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Bank of England Admits that Loans Come FIRST … and Deposits FOLLOW

George Washington's picture




 

The Bank of England Corrects a Widespread Myth

The above is from a new official video released by the Bank of England.

The Bank of England notes in a new article:

Broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

 

***

 

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

 

This process is illustrated in Figure 1, which shows how new lending affects the balance sheets of different sectors of the economy (similar balance sheet diagrams are introduced in ‘Money in the modern economy: an introduction’). As shown in the third row of Figure 1, the new deposits increase the assets of the consumer (here taken to represent households and companies) — the extra red bars — and the new loan increases their liabilities — the extra white bars. New broad money has been created. Similarly, both sides of the commercial banking sector’s balance sheet increase as new money and loans are created.

 

***

 

Reserves are, in normal times, supplied ‘on demand’ by the Bank of England to commercial banks in exchange for other assets on their balance sheets.  In no way does the aggregate quantity of reserves directly constrain the amount of bank lending or deposit creation.

 

This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.

(footnotes omitted.)

Banks DO, In Fact, Create Money Out of Thin Air

 

Not convinced? Think the Bank of England chaps misspoke, or that the British have a unique system?

 

In fact, other central banks also admit that commercial banks create money out of thin air ... without regard to deposits on hand.

 

Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air.

And the Fed has said the same thing. For example, a 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics” said:

[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.

William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech in July 2009:

Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference.

And on February 10, 2010, Ben Bernanke proposed the elimination of all reserve requirements:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Under the current fractional reserve banking system, banks can loan out many times reserves. But even that system is being turned into a virtually infinite printing press for banks.

And there’s an overwhelming amount of additional proof ….

For example, 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true (via Steve Keen):

The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

 

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

 

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

 

Kydland and Prescott observed at the end of their paper that:

 

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

In other words, if the conventional view that excess reserves (stemming either from customer deposits or government infusions of money) lead to increased lending were correct, then Kydland and Prescott would have found that credit is extended by the banks (i.e. loaned out to customers) after the banks received infusions of money from the government. Instead, they found that the extension of credit preceded the receipt of government monies.

This angle of the banking system has actually been discussed for many years by leading experts:

“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.”
- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.

“Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.”
- Graham Towers, Governor of the Bank of Canada from 1935 to 1955.

Moreover, in First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).

Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.

But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book.

Moreover, although it is counter-intuitive, virtually all money is actually created as debt. For example, in a hearing held on September 30, 1941 in the House Committee on Banking and Currency, then-Chairman of the Federal Reserve (Mariner S. Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

And Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

Indeed, even Krugman admits that “banks can create inside money”. Inside money is “debt that is used as money”.

Why Is This Such An Important Revelation?

As economics professor Steve Keen documents in his must-read book, Debunking Economics: The Naked Emperor Dethroned, mainstream economists – from both the left and the right – don’t even take debt into consideration in their models of what makes for healthy economies.

As Keen has previously noted:

The vast majority of economists were taken completely by surprise by this crisis—including not just … the ubiquitous “market economists” that pepper the evening news, but the big fish of academic, professional and regulatory economics as well.

 

***

 

Why did conventional economists not see this crisis coming, while I and a handful of non-orthodox economists did [?] Because we focus upon the role of private debt, while they, for three main reasons, ignore it:

 

***

 

 

They believed that the level of private debt—and therefore also its rate of change—had no major macroeconomic significance:

 

***

 

Finally, the most remarkable reason of all is that debt, money and the financial system itself play no role in conventional neoclassical economic models. Many non-economists expect economists to be experts on money, but the belief that money is merely a “veil over barter”—and that therefore the economy can be modeled without taking into account money and how it is created—is fundamental to neoclassical economics. Only economic dissidents from other schools of thought … take money seriously, and only a handful of them—including myself (Steve Keen, 2010; http://www.economics-ejournal.org/economics/journalarticles/2010-31)—formally model money creation in their macroeconomics.

 

Even the most “avant-garde” of neoclassical economists … have only just begun to consider the role that debt might play in the economy ….

In other words, most economists think that debt – and the real nature our money system – don’t matter.

For example, the economists who have had the most influence over government policy over the last decade – such as Ben Bernanke and Paul Krugman – think that the amount of private debt is totally irrelevant to the health of the economy:

Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects… (Bernanke 2000, p. 24)

***

 

Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth — one person’s liability is another person’s asset…

In what follows, we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending… (Krugman and Eggertsson 2010, p. 3)

***

 

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. (Krugman 2011)

Specifically, Bernanke and Krugman assume that huge levels of household debt don’t hurt the economy because more debt among households just means that savers have loaned them money … i.e. that it is a net wash to the economy.

To make this assumption, they rely on the myth that banks can only loan as much money out as they have in deposits. In other words, they assume that if bank customer John Doe has $100 in the bank, then the bank can loan that $100 to someone else.

But Keen points out – as the Bank of England is now finally doing as well – that banks actually loan out money whether or not they have enough in deposits … and then borrow the shortfall from the central bank.

Keen therefore says that it is not a wash … and that high levels of private debt are the cause of economic crises.

Washington’s Blog spoke with one of the country’s top experts on money creation, L. Randall Wray, to get his view on this issue. Wray is professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City, and author of Money and Credit in Capitalist Economies, and Understanding Modern Money: The Key to Full Employment and Price Stability, and coeditor of and contributor to Money, Financial Instability, and Stabilization Policy, and Keynes for the 21st Century: The Continuing Relevance of The General Theory.

Here’s the important nugget from our conversation …

WASHINGTON’S BLOG: As you might have heard, Paul Krugman argues that banks only loan out based upon their deposits, while Steve Keen argues that loans are created through double entry bookkeeping, so that money is created endogenously [i.e. banks create their own money].

For example, there is Scott Fullwiler’s (Associate Professor of Economics and James A. Leach Chair in Banking and Monetary Economics at Wartburg College) take on the debate [see this or summary here].

As a leading expert on modern monetary theory, who do you think is right? Do banks need deposits before they can lend … or do they lend regardless of deposits, and only bounded by reserve and capital requirements (or access to Fed monies)?

PROFESSOR WRAY: Bank deposits are bank IOUs; an IOU can only come from the issuer. Where do your IOUs come from? Do you borrow them? NO. [Professor] Scott [Fullwiler] is right, Krugman does not know what he is talking about.

Indeed, economics professor and money expert Fullwiler says that Krugman should wear a flashing neon sign saying “I don’t know what I’m talking about”, and explains:

As is well known, and by the logic of double-entry accounting, the bank does make a loan out of thin air—no prior deposits or reserves necessary.

 

***

 

[Krugman writes:]

And currency is in limited supply — with the limit set by Fed decisions.

This statement is simply mindboggling. It’s so wrong I don’t know where to begin. The Fed NEVER limits the supply of currency. Never. Ever. To do otherwise would be to violate its mandate in the Federal Reserve Act to provide for an elastic currency and maintain stability of the payments system.

Economics professor Michael Hudson also slams Krugman for having a blind spot on debt:

Mr. Krugman’s failure to see today’s economic problem as one of debt deflation reflects his failure (suffered by most economists, to be sure) to recognize the need for debt writedowns, for restructuring the banking and financial system, and for shifting taxes off labor back onto property, economic rent and asset-price (“capital”) gains. The effect of his narrow set of recommendations is to defend the status quo – and for my money, despite his reputation as a liberal, that makes Mr. Krugman a conservative. I see little in his logic that would oppose Rubinomics, which has remained the Democratic Party’s program under the Obama administration.

 

***

 

Mr. Krugman got lost in the black hole of banking, finance and international trade theory that has engulfed so many neoclassical and old-style Keynesian economists. Last month Mr. Krugman insisted that banks do not create credit, except by borrowing reserves that (in his view) merely shifts lending savings from wealthy people to those with a higher propensity to consume.

 

Criticizing Steve Keen (who has just published a second edition of his excellent Debunking Economics to explain the dynamics of endogenous money creation), he wrote:

Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand. Keen says that it’s because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can’t increase unless the money supply rises, but that’s only true if the velocity of money is fixed;

But “velocity” is just a dummy variable to “balance” any given equation – a tautology, not an analytic tool. As a neoclassical economist, Mr. Krugman is unwilling to acknowledge that banks not only create credit; in doing so, they create debt. That is the essence of balance sheet accounting. But … Krugman offers the mythology of banks that can only lend out money taken in from depositors (as though these banks were good old-fashioned savings banks or S&Ls, not what Mr. Keen calls “endogenous money creators”). Banks create deposits electronically in the process of making loans.

 

***

 

Said Krugman:

First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.***

 

There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.***

The problem with Mr. Krugman’s analysis is that bank debt creation plays no analytic role in Mr. Krugman’s proposals to rescue the economy. It is as if the economy operates without wealth or debt, simply on the basis of spending power flowing into the economy from the government, and being spent on consumer goods, investment goods and taxes – not on debt service, pension fund set-asides or asset price inflation. If the government will spend enough – run up a large enough deficit to pump money into the spending stream, Keynesian-style – the economy can revive by enough to “earn its way out of debt.” The assumption is that the government will revive the economy on a broad enough scale to enable the individuals who owe the mortgages, student loans and other debts – and presumably even the states and localities that have fallen behind in their pension plan funding – to “catch up.”

 

Without recognizing the role of debt and taking into account the magnitude of negative equity and earnings shortfalls, one cannot see that what is preventing American industry from exporting more is the heavy debt overhead that diverts income to pay the Finance, Insurance and Real Estate (FIRE) sector. How can U.S. labor compete with foreign labor when employees and their employers are obliged to pay such high mortgage debt for its housing, such high student debt for its education, such high medical insurance and Social Security (FICA withholding), such high credit-card debt – all this even before spending on goods and services?

 

In fact, how can wage earners even afford to buy what they produce?

Why Is The Myth About Banks So Dangerous?

Even if banks don’t really loan based on their deposits and reserves, who cares? Why is this such a dangerous myth?

Because, if banks don’t make loans based on available deposits or reserves, that means:

(1) This was never a liquidity crisis, but rather a solvency crisis. In other words, it was not a lack of available liquid funds which got the banks in trouble, it was the fact that they speculated and committed fraud, so that their liabilities far exceeded their assets. The government has been fighting the wrong battle, and has made the economic situation worse.

 

(2) The giant banks are not needed, as the federal, state or local governments or small local banks and credit unions can create the credit instead, if the near-monopoly power the too big to fails are enjoying is taken away, and others are allowed to fill the vacuum.

Indeed, the big banks do very little traditional banking. Most of their business is from financial speculation. For example, less than 10% of Bank of America’s assets come from traditional banking deposits.

Time Magazine gave some historical perspective in 1993:

What would happen to the U.S. economy if all its commercial banks suddenly closed their doors? Throughout most of American history, the answer would have been a disaster of epic proportions, akin to the Depression wrought by the chain-reaction bank failures in the early 1930s. But [today] the startling answer is that a shutdown by banks might be far from cataclysmic.

 

***

 

Who really needs banks these days? Hardly anyone, it turns out. While banks once dominated business lending, today nearly 80% of all such loans come from nonbank lenders like life insurers, brokerage firms and finance companies. Banks used to be the only source of money in town. Now businesses and individuals can write checks on their insurance companies, get a loan from a pension fund, and deposit paychecks in a money-market account with a brokerage firm. “It is possible for banks to die and still have a vibrant economy,” says Edward Furash, a Washington banks consultant.

So we the government has been barking up the wrong tree by propping up the big banks. Indeed, top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the economy. They say we need to break up the big banks to stabilize the economy.

Moreover, as discussed above, the fact that banks can create money means that the level of private debt does matter … and economists like Bernanke and Krugman who encourage massive levels of private debt are hurting the economy.

As professor Keen explains:

In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt, with the change in debt spending new money into existence in the economy. This is then spent not only goods and services, but on financial assets as well—shares and property. Changes in the level of debt therefore have direct and potentially enormous impacts on the macroeconomy and asset markets, as the GFC [global financial crisis] — which was predicted only by a handful of credit-aware economists (Bezemer 2009)—made abundantly clear.

 

If the change in debt is roughly equivalent to the growth in income—as applied in Australia from 1945 to 1965, when the private debt to GDP ratio fluctuated around 25 per cent (see Figure 1)—then nothing is amiss: the increase in debt mainly finances investment, investment causes incomes to grow, and the economy moves forward in a virtuous feedback cycle. But when debt rises faster than income, and finances not just investment but also speculation on asset prices, the virtuous cycle gives way to a vicious positive feedback process: asset prices rise when debt rises faster than income, and this encourages more borrowing still.

 

The result is a superficial economic boom driven by a debt-financed bubble in asset prices. To sustain a rise in asset prices relative to consumer prices, debt has to grow more rapidly than income—in other words, if asset prices are to rise faster than consumer prices, then rather than merely rising, debt has to accelerate. This in turn guarantees that the asset price bubble will burst at some point, because debt can’t accelerate forever. When debt growth slows, a boom can turn into a slump even if the rate of growth of GDP remains constant.

Indeed, people have known for thousands of years that debt grows exponentially, while economies only grow in an S-curve. No wonder ancient cultures were founded on the idea of debt forgiveness, and the first word for “freedom” in any language meant freedom from debt.

In 2008, the Bank for International Settlements (BIS) – often described as the central bank for central banks – said that failing to force companies to write off bad debts “will only make things worse”.

Indeed, mainstream economists from the left and the right who encourage more private debt are only creating a debt trap … where people take on new debt to try to pay for the old debt, and end up in a worse situation than they started.

 

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Fri, 03/21/2014 - 12:28 | 4577372 Johnny Cocknballs
Johnny Cocknballs's picture

This is really excellent stuff, Mr. Washington.

 

Fri, 03/21/2014 - 08:20 | 4576263 TheGoldMyth
TheGoldMyth's picture

No study of money creation (To Buy All The Gold ) is complete without the study of how money is uncreated, or destroyed.

From Wikipedia:
"When a commercial bank loan is extended, new commercial bank money is created if the loan proceeds are issued in the form of an increase in a customer's demand deposit account (that is, an increase in the bank's demand deposit liability owed to the customer). As a loan is paid back through reductions in the demand deposit liabilities the bank owes to a customer, that commercial bank money disappears from existence.

Thanks!!

Fri, 03/21/2014 - 08:24 | 4576271 TheGoldMyth
TheGoldMyth's picture

Or....................... From Wikipedia in an older edit......
"When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, that commercial bank money disappears from existence."

In order to buy all the gold and keep it scarce...

Thanks!!........

Fri, 03/21/2014 - 14:46 | 4577938 blindman
blindman's picture

also, because of the interest payment associated,
the system, activity or mechanism of lending process must
continue and increase to provide the liquidity necessary
for systemic stability and further economic activity, but ,
it can't and does not within constructed parameters of credit
and limits on moral hazard.
.
the money system was fraudulently designed that way
to replace human slavery, as slavery became abhorrent to
the enlightened age of reason mind the "owners" needed a
systemic fix to provide for the lost slave labor. this
"money" system that everyone is so confused about worked
perfectly as that replacement but up to a point.
"today"(broadly speaking), there
is so much incompetence and failure of the massaging of
the system (including outright fraud) that the essential nature
of the abomination is glaring even to the most distracted and
even they cannot fail to either see it or be profoundly impacted
by its criminal intent and nature.
the crime is nothing more than civilisation and its tendency
to push the limits of exploiting labor via symbolic miseducation
beyond the point of utility, perhaps?
in few words, pursuit of deadly greed, ambition and power;
watch for the judgement of that as has been advised.

Fri, 03/21/2014 - 07:04 | 4576112 andrewp111
andrewp111's picture

Banks need to borrow or take deposits to be able to make payments to other banks or to satisfy withdrawls in currency. If there was only one bank, it would create all its own deposits and would never have to make a payment to any other bank. In the absence of currency, it could never be insolvent. If there are only 2 big banks, each behemoth creats half of its own deposits, and only has to make payments half the time. If you are just a little bank, you almost always have to make a payment to a different bank when you make a loan. So, obviously there are advantages to being big.

Fri, 03/21/2014 - 05:17 | 4576020 messymerry
messymerry's picture

"HOLY COW, Ratman, they're all wearing suits!"

"Don't be deceived Bobbin, they're thieves disguised as bankers."

POW BAM KNOCK SLUG BIFF CRUNCH SLAM WHAM GLAM!

Good morning you effing moneychangers, your Come to Jesus moment is almost here.

Fri, 03/21/2014 - 03:06 | 4575901 Drifter
Drifter's picture

Just now figuring out banks create "money" when they make a loan?

I knew that when I was 20.  Basic Econ 101 stuff.

"Gold is money, everything else is credit."  -- JP Morgan

It's not money.  It's credit.  IOUs.  FRNs are IOUs.  Every currency in the world is IOUs.

Real money, gold, is held back as "reserves".

In 1930s bankers began removing real money (gold and silver) from circulation, replacing it with "bank notes" which are IOUs.  But they're a special kind of IOU that never pays off.

Most everybody on ZH knows these things.  Why are you acting like it's some new revelation?

Fri, 03/21/2014 - 07:13 | 4576121 free_lunch
free_lunch's picture

There is even a nice website that has a free video crash course on it, not only about the money creation process, wich guarantees constant everlasting inflation (++gold++), but also about other scary stuff like exponential growth:   http://www.peakprosperity.com/video/223/playlist/153/chapter-7-money-cre...

Fri, 03/21/2014 - 07:22 | 4576138 free_lunch
free_lunch's picture

 

 

If you want to know why money creation works the way it does, watch this short video:

Stefan Molyneux - The Story of Your Enslavement: http://www.youtube.com/watch?v=eq3jjzI8Gdo


"We can only be kept in the cages we do not see. A brief history of human enslavement - up to and including your own."

 

Sat, 03/22/2014 - 06:45 | 4575843 Dr. Bonzo
Dr. Bonzo's picture

Brilliant piece George. This is the hidden secret behind China's rise to economic ascendancy. They learned to play our game. Print their own money, buy up our bonds to keep their money competitive, put slave labor to work, rob slave labor of their land, badabing-badaboom. Your son's driving a Ferrari around Havud yard and you've got 4 trillion in stolen wealth stashed away in the Caribbean and own beachfront in 7 countries.

When will people wake up? SMH.

 

Fri, 03/21/2014 - 01:12 | 4575800 USGrant
USGrant's picture

Screw the words. Count the gold. Minimum 60 bars per shelf x 3 shelves = 180 bars per rack. Long view 48 racks, short view 18 racks or 180 x 64= 11520 bars. Double it since the interview may have been in the center of the room and shorting the bar count on the racks. 23K bars.

23K x 400 oz = 9.2 E6  troy oz./12 x 373.24 = 2.86E8 g = 286 tonnes =Not very much. 

Thu, 03/20/2014 - 21:27 | 4575251 Midnight Rider
Midnight Rider's picture

The economy would in fact actually perform better without these blood sucking TBTF bankers. No doubt about it.

Thu, 03/20/2014 - 20:51 | 4575153 zionhead
zionhead's picture

ZH is every much part of this circus.

I have been writing forever here on ZH that BANKS only job is to loan money, and they don't take in deposits, their source of money is the FEDERAL RESERVE where ZIO-Oligarchs pull it out of their ass to infinity.

Then you have the WASH-DC circus where sociopaths pretent  to 'play government' for the MSM.

But certainly there is no reason for ZH to discuss 'economic illusions' of pre 1910 thought about banking.

For that matter discussing the 'gold standard' as KRUGMAN so well says "WE CANT GO BACK",

How do we pull infinite GOLD out of our ass? We can't.

All economics, all financial its all a bullshit mirage.

"MONEY" as we know it is "MURDER", USA via zio-overlords have MURDERED +100 Million people since 1910 to create this illusion of economics.

Talking about deposits/loans is an illusion for mormons, mushrooms to be fed shit.

Fri, 03/21/2014 - 06:26 | 4576079 overmedicatedun...
overmedicatedundersexed's picture

 fiat = crime =in most cases jews in management (fed), not that there is anything wrong with that. it just looks bad to non jews, who at times run planes into buildings killing alot of finance workers (some jews, some not)..some jews seem to keep butting in on national crisis like soros on putin, seems they think they know something others don't and are above the common man, maybe they are right.

Thu, 03/20/2014 - 21:12 | 4574898 WhyWait
WhyWait's picture

Good piece.  You've got me wanting to check out Hudson.

If we had a money supply anchored in gold, how would expansion work?  Could additional money be created, and would it have to be?  Would we allow one degree of multiplication through gold notes and fractional reserve banking?  Would there be forces at work in the economy that would halt growth and drive us into depression if the money supply is forced to remain proportional to the gold supply?  Would the economy still tend to generate ever greater concentrations of wealth, and would that still ultimately strangle the economy?  Would not there be a huge temptation, greed for the bankers and speculators and fear of the backlash from deflation for the politicians, to allow reflation of the economy through bubbles and the use of derivatives and second, third degree derivatives as a kind of money?  Or could and would the government act to prevent this?  

And what then would keep the regulators honest?  Or could a system be designed that didn't depend on the regulators being above temptation?

And then what about Ellen Brown's proposal (WebofDebt.wordpress.com) for publicly-owned banks and a non-debt-based fiat currency, spent into existence by governments?  Would that stop the tendencies to wealth concentration or allow governments to solve the problem of inadequate consumer demand that creates? Would this require cutting off all private credit creation, and if not, how could that proceed without generating interest obligations that the available money supply couldn't cover? Would the economy then generate deflationary crises and an irresistable demand for inflationary solutions anyway?  

Clearly we need a new scenario, a new financial system.  We'd be wise to model the alternatives before committing to one.  Has anyone constructed models of the economy with these reforms built in, and what do they show? 

 

Thu, 03/20/2014 - 21:56 | 4575253 acetinker
acetinker's picture

The system we have is workable, IF there's no central bank.  It really is that simple.  Think about it.  Economists and even traders benefit if we believe it's more complicated than that.  They have built an elaborate facade of total horseshit and most of us marvel after that which was dead, but lives on.

If every project, be it a home or a shopping mall required that the lender had confidence, with no expectation of a backstop, that the borrower would 'make good' the credit extended, almost every project embarked on 'in good faith' would result in success.

There is no need for usury in this scenario.  Bankers who make good decisions become fabulously rich.  So do the borrowers.

The Treasury only exists to keep the ledger, and keep the various players honest.

You can't get something for nothing.

You can't have freedom for free.

The government is funded by the people, to the extent they desire, and not a penny more.

State banks.

Local control.

DC becomes an artifact of a failed system.

Alexander Hamilton is finally outed as a traitor to humanity.

NO foreign intervention (.)  Even if we are appalled, it's really none of our business.

I could go on, but maybe you get the idea.

Oh and a zh'ers initials I won't name but is RadicalMarijuana must feel vindicated, he highlighted this BoE missive yesterday.

 

Thu, 03/20/2014 - 18:25 | 4574641 wnoise
wnoise's picture

Bullshit article, mostly bullshit comments. Money IS debt, so OF COURSE when a bank gives a loan an equivalent amount of money is created. That's what banking is all about: transforming a specific debt into a general purpose one (which we call money). Duh!

Thu, 03/20/2014 - 18:21 | 4574614 RMolineaux
RMolineaux's picture

This is a chicken and egg argument.  Fact is, when the government sells bonds, it creates new reserves available to commercial banks to make loans or to satisfy minimum reserve requirements.   It is the commercial bank's choice as to which of the two they will do.  While it is true that new money is created only when a commercial bank makes a new loan, the ability of the commercial bank to do so is limited by its reserve requirement.

Thu, 03/20/2014 - 17:12 | 4574408 blindman
blindman's picture

Older men declare war. But it is the youth that must fight and die.
Herbert Hoover
.
Quotations about War

Give me the money that has been spent in war and I will clothe every man, woman, and child in an attire of which kings and queens will be proud. I will build a schoolhouse in every valley over the whole earth. I will crown every hillside with a place of worship consecrated to peace. ~Charles Sumner

War does not determine who is right - only who is left. ~Bertrand Russell

It'll be a great day when education gets all the money it wants and the Air Force has to hold a bake sale to buy bombers. ~Author unknown, quoted in You Said a Mouthful edited by Ronald D. Fuchs

I dream of giving birth to a child who will ask, "Mother, what was war?" ~Eve Merriam

The release of atom power has changed everything except our way of thinking... the solution to this problem lies in the heart of mankind. If only I had known, I should have become a watchmaker. ~Albert Einstein

The direct use of force is such a poor solution to any problem, it is generally employed only by small children and large nations. ~David Friedman

"There are no atheists in foxholes" isn't an argument against atheism, it's an argument against foxholes. ~James Morrow

Sometimes I think it should be a rule of war that you have to see somebody up close and get to know him before you can shoot him. ~M*A*S*H, Colonel Potter

All the arms we need are for hugging. ~Author Unknown

A soldier will fight long and hard for a bit of colored ribbon. ~Napoleon

If we do not end war - war will end us. Everybody says that, millions of people believe it, and nobody does anything. ~H.G. Wells, Things to Come (the "film story"), Part III, adapted from his 1933 novel The Shape of Things to Come, spoken by the character John Cabal (Thanks Bill!)

A great war leaves the country with three armies - an army of cripples, an army of mourners, and an army of thieves. ~German Proverb

The world has achieved brilliance without wisdom, power without conscience. Ours is a world of nuclear giants and ethical infants. We know more about war that we know about peace, more about killing that we know about living. ~Omar Bradley

Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron. ~Dwight D. Eisenhower, speech, American Society of Newspaper Editors, 16 April 1953

The most persistent sound which reverberates through men's history is the beating of war drums. ~Arthur Koestler, Janus: A Summing Up

What a cruel thing is war: to separate and destroy families and friends, and mar the purest joys and happiness God has granted us in this world; to fill our hearts with hatred instead of love for our neighbors, and to devastate the fair face of this beautiful world. ~Robert E. Lee, letter to his wife, 1864

Everyone's a pacifist between wars. It's like being a vegetarian between meals. ~Colman McCarthy

Nations have recently been led to borrow billions for war; no nation has ever borrowed largely for education. Probably, no nation is rich enough to pay for both war and civilization. We must make our choice; we cannot have both. ~Abraham Flexner

Draft beer, not people. ~Attributed to Bob Dylan

The problem in defense is how far you can go without destroying from within what you are trying to defend from without. ~Dwight D. Eisenhower

War will exist until that distant day when the conscientious objector enjoys the same reputation and prestige that the warrior does today. ~John F. Kennedy
.
......

Thu, 03/20/2014 - 17:50 | 4574507 weburke
weburke's picture

.

Thu, 03/20/2014 - 16:45 | 4574310 blindman
blindman's picture

it is a sovereignty scam perpetrated by the
high priests of spreading ignorance,
nothing new and as old as dirt or claims
on the same. the beauty of it is that it
provides the leverage for the few to own the many
by way of shame, confusion and mass incompetence
but that, too, is a double edged sword.
every game has its rules and the rules are
entirely arbitrary and relevant only to the game
at hand. they need not have any basis in anything
other than the participants can internalize them.
then the game can commence. that is money, an arbitrary
rule. nothing more. unfortunately, the rule of the game
is humanity must agonize the stupidity of the rule
and then die in ignorance at the direction of the high
priests.
so it goes.

Thu, 03/20/2014 - 16:03 | 4574132 farragut
farragut's picture

I think the sh1t will only really hit the fan when J6P begins to ask potentially awkward questions such as, "Remind me again: why do I have to pay back that loan--when you, Mr Banker, freely admit you created it out of thin air?!"

Hopefully, this will begin to happen within the next few months (but I'm not holding my breath).

 

 

Fri, 03/21/2014 - 14:49 | 4577961 blindman
blindman's picture

even the banksters are realising the scarcity of
"money" to repay that which is fraudulently induced.
the emperor has no empire.

Thu, 03/20/2014 - 15:27 | 4573923 I Write Code
I Write Code's picture

This was never a liquidity crisis, but rather a solvency crisis.

Well, it was both.  There was a MARKET FAILURE, sand got in the gears, a disk drive failed, a network link broke.  Then banks could not fulfill their mandated procedure for being solvent at the end of the day.  There was a snowball effect of failures, Lehman and Bear-Stearns got rolled, before TPTB decided on a "fix".  The liquid was always there but stopped moving, so TARP and the Fed made more liquid.  This was all aggravated by unsound leverage, but that's another matter.

The BoE writer was just an ignorant jerk, who got this discussion going.  The "truth" is more complicated.  Pelosi is certain that debt is consumption and comes first, and she's wrong.  Krugman is certain that savings comes first, and he's 35 years out of date or simply lying.  In our fiat system it's PRINTER'S INK that comes first. You can resolve all the rest under whatever labels you like, and the myriad details are all negotiable.

 

Fri, 03/21/2014 - 05:17 | 4576025 Global Observer
Global Observer's picture

Sorry, but there can never be a liquidity crisis in a fiat money system. As long as a bank is solvent, the Central Bank can and will provide as much liquidity as is needed. It may provide short term liquidity by lending reserves at an interest or long term liquidity by purchasing assets from the bank.

What the US government did in the wake of 2008 banking crisis was capital injection, not liquidity injection. Capital injection is needed only in the case of insolvency, not illiquidity.

Thu, 03/20/2014 - 15:15 | 4573843 drdolittle
drdolittle's picture

Don't see how whiskey backed coin is better than gold/silver in that they have an energy cost to mine but I'm game. Anything real that can't be made up whenever you want. What TPTB want is electronic money. As in "and, it's gone." Pretty soon I'm going to be all barter cause, I mean, could they fuck us any more with our "money" (currency)?

Thu, 03/20/2014 - 17:50 | 4574522 VWAndy
VWAndy's picture

At one time I would have agreed with you about gold. The catch is golds value can be increased and will become a mania. This would be extreamly bad. The amount of labor per oz will crush labors value. Whiskey is not very labor intensive. So the productive can and will regulate its actual value.

 Well thats how I see it working in my head. Any thoughts?

Thu, 03/20/2014 - 15:11 | 4573818 YHC-FTSE
YHC-FTSE's picture

"This was never a liquidity crisis, but rather a solvency crisis."

"Welcome to the party, pal". - John McClane

 

Thu, 03/20/2014 - 14:53 | 4573727 luckylongshot
luckylongshot's picture

Now since money is created by private banks out of thin air what occurs is technically fraud. Using this fraud the private bankers that control the system have according to Vitali Glattfelder and Battiston (2011) managed to grab control of up to 80% of the wealth in the western world. The greatest crime of all time... and still unpunished as no government is, as yet, prepared to go after these criminals.

Thu, 03/20/2014 - 14:22 | 4573532 Philalethian
Philalethian's picture

When will the world admit there is a real problem that needs to be addressed.

Looks like a lot of shaking going on overseas there. Please watch this video.

http://sabbah.biz/mt/archives/2014/03/20/time-bds-target-worst-villains/

Thu, 03/20/2014 - 13:54 | 4573419 kellycriterion
kellycriterion's picture

First shmirst. How about the really important feature of fractional reserve banking?

Skin in the game, market discipline, laws to insure same. Anything sound familiar? The underlying theory is it's in the self interest borrower and LENDER to have legitimate sound loans. Making fraudulent loans for productive purposes or frivolous loans for consumption are supposed to be losers for both borrower and lender.

The decoupling of cartel banks from consequences begins with the sovereign debt game. But it's gone so much further.
Derivatives, repeal of Glass-Steagle, investment banking going public financing instead of partnership, and of course the big kahuna the CB put.

What about this teeny weeny little detail that's supposed to make the extraordinary privilege of fractional reserve banking legitimate as opposed to looting and pillaging societies resources.

Fractional reserve banking is a great theory. So is a constitutional republic. From articles and comments ZeroHeroes can't grasp either one. Not how they should fit in a real world context or root causes when things go wrong. They want a new fantasy because the old one isn't working for them. They want red meat.

Thu, 03/20/2014 - 14:07 | 4573484 George Washington
George Washington's picture

"Skin in the game, market discipline, laws to insure same. Anything sound familiar?"

Rings a bell ... I could have sworn I heard about that somewhere ....

Fri, 03/21/2014 - 00:18 | 4575712 kellycriterion
kellycriterion's picture

Have you ever heard anyone discuss the Genovese crime family in terms of "moral hazard"?

Thu, 03/20/2014 - 12:56 | 4573107 Joebloinvestor
Joebloinvestor's picture

Banks, the ultimate Ponzi scheme.

Thu, 03/20/2014 - 13:53 | 4573408 Jumbotron
Jumbotron's picture

So what this article is saying is that there is absolutely NO free political and/or economic system. 

There is only a "By your leave" system.  If and when a bank deems something worthy enough of the presses to be turned on, then it does it.  If not, they don't.

Even if George Bush didn't really say it.....it's still just as true as if he did.  "The Constitution is just a goddamn piece of paper"

Thu, 03/20/2014 - 12:51 | 4573082 moneybots
moneybots's picture

"modern monetary theory"

 

Magic Money Tree

Thu, 03/20/2014 - 12:32 | 4572978 proLiberty
proLiberty's picture

Also an excellent read on fractional reserve banking from the Austrian perspective:

Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto.
see: http://mises.org/document/2745/Money-Bank-Credit-and-Economic-Cycles

Free PDF of book: mises.org/books/desoto.pdf.

örg Guido Hülsmann has said that this is the most significant work on money and banking to appear since 1912, when Mises's own book was published and changed the way all economists thought about the subject.

Its five main contributions:

a wholesale reconstruction of the legal framework for money and banking, from the ancient world to modern times,

an application of law-and-economics logic to banking that links microeconomic analysis to macroeconomic phenomena,

a comprehensive critique of fractional-reserve banking from the point of view of history, theory, and policy,

an application of the Austrian critique of socialism to central banking,

the most comprehensive look at banking enterprise from the point of view of market-based entrepreneurship.

Thu, 03/20/2014 - 12:25 | 4572934 Winston Smith 2009
Winston Smith 2009's picture

Gosh. No sh*t?

Duh...

Money as Debt

https://www.youtube.com/watch?v=jqvKjsIxT_8

Thu, 03/20/2014 - 12:21 | 4572909 CynicalBastard
CynicalBastard's picture

"Nobel-prize winning economists"

 

Bullshit term. There does not exist a Nobel in economics. The award  (Sveriges Riksbank prize in economic sciences) was made up by the Swedish Central ban to promote economics as a "science". Alfred Nobel disliked economists and specifically did not lend his name to such an award.

Thu, 03/20/2014 - 14:47 | 4573701 Ifigenia
Ifigenia's picture

must be "Israelis-prize winning economists"

Thu, 03/20/2014 - 17:26 | 4574442 The Abstraction...
The Abstraction of Justice's picture

Or Israeli financed prize finds other Israelis are the winners.

Thu, 03/20/2014 - 12:25 | 4572933 George Washington
George Washington's picture

Yes, we know.  But Krugman uses his as a weapon, so others who have received the same "prize" should be able to use theirs as well.  In other words, either they can all brag about it, or none of them can ...

Thu, 03/20/2014 - 19:21 | 4574829 centerline
centerline's picture

His notions that debt levels do not matter because debt is just money we owe to ourselves is so intentionally flawed.  In a closed system, he is correct.  So, he is very careful to stay within the context of said academic box.  In reality though, we all know that the process of money creation favors those who are closest to it's creation.  This serves as nothing less than than a wealth transport mechanism.  And we haven't even begin to account for the real inner-workings of the creative financial instruments that have leveraged the world with a near infinite chain of counterparty exposure churning recursive profits until some sort of circular logic cathes up with said partying.

Krugram claiming on one hand to be a man of the people - but never daring to go beyond the OBVIOUS boundary conditions of his own work demonstrates he is a political tool and could care less about how the world really works... same as every other major economist in history including Mises.  I hold Steve Keen accountable in the same regard - although at least Mr.Keen has "alluded" in the past of such "limitations" and has paid in some ways for earlier outspokeness.  At one point I thought he might actually have some balls - but now appearing more like a mangina,  having got snared by pretending economics is a real science that can be boiled down to differential equations and trying to play in a closed system with the likes of a genious sociopath like Krugman.

 

 

Thu, 03/20/2014 - 11:53 | 4572704 VWAndy
VWAndy's picture

Our monatary systems are actualy just control systems. For the exact reason that we dont control the system. We meaning the honest folks. Weather it is fiat or fanta coin or gold and silver. These systems can and will be control systems every time. Because they can be controled. There is no way any honest person can compete with the counterfitters. I have said this before a whisky backed coin sets the field fairly level in two really good ways.

 First it is a form of energy therefor it has an actual value. Not a made up value.

Second anyone can make it from scratch. This is so important it cannot be understated. Debase an energy based coin and energy costs go with it. This gives us a hard floor of real value.

As it stands now why do any work when you can print and spend any amount of money? Ask yourself how many of the worlds monopolies would crumble without the conciderable advantage of a false medium of trade? My guess is none of them would last in a truly free market. At least not how they do now.

Thu, 03/20/2014 - 13:56 | 4573434 Jumbotron
Jumbotron's picture

VWAndy.....I think it's time for another 'Whiskey Rebellion"

https://en.wikipedia.org/wiki/Whiskey_Rebellion

 

 

Thu, 03/20/2014 - 12:06 | 4572810 VWAndy
VWAndy's picture

Yall want to change the world? Or just cry about it?

Thu, 03/20/2014 - 17:53 | 4574528 VWAndy
VWAndy's picture

This jacks up my context. Bracketed @#$%^&*

Thu, 03/20/2014 - 15:36 | 4573970 Boxed Merlot
Boxed Merlot's picture

change the world? Or just cry...

 

 

 

Why are all those bars sitting there in the background?  Is this the best the BOE can do with their turn of "ownership" of Germany's deposit, i.e. use it as a subliminal message as to their worth? 

Tell you what, let's just coin that crap and send it out to the populace and let the market take over.  This "Great Recession" being referred to in the "official" interview would evaporate quicker than the usefulness of the US federal reserve.

 

The object of the exercise is to engender Trust.  The same principle applies today as it did when the jew's last king castigated the leaders for giving more value to the gold of the temple than to the republic / voluntary adherence to the rule of law the temple represented.

 

jmo.

 

Thu, 03/20/2014 - 12:12 | 4572799 George Washington
George Washington's picture

VWAndy: Very interesting. Relevant:

BTW, the "Boozero" isn't catchy enough.  Need a better name ...

"I'll give you 9 GlenFiddies for that"?

Thu, 03/20/2014 - 12:24 | 4572927 Ariadne
Ariadne's picture

Byproducts of burning alcohol include nasty carcinogens and as a solvent, alcohol breaks down the lube on the cylinder chamber walls, causing extreme wear, elsewhere inducing rust, plus alcohol is hydroscopic. If you're chort on fuel it'll do, but if it were better we'd have been using it when carbers roamed the land.

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