Hi Everyone!
Until now I thought that the central bank is loaning the banks money at the discount interest, and they to the borrowers. So central bank -> banks -> borrowers. in other words, the central banks are those who really create the money, and the government (at least where the central bank is in the hands of it) is taking low interest from the banks. that is why, interest rate by the central bank is so important.
i've seen the movie "Money as Debt"
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http://video.google.com/videoplay?docid=-2550156453790090544&hl=en
What this is saying, is that banks can multiply the base money (in the past, gold, now resrve money), by 100 times. They claim that banks create 95% of the money, the government only 5%. which means, COMMERCIAL BANKS create new money and not the government. and the the one who create inflation.
It doesn't make any sense to me, since:- why the interest rate is so important, if the banks can creating new money by themselves? they do not need to borrow money from the central bank anyway, so it wouldn't have any serious effect. let's say it 5%. who cares? they can lend in 2%, it doesn't matter, they create it.
- In my place, in Israel, we have in the last 20 years about 4% inflation (my estimation based on the changes in prices). if the banks could create 100 times the money, + the government prints is own money as taxation, how it could possibly be 4%? doesn't make sense.
- Why I hear Austrian Economics warning that the Government deficit will result in inflation. It's anyway, mostly, been created by private borrowers... not the government prints money. if the government will print like 2 trillion dollar to pay the Chinese, still private borrowers can borrow more all over America, and by that creating more new "money" (currency), in the supply
do you get my point here?
There is no doubt that new money (currency\) ic created when a new loan is being made. the question is, does it come from the central bank, that charge interest from the banks (it fot the power), or if it comes directly from the banks themeselves.
On another note, I read some article a long time ago that there was some cheat of the reserve requirement discovered around 2000. Can't remember where, though.
Oh. Also, "money as debt" is a kook show. Obviously put together by the usual conspiracy nutters. Money is not debt. It's sort of a caricature of Money, Banking and the Federal Reserve, which is what you should watch instead.
In fact, it is debt.
think about it.
99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. -> every dollar in the market is acually is part of a loan -> every dollar actaully has interest with it = Money IS debt. got it?
rimon: In fact, it is debt. think about it. 99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. -> every dollar in the market is acually is part of a loan -> every dollar actaully has interest with it = Money IS debt. got it?
Most of the money injected by the central bank is done through what is called Open Market Transactions. That is, the Fed buys Government Securities or any assets it wishes from the Public. Those securities are bought with newly created money. No debt!
JackCuyler:That is ignoring the inherent subjectivity of value. You don't get a say in how I use (or don't use) my property. I prefer that my tomato and cheese sit in storage rather than being used by someone else. There is no waste.
Then put in a safety deposit box.
Just want to tell you thank you for the answers. I could not understand it without you.
regarding what you said: "I dont understand it either, but unfortunately I couldn't get the movie to play. As such, I can't evaluate that part of the question, only give my understanding of how the process works. "
Go to google video, and search for "money as debt". it's around minute 13.I explain you what I understand -
the ratio the central banks can lend money to the banks, is needed a conversion.
let's say the reserve ratio is 10%. it is actually a ratio of: 10% kept money : 90% kept money - 1:9 reserve ratio.
Then, the central bank looks on the 1:9 ratio the opposite 9:1 9 new money: 1 old money. so it lends the banks on every 1 dollar reserve, 9 dollars.
If the reserve ratio is 5% - 1:19. the banks can get 19 dollars, actually new dollars printed, on that 1 dollar reserve.
I'm pretty sure that that's the way it goes, because I checked what the movie claims here in Israel (we have, by the way, 9:1 ratio, or 10% reserve ratio).
By the way, in the personal leverl, how long are you studying Economics and Austrian Economics, and if you put it into a practical use?
"Those securities are bought with newly created money. No debt!"
It's good that we agreeing that what the commercial banks create, IS debt. By the way, most of the money that in the circulation, is created by the banks, not the government, by loans. in fact, the movie I mentioned (money as debt) says that 95% is created by the banks.
What about the government? well, the federal reserve loans money to the government. not gives.As I understand, it is part of the national debt.and U.S. is paying the income tax for that purpose, (see "America, Freedom to Fascism" or "Zeitgeist").
Maybe in some countries the government prints money by itself, and it is not goes to the national debt (paid by the inflation tax), and in this case, you are right. but still, most money comes fromt he banks, and it is debt.
rimon: I'm pretty sure that that's the way it goes, because I checked what the movie claims here in Israel (we have, by the way, 9:1 ratio, or 10% reserve ratio).
Stanley Fisher, has bought 27 Billion Dollars over the past 2 years. That is about 100 Billion Shekels the Israel Central Bank has created out of thin air in order to buy these US dollars. Those 100 Billion Shekels were injected into the economy not by debt, but buying US dollars from from People holding US dollars who wanted to buy Israeli Shekels instead.
Really, those "money as debt" movies are not a good source for learning how the economy works.
You are in the right place though.
rimon: what about the government? well, the federal reserve loans money to the government. not gives.As I understand, it is part of the national debt.and U.S. is paying the income tax for that purpose, (see "America, Freedom to Fascism" or "Zeitgeist"). Maybe in some countries the government prints money by itself, and it is not goes to the national debt (paid by the inflation tax), and in this case, you are right. but still, most money comes fromt he banks, and it is debt.
what about the government? well, the federal reserve loans money to the government. not gives.As I understand, it is part of the national debt.and U.S. is paying the income tax for that purpose, (see "America, Freedom to Fascism" or "Zeitgeist").
If the Fed lends at 2% interest and the commercial bank at 5% interest, then effectively, the end result is that money was given as "liquidity" for the bank to earn 3% on it. The 2% paid back to the Fed goes out of existence back to where it came from. The term "interest" here is really being misused. It is not interest in the traditional sense of the word. It's more like a valve on a money faucet, which the Fed plays with to get banks to take more or less money. That is all. It is meaningless to talk about interest when there is no real savings involved.
Also, most of the new money injected into the system is done by open market operations, as I explained before (Like Fisher buying dollars).
Also, if the Fed lends money to the government, the interest on that loan is refunded into the treasury department. It is true that tax payers are repaying that loand + interest, but it's the government who's doing the theft. The Fed just provides the service of complicating the process.
If you are serious about educating yourself about how it all works I would suggest for you:
For start, “The Mystery of Banking” by Murray N. Rothbard
Also for a more in depth book on banking and also Capital theory, I hear that “Money, Bank Credit, and Economic Cycles” by Jesus Huerta de Soto is very good.
rimon: 99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. -> every dollar in the market is acually is part of a loan -> every dollar actaully has interest with it = Money IS debt.
99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. -> every dollar in the market is acually is part of a loan -> every dollar actaully has interest with it = Money IS debt.
The second half is wrong and the conclusion is non sequitur.
When you say that A is B, that means there is no difference between A and B. Following from that, A cannot exist if B does not exist. If money is debt, debt cannot exist if money does not exist and money cannot exist if debt does not exist. Obviously absurd.
"Stanley Fisher, has bought 27 Billion Dollars over the past 2 years. That is about 100 Billion Shekels the Israel Central Bank has created out of thin air in order to buy these US dollars. Those 100 Billion Shekels were injected into the economy not by debt, but buying US dollars from from People holding US dollars who wanted to buy Israeli Shekels instead."
You are right... this form of money created is not with debt. this is what is called "imported inflation". Like what is going in China.Petter Schiff always says that U.S. biggest export is inflation, which is funny but very true. Think what happens when the dollar will tank rapidly, and all this inflation will be imported back to U.S. this is overwhelming, and can happen in days.
about the how much money comes from the "open market operations", I have no data for how much the banks create and what portion comes from the government securities. So I really can't say. if you know specific number (Like what the movie claim - 95%-5%), I'd like to know. for me, it make more sense that the most comes from the banks although it is not a monetary base, but revolving credit.
... and I still think it is an interest, but this is semantics, and my personal view. can't argue with you.
"Also, if the Fed lends money to the government, the interest on that loan is refunded into the treasury department." I'm not sure about that. I pretty sure that U.S. pays interest to the internation banking for money it's can print by itself . a conpiracy, I know, but from my research this is my belief and conviction.I wish that you are right and really the income tax does not goes to pay the interest, but is used in government expenditure.
Thank you for the book, by the way. I will read it. Look at the movies I suggested, they are facinating and you can find them on Google Video.
Yes, this is absurd, since money is needed to pay the interest, and a good point.
That is why many economists are warning against the collapse of system, and that is why the system needs endless growth to function, which is not possible.when is collapsed, the banks will have the whole country.
Till then, more and more wealth is tranfered to the banks.
scineram: JackCuyler:That is ignoring the inherent subjectivity of value. You don't get a say in how I use (or don't use) my property. I prefer that my tomato and cheese sit in storage rather than being used by someone else. There is no waste. Then put in a safety deposit box.
Didn't we already have a long thread about that? A safety deposit box is not a checking account.
rimon: Yes, this is absurd, since money is needed to pay the interest, and a good point. That is why many economists are warning against the collapse of system, and that is why the system needs endless growth to function, which is not possible.when is collapsed, the banks will have the whole country. Till then, more and more wealth is tranfered to the banks.
You're confused. People that lament "debt backed" money do so because they want "debt free" money. That means they want the government to create fiat money and hand it out.
Money is debt backed because of how the monetary system has evolved. In the past, when money was specie and bills were used to represent specie, the money supply was expanded by pyramiding deposits; by having a single gold dollar backing several paper dollars. Today, even though dollar bills no longer represent gold, money is still created in the same way, by pyramiding deposits; a single physical dollar bill backing several dollars worth of deposit balance.
A debt free money would be one that is simply created new and then spent. Newly created debt free money gets it value from government violence(ie legal tender laws), while newly created debt backed money gets its value from deception.
The Federal Reserve System adds another inflationary layer to an already unstable banking system. For example if the central bank has $100 worth of gold reserves in its vaults and a 10% reserve requirement, it can print up $1,000 of new notes in deposits, which become the reserves of the commercial banks. The commercial banks take this $1,000 and, if they're required to hold 10% again in reserve, they can multiply the $1,000 into $10,000 through fractional-reserve loans. So an inverted pyramid is created with $100 worth of gold, or real money, at the bottom and $10,000 of inflated paper money at the top. As this $10,000 of new paper money circulates in the economy, it drives prices up, therefore reducing the buying power of ordinary citizens.
http://mises.org/story/2870
as i understand this excerpt...a commercialbank goes to centralbank with an amount of real-money - the centralbank takes this amount of real money calls it reserves and permits commercial bank to create 10x the amount of their realmoney as creditmoney.
also when commercialbanks aquire realmoney in deposits, centralbank regulation can dictate commercialbanks to keep wahtever reserve they are required to on hand - a commercialbank will often loan away 90percent of its realmoney and keep 10 percent as reserve while creating creditmoney in deposits of what they have loaned out.
to the extent that the centralbank 'permits' commercialbank creditmoney, interacts with it and makes purchases with it in leage with govt etc...i guess you could say that the centralbank inflates as well as commercialbanks.
i assume the linked information above is true -- i am not sure.
rimon:By the way, in the personal leverl, how long are you studying Economics and Austrian Economics, and if you put it into a practical use?
I first came across Austrian economics in 2000 when I started reading LewRockwell. I didn't start studying it in any depth, though, until a few years later, say 2004. I went to Mises U a few years ago, then 2 years ago went to the David Gordon seminar and FEE's Austrian seminar, then this summer went to the Advanced Austrian seminar at FEE. It depends on how you define "practical" - I use Austrian thought in my research as a grad student in math focusing on emergent order and complexity (in the context of mathematical logic.)
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