Where the banks got the money...

[Lthse]

In some cases a "developer" took real cash profits from his developments and bought bank shares.
That money has now disappeared big time.
Or as is the Anglo case.
Someone put shares up as collateral for a lone.
Again that money has disappeared.

The money hasn't disappeared, it was paid to the owner of the shares.

[jpc]

But the shares appreciated from their original price.
You retain them draw a dividend for a number of years but don't sell them.
They have an implied value which you are using to obtain a loan.
Then pooft!, one day the shares aren't worth anything.
But you still got the loan based on what the shares were worth at the time.
If that loan had bought a house or retain space at the height of the retail boom, you owe a lot of dough.

[Lthse]

But the shares appreciated from their original price.
You retain them draw a dividend for a number of years but don't sell them.
They have an implied value which you are using to obtain a loan.
Then pooft!, one day the shares aren't worth anything.
But you still got the loan based on what the shares were worth at the time.
If that loan had bought a house or retain space at the height of the retail boom, you owe a lot of dough.

If you use the shares for collateral for a mortgage then the money goes to the seller so there's no disappearance of money. You still owe the bank the outstanding loan of course but that's irrelevant to the amount of money in the system.

[crocked]

The biggest problem here is the mistaken belief that profit = stolen wages.

so you agree with people making billions in profit, while there workers earn minimum wage?

i call it greed.

[Kensington]

Imported Deise,

Slippers is entirely correct. About 97% of all money in circulation is created as bank credit out of thin air. Notes and coins, created by the Government debt-free, are the only real money in the system. Government-printed money is the only money that actually exists. That is how fractional reserve banking works.

The problem, of course, is that the money is created as debt Worse still, the principle of the loan is created; not the interest, so there is more debt in the world than there is money to pay, and that can not change if we continue with this monetary system.

The more money we have; the more debt we have and we always have to increase our money supply so as to pay off our debt. It is a ridiculous and pointless system.

If you think about our present economic crisis, this makes complete sense. We haven't become less productive over the last 12 months, nor has there been a catastrophic supply shock.

The only difference is that the banks have stopped creating money. Loans are being paid back (when credit is repaid the credit 'money' disappears), but new money is not being made. The economic crisis was simply a shrinkage in the money supply.

Seeing this, the Government stepped in and, in effect, took out a big loan, increasing the money supply and, as they hope, bring the economy back on track. This money is also debt and the interest will have to be paid by the taxpayer.

The only sensible alternative is that the Government creates the money debt-free and spends it into the economy.

All banks should have a 100 reserve requirement. The Government should create the money and lend it to banks debt-free. This will not increase the money supply nor lead to inflation as this is not increasing the money supply. It is simply replacing credit money with real permanent money. Banks should no longer be able to lend out more money than they have on deposit.

The only organization with the authority to create money should be the Government. It should spend money into existence or, if needs be, remove money from circulation through taxation. It would be much easier to tackle inflation or deflation this way rather than the present blunt instrument of fiddling with interest rates.

Worryingly, the gold-standard idea is being touted as a possible replacement. This would be disastrous. It would lead to catastrophic deflation and leave a countries financial system at the complete mercy of foreign speculators. Government created money is the only way to go.

[20000miles]

The only sensible alternative is that the Government creates the money debt-free and spends it into the economy.

All banks should have a 100 reserve requirement. The Government should create the money and lend it to banks debt-free. This will not increase the money supply nor lead to inflation as this is not increasing the money supply. It is simply replacing credit money with real permanent money. Banks should no longer be able to lend out more money than they have on deposit.

The only organization with the authority to create money should be the Government. It should spend money into existence or, if needs be, remove money from circulation through taxation. It would be much easier to tackle inflation or deflation this way rather than the present blunt instrument of fiddling with interest rates.

Worryingly, the gold-standard idea is being touted as a possible replacement. This would be disastrous. It would lead to catastrophic deflation and leave a countries financial system at the complete mercy of foreign speculators. Government created money is the only way to go.

Kensington is correct; full reserve must replace fractional reserve. First and foremost becuase you can't have two property owners of the same good. It's simply incompatible with a private property society. Under such a sceme, presumably, it would be time deposits, rather than demand deposits that get lent out.

The fact of the matter is that money is nothing more than a medium of exchange, hence additional money is not needed to perform this function. Contrary to conventional wisdom, falling prices do not result in poverty, but rather prosperity.

The best way to go is privately produced money.

[Kensington]

2000miles,

I think that the best reform would be the least disruptive. The best way is simply this. The nationalized treasury loans newly created to the banks to bring their cash reserves up to 100%. The money as debt is transformed into actual debt-free money without disrupting the system in any way. The U.S. debt purchased by the banks would be canceled out by this loan of cash to the banks.

The money system would be completely transformed in an incredibly simple way.

It would also be much easier to control the quantity of money as the Government could increase the money supply or reduce it with ease. interest could be abolished.

Robert De Fremery is probably the best advocate of the 100% reserve system.
The Writings of Robert de Fremery

I strongly disagree with the private route. We have tried that since the scrip and the Greenback and, whether was backed by metal or not, i do not think that it has been successful.

[20000miles]

2000miles,

I think that the best reform would be the least disruptive. The best way is simply this. The nationalized treasury loans newly created to the banks to bring their cash reserves up to 100%. The money as debt is transformed into actual debt-free money without disrupting the system in any way. The U.S. debt purchased by the banks would be canceled out by this loan of cash to the banks.

The money system would be completely transformed in an incredibly simple way.

It would also be much easier to control the quantity of money as the Government could increase the money supply or reduce it with ease. interest could be abolished.

Robert De Fremery is probably the best advocate of the 100% reserve system.
The Writings of Robert de Fremery

I strongly disagree with the private route. We have tried that since the scrip and the Greenback and, whether was backed by metal or not, i do not think that it has been successful.

On the contrary, we have tried government controlled monies, and we've tried central banking - both have been complete failures. Under such a system the government is still in charge, and if anything, its shown itself to be incompetent. Your suggestion is still a step up from the current regime.

Slippers had skipped a few steps in the fractional reserve process. The banks can't just loan out something with zero to back it up.

I don't follow you on the idea that there is more debt in the world than moeny to pay. Do you mean there is more debt than legal tender.

This seems to resemble something called the compound interest paradox. I'm still undecided as to the existence of such a paradox.

What I don't understand about the Austrian school is that if we enforce a 100% reserve, does that not require government regulation?

The thing is, it's merely an enforcement of property rights, not a new regulation.

[SamVimesBoots]

Worse still, the principle of the loan is created; not the interest

And here is the real answer to the question that has been bugging Lthse!

Lthse, the money created by the original loans (as 97% of all "money" is in fact just debt in our current system) was out there once. But the interest on that loan, where does that come from? In the final analysis, from the sweat of your brow as you do productive work that has value.

If "money" is created in the form of loans and is spent, and the "money" circulates from hand to hand as goods and services are exchanged, then at every step along the way a small percentaqge of it will stop being circulated as people pay it to the banks both in interest and repayment of principal on their loans, which may be different loans to the original loans that created the money in the first place. If you follow. In aggregate everyone has loans, and every time money changes hands the new holder will put a bit aside to pay the interest on their loans, so a smaller amount gets passed on each time.

So the amount of "money" is bleeding away all the time, and the banks have to constantly create ever-more imaginary "money" in form of huge new debts, to keep all the plates spinning. Yes, the system is this insane.

So when the punters are maxed out and can't take on any more loans, and can't afford to repay the loans they took out, and can barely afford to pay the interest, then you get a cascade effect where the amount of "money" very rapidly dries up as debts are paid off or written off and no new loans are given out, and all the time the slow bleed of interest on existing credit extracts "money" from the system. And so we get recessions and depressions.

Barring a global revolution and a new monetary system, then this recession/depression will continue until the aggregate debt burden has been paid off or written off and we reach a point where punters feel comfortable about taking on debts again for current spending.

Most Western Governments simply do not uderstand this and are trying to solve the wrong problem, trying to get everyone loading up on more debt for SUVs and plasma tellys to "get back to normal".

[Kensington]

Imported Deise,

Well that's the thing, they actually can. There is usually a very small reserve deposit, say 10%. So, if you deposit 100 euro into bank A, your money is safe in the account and can be taken out at any time. The bank can create create 90 Euro from your 100 and loan it to someone. That 90 Euro can then be deposited in a bank and that bank can create 81 euro out of thin air and loan it to someone else. That 81 Euro is deposited and that bank can create 72.9 and loan it, and so on, so on. All of this money is being created from that 100 Euro deposited into the bank at the beginning.

lets just say, it stooped there. The guy who took out the 72.9 pays it back. The deposit in the bank remains at 81 euro. It does not change, that 72.90 that had been created out of thin air from the 81 Euro disappears. It was, afterall, technically 72.9 of that 81 euro which was loaned out. Of course, it actually wasn't. The 81 Euro was still in the bank, never touched. If every single person in that above chain pays back their loans, all we are left with is the 100 Euro we had at the beginning. All the money which was created from that 100 disappears. That 100 was also created as debt, so the line would continue. To put it simply, it everyone in the world paid their debt, there would be no money, bar the 3% which is notes and coins printed by the Government.



Approximately 97% of the money is debt. It was created in the way explained above. If you add up all the money in the world and add up all the debt and interest (which is not created), then, yes, there is more debt in the world than money to pay it.

The Austrian School, i think, would say that all money has to be convertible into gold (and maybe silver), so, theoretically, there would be no need for Government regulation as the amount of money cannot exceed the amount of gold. There would have to be regulation though, to ensure that the banks are not lending out more bank notes than gold they have in their vault.

bank credit is legal tender, as much as notes and coins. It is convertible into notes and coins and, besides, most people pay with cheques or money transfers anyway.