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Here's an graphic from a while back that is useful

Pyriel- wrote:Got it mostly from reading things like this:

How banks create money from nothing:
http://prosperityuk.com/2002/02/how-banks-create-money-out-of-nothing/
http://www.trcb.com/finance/economics/how-banks-create-money-out-of-thin-air-525.htm
http://ezinearticles.com/?How-Banks-Create-Money-Out-Of-Thin-Air&id=921796

Each of those articles describes the process as I explained it to you. The first one, in particular, used almost exactly the same language I used.

Please understand that the bank is not free to just invent money and give it to people. It can't do that.

Once again, the phenomenon is that government prints up $1,000, and the banks (keeping to a fractional reserve of 10%) receive that money in deposits, lend it out, receive it again in fractional deposits and so on, until the bank has received and loaned that money ten times over, giving it deposits of $10,000 and loans of $10,000.

There is also a very good example, I dont remember the details nor have a link but I am certain you know what I am talking about and can correct any errors that I make.
A man in the US some decades ago sued a bank over a foreclosure the bank had over his house. He claimed that a contract couldnt be valid as the bank didnt follow the definition of a contract, meaning two (in that case) parties both had to exchange something of value. He claimed that whereas he gave the bank something of value (a debt) the bank didnt give him anything since it basically invented the money he was to owe them out of thin air. He won.

That ruling goes against basic economics, and would have destroyed banking as we know. To the extent that such a ruling exists, I am certain it didn't happen as you described it. I would love to read a link to the case.

That is not true. The whole issue with a "bank run" plus the bank doesnt have to have the whole sum it wants to lend to someone.

No, please read what I'm saying. The bank needs to have $100 to give you $100.

What happens is that when you go and give them $100, they go and lend 90% of that money to someone else. That's how banks make money, on the difference between the interest they pay you, and the interest they charge the borrower. This means that of the original $100 you deposited, only $10 of it is still in the bank, because the rest was loaned to someone else.

A bank run occurs when most of the people who deposited money in the bank want their money. The bank has lent 90% of their money to other people, and so it doesn't have it there to give it to people.

Think about it this way, if the bank was free to just invent money whenever people wanted it, and lots of people came in demanding the bank give them their money, couldn't it just 'invent' money to give them? No, of course it can't, because banks do not get to invent money.

Please repeat that bit with me... banks do not get to invent money. The process you are attempting to describe is the process by which depositors, lendors, and banks acting as nothing but an intermediary, all work to increase the basic money supply into 10 or 20 times that amount.

This process doesn't even need banks, you, me and Jervis Johnson could do the same. Say you work hard as a gardener and save $100, and Jervis Johnson says he'll give you 4% on your money if you lend it to him, and you agree. Jervis is cunning sort, and he knows I need some cash, so he offers me $90 at 8% interest, and I readily jump at the opportunity. I needed that cash to pay you for your gardening work, and now you've got another $90, which you then turn around and give to Jervis, who will pay you 4% for this money as well. Jervis then goes and sees if I need to borrow some more money, and is able to lend me 10% of your last deposit, so he gives me $81, which I use to buy more of your gardening service. This continues again and again, reducing by 10% each time to cover the minimum deposit, until eventually you Jervis has lent me $1,000, I've paid you $1,000 for gardening, and you've deposited $1,000 with Jervis.

No magical bank powers needed.

Yes it does. We are not talking about 10% but far greater numbers. It's the basics of interest, you add up debt to a pool of money that in theory make the money grow but is not represented by actual money. Printing new is a temporary way out but causes inflation. Look up germany when bread cost wheelbarrows of money.

Hyperinflation in Germany was driven by the German government attempting to cover it's massive government deficit by printing more money. The interest rate, and interest paid on debt is totally different.

Answer me this: How much money is there roughly in the world?
How much of this does actually exist in a physical form, 5%?

The amount of cash in the world varies from country to country depending on systems and regulation, but 5% is probably about good for a rule of thumb figure.

What happens when the system crashes (depression) and scared people run to the banks wanting to withdraw all their savings to put under the pillow due to lack of trust in the economy/bank but there are actually no money?

Yes, leveraging exists. This does open up the possibility for panic and bank runs, though it's a fairly remote possibility at best (pretty much when banking collapses on that level, then the system is screwed to such an extent that the money they get is pretty useless as well, and so is the gold that some people wish the money was based on, what you'd really want then is shotguns and bottled water).

But it really, really matters that you understand the process of how this really works, and that it has nothing to do with banks magically creating money.

Interest from a set amount of money create "invented" money that increase the sum but those are never there since interest is just a percentage growth.

No. Interest and inflation are different things. Just because they both have % signs doesn't mean they're the same thing.

My example is thus sound in its simplified state.
If we only have 100$, you have 0 and I have 100 and I lend you my 100 for a yearly interest rate of 20% and you pay me back the next year I would get 120$ from you but you only have 100$.
Thus interest created out of thin air 20$.

No, that isn't how it works at all. Interest doesn't just create money. Interest creates an obligation on the borrower to pay. So in your example, I borrow $100, and a year later you come to me telling me I have to pay you $120. I explain that I just put that money under my bed for a year but that I'm willing to give it back now. No, you reply, now you have $120 because interest magically created more money. I explain that no, in order for you to actually get $120 I would have to physically pay you that much.

You learn, and next time you lend the $100 to Gavin Thorpe, who uses the money to start a miniature game company, earning himself many thousands of dollars in profits. Because he used your loan to generate money, he can afford to pay you back the full $120. But note no new money was created in that borrowing process, the $120 you received was $120 that came out of Jervis's profits from his business.

If you do study economy (which I dont) please do educate me on this (since I want to learn and know more) by explaining in simple terms how it is that actual money are so much less then "invented" money, how it is that interest does not create money out of thin air, how debt and inflation are a part of the economical system and how on earth does a bank lend you 100 000$ when all it is actually required to hold in its vault is some 10-100 bucks and not call it invented/made up money.

Okay, I'll just and explain these terms as simply as I can;

Think of interest on a loan where you never pay back the principle. So you borrow $100, and in exchange you have to pay the interest back every year. The interest rate is 6%, so every year you take $6 out of your pocket, and give it to the lendor. That's it. There's no creation of money.

Think of inflation as the relationship between the amount of goods and services moving around the economy in relation to the amount of money out there. So if you have $150 in the bank and tomorrow Obama declared he was going to double everyone's bank balances because he's just that awesome, then you'd have $300, but the amount of goods and services out there would be exactly the same, and everyone else would have twice as much money as well. You'd expect the cost of every good to double, wouldn't you? And so you'd expect that your bank deposit, despite having doubled in value, is still only able to buy the same quantity of goods as it did when was $150. That's inflation, and it's something the government tries to control, matching the increase in money supply more or less to the steadily increasing amount of goods and services available.

And with the banks loaning out money, you're confusing the effect of the process with a power you think is held by a bank. Yes, the effect of the process is that the total cash available is increased, but that's due to how all parts of the economy, depositors, banks, and lendors operate together. Read the anecdoate about you, me and Jervis Johnson. That's how it all works on a large scale, with no magic powers needed.

In the case of Ireland the bank debt became sovereign debt because of the state issued a blanket bank guarantee (hurray crony capitalism!). So if you were a German trader who had bought bank Irish bank shares because they were yielding high profits (by trading credit default for example) the Irish tax payer now has the bill. The story is similar in other countries. Greece and Italy are partial exceptions due to systemic corruption.

sebster wrote:~

Not much to add to this thread. Haven't read all of it as I'm still at work, but I'm going to follow. Hopefully I can throw in something in a bit.

What Sebster is saying about banks etc. though, is correct. For what its worth, I'm going to back him up.

This had to happen:




Automatically Appended Next Post:
The Polish (In the EU but not in Euro) foreign minister has criticized the Germans for acting like innocent victims of the profligacy of others:

First came six points Mr Sikorski wanted Germany to acknowledge.

1) it is the biggest beneficiary of the current arrangements and therefore under the biggest obligation to sustain them
2) it is not the "innocent victim of others' profligacy...You, who should have known better, have also broken the Growth and Stability Pact...your banks...recklessly bought risky bonds"
3) the crisis has lowered Germany's borrowing costs
4) if its neighbours' economies implode, it will suffer
5) the danger of collapse is greater than the danger of inflation
6) "your size and your history" mean a "special responsibility to preserve peace and democracy on the continent".

Here's the money quote:

I demand of Germany that, for your sake and for ours, you help [the euro zone] survive and prosper. You know full well that nobody else can do it. I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.

http://www.economist.com/blogs/easternapproaches/2011/11/polands-appeal-germany?page=15

dogma wrote:

Da Boss wrote:Shuma, I agree. For Europe to survive we must either federalise or disintegrate. It is merely nationalistic nostalgia that prevents federalisation- that and a distrust of the technocratic institutions of the EU.

Its more than that, there's also legitimate reservations about how a federal Europe would be governed. I mean, look at the US and how volatile the political system is here. Now apply a similar federal system to the EU, where there is no common language (or lingua franca), no common culture, and a significantly larger population. Its a mess, though a mess that leads to many beneficial outcomes if muddled through.

A system of free trade, with common weights and measures seems most appropriate, while allowing each country to retain its sovereignty and home rule towards other important matters. Sounds almost like...NAFTA.

Frazzled. here's why it is bad if all countries go back to their own currency.

All current debts are in the Euro. Every single bank in the world has bets out that the debts will be paid or not repaid base dont he Euro. if the Euro ceases to exist, ALL of those bets are essentially zeroed out for a loss.

I don;t know the exact amount of loss, but it is something larger than we have ever seen before.

Now, couple that with the staggering losses from the real estate derivative/toxic assets morass that still has not been really addressed, and we are talking total financial armageddon, as there would be no TRUST anywhere taht anything had any actual REAL value.

Since trust and perceived value is the basis of the economy, when you lose those things.... well.... hello Road Warrior.

Easy E wrote:Frazzled. here's why it is bad if all countries go back to their own currency.

All current debts are in the Euro. Every single bank in the world has bets out that the debts will be paid or not repaid base dont he Euro. if the Euro ceases to exist, ALL of those bets are essentially zeroed out for a loss.

I don;t know the exact amount of loss, but it is something larger than we have ever seen before.

Now, couple that with the staggering losses from the real estate derivative/toxic assets morass that still has not been really addressed, and we are talking total financial armageddon, as there would be no TRUST anywhere taht anything had any actual REAL value.

Since trust and perceived value is the basis of the economy, when you lose those things.... well.... hello Road Warrior.

Frazzled would, I suspect, be content with the Road Warrior scenario.

But...but... won't he think about the weiner dogs?



Article from Slate: http://www.slate.com/articles/business/moneybox/2011/11/the_terrifying_new_theory_that_europe_s_economic_troubles_could_devastate_the_u_s_.html

That ruling goes against basic economics, and would have destroyed banking as we know. To the extent that such a ruling exists, I am certain it didn't happen as you described it. I would love to read a link to the case.

I found it for you, no wonder it was hell to find as it is not a good thing to know lol

http://educationcenter2000.com/legal/credit_river_decision.htm
http://www.lawlibrary.state.mn.us/CreditRiver/CreditRiver.html


Basically it backs what I am saying, a judge actually declared a banks foreclosure demands null and void on the premises that it created money out of thin air and thus the contract was not valid.

But as you say, pointing out the truth would destroy the banking system as we know it so I dont know this but I bet it was later over turned by pressure from the bank lobby, that or the laws must have been altered to allow for such a fraud system to pass.

olympia wrote:

Easy E wrote:Frazzled. here's why it is bad if all countries go back to their own currency.

All current debts are in the Euro. Every single bank in the world has bets out that the debts will be paid or not repaid base dont he Euro. if the Euro ceases to exist, ALL of those bets are essentially zeroed out for a loss.

I don;t know the exact amount of loss, but it is something larger than we have ever seen before.

Now, couple that with the staggering losses from the real estate derivative/toxic assets morass that still has not been really addressed, and we are talking total financial armageddon, as there would be no TRUST anywhere taht anything had any actual REAL value.

Since trust and perceived value is the basis of the economy, when you lose those things.... well.... hello Road Warrior.

Frazzled would, I suspect, be content with the Road Warrior scenario.

You call it a scenario, I call it retirement.

...As they wonder up Fortress Dakka gates...as the raiders and looters roaming not far.....Frazz probaly be the first to go "Whats in it for us."....in a big comfy field chair, mug of coffee with the umbrella, and his golfbag weapon sets within reach




edit
Does this seem like a game of hot potato to anyone?. So...which euro country going to bail us out next?

Easy E wrote:Frazzled. here's why it is bad if all countries go back to their own currency.

All current debts are in the Euro. Every single bank in the world has bets out that the debts will be paid or not repaid base dont he Euro. if the Euro ceases to exist, ALL of those bets are essentially zeroed out for a loss.

I don;t know the exact amount of loss, but it is something larger than we have ever seen before.

Now, couple that with the staggering losses from the real estate derivative/toxic assets morass that still has not been really addressed, and we are talking total financial armageddon, as there would be no TRUST anywhere taht anything had any actual REAL value.

Since trust and perceived value is the basis of the economy, when you lose those things.... well.... hello Road Warrior.

Why does the Euro have to cease to exist if Greece defaults? Serious question. I don't understand the relationship. If California defaults, the US$ doesn't go in the toilet. California is just that much crappier. Hence my query.



Automatically Appended Next Post:

Jihadin wrote:...As they wonder up Fortress Dakka gates...as the raiders and looters roaming not far.....Frazz probaly be the first to go "Whats in it for us."....in a big comfy field chair, mug of coffee with the umbrella, and his golfbag weapon sets within reach




edit
Does this seem like a game of hot potato to anyone?. So...which euro country going to bail us out next?

Just don't let the raiders get too close to Frazzled. He has ten million wiener dog mouths to feed, and they like meat...

So, the Fed is now freely converting Euros to dollars for big banks.

So again, creditors get a bail-out while debtors get a little thing Jimmy James from News Radio likes to call "The Shaft".

Pyriel- wrote:

That ruling goes against basic economics, and would have destroyed banking as we know. To the extent that such a ruling exists, I am certain it didn't happen as you described it. I would love to read a link to the case.

I found it for you, no wonder it was hell to find as it is not a good thing to know lol

http://educationcenter2000.com/legal/credit_river_decision.htm
http://www.lawlibrary.state.mn.us/CreditRiver/CreditRiver.html


Basically it backs what I am saying, a judge actually declared a banks foreclosure demands null and void on the premises that it created money out of thin air and thus the contract was not valid.

But as you say, pointing out the truth would destroy the banking system as we know it so I dont know this but I bet it was later over turned by pressure from the bank lobby, that or the laws must have been altered to allow for such a fraud system to pass.

The first link you posted was super biased anti-fed nonsense. The second link was just the raw rulings. The ruling simply didn't have a basis. The justice didn't have jurisdiction and while cases just like that have been brought on a regular basis, that's the only one that was ruled that way.

What you are calling a "fraud system" is how banks work. It's the entire purpose of banks. I swear to god, it's like every 20 years america forgets how banks work and freaks out about it all over agian.

http://en.wikipedia.org/wiki/Credit_River_Case



Automatically Appended Next Post:

Frazzled wrote:
Why does the Euro have to cease to exist if Greece defaults? Serious question. I don't understand the relationship. If California defaults, the US$ doesn't go in the toilet. California is just that much crappier. Hence my query.

This is a great question!

It happens because of a complex series of loans and bailouts that have been made in a circle, so if certain key countries fall apart, the values of the debt that they are all borrowing against drops in a domino effect. Basically europe has bailed each other out in a long chain and some links are looking weak.

I just realized if their economies tank, take them over "in receivership." Take all US debt and convert it to acres of Euro dirt.

Euro crisis + US bases = PROFIT!

Euro crisis + US bases = PROFIT!

autobahn time woot.

Actually it'll be to fun and Uncle Sam will say no

edit
France saying possible revolution or war if it goes down the tube?

Pyriel- wrote:

That ruling goes against basic economics, and would have destroyed banking as we know. To the extent that such a ruling exists, I am certain it didn't happen as you described it. I would love to read a link to the case.

I found it for you, no wonder it was hell to find as it is not a good thing to know lol

http://educationcenter2000.com/legal/credit_river_decision.htm
http://www.lawlibrary.state.mn.us/CreditRiver/CreditRiver.html

Basically it backs what I am saying, a judge actually declared a banks foreclosure demands null and void on the premises that it created money out of thin air and thus the contract was not valid.

Umm, that was a ruling by a Justice of the Peace, and it was immediately overturned because he had no right to make such a ruling. When a similar case was attempted in a Utah court in 2008, that court noted that cases like these had been overturned repeatedly, and had no basis in law or in fact.

So basically you had a JP overreach his grounds, get confused by fractional banking and think it was something it was not, before more level heads immediately overruled his mistake, and courts in every instance since then go on to enforce that position.

But as you say, pointing out the truth would destroy the banking system as we know it so I dont know this but I bet it was later over turned by pressure from the bank lobby, that or the laws must have been altered to allow for such a fraud system to pass.

No, that is not what I'm saying. I am saying that if such a case was upheld and maintained, it would have destroyed US banking (why would a bank ever lend money, if people didn't have to repay it?)

That doesn't mean what the guy claimed is true. What he claimed was utter nonsense, and that's something you would understand to, if you'd only do me the service of properly reading what I wrote out for you. I mean seriously, just read this example I've coped from above;
"This process doesn't even need banks, you, me and Jervis Johnson could do the same. Say you work hard as a gardener and save $100, and Jervis Johnson says he'll give you 4% on your money if you lend it to him, and you agree. Jervis is cunning sort, and he knows I need some cash, so he offers me $90 at 8% interest, and I readily jump at the opportunity. I needed that cash to pay you for your gardening work, and now you've got another $90, which you then turn around and give to Jervis, who will pay you 4% for this money as well. Jervis then goes and sees if I need to borrow some more money, and is able to lend me 10% of your last deposit, so he gives me $81, which I use to buy more of your gardening service. This continues again and again, reducing by 10% each time to cover the minimum deposit, until eventually you Jervis has lent me $1,000, I've paid you $1,000 for gardening, and you've deposited $1,000 with Jervis. "

Do you see how that works? Without granting Jervis, or any bank, the magical power to create money, we've seen how fractional banking works within an economy to create money.

Can you please just accept this, and get on with worrying about things that are actually real problems in the world?

ShumaGorath wrote:

Jihadin wrote:So UK like "leaning" away from Europe before it gets stuck in the commode and waiting to see the result eh?

They're in there regardless. Europe is their largest trading partner and they're pretty well attached. They'll recover more quickly though.

Nope. All the European countries are in the same financial gak except Switzerland. They (most of them) got the Euro, we got Gordon Brown. Those nations that had the Euro got the better deal, excepting Greece and Ireland.

Orlanth wrote:

ShumaGorath wrote:

Jihadin wrote:So UK like "leaning" away from Europe before it gets stuck in the commode and waiting to see the result eh?

They're in there regardless. Europe is their largest trading partner and they're pretty well attached. They'll recover more quickly though.

Nope. All the European countries are in the same financial gak except Switzerland. They (most of them) got the Euro, we got Gordon Brown. Those nations that had the Euro got the better deal, excepting Greece and Ireland.

What were you noping exactly? You can't just nope and then say something unrelated.

I swear to god, it's like every 20 years america forgets how banks work and freaks out about it all over agian.

Andrew Jackson anyone? i'm pretty conservative but that guy was crazy, kind of like an angry primarch...hmm

Also for people wondering how Euro could switch back to currencies. Currencies have switched before and everyone just has to agree on a set transfer limit. the problem is that it's unbelievably complicated and theres a lot of room for more agressive(not calling them greedy) countries to profit. For instance, Germany before the wall had two currencies, afterwords, had one. well they didn't say ALL OF THE PEOPLE WITH THIS CURRENCY ARE NOW RENDERED WORTHLESS they declared an exchange rate (of 1 to 1 which was huge considering how much better West German was than East germany). The Europ could do this and possibly even do 1 to 1 and just let the chips fall where they may.

Orlanth wrote:

ShumaGorath wrote:

Jihadin wrote:So UK like "leaning" away from Europe before it gets stuck in the commode and waiting to see the result eh?

They're in there regardless. Europe is their largest trading partner and they're pretty well attached. They'll recover more quickly though.

Nope. All the European countries are in the same financial gak except Switzerland. They (most of them) got the Euro, we got Gordon Brown. Those nations that had the Euro got the better deal, excepting Greece and Ireland.

Well, they're not, or everyone wouldn't be trying to get Germany to bail out the system.

I think Germany has the ability to bail out a decent amount of the problem, then again they also have the ability to start WW3 so, I don't expect them to do much in either direction.