fractional reserve

strantor

100 W
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Sep 12, 2011
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Houston, TX USA
I wrote this and posted it on facebook. I thought I would share it here, as I am spreading awareness:
Ever wonder why it gets harder and harder to live every year?

Most of my life I have been, like most people that I know, under the impression that the people on the streets and the people on welfare are there because they aren’t motivated. They don’t try hard enough. They would rather sit back and let someone else do all the work while they sit at home and be paid to do nothing. While I’m still sure that’s the case in a lot of instances, I have started to reflect back on my own situation. There have been a couple of times, where if I didn’t have a family, I would have been on the streets or welfare. And as time goes by, it seems that despite my best efforts, I am getting ever closer to being poor(er). From my perspective, with the job that I have, and the amount of effort I put into it, I should not be having any money problems, but problems abound. I have been seeking the answer to the question “why does it keep getting harder and harder?” I will now attempt to explain the epiphany that I have just recently made.

Do you have a dollar in your wallet, or in your bank account? If so, do you know where it came from? how it was created?I’ll tell you; at some point, someone took out a loan from a bank, and that dollar was created. It could have been a home loan, car loan, business loan, or government stimulus loan, any kind of loan. In any case, someone is paying interest on that dollar in your wallet. That’s how money is created; when people take out loans. Contrary to popular belief, money is created by private banks when they issue loans. It’s not created in the government mint, or solely by the FED (the fed is a private bank BTW, not a government agency). Banks create this money out of thin air and then expect to be paid interest on it. They just type it into existence on a computer screen. Well, where does the money come from to pay off the loan? It comes from somewhere else, maybe a paycheck, which also at some point down the line originated in the form of a loan. So we are paying off loaned dollars with loaned dollars. Banks only generate the amount of the Principle. You take out a loan for 10,000$, the bank creates 10,000$, not the extra 5000$+ for the amount of the interest. So where does the money that is supposed to pay the interest come from? IT DOESN’T! It does not exist! ALL the money in circulation is the principle of one giant loan, and there is NO money in circulation to pay the interest on this giant loan.

Even if everybody everywhere in America, or the face of the entire planet for that matter mystically woke up tomorrow morning with an unquenchable drive to be productive, get off welfare, go get a job, and pay their debt to society, and they actually DID this, there would still be a portion of people filing for bankruptcy, losing their homes, losing their cars, not paying student loans, etc. because THERE IS NOT ENOUGH MONEY ON THE PLANET TO PAY ALL THE LOANS. Yes, even if everybody stopped protesting, and went out and got a job (assuming there are jobs to be had), there would still be “losers” despite their best efforts. It is mathematical fact. Now, I’m not saying the protesters are right. In my opinion, they are mostly a bunch of entitlement seeking lazy idiots. The occupy movement is angry at some of the right people, but has completely missed the boat on WHY. They are protesting rich people in general. “you have money, you should give it me” – that’s their general message as I have interpreted it. I have read up on their demands and gripes, and nowhere did I see anything about the Fractional Reserve System (that’s what it’s called by the way, this system of creating money by the banks, google that). They just want the rich to “pay their fair share” – fair share of WHAT? Interest?

The banks: The banks know that not everybody can pay their loans. And they don't mind. See, they have the legal right of counterfeiting; so they counterfeit as much as they want, and loan it to you. When you default, they get your house, or car, or whatever. They get REAL GOODS in exchange for FAKE MONEY. This is only the first in a long list of perks the banks get. Another perk, is that as they are pumping out all these dollars, they are diluting the power of the money. They jack the inflation sky high and cause the cost of everyday items to go up, so that you have to keep coming back for more loans for things that you otherwise could have just paid for outright. One more perk of being a bank, is connections. All the major banks are connected via a network, with the FED at the center, so they can effectively be considered one giant bank. So when you take out a car loan and you take your check and give it to the guy at the car lot, he takes it and deposits it in his bank, which is linked with your bank, so effectively the giant bank created 10,000$, and then the 10,000$ was turned around and given right back to it; BUT you still owe the bank 10,000$ + INTEREST. And the most important perk of being a bank, is that you get to rule the world. Yes, I said it. EVERYBODY is in debt to the banks. Including, and to an unfathomable extent, THE U.S. GOVERNMENT. Do you think that the government considers YOUR demands as much as they consider the BANKS’ demands? If you owed trillions of dollars to guy A and nothing to guy B, and they had conflicting interests, who would you try to make happy? You are naïve if you think that the government doesn’t cater to the banks.

So, that’s why it gets harder and harder every year. Banks drive down the value of the dollar, and the public further into debt. We’re all working indirectly for the banks night now. Even if you don’t have a cent of debt; your house & cars are paid off, you have a steady job, etc. you are still under the bank’s thumb because they decide how much your money is worth. That’s why I have to work 60-70 hours per week at SKILLED LABOR, and barely afford to pay my rent, not own my own car, and feel like I’m sinking lower and lower, maybe to the point I won't be able to feed my family one day, when men of my grandfather’s day could graduate high school (or not graduate) and be able to afford a house and a reasonably comfortable life, working 40hrs/week doing UNSKILLED LABOR. Every day the banks get richer and the poor get poorer. The government has done nothing to stop this. They could have at least made sure that minimum wage followed with inflation.

Back to the occupy movement; The problem DOES lie with the banks, and with the paychecks of the CEOs; not because just by virtue of CEOs being RICH, but because the CEOs are UNFAIRLY rich. They used to have a term for this fractional reserve and loaning money at interest practice; USURY, google that too. I don’t think that mindset of “Don’t be angry at the bank CEOs because they are rich; they earned it, you didn’t” holds any water. The banks might not be STEALING money out of your pocket, as is usually how the defense goes, but they are stealing the VALUE of the money that you DO have, that you DID earn, and demanding even more. Did you know that the dollar is only worth 4 cents compared to when it was introduced?

This is all quite silly when you consider that money is NOTHING. It is a unit of measure. A unit of measure to represent a trade value of goods/services. An able bodied young man such as myself saying that he can’t afford a house because he doesn’t have enough money, is like a contractor saying that he can’t build a building because he doesn’t have enough inches. We are working our asses off in pursuit of a deliberately fabricated scarcity of measurement units. Its utter nonsense!

What can we do about it? STOP USING THE INFLATED MEASUREMENT UNITS! Being that money is a unit of measure, it is (or should be) infinite. What is the total number of meters? There is no total. There are infinite meters. SO WHY IS THERE A FINITE AMOUNT OF MONEY? I think I’ve covered that, but it’s because the banks generated the finite amount to keep you on a hamster wheel.

So, what can we do about it? Well, I think the permanent solution is rather obvious. But in the short term, you can TRADE. Goods and services. As much as you can. Use craigslist. Don’t use dollars to pay for anything you can get away with trading for. There is only so much you can trade, and finding a trading partner who has what you want and wants what you have is tough. There are trading communities with Mutual Credit Systems (google that) and there are alternative community currencies popping up all over. SPREAD AWARENESS. Most people who I know have not heard this information. The more people “in the know”, the more likely change will come. DON’T BE COMPLACENT. This problem is not going away until someone does something about it, and you don’t care, nobody else will care either.

please correct me if I'm wrong about anything here, and please let me know if you have any more ideas about what we can do individually to mitigate this problem.
Thanks,
-Charles Staton
I tagged everybody I know in that post. Not just random facebook "friends" - people that I actually know personally very well. I got a total of 4 people to reply. Nobody cares about this stuff. Nobody wants to talk about it. I was appalled.
 
Thanks for sharing. The world really needs to educate themselves about this. We are living in the information age (for now) and all this info is readily available to everyone. there is no excuse for the general populace to be oblivious to these facts.
 
Problem is, its not a fact. It's complete fiction.

Banks can't create money, they must borrow it to on-lend. In fact, they can't even lend everything they borrow - which is why its called fractional reserve - they need to keep a fraction in reserve in case the people they borrowed off want their money back.

What appears to be money creation, is actually what is known in finance as the velocity of money. Let's say we have a $10 note. You pay me to mow your lawn and pay me $10. I pay you to clear my gutter and give you back the $10. You pay me to clear your drain and give me the $10. I pay you to wash my car. How much money is there? $10. At no time did more than $10 exist. How much in services was created? $40 - the note, by being used 4 times created 4 times its value in services. Was new money created? Could you at any point have had $20, $30 or $40 in your hand? No.

But what if after mowing your lawn, I put the money in the bank? Can I now pay you to clear my gutter? No, I can't save money and spend it. Now since you never cleared my gutter, do you have any money to pay me to clear your drain? No, you've already spent your $10 and haven't earned it back. So, now that work has stopped, how much in services would have been created? Only $10 - the first $10 you paid me to mow your lawn.

But what if the bank then lent you the $10 I deposited and you used it to pay me to clear the drain? Well, we could continue the trading until the money had to be repaid - with interest. Of course in a totally closed system with only two people and one bank, it's hard to show where the money from interest would come from - but basically, you'd use some of your income from your work, some of the interest would be paid to the depositor, the rest will be profits for the bank, some of which will pay its employees, others will go back to the shareholders - either way, it gets pumped back into the system, which can then be used either it buy goods and services, or pay someone else's loan.

Long post, but the long and the short of it, is that the op quote is bollocks. Aside from the central banks of each currency, nobody has the right to create money, and banks don't. They can only keep the money moving (velocity of money, remember?) to create that appearance.
 
Sunder said:
Problem is, its not a fact. It's complete fiction.

Banks can't create money, they must borrow it to on-lend. In fact, they can't even lend everything they borrow - which is why its called fractional reserve - they need to keep a fraction in reserve in case the people they borrowed off want their money back.
Do you know what that fraction is?
There are different fractions for different situations, but they rarely go >10%.
They can be lower than 1%
We'll just say for the sake of arguement, it's a fixed 10%.
So a new bank opens, I put in 10,000$. That's an asset. they are now allowed to loan out 100,000$ while still meeting the requirement of keeping 10% on hand. You go into the bank and take out a loan of 100,000$. they type it into your account; where did it come from?
and note, that my 10,000$ is still in the bank. I can go get it if I want.
Sunder said:
What appears to be money creation, is actually what is known in finance as the velocity of money. Let's say we have a $10 note. You pay me to mow your lawn and pay me $10. I pay you to clear my gutter and give you back the $10. You pay me to clear your drain and give me the $10. I pay you to wash my car. How much money is there? $10. At no time did more than $10 exist. How much in services was created? $40 - the note, by being used 4 times created 4 times its value in services. Was new money created? Could you at any point have had $20, $30 or $40 in your hand? No.
I see your point there, but I don't think we're talking about the same thing. You're talking about the seemingly massive amount of money that goes through banks, and I'm talking about the money originating from banks in the form of loans.
Sunder said:
But what if after mowing your lawn, I put the money in the bank? Can I now pay you to clear my gutter? No, I can't save money and spend it. Now since you never cleared my gutter, do you have any money to pay me to clear your drain? No, you've already spent your $10 and haven't earned it back. So, now that work has stopped, how much in services would have been created? Only $10 - the first $10 you paid me to mow your lawn.

But what if the bank then lent you the $10 I deposited and you used it to pay me to clear the drain? Well, we could continue the trading until the money had to be repaid - with interest. Of course in a totally closed system with only two people and one bank, it's hard to show where the money from interest would come from - but basically, you'd use some of your income from your work, some of the interest would be paid to the depositor, the rest will be profits for the bank, some of which will pay its employees, others will go back to the shareholders - either way, it gets pumped back into the system, which can then be used either it buy goods and services, or pay someone else's loan.
The actual closed loop system of billions of people and several banks is the exact same model as your closed loop system of 2 people and one bank.The entire economy is on loan to us from banks, and there's nobody creating money to pay the interest.
Sunder said:
Long post, but the long and the short of it, is that the op quote is bollocks. Aside from the central banks of each currency, nobody has the right to create money, and banks don't. They can only keep the money moving (velocity of money, remember?) to create that appearance.
I appreciate your input and discussion. I would encourage you to seek out the answer for yourself to the question "where does money come from?"
 
strantor said:
...We'll just say for the sake of arguement, it's a fixed 10%.
So a new bank opens, I put in 10,000$. That's an asset. they are now allowed to loan out 100,000$ while still meeting the requirement of keeping 10% on hand. You go into the bank and take out a loan of 100,000$. they type it into your account; where did it come from?
Sorry, but that is wrong. With a 10% reserve requirement, and only a single $10,000 deposit, the bank would only be able to lend out $9,000, as they must keep 10% ($1000) in reserve. With thousands of depositors, the reserve needs to be large enough to allow depositors to make expected withdrawals. That means that with millions deposited, the first depositor of $10,000 will have no problem getting his/her money back.

-- Alan
 
alan said:
strantor said:
...We'll just say for the sake of arguement, it's a fixed 10%.
So a new bank opens, I put in 10,000$. That's an asset. they are now allowed to loan out 100,000$ while still meeting the requirement of keeping 10% on hand. You go into the bank and take out a loan of 100,000$. they type it into your account; where did it come from?
Sorry, but that is wrong. With a 10% reserve requirement, and only a single $10,000 deposit, the bank would only be able to lend out $9,000, as they must keep 10% ($1000) in reserve. With thousands of depositors, the reserve needs to be large enough to allow depositors to make expected withdrawals. That means that with millions deposited, the first depositor of $10,000 will have no problem getting his/her money back.

-- Alan
ah yes, I had that backwards, thank you for the correction. Big difference. but in any case, where does the 9000$ come from?
 
It's 1am local time, and while Id like to respond to your post in detail, I really should get too bed. but to keep this discussion going, Id like to point out a few things.

If a bank has a fraction reserve requirement of 1%, then, if you deposit $10,000 the bank can only lend out 99%, or $9,900. That's the whole definition of the reserve system - you can't lend out everything you borrow in. That's caveated by the fact that after it's been loaned out and spent, it will come back as a $9,900 deposit, of which $9,801 could be loaned out again. That will eventually create nearly your $100,000 in loans - but it will create also the exact same amount in oustanding deposits.

Now here's an interesting question... what if all the depsitors wanted their money back, while the loans are still out? and all the depositors wanted it back in cash, not numbers on a screen?

If you think you can withdraw money while it's loaned out, you should google 'bank run' and see what happens when everyone tries the same thing. This is exactly why they need a fraction in reserve. What the bank is gambling is that less than 1% of people will want their money back at any one time (assuming the fractional reserve is 1%) as long as that is true, all good, here's your money. When too many people want their money back, it creates a bank run.

Where does money come from? That's easy and requires no thought. It's created solely by the reserve bank of each currency. end of story. Only money velocity is created by retail banks and loans, not additional fiat money.
 
Sunder said:
If a bank has a fraction reserve requirement of 1%, then, if you deposit $10,000 the bank can only lend out 99%, or $9,900. That's the whole definition of the reserve system - you can't lend out everything you borrow in. That's caveated by the fact that after it's been loaned out and spent, it will come back as a $9,900 deposit, of which $9,801 could be loaned out again. That will eventually create nearly your $100,000 in loans - but it will create also the exact same amount in oustanding deposits.
Right, so I deposit 10,000$, you borrow $9,900 and spend it on a motorcycle. Motorcycle dealer deposits the check and books are balanced. The bank can now loan out the $9,801 as you say. But what about the $9,900 + interest that you still owe the bank? You will be making payments on that bike for the next 3 years or so. How is money not created in this scenario?

Sunder said:
Now here's an interesting question... what if all the depsitors wanted their money back, while the loans are still out? and all the depositors wanted it back in cash, not numbers on a screen?

If you think you can withdraw money while it's loaned out, you should google 'bank run' and see what happens when everyone tries the same thing. This is exactly why they need a fraction in reserve. What the bank is gambling is that less than 1% of people will want their money back at any one time (assuming the fractional reserve is 1%) as long as that is true, all good, here's your money. When too many people want their money back, it creates a bank run.

Where does money come from? That's easy and requires no thought. It's created solely by the reserve bank of each currency. end of story. Only money velocity is created by retail banks and loans, not additional fiat money.
Yes I'm well aware of the bank run scenario, and I think it stands as proof that the banks create money. If they weren't creating money, then they should be able to pay all withdrawals. If they were loaning out money that they actually had, then it wouldn't be a problem. But they are loaning out money that they don't have, and that is the definition of creating it, as I see it.
 
I can understand your confusion. This problem made the rounds by a You tube video in 2007 during GFC1. This is not a new epiphany. This is not a new problem. You can create exactly the same problem using gold and promisory notes, without the magic of computers to create money out of thin air, or the ability of a reserve bank to print addition fiat..

Trust me, this does all work out logically, but it will have to wait till tomorrow.
 
Sunder said:
I can understand your confusion. This problem made the rounds by a You tube video in 2007 during GFC1. This is not a new epiphany. This is not a new problem. You can create exactly the same problem using gold and promisory notes, without the magic of computers to create money out of thin air, or the ability of a reserve bank to print addition fiat..

Trust me, this does all work out logically, but it will have to wait till tomorrow.
It's new to me, but not new, as evidenced by the bank runs of the great depression, and I read about how it happened with gold and promisory notes as well. Yes, I did see some youtube videos in addition to plenty of reading on the topic from many sources and I never enountered an alternate explanation, so I took it as fact. I will continue to take it as fact until am given a new lead in another direction. I can wait for any light you may be able to shed on it. Always open minded. Thanks again.
 
Okay, let's create a slightly more complex model with some constraints to complexity.

Let's create a community of a butcher, a baker, a candlestick maker. These people trade in gold. As they live in a backward town, and everyone knows each other to be trustworthy, there is no bank (yet). Everyone has 10 one ounce coins of gold. There is no fed minting new coins, money is not brought in from external economies. Let's keep the model simple, right? But nothing that would impede a banker "making money out of thin airs from loans", so none of the model constraints impact the comparison with real life. Until the banker arrives, everyone keeps their coins in a jar under their mattress or something.

Current balance sheet:
Butcher: Asset - 10 coins in hand
Baker: Asset - 10 coins in hand
Candlestick maker: Asset - 10 coins in hand

Then one day a banker moves into town. For simplicity's sake, he brings no money to the economy. No new cash. He's purely a broker. He says to the locals "If you deposit money in my safe. I will give you 10% a year interest If you want to borrow from me, I will lend to you at 20% a year interest"

So everyone thinks this is great - I have 10 coins, but really don't need them all now. I'm going to put 5 of my coins in the bank, and keep 5 in circulation to spend. So the balance sheet now looks like this:

Banker:
Assets - 15 coins in the bank
Liabilities - 15 Coins worth of deposit slips it is liable to pay out for.
Balance = 0

Butcher, baker, candlestick maker
Assets - 5 coins in the jar under the bed each, and a deposit slip for 5 coins each = 10 coin total
Balance = 10 coins each

The baker is quite the entrepreneur, and thinks "Hey, if I had more light later in the night, I could make more bread, and therefore more money." He withdraws his money, and asks for a loan of 10 gold pieces from the bank. Balance sheet:

Banker:
Assets - 0 coins in the bank + a loan of 10 coins that the baker must pay for.
Liabilities - 10 Coins worth of deposit slips it is liable to pay out for.
Balance = 0 coins

Butcher
Assets - 5 coins in the jar under the bed, and a deposit slip for 5 coins = 10 coin total
Liabilities = None
Balance = 10 coins

Baker
Assets - 20 coins in the jar under the bed, ready to invest
Liabilities = 10 coin loan from the bank which he will eventually have to repay with interest
Balance = 10 coins

Candlestick Maker
Assets - 5 coins in the jar under the bed, and a deposit slip for 5 coins = 10 coin total
Liabilities = None
Balance = 10 coins

He then goes to the Candlestick Maker and asks for 20 gold coins worth of candles. Balance Sheet:

Banker:
Assets - 0 coins in the bank + a loan of 10 coins that the baker must pay for.
Liabilities - 10 Coins worth of deposit slips it is liable to pay out for.
Balance = 0

Butcher
Assets - 5 coins in the jar under the bed, and a deposit slip for 5 coins = 10 coin total
Liabilities = None
Balance = 10 coins

Baker
Assets - 0 coins in the jar under the bed,
Liabilities = 10 coin loan from the bank which he will eventually have to repay with interest
Balance = 10 coins in debt

Candlestick Maker
Assets - 25 coins in the jar under the bed, and a deposit slip for 5 coins
Liabilities = None
Balance = 30 coins

Total physical gold in the system: 30 Gold Coins (Bank 0, butcher 5, baker 0, candlestick maker 25 = 30)

The Candlestick maker doesn't need that much money so puts 10 coins in the bank:
Banker:
Assets - 10 coins in the bank + a loan of 10 coins that the baker must pay for.
Liabilities - 20 Coins worth of deposit slips it is liable to pay out for. (15 to Candlestick and 5 to butcher)
Balance = 0

Butcher
Assets - 5 coins in the jar under the bed, and a deposit slip for 5 coins = 10 coin total
Liabilities = None
Balance = 10 coins

Baker
Assets - 0 coins in the jar under the bed,
Liabilities = 10 coin loan from the bank which he will eventually have to repay with interest
Balance = In debt for 10 coins

Candlestick Maker
Assets - 15 coins in the jar under the bed, and a deposit slip for 15 coins = 30 coin total
Liabilities = None
Balance = 30 coins

Total physical gold in the system: 30 Gold Coins (Bank 10, butcher 5, baker 0, candlestick maker 15 = 30)

So our first loan has been issued, and money has been deposited back in the bank. Has any money been created? I can't see any new money, can you? Total coinage in the system before the banker: 3 x 10 coins, total after 30. No change.

Ah - now here's the interesting thing and one of your "proofs" that the bank is lending money it doesn't have - The candlestick maker has a deposit slip for 15 coins. The bank only has 10 coins in its vault. If he wanted to withdraw all his money, he couldn't. So where did the money go? The answer is "you're asking the wrong question". We KNOW from the walkthrough before, that money was not created anywhere. What was created, was a promise to pay - using a the bank as a broker. In effect, the Baker spent money he didn't have, and the Candlestick maker made candles on a promise. But the candlestick maker got paid, essentially by a guarantee from the bank. The bank gave out money that it didn't own (It's so far had a zero balance sheet, remember?), but had access to. But it couldn't create money out of thin air - it could only do it when the Butcher and the Candlestick maker made the initial deposit.

See what happened there? If the baker can't repay his loan, then the bank can't repay the Butcher and Candlestick maker for their deposit slips.

What about interest, you asked?

Well, let's say the Baker was successful in his new venture. That year, he sells 5 coins worth of bread to the butcher, and because the candlestick maker is feeling so rich from his new found wealth, he buys 10 coins worth of bread, pastries, and other wonderful prandial delights. Balance sheet?

Banker:
Assets - 10 coins in the bank + a loan of 10 coins that the baker must pay for.
Liabilities - 20 Coins worth of deposit slips it is liable to pay out for. (15 to Candlestick and 5 to butcher)
Balance = 0

Butcher
Assets - 0 coins in the jar under the bed, and a deposit slip for 5 coins = 5 coin total
Liabilities = None
Balance = 5 coins

Baker
Assets - 15 coins in the jar under the bed,
Liabilities = 10 coin loan from the bank which he will eventually have to repay with interest
Balance = Net worth 5 coins

Candlestick Maker
Assets - 5 coins in the jar under the bed, and a deposit slip for 15 coins = 20 coin total
Liabilities = None
Balance = 20 coins

Now the bank needs to settle its interest payments, and for simplicity leaves town to wrap up this example. It needs to collect a 10 coin loan from the Baker, and 2 coins in interest. It needs to pay out a 5 coin deposit to the butcher, and 0.5 coins in interest. And it needs to pay out a 15 coin deposit to the baker, and 1.5 coins in interest.

So it collects 12 coins from the Baker. The baker has 15 coins at present, so no problem. Banker now has 22 coins in his vault.

He pays out his best creditor first - 15 coins, plus 10% interest for 1.5 coins, that's 16.5 credits plus the 5 coins he had under his bed, for a total 21.5 coins

Finally, he pays out the butcher, who gets 5 coins from his deposit, 0.5 coins as interest. He spent the money under his bed, so that's all he gets, 5.5 coins.

Let's add it all up. The banker now has nothing. The butcher now has 10.5 coins, the baker has 3 coins (and a bright shiny new candle driven bakery) and the candlestick maker goes into semi-retirement on the Amalfi coast with a whopping 21.5 coins.

So that's Banker 0, Butcher 5.5, baker 3, candlestick maker, 21.5 for a total of... 30 coins.

In this scenario, we showed:

1. How loans can be issued without creating new money

2. How interest can be paid without the creation of new money

3. How a bank can have a market create new goods and services, by moving money faster (Taking savings that would have otherwise sat in a jar under the bed, and using it to get the candlestick maker to make more candles).

Hope this makes more sense to you now?
 
I think that it's when the banks go dirty and start betting on things and need to get bailed out, resulting in the fed printing more money that everyone gets the shaft and everyone's dollars are worth less.

Your examples may make sense but they sure give me a headache. I couldn't imagine keeping accurate track of a system like that on a large scale.......

Also, what's the deal with the bank paying less interest for the use of other people's money than they charge other people to use someone else's money??? It's all a big nasty scam that allows people that have money and don't want to work to make more money....just because they have money........get a rope. :evil:
 
mdd0127 said:
I think that it's when the banks go dirty and start betting on things and need to get bailed out, resulting in the fed printing more money that everyone gets the shaft and everyone's dollars are worth less.

Your examples may make sense but they sure give me a headache. I couldn't imagine keeping accurate track of a system like that on a large scale.......

Also, what's the deal with the bank paying less interest for the use of other people's money than they charge other people to use someone else's money??? It's all a big nasty scam that allows people that have money and don't want to work to make more money....just because they have money........get a rope. :evil:

Absolutely - when you get into more complex banking, such as credit default swaps, collatorised debt obligations, and all sorts of wonderfully leveraged instruments, that's when things can go pear shaped. Although in an extreme situation, the whole lot can go pear shaped, simply because the banks lent the money too many times, and then suddenly all the depositors want their money back. Alternatively, when they've lent recklessly, and people can't repay the money, and the asset under mortgage is not worth what they lent for it.

In terms of how come banks pay less interest than they receive... Well, that's just business isn't it? Why does K-mart sell a shirt for $10 that they bought for $2? So they can make money.
 
Stantor,
You really need some very basic help. The banks are not the problem. You and others who live beyond their means are their own problem. Credit is not the problem. People who borrow are the problem. Rule number one for people who can not manage their finances, is to NOT borrow. NEVER. Next is to figure out how to live smarter, with less, instead of working longer for more. I guess by now you have figured out why your original post got so few answers? I mistakenly took it for the ramblings of an idiot, instead of an honest search for the total understanding of today's very complex financial structure. Your basic premise was totally flawed. When searching for complex answers, you sometimes need to start with short, simple questions. You have received some very good examples of simple answers to get you started asking more complex questions, as your understanding grows.
You are lucky a great tutor in the form of Sunder has come along. :mrgreen:
 
Sunder,
Thank you for your lengthy and thorough reply. I really appreciate you taking the time to write that. I went through the whole thing several times. I even drew it out and moved the coins around physically and it works out. I think the key to it though is the ratios of interest to the ratios of people who took out loans. 1 person took out a loan @ 20% and 2 people loaned to the bank @ 10%, so they effectively cancelled each other out, leaving the net money the same. now if you change the interest rates to something more like real life, and/or change the number of people who take out loans, the system no longer remains balanced. For example I went through your exercise exactly as you wrote it, only I changed the interest rates to 1% on deposits and 10% on loans, and I came out with 34.2 coins in the end. That says to me that either someone wasn't able to repay their loan, or someone wound up with a bank note of 4.2 coins that wasn't backed by gold and inflation took place. Are either of those the correct conclusion?
 
It is certainly possible to contrive scenarios that appear to create money on paper, but in real life would be prevented from happening because it actually send the bank broke - For example, if the fractional reserve rate was set at something ridiculously high, like 20% (Or simply, the bank couldn't or didn't lend out everything that was deposited with it) then it would be paying out interest on deposits that it wasn't receiving from loans. On paper this would create money. In real life, the Fed would print/loan/give it money to keep the bank afloat - or in some cases, just let it fail. That wouldn't be the bank's choice though.

If you set the rates to 1 and 10%, that shouldn't have happened. Let me do the maths after all the guests leave, I'll let you know what I come back with.
 
Sunder said:
If you set the rates to 1 and 10%, that shouldn't have happened. Let me do the maths after all the guests leave, I'll let you know what I come back with.
yes, you are right. I found my error. Actually it was a shared error between both of us. I multiplied the incorrect number (in red) instead of the correct number (in blue)
Sunder said:
Finally, he pays out the butcher, who gets 5 coins from his deposit, 0.5 coins as interest. He spent the money under his bed, so that's all he gets, 5.5 coins.

Let's add it all up. The banker now has nothing. The butcher now has 10.5 coins, the baker has 3 coins (and a bright shiny new candle driven bakery) and the candlestick maker goes into semi-retirement on the Amalfi coast with a whopping 21.5 coins.

So that's Banker 0, Butcher 5.5, baker 3, candlestick maker, 21.5 for a total of... 30 coins.

So, when I went back through using 1% and 10%, this is what I got:

Now the bank needs to settle its interest payments, and for simplicity leaves town to wrap up this example. It needs to collect a 10 coin loan from the Baker, and 1 coin in interest. It needs to pay out a 5 coin deposit to the butcher, and 0.05 coins in interest. And it needs to pay out a 15 coin deposit to the baker, and .15 coins in interest.

So it collects 11 coins from the Baker. The baker has 15 coins at present, so no problem. Banker now has 21 coins in his vault.

He pays out his best creditor first - 15 coins, plus 1% interest for .15 coins, that's 15.15 credits plus the 5 coins he had under his bed, for a total 20.15 coins

Finally, he pays out the butcher, who gets 5 coins from his deposit, 0.05 coins as interest. He spent the money under his bed, so that's all he gets, 5.05 coins.

Let's add it all up. The banker now has .8 coins. The butcher now has 5.05 coins, the baker has 4 coins (and a bright shiny new candle driven bakery) and the candlestick maker goes into semi-retirement on the Amalfi coast with a whopping 20.15 coins.

So that's Banker .8, Butcher 5.05, baker 4, candlestick maker, 20.15 for a total of... 30 coins.
So, no money created, despite interest rates changing. The banker makes a profit, but that's not a bad thing, as he did actually provide a service.

The new understanding I have gained from your example is that at the same time that the bank "creates money out of thin air", they also create a negative money "out of thin air" that cancels it out.

thanks for the help!
 
Thanks for working that out. I was finally going to try to work it through again this morning.

It has been a good but very busy Christmas and Boxing day!
 
I'm still not done kicking this horse; been thinking about it more...Does the 10 coins put into the economy by the loan not constitute inflation? The way I'm looking at it now, the -10 coins (promisory note from the baker) exists only behind the doors of the bank, yet the bank notes exist in the hands of the populace as money. So, until the baker repaid the 10 coin loan, there were 40 coins worth of coin & bank notes floating around as money. The existence of the promisory note means nothing the rest of the participants of the economy; so in the grand scheme it is effectively nonexistent (until paid back), especially if the baker pays it back in installments over a long period.In the example there were a fixed amount of people but in our real economy, where people take out loans repaid over 30 years, and with the population ever expanding (more and more people available to take out the loans), the loans are being taken out faster than they will ever be repaid. So does that not cause an ever increasing amount of money to injected into the economy?
 
Spacey said:
Did anyone watch the 2nd vid I put in my post?
I just watched it. It's a little to "conspiracy theory"-esque for me. I'm not saying it's wrong, just that any "reasonable" or "well-grounded" type would completely discredit it despite any factual content, based on the other content. I think that people should be introduced to the topic in a facts-only way, and then be allowed to follow that wherever it takes them. If they take the factual information about fractional reserve banking, and follow that to their own conclusion that the whole system was created by an unknown evil entity then so be it, but I think that advertising it as such does more to hurt awareness than help it. Videos like that, make people associate people like me, that is, people searching for answers, with raving conspiracy theory lunatics. Not many people would except the explanation that it is a giant NWO conspiracy, whether that is the truth or not. It may well be the truth, but I have no comment on the matter.
 
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