The next Bubble is a matter of time (?)

[Libertie76]

Yikes. I haven't read this thread, but I'm a liberal/progressive, and not a halfhearted one, and I do NOT think I know what is better for everyone else, nor do I feel we need a "centralized state dictating where our money goes." This strikes me as very extreme.

What elements of government spending do you support? Or is yer concern more with regulations like minimum wage laws?

Umm the entire concept behind monetary policy and fiscal policy is assuming that peoples time preferences are wrong and a centralized authority must rectify the wrong time preferences of everyone in the market, this is a key element to progressive thought

Elements of gov spending? I don't understand the question.

 

[donsutherland1]

Limitation of government would... I'll give you examples as to why

1. Government always needs a quick fix to pay off debt. Inflation

Most debtors would like an easier path toward paying off their debt. However, for institutional borrowers there is no compelling need to eliminate all debt within a fixed period of time e.g., lifetime, as institutional borrowers (including the government) don't automatically have that lifetime constraint. Hence, rolling over debt and focusing on manageable debt (debt which can readily be serviced) is an option available to them. Of course, institutional borrowers can fail, but their failure is not an automatic outcome, at least within the constraint of a human lifetime.

2. Governments are the institutions that create war, not individuals. The quick fix for war is inflation

Nations can launch wars or be drawn into them. While not every war is appropriate, I would suggest that if a country faced a choice between a war of survival followed by a period of inflation or capitulation and subjugation, the former choice is vastly superior.

3. Government sets up merchantilist policies, increase exports through inflation

Mercantilism is largely gone, though some countries still engage in mercantalistic practices. Trade liberalization has greatly reduced the kind of protectionism that was a vital mechanism for pursuing mercantalism.

4. Big business needs governmental protectionist policies to maintain cartel level output without remaining competitively price, I.e. Reflecting consumer value, protectionist policy = inflation

Many businesses of all sizes lobby the government or have some kind of effort aimed individually or through trade associations to influence public policy. Such efforts to shift public policy to serve narrower interests is not unique to big business, or business in general for that matter. Democratic societies have myriad groups of people united by common interests who seek to see their interests protected or advanced in public policy. Given the alternative of an illiberal government that is not responsive to the public, the messy democratic approach is still a much better one, at least IMO.

5. Government needs revenue, in order to take in revenue without increasing taxes the gov. Can just do what? Inflate the currency

Some governments have taken such a course. But many, including the U.S. have aimed to pursue policies tied to price stability (modest inflation usually but not limited to around 2%). The modest tolerance for inflation is used as a buffer to avoid tipping into deflation should monetary policy prove somewhat tight relative to economic fundamentals. Given how economies have suffered from past major outbreaks of deflation--and this includes the recent example of Japan's deflationary stagnation--most policy makers have accepted tolerance of a small amount of inflation (despite its own costs) as a worthy trade-off to mitigate the risk of deflation.

The list goes on and on... This is why we need to limit government as much as possible.

Many arguments can be made for limited government e.g., inefficiencies that arise out of massive scope of activities. IMO, the existence of central banking is among the weaker ones, as even when one considers monetary policy errors, the lender-of-last-resort role is a vital one.

If a bank has liabilities of 1000, checkable deposits, blah blah blah and the liability = assets, loans, and reserves etc etc. reserves = 750, loans = 150, securities =50. Then the bank has a few investors, which capital = 50, or money owed to investors let's look at what happens when the money supply expands

The above numbers contain a double-entry accounting error: debits < credits. Assets (dr) come to : 950 (cash reserves 750, loans 150, securities 50); Liabilities (cr) come to 1000 (demand deposits) and Stockholders' Equity (cr) comes to 50. Even setting aside these numbers, this bank would be passing up opportunities for profit, as its reserves would be excessive relative to its loan portfolio.

Net assets go up net liabilities go up as well right?

Technically, no. Net assets = assets - liabilities = Stockholders' equity. Net Liabilities is a case where Liabilities - Assets > 0 (insolvency). If the bank makes a loan, let's say 500 dollars (using your hypothetical institution), there would be no change in net assets, as the debits and credits associated with the transaction would be equal. Over time, as the loan generates interest, the bank's balance sheet would grow larger, with some of the interest winding up in retained earnings (a Stockholders' equity account).

Continued...

 

[donsutherland1]

Well guess what happens to that capital, or the money the bank owes to all of it's investors? It goes up with the increased money supply, but guess where that money comes from? That's right, your reserves.

The bank's reserves. Bank's have set reserve requirements. There is no obligation to maintain reserves much in excessive of that requirement. Banks are, among other things, in the business of lending money. If banks could only hold reserves, there would be no other purpose for them other than to hold deposits. In that model, they would charge a fee for holding deposits, rather than pay interest. And in the absence of financial intermediation, the economy would be vastly smaller than it is today, living standards would be vastly lower, etc.

So, if investors put 19$ into the bank, 31$ are from your reserves, expanding the money supply increases the reserves to 1300 instead of 750, they then just made 79$ for literally nothing. [/quote]

Tier 1 capital (basically common stock and retained earnings, though some types of preferred stock are included) does not increase when loans are made. It increases when the loans generate income, not when the bank makes loans. The other way to increase Tier 1 capital is to issue new stock.

It's a very sophisticated way, inflationary banking, to rob the wealth of the consumer. Or the average citizen

I disagree. Inflation impacts banks and consumers, alike. Bank earnings are not somehow magically insulated from inflation with banks having a separate class of money that is immune to inflation. Moreover, if banks played as negative a role as you describe, they would long ago have been regulated out of existence. The banking industry, like any other industry, has its flaws and has had its share of problems, but it plays an essential role in any economy (financial intermediation).

 

[donsutherland1]

Umm the entire concept behind monetary policy and fiscal policy is assuming that peoples time preferences are wrong and a centralized authority must rectify the wrong time preferences of everyone in the market, this is a key element to progressive thought

Elements of gov spending? I don't understand the question.

Time preference is simply people's preference for having immediate claim to assets rather than the asset at some point in time. Hence, future claims of assets are discounted. It plays out in interest rates and savings rates. Monetary policy in the U.S. is aimed at smoothing the business cycle (full employment mandate) and promoting price stability, not changing people's time preference.

 

[WCH]

"EXPERT" Porter Stansberry claims to have made many accurate forecasts.
I can only say that a guy who regularly contributes to World Net Daily and has appeared on Alex Jones' radio show doesn't inspire confidence.
Actually, I see these doom-and-gloom scenarios advertised by "EXPERTS" on Yahoo everyday.
Eventually, one of these horrible predictions will be accurate, I suppose.
Luckily, I'll have my gold bullion to cling to as the ship sinks.

They won't just go after deposits.

Gold Confiscation: Here's how it could happen - and what you can do about it

 

[donsutherland1]

It is at this point that I will have to bow out of this debate, because it has, like most debates with Austrians, become lost in the gobbledygook of crazy assumptions.

On the surface, the Austrian rationale seems persuasive. But, when put to the real world test, it hasn't really held up. If deflation were as virtuous as some have argued, societies would eagerly seek to promote it. Instead, the experience has been destructive, especially in cases where real debt burdens increased faster than people could pay them off.

The recent financial crisis and recession provided a great example of the irrelevance of the Austrian school. One can go back to October 2008 when the House of Representatives initially rejected TARP. Financial markets headed sharply lower and the panic that was rippling through the financial system intensified. The Austrians had an opportunity to step forward with their own alternative. If ever there was a time to come forward, this was it. After all, the upside of coming up with a workable solution would have been enormous had it proved effective.

Ron Paul who aligns himself with the Austrian school could have offered an alternative piece of legislation. He railed loudly against TARP. TARP went down to defeat. Paul never introduced anything. Peter Schiff could have advanced a solution from the sidelines encouraging Congress to pursue it. He didn't.

The Austrians had an historic opportunity. They could have filled the temporary policy vacuum that was created from TARP's defeat. The blunt reality is that the Austrians had no ideas when they were thrust in a policy making opportunity. They had warned about the coming financial crisis--or at least some of them--but had nothing to offer now that the nation was in the midst of such a crisis. Doing nothing was not viable, as it would be unconscionable and unnecessarily destructive simply to allow the nation's financial system to disintegrate and its economy to sink into another Great Depression.

TARP was later adopted. It played a role in recapitalizing the nation's banking system. The Fed engineered a range of innovative policy mechanisms and solutions ranging from becoming the sole buyer of commercial paper until that market resumed functioning to QE. Fed Chairman Ben Bernanke's leadership during the crisis will go down as one of the top moments of global central banking, much as Paul Volcker's did in breaking the back of inflation a generation ago.

Much as they opposed TARP, the Austrians slammed QE. Schiff warned of hyperinflation. Such hyperinflation did not occur. Why? Because the Austrian understanding of inflation is inherently flawed. It is premised on an implicit assumption that velocity is stable. Therefore, the huge increase of money could only lead to hyperinflation. In reality, velocity changes. There had been a secular decline underway since the mid-1990s (almost certainly tied to the aging of the population). At the same time, during panics people hoard cash out of fear. Velocity collapsed during the financial crisis and remains at abnormally low levels today. The result is that inflation in consumer prices remains very modest. Asset prices reflated and there is some discussion on valuations. Nevertheless, Schiff's hyperinflationary scenario never materialized.

 

[Libertie76]

Most debtors would like an easier path toward paying off their debt. However, for institutional borrowers there is no compelling need to eliminate all debt within a fixed period of time e.g., lifetime, as institutional borrowers (including the government) don't automatically have that lifetime constraint. Hence, rolling over debt and focusing on manageable debt (debt which can readily be serviced) is an option available to them. Of course, institutional borrowers can fail, but their failure is not an automatic outcome, at least within the constraint of a human lifetime.



Nations can launch wars or be drawn into them. While not every war is appropriate, I would suggest that if a country faced a choice between a war of survival followed by a period of inflation or capitulation and subjugation, the former choice is vastly superior.



Mercantilism is largely gone, though some countries still engage in mercantalistic practices. Trade liberalization has greatly reduced the kind of protectionism that was a vital mechanism for pursuing mercantalism.



Many businesses of all sizes lobby the government or have some kind of effort aimed individually or through trade associations to influence public policy. Such efforts to shift public policy to serve narrower interests is not unique to big business, or business in general for that matter. Democratic societies have myriad groups of people united by common interests who seek to see their interests protected or advanced in public policy. Given the alternative of an illiberal government that is not responsive to the public, the messy democratic approach is still a much better one, at least IMO.



Some governments have taken such a course. But many, including the U.S. have aimed to pursue policies tied to price stability (modest inflation usually but not limited to around 2%). The modest tolerance for inflation is used as a buffer to avoid tipping into deflation should monetary policy prove somewhat tight relative to economic fundamentals. Given how economies have suffered from past major outbreaks of deflation--and this includes the recent example of Japan's deflationary stagnation--most policy makers have accepted tolerance of a small amount of inflation (despite its own costs) as a worthy trade-off to mitigate the risk of deflation.



the lender-of-last-resort role is a vital one.



The above numbers contain a double-entry accounting error: debits < credits. Assets (dr) come to : 950 (cash reserves 750, loans 150, securities 50); Liabilities (cr) come to 1000 (demand deposits) and Stockholders' Equity (cr) comes to 50. Even setting aside these numbers, this bank would be passing up opportunities for profit, as its reserves would be excessive relative to its loan portfolio.



Technically, no. Net assets = assets - liabilities = Stockholders' equity. Net Liabilities is a case where Liabilities - Assets > 0 (insolvency). If the bank makes a loan, let's say 500 dollars (using your hypothetical institution), there would be no change in net assets, as the debits and credits associated with the transaction would be equal. Over time, as the loan generates interest, the bank's balance sheet would grow larger, with some of the interest winding up in retained earnings (a Stockholders' equity account).

Continued...

1. This isn't about opinions it's about fact, government inflates currency, central banks inflate currency. You stated "inflation has occurred before a central bank" and I said,byes because government tends to inflate currency, and I gave you a list of reasons it inflates the currency.

2. This construct is a balance sheet of a bank where we are assuming the creation of new loans go into liabilities as well as new assets because it's assuming the person receiving the loan turns it into a reserve at that same bank, seriously what the hell are u even talking about in terms of loan portfolios. You attempt to make points that are either not relative to the scope of my point or are completely off topic with no decisive point at all. What is your point

3. When the bank makes a new loan, and then the person deposits that loan into the same bank it then evens out as an asset "the loan" and a liability "the demand deposit" this new set of reserves banks additional capital because the capital is now expanding due to the fact that you took out a loan, and deposited it in the bank. It's generating profit from expanding the money supply when the way it expands the money supply is on your reserves, meaning when you use labor for your money and en put it into the bank the bank profits from your labor and gives no valuable contribution to society because all it is doing is inflating currency. The banks profit off of absolutely nothing

 

[Libertie76]

The bank's reserves. Bank's have set reserve requirements. There is no obligation to maintain reserves much in excessive of that requirement. Banks are, among other things, in the business of lending money. If banks could only hold reserves, there would be no other purpose for them other than to hold deposits. In that model, they would charge a fee for holding deposits, rather than pay interest. And in the absence of financial intermediation, the economy would be vastly smaller than it is today, living standards would be vastly lower, etc.

So, if investors put 19$ into the bank, 31$ are from your reserves, expanding the money supply increases the reserves to 1300 instead of 750, they then just made 79$ for literally nothing.

Tier 1 capital (basically common stock and retained earnings, though some types of preferred stock are included) does not increase when loans are made. It increases when the loans generate income, not when the bank makes loans. The other way to increase Tier 1 capital is to issue new stock.



I disagree. Inflation impacts banks and consumers, alike. Bank earnings are not somehow magically insulated from inflation with banks having a separate class of money that is immune to inflation. Moreover, if banks played as negative a role as you describe, they would long ago have been regulated out of existence. The banking industry, like any other industry, has its flaws and has had its share of problems, but it plays an essential role in any economy (financial intermediation).[/QUOTE]

1. I have no problem paying a bank for services because when that happens competition will decrease the amount a bank charges me and my real wealth will increase because they are no longer INFLATING THE CURRENCY

2. The economy would be better because resources are being sufficiently utilized as opposed to used in ways that only create loss of efficiency

3. Do you honestly think a politician wants to get rid of this racket? Honestly? You do realize that fdr received 20 million dollars for the expansion on banking authority right? They would be regulated!!!!??? We just witnessed the era of banks being too big to fail and government giving them billions of more dollars! It's a complete scam, are you joking? This system was built by the rockefellers and chase. Do you honestly think the intentions of the rockefellers and chase were moral sounding and not creating sustained wealth through government? Come on, stop being so naive, have you paid attention to ron Paul's audit the fed bill? The bill will require the federal reserve to disclose the amount of money it has profited since it was created. Now let's think about this, there is no logical reason a politician would oppose this bill at all unless they were being bribed or blackmailed by the bank

 

[JohnfrmClevelan]

1. This isn't about opinions it's about fact, government inflates currency, central banks inflate currency. You stated "inflation has occurred before a central bank" and I said,byes because government tends to inflate currency, and I gave you a list of reasons it inflates the currency.

2. This construct is a balance sheet of a bank where we are assuming the creation of new loans go into liabilities as well as new assets because it's assuming the person receiving the loan turns it into a reserve at that same bank, seriously what the hell are u even talking about in terms of loan portfolios. You attempt to make points that are either not relative to the scope of my point or are completely off topic with no decisive point at all. What is your point

3. When the bank makes a new loan, and then the person deposits that loan into the same bank it then evens out as an asset "the loan" and a liability "the demand deposit" this new set of reserves banks additional capital because the capital is now expanding due to the fact that you took out a loan, and deposited it in the bank. It's generating profit from expanding the money supply when the way it expands the money supply is on your reserves, meaning when you use labor for your money and en put it into the bank the bank profits from your labor and gives no valuable contribution to society because all it is doing is inflating currency. The banks profit off of absolutely nothing

Your understanding of the banking system is deeply flawed. There is a good thread about this very issue that explains how banks actually operate. It's a long thread - but you should be able to start on page 38 and still get a full explanation of banking in just a few pages. http://www.debatepolitics.com/gover...t/224496-whole-making-new-money-thing-38.html

In short, banks don't profit when they inflate their balance sheet to make a loan - assets and liabilities balance out. They make their profit when you pay them interest. When the loan is paid off, all of the assets and liabilities that they created with the loan are extinguished. The net result is that some pre-existing dollars moved from borrower to bank (in the form of interest) as the bank's reward for their service.

Reserves are merely separate accounts at the Fed that enable banks to "settle up" with each other at the end of the day. Banks also have to maintain a sufficient supply of capital in relation to their total liabilities. Both are costs to the bank when they create a loan.

 

[Libertie76]

The bank's reserves. Bank's have set reserve requirements. There is no obligation to maintain reserves much in excessive of that requirement. Banks are, among other things, in the business of lending money. If banks could only hold reserves, there would be no other purpose for them other than to hold deposits. In that model, they would charge a fee for holding deposits, rather than pay interest. And in the absence of financial intermediation, the economy would be vastly smaller than it is today, living standards would be vastly lower, etc.

So, if investors put 19$ into the bank, 31$ are from your reserves, expanding the money supply increases the reserves to 1300 instead of 750, they then just made 79$ for literally nothing.

Tier 1 capital (basically common stock and retained earnings, though some types of preferred stock are included) does not increase when loans are made. It increases when the loans generate income, not when the bank makes loans. The other way to increase Tier 1 capital is to issue new stock.



I disagree. Inflation impacts banks and consumers, alike. Bank earnings are not somehow magically insulated from inflation with banks having a separate class of money that is immune to inflation. Moreover, if banks played as negative a role as you describe, they would long ago have been regulated out of existence. The banking industry, like any other industry, has its flaws and has had its share of problems, but it plays an essential role in any economy (financial intermediation).[/QUOTE]

Let's say the bank has 1,000$ assets, and 50$ capital. This = leverage ratio of 20, 1000/50. Let's say banks assets appreciate by 5% to 1,050 then the capital increases to 100$.

The leverage ratio of 20, for every 1$ financed by investors, 19$ is financed by borrow money, when you increase the money supply you increase the leverage ratio. Which means as the more assets accumulate in the bank I.e. Reserves and loans, more capital is generated for investors, and that capital generation comes directly from the ability to expand money and generate credit, while not doing anything to contribute towards anything valuable.

Basically, capital increases tremendously while they inflate the currency.

 

[donsutherland1]

3. When the bank makes a new loan, and then the person deposits that loan into the same bank it then evens out as an asset "the loan" and a liability "the demand deposit" this new set of reserves banks additional capital because the capital is now expanding due to the fact that you took out a loan, and deposited it in the bank. It's generating profit from expanding the money supply when the way it expands the money supply is on your reserves, meaning when you use labor for your money and en put it into the bank the bank profits from your labor and gives no valuable contribution to society because all it is doing is inflating currency. The banks profit off of absolutely nothing

A bank's making loans does not, repeat, not have any immediate impact on stockholders' or owners' equity. The bank's owners are not suddenly more wealthy. The only changes occur to assets and liabilities. On the asset side (changes occur in adding the loan--and increasing required reserves, and decreasing excess reserves takes place). On the liability side, demand deposits are increased by the amount of the loan. That's it. No changes in owners' equity takes place. The argument that making loans leads to a bank's owners increasing their wealth "for literally nothing" is not accurate.

For a basic introduction to the financial statement implications of financial intermediation: Eco 200 chapter 14

 

[Libertie76]

Your understanding of the banking system is deeply flawed. There is a good thread about this very issue that explains how banks actually operate. It's a long thread - but you should be able to start on page 38 and still get a full explanation of banking in just a few pages. http://www.debatepolitics.com/gover...t/224496-whole-making-new-money-thing-38.html

In short, banks don't profit when they inflate their balance sheet to make a loan - assets and liabilities balance out. They make their profit when you pay them interest. When the loan is paid off, all of the assets and liabilities that they created with the loan are extinguished. The net result is that some pre-existing dollars moved from borrower to bank (in the form of interest) as the bank's reward for their service.

Reserves are merely separate accounts at the Fed that enable banks to "settle up" with each other at the end of the day. Banks also have to maintain a sufficient supply of capital in relation to their total liabilities. Both are costs to the bank when they create a loan.

Part of the liabilities on the balance sheet = the capital. Meaning, it's a liability to pay the investor money. And this is called capital on the balance sheet, so basically when loans appreciate they make a lot more money. The way to create more loans is by expanding the money supply meaning the leverage rate explodes for investors

 

[donsutherland1]

Part of the liabilities on the balance sheet = the capital. Meaning, it's a liability to pay the investor money. And this is called capital on the balance sheet, so basically when loans appreciate they make a lot more money. The way to create more loans is by expanding the money supply meaning the leverage rate explodes for investors

Leverage ratios by themselves do not result in increased stockholder wealth. If the loans perform, than earnings per share are higher than would otherwise be the case on account of leverage. If, on the other hand, losses are incurred, losses per share are higher than would otherwise be the case. But this outcome depends on the performance of loans, not simply the act of lending money.

 

[JohnfrmClevelan]

Part of the liabilities on the balance sheet = the capital. Meaning, it's a liability to pay the investor money. And this is called capital on the balance sheet, so basically when loans appreciate they make a lot more money. The way to create more loans is by expanding the money supply meaning the leverage rate explodes for investors

No, liabilities are liabilities.

When you take out a mortgage for $100,000, here is what the bank does: it writes up your account by $100,000 (an asset to you, a liability to the bank); it counts your debt as an asset on their books (you owe them $100,000+, which is a liability for you and an asset for them). No net dollars have been created, as everything balances out, but M1 goes up (because it just counts the assets, not the matching liabilities). In the past, the bank also had to acquire $10,000 in reserves, but now, after QE, banks normally have plenty of excess reserves. And finally, the bank needs to acquire $10,000 in capital (assuming a 10% capital requirement), meaning the bank needs to have $10,000 more in a fairly liquid form available in case things go south.

Plus, to create a loan, a bank needs a creditworthy borrower that is likely to pay them back. Don't forget that. Banks don't just write themselves checks or anything.

The money a bank gains from a loan comes when you pay interest. Everything else is a cost to the bank. And once the loan is paid off, the $100,000 that the bank created with the loan ceases to exist.

 

[Libertie76]

A bank's making loans does not, repeat, not have any immediate impact on stockholders' or owners' equity. The bank's owners are not suddenly more wealthy. The only changes occur to assets and liabilities. On the asset side (changes occur in adding the loan--and increasing required reserves, and decreasing excess reserves takes place). On the liability side, demand deposits are increased by the amount of the loan. That's it. No changes in owners' equity takes place. The argument that making loans leads to a bank's owners increasing their wealth "for literally nothing" is not accurate.

For a basic introduction to the financial statement implications of financial intermediation: Eco 200 chapter 14

As soon as I invest a dollar into a bank, then they make a loan, I immediately earn equity because with that increased money in assets will pay for my debt, meaning my debt is paid off and I immediately earn equity.

 

[Libertie76]

No, liabilities are liabilities.

When you take out a mortgage for $100,000, here is what the bank does: it writes up your account by $100,000 (an asset to you, a liability to the bank); it counts your debt as an asset on their books (you owe them $100,000+, which is a liability for you and an asset for them). No net dollars have been created, as everything balances out, but M1 goes up (because it just counts the assets, not the matching liabilities). In the past, the bank also had to acquire $10,000 in reserves, but now, after QE, banks normally have plenty of excess reserves. And finally, the bank needs to acquire $10,000 in capital (assuming a 10% capital requirement), meaning the bank needs to have $10,000 more in a fairly liquid form available in case things go south.

Plus, to create a loan, a bank needs a creditworthy borrower that is likely to pay them back. Don't forget that. Banks don't just write themselves checks or anything.

The money a bank gains from a loan comes when you pay interest. Everything else is a cost to the bank. And once the loan is paid off, the $100,000 that the bank created with the loan ceases to exist.

The bank takes a reserve, holds a percentage of the reserve, then it lends off a multiple of that reserve. Let's say one dollar, it holds .25 of 1, then it multiplies x by .75, which increases the money supply. When that money supply increases, to .75x the initial .20 I invested in is paid off because of my leverage ratio being so tiny, thus my debt is paid for and my equity explodes to a fraction of .75x which is higher then it would of been if the loan never took place.

 

[Libertie76]

Leverage ratios by themselves do not result in increased stockholder wealth. If the loans perform, than earnings per share are higher than would otherwise be the case on account of leverage. If, on the other hand, losses are incurred, losses per share are higher than would otherwise be the case. But this outcome depends on the performance of loans, not simply the act of lending money.

Loans performing has to do with the increased assets. If the loan fails it turns into a liability and if assets decrease the leverage ratio is so high that the bank will fail quicker because of the excess loan and the leverage ratio. This is why it is very lucrative for a bank to have a central bank because there is hardly any risk because if the bank "fails" the fed will bail the bank out with tax payer dollars meaning no matter what the investors will always turn a profit at the dime of the people and consumers. This is why I say the banking system robs us of our wealth and uses inflation to do so because the only way they can continue their increased assets is to expand the supply of money, and Doing so inflates the currency

 

[JohnfrmClevelan]

As soon as I invest a dollar into a bank, then they make a loan, I immediately earn equity because with that increased money in assets will pay for my debt, meaning my debt is paid off and I immediately earn equity.

The bank takes a reserve, holds a percentage of the reserve, then it lends off a multiple of that reserve. Let's say one dollar, it holds .25 of 1, then it multiplies x by .75, which increases the money supply. When that money supply increases, to .75x the initial .20 I invested in is paid off because of my leverage ratio being so tiny, thus my debt is paid for and my equity explodes to a fraction of .75x which is higher then it would of been if the loan never took place.

This is flat-out incorrect, Libertie. Please read that other thread so I don't have to repeat everything.

Banking is not an intuitive subject, and it's not easy to grasp, but you have gone way down the wrong path here.

 

[Libertie76]

This is flat-out incorrect, Libertie. Please read that other thread so I don't have to repeat everything.

Banking is not an intuitive subject, and it's not easy to grasp, but you have gone way down the wrong path here.

Tell me where I am wrong please I'm not reading some other thread

 

[JohnfrmClevelan]

Tell me where I am wrong please I'm not reading some other thread

I gave a pretty good explanation of banking in post 164. It explains what "expanding a balance sheet" means. It explains where new dollars come from. It explains where a bank's profits actually come from. It explains how dollars are extinguished.

There is no "leverage" in the way you are thinking. Banks make loans, then they acquire the necessary (by law) reserves and capital after the fact. They don't lend out of a pile of pre-existing money or other capital. There is nothing to leverage. What determines the amount of money banks create is the availability of creditworthy borrowers - banks don't make loans without a borrower, and they don't create loans for people who are unlikely to pay them back. That's why when business is bad, banks make fewer loans.

Banks have excess reserves right now, and excess capital. They could make loans right now, but there aren't enough borrowers.

Finally, reserves are not what you think they are. Banks have reserve accounts at the Fed so they can settle up. Only the Fed can change M0/MB, banks cannot. And it certainly isn't where profits come from.

 

[Libertie76]

I gave a pretty good explanation of banking in post 164. It explains what "expanding a balance sheet" means. It explains where new dollars come from. It explains where a bank's profits actually come from. It explains how dollars are extinguished.

There is no "leverage" in the way you are thinking. Banks make loans, then they acquire the necessary (by law) reserves and capital after the fact. They don't lend out of a pile of pre-existing money or other capital. There is nothing to leverage. What determines the amount of money banks create is the availability of creditworthy borrowers - banks don't make loans without a borrower, and they don't create loans for people who are unlikely to pay them back. That's why when business is bad, banks make fewer loans.

Banks have excess reserves right now, and excess capital. They could make loans right now, but there aren't enough borrowers.

Finally, reserves are not what you think they are. Banks have reserve accounts at the Fed so they can settle up. Only the Fed can change M0/MB, banks cannot. And it certainly isn't where profits come from.

Federal reserve is ran by private banks

If the federal reserve wants to expand the money supply they go to the open market comitte and buy gov bonds. With the bonds they then give the reserves to member banks to loan out.

If I am a bank and have 10 reserves and my reserve req. is 20% that means I have to put 2$ into my account at the fed, and then with the 8$ I can now loan out 40$ because the multiplier is 5. So basically I give the person a receipt saying "your account is now +40$" when they come to draw on that account, I take money out of the federal reserve account and pay them with it. That's how money supply is expanded


Now let's say I am an an investor in the bank, I invest 2$. The initial 10$ reserve to my investment is 10/2 which is my leverage rate, meaning out of the 10 dollars, in assets, I contributed 2. Now let's expand the money supply with a loan, the assets rise to 40$, which means the 2$ I invested into the bank is paid off with the loan. So now assets of the bank are 2$+ 40 or 42$. All things equal, my equity just shot up tremendously because now that initial 40$ boost into the bank paid off my debt.

What I just explained to is how a bank investor profits, and what else I explained to you is a Ponzi scheme where government and consumers bear the burden of the banks debt, which is unsustainable. But guess what, the federal reserve makes sure he Ponzi scheme does not fail.

Banks do not have accumulate pre-existing capital to make loans. They literally make it out of thin air.

The banks use fed reserve interest rates to expand supply of money, they can charge consumers a higher interest rate etc. but that doesn't matter, because the way bankers profit is by expanding the money supply

Banks do create loans to people who can not pay them back look at the subprime crisis! This is why the federal induced interest rate is so misleading, because it creates more worthy people in the eyes of the value of money then what is actually the case! If a bank screws up on who they loan to, the federal reserve will bail them out!

 

[donsutherland1]

As soon as I invest a dollar into a bank, then they make a loan, I immediately earn equity because with that increased money in assets will pay for my debt, meaning my debt is paid off and I immediately earn equity.

That's not correct. Ownership equity does not change when a loan is made.

 

[Libertie76]

That's not correct. Ownership equity does not change when a loan is made.

The amount of money you invested "debt" is paid off, and assets rise at the same time...

 

[donsutherland1]

The amount of money you invested "debt" is paid off, and assets rise at the same time...

That's incorrect. That's not how banking operates.

I provided a link that explains how banks account for financial transactions (#161 in this thread). John posted a link to an explanation of banking: http://www.debatepolitics.com/gover...t/224496-whole-making-new-money-thing-38.html

The act of making a loan has no impact on a bank owner's wealth. The performance of the loan is what matters (or the bank's ability to sell the loan at a profit).

 

[Libertie76]

That's incorrect. That's not how banking operates.

I provided a link that explains how banks account for financial transactions (#161 in this thread). John posted a link to an explanation of banking: http://www.debatepolitics.com/gover...t/224496-whole-making-new-money-thing-38.html

The act of making a loan has no impact on a bank owner's wealth. The performance of the loan is what matters (or the bank's ability to sell the loan at a profit).

Ok I read through his posts and found absolutely no concrete explanation of how a bank operates... Which post on that thread are you referring to?

It boosts up assets making it more valuable which increases wealth, meanwhile the burden of debt by the investor is paid off by the initial loan.... Meani people become wealthier with each additional loan as equity increases while the payment of that equity's is based on a loan that comes from expanding the money supply through the things like the open market operations. Cut and dry, it's the printing of money by creating a multiple number on a computer and not actually acquiring any actual value and the bankers and investors profit off of it meanwhile you as a consumer are losing because prices for you are rising meaning your wealth is diminishing.

It's a Ponzi scheme where they rob us of our wealth plain and simple.