Money Money Money Money............................ Money

HAMISH_MCTAVISH

The money supply is mostly created through fractional reserve banking, which relies on debt to create money.

And a number of posters here desire lower levels of debt in general, and expect this to lead to greater levels of money to spend in the economy.

Yet those same posters seemingly fail to understand that less debt equals less money in the system to go around, as when debt is repaid to banks without being lent out again an equivalent amount of money ceases to exist.

So their desire is an impossibility.

Discuss.....

Generali

HAMISH_MCTAVISH wrote: »

The money supply is mostly created through fractional reserve banking, which relies on debt to create money.

And a number of posters here desire lower levels of debt in general, and expect this to lead to greater levels of money to spend in the economy.

Yet those same posters seemingly fail to understand that less debt equals less money in the system to go around, as when debt is repaid to banks without being lent out again an equivalent amount of money ceases to exist.

So their desire is an impossibility.

Discuss.....

One of several problems is that the amount of debt in the economy is such that the cost of servicing it is weighing down on consumption.

The cost of servicing mortgages is low but the cost of servicing unsecured debt has hardly budged. In addition, real disposable incomes are falling which leaves less cash available to service the debt.

Of course if people are repaying debt then Fractional Reserve Banking money creation goes into reverse: for each £ that is repaid and not re-lent, somewhere between £10 and £20 is removed from the money supply as measured by M4.

That problem is exacerbated by the costs of implementing Basle III which effectively means that much debt that is being repaid cannot be re-lent by Government diktat. There are twin forces at work: banks can't lend and consumers can't borrow. That is a process that will take years or even decades to unwind.

The more I look at things the more I think that QE will never be unwound, even as interest rates rise.

homelessskilledworker

HAMISH_MCTAVISH wrote: »

The money supply is mostly created through fractional reserve banking, which relies on debt to create money.

And a number of posters here desire lower levels of debt in general, and expect this to lead to greater levels of money to spend in the economy.

Yet those same posters seemingly fail to understand that less debt equals less money in the system to go around, as when debt is repaid to banks without being lent out again an equivalent amount of money ceases to exist.

So their desire is an impossibility.

Discuss.....

Well if what you say is true we are then living on borrowed time and doomed to one day collapse.
At the very best we are presently walking a tightrope then.

Just quickly come back to this post to edit(off to Bruge this morning), I partially agree with what you are saying, but the massive difference between us is that you see debt as wealthand I see it as the complete opposite.

The way debt has been used in the last decade is not just a case of getting things on the never never and paying the price later with interest, but debt has been used to plaster over a whole multitude of problems which some of us realise will one day surface.

For example up untill the 1st collapse(banking 2007) HPI was on the rise and everything but the kitchen sink was squared up using mortgage equity withdrawl. Everything was paid off with housing equity in many households, from breast implants to tax bills to holidays to electrical appliances to the very day to day running of a home.

Yes we all LOOKED rich and wealthy, but debt is just a way of putting off tomorrows problems today. But you just cannot see that, or do not want to.

Bigdeflationfirst

homelessskilledworker wrote: »

Well if what you say is true we are then living on borrowed time and doomed to one day collapse.
At the very best we are presently walking a tightrope then.

Just quickly come back to this post to edit(off to Bruge this morning), I partially agree with what you are saying, but the massive difference between us is that you see debt as wealthand I see it as the complete opposite.

The way debt has been used in the last decade is not just a case of getting things on the never never and paying the price later with interest, but debt has been used to plaster over a whole multitude of problems which some of us realise will one day surface.

For example up untill the 1st collapse(banking 2007) HPI was on the rise and everything but the kitchen sink was squared up using mortgage equity withdrawl. Everything was paid off with housing equity in many households, from breast implants to tax bills to holidays to electrical appliances to the very day to day running of a home.

Yes we all LOOKED rich and wealthy, but debt is just a way of putting off tomorrows problems today. But you just cannot see that, or do not want to.

Its very simple up till 1971 all currencies in the world were backed by monetary precious metals, after August 1971 all currencies are backed by debt. Every single unit of currency is debt, borrowed out on interest and more units need to be created to pay that interest. It has to keep expanding or the system collapses. It was doomed to failure in 1971, the only surprise is it has lasted this long.

What you say is true "we are then living on borrowed time and doomed to one day collapse.
At the very best we are presently walking a tightrope then."

Generali

Bigdeflationfirst wrote: »

Its very simple up till 1971 all currencies in the world were backed by monetary precious metals, after August 1971 all currencies are backed by debt. Every single unit of currency is debt, borrowed out on interest and more units need to be created to pay that interest. It has to keep expanding or the system collapses. It was doomed to failure in 1971, the only surprise is it has lasted this long.

What you say is true "we are then living on borrowed time and doomed to one day collapse.
At the very best we are presently walking a tightrope then."

Not true. The UK hasn't been on the Gold Standard since the 1930s.

Bigdeflationfirst

Generali wrote: »

Not true. The UK hasn't been on the Gold Standard since the 1930s.

After WW2 the bretton woods agreement was that all currencies would be backed by the US$ because the US$ was backed by gold. So all currencies were backed by gold through the dollar. This ended in 1971.

macaque_2

HAMISH_MCTAVISH wrote: »

And a number of posters here desire lower levels of debt in general, and expect this to lead to greater levels of money to spend in the economy.

I am no economist but it seems common sense that the value of debt must be dependent on the nature of the debt.

Credit to improve infrastructure or expand a business is good.

Credit on property to live in is a also good since it evens out the cost for the buyer and ultimately funds the construction of new properties.

Credit for buy to let is also good since buy to let (just like hotels) provide a valuable service.

Borrowing to buy capital goods (because the buyer does not have the discipline to save up) is not an efficient use of credit as the borrower ends up paying a premium. This makes the economy less efficient. There are better uses for this money such as investing and saving for pensions. If the credit exceeds the borrowers ability to repay, then bad debt increase. This is what we are seeing now.

Credit for speculation is potentially very bad since speculation by definition can go two ways and risks creating dangerous levels of exposure for both lender and borrower. In the UK, this has happened in the property market where too many home buyers and buy to let people have been almost totally dependent on capital gains to balance the books.

Generali

Bigdeflationfirst wrote: »

After WW2 the bretton woods agreement was that all currencies would be backed by the US$ because the US$ was backed by gold. So all currencies were backed by gold through the dollar. This ended in 1971.

Kinda.

The pound came off gold from 1914-1925 and then again in 1932.

Bretton Woods was an agreement that exchange rates should be fixed to the USD at predetermined rates, like the ERM. Again like the ERM, the UK Government was unable to maintain the agreed exchange rate and Labour Governments were forced to devalue in 1949 and 1967.

It's not much of a Gold Standard if you keep cutting the amount of gold that you can exchange the currency for!

FWIW, the pound also came off the Gold Standard in 1797 for about 25 years during and after the Napoleonic Wars. During the time the pound was on the gold standard there were several asset price and credit booms including the South Sea bubble and Railway Mania.

Thrugelmir

homelessskilledworker wrote: »

Well if what you say is true we are then living on borrowed time and doomed to one day collapse.
At the very best we are presently walking a tightrope then.

Just quickly come back to this post to edit(off to Bruge this morning), I partially agree with what you are saying, but the massive difference between us is that you see debt as wealthand I see it as the complete opposite.

The way debt has been used in the last decade is not just a case of getting things on the never never and paying the price later with interest, but debt has been used to plaster over a whole multitude of problems which some of us realise will one day surface.

For example up untill the 1st collapse(banking 2007) HPI was on the rise and everything but the kitchen sink was squared up using mortgage equity withdrawl. Everything was paid off with housing equity in many households, from breast implants to tax bills to holidays to electrical appliances to the very day to day running of a home.

Yes we all LOOKED rich and wealthy, but debt is just a way of putting off tomorrows problems today. But you just cannot see that, or do not want to.

Nicely sums up my view.

The UK Banks exploited the fractional reverse banking system by there use of mortgage securitisation. We all know what happened to both B&B and NR (and indirectly HBOS) as a consequence.

The G20 globally are the ones that collectively decided that banks should be better capitalised. The world has learnt a harsh lesson in that debt is not wealth.

michaels

One bit I don't get - it is suggested that payments on debt 'sucks money out of the economy' but surely such payments are merely transfers between borrowers and lenders (with a cut going to bank employees and shareholders)?

I'm not sure I am entirely convinced by the 'bringing forward consumption' argument. On a global scale I don't see how the monetary system can alter the balance between production and consumption although I guess there is some choice between producing 'capital goods' and 'consumption goods'. Obviously between any subgroups there can be an agreement for one to consume sooner and another later.

Thrugelmir

michaels wrote: »

One bit I don't get - it is suggested that payments on debt 'sucks money out of the economy' but surely such payments are merely transfers between borrowers and lenders (with a cut going to bank employees and shareholders)?

Capital repayment (i.e. debt reduction) is not income. So there's no distribution to shareholders , employees etc.

When debt is repaid its effectively being cancelled. Reducing the amount of money in circulation.

Read Niall Fergusons "Ascent of Money". A good laymans read and will explain the topic to you.