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Author Topic: Money as Debt from Paul Grignon  (Read 4065 times)
Fjordbit
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October 18, 2012, 08:55:44 PM
 #41

A mortgage is a promise from the bank to gives you that money, so they create it.

Except that's not really what happens. Fully private banks can't just make money from a credit card loan (home loans are tricky because they have a real asset behind them). They have to have the deposit on reserve and if they don't then they borrow it from intrerbank lending. The Fed is the only one that creates money. The additional dollars from fractional reserve lending are real at each step.

Fractional reserve lending can (and likely has) been done with Bitcoin. Person A buys some bitcoin from Mt Gox and gives it to pirateat40. pirate then sells the coin at mt gox to get fiat to put into Zeekbucks. The person who buys the coins happens to be person A again, who sends pirate more money.

Ignoring the rediculous 7% interest, in the scenario above, Person A at one point in time has a single bitcoin twice. Once in their Mt Gox account, and twice as a note from pirate for redemption.
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October 19, 2012, 01:05:37 AM
 #42

Man, forget it. You just don't want to understand

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October 19, 2012, 08:31:15 AM
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You need to understand the difference between base money and broad money. Base money is issued by the central bank and only the central bank can increase its supply. In other systems, base money could indeed be gold or pebbles or something physical. Broad money is many multiples of base money. The difference between broad money and base money(in simplified terms) is that broad money includes bank deposits.

Since broad money is many multiples of base money it is broad money that is created out of thin air. This is important. You really need to understand this to understand the whole system. When you have a bank account with $1,000 in it, you have broad money. When you withdraw the $1,000 you have base money. When you get a loan for $1,000 and have the cash in your hands, you have base money. When you get a loan for $1,000 and it is sitting in your bank account you have broad money.

When the goldsmith starts issuing paper notes against the gold in his vault it is the gold that is the base money. In this case, a loan issued in notes is indeed broad money written into existence by the goldsmith. A fixed amount of gold can support a much larger supply of gold plus note money, broad money. A fixed supply of base money can support a much larger supply of base money plus deposits; broad money. For the goldsmith, the difference is clear between gold and notes. For us, the difference between base money and broad money is more tricky as both can be just numbers on a computer.

The bottom line, though, is that private banks are not writing base money into existence.

"Remember too on every occasion which leads you to vexation to apply this principle: not that this is a misfortune, but that to bear it nobly is good fortune." - Marcus Aurelius
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