Moneyweek - British interest rates & debt....are we all doomed?

Thrugelmir

JohnRo wrote: »

Everything I've read indicates private banks create money out of thin air when new credit is created, it isn't lent, it is invented via a keyboard as debt. Those banks then trouser the interest charges as profit as and when that debt is repaid and the capital then disappears whence it came.

Change the tense to did. Without the stimulus of QE money supply would be negative. After 40 years of credit boom boom since the early 70's. We're going to have work harder to earn our money rather than speculating on ever increasing asset prices. There's no next generation to sell the debt to. Time has run out.

Glen_Clark

Thrugelmir wrote: »

. Take a look at Japan for the past 2 decades. An indication of what maybe in store.

Deflation?
I don't think so.

Jegersmart

IronWolf wrote: »

The definition of money is important though. For example if I put £10 in the bank, who lends that £10 to someone who buys a pint of beer. The pub deposits that £10 in a bank who then lend it out to another person who buys a book. The bookshop owner then deposits that in a bank who lend it out etc etc (I've ignored reserves).

The total amount of money involved in this loop is £10, but that same £10 has been used to purchase multiple items via the creation of debt.

I would not say that the bank is 'creating money', it is simply an enabler, it allows money that would be otherwise be doing nothing to be active in the economy.

This thread is about debt, and the increasing levels of debt. Your example is incorrect and misleading in relation to this topic and this is why I suggest starting a new thread:

The table below displays the relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $500 of commercial bank money (it is important to note that the 20% reserve rate used here is for ease of illustration, actual reserve requirements are usually a lot lower, for example around 3% in the USA and UK). Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs.[3]
At this point in the relending model, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.

I haven't included the table, this is easily available through google.

Please start another thread if you wish to discuss the differences in MB, M0, M1 and M2 etc. because this thread is debating burgeoning levels of debt, not the semantics of which money supply is affected by certain activities. From the above you can also see that in any case your example is incorrect and misleading - and I don't know why you seek to derail this thread in this way?

J

SavingFish

What a confusing thread. I think a lot of this is being caused by the limits of the English langauge. (The problem comes from the overuse of the word 'money' which has several different meanings in an economic sense.)

I'm probably not going to make everyone happy, but here's my attempt at an explanation...

---

Taking a simplified example...

Person A gives £10 to person B to look after for them.
Person B lends the money to person C as an interest bearing loan.

Person A considers themselves to have £10 available to spend.
Person C considers themselves to have £10 available to spend.

So although we started with £10 (the equivalent of MB/M0 in the system), there is notionally twice as much 'money' (M2) available to spend.

Obviously this example is ridiculous. When A asks B for their money back there are going to be some nasty repurcussions. (B certainly won't be getting a Christmas card from A this year.)

---

Fractional reserve banking applies the above approach to groups and attempts to add an element of safety.

Group A all give their money to group B(ank) for safe keeping.
Group B(ank) lends some of the money (a fraction) to Group C.

Individual members of Group A can withdraw their money and the reserves kept by B should cope with this. However if everyone in Group A asks for their money simultaneously (a bank run) then group B is in trouble.

At this point, one of several things might happen...
- Group A loses out, they are told their money no longer exists.
- Group B recalls loans from Group C.
- Group B desperately borrows money from some other group, possibly a central bank which CAN print money.

so Group B never created any (M0) money, but from the outside, it looks like there is more money (M2) available to spend than there really is.

---

So the people claiming that commercial banks can create money, and the people claiming that only central banks can, are both right!

Confusing or what :P

sabretoothtigger

If Bank A has £10 capital, it loans out £100 to Joe1
Joe1 puts his money into bank B and they loan out £1000 to Joe2
Joe2 puts his money into bank C and they loan out £10000 to Joe3

Joe3 spends his 10,000 based off £10 of original capital. Seems to be they have created money, main thing is what happens next.
Is it a bad debt or returned with profits because 10k can easily double the original capital just on 1 weeks interest

IronWolf

Jegersmart wrote: »

This thread is about debt, and the increasing levels of debt. Your example is incorrect and misleading in relation to this topic and this is why I suggest starting a new thread:

The table below displays the relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $500 of commercial bank money (it is important to note that the 20% reserve rate used here is for ease of illustration, actual reserve requirements are usually a lot lower, for example around 3% in the USA and UK). Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs.[3]
At this point in the relending model, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.

I haven't included the table, this is easily available through google.

Please start another thread if you wish to discuss the differences in MB, M0, M1 and M2 etc. because this thread is debating burgeoning levels of debt, not the semantics of which money supply is affected by certain activities. From the above you can also see that in any case your example is incorrect and misleading - and I don't know why you seek to derail this thread in this way?

J

The example you quoted is exactly the same as what I said but including the reserves.

Anyway you're right this has nothing to do with the thread and I don't even know how we got started on this

Jegersmart

IronWolf wrote: »

The example you quoted is exactly the same as what I said but including the reserves.

Anyway you're right this has nothing to do with the thread and I don't even know how we got started on this

Yes, most threads on this subject are hijacked in this way, and the other thing that happens is that one never receives much of a reply from Antrobus.....

No wonder these debates don't go anywhere, because thanks to posts such as yours most people develop "thread fatigue" before anything interesting (or in some cases, relevant) happens. Thank you for that...^^

p.s. on top everything else, the above is not at all what you stated. You said that the same £10 is just passing through different hands. That is true to a very limited extent but extremely misleading as you know. Shame on you.

J

JohnRo

That's the theory, that's what they've told everyone they're doing, that's what they're supposed to be doing. Unfortunately they aren't even managing that, as objectionable as it is. It seems to me that's why QE handouts from "the future" are being used to repair what should never have been broken in the first place. Rather than being lent out to stimulate growth (and inflation)

Commercial banks have been and presumably still are, to a lesser extent now, simply creating credit first, enjoying the bonuses bonanza, then seeking to cover the liability after the fact via the central banks they largely control and ultimately via taxpaying wage slaves. In other words grab the profits now and let everyone else face the consequences later. The bottom line seems to be that commercial banks, at the top level, effectively rule the world and have become a law unto themselves because dependent governments are too afraid of the consequences the global cartel can and will inflict on any one who dares to really try sorting it out in any meaningful way.

SavingFish

JohnRo wrote: »

Commercial banks have been and presumably still are, to a lesser extent now, simply creating credit first, enjoying the bonuses bonanza, then seeking to cover the liability after the fact via the central banks they largely control and ultimately via taxpaying wage slaves. In other words grab the profits now and let everyone else face the consequences later. The bottom line seems to be that commercial banks, at the top level, effectively rule the world and have become a law unto themselves because dependent governments are too afraid of the consequences the global cartel can and will inflict on any one who dares to really try sorting it out in any meaningful way.

My understanding was that there was a fractional reserve level that was considered 'safe', for example 3% - That is, the commercial banks were to lend out no more than 97% of deposits they took (whether from central banks, savers, money markets etc...)

The banks that were being irresponsible went well below this level, say lending out 99.9% of deposits. When the 'depositors' asked for their money back, the banks didn't have the necessary reserves, couldn't raise money from anywhere else quickly enough and subsequently failed.

If the banks were allowed to fail, this would have set off a domino rally effect where debts were called in/defaulted and the other banks would fail one by one in a chain. Hence the central banks felt compelled to intervene.

It sounds like you're implying that they were lending out over 100% of their deposits? I don't think that's right?

JohnRo

The simple fact is that no one, any where knows exactly what the hell they're doing.