total money held by banks and building
societies becomes swollen by loans returning as new deposits
this provides them with the basis for further loans.

Perhaps the best description of this process of money
creation was provided by H.D. Macleod : ”

When it is
said that a great London joint stock bank has perhaps
£50,000,000 of deposits, it is almost universally believed that
it has £50,000,000 of actual money to lend out as it is
erroneously called… It is a complete and utter delusion.
These deposits are not deposits in cash at all, they are nothing
but an enormous superstructure of credit.”
The Grip of Death, Jon Carpenter Publishing, 1998, pp. 11-13.

http://prosperityuk.com/2000/04/how-private-commercial-national-and-international-money-is-created/

Stevo!! He's a broth of a boy!

Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw.

Posted by Daniel [User Info] [Email User] on November 9, 2012, 2:23 pm, in reply to "Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw. "

You might learn a lot from this as well:

https://www.youtube.com/watch?v=Qf_DxbWVaak

Daniel

Re: For Stevo!!, ceemac666 & Daniel - my last thoughts fwiw.
Posted by CJ on November 11, 2012, 3:47 am,
in reply to "Re: For Stevo!!, ceemac666 & Daniel - my thoughts fwiw. "

I have learned a lot from this debate and the references and links. But I still have this problem - I am not convinced.

I’m trying to see this from your perspective. The Bank creates deposits in the name of each borrower equal to the sum borrowed at the time of the creation of the loan. So the Bank has an asset of the loan ( a debt to be repaid by the borrower in the future) and a liability of the deposit ( a debt owed to the borrower as soon as the Bank agrees to lend the borrower money which will be paid as soon as it is drawn in cash by the borrower or it is transferred to someone else who Banks elsewhere). Since loans are taken out to spend on something the deposit will be depleted almost immediately and so the Bank’s IOU will be called and paid – either with cash out of the Bank’s own notes and coins or out of the Bank’s general reserves held at the Bank of England in the payments system. In either case the lending Bank is left with a reduced asset ( cash or reserves) and the loan to the borrower. The fact that there is an increase in the circulation of money is due to the activation of cash from its resting place in the Bank or its reserves from their resting place in the Payments system. This increase in the money circulated may only be for a few hours or it may be continually circulating depending on the use to which the money is put.

There will always be an increase in the current money sloshing about because the Bank has converted a future cash flow into a current lump sum and this will be a permanent state of money since the amount being repaid is not the same as the sum borrowed but a cash flow from future sources. There is a reduction in future money by having to repay debts as that money arises and to that extent it is taking money out of circulation in the future balanced by the current money advanced. So over time if we accept a growing economy through increased output / manufacture /service by creating debts now we are drawing upon those future resources and over time the effect is to level out an economy

Daniel points out that there are two forms of government money – coins and notes , and reserves at the Bnk of England – and from this : http://www.positivemoney.org.uk/wp-content/uploads/2012/03/How-Banks-Create-Money.pdf there is an exceedingly clear account of how Bank credit is created and Bank IOUs are transferred between Banks using Central Bank Reserves. I have assumed that when talking about how Banks can create money out of nothing the proponents of this theory are saying that the Banks can create money for their own benefit. A bit like legal counterfeiting. But having read the above it seems not. What is being proposed is that the Commercial Banking System creates “money” in the same way that the Bank of England creates money in their Central Bank Reserves. In other words just like the Bank of England promises to pay the owners of balances in the Central Bank Reserves whenever they request payment so too the Commercial Banks promise to pay the account holders at each of their banks and when payment is made to an account holder at another bank then that other bank is paid to issue its own promise to pay to its own account holder thereby keeping those newly created funds in circulation albeit through a different bank.
But what strikes me is that there is something fundamentally different between the deposit account of the original borrower and the deposit account of the supplier who is paid by the borrower for goods or services. The original Bank swaps its promise to pay for a promise to repay the loan from the borrower – the Bank is backed by the loan contract with the borrower ( not exactly of equal value and hence balanced by the promise to pay interest ). But when the borrower buys his goods from the supplier by telling his Bank to pay the supplier’s account at another Bank why would the supplier’s bank do that unless they were paid to do that? When the supplier is paid by a Bank transfer there is a Bank deposit in the name of the supplier which is a promise by his bank to pay the supplier - this happens at the same time as the deposit in the name of the borrower is extinguished once the transfer takes place. The was this is done through the Central Bank Reserves means that the second deposit and all subsequent deposits are fully backed by transfers of general reserves held by the transferor banks to the accounts of the transferee bank – as such the transferee banks always have the equivalent of cash ( the Bank of England “promises to pay” of general reserves held at the Central Banking Reserves “CBR” ) backing their promise to pay their account holders. If this is correct then the original deposits created for borrowers which may last only a couple of hours before they are transferred to a supplier of goods or services only create money out of nothing for a short time – their promise to pay is called upon almost immediately and the Banks do pay up to other Banks in the form of a transfer of general reserves at the CBR. The sums transferred are then fully cash backed deposits with the strength of the Bank of England behind them – the only missing point is that this backing for deposits is not hypothecated through to the general reserves at the CBR- although why they aren’t is a mystery as this would provide full insurance for depositors! So if the creation of deposits are creation of credit by the commercial banks for just an infinitesimal time and the continuing existence of that commercial bank “money” is fully backed by the Bank of England – this is not creation of money by the commercial banks out of nothing but by the Central Bank which allows its reserves to stand behind the commercial bank IOUs and is in fact not very different from notes and coins which are bought by the Banks and put in circulation when required. When the Bank of England lends commercial banks general reserves to be held at the CBR – it is the Bank of England that is maintaining in play the deposits . Without the backing of the Bank of England CBRs it would not be possible to transfer IOUs from one Bank to another – why would the transferee agree to take over the obligation of the transferor bank without being paid to do so? The Banks would be forced to deal in cash transfers. OR they would borrow from each other to meet highs and lows in the market – and where they could not borrow general reserves like Northern Rock then they would seek borrowing elsewhere.
What strikes me is that Banks only benefit at the margin – the benefit of the creation of any credit only accrues to the person with the obligation to repay a loan ( and he pays for that benefit in interest ) all the rest is a means of transferring value from one entity to another.

cheers
Tue Mar 26, 2013 11:30 am
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CJ



Joined: 03 Aug 2012
Posts: 6
Location: UK

Post Post subject: continuation of topic Thread 3 Reply with quote

Thread 3

{ this follows on from a personal email discussion between CJ and Coinneach here are some of my emails :

1. Hi Coinneach,

This was the MLMB post :

"Media Lens Message Board
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Re: Austerity and the Balanced Budget Myth

Posted by CJ [User Info] [Email User] on February 4, 2013, 4:15 pm, in reply to "Re: Austerity and the Balanced Budget Myth"

I found the link that I was trying to recall - it's on the BBC Website of all places!:

http://www.bbc.co.uk/news/business-15198789

"Quantitative Easing: Step by step

1. First, with the permission of the Treasury, the Bank of England creates lots of money. It does this by just crediting its own bank account.

2. The Bank of England wants to use that cash to increase spending and boost the economy so it spends it, mainly on buying government bonds from financial firms such as banks, insurance companies and pension funds.

3. The Bank buying bonds makes them more expensive, so they are a less attractive investment. That means companies that have sold bonds may use the proceeds to invest in other companies or lend to individuals.

4. If banks, pension funds and insurance companies are more enthusiastic about lending to companies and individuals, the interest rates they charge should fall, so more money is spent and the economy is boosted.

5. Theoretically, when the economy has recovered, the Bank of England sells the bonds it has bought and destroys the cash it receives. That means in the long term there has been no extra cash created.
....
Why are the UK and US's actions different from 1920s Germany and Zimbabwe?

Printing money can be defined as the central bank financing of government debts. This is what happened in both 1920s Germany and Zimbabwe and what the British government will insist it is not doing, although the short-term effect is similar.

According to the Maastricht Treaty, EU member states are not allowed to finance their public deficits by printing money. That is one reason why the Bank of England has been buying government bonds from financial institutions, not directly from the government.

The Bank believes this form of QE is different because it is "printing money" as part of monetary policy - to prevent deflation. It is not printing money to help the government finance its deficit.

Also, unlike Zimbabwe, this is a temporary policy: the Bank expects to sell the government bonds back into the market when the economy recovers."

The last paragraph and para 5. above are subject to the major qualification - the B of E may never be able to do this!

From this you will gather I do not accept that this QE process is just another form of asset swap. There is an asset swap for the current gilt holders but the B of E firstly creates the money to swap - a fundamental difference that is until or if it is able to reverse the process only then does it become( retrospectively ) an asset swap.

cheers



--Previous Message--
: They're talking about the prohibition on
: direct purchases of government debt by
: central banks. As I said earlier, debt
: issuance is entirely voluntary.
: Furthermore, as far as non-Eurozone nations
: are concerned, purchases of government debt
: (bonds) by the central bank or by the
: secondary market does not finance government
: expenditure. Government bonds are used
: primarily to regulate interest rates.
:
: Nothing to do with QE either."

cheers

2. Hi Coinneach,

Thanks for the link to Bill Mitchell (http://bilbo.economicoutlook.net/blog/?p=661 ) - I usually like his take on stuff but I think his view was too early in the game : compare it with Faisal Islam a year later, Channel 4's economist:

http://www.prospectmagazine.co.uk/magazine/is-quantitative-easing-working

There is no argument that the Commercial Banks have only exchanged their gilt holdings for Central Bank Reserves and so there is no increase in net assets in their hands - but the Bank of England's Balance Sheet has increased only on one side : it now owns 25% of all Gilts and the interest on these is passed back to the government turning these gilts into cost free debt!
The Bank of England acquired these gilts with newly created reserves - new money.

cheers }


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FAO: CJ - Quantitative Easing

Posted by Coinneach [User Info] on March 24, 2013, 5:57 pm

*This message was too big for a PM, so I put it here*

Hi CJ,

Firstly, Faisal Islam is not an economist, he's a journalist. I would treat such articles, especially when they're peppered with monetarist rhetoric ("printing money lol"), with a great degree of caution.

As I understand it, your concern is with the amassing of government bonds in the hands of the CB? Well, again, nothing has really changed - the assets accrued to the CB are offset by their liabilities (the injection of bank reserves). Net assets on both sides amount to zero. Financial instruments are merely changing hands. Its not like when the government purchases real goods and brings in taxes less than the amount spent. In that case new money is created (or in the case of taxing more than was spent, money is destroyed), but not with QE.

Does that make any sense? Sometimes what I write doesn't entirely match up with what's in my head....

Scott Fullwiller and L. Randall Wray wrote a working paper on QE in the US that you might find interesting: http://www.levyinstitute.org/pubs/wp_645.pdf

The Levy Institute website has a lot of great stuff btw.

Regards.

Re: FAO: CJ - Quantitative Easing

Posted by CJ [User Info] [Email User] on March 25, 2013, 3:26 am, in reply to "FAO: CJ - Quantitative Easing"

Hi Coinneach,
Thanks for the response - I take your point about Faisal Islam not being an economist - I in fact take comfort in this since I'm not one either.

I will get round to the link, thanks. But I just wanted to clarify :

I think that the CB liability in its Balance Sheet is not payment into the reserves of commercial banks but rather a profit due to its shareholders - the UK Treasury.
The payment they make to the commercial banks for the Gilts they buy from them will of course be transfers of reserves in the Bank of England's Central Reserves but prior to the purchase the Bank of England would not have had such a cash asset sitting in its books, the amount will have been newly created ab initio by the Bank of England specifically for the gilt purchase. The ability of the CB to create money in this way is of course only available to the CB of a currency. ( a statement which I know many dispute !)


I think the only reason the Bank of England is able to maintain the fiction that QE is not printing money is because it says that in due course the gilt purchases will be reversed and the cash receipts will be cancelled:
( "Theoretically, when the economy has recovered, the Bank of England sells the bonds it has bought and destroys the cash it receives. That means in the long term there has been no extra cash created. " slide 5 of the BBC guide to QE here:
http://www.bbc.co.uk/news/business-15198789 )
I would maintain that the more QE takes place and the longer it lasts the less likely it will be reversed and the result is exactly the same as printing money - as one of Bill's commentators adds in the link that you sent to me.

But the most interesting thing to me is the fact that the �350BN of gilts ( 25% of all government gilts issue ) and corporate bonds produce income which is then paid to the government making those gilts essentially interest free for the Government - why would the Government ever give up interest free financing?

cheers


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Re: FAO: CJ - Quantitative Easing

Posted by Coinneach [User Info] on March 25, 2013, 8:32 am, in reply to "Re: FAO: CJ - Quantitative Easing"

CJ,

I'll respond in more detail later, but if you look at figures 9 and 10 in the appendix of the pdf I linked to, you'll notice that the Fed's assets and liabilities match up almost perfectly.

As for your question of why the government would give up 'interest free financing': the government is not revenue constrained to begin with. The term 'interest free financing' has no meaning in relation to the operations of the UK government, which is the monopoly issuer of a non-convertible fiat currency. There are plenty of reasons the CB may wish to hold these assets, but obtaining 'interest free financing' is not one of them.

PS - I agree that not being an economist is a blessing. The vast majority of mainstream economists are fundamentalist religious fanatics - their religion being monetarism and the free market.

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Re: FAO: CJ - Quantitative Easing

Posted by Stevo!! [User Info] on March 25, 2013, 5:52 pm, in reply to "Re: FAO: CJ - Quantitative Easing"

QE is basically an asset swap of Government created money By the BoE here and money created by the Fed in the USA (NOT by the government as the US Fed is a private concern).

The money is put into bank reserve accounts at the face value of the bonds, on other words, �1,000,000 or $1.000.000 of bonds is exchanged for �1,000,000 or $1,000,000 of QE money. No extra money is created and bank reserves cannot be spent so none of this QE money finds its way into the economy. Unless it is banked against, of course.

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Stevo!! He's a broth of a boy!

Re: FAO: CJ - Quantitative Easing

Posted by Stevo!! [User Info] on March 25, 2013, 5:40 pm, in reply to "Re: FAO: CJ - Quantitative Easing"

"The ability of the CB to create money in this way is of course only available to the CB of a currency. ( a statement which I know many dispute !)"

Currency, by which I presume you mean notes and coins then, yes, only the Bank of England can create them.

If however, you meen credit, then banks certainly can create that, out of thin air, simply by accounting entries, or put plainly, simply writing the amount into the accoumt for the borrower.




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Stevo!! He's a broth of a boy!
Tue Mar 26, 2013 11:35 am
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