Topic: Money as Debt from Paul Grignon (Read 4387 times)

You need to understand the difference between base money and broad money. Base money is issued by the central bank and only the central bank can increase its supply. In other systems, base money could indeed be gold or pebbles or something physical. Broad money is many multiples of base money. The difference between broad money and base money(in simplified terms) is that broad money includes bank deposits.

Since broad money is many multiples of base money it is broad money that is created out of thin air. This is important. You really need to understand this to understand the whole system. When you have a bank account with $1,000 in it, you have broad money. When you withdraw the $1,000 you have base money. When you get a loan for $1,000 and have the cash in your hands, you have base money. When you get a loan for $1,000 and it is sitting in your bank account you have broad money.

When the goldsmith starts issuing paper notes against the gold in his vault it is the gold that is the base money. In this case, a loan issued in notes is indeed broad money written into existence by the goldsmith. A fixed amount of gold can support a much larger supply of gold plus note money, broad money. A fixed supply of base money can support a much larger supply of base money plus deposits; broad money. For the goldsmith, the difference is clear between gold and notes. For us, the difference between base money and broad money is more tricky as both can be just numbers on a computer.

The bottom line, though, is that private banks are not writing base money into existence.

Man, forget it. You just don't want to understand

Except that's not really what happens. Fully private banks can't just make money from a credit card loan (home loans are tricky because they have a real asset behind them). They have to have the deposit on reserve and if they don't then they borrow it from intrerbank lending. The Fed is the only one that creates money. The additional dollars from fractional reserve lending are real at each step.

Fractional reserve lending can (and likely has) been done with Bitcoin. Person A buys some bitcoin from Mt Gox and gives it to pirateat40. pirate then sells the coin at mt gox to get fiat to put into Zeekbucks. The person who buys the coins happens to be person A again, who sends pirate more money.

Ignoring the rediculous 7% interest, in the scenario above, Person A at one point in time has a single bitcoin twice. Once in their Mt Gox account, and twice as a note from pirate for redemption.

I'm not sure to understand your point. But yes, banks create all the money in circulation out of loans and no, it's not possible with gold, pebbles or bitcoin.


A mortgage is a promise from the bank to gives you that money, so they create it.

Okay, I'm looking at the link and I can't see which part disagrees with my account. Maybe you'd like to narrow it down from 50 pages to give me a hint which bit proves I'm wrong. Bear in mind that I said;


and there are numerous references to deposit expansion, expansion of deposits and so on.

When bank A make a deposit at the central bank, the baking regulation allows Bank A to literally CREATE 9X this amount and invest this money on whatever they want. Also banking regulation allows them to CREATE 90% of the deposit amount in their book.

You should take a look in the Modern Money Mechanics which I referred earlier. The process of money CREATION as it is stipulated in this booklet is very well explain. (Written by the Federal Reserve itself)

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

Yeah that part is also a bit dubious. The only time money is written into existence is from the Fed (e.g. QE)

I still have an issue with the idea that a bank 'writes money into existence' when someone takes out a loan. I can sort of see where they are coming from, but you could also get the wrong idea.

So at the start, a bank has $1,111.12 on reserve at the central bank. The central bank will then lend them $10,000 with the reserves as collateral. So when someone comes to take out a loan for, say $1,000, is the money being created out of thin air? No, its just part of the $10,000 being passed on to a borrower. (Okay so the central bank might have written it into existence to begin with, but that is a separate issue...) When that $1,000 gets deposited at another bank and it is used to fund a $900 loan, is the money created out of thin air? No, part of the $1,000 (which can be traced back to the central bank) has just been passed on. There are no fictional dollars in this part; you could do fractional reserve banking with gold, pebbles, whatever you like.

The money that gets created out of thin air, if you want to call it that, is on the depositor side. When you deposit $100 at the bank, you don't own the $100 any more, you have an IOU from the bank for $100 and that is an important distinction.

Let's say there is a bank with $1,000 deposit reserves and $9,000 of outstanding loans. This is due to 100 people each depositing $100 at the bank, of which 10% is kept as reserves and the rest is loaned out. If someone else deposits $100 in the bank, the bank now has $1,100 reserves supporting $9,000 of loans. If all the depositors demanded their money at the same time, each $100 of deposits would only support a payout of $10.90. In other words, the $100 of money has been transformed into a claim on $10.90 of reserves plus a claim on the repayments of $89.10 worth of loans.

The way that money is created is that these claims on the bank are treated the same as if they were $100 of real money. The fictional money is in the bank accounts, not in the hands of the people who borrow from the bank. When money is loaned out, the deposits represent a claim on a bit less reserves and a bit more promise to pay (i.e. loan). When loans are paid back, the deposits are a claim on a bit more reserves and a bit less promise to pay.

Enabled Person A to buy a fishing rod.

You know you're not supposed to ask that!

What did Bank (B) do to create $100 to subsequently loan out to A and receive a handsome $10 profit?

Of course you can pay back you debt... with someone else debt. IMO the fact that we, as a society, absolutely need dept to run this carousel over and over to avoid a crisis is a fundamental problem that only profit the banksters. Period.

I kind of feel that these two videos have some logical errors that are there specifically to introduce a new-Marxist agenda. The first video definitely has this problem and they actually correct it in the secodn video, but kind of handwave it away.

The core thesis is that the money supply must be ever expanding in order to satisfy interest based debt. This is absolutely not true. I'll give an example:

Imagine a system with no money, but a central bank. Person A borrows $100 from Bank B to buy a fishing rod with the agreement that they will pay back $110 at the end of the year. Bank B creates $100 out of thin air and gives it to Person A. Person A then buys a fishing rod from Rod maker C for $100.

Person A is very successful at fishing. She is able to fish an overabundance of fish, way more than she needs. Rod maker C doesn't really like fishing, so he makes an arrangement with Rod maker C to pay them $10 per month for a certain amount of fish. Person A can fish all that she needs, all that Rod maker C needs, and even more if they put in the time. After 5 months, Person A has $50 back from Rod maker C, and takes that to Banker B who takes the first $10 paid back as his own interest profit and applies $40 to the principle. Thus, she still owes $60.

Well, Banker B also likes fish and would prefer to not have to fish every day, so he signs up for a month of fish with Person A for $10. Since Banker B only has $10, he can only do that for one month. Rod maker C continues to buy the fish for the next 5 months, giving Person A $60. They then discharge the debt. No more debt was created and all debt and cash was discharged even though there was at most $100 in the system at a time.

So what happened? The answer is "usable production." The debt can be repaid when Person A is able to produce something that convinces Banker B to spend their interest profit. In fact, this is why bankers charge interest (aside from defaults): so that they can have a profit that they then use to live on. In a highly complex economy, Banker B would have loans out to the ranchers and apple farmers and wine makers. This would allow them to buy beef, apples, and wine. In effect, the lending of the money gives Banker B a 10% slice on production, something that is sought after because without it people like Person A wouldn't have any fish. 90% of an overabundance of fish is better than 100% of no fish.

This is touched on by the second video, but then it dismisses this a "unlikely," but in reality it's very likely in the case of a central bank like the Fed. This is because all profits by the federal reserve are not privately held but instead turned over to the Treasury. And the treasury spends all the money like it's on fire, so it's apparent that these profits are cycling back into the economy and thus all debts are resolvable.

Money as Debt does have some good info in it, but it needs to have a huge grain of salt.

To respond your statement, it was because he didn't explain that the money create out of a loan is being destroyed when you pay back your loan. This has been added in the second edition which I didn't find in the English version but is pretty well explain in the video part II.

I got this from Wikipedia I can't follow the link on my work internet access, but I will check it out later. I am guessing that the misleading part is the bit about banks writing money into existence when you take out a loan.

Not realy as bitcoin is still quite small and the value per coin is still low.
The more valuable one bitcoin becomes the more of a problem it will be that there are people wil lots and lots of bitcoin if it means that their jobs are at stake, for instance.
The question is whether the bitcoin market is willing to put up with the shenanigans of a relatively small group of big coin owners.

I'm sorry, I thought you were speaking of Bitcoin. Every time Bitcoin grows, a whole new crop of people "step into a new currency where a small minority has almost complete control over the market", that small minority being the people who came in previous waves. Every time a new user joins this forum, your "rhetorical question" is answered: Yes.

I'm not talking about us now, i'm talking about other people in the future.
It. Was. A. Rhetorical. Question.
...

Dumbest. Question. Ever.

Look where you are, man.

It's a natural process.
Would you step into a new currency where a small minority has almost complete control over the market?