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View Poll Results: Does fractional reserve banking create money as debt?
Yes 17 50.00%
No 10 29.41%
Neither answer is accurate, so I'm leaving a comment to explain 2 5.88%
Who cares? 5 14.71%
Voters: 34. You may not vote on this poll

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Old 28th October 2008, 02:03 PM   #1
zaphod2016
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Does fractional reserve banking create money as debt?

Zeitgeist, the Money Masters and other conspiracy-theory videos make the claim that, through the process of fractional reserve banking, our money supply in America is fundamentally based on debt.

Many here on JREF have debunked other potions of these programs in the past, however, as best as I can tell, this statement is true.

Source: Federal Reserve Bank of New York

Quote:
Reserve Requirements and Money Creation
Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.

In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels. Furthermore, the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States.
One piece sticks out at me right away: reserve requirements currently play a relatively limited role in money creation in the United States. However, this statement seems extremely deceptive to me. Above this, it is stated: Reserve requirements apply only to transaction accounts, which are components of M1...the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves.

In other words, reserves themselves play a "relatively limited" role, because banks can borrow reserves on demand, and these reserve requirements only apply to the M1. In other words, as far as the process of creating debt-money from fractional reserve banking goes, the fractional part is extremely important, and the "reserves" appear to be a token at best.

To use the above example: the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money. Note: this assumes a 10% reserve, which as discussed above, is an extremely optimistic figure, and not necessary to the process in the majority of cases.

I leave it to the best and brightest here on JREF to either explain what I have misunderstood, or help debunk this claim entirely. As best I can tell, this cornerstone to banking "conspiracy theory" appears to be 100% true.
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Old 28th October 2008, 02:37 PM   #2
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It's interesting you've made this a poll Zaphod - And even more interesting it's in the Conspiracy theory section.

Fractional Reserve Banking creating money is debt is a fact and the way it is done.

The Federal Reserve explains it simply in their PDF for anyone who is still not convinced.

http://www.federalreserveeducation.o...itCreation.pdf
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Old 28th October 2008, 03:15 PM   #3
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What does it mean, exactly, to "create money as debt"?
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Old 28th October 2008, 03:22 PM   #4
Tin Foil Timothy
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Originally Posted by CurtC View Post
What does it mean, exactly, to "create money as debt"?
It means the money is created into existence on the promise from the borrower to pay it back. Once the money is paid back it no longer exists again
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Old 28th October 2008, 03:38 PM   #5
zaphod2016
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To expand on Tim's point: the main concern here is inflation.

Ie. bank A makes a $1,000 deposit at the central bank. They now have authority to loan $10,000, assuming a 10% reserve requirement.

What is that $9,000 made of? What is it?

I used to assume the answer was "nothing". It was just an arbitrary number to represent production. But the truth is far worse. That new $9,000 exists as debt. Specifically, someone has borrowed this money from the bank, in the form of a loan.

Now, we have $9,000 in new money. Unless productivity also expands by $9,000, we will have inflation. I.e. more dollars chasing the same amount of goods.

Furthermore, the debt must be repaid with interest. I.e. if you borrow $10k, you will be expected to pay back, say $11k after X years. Where does that $1,000 come from? It necessitates the creation of more money, and under the debt-money paradigm, this means more debt.

Tim: I put this as a poll here in the CT section so that our skeptical friends (those who vote "no") will have a chance to explain why I am wrong about this. Assuming no one debunks it, I can point others to this thread the next time this is called a CT. I am also extremely curious to see how many will vote "who cares?" This is a continuation of the "Zeitgeist" thread, which kind of dissolved into a distracted mess.

I'm willing to accept I'm wrong, but so far, no one has explained to me what I've misunderstood here.

I am missing a piece of the puzzle myself: is ALL US money based on debt (other than M1), or only a potion of it? I like that you are using primary sources from the Fed directly, because this way we can skip the whole "that's an unreliable source" debate, which tends to distract from the issue at hand.

Last edited by zaphod2016; 28th October 2008 at 03:48 PM.
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Old 28th October 2008, 03:48 PM   #6
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Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.
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Old 28th October 2008, 03:56 PM   #7
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Originally Posted by theprestige View Post
Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money, it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.
so that's a yes
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Old 28th October 2008, 03:57 PM   #8
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I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game, however - it transfers money from the loaner to the bank and the account holders, causing no change in the total amount of money.

The main area of focus should be that the total amount of money in circulation increases just slightly faster than the total production increase. Inflation is actually a good thing, as long as it is reasonably low, since it promotes investing money into businesses instead of letting it sit idle in the bank. The trick is to find the right balance.
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Old 28th October 2008, 04:01 PM   #9
zaphod2016
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theprestige:

I agree with your above comment, but I am trying to move past generalization into specifics.

You borrow $10k because the bank trusts you will repay them $11k in X years.

This $11k will be earned at a job or business, where you create value to your employer. No debate here at all. The $ is just a representation of whatever actual value is involved.

But as far the money supply itself is concerned, so long as all new money is backed by debt, it contains an inherit demand for interest, which demands a continuous source of new money to cover the spread. The result is an inherently unstable system, which demands a growing economy in order to function. When economic growth halts, or is even slowed significantly, it is mathematically certain that some people will default, because the money to cover the debt plus interest will simply not exist, irregardless of the amount of production (value) in the real world.

I.e. the $11k in wages earned from your employer are backed by another $11k debt somewhere in the system. So even after the original $10k debt is repaid, and that money has been removed from circulation, there is still an $11k debt in existence. The net result is perpetual growth of debt. The system shifts the debts themselves back and forth, but the total amount of outstanding debt never has an opportunity to decline.

This assumes all money out of M1 is debt-based. If I am wrong about this, that would undermine this theory.

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Old 28th October 2008, 04:03 PM   #10
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Originally Posted by ArmillarySphere View Post
I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game,
Let me illustrate with simple math:

$100 loan @ 10% interest

Bank creates $100 in form of loan

Customer repays $110 a year later

Where did the $10 come from?

This isn't zero-sum at all- the new debt has an associated cost of $10. The net result is +$10 for the bank, -$10 to the debtor, plus $10 being removed from the money supply in addition to the $100 that was created for the loan.

And if you default, the $100 loan they gave you was already spent into circulation. It has already affected the net money supply. And the bank will still come after you to repay, usually with a higher penalty, only amplifying the paradox above. (i.e. if there's no $10 to cover spread, where does the $40 in penalties come from?)

During economic growth, so long as inflation is held in check, you are 100% right- there is no problem.

But- how does this system function in times of economic decline or stagnation?

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Old 28th October 2008, 04:07 PM   #11
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True, but when economic growth halts, or is even slowed significantly, it's because people aren't creating new wealth. And so of course they're defaulting on their loans. And of course there isn't enough money to cover the original estimated value of the loan. After all, they never created the wealth to cover it (hence the economic slowdown).

As long as the money supply is tracking with wealth-creation to within some acceptable degree of accuracy (which it does, in both my general scenario and your specific scenario), who cares?

And "who cares" is, in fact, my answer to the poll.
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Old 28th October 2008, 04:11 PM   #12
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Originally Posted by ArmillarySphere View Post
I did a little think on this subject recently, and you're quite right - loans create money, paying them back (or defaulting on the loan) destroys it. Interest is a zero-sum game, however - it transfers money from the loaner to the bank and the account holders, causing no change in the total amount of money.

The main area of focus should be that the total amount of money in circulation increases just slightly faster than the total production increase. Inflation is actually a good thing, as long as it is reasonably low, since it promotes investing money into businesses instead of letting it sit idle in the bank. The trick is to find the right balance.
Interest isn't a zero sum game. Creating money, loaning it out and having it paid back thus destroying it again is a zero sum gain. The addition of interest creates a non zero sum gain as there's always more money required to be paid back as their is created. A shortfall. Apart from foreign sales/investments the only way to find this extra money is create it. i.e more debt
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Old 28th October 2008, 04:18 PM   #13
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Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself. No change in the total money supply occurs.
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Old 28th October 2008, 04:22 PM   #14
Tin Foil Timothy
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Originally Posted by theprestige View Post
Money is an abstraction. It's a way of measuring and transporting wealth, another abstraction.

Paying back a loan with interest doesn't require the creation of more money,
it requires the creation of more wealth. And most banks try to loan money to people who can demonstrate some ability to create more wealth. You can't get a loan from a bank by telling them you'll pay their interest by borrowing more money from another bank. You do it by presenting them with a business plan, or collateral, or something else of value or potential value. You're going to convert your hard work into added value for others (e.g., via a business plan), or you are going to wager something of value that's already been converted from hard work (e.g., collateral), against your chances of converting more hard work into more value in the future. If you can convince the bank the odds are good, then you get the loan.

And always, when you get right down to it, you and the bank are talking about turning your hard work into things that people will value. It is this value, produced by your hard work, that we call wealth. And it is this wealth that money makes it easier for us to measure and transport.

The only debt involved is really your hard work, not yet done, from which the bank expects to profit by a percentage of the wealth you create, and which they will represent with amounts of money.
your post deals more with the methods of obtaining the loan not whether money is required to be created.

You are incorrect however and paying back a loan with interest does require the creation of more money.

Of course as the borrower you can obtain this money more than one way.

1] you can of course obtain yet another loan to pay it off ( if your original business pklan failed for example )

2] Your business plan was succesful so you sell your goods/services to a 3rd party in exchange for money in order to pay off the loan. In this the money still has to be created by debt. i.e the buyer of your goods may have taken out a loan in order to purchase them. Whatever, somebody sonmewhere is paying back aloan+interest on that money

3] Steal it. And that money you stole was, you guessed it, created as debt.


It's quite simple. if $10k is created into existence on the basis that $11k has to be found to pay off the debt then the extra $1k has to be created from somewhere
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Old 28th October 2008, 04:26 PM   #15
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Originally Posted by ArmillarySphere View Post
Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself. [/b]No change in the total money supply occurs.[/b]
That's not correct. Whatever is done with the interest (bank profit, operating expenses, re-investment, etc) it still has to be created somewhere and therefore is an increase in the money supply
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Old 28th October 2008, 04:32 PM   #16
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Re: what about interest?

Originally Posted by ArmillarySphere View Post
Interest is either credited to those with savings, or transferred to the bank itself. This does not destroy the money, as the bank itself can now use it - mostly for salaries, but also to do investment on its own, or even lending it again. Effectively, the bank is an account-holder with itself.
This makes perfect sense to me.

Originally Posted by ArmillarySphere View Post
No change in the total money supply occurs.
Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?

If there is no change to money supply, doesn't this mean this profit came from the existing money supply?

And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?
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Old 28th October 2008, 04:33 PM   #17
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Originally Posted by Tin Foil Timothy View Post
your post deals more with the methods of obtaining the loan not whether money is required to be created.

You are incorrect however and paying back a loan with interest does require the creation of more money.

Of course as the borrower you can obtain this money more than one way.

1] you can of course obtain yet another loan to pay it off ( if your original business pklan failed for example )

2] Your business plan was succesful so you sell your goods/services to a 3rd party in exchange for money in order to pay off the loan. In this the money still has to be created by debt. i.e the buyer of your goods may have taken out a loan in order to purchase them. Whatever, somebody sonmewhere is paying back aloan+interest on that money

3] Steal it. And that money you stole was, you guessed it, created as debt.


It's quite simple. if $10k is created into existence on the basis that $11k has to be found to pay off the debt then the extra $1k has to be created from somewhere
You have a good point. Therefore, I refer to my subsequent post, in which I continue the line of argument that as money is a representation of wealth, and wealth is a representation of value created by hard work, as long as these things track reasonably accurately with each other, who cares?

So you create more money, to represent your creation of more wealth. Who cares?
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Old 28th October 2008, 04:40 PM   #18
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Originally Posted by zaphod2016 View Post
Re: what about interest?



This makes perfect sense to me.



Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?
it comes from either

1] extra debt created through fractional reserve

2] Foreign sales/investments ( In a global market this is becoming an increasingly pointless factor though )



Quote:
If there is no change to money supply, doesn't this mean this profit came from the existing money supply?

And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?
Well that's why the current system is so favourable to bankers. The added interest on all money created is basically constant flow of money ( and thus wealth) from us to them. A vicious expanding cycle as we have to keep borrowing an ever increasing amount off them in order to keep up the interest payments.
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Old 28th October 2008, 04:45 PM   #19
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Quote:
So you create more money, to represent your creation of more wealth. Who cares?
If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.
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Old 28th October 2008, 04:53 PM   #20
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Originally Posted by theprestige View Post
You have a good point. Therefore, I refer to my subsequent post, in which I continue the line of argument that as money is a representation of wealth, and wealth is a representation of value created by hard work, as long as these things track reasonably accurately with each other, who cares?

So you create more money, to represent your creation of more wealth. Who cares?
But those things don't track reasonably accurately. And that's what people are complaining about. how much was a new car 50 years ago and how much is it now. Or a house?

There's nothing wrong with creating money out of thin air. It has to be created somewhere. It's the creation of money as debt with interest that is the problem.

because there is always more money to be paid back than is created an infinitely expanding or inflationary economy is required. This means constant increases in toil and rape of the earth's resources to simply stand still.

We're getting away with it in the Western world because we're buying and profiting from the rich resources in poorer countries. But what happens when those resources run out? The whole thing is unsustainable.

And the other major problem with private banks creating the money is that they also have control over it's supply. Which means they have control over whether we have jobs a roof over our heads and food on the table
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Old 28th October 2008, 04:55 PM   #21
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Originally Posted by zaphod2016 View Post
If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.
The Achilles heel is the Interest. Usury was banned in older times precisely because of that.

And as I say above the other big problem is putting the creation of money in private hands.
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Old 28th October 2008, 06:50 PM   #22
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Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true. Central Bankers don"t rule the world. Just because Alan Greenspan made mistakes in his policy, that doesn"t mean that he is apart of some evil conspiracy by the central bankers. Ron Paul is still wrong about abolishing the Federal Reserve and the Rothschild family doesn"t own the Bank of England or the Federal Reserve and neither do the Rockefeller family.
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Old 28th October 2008, 08:16 PM   #23
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Originally Posted by moon1969 View Post
Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true. Central Bankers don"t rule the world. Just because Alan Greenspan made mistakes in his policy, that doesn"t mean that he is apart of some evil conspiracy by the central bankers. Ron Paul is still wrong about abolishing the Federal Reserve and the Rothschild family doesn"t own the Bank of England or the Federal Reserve and neither do the Rockefeller family.
I think looking at it as some evil conspiracy is the wrong angle. But by definition the bankers do have the power over money creation and it's supply and thus a certain power over the economy.

It doesn't really matter who owns the central bank the vast majority of money is created by private banks.

The system by default drains wealth from the masses and gives it to the few at the top of the pyramid. And it's only natural that those at the top are not going to relinquish that privilege lightly.

The interesting factor is that the economic basics of money creation are so widely dismissed and misunderstood. That says a lot about the lack of education and even more about just why there's a lack of education.

Why should it be left to sources normally associated with Conspiracy Theories to educate us about money creation. You can't help but feel that it's knowledge that the officials would rather not got into the mainstream.

Although I can understand it. Most people wouldn't be to happy to learn that they have to toil all hours to earn money that other people can simply create out of thin air.
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Old 28th October 2008, 08:22 PM   #24
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Originally Posted by moon1969 View Post
Just because there are flaws and problems in the Banking system and the FED doesn"t mean that there is a conspiracy. It just means that the Banking system and the FED needs reforming. I don"t also believe that statement is 100% true.
For clarity: the statement in question is: Does fractional reserve banking create money as debt?

This thread has nothing to do with Rockefeller or the Bank of England or even my beloved Ron Paul. Please keep replies on-topic.
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Old 28th October 2008, 08:23 PM   #25
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As of 11:30pm Tuesday, 3 people have answered "no", zero of these people have offered an explanation or evidence. Please, friends; less rhetoric, more debunking.

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Old 28th October 2008, 08:49 PM   #26
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Originally Posted by zaphod2016 View Post
If this were a zero-sum game, I wouldn't care either. But what about the interest?

We aren't creating 1 unit of debt to represent 1 unit of wealth; we are creating 1 unit of debt + interest to represent one unit of wealth.

Either I'm misunderstanding something, or our system contains an Achilles heel.
You're misunderstanding something. Money is a representation of wealth, and wealth is a representation of hard work.

Human desire and human effort aren't zero-sum games. Why should wealth or money, which describe these things, be zero-sum games?

Originally Posted by Tin Foil Timothy View Post
But those things don't track reasonably accurately. And that's what people are complaining about. how much was a new car 50 years ago and how much is it now. Or a house?
How much more car do you get for your money now, than you did 50 years ago? How much more house?

Originally Posted by Tin Foil Timothy View Post
The Achilles heel is the Interest. Usury was banned in older times precisely because of that.
Some would argue that there's a diffrerence between "usury" and a reasonable interest rate. I'm not going to let you consume my money for free, any more than I'm going to let you drive my car for free, or live in my house for free. If you want to use these things to make yourself better off, I expect to be made better off by letting you use them. Otherwise, you use them up, and I'm worse off than if I'd used them up myself.

Now, the practice of tyrannizing somebody by means of charging an unpayable interest rate ("usury") is just as bad for individuals and for the economy as the practice of tyrrany by charging an unpayable rent, or an unpayable automobile lease.

The idea is to charge you less for the use of my wealth, than the new wealth you will create by working hard with my wealth. That way we both come out ahead: You get access to wealth you hadn't worked for, and can use it to create new wealth for yourself. And I can benefit from your hard work, by letting you use wealth that I have already worked hard for.

Money is just a way of counting up how hard each of us has worked, and how valuable our neighbors think our work really is.
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Old 28th October 2008, 09:04 PM   #27
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Zaphod:

Unfortunately the same woos in the other thread are still in this one, but maybe it will be easier to ignore them (I still can't find the ignore button - can someone tell me where that thing is?)

Money is technically created by buying securities - which is a debt instrument. When that cash is then lent out, more cash is available to lend because the chance of the demand for money increasing above and beyond reserves kept for the original loan is almost 0.

This does NOT lead to inflation per say, as long as the demand for money increases with supply, and borrowers are a direct proxy for demand. Inflation usually occurs due to reasons other than lending of money, it only occurs due to the Federal Reserve a fraction of the time and only when the estimates of money demand are overshot. Given that we have a fractional reserve and deflation has occurred throughout our economic history, the assumption that "fractional reserve = inflation" is false.

There is nothing wrong with fractional reserve banking, its the best type of banking we've seen so far. The question is not "does fractional reserve banking create money from debt" - because it does - but rather if this is a good system. It has its flaws, but its the best system available so far.

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Old 28th October 2008, 10:01 PM   #28
Tin Foil Timothy
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Originally Posted by theprestige View Post
How much more car do you get for your money now, than you did 50 years ago? How much more house?
Are you really being serious using that as an argument against the mistracking between money and value? i.e inflation


Quote:
Some would argue that there's a diffrerence between "usury" and a reasonable interest rate. I'm not going to let you consume my money for free, any more than I'm going to let you drive my car for free, or live in my house for free. If you want to use these things to make yourself better off, I expect to be made better off by letting you use them. Otherwise, you use them up, and I'm worse off than if I'd used them up myself.

That's a nonsensical argument. The money is created out of thin air. it has no intrinsic value, and it's value isn't fixed.

Quote:
Now, the practice of tyrannizing somebody by means of charging an unpayable interest rate ("usury") is just as bad for individuals and for the economy as the practice of tyrrany by charging an unpayable rent, or an unpayable automobile lease.

The idea is to charge you less for the use of my wealth, than the new wealth you will create by working hard with my wealth. That way we both come out ahead: You get access to wealth you hadn't worked for, and can use it to create new wealth for yourself. And I can benefit from your hard work, by letting you use wealth that I have already worked hard for.

Money is just a way of counting up how hard each of us has worked, and how valuable our neighbors think our work really is.
No, in the sense of creating money out of nothing and lending it out with interest it's nothing to do with counting how hard anyone has worked. When you take out a mortgage to buy a house the bank doesn't do any work above pressign a few keys on a keyboard and crediting your account with the required loan.

This is the point. to you and I who toilo for money then sure the money does represent work, but for the bank and it's fractional reserve system it doesn't work that way.
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Old 28th October 2008, 10:46 PM   #29
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Originally Posted by LightinDarkness View Post
Zaphod:

Unfortunately the same woos in the other thread are still in this one, but maybe it will be easier to ignore them (I still can't find the ignore button - can someone tell me where that thing is?)
Stop being so childish. A mature person would accept defeat instead of trying to bury their head in the sand as protection against anyone who can debunk their misleading nonsense.

You keep on injecting misleading and lame attempts at discrediting the Zeitgeist explanation of the monetary system in this forum and you are going to be debunked. ignoring it won't make it go away.

It's even fun watching you make yourself look increasingly more foolish as the days go by.

You continue to be debunked time and time again in the Zeitgeist thread and you will be here.



Quote:
Money is technically created by buying securities - which is a debt instrument. When that cash is then lent out, more cash is available to lend because the chance of the demand for money increasing above and beyond reserves kept for the original loan is almost 0.
Gibberish nonsense.

The central bank creates a deposit in a bank's account by buying government bonds ( bills-IOUs). That money is not lent out it remains as the bank's reserve. The bank then creates new money ( out of thin air ) through fractional reserve banking. The amount of which is determined by the reserve ratio and is generally 10:1. so, for example, if the Fed deposits $10,000 into the bank, the bank can then create $9,000 of dent and credit the account of the borrower with that amount. this has increased the deposits of the bank from $10,000 to $19,000. From that another $8,100 of debt can be created increasing the deposit to $27,100. and so on and so on.



Quote:
This does NOT lead to inflation per say, as long as the demand for money increases with supply, and borrowers are a direct proxy for supply. Inflation usually occurs due to reasons other than lending of money, it only occurs due to the Federal Reserve a fraction of the time and only when the estimates of money demand are overshot. Given that we have a fractional reserve and deflation has occurred throughout our economic history, the assumption that "fractional reserve = inflation" is false.
Another load of gibberish nonsense. Your problem is that you're not fooling anyone who actually understands the system.

Yet again I've completely debunked your economic gibberish in the Zeitgeist thread and yet again I can do it with ease here.

The existence of a fractional reserve system with interest doesn't guarantee the continual existence of inflation and it's complete nonsense to argue that a period of deflation proves that fractional reserve doesn't require inflation. Deflation can still happen. But the fractional reserve+interest system requires a certain amount of inflation as the expansion an never keep up.

That's why central banks aim for an optimum inflation rate. Too little inflation is just as bad as too much. They control it buy adjust interest rates and buying and selling bonds ) bills)

You can ignore me if you like, but you can't ignore the way the monetary system works. Unfortunately for you I simply give the same information the Federal Reserve does.

I think your big problem is one of pride. You are ignoring reality because you can't bring yourself to agree with the Zeitgeist film because of it's CT history.

Sure the original Zeitgeist film posited a lot of CTs. But Zeitgeist film is wholly accurate in it's description of the monetary system and even correctly uses a Federal Reserve document as reference.

You started off by calling out the Zeitgeist film as CT nonsense and one by one all of your arguments trying to discredit the film have been debunked.

You're now running out of Zeitgeist:Addendum statements to discredit regarding the money supply and are now flapping about like a fish gasping for air on the riverbank.

I do admire your tenacity. Most would have conceded by now. But do carry on it's your rep that's diminishing by the day.

Zeitgeist/Federal Reserve 1 - Lightindarkeness 0













There is nothing wrong with fractional reserve banking, its the best type of banking we've seen so far. The question is not "does fractional reserve banking create money from debt" - because it does - but rather if this is a good system. It has its flaws, but its the best system available so far.[/quote]
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Old 28th October 2008, 11:06 PM   #30
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Originally Posted by zaphod2016 View Post
$100 loan @ 10% interest

Bank creates $100 in form of loan

Customer repays $110 a year later

Where did the $10 come from?
It obviously came from the customer's income, which the customer might have had regardless of whether he borrowed the money (it depends on what kind of loan we're talking about). The customer effectively accepted a higher price for whatever he was buying, in exchange for having it sooner.

Originally Posted by zaphod2016 View Post
This isn't zero-sum at all- the new debt has an associated cost of $10. The net result is +$10 for the bank, -$10 to the debtor
The bank gets $10. In exchange, the borrower gets the use, during the term of the loan, of whatever he bought.

Your question of "Where does the interest come from?" is one that the borrower is supposed to get an answer for, before he ever takes the loan. It's his responsibility. People take loans based on plans that don't completely work out, and that's one thing. Taking a loan when you don't even have a plan for paying the interest is quite another, and foolish.

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Old 28th October 2008, 11:25 PM   #31
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Originally Posted by Gazpacho View Post
It obviously came from the customer's income, which the customer might have had regardless of whether he borrowed the money (it depends on what kind of loan we're talking about). The customer effectively accepted a higher price for whatever he was buying, in exchange for having it sooner.


The bank gets $10. In exchange, the borrower gets the use, during the term of the loan, of whatever he bought.

Your question of "Where does the interest come from?" is one that the borrower is supposed to get an answer for, before he ever takes the loan. It's his responsibility. People take loans based on plans that don't completely work out, and that's one thing. Taking a loan when you don't even have a plan for paying the interest is quite another, and foolish.
I am speaking in regards to money supply. I understand what you are saying, and agree 100%, but it does not address the issue at hand.

Originally Posted by LightinDarkness
The question is not "does fractional reserve banking create money from debt" - because it does -
Huzzah! I knew I wasn't totally crazy here. Thank you, thank you, thank you again for helping to separate fact from fiction. Fractional reserves banking DOES create money as debt.

Originally Posted by LightinDarkness
...but rather if this is a good system. It has its flaws, but its the best system available so far.
Whether or not this is the best system seems to me a debate for the politics forum. My concern here was establishing the facts of the case, and you have helped me immensely with that. Thanks again.

To those of you who voted "no": pbbbbbbbt

Tim: stop picking on LightinDarkness; we have what we need. I keep telling you- this is an ally to our cause, not an opponent.
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Old 28th October 2008, 11:49 PM   #32
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Originally Posted by zaphod2016 View Post
Wait a sec- $100 debt in new money created, $110 repaid, $100 debt destroyed (removed from circulation).

Where did this $10 in bank profits come from?
It comes from the money currently in circulation.

Quote:
If there is no change to money supply, doesn't this mean this profit came from the existing money supply?
Yes

Quote:
And if this is true, wouldn't *all* money eventually get transferred to either bank profits or interest paid to depositors?
No because you have to remember that while banks are using that money to pay interest in savings and cheque accounts and their shareholders..., they also have to pay for their electricity, their rent, their staff's paychecks, and so forth. So while the money passes through the bank, just like any other business, it doesn't stop there and pile up, it gets spat back out in the form of both expenses and dividend.
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Old 29th October 2008, 12:04 AM   #33
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Are you sure you want to add Tin Foil Timothy to your ignore list?

YES!

It is people like him that destroy the credibility of otherwise legitimate movements, I hope to God he never supported Ron Paul. Timothy - thanks for all the opportunities to debunk your conspiracy non-sense. I just got tired of debunking you over and over again because you were incapable of doing anything but ranting and raving with more made up stuff in response. However, I finally found the ignore button (was looking in all the wrong places). Go back to the David Icke forum that spawned you, troll.

Now, back on topic:
Zaphod - Happy to be of assistance . I still maintain that conspiracy theory intentionally mis-characterizes how money is created and the role that the Federal Reserve plays in it. However, it is true that debt, through temporary securities based debt exchange, creates money.

Many people have a negative perception of debt as a principle and, if you poll people on whether the concept is good or bad, most Americans will tell you its bad. We have had it ingrained by us by those who don't really understand finance that debt = bad. This is why when I think many people learn about this, they go a bit psycho because they assume debt is horrible. This is not true. If you appropriately manage debt it can be a good tool, both for the government and for your personal finances.

Also, I don't think whether its the best system is a political issue, more of a economic one - what else would you do? You can tie it to gold but the principle is the same: gold only has the value we give to it, just like the paper dollar. Its limited in scale of its actual usability much like paper. The only form of exchange that has innate value is bartering things we actually use, which would throw us back to medieval exchanges.
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Old 29th October 2008, 12:11 AM   #34
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Originally Posted by PhantomWolf View Post
No because you have to remember that while banks are using that money to pay interest in savings and cheque accounts and their shareholders..., they also have to pay for their electricity, their rent, their staff's paychecks, and so forth. So while the money passes through the bank, just like any other business, it doesn't stop there and pile up, it gets spat back out in the form of both expenses and dividend.
Thank you for a clear reply. Let me be sure I have this right:

Say we have $100 in the total money supply.

We issue a loan for $1000 @ 10% for 1 year.

We create $1000 to cover this, and send it out into circulation.

A year later, the $1000 is repaid, removed from circulation. No inflation; homeostasis is achieved.

We owe $100 in interest- this comes from the $100 in our existing money supply.

How did the $100 get there in the first place? It cannot be debt-money like the $1000 is, because it would have to be repaid also, and so could not also be used as an interest payment. The $100 of interest money stays in circulation- i.e. is spent by the bank, not retired after repayment.

Is the original $100 created without debt? If so, by which process?

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Old 29th October 2008, 12:22 AM   #35
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Originally Posted by LightinDarkness View Post
Also, I don't think whether its the best system is a political issue, more of a economic one - what else would you do? You can tie it to gold but the principle is the same: gold only has the value we give to it, just like the paper dollar. Its limited in scale of its actual usability much like paper. The only form of exchange that has innate value is bartering things we actually use, which would throw us back to medieval exchanges.
Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town?

Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.

Warning: here comes my inner left-winger again: why is a bank allowed to charge interest on money it doesn't have? Sure, it boosts economic growth, but couldn't we achieve better results if the SBA just gave 0% loans directly, in accordance with our needed money supply? Short version of my logic: removing the interest factor on money would increase spending power, boost economic growth. I.e. I can spend $11k on a new car, instead of $10k on the car, and $1k to the bank.

When I have $100 in my lame old ING account, I earn interest on $100. I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.

And to be clear: I have no moral problem with interest. It is logical to compensate for the opportunity costs of making a loan. But if the bank doesn't have the money to begin with- what is the risk to the bank? The "opportunity cost" argument sort of falls apart, doesn't it?

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Old 29th October 2008, 09:45 AM   #36
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Wallenberg family probaly has more money then the Rothschild family so does the Wallenberg family own the Federal Reserve? House of Morgan is also alot more powerful then the House of Rothschild. Point is that all of these people are not apart of some big conspiracy by the central bankers and they are not shape-shifting reptilians like David Icke claims.
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Old 29th October 2008, 10:02 AM   #37
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Originally Posted by zaphod2016 View Post
We owe $100 in interest- this comes from the $100 in our existing money supply.

How did the $100 get there in the first place? It cannot be debt-money like the $1000 is, because it would have to be repaid also, and so could not also be used as an interest payment. The $100 of interest money stays in circulation- i.e. is spent by the bank, not retired after repayment.
The best that I can tell, when people say that "lending creates money," they do not mean that money pops into existence from nothing as a result of a loan. They mean that it enables money to be used as money when it would otherwise sit in Scrooge McDuck's money bin, or under someone's mattress.

The former interpretation leads to the questions you are asking. The latter does not.
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Old 29th October 2008, 10:22 AM   #38
Tin Foil Timothy
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Originally Posted by LightinDarkness View Post
Are you sure you want to add Tin Foil Timothy to your ignore list?

YES!

It is people like him that destroy the credibility of otherwise legitimate movements, I hope to God he never supported Ron Paul. Timothy - thanks for all the opportunities to debunk your conspiracy non-sense. I just got tired of debunking you over and over again because you were incapable of doing anything but ranting and raving with more made up stuff in response. However, I finally found the ignore button (was looking in all the wrong places). Go back to the David Icke forum that spawned you, troll.
...
Please don't be so childish.

How can you accuse my debunks of your attempts to discredit the Zeitgeist:Addenudum film as 'made up stuff' when the Federal Reserve itself supplies the information?

Fractional Reserve Banking isn't "consiparcy nonsense" it's the way it works.
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Old 29th October 2008, 10:25 AM   #39
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Originally Posted by zaphod2016 View Post
Gold is no good because it limits our ability to expand. Say we peg $1 = 1/1000 Oz of gold. Our economy now has an artificial ceiling- some point at which we need to go dig rocks in order to have a larger economy. Its absurd. Can you imagine the market "maxing out" for a few days, waiting for a miner to walk back to town?

Maybe I am being way too simplistic here, but why not just create the money directly, and spend it into existence. I.e. Congress tells Treasury we need another $10,000, Treasury tells Mint, Mint prints up the cash, and they send paychecks to the military so they can withdraw it from whatever bank they use. Money could be retired from the system via taxes. I.e. only spend a portion of tax revenues back into the system, and destroy the rest, to adjust for inflation as needed.

Warning: here comes my inner left-winger again: why is a bank allowed to charge interest on money it doesn't have? Sure, it boosts economic growth, but couldn't we achieve better results if the SBA just gave 0% loans directly, in accordance with our needed money supply? Short version of my logic: removing the interest factor on money would increase spending power, boost economic growth. I.e. I can spend $11k on a new car, instead of $10k on the car, and $1k to the bank.

When I have $100 in my lame old ING account, I earn interest on $100. I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.

And to be clear: I have no moral problem with interest. It is logical to compensate for the opportunity costs of making a loan. But if the bank doesn't have the money to begin with- what is the risk to the bank? The "opportunity cost" argument sort of falls apart, doesn't it?
I can't see any reason why we can't just create money and spend it into existence. In fact wasn't that the way Lincoln's Greenbacks worked?
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Old 29th October 2008, 10:31 AM   #40
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Originally Posted by zaphod2016 View Post
Tim: stop picking on LightinDarkness; we have what we need. I keep telling you- this is an ally to our cause, not an opponent.
I'm not picking on LightinDarkness. I'm just correcting the errors in LightinDarkness' attempts to discredit the Zeitgiest Addendum film in regards to it's explantion of the monatary system. LightinDarkness personal insults and childish responses are also duly noted. Why can't people accept they are wrong without stomping their feet.

But that aside it's good to see that at least a good number of people are starting to understand how money is created from nothing and how the interest attached causes an inbuilt monetary shortfall.

So thanks for starting the thread.
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