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Mike4DebtFreeMoney

antrobus wrote: »

Joe, Mike, and Simon are down the pub. A man approaches them as they are sitting at the table and asks them 'how much money have you all got?' Joe says that he has £10, Mike and Simon shake their heads and admit they are skint. Joe then decides to lend Mike a £10. When the man returns and asks them once more how much money they have, Joe says he has £10 , and now Mike says he has £10 as well, so now there is £20 worth of money where there was only £10 before. As long as Joe thinks that the £10 that he lent Mike is his money, then it's his money, in the same way as when people lend money to banks, they still think that it's their money.

Thanks! That’s a really clear description of the problem and I agree with your description. I think people can read that and understand the flawed logic of Joe. There was no actual money creation: Joe no longer has £10, he has an IOU. If he takes it to the bar, he will be disappointed. There was only £10 between the three of them, and Mike now has it.

In the same situation, Joe the high street banker can lend £10 to Mike, then another £10 to Fred, then another £10 to George, again and again, ten, twenty, thirty times. In the pub he’d need a magic wallet, but instead he has a computer and puts ‘10’ into each of their accounts. It does matter that it's a computer because Joe is banned from writing IOUs on paper. The many recipients of £10 think it’s money because they go to the cashpoint, draw it out, and spend it at places that use Bank of Joe. Then Joe gets to lend it out again, even though when he typed it, it was just a magic ‘10’ in their account on the back of his previous IOU, which itself was on the back of the previous IOU, which itself.... you get the picture. Joe thinks he ‘attracted’ the deposit when really it had no-where to go but a mattress or back into the banking system.

Both Mike and George spent their money at the corner shop. The owner goes to Joe’s cashpoint to withdraw £20: now Joe’s in trouble! But don’t worry, the Chancellor of the Exchequer will bail him out using a little bit of money from Mike, and Fred, and George .... in fact all of Joe’s customers get a little bit poorer so that Joe doesn’t go bust. Joe feels so happy with his ability to generate interest on £300 using just £10 that he pays himself around seven times his annual salary in shares, bonus payments and incentive schemes.

[FONT=&quot]An excellent simile, thanks.

[/FONT]

CLAPTON

Mike4DebtFreeMoney wrote: »

Thanks! That’s a really clear description of the problem and I agree with your description. I think people can read that and understand the flawed logic of Joe. There was no actual money creation: Joe no longer has £10, he has an IOU. If he takes it to the bar, he will be disappointed. There was only £10 between the three of them, and Mike now has it.

In the same situation, Joe the high street banker can lend £10 to Mike, then another £10 to Fred, then another £10 to George, again and again, ten, twenty, thirty times. In the pub he’d need a magic wallet, but instead he has a computer and puts ‘10’ into each of their accounts. It does matter that it's a computer because Joe is banned from writing IOUs on paper. The many recipients of £10 think it’s money because they go to the cashpoint, draw it out, and spend it at places that use Bank of Joe. Then Joe gets to lend it out again, even though when he typed it, it was just a magic ‘10’ in their account on the back of his previous IOU, which itself was on the back of the previous IOU, which itself.... you get the picture. Joe thinks he ‘attracted’ the deposit when really it had no-where to go but a mattress or back into the banking system.

Both Mike and George spent their money at the corner shop. The owner goes to Joe’s cashpoint to withdraw £20: now Joe’s in trouble! But don’t worry, the Chancellor of the Exchequer will bail him out using a little bit of money from Mike, and Fred, and George .... in fact all of Joe’s customers get a little bit poorer so that Joe doesn’t go bust. Joe feels so happy with his ability to generate interest on £300 using just £10 that he pays himself around seven times his annual salary in shares, bonus payments and incentive schemes.

[FONT=&quot]An excellent simile, thanks.

[/FONT]

indeed so
but such mechanisms allow the system to create great (real ) industries and create employment, create medical services, build houses, create MRI machines, provide beer in pubs etc.

alternatively we could have a different system with massive unemployment and poverty everywhere no medical services etc


it's a difficult choice.

antrobus

CLAPTON wrote: »

that's not the normal meaning of 'fractional'
that would simply be 'borrowing short and lending long'

Fractional Reserve Banking

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.
http://www.investopedia.com/terms/f/fractionalreservebanking.asp

As far as the traditional building society model was concerned only a fraction of the share account balances received as deposits were backed by actual cash on hand; most of it was lent out over 25 years.

That's still pretty fractional.:)

CLAPTON

antrobus wrote: »

Fractional Reserve Banking

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal.
http://www.investopedia.com/terms/f/fractionalreservebanking.asp

As far as the traditional building society model was concerned only a fraction of the share account balances received as deposits were backed by actual cash on hand; most of it was lent out over 25 years.

That's still pretty fractional.:)

I agree, but nothing to do with borrowing short and lending long

antrobus

Mike4DebtFreeMoney wrote: »

Thanks! That’s a really clear description of the problem and I agree with your description. I think people can read that and understand the flawed logic of Joe. There was no actual money creation: Joe no longer has £10, he has an IOU. If he takes it to the bar, he will be disappointed. There was only £10 between the three of them, and Mike now has it. ....

Sorry, wrong. Joe's IOU from Mike may well be accepted by the barman as payment. It's called a bill of exchange.

Mike4DebtFreeMoney wrote: »

....In the same situation, Joe the high street banker can lend £10 to Mike, then another £10 to Fred, then another £10 to George, again and again, ten, twenty, thirty times. In the pub he’d need a magic wallet, but instead he has a computer and puts ‘10’ into each of their accounts. It does matter that it's a computer because Joe is banned from writing IOUs on paper. The many recipients of £10 think it’s money because they go to the cashpoint, draw it out, and spend it at places that use Bank of Joe. Then Joe gets to lend it out again, even though when he typed it, it was just a magic ‘10’ in their account on the back of his previous IOU, which itself was on the back of the previous IOU, which itself.... you get the picture. Joe thinks he ‘attracted’ the deposit when really it had no-where to go but a mattress or back into the banking system.

Both Mike and George spent their money at the corner shop. The owner goes to Joe’s cashpoint to withdraw £20: now Joe’s in trouble! But don’t worry, the Chancellor of the Exchequer will bail him out using a little bit of money from Mike, and Fred, and George .... in fact all of Joe’s customers get a little bit poorer so that Joe doesn’t go bust. Joe feels so happy with his ability to generate interest on £300 using just £10 that he pays himself around seven times his annual salary in shares, bonus payments and incentive schemes....

I see you've misundersood. It's not Joe that is the banker, it's Mike. He's the one that's accepting the deposit. You've got everything the wrong way around. And there is nothing flawed about Joe's logic per se; if Mike has promised him that he can have his £10 back any time he wants, well, how do you know he isn't good for it? Back in the day, that's exactly how it worked. People would entrust their spare cash to 'Mike the banker' because he had a big house, lots of sheep, and a good reputation for paying his debts on time.

After all, that's the way things work now. People entrust their spare cash to all manner of 'Mikes' , or 'credit institutions, as the EU banking directive likes to call them, and trust that the credit institution concerned will indeed meet its obligations.

P.S. And no, it does not matter that it's a computer because Joe is not banned from writing IOUs on paper. Assuming that Joe is banned from writing IOUs on paper is like assuming that fish can't swim. How do you think banking worked before they invented computers? Or punched card tabulating machines for that matter.

Mike4DebtFreeMoney wrote: »

....[FONT=&quot]An excellent simile, thanks. [/FONT]

It was, wasn't it.

antrobus

CLAPTON wrote: »

I agree, but nothing to do with borrowing short and lending long

I was simply drawing attention to the fact that in no way could an asset that had a 25 year term be considered as 'cash'.

CLAPTON

antrobus wrote: »

I was simply drawing attention to the fact that in no way could an asset that had a 25 year term be considered as 'cash'.

if it is match with a 25 year liability then they can be in balance and there is no fractional banking

antrobus

CLAPTON wrote: »

indeed so
but such mechanisms allow the system to create great (real ) industries and create employment, create medical services, build houses, create MRI machines, provide beer in pubs etc.

alternatively we could have a different system with massive unemployment and poverty everywhere no medical services etc


it's a difficult choice.

Indeed.

The Joes of this world might well feel obliged to keep their £10s safe and sound under the mattress. However if they feel so enclined to entrust their £10s to the Mikes of this world, then this enables them to advance a good proporion of it to the Toms, Dicks, and Harries that are always knocking around. Tom wants to open a factory, !!!!!! wants to build a house, and Harry has a cure for cancer all lined up and ready to go. All of these things will now happen because they can get the money from Mike.

antrobus

CLAPTON wrote: »

if it is match with a 25 year liability then they can be in balance and there is no fractional banking

Yes, but building societies were largely funded by share accounts repayble on demand. I'm not aware of any building society that has ever had a 25 year notice or term account.

So it was pretty fractional.

CLAPTON

antrobus wrote: »

Yes, but building societies were largely funded by share accounts repayble on demand. I'm not aware of any building society that has ever had a 25 year notice or term account.

So it was pretty fractional.

whilst the meaning of words do still have a value the contend has lost value