Money As Debt - Paul Grignon

Discussion in 'Business & Economics' started by Quigly, Oct 24, 2008.

  1. Quigly ......................... ..... Registered Senior Member

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  3. Pandaemoni Valued Senior Member

    Would you like to, say, summarize his position, or do you expect people to watch for 47 minutes just so we can reply to this thread?

    Please Register or Log in to view the hidden image!

    For me especially, I am not sure by boss would appreciate it.
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  5. Quigly ......................... ..... Registered Senior Member

    It is a pretty good documentary =)

    It goes into detail about how banks got started and where the problems are. It details how there isn't enough money in circulation to pay off debt so in this system some pay off their debt while in this system many always will be unable to settle their debt. There isn't near enough "real money" to settle everyone in the US's debt. Without more loans and more debt, there will never be enough "real money" to pay off all debts. It discusses how money is leveraged and how much money banks loan vs. how much deposits are made. It discusses how banks double dip as they say with deposits and loans.
    It discusses the danger in not having our currency backed by any real commodity. It discusses how the only way our society will operate is if debt continues to accumulate and loans continue to be offered. That is kind of the feel or course of the documentary. Some good quotes included and enjoyable enough. Well worth the time imo. In the end he promotes some plan to solve this and push an agenda, but otherwise pretty informational.
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  7. Carcano Valued Senior Member

    Not ALL money in existence is outstanding debt.

    This is the central thesis of the video.
  8. Nasor Valued Senior Member

    In general it's pretty good, but there are a few major flaws.

    First of all, it says "At one time bankers were lending out the money that people deposited, but not any more!" and then goes on to explain how the bank is "magically conjuring money into existence" when it makes a loan (complete with a cute animation of waving a magic wand over a hat before pulling the money out). The thing is, banks are still lending out the monies that people deposit with them. They are arguably "conjuring money into existence" when they do this because if someone deposits $100 and they loan out $90 of it, they will still tell the person who made the $100 deposit that he has $100 in his account, even as they give $90 to someone else. But you'll notice that later on in the video they point out that banks aren't allowed to lend out more money than they have as deposits. HELLO! That's an implicit admission that the money being loaned out is deposit money. You can't simply start a bank and immediately give out a billion dollars in loans when you don't actually have any money; you would need to get customers with savings and checking accounts to deposit a billion dollars first. Also, if the bank's depositors all show up and want to withdraw all the money in their accounts at once, the bank will itself need to borrow money to pay them because a larger percentage of its depositors' money will be out in circulation as loans. Again, this is a consequence of the fact that the bank was loaning out deposited money. If it was really conjuring new money into existence from nothing, it would be able to make loans to people while still being able to give its depositors all of their money back should they ask for it. In fact, one of the main functions of the federal reserve is to loan money to banks when they are caught short and don't have enough money on hand to meet people's requests for withdraws - this ensures that the bank won't simply collapse if a lot of people unexpectedly want to withdraw their money (although banks hate to do this, because now they are paying interest to the federal reserve on the money that they borrowed). So one of the major complaints of the film - that banks cheat people by creating money from nothing - isn't really accurate.

    Second, the film seems really upset that the process isn't under government control, when in fact it is. The federal reserve (which controls how banks are able to make "new money" by regulating how much money banks can loan out and what sorts of interest rates the banks pay when they borrow money) is a government-controlled institution. So toward the end of the film, when they are saying "Why don't we have the government in control..." well, they already.
  9. Quigly ......................... ..... Registered Senior Member

    I could be wrong, but weren't they saying more like: Lets say somebody finances the purchase of a car from a third party financer. That money that is borrowed is then placed in the dealers bank as a deposit. That money that was borrowed is now able to created loans (its not even money loans to deposits either) Its like 10x or so I think. So they can loan 10 times their deposits. It may be 6 or 7, but can't remember. At any rate, say that borrowed 10,000 to buy the car now goes into the bank. Somebody comes in and wants to borrow 60,000 for their first house...ok, we can cover that. Then the money that is borrowed (60k) eventually circulates to a bank again that now has the ability off of the 60,000 to loan out $300,000+. Is this an incorrect way of viewing this?
  10. Read-Only Valued Senior Member

    Sorry, but that IS totally incorrect. They cannot "multiply" the deposits in any way - that's nothing but a common myth.
  11. Read-Only Valued Senior Member

    Thank you, Nasor, that was good and level-headed description of how the process really works.

    I cannot even begin to count the number of times I've had to cringe when seeing someone repeat the old myth about banks magically "multiplying" money. I don't know what idiot started it in the first place but over the years it has spread more than the common cold does in winter.

    It's popularity is due to it having been repeated so many times like some of the other ridiculous things that all the "armchair economists" spread in these forums.

    It probably originated because of the fact that many people distrust banks and really never bothered to find out how they work. They don't even begin to understand the principle of "fractional reserves" and actually believe that the Fed prints money.

    Ah, well, there are plenty of fools in the world and always will be...
  12. DubStyle I may be wrong, but I doubt it Registered Senior Member

    I was recently in a discussion about this video and the whole money multiplier concept. The fact of the matter is that this video is overly simplistic and really doesn't reflect the reality of modern day banking.

    The money multiplier as described in textbooks really is not accurate. Here is one of the best explanations I've read:

  13. liz miller Registered Member

    I have just watched the documentary - I was convinced by the argument that by lending and redepositing money, the amount of money available in the system constantly increases. Each redeposit allows a bank to make a further loan

    eg As a bank I put up £100 - I can lend £1,000 pounds
    That loan is redeposited with me - I can lend another £900
    That loan is redeposited with me - I can lend another £90 pounds
    The more credit there is, the more "money" there is in circulation.

    This goes deeper. I borrow money, I promise to pay interest at £100 a day, because I work and add value to goods. The value that I add becomes the value that backs money. If I cannot add value to goods, then my promise to pay interest at £100 becomes worthless. I might borrow more money, but if the money does not have any "value" backing it, then money becomes worthless and the goods become fewer. And that is "inflation" and the situation seen in Zimbabwe - where there are no goods on the shelves

    Many corner shops in the UK no longer have much stock, the first step towards Zimbabwe economics.

    How to put "value" back into money? do more work for less money. Put extra value into the work you do. This is called unemployment, which forces employees with a job to work harder and put more value into money for lower wages.

    The unemployed "work" in society by bringing up children by contributing in a voluntary way to the economy, by working on the black economy. All of these activities returns unpaid work into the community. Then when the economy has got some value in it again, it comes out of recession. Money starts to have some value, and is once again exchanged for goods
  14. Nasor Valued Senior Member

    No, you can't. Once someone deposits £1,000 at your bank, you can loan out up to £900. You will be required to keep at least £100 of that deposit in your vaults.

    If you start a bank and only have £100 of your own money to put up, you can only lend out up to £90.
  15. dixonmassey Valued Senior Member

    If it's true that "once someone deposits £1,000 at your bank, you can loan out up to £900" how monetary ma$$ grew roughly 3 times in the past 30 years? Who creates new money in the system, who pockets interest involved in lending "new money"? BTW, Federal Reserve is NOT US government institution.
  16. Nasor Valued Senior Member

    If you don't believe me on that, just google "bank reserve requirement" and read up on the applicable laws.
    "New money" is mainly created when the Federal Reserve buys back US treasury securities. The money that is used to buy the securities is basically "created from nothing" for the purpose of buying the security, and goes into the economy as "new money". The Fed can also change the money supply by tinkering with the reserve requirement, but so far as I know that doesn't really happen. I don't think the reserve requirement has changed in a long time.
    If you lent someone money (as in, you have some money and you give some of it to someone else), you pocket the interest. But when the Fed buys back US treasury securities, they aren't really making a profit on anything. It's like they're paying off the US government's debt using money that they just created. The person who makes a profit on the whole series of transactions is whoever was holding the treasury security that the Fed bought back, because they buy the securities back with interest. The holder could be a private person, a bank, or anyone/anything else. If you want in on it, you can buy treasury securities directly from the US government in denominations as small as $100, or buy them on the secondary market.

    The Fed does make a profit by lending money to other banks when the other banks can't cover their reserve requirement, but that doesn't really involve the creation of new money, and the bank has to pay the Fed back. Also, it's important to note that any net interest that the Fed makes is rebated back to the US treasury department.

    Edit: Banks try to avoid borrowing money from the Fed, because it costs them money and makes them look bad.

    The head of the Fed is nominated by the President of the United States and must be approved by Congress. They can be recalled/impeached at will by congress (I don't remember if it's the house or the senate that has that power). Whether or not that makes them a "government institution" depends on your definition of "government institution," I guess.
    Last edited: Sep 3, 2009
  17. Carcano Valued Senior Member


    Money creation is the process by which new money is produced or issued. Three ways to create money are; by manufacturing paper currency or metal coins, through debt and lending, and by government policies such as quantitative easing.

    Fractional-reserve banking creates money whenever a new loan is created. In short, there are two types of money in a fractional-reserve banking system, the two types being legally equivalent.

    1. central bank money (all money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks))

    2. commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money.

    When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.
  18. Carcano Valued Senior Member

    Superstar blogger Karl Denninger was a little hot under the collar today talking about how the Fed has been quietly amending the reserve ratio laws for quite some time...making the banks even more unstable during a crisis.
  19. Carcano Valued Senior Member

    Just to expand on what Karl means by 'sweep' accounting, in the 1990s the Federal Reserve lowered to zero the 10% reserve requirements for all bank deposits aside from checking accounts.

    This enabled banks to lend more money, but wait there's more! Further steps were then taken to allow banks to 'sweep' checking account balances into other accounts and funds at the the end of each business day, so that when checked by computers during the night the banks would look like they had far less money deposited...thus enabling even more instability!

    Clever huh?
  20. Nasor Valued Senior Member

    If I'm remembering this right, what they did was change the laws so that only deposits that could be withdrawn by customers with no notice were subject to the 10% reserve requirement. Other types of deposits that couldn't be withdrawn until a specified time got a 0% reserve requirement, because there was no danger of the customers showing up and unexpectedly asking to withdraw those deposits. So I don't think it was strictly checking accounts alone that had a 10% reserve, although checking accounts are certainly the biggest example of a type of account where money could be withdrawn with no prior notice.
  21. dixonmassey Valued Senior Member

    Nasor, here is popular description of money making process. Banks DO create money out of nothing and charge interest on it.

    A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics". This publication detailed the institutionalized practice of money creation, as utilized by the Federal Reserve and the web of global commercial banks it supports. On the opening page, the document states its objective: "The Purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system". It then proceeds to describe this 'fractional reserve process' through various banking terminology. A translation of which goes something like this:

    The United States Government decides it needs some money, so it calls up the Federal Reserve, and requests, say, 10 billion dollars". The fed replies, saying " sure… we'll buy 10 billion in government bonds from you."
    So, the government then takes some piece of paper, paints some official looking designs on them, and calls them 'Treasury Bonds'. Then, it puts a value on these Bonds to the sum of 10 billion dollars, and sends them over to the Fed. In turn, the people at the Fed draw up a bunch of impressive pieces of paper themselves, only this time calling them 'Federal Reserve Notes'…also designating a value of 10 billion dollars to the set.

    The Fed then takes these notes and trades them for the Bonds. Once this exchange is complete, the government then takes the 10 billion in Federal Reserve Notes and deposits it into a bank account…and upon this deposit, the paper notes officially become 'legal tender' money, adding 10 billion to the US money supply. And there it is… 10 billion in new money has been created. Of course, this example is a generalization, for, in reality, this transaction would occur electronically, with no paper used at all. In fact only 3% of the US money supply exists in physical currency. The other 97% essentially exists in computers alone.

    Now, Government bonds are, by design, instruments of Debt and when the Fed purchases these bonds, with money it created essentially out of thin air, the government is actually promising to pay back that money to the Fed.

    In other words… The money was created out of debt. This mind numbing paradox of how money, or value, can be created out of debt, or a liability, will become more clear as we further this exercise.

    So, the exchange has been made and now 10 billion dollars sits in a commercial bank account. Here is where it gets really interesting, for as based on the Fractional Reserve practice, that 10 billion dollar deposit instantly becomes part of the bank's Reserves, just as all deposits do. And regarding reserve requirements, as stated in Modern money mechanics:
    A bank must maintain legally required reserves, equal to a prescribed percentage of its deposits. It then quantifies this by stating: under current regulations, the reserve requirement against most transaction accounts is 10%."

    This means that with a ten billion dollar deposit, 10% or 1 billion is held as the required reserve, while the other 9 billion is considered an excessive reserve and can be used as the basis for new loans.

    Now, it is logical to assume that this 9 billion is literally coming out of the existing 10 billion dollars deposit. However, this is actually not the case. What really happens is that the 9 billion is simply created out of thin air, on top of the existing 10 billion dollar deposit. This is how the money supply is expanded. . As stated in Modern Money Mechanics: " of course, they (the banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes (loan contracts) in exchange for credits (money) to the borrower's transaction accounts."
    In other words, the 9 billion can be created out of nothing, simply because there is a demand for such a loan, and there is a 10 billion dollars deposit to satisfy the reserve requirements.

    Now, let's assume that somebody walks into this bank and borrows the available 9 billion dollars. They will then most likely take that money and deposit it into their own bank account.

    The process then repeats, for that deposit becomes part of the banks reserves, 10% is isolated and in turn 90% of the 9 billion or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion…to 6.5 billion.. to 5.9 billion etc.

    This deposit-money creation-loan cycle can technically go on to infinity… the average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words, for every deposit that ever occurs in the banking system, about 9 times that amount can be created out of thin air.
  22. dixonmassey Valued Senior Member

    The fractional reserve policy perpetrated by the Federal Reserve, which has spread in practice to the great majority of banks in the world is, in fact, a system of modern slavery. Think about it… Money is created out of debt. And what do people do when in debt? They submit to employment to pay it off. But, if money can only be created out of loans, how can society ever be debt free? It can't. And that's the point.
  23. Nasor Valued Senior Member

    Thanks, but I've taken college classes on banking, so I think I'm pretty well up to speed on the basics of how banking works.
    It depends on what you mean by "create money". If you deposit $100 in a bank, they will turn around and loan $90 out to someone else. Even though $90 of your money has now been given to someone else, they will still tell you that you have $100 in your bank account. So if you are measuring the amount of money that exists in terms of what the bank says everyone's bank account balance is, then the bank has indeed created $90 of "new money". BUT, even though the bank will tell you that you have all $100 in your account, only $10 of that money is actually there. If you show up at the bank and want to withdraw, say, $50, the bank will be left $40 short and it will need to borrow money from somewhere else to cover your withdraw. If the bank had really created "new money" when it made that $90 loan, it wouldn't have any trouble covering your request for a $50 withdraw. The bank's inability to simultaneously loan money and meet all the potential withdraw requests that its customers might make is a reflection of the fact that it isn't really creating new money when it makes loans.

    Even though the bank will tell you that you have a balance of $100 and simultaneously tell the person who got the loan that he has a balance of $90, there is only actually $100 of "purchasing power" that can be in use at any one time. The person who got the $90 loan can buy something worth $90 (assuming you don't try to withdraw your money) or you can buy something worth $100 (assuming the guy who got the loan doesn't try to withdraw his loaned money), but if you and he got together you couldn't pool your money and purchase something for $190 because the bank doesn't have enough money to simultaneously give both of you the amounts reflected by your account balance. Again, this is a consequence of the fact that the bank didn't really create any "new" money. If it had really created 90 new dollars, you and the guy who got the loan could pool your money and buy something worth more than $100.

    This is why there are different definitions of the "money supply," and why it's important specify exactly what you mean when you talk about "creating new money." If you're talking about the amount reflected in bank account balances, then sure, a bank creates new money every time it makes a loan. But that's not really the same thing as genuinely creating new money, as explained above.
    Ah, now we get to something that actually can introduce genuine new money into the economy - an operation that can only be carried out by the Federal government, as it is the Federal government that decides if and when it will issue securities. You'll note that this is a very different thing from a bank simply making a loan - the Fed is actually creating new money to cover government debts (debts that are created when the government decides to issue securities to pay for all the crap they want to spend money on but can't actually afford).
    Last edited: Sep 7, 2009

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