A sticky?

pacquiao

[Jackass] wrote: »

A simple model of what happens to your money.

Let's assume you uncover a hidden treasure of EUR10,000 of real, legitimate paper cash. For arguments sake, and for the sake of clarity in this example, lets assume that there is only one bank, and only this money you have uncovered is used in the following example, again, for the purpose of clarity.

You decide that you want to deposit this money to the bank. So we will track what happens to this form of "real" cash over time.

You deposit this cash to the bank, they are delighted. And, under the practice of fractional reserve lending, they put 10% in the bank vault (EUR1,000), and then they lend out the remaining EUR9,000. (banks only retain approxiamtely 10% of all deposits in real capital - in theory )

So the bank then lends this EUR9,000 of your money to a lady who then goes out and buys a car.

The car dealership says thank you very much, and they then deposit the EUR9,000 from the car sale into the same bank.

The bank now puts EUR900 of this aside (10%), and lends EUR8,100 to a couple who are getting married.

This couple then goes out and has a wonderful wedding, and all of the venue, catering etc. all lodge the money the couple spent to the same bank.

The bank now puts 10% of this next lodgement aside as usual (EUR810), and lends out the remaining EUR7,290 to someone else....

At this point, the bank now has EUR2,710 in "fractional reserve" from all of the above transactions, and they have a total amount owing to them from customers on their loan books of EUR24,390, of which they are all paying 5% interest.

Now, how can a total material wealth of EUR27,100 (amount owed to them by customers + the amount held in capital reserve) have come in a couple of days from a single EUR10,000 deposit that you made?

By the time the bank has EUR10,000 in their "vault" in reserve from this cylce (i.e. when all of your money is actually back in the bank), they will have EUR90,000 loaned out to customers, paying interest on it, but your entire EUR10,000 is now back in the vault, which you then withdraw the following day...so where did this EUR90,000 come from, that all of these people are paying interest on, when it doesn't really exist...

Essentially, over a long enough time scale, trillions upon trillions of money is lent to people, when in reality, it does not exist. Banks have set up a system where they are lending us money that does not exist, only shows up in accounting ledgers and computer screens, but has literally been plucked out of thin air, and has made a society of debt slaves, going out, working, and giving all of their money to the bank, for the benefit of a couple of paper transactions, that never really happened in the first place...

Take the above example, and when EUR300,000 of fictional wealth is created, this is then lent to you, who goes and buys a house, and the developer then lodges this money into the same bank. Nothing has really happened, no money has been printed, no valuable metals have been mined, the bank has merely moved some figures around on a piece of paper or computer screen, and you are now paying them most of your money for the rest of your life, and the developer is now borrowing all of the money it's "giving back" to the banks to clear the debt from the previous project..

The financial system is a scam. And it's a business of thin air transactions.

Then, it's a whole other system in place that runs the bank of England, the Federal Reserve and the European Central Bank, that are not Government run and owned institutions, contrary to popular belief, these are privately owned, by the banking system, which fundemantally agree to control monetary conditions for a Government, print money when they need it, but they control the supply and circulation of money, so control interest rates and rate of inflation. They can print money, devalue your money, increase inflation, as you to borrow and entice you to borrow with low interest, lock you in, increase interest rates, milk you dry, boom, bust, boom, bust, boom, bust. It's an endless cycle, and it's all controlled by the banks.

What Governments do is almost immeterial.

But the current situation is far from a banking "crisis", they now have a world indebted, who are contracted to pay this money back, and then get all the money they've lent out back off the people they lent it to through their Government tax collection, and are bailed out no matter how much they lend, and have now created a whole new level of wealth where they have pulled the biggest scam of all, leanding until they bankrupt themselves, tie in an entire generation into unsustainable wealth they must slave to pay back, and get the money back instantly through your taxes, and will begin the process all over again.

"It is well enough that the people of our nation do not understand the banking system, as if they did, I believe there would be a revolution before the morning." - Henry Ford 1922

If the above was made a sticky. I feel a lot of people might learn something worth while.

Scofflaw

pacquiao wrote: »

If the above was made a sticky. I feel a lot of people might learn something worth while.

That's a very tempting straight line, since what they should learn is never to listen to only one side of the story, or accept at face value an explanation for a complex system that describes it as anything as simplistic as "a scam".

Yes, banks lend money that doesn't exist. No, it's not a scam, although it's an enormously lucrative business, and protected by governments.

However, the reason it's protected by governments is because it is the most flexible way of driving economic expansion. Again, yes, there are bank lobbyists, and bankers in high office, but, no, the world is in no sense organised enough to allow that to be meaningful.

Have a think about a situation in which a rich businessman A deposits €100k in a bank, and the bank is allowed only to lend the amount it actually has on deposit. When poor business man B comes along to the bank, hoping to borrow €100k for startup funds, or expansion funds for his business, the bank can lend him at most €100k. Of course, it won't risk anything like the whole sum, and in any case, it has to keep some money on hand in case A wants to withdraw some money. So it might lend him €20k, and it will charge a very high interest rate for doing so, because it's directly risking its client's money. Really, businessman B might as well go directly to A and ask him to invest - and he might do so, but he'll probably want a controlling interest.

Scale that up to the size of the economy, and you'll see that economic growth in that situation is going to be limited by a lack of funds. If you want to start a business in such an economy, you'll probably have to get a rich backer, and your rich backer will take a good slice of your pie for himself - not entirely out of greed, but because he's risking his money.

If you take the fractional system instead, banks are freed up to lend into the economy amounts larger by orders of magnitude. Business investment becomes a nearly impersonal affair - a numbers game for the banks, where they can expect to cover the losses from bad loans with the proceeds of the good ones.

But what does the money the banks create mean? Where does it go? What does it relate to?

The answer is the expectation of future added value. If you come up with a way to increase the recovery from an oilfield from 25% to 26%, you'll add immeasurably to the world's available oil. If you produce a better pesticide, you'll reduce pest damage to crops, and add to the world's wealth. So the debt the banks create is matched or exceeded by the gains from the opportunities they're funding.

Classically, governments have tried to do this themselves, but they have now decided by and large that commercial banks are able to do it more cheaply, more flexibly, and more effectively. Civil servants have a poor record of spotting business opportunities, have an entirely different set of motives, and are generally highly risk-averse.

That's why banks are fostered and protected by governments - they're an essential economic "utility", in the same sense that electricity is. And to reiterate the most important point - the debt the banks create is matched or exceeded by the gains from the opportunities they're funding. They're not in the business of enslaving people with debt, because, frankly, that doesn't pay. Large amounts of debt in a healthy economy are a sign of growth and investment - lots of people borrowing against their expectation of creating more economic growth, and using the money to create that growth.

Of course, you can use that money to go on shopping trips to New York, buy ever-larger cars made elsewhere, and on pushing the price of a 2-bed semi-d in a nice neighbourhood over the million mark...and then you're stuffed, because you've borrowed to buy things that will not create growth, and when the music stops, there will be lots of debt with no corresponding wealth. And even without such monumental stupidity, an economic downturn after a long period of prosperity is going to result in a lot of people who borrowed to create wealth in ways that only work in a boom.

But when it works, it works well. It's just that when it goes wrong, it tends to go wrong spectacularly.

cordially,
Scofflaw

johnnyskeleton

Whatever about the Fed, the ecb is owned by the European union and not the banks. The governing structure of the eu is to have a central bank with a mandate independent of the other agencies of eu government so that there isn't too much political interference in interest rates etc. However, to conclude from that that it is owned by the banks is demonstrably wrong. I believe the same applies to the boe and while the fed is technically a private entitly, the federal government exercises considerable control over it.

freeze4real

The first half of the op post is called the money multiplier effect.
This depends on the reserve ratio which is 10% in this case.
its not a scam its just as many flaws as all economics model.