The Money Myth Exploded

[phattonez]

In theory, you can start a bank with nothing, just a ledger, and it all works just fine as long as borrowers don't default. You can even manage interbank settlement just by creating settlement accounts between banks.

In reality, you need some (hard) assets to start a bank. And in the U.S., you need reserves to get started, because reserves are what banks use for settlement. Those hard assets are what is at risk when borrowers default, because as soon as you get your loan, and before you ever make a payment, your bank transfers reserves in settlement of your check. If you default, your bank loses those real assets.

FDIC is just insurance that all banks have to kick in to. The real (moral) problem is when the government increases its own liabilities in order to decrease the bank's liabilities. Which doesn't really happen. It didn't even happen in 2008. But it could.

Sure, but this isn't something that normally happens a year or two after the founding. I mean, I guess if you're reinvesting everything foolishly then it's a risk, but I'd be crazy to deny that people get massive wealth through banking.

 

[JohnfrmClevelan]

Sure, but this isn't something that normally happens a year or two after the founding. I mean, I guess if you're reinvesting everything foolishly then it's a risk, but I'd be crazy to deny that people get massive wealth through banking.

It has nothing to do with when the bank was founded. It just demonstrates that, right from the start, banks have hard assets that they put at risk in exchange for soft assets (loans) that will hopefully become hard assets (reserves).

Yes, banks make a lot of money. So does Amazon, so does Microsoft. Some banks go under, too. I never denied that banks are normally very profitable.

 

[phattonez]

It has nothing to do with when the bank was founded. It just demonstrates that, right from the start, banks have hard assets that they put at risk in exchange for soft assets (loans) that will hopefully become hard assets (reserves).

Yes, banks make a lot of money. So does Amazon, so does Microsoft. Some banks go under, too. I never denied that banks are normally very profitable.

Except that Amazon and Microsoft make a lot of money by creating wealth. Banks do not create real wealth. They drive up asset prices with their accounting entries and pocket the interest.

 

[JohnfrmClevelan]

Except that Amazon and Microsoft make a lot of money by creating wealth. Banks do not create real wealth. They drive up asset prices with their accounting entries and pocket the interest.

Don't you think that banks, and the credit they create, contribute to wealth-building?

How would you buy a house without credit? How would you start a business without credit? How would you run a business without credit?

 

[phattonez]

Don't you think that banks, and the credit they create, contribute to wealth-building?

How would you buy a house without credit? How would you start a business without credit? How would you run a business without credit?

No, the banks hinder it. We don't need to create money to finance a home purchase. It just raises the price by raising demand. It raises the prices of essentially everything. Even costs rise because of debt service.

How did people buy homes before banks? They were a lot cheaper!

So no, ultimately banking isn't necessary to build wealth. Finance is a parasite on the productive part of the economy. It's no coincidence that when finance was a smaller part of our economy that growth was better and incomes were higher.

Sent from my phone. Instaurare omnia in Christo.

 

[DaveFagan]

Assets = liabilities, always. It's just that not every asset is in the form of a paper dollar.

You take out a loan for $1000. The interest is $80.

Your asset equals the bank's liability, $1000.

Your liability equals the bank's asset, $1080.

While we have multiple loans open at once, and while we service our debt, old loans can be retired and new loans created.

Having to extinguish all loans at once is just a thought experiment. If that ever happened, it would be because the economy collapsed. Repaying loans would be the least of our problems. BUT, once all of the principal has been paid, the banks would simply write off the unpaid portion of their loans, which would extinguish both borrower's liability and the bank's asset (which are still equal), bringing everything back to zero on both sides of the ledger.

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Banks do provide something to earn their profits; they take a very real risk when they lend money. Even though money is created "out of thin air" when loans are created, banks cover your check with hard assets (reserves) before you ever pay them a nickel.

You are equating TBonds as hard assets. I don't agree. Uncollaterolized Loans.
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[JohnfrmClevelan]

No, the banks hinder it. We don't need to create money to finance a home purchase. It just raises the price by raising demand. It raises the prices of essentially everything. Even costs rise because of debt service.

How did people buy homes before banks? They were a lot cheaper!

I don't know where you are getting these ideas. Widespread homeownership was only made possible by credit; very few people ever had the means to buy a house out-of-pocket.

Look at what goes into building a house; the estimates I have seen online range from 0.5 to 1 hour of labor/square foot. For a modest, 2000 square foot house, that equates to 0.5-1 year of labor (40 hours/week, like a normal job). So about one year's income. And that's just the labor; materials and land are extra. Add in some profit for the builder, and you are talking the equivalent of maybe two years of working. Nobody is going to be able to afford that without credit. And banks have nothing to do with those estimates.

A house is not an easily affordable item. Cars are tough enough to save up for.

So no, ultimately banking isn't necessary to build wealth. Finance is a parasite on the productive part of the economy. It's no coincidence that when finance was a smaller part of our economy that growth was better and incomes were higher.

The financial sector certainly takes more than its fair share. But that is more a problem of today's conditions, not the structure of banks themselves. A bank creating a loan so you can buy a house or open a business is a good thing. What Lehman Brothers grew into is (was) not.

 

[JohnfrmClevelan]

You are equating TBonds as hard assets. I don't agree. Uncollaterolized Loans.
/

I'm talking about reserves. Cash. Base money.

You aren't going to be happy with anything that isn't gold, are you?

 

[DaveFagan]

I'm talking about reserves. Cash. Base money.

You aren't going to be happy with anything that isn't gold, are you?

Gold, precious metals, oil, carbon credits, acreage, timber, any satisfactory collaterol.

/

 

[JohnfrmClevelan]

Gold, precious metals, oil, carbon credits, acreage, timber, any satisfactory collaterol.

/

Most of that wouldn't do you a speck of good if the economic activity that gives debt value ever stopped.

 

[johndylan1]

Written in 1936, this was a pamphlet that dealt with the issue of money creation and how banks have a claim on the entire productive capacity of an economy without actually providing anything.

It's only a few pages long, but it's a nice allegory to explain the concept.

This short segment explains the crux of the problem of a debt based monetary system.

“Can the population of the island taken as a whole” he mused, “meet its obligations? Oliver issued a total of $1000. He's asking $1080 in return. But even if we were to bring him every dollar bill on the island, we would still be $80 short. Nobody issued the extra $80. We turn out products, not dollar bills. Oliver can therefore take over the entire island, since we, together as a group, cannot pay back both money and interests

https://www.michaeljournal.org/articles/social-credit/item/the-money-myth-exploded

Sent from my phone. Instaurare omnia in Christo.

Can one not spend (or pay the bank) with the same dollar twice? Certainly the banker has needs too that he is willing to pay for.

 

[DaveFagan]

Most of that wouldn't do you a speck of good if the economic activity that gives debt value ever stopped.

True, but it puts a modicum of responsibility upon the Issuer of the debt, TBonds for example. Irresponsible creation of money would disappear, unless Tulips came back in vogue.

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[JohnfrmClevelan]

True, but it puts a modicum of responsibility upon the Issuer of the debt, TBonds for example. Irresponsible creation of money would disappear, unless Tulips came back in vogue.

/

Define what is "irresponsible." Under the gold standard, a self-imposed restraint which limited money creation, if the government needed to deficit spend, they couldn't. Depression? Gotta cut back. Hurricane relief? Can't afford it right now. Highways crumbling? Sorry, we didn't stockpile enough gold. Hitler is taking over Europe? Well, I guess we should suspend the gold standard, because we need to spend now.

If the government spent more and worried about the deficit less, we could have universal healthcare, solid pensions, lower unemployment, better infrastructure,... pretty much anything we had the labor and materials for. So, how have we benefited, on balance? Lots of people are unemployed. Tons more without health insurance. The economy is failing a huge chunk of the labor force. Can you demonstrate, for sure, that there is some benefit to less deficit spending? Because I just pointed out a whole bunch of negatives.

You are letting your fear of an imaginary boogeyman keep you in your cave.

 

[DaveFagan]

Define what is "irresponsible." Under the gold standard, a self-imposed restraint which limited money creation, if the government needed to deficit spend, they couldn't. Depression? Gotta cut back. Hurricane relief? Can't afford it right now. Highways crumbling? Sorry, we didn't stockpile enough gold. Hitler is taking over Europe? Well, I guess we should suspend the gold standard, because we need to spend now.

If the government spent more and worried about the deficit less, we could have universal healthcare, solid pensions, lower unemployment, better infrastructure,... pretty much anything we had the labor and materials for. So, how have we benefited, on balance? Lots of people are unemployed. Tons more without health insurance. The economy is failing a huge chunk of the labor force. Can you demonstrate, for sure, that there is some benefit to less deficit spending? Because I just pointed out a whole bunch of negatives.

You are letting your fear of an imaginary boogeyman keep you in your cave.

Take a look at an Amish community economic flow. LOCAL infrastructure is a lot different than Corporatism. The wealth is all at the top and not moving in a circular local infrastructure.
/

 

[phattonez]

I don't know where you are getting these ideas. Widespread homeownership was only made possible by credit; very few people ever had the means to buy a house out-of-pocket.

Look at what goes into building a house; the estimates I have seen online range from 0.5 to 1 hour of labor/square foot. For a modest, 2000 square foot house, that equates to 0.5-1 year of labor (40 hours/week, like a normal job). So about one year's income. And that's just the labor; materials and land are extra. Add in some profit for the builder, and you are talking the equivalent of maybe two years of working. Nobody is going to be able to afford that without credit. And banks have nothing to do with those estimates.

A house is not an easily affordable item. Cars are tough enough to save up for.

Look at these two charts. What conclusion do you draw?

The financial sector certainly takes more than its fair share. But that is more a problem of today's conditions, not the structure of banks themselves. A bank creating a loan so you can buy a house or open a business is a good thing. What Lehman Brothers grew into is (was) not.

As financialization of our economy has grown, growth has suffered. Why should I draw any other conclusion about fractional reserve lending?

 

[James972]

What is the risk? They're lending out money that they create against deposits that are not their own.

the risk??owners lose their capital and managers lose their jobs if they are not the best at funneling money into places that will increase our standard of living at the fastest possible rate. 1+1=2

 

[JohnfrmClevelan]

Look at these two charts. What conclusion do you draw?

From the charts alone? Nothing. Looking at a chart without context and trying to draw conclusions from it is a good way to go astray.

But from what I know about history, what I can put in context is a post-WWII boom in homebuilding, the growth of suburbs (due largely to the growth of car ownership), a postwar period of strong economic growth that lasted for over 20 years, and a fairly recent housing bubble.

As financialization of our economy has grown, growth has suffered. Why should I draw any other conclusion about fractional reserve lending?

Because your conclusion is too simplistic? There are a lot of factors that have led to slower growth in the U.S. By coming to the conclusion that financialization caused slower growth, you are tossing all of those other factors in the trash. Also, you are lumping traditional banking and credit in with the more complicated shenanigans of the finance industry and blaming fractional reserve lending for our ills.

 

[phattonez]

From the charts alone? Nothing. Looking at a chart without context and trying to draw conclusions from it is a good way to go astray.

But from what I know about history, what I can put in context is a post-WWII boom in homebuilding, the growth of suburbs (due largely to the growth of car ownership), a postwar period of strong economic growth that lasted for over 20 years, and a fairly recent housing bubble.

You know exactly what those charts say. There's a near perfect correlation between mortgage debt and real home prices.

Because your conclusion is too simplistic? There are a lot of factors that have led to slower growth in the U.S. By coming to the conclusion that financialization caused slower growth, you are tossing all of those other factors in the trash. Also, you are lumping traditional banking and credit in with the more complicated shenanigans of the finance industry and blaming fractional reserve lending for our ills.

It's just so weird that these peaks perfectly correlate with the worst periods of growth, while the valleys correspond to periods of excellent growth. So weird.

 

[JohnfrmClevelan]

You know exactly what those charts say. There's a near perfect correlation between mortgage debt and real home prices.

It's just so weird that these peaks perfectly correlate with the worst periods of growth, while the valleys correspond to periods of excellent growth. So weird.

Why would you expect the two to not correlate perfectly? Think about it. Double the number of homes, and you naturally double the amount of mortgage debt. Double the price of homes, and you naturally double the amount of mortgage debt. The total value of all homes is of course going to correlate perfectly with total mortgage debt. That tells you zero about how or why, though.

Same goes for the economy. When it's growing, so is debt. That doesn't tell you why, though.

 

[James972]

It's just so weird that these peaks perfectly correlate with the worst periods of growth, while the valleys correspond to periods of excellent growth. So weird.

insanity!! there are only 2 peaks; not enough to draw conclusions.

 

[phattonez]

Why would you expect the two to not correlate perfectly? Think about it. Double the number of homes, and you naturally double the amount of mortgage debt. Double the price of homes, and you naturally double the amount of mortgage debt. The total value of all homes is of course going to correlate perfectly with total mortgage debt. That tells you zero about how or why, though.

And you're assuming that the price of mortgages causes the rise in debt. I'd draw the opposite conclusion. Theoretically it just makes more sense. As you increase debt, you effectively increase demand while doing nothing about supply. This causes price to rise. Simple.

Same goes for the economy. When it's growing, so is debt. That doesn't tell you why, though.

And as debt has grown as a percentage of GDP, GDP growth has faltered. What does that tell you?

 

[JohnfrmClevelan]

And you're assuming that the price of mortgages causes the rise in debt. I'd draw the opposite conclusion. Theoretically it just makes more sense. As you increase debt, you effectively increase demand while doing nothing about supply. This causes price to rise. Simple.

Two things increase private sector debt; borrowing for investment, and borrowing for consumption. Both of those result in an increase in production (supply).

And as debt has grown as a percentage of GDP, GDP growth has faltered. What does that tell you?

Absolutely nothing without other facts.

 

[phattonez]

Two things increase private sector debt; borrowing for investment, and borrowing for consumption. Both of those result in an increase in production (supply).

It doesn't increase production to the point of clearing the increased demand, which is why prices follow mortgage debt almost perfectly. If your situation were true, then real home prices should be more or less constant. They aren't.

Absolutely nothing without other facts.

Then let's look at a study that controls for those other facts:

We also study the relationship between debt and economic growth rate in Granger causality and Dynamic Arellano-Bond panel data estimation frameworks, and find evidence of a negative correlation between the two variables (Debt and GDP) and confirm the findings by testing several versions of the models. Political decision and economic policy are intertwined and need to be examined carefully when implemented for economic growth and our findings lend credence to the politically unpopular austerity measures (constraints on government spending financed by borrowing). There is a limit to the economic growth rate that the government financed expenditure can bring. If the burden of debt is too high then there is a negative impact of debt on the economic growth.

Relationship between Economic Growth and Debt: An Empirical Analysis for Sub-Saharan Africa | HUSSAIN | Journal of Economics and Political Economy

 

[JohnfrmClevelan]

It doesn't increase production to the point of clearing the increased demand, which is why prices follow mortgage debt almost perfectly. If your situation were true, then real home prices should be more or less constant. They aren't.

Why on Earth would you expect home prices to be constant? Real estate is a unique and limited good, not a widget.

Then let's look at a study that controls for those other facts:

Relationship between Economic Growth and Debt: An Empirical Analysis for Sub-Saharan Africa | HUSSAIN | Journal of Economics and Political Economy

I saw all I needed in the abstract. You can't seriously compare U.S. sovereign debt to that of 48 sub-Saharan countries. Plus, they're talking about foreign debt.

 

[phattonez]

Why on Earth would you expect home prices to be constant? Real estate is a unique and limited good, not a widget.

Because housing ought not become more expensive for a society that's becoming wealthier.

I saw all I needed in the abstract. You can't seriously compare U.S. sovereign debt to that of 48 sub-Saharan countries. Plus, they're talking about foreign debt.

I think the main themes are applicable. Debt can temporarily expand production and make your country wealthier. When debt service becomes onerous, then it's a problem. Spending money on interest is a real drain on real wealth creators.

And this is why I favor printing money rather than paying interest.

Sent from my phone. Instaurare omnia in Christo.