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Author Topic: Money as Debt  (Read 3344 times)
harm
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June 14, 2011, 02:50:01 PM
 #1

Hey guys,
I have found this video which made me think a lot:
http://www.youtube.com/watch?v=vVkFb26u9g8&feature=related

The video demonstrates the process of money generation:
1) A recipient asks a bank for credit.
2) Therefore the recipient has to take mortgage from the bank for the own car or house
3) The bank now has security in case the recipient doesn't pay back the credit
4) The bank can grant 9 times the credit value one investor has invested

One would suspect the bank lends the money only it got from investors previously. One party has to pay interest, the other gets interest and the bank receives the margin.

This would be acceptable. But in reality the bank can grant 9 times the credit value one investor has invested, as only one of 10 investors claims his money back at a time. So a bank can spend much more money than it actually possesses before it gets ILLIQUID.

And even worse: The process of money creation is recursive!
5) One recipient takes the created money to pay a car
6) The seller puts the money (which is actually a credit) on his bank account.
7) The bank has new deposit and is more LIQUID
Cool The bank grants 9 times the credit value of this deposit - which again is a credit!!
9) repeat at 5)

And on each credit the bank earns interest. But not the investor.
Neither does the money exist that banks spend, nor does the money exist to pay back the interest.

Please correct my mistakes;)!!!

Now my question:
10) It is criticiesed that banks "create" money. Usually one would trade goods. Banks create money like someone else produces a chair or something. I see the problem that there are no goods trades as the recivient does not pay with his house or something else. But banks COULD take the house and so it IS a VALUE behind the "created money". Banks also have the risk of losing their mortgaged house as it might burn down sooner or later.
Is this so bad? How else should a bank create money?

11) Banks live of the interest for their granted money. The money to pay the interest has never been created so it cannot be paid back.
But something a bank has to live of? What could be an alternative? The video mentions that only the government should be allowed to create money. It pays companies to build roads, schools and so one and this way put money on the markte. It would also grant credits and earn the interest. The richer the government becomes the less will be the taxes or the more money it spends on new infrastructure to put the money back into the market.

12) Banks do multiple, recursive money creation. The money not existing to pay back the interest on the credits rises extremely.
This process should be forbidden!!! Or not? On the other hand this allows componies the receive lager credits and grow faster! Much faster!!
This is not too bad, is it?

Cheers
Harm
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June 14, 2011, 03:30:21 PM
 #2

In the Morning! Glad you could join us in the waking world. Wink

Yes, what you have discovered is called "Fractional Reserve Banking", and it is the major cause of inflation.

Thankfully, Bitcoin sounds the death knell for this kind of jiggery-pokery.

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Findeton
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June 14, 2011, 09:09:01 PM
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Money is NOT debt. The video "Money as Debt" has been debunked many times.

The actual fractional reserve system is a bad thing, but to crictizise it you first actually have to understand it.

Hey guys,
I have found this video which made me think a lot:
http://www.youtube.com/watch?v=vVkFb26u9g8&feature=related

The video demonstrates the process of money generation:
1) A recipient asks a bank for credit.
2) Therefore the recipient has to take mortgage from the bank for the own car or house
3) The bank now has security in case the recipient doesn't pay back the credit
4) The bank can grant 9 times the credit value one investor has invested

Banks create the money they lend you because they keep their money in securities. If you can't pay the mortage they'll sell your house, or maybe your mother's even. And that's why they are able to create money: because when they create a security it's backed up in some kind of a real thing (for example your mother's house).

So they create that money because you are putting your mother's house back inside the economy, which it was out of the economic system just before they conceded you the mortgage.

10) It is criticiesed that banks "create" money. Usually one would trade goods. Banks create money like someone else produces a chair or something. I see the problem that there are no goods trades as the recivient does not pay with his house or something else. But banks COULD take the house and so it IS a VALUE behind the "created money". Banks also have the risk of losing their mortgaged house as it might burn down sooner or later.
Is this so bad? How else should a bank create money?

Thing is they are the ones that calculate the value of the security but if everything goes wrong, you'll pay the difference. And if you can't pay the difference and many people can't pay the difference, then the government will "Rescue/bail out" the banks.

So they  privatize benefits and socialize losses. It's socialism for the rich.

BTW that's one of the reasons this system in inflationary: they miscalculate the value of securities. Also, as more money is being moved around, merchants just rise prices.

11) Banks live of the interest for their granted money. The money to pay the interest has never been created so it cannot be paid back.
But something a bank has to live of? What could be an alternative?

The money to pay the interest is actually been created, that "documentary" spreads lies on purpose. When banks lend you money, they create the double amount of money that they lend you. So yeah, there's plenty of money created to pay interest.

As I said before, there are many lies and mistakes in that video. Yeah, the actual economic system is fucked up. But it's not fucked up in the way they say it is, actually, because the system doesn't work like they describe.

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June 15, 2011, 12:01:33 AM
 #4

FYI, related thread with some more similar movies:

You cannot talk about Money without watching this movies first
http://forum.bitcoin.org/index.php?topic=11713.0
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June 15, 2011, 12:39:11 AM
 #5

A bank doesn't create money, it only lends out money which people have deposited in the bank. Thus the money people give to their bank and that is shown on their bank account balances isn't actually there. Bank account balances are what the bank owes you but not what the bank can necessarily give to you.

People have rightly pointed out that this is fractional reserve banking.

Governments create money. They have full central control over the supply of money.

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andes
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June 15, 2011, 01:44:41 AM
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A bank doesn't create money, it only lends out money which people have deposited in the bank. Thus the money people give to their bank and that is shown on their bank account balances isn't actually there. Bank account balances are what the bank owes you but not what the bank can necessarily give to you.

People have rightly pointed out that this is fractional reserve banking.

Governments create money. They have full central control over the supply of money.

Look, the Bank owners are also the FED owners (and some would argue also the Government owners), if you dont have the ability to associate ideas, you will never understand the financial system we live in.

And it is false that banks lend out just the money people have deposited in the banking system. Money is effectively created out of thin air due to fractional reserve banking. Moreover if a relatively small percentage of people would decide to live debth free, our financial system would collapse, as the currency supply would shrink massively due to the fractional reserve leverage. If you pay 1 dollar of debth, you withdraw 10 or more dollars from the economy. Is that too difficult to understand? The bankers have implemented a system where debth is essential. If debth shrinks the economy collapses.
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June 15, 2011, 05:31:10 AM
 #7

I have to agree with Findeton. The movie "Money as debt" is not that incorrect, its just dishonest because it hides very imporant parts of the monetary system, and gives a skewed view on how it works.

Look, the Bank owners are also the FED owners (and some would argue also the Government owners), if you dont have the ability to associate ideas, you will never understand the financial system we live in.

Not this again... Can we stop the stupid internet meme that the Fed is a private institution? I dont like the Fed, I want it closed but saying false things like this only takes credibility away form the anti-Fed movement.

The Fed is a mix government and private, but the decission over monetary policy are taken by the government parts. You can argue that the Fed (and the rest of the government) is corrupt and I will agree with you, but that does not maket it less government. In fact, being corrupted defines what a government is.
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June 15, 2011, 07:13:20 AM
 #8

Hugolp, I am courious if you are familiar with the ideas of G. Edward Griffin (specifically his research on the FED in his book "The Creature from Jekyll Island")? And if, yes what do you think about it. Is this guy credible, or a crackpot? BTW, the author argues that the FED is an invention of the Bankers and financial elites of the time, American and European.

Regarding government and banks, dont you agree with the point of view that the powerful financial institutions are controlling the governments? The fact that governments seem to work for the interests of big banks seems to prove this, at least to me.

I feel I dont get why you separate elite private interests, from governmets. What makes you think they are separate entities. Of course this is the infromation the mainstream media and the government influenced schools teach us, but I guess you are a pretty intelligent and above average informed person, not relying solely on what school or tv says, so as an open minded person myself, I wonder which information I have been missing to have such a different point of view with you on the financial system.

I dont say your sources are right or wrong, but I would like to listen to them too, to have a common ground to discuss these things.

Any light on this will be wellcomed.

Peace.




Findeton
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June 15, 2011, 07:51:31 AM
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A bank doesn't create money, it only lends out money which people have deposited in the bank.

Private banks DO create money. It's just that they don't create money out of thin air (is back up in securities related to real world things) and that in order to create that money, the central bank has to start the money creation chain first.

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harm
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June 15, 2011, 09:39:26 AM
 #10

Thanks to all for your informative comments! I have learnet a lot:)


10) It is criticiesed that banks "create" money. Usually one would trade goods. Banks create money like someone else produces a chair or something. I see the problem that there are no goods trades as the recivient does not pay with his house or something else. But banks COULD take the house and so it IS a VALUE behind the "created money". Banks also have the risk of losing their mortgaged house as it might burn down sooner or later.
Is this so bad? How else should a bank create money?

Thing is they are the ones that calculate the value of the security but if everything goes wrong, you'll pay the difference. And if you can't pay the difference and many people can't pay the difference, then the government will "Rescue/bail out" the banks.

So they  privatize benefits and socialize losses. It's socialism for the rich.

BTW that's one of the reasons this system in inflationary: they miscalculate the value of securities. Also, as more money is being moved around, merchants just rise prices.
So true...

11) Banks live of the interest for their granted money. The money to pay the interest has never been created so it cannot be paid back.
But something a bank has to live of? What could be an alternative?

The money to pay the interest is actually been created, that "documentary" spreads lies on purpose. When banks lend you money, they create the double amount of money that they lend you. So yeah, there's plenty of money created to pay interest.

I don't get this. What do you mean? How is there money on the market to pay interest?
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June 15, 2011, 10:25:13 AM
 #11

Hugolp, I am courious if you are familiar with the ideas of G. Edward Griffin (specifically his research on the FED in his book "The Creature from Jekyll Island")? And if, yes what do you think about it. Is this guy credible, or a crackpot? BTW, the author argues that the FED is an invention of the Bankers and financial elites of the time, American and European.

I have not read the book, but from talking to people that has read it, I think its mostly true, just some things are debatable. But at the end it was written some decades ago, there are new discoveries and no book is perfect.

It is true that the manuscript to create the Fed was written in a reunion of politicians and bankers at Jekyll Island. Some of the people at that meeting have written about it and explained how they went incognito. But keep in mind that the bankers were trying to get the government to create a central authority to manage money way before that. During the first decade of the XX century they managed to have the Treasury act as a sort of central bank for some years. And the USA had three central banks before the Fed.

The meeting at Jekyll Island was in 1910. You know what the Fed did at 2010, a hundred years later? They celebrated a meeting at Jekyll Island. You know what the name of the conference by the Federal Reserve of Atlanta? 'A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve'. These suckers have a wicked sense of humor.

Quote
Regarding government and banks, dont you agree with the point of view that the powerful financial institutions are controlling the governments? The fact that governments seem to work for the interests of big banks seems to prove this, at least to me.

Yes. I actually believe governments exists to favour special interest. Its not a situation that can be ammended, its what governments are.

Quote
I feel I dont get why you separate elite private interests, from governmets. What makes you think they are separate entities. Of course this is the infromation the mainstream media and the government influenced schools teach us, but I guess you are a pretty intelligent and above average informed person, not relying solely on what school or tv says, so as an open minded person myself, I wonder which information I have been missing to have such a different point of view with you on the financial system.

Well, they are separate things even if they "love" each other. The government has its own dinamics and while its objective is to pander to the special interests, it has to give the appearence of worrying about the people. So its a "game" of smoke and mirrors, and while the people get usually the short stick, some very few times you can get something out of it.

Quote
I dont say your sources are right or wrong, but I would like to listen to them too, to have a common ground to discuss these things.

Any light on this will be wellcomed.

Peace.

Absolutely.

Quote from: Findeton
Private banks DO create money. It's just that they don't create money out of thin air (is back up in securities related to real world things) and that in order to create that money, the central bank has to start the money creation chain first.

Just a detail. The banks create money first, and then, later, the central bank creates money if the banks need it to cover the reserve requirements. So basically its not the central bank that creates money first, but the commercial banks, and later the central bank creates the money so they stay solvent. Supposedly the central bank will only create money and give it to banks that have worhty assets, but we have seen during this crisis that "worthy asset" is a extremely relative concept when it comes to save the big banks.

At the end what you say is more or less correct, because if the commercial banks know they dont have the central bank covering their backs they will not lend so much money. So even when they commercial banks are the ones lending the money first, they only do because they know the central bank is behind them.
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June 15, 2011, 11:19:18 AM
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Quote from: Findeton
Private banks DO create money. It's just that they don't create money out of thin air (is back up in securities related to real world things) and that in order to create that money, the central bank has to start the money creation chain first.

Just a detail. The banks create money first, and then, later, the central bank creates money if the banks need it to cover the reserve requirements. So basically its not the central bank that creates money first, but the commercial banks, and later the central bank creates the money so they stay solvent. Supposedly the central bank will only create money and give it to banks that have worhty assets, but we have seen during this crisis that "worthy asset" is a extremely relative concept when it comes to save the big banks.

At the end what you say is more or less correct, because if the commercial banks know they dont have the central bank covering their backs they will not lend so much money. So even when they commercial banks are the ones lending the money first, they only do because they know the central bank is behind them.

Are you talking about the lending or the printing of that money? As I read you, what actually happens is that banks lend money to people/other banks first and then they ask the central bank to lend them that money. That's interesting (and actually makes sense), I surely learned an oversimplified version of reality.

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June 16, 2011, 02:41:48 AM
 #13

Quote from: Findeton
Private banks DO create money. It's just that they don't create money out of thin air (is back up in securities related to real world things) and that in order to create that money, the central bank has to start the money creation chain first.

Just a detail. The banks create money first, and then, later, the central bank creates money if the banks need it to cover the reserve requirements. So basically its not the central bank that creates money first, but the commercial banks, and later the central bank creates the money so they stay solvent. Supposedly the central bank will only create money and give it to banks that have worhty assets, but we have seen during this crisis that "worthy asset" is a extremely relative concept when it comes to save the big banks.

At the end what you say is more or less correct, because if the commercial banks know they dont have the central bank covering their backs they will not lend so much money. So even when they commercial banks are the ones lending the money first, they only do because they know the central bank is behind them.

Are you talking about the lending or the printing of that money? As I read you, what actually happens is that banks lend money to people/other banks first and then they ask the central bank to lend them that money. That's interesting (and actually makes sense), I surely learned an oversimplified version of reality.

Yes, there is a study from some local Fed from around 1992 that studies this issue and shows how the money expansion comes frist from the banks and the Fed comes later.
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December 29, 2011, 11:29:20 AM
 #14

There's a third film. I think they try to be very accurate and present most different visions in this one:

http://www.youtube.com/watch?v=_2LjbBfh7Ug

Give it a try. I don't think the intention is to mislead people.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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