Money Creation - "So Simple The Mind Is Repelled"

Tyler Durden's picture




 

As John Kenneth Galbraith famously stated, "The process by which money is created is so simple the mind is repelled." As Peak Prosperity's Chris Martenson explains (as part of his excellent Crash Course), essentially, money is lent into existence though fractional reserve banking. The dollars you deposit at the bank? They turn into nearly 10x that amount as your bank subsequently makes loans using that money as collateral. As simple as the process is, nearly every American remains ignorant of it and its massive implications. At the heart of the matter is this: our money supply and its related debt obligations MUST continue expanding (thereby devaluing the purchasing power of each dollar ad infinitum) -- forever -- or the entire system collapses upon itself. Prepare to be repelled...

 

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

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Sun, 08/03/2014 - 18:15 | 5041639 Freewheelin Franklin
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LOL. "Crash course". Pun intended, I suppose.

Sun, 08/03/2014 - 18:18 | 5041645 jaap
jaap's picture

Need to see, for everyone. The whole series.

Sun, 08/03/2014 - 18:23 | 5041660 Publicus
Publicus's picture

Print money to fund economic activity. Then collect the money back from where they pooled, and cancel them.

People can then do whatever they want, plus, there is no need for tax.

Sun, 08/03/2014 - 18:29 | 5041680 Newsboy
Newsboy's picture

Good work, if you can get it, but you can't get it.

You aren't a banker.

Sun, 08/03/2014 - 18:51 | 5041753 CrazyCooter
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It is extremely important for folks to understand that the leverage in banking is not limited to 10x as is popularly repeated/recited/etc. Leverage is infinite given a very simple, and true, assumption.

Given a closed banking system (i.e. all banking activity in a nation can be consolidated to a fixed set of banks), banks will lend EVEN IF THEY DO NOT HAVE THE RESERVES. Why? Because banks can borrow at the intra-bank rate (e.g. LIBOR, Fed Funds, etc) and still make a decent profit on the spread between the borrow rate and the loan rate. This only works because the loan from Bank A will deposit to Bank B (in a closed system) such that Bank A can borrow from Bank B (i.e. at the LIBROR, Fed Funds, or equivalent rate) and still be within regulations.

To be clear, Bank A created moeny PAST their regulatory limit, but Bank B took the deposit and is by definition under their regulatory limit and therefore able to lend those funds in the intra-bank market to Bank A who origininated the loan.

This is all fine and dandy unless banks are run by greedy sociopaths, the leverage in the banking system is infininte.

<looks around>

I reccomending pulling your funds and putting CASH in a safe deposit box.

Regards,

Cooter

Sun, 08/03/2014 - 19:18 | 5041790 Dr Hackenbush
Dr Hackenbush's picture

Throw away the textbooks, the money multiplier is long since dead.  

edit: Actually the text books should have been thrown out a long time ago 

 

"In the real world, banks extend credit, creating deposits in the process , and look for the reserves later."

-Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

Sun, 08/03/2014 - 19:34 | 5041904 john39
john39's picture

Mystery babylon...

Sun, 08/03/2014 - 20:53 | 5042124 Seek_Truth
Seek_Truth's picture

Bingo!

"Your merchants were the world's important people. By your magic spell all the nations were led astray." - Revelation 18:23

Sun, 08/03/2014 - 21:07 | 5042215 Silveramada
Silveramada's picture

Indeed! 

And I would spicy it up even more adding Revelation 2:9 and 3:9...

Sun, 08/03/2014 - 21:24 | 5042257 BigJim
BigJim's picture

I'd still like to know how Martenson could afford Kermit for the voice over. Isn't he, like, an A-lister?

Mon, 08/04/2014 - 04:38 | 5042829 All Risk No Reward
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Money is conjured out of thin air when a debt obligation that accrues interest is created.  Even the Bank of England finally came clean.

News Release - Quarterly Bulletin pre-release articles: ‘Money in the modern economy: an introduction’ and ‘Money creation in the modern economy’
http://www.bankofengland.co.uk/publications/Pages/news/2014/051.aspx

"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money."

Money creation in the modern economy
http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/...

They make it out of thin air and require that it be paid back with interest.

In the video above, the cash deposited was assumed into existence.  IT DOESN'T WORK LIKE THAT.

That cash was lent into existent at interest.

If the banks lend $20 to society @ 5% interest, in one year society owes the banks $21 due to double entry bookeeping adjustments that add $1 interest liability to society and $1 interest asset to the banks.

The monetary balance sheet still balances, BUT THE IMPORTANT PART IS **WHO** CONTROLS THE MONEY NEEDED FOR SOCIETY TO PAY BACK THE DEBT - AND THE ANSWER IS THE BANKS.

The society is not sovereign, it is a financial vassal of the monetary/banking system.

This was not news to Napoleon...

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
 ~Napoleon

Also note that one person net positive position in debt money is some other person or group of person's inextinguishable debt.

The debt money system is a MONETARY BALANCE SHEET - A ZERO SUM GAME.

POVERTY IS A FEATURE OF THE SYSTEM, NOT A BUG.

When the debt pushers get wealthier, everyone else gets poorer.

All by design.

 

Sun, 08/03/2014 - 19:12 | 5041802 DoChenRollingBearing
DoChenRollingBearing's picture

 

 

Yes, I agree re keeping a decent amount of CA$H around the house, but...., 

They have been printing a LOT of $50s too.  I get mostly $50s from the ATM now.

The CVS "checkout machines" (replacing a cashier or two) now takes $50s.

Can they print iridium?

"$50 Bills, Iridium, Bitcoin app for iPhone"

http://goo.gl/pndDh3

Sun, 08/03/2014 - 19:32 | 5041896 Escrava Isaura
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“Textbooks assume that money is exogenous.” … “In the United Kingdom, money is endogenous” Mervyn King, Governor of the Bank of England. 

Sun, 08/03/2014 - 19:42 | 5041931 DoChenRollingBearing
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OK, + 1

(But I had to look up the two terms...)

The quotation is probably true of most other countries as well, not just the UK.

Sun, 08/03/2014 - 20:34 | 5042065 Dr Hackenbush
Dr Hackenbush's picture

endogeneous money indeed - each borrower is a mini Bernank 

Sun, 08/03/2014 - 21:39 | 5042322 lovejoy
lovejoy's picture

Crazy ... you are so sane.

When I hear the money creation based on deposit argument, I know that that person has never worked in finance. If a good loan opportunity walks through the door, does the banker go to the computer to see what his deposits are at the Fed? No, you just make the loan and worry about that later. In the worst case you can simply go to the interbank market market to get the necessary funds to meet you Federal Reserve requirements.

Mon, 08/04/2014 - 00:40 | 5042663 CrazyCooter
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And that sir is why the system's "heart attack" will be clearly visible in the "intra-bank market".

While I can't articulate, my gumption tells me the recent MMMF shenanigans are rooted precisely in this very mechanism. When short term goes tits up, it is all coming down ...

Regards,

Cooter

Sun, 08/03/2014 - 22:05 | 5042390 moonstears
moonstears's picture

Cooter, bank of Sealy trumps SDB, if shit gets squirrely. Buy US bonds, bitchez.

 

Mon, 08/04/2014 - 00:38 | 5042659 CrazyCooter
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It is a fair argument, but care to quantify the odds of your mattress being expropriated, via catastrophe or otherwise, vs a SDB?

The answer, the crux of the question, is simply one of odds.

Regards,

Cooter

Mon, 08/04/2014 - 09:46 | 5043353 Global Observer
Global Observer's picture

Banks can borrow reserves from other banks only if the other banks have excess reserves. However they can borrow reserves from the Central Bank. Only the Central Bank can create reserves. When a customer withdraws reserves from one bank and deposits them in another, the total reserves in the banking system doesn't change, it only affects the reserve balances of the individual banks. However, when a customer withdraws reserves from a bank, but does not deposit them in any other, the total reserves in the system will come down and if enough of them do it, the Central Bank has to purchase bank assets to infuse reserves into the system. That is what the Quantitative Easing programme was about, converting illiquid bank assets into reserves.

Mon, 08/04/2014 - 03:10 | 5042780 StychoKiller
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I read "The Creature from Jekyll Island," 'nuff said.

Sun, 08/03/2014 - 19:22 | 5041868 williambanzai7
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Sun, 08/03/2014 - 19:28 | 5041883 nmewn
nmewn's picture

Banzai, you've picked up your own personal troll!!!

Cool ain't it? ;-)

Sun, 08/03/2014 - 19:39 | 5041918 DoChenRollingBearing
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My trolls are legion.  On the other hand, I ask for it...

Sun, 08/03/2014 - 20:32 | 5042107 nmewn
nmewn's picture

Oh yeah DoChen, if you haven't pissed someone off, by you being you, to the point of living rent free in their heads and them realizing you'll never change and them becoming a troll of you, so you can smile at every down vote, you really haven't accomplished anything in proving the existence of rabid little trolls ;-) 

Sun, 08/03/2014 - 21:26 | 5042261 BigJim
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I reflexively downvote anyone who mentions downvotes.

Including (of course) myself.

Sun, 08/03/2014 - 21:29 | 5042270 fonzannoon
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I reflexively upvote anyone who tries to downvote themselves.

Then I downvoted myself for having to reference this before replying

http://www.oxforddictionaries.com/us/words/themselves-or-themself

Mon, 08/04/2014 - 08:39 | 5043100 JamesBond
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I downvoted you to make it even

Sun, 08/03/2014 - 21:56 | 5042370 williambanzai7
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Mon, 08/04/2014 - 12:29 | 5044234 michaelbrownira
michaelbrownira's picture

this is our reality (even if we close our eyes)

Michael Brown

Sun, 08/03/2014 - 18:19 | 5041650 MH17FLIGHT
MH17FLIGHT's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://goo.gl/bhiamE

Sun, 08/03/2014 - 18:30 | 5041668 Skateboarder
Skateboarder's picture

edit: [for once], that comment is totally apropos for a thread.

Sun, 08/03/2014 - 18:52 | 5041754 cartonero
cartonero's picture

Yeah, I finally get it: MH17 and her sister's friend are bankers!

Sun, 08/03/2014 - 19:39 | 5041921 DoChenRollingBearing
DoChenRollingBearing's picture

Was that last word supposed to be "wankers"?

Mon, 08/04/2014 - 00:35 | 5042654 CrazyCooter
CrazyCooter's picture

I sure hope the Limerick King is around ... i see Bankers, Wankers, and Anchors ... comedy gold for the right mind!

Regards,

Cooter

Sun, 08/03/2014 - 18:29 | 5041681 stinkhammer
stinkhammer's picture

I had no idea that you made that much money milking horses for semen with your sisters friend.  keep it up loser!

Sun, 08/03/2014 - 18:46 | 5041733 Manthong
Manthong's picture

You flatter the troll.

The scammer is not of equine quality.

Rather, jackass DNA so their mother can spawn more siblings is most appropriate.

Sun, 08/03/2014 - 18:55 | 5041764 Yen Cross
Yen Cross's picture

 Don't confuse the "Jackass" with the "Mule" my friend. Both, loyal 1/2 breeds that have their own specialties.

Sun, 08/03/2014 - 18:52 | 5041755 codecode
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Sun, 08/03/2014 - 18:59 | 5041779 nc551
nc551's picture

MH17FLIGHT is a time traveler from the near immediate future where minimum wage is $800/hour, about the same as a gallon of gas.

Sun, 08/03/2014 - 18:20 | 5041653 kchrisc
kchrisc's picture

People should never forget that "printing" is theft.

 

"Guillotines are debt reduction."

Sun, 08/03/2014 - 18:34 | 5041694 Cliff Claven Cheers
Cliff Claven Cheers's picture

Why do individual banks fail if they can create money at will?

Sun, 08/03/2014 - 18:48 | 5041734 tickhound
tickhound's picture

I know u know this...

But individual banks can't create money at will, they can only create new money upon loan demand. They "fail" once they fail to entice you to borrow, artificially if need be.

So central banks become this demand of last resort... And since we don't seem to like loans at 3%, they deduced that we'd HATE them at 4.

YOU ARE HERE.

Sun, 08/03/2014 - 18:57 | 5041767 Cliff Claven Cheers
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My question was meant to provoke thought.  Everyone is surprised how money is created.  It is created by the banking system as a whole not individual banks.  No one bank can create their own money.  They get a deposit and they lend out 90% of it and that other 90% get deposited elsewhere and it is reloaned, etc, etc.  Individual banks still have to make good loans or fail in the real world, or in our world they get bailed out.  The money supply increasing should be a function of a growing economy. 

When the world was on gold standard and a nation that purchased more than they sold, their gold would migrate out of the country and they would experience a recession due to now having a smaller money supply and the country that received the gold would have a money supply that would increase and they would experience an inflationary period. 

The paper money supply has so many more advantages, we now can spend more than we have and continue to borrow to make up the difference due to money printing by the central bank.  People should be more concerned with the out right money printing by the Fed to support the government debt versus the natural money supply creation due to economic growth.

Sun, 08/03/2014 - 19:33 | 5041901 pods
pods's picture

Small correction Cliff, banks do NOT lend out deposits, but lend AGAINST deposits.

pods

Sun, 08/03/2014 - 20:20 | 5042073 Cliff Claven Cheers
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Potato Patato.  Just kidding.  Its been awhile since I studied economics.

Sun, 08/03/2014 - 19:41 | 5041916 Escrava Isaura
Escrava Isaura's picture

Cliff Claven Cheers, below is a repost. It should add some clarity.

Ladies and Gentlemen, REN, at Real Currencies.com:

Nature of debt money [dollar], specifically that created by hypothecation.

The hypothecation mechanism takes the borrower’s credit and assigns it to the banker. The banker then creates bank money, even though the debtor provided his asset or future labor. Banker’s risk is also low, as the debtor’s assets can be foreclosed.

This banker money splits into two parts at birth: A debt instrument is created i.e. loan documents, mortgage or some sort of debt claim. Simultaneously, the banker creates ‘his new’ money as an output of the loan. This money is called banker.

However, the instrument may travel a path different [where this fraud/loot gets in high gear]… The two entities may be disallowed from returning to each other, and hence they cannot cancel out. This is a clear danger…These two paths, and disallowing is not comprehended well by economists.

In the case of Germany circa Versailles treaty, a three way triangular flow was created. The allies had to pay back dollar denominated debts to America for war material borrowed. Germany in turn was put on the debt hook to pay dollars, gold, pounds or Francs to the Allies.

The U.S. didn’t allow much in the way of German goods importation, so Germany could not acquire dollars in trade to pay allies, who wanted dollars to pay their debts. Ultimately, Germany borrowed (more debt) from wall street to pay into the triangular flow. This triangular flow led to the hyperinflation, and ultimately a populist (Hitler) being elected.

Germany issued bonds to create credit money in Wall Street. Credit dollars found their way from Germany and ultimately to the U.S. treasury, as if they were going from one U.S. pocket to the other. However, Germany, England and France all had dollar debts that were outside of their legal system. They had difficulty acquiring the dollars to satisfy the debt instrument outside their country. This ultimately led to WW2.

It should be a cardinal rule in economics; never let your debts point outside of your legal system. How many need to die before this rule is learned? Debt money, even without usury is dangerous if not kept under control.

Lately, the U.S. has used debt instruments to create empire. A foreign country. lets say Bolivia, is hooked on dollar loans. The dollar denominated debt instruments are attached to the whole country and population. The BM [Bank Money] soon leaves the economy as much of it becomes bribe money for leaders, and the rest goes overseas to buy the power plant, or road construction machinery, etc.

The rosy economic picture of the World Bank projections never materializes, hence no dollars are available in local economy to cancel the debt instruments. Bolivia does not have enough dollars and the Bolivian currency comes under pressure.

At that time bear raiders [speculators] borrow BM money into existence and attack, causing the local money to collapse. Predators [US banks] can then enter with dollars and buy up the country, leading to Oligarchy. Or, dollar zone countries (U.S. with its military) may go in and demand their pound of flesh, i.e. resources such as oil extraction, in exchange for the debt relief.

So, usury turbocharges the debt problem, as there is not enough money to pay off the instruments. But, also there is a big problem of path, where the BM [Bank Money] is not available… it has disappeared.

Mon, 08/04/2014 - 10:08 | 5043444 Global Observer
Global Observer's picture

Banks can create liabilities (money), but only against assets (loans). If their assets don't perform (defaults by borrowers), they have to write off/markdown their assets. However, the liabilities they created would have already moved to the accounts of other customers or even to a different bank and hence cannot be reduced. So they have to reduce the shareholder equity on the liabilities side to balance the books. If the total loss in asset value is more than the shareholder equity, the bank becomes insolvent.

Yes, endogenous money creation by banks is quite useful and enabled the explosion of commerce that occurred since the industrial revolution. However, money is not wealth, just a token of value that is expected to be exchanged for wealth. Reckless expansion of money (debt) whether by commercial banks or the Central Bank doesn't by itself create wealth and could lead to a collapse of the whole system. Not the end of the world, but would definitely cause a lot of hardship for a lot of people when commerce ceases because of the collapse of the system.

Sun, 08/03/2014 - 18:48 | 5041741 kchrisc
kchrisc's picture

Individual banks can only create loan-fiat from stolen deposits. If they mismanage things and have too many bad loans,  they can have cash flow problems and go "tits-up." Also, as they get close to certain solvency ratios, the Fed and DC US tend to come in and transfer the bank to another bank to prevent runs and reductions in "Confidence"--fraudulent-reserve banking is, after all, a con.

So basically, the individual banks can only create loan-fiat that then needs to have a healthy flow of cash from their loan victims to stay afloat.

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