A very simple fact about Economics, too basic, but trying to understand "money=debt"

Hi all,

These last months I am studying Economics, but at a personal level, for I have another profession.

I have been reading and watching books and documentaries about money as debt, The Federal Reserve, and so forth.

I am quite interested in such topics, and I would like to present here what it seems to me a "ideal town/country" without debt. It is very basic, but I fail to understand why there is so much debt:

The town (the only town , the first town in the world, let´s say)

-Incomes: people want to have schools and hospitals and public libraries and public roads and public music schools. The mayor says: If you want such things, we all hay to pay a little money every year and in that way we all enjoy such public, magnificcent services. Therefore, people are not stupid and willingly pay a 8% of their income to pay that.

-Expenses: Just as they collect the taxes, the money from the citizens, they build schools, hospital, give allowances to unemployed people, accordinly with the income of course!

-Private Banks: As any other business (bakery, drugstore....) a person thinks about setting up a bank, therefore, as any other business the guy has 15.000 dollars to begin with, to lend them at interest to people. Must that business be regulated by the state, by the government of the town? I don´t think so, just the same as neither the bakery or the drugstore must. Who does this guy make profits? through loans of course, at his own risk, as the bakery.

Here is where I don´t understand why this government would need a central bank (The Federal Reserve, The European Central Bank, The Bank of England...). Logically, I am a newcomer, not undertanding the complexity of these central banks, but I have to being from scratch to understand why they are needed.

IN THIS TOWN, I DON´T SEE MONEY AS DEBT, I DON´T SEE THE GOVERNMENT HAS TO BORROW MONEY JUST BECAUSE PEOPLE PAY THE PUBLIC SERVICES, WHAT FOR WOULD THE NEED TO BORROW MONEY IF PEOPLE GIVE IT WILLINGLY?

 

In some ways its a matter of perspective. Different types of commodities can be used to back money. That is why central banks that issue money hold reserve assets. Right now, money is being backed with debt, secured with land.

 

The funny thing is when money is backed by government debt. About half the reserve assets held by the Federal Reserve bank backing the US dollar, for example, are Treasury bonds/notes.

So what happens when paper money is just backed by promises to pay more paper money in the future?
Seems like circular logic to me.

As you can see, there are big potentially dangerous problems when too much of a country's money is backed by debt. A feedback effect can unexpectedly be triggered. If borrowers cannot sustain their debts, suddenly the money supply (which is based on debt) starts to dissappear. This could either tank the form of bank closures, or through inflation if the value of the assets backing the money become diluted. For example, when the Federal Reserve provided bailouts to large banks, buying toxic assets at higher than market value, it reduced the value of the dollar, contributing to inflationary pressure. The money supply was expanded out of proportion with the increase in reserve assets.

 

I don´t even know what money is!. the deeper I get into this subject, the less I understand the nature of money.

Is the Fed a private-owned bank who LENDS money to the US? Can´t the US issue the money itself, without interest to pay to the Fed?. Is this system so-called "money as debt" bound to fail?

Does Sweden or Norway or Findland or Denmark have a Central bank that LENDS money to the government?

I quite don´t understand how a private bank (the Fed) can lend money at interest to a government.

 

It is rather complicated, but this thread may help:
http://www.politicalforum.com/economics-trade/203166-how-federal-reserve-notes-work.html

And to understand why money is worth anything to us:
http://www.politicalforum.com/economics-trade/254643-inflation-augments-taxation.html

 

Really interesting (but complex indeed to me) the "how Federal Reserve notes work" link.
I appreciate it very much.

 

The concept of money being debt isn't complex at all. You just have to think of how money is created in the first place. As one economist said, ''the process by which banks create money is so simple that the mind is repelled''.

Here are some excerpts from the Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa, J.O. Patenaude, I.S.O., Printer to the King's Most Excellent Majesty, 1939.

Here's the original document, in part:

http://www.scribd.com/doc/38349556/...Commerce-May-9-1939-MINUTES-CANADA-Pg-461-500

Then consider that most ''money'' banks create by typing numbers into accounts in the form of loans, doesn't really exist, never has and never will exist. All the money banks have are their reserves, and bank reserves make up only a small fraction of the amounts banks owe to their customers.

This is where the theory that money is something which customers pay into their bank accounts, and the banks then lend to other customers, falls apart. Because if that was the case then the chances are that most or all of the money your bank lent to someone else, would be in somebody else's bank account, which would contribute to that bank's reserves. But since bank reserves make up only a small fraction of the total of customer accounts, this is obviously not how banks, and hence the money supply, works.

Then consider that all money banks create this way, comes with interest attached, and the only way the money needed to pay the interest can come to exist, is in the form of another loan from a bank. So when you hear the term ''mature economy'' as is being applied to western economies these days, think of hugely indebted economies which are now struggling to pay the compound interest on their money supplies which has built up over the years. ''Emerging economies'' OTOH are ones in which a far higher proportion of new money is being created for the first time, so don't have the same compound interest problem.

Bill Still, author of Money Masters has done plenty of work to expose this ponzi scheme which we call money. And seemingly, the IMF is now thinking along the same lines, and have reported that growth of 10% would be achieved simply by changing our debt money systems.

[video=youtube;RfxUNYQZJzU]http://www.youtube.com/watch?v=RfxUNYQZJzU[/video]

 

Re my post above, this is incorrect:

...as this is what happens in a fractional reserve banking system. But I don't think that affects anything else in the post.

 

Except of course that the entire economy of the town is far more dependent on the banker than the baker. The bank is in a unique position. It makes loans but it also takes deposits, i.e. the savings of the townspeople are entrusted to it. The bank must allow these savers to withdraw their money when they need it. If it fails to do so the entire economy may collapse in a cascade of unpaid debts. While a prudent banker would keep enough reserves on hand to deal with this, history has proven that this is not always the case. The result is banking regulation and the institution of central banking.

It is much the same with pharmacists and bakers. Unscrupulous operators have proven a need for regulation to protect the public.

In every case such regulation has been enacted only after public outcry at being variously cheated, ruined, poisoned and killed by unscrupulous merchants. If there is anyone to blame for the regulation of business it is business itself for acting against the safety and security of the public.

There are a number of reasons why central banking is a good idea, mostly having to do with the number of banks and the distance they operate at. For example, until after the US civil war the vast majority of currency circulating in the US was private bank notes, mostly issued as loans but supposedly backed by specie (i.e. gold or silver) in the banks vaults and redeemable on demand. There was a lot of problems with this and bank failures to redeem notes were numerous and often. This led to the establishment of the First, and then the Second Bank of the United States, which were the depository for US government funds and their point of disbursement. These banks received, in their normal course of business, numerous notes from private banks which they dispatched to their agents for redemption in wither their own notes or specie. In effect they kept the private banks honest. Big private banks in Boston did much the same for New England.

Bankers in the west (Kentucky and Tennesee etc) complained that the central bank was ruining their business so they got Andrew Jackson elected and he did not renew the banks charter. The end result was a totally confusing system of money for the next forty years. While this flood of semi-legitimate money masquerading as currency fuelled the enormous growth of the US it also caused huge problems. The major currency exchange, an alley in New York City, was often littered ankle deep in worthless bank notes. Some economists who studied the era concluded that it retarded economic growth by some 10% a year or more.

During the civil war the US Treasury began issuing its own paper notes, which quickly inflated as more and more were issued. Despite that they managed within a few years to replace private banks notes and become the preferred currency of exchange across the US. Later, the Treasury began issuing gold and silver certificates backed by and redeemable for specie. There were unintended consequences to this.

Now that the amount of money in the US was fixed to the Treasury reserves of gold, as the economy grew there was less and less money chasing more and more goods. Prices would stagnate and then decline, debtors would default because their production could not generate enough cash to repay their loans. Banks would stop lending since their cash was becoming more valuable just sitting in the vaults without the risk of lending in a deflating economy. The economy would grind slowly down. Then there would be a new gold strike and the Treasury would flood the economy with more money. Optimism and inflation would run rampant through the economy at first as the amount of new money outran the economy but eventually the economy would catch up and prices would moderate and the cycle of decline begin again.

There were other important components, lie the annual fall exodus of bank reserves from New York as western banks withdrew them to pay farmers for their crops. The semi-regular stock market panics inevitably came in the fall, when credit became tight and margin traders were caught short. These regular economic calamities also generated huge social unrest as millions of workers were tossed into unemployment, homelessness and starvation on a cycle to them that seemed especially evil since they would lose everything they had gained through their years of hard work at one stroke.

This was the regular cycle of the boom and bust economy of the later 19th and early 20th century. By the early 20th century it was realized that a commodity based currency (gold) was not conducive to social, economic, and political stability since socialists and other radicals were gaining political power with every economic downturn and there was a real possibility that capitalism would be entirely overturned if boom and bust continued.

The result became the Fed. The remit of the Fed was to adjust the supply of money to avoid the monetary economic calamities of the past. Unfortunately, the structure of the Fed essentially precluded this and the Fed became an instrument of the private banking interests, flooding the US economy with excess liquidity right up to the crash of 1929 and beyond. After that spectacular failure the Fed were taken over by strict Keynesian economists who led the economy into the 1960s until they were replaced by others who thought that currency manipulation alone could maintain full employment and economic growth regardless of underlying conditions. In the 1980s these were replaced by free market thinkers who believed that the Feds primary function was to supply liquidity to markets. Every time the market looked like it would falter the Fed flooded money into the economy. By the 2000s all this excess liquidity found its way into the housing market and created an asset bubble that imploded the entire world economy.

Now, after all that a lot of people would say that this Fed thing is an entirely bad idea. Consider any alternative. Would it bring a better result?

The idea of government borrowing is to spread the burden of public building projects, like roads and bridges and schools over a number of years thus reducing the yearly tax burden on the citizenry and spreading it more evenly among those who benefit. For example, a town may vote to build a bridge that will cost the entire years taxes. Rather than forego all the other services the town supplies for a year to pay for it the town borrows the money and pays it off over time. Since the bridge increases economic activity the actual tax burden per person may not increase much at all due to the bridge building expenditure.

T

 

According to the IMF working paper mentioned in the video I posted above, changing to a system where money is not issued by commercial banks as debt, would mean:

That certainly seems like a better result.

 

It is certainly better for an economy that does not run on debt. Unfortunately that would exclude the current world economy and bring a host of other difficulties that may prove to provide less than achievable economic growth goals.

While it may be desirable to steer certain types of lending from the current commercial banking system is it achievable?

Also, how will commercial lending proceed without the creation of debt?
While lending at interest creates new funds and the bank captures some part of the economic growth of the firm by doing so what is the alternative that can bring financing to the firm without capturing some of its growth? And, more importantly how will this generate the new money in the economy necessary to meet economic growth?

There is a lot of crap from "expert" think tanks like the IMF. It does not mean they understand the implications of their proposals. In fact the IMF has been particularly prone to causing economic calamities with its prescriptions over the years. Their "expertise" is entirely suspect.

 

What difficulties are you referring to?

I don't see why not.

Banks or other agencies could still arrange loans, and receive fees for doing so, but the government would create the money. Interest could still be charged on loans, which the government would receive as a form of revenue, meaning taxes could also be lowered, spurring yet more growth. Both the expansion of the economy and house prices could be regulated by altering interest rates on loans to businesses and mortgages respectively. The most significant factor of this system, is that the cut that banks currently get, would be paid back into the public purse. So we would be effectively paying the interest back into the economy, instead of into the coffers of commercial banks.

However much economies grow and populations expand by, it would be up to governments to make sure enough new money enters circulation to provide for the needs of the people and commerce, and to keep inflation/deflation at 0%. If too much is printed they can simply destroy it when they receive it back, but with the growth mentioned the more likely scenario would be that they would simply print money and spend it into the economy, which would again allow taxes to be lowered as that's money they wouldn't have to raise from tax revenue.

This, together with no national debts to pay ever increasing compound interest on, makes the figure of 10% growth with 0% inflation seem not too unrealistic.

The only losers under such a system would seem to be the banks.

Although I haven't finished reading the IMF paper, it's an interesting proposal which makes a lot of sense. The history of government versus private money beginning on page 12 is particularly interesting.

Dusty

 

I just wonder:

Why the US government has to borrow something that was created by the US?, this is, the Dollar.

I mean, a country creates a currency (Dollar, Yen, Mark....) , then, why does that country borrow money?

Just can´t make sense of that.

Maybe that is why Jonathan Rothschild said something like: "Give the power of issuing the money and I won´t care which party governs the country". That sounds scary.

 

I am a beginner on this matters, but your post seems a great one to me. For it implies 0% inflation, governments not having to borrow (never understood why if a country creates a currency, the country itself has to borrow, rather than printed WHAT THEY CREATED)

I have read other posts really interesting, I think I am going to learn a lot here. Although some agree about debt-based money (not me) and others don´t, and that is for me the key question: Fiat vs gold standar, money issued by Central Bans (Fed=Private Bank, of a few people, therefore, not a PUBLIC institution).

 

I am a beginner on this matters, but your post seems a great one to me. For it implies 0% inflation, governments not having to borrow (never understood why if a country creates a currency, the country itself has to borrow, rather than printed WHAT THEY CREATED)

I have read other posts really interesting, I think I am going to learn a lot here. Although some agree about debt-based money (not me) and others don´t, and that is for me the key question: Fiat vs gold standar, money issued by Central Bans (Fed=Private Bank, of a few people, therefore, not a PUBLIC institution).

 

Not true. The owners of the Fed are the banks, which in turn are large publicly held corporations.

Now, if you want to talk about control instead of ownership, that's a different story.

 

1.How about this: "... governments not having to borrow (never understood why if a country creates a currency, the country itself has to borrow, rather than printed WHAT THEY CREATED)..." ?

2.Who controls the Fed? With what money do the Fed buy the US bonds (that is what many people argue saying the Fed does not lend money to the US government (US government = US people, government is only a representation of the people).

3.If the US governments borrows money and they created the Dollar, does the same apply to The UK, borrowing money at interest to the Bank of England? , or any other country having a central bank.

 

It's not the country that creates the money we use, it's commercial banks that do so. (i.e. not the central bank, whether it's privately owned or nationalised.)

Consider this, when you take out a mortgage, the bank you got the mortgage from didn't give you anything, as the money they typed into your account didn't exist until they typed it into your account. That's how banks create money. Money is bank reserves, and banks create them out of thin air by themselves. You, OTOH, gave the bank the amount of your mortgage, by singing on the dotted line. Your mortgage (debt) is an asset to that bank, which it could choose to sell (even though it cost them nothing to make), and it's you who has to earn the money to give to the bank.

Here's another good article, which also says:

I believe the Rothschild quote you referred to was one which someone who wrote a book about them claimed they said, but there is no other record of any of them having said any such thing. But then if you controlled a nation through it's currency, the last thing you would do would be to tell everyone. Nathan Rothschild certainly financed the UK's victory over Napoleon, single handedly bailed out the Bank of England, financed the rebuilding of the Royal Navy into by far the biggest navy in the world at the time, and the subsequent British empire of the 1800s, and the Rothschilds were presumably among the ''international Jewish financiers'' that Hitler blamed for both world wars. But the Rothschild family in Europe would have lost much of their wealth when Hitler confiscated it, and it was the US that was the main factor in re-financing Europe through the Marshall Plan. So while they are still an extremely wealthy family, they appear to be a shadow of their former selves. The New Scientist carried out a study of which companies ''run the world'' in 2011, and Barclays bank came out on top. But there are certainly lots more fingers in the pie these days, compared to when the Rothschilds ''ruled the world.''

http://www.newscientist.com/article...e-capitalist-network-that-runs-the-world.html

As the saying goes, he who has the gold makes the rules. In these days of fiat money, whoever has the power to create money makes the rules. If you read the history of government versus private money creation in the IMF paper I posted a link to, you'll realise how hugely important this has been throughout history. And with the state of our economies, I believe it's the most important issue we face today.

 

Like a fiat currency, a gold backed currency could also be either created by commercial banks as debt, or created by the government without debt. A gold standard just means that it's value would be consistent with gold, and that the value of amount of money in existence could not exceed the value of the gold reserves that back it, to whatever degree. I doubt it would be a good idea while the US runs a trade deficit though, or the gold reserves would be being continually depleted, and so would the money supply.

Contrary to popular belief, Ron Paul didn't advocate a return to the gold standard, but rather intended to repeal the legal tender laws, remove the sales tax on precious metals, and let the market decide what money would be. In such a scenario, there would probably be more than one currency to choose from.

But the point here is not what money is, but rather how it's created.

Even though Romney claims to be investigating returning to the gold standard, I believe he's doing so partly to try to win Ron Paul supporters, and partly so that he can say he knows it's not a good idea because he's looked into it. All mainstream politicians seem to be financed by banks these days, so we shouldn't be surprised that they would keep a system that suits banks, rather than change it to one that suits us. But the more people know about how money is created and what the alternatives are, the more pressure politicians will face to do something about it.

Personally I believe fiat currencies created without debt by governments make a lot of sense, and it's encouraging to see the IMF paper say the same. Only when we understand what the problem is, can we begin to look for a better solution.

Dusty

 

Yes. Even though the Bank of England was nationalised in 1946, it's UK commercial banks that create the UK money supply, just the same as US commercial banks create the money supply for the US. The UK was the first country in the world to give it's sovereign power to create money to a private banking cartel in the late 1600s, and AFAIK, every country in the world now does the same. All central banks seem to be connected through the IMF and world bank, so it's quite possible that they wouldn't accept any currency that's created any other way. As the commercial banking system has the power to create the world's money, the last thing they are going to want to do is relinquish that power to anyone else. The commercial banking system is I believe, the closest thing we have to a world government, and an unelected one at that.

Dusty

 

So, you say: "Fiat currencies created WITHOUT debt by governments make a lot of sense" .

Does that imply that the US government and others BORROW the money from private banks?.

My point is: If I created a currency named "mark" (it doesn´t matter the name) , I, as a nation, don´t have to borrow it from any PRIVATE bank, because it was me, my government, who created that currency and therefore, we have an entity that issues that currency, a PUBLIC entity, without SHAREHOLDERS.

I read that The Australian Central Bank is a public entity, with no SHAREHOLDERS, and that the Australian government does not borrow money from it, the bank, being public, creates it, at not interest to the government, but of course, this bank LENDS money to PRIVATE, COMMERCIAL banks, at interest. Could it be so with other countries: Brazil, Mexico, Russia...? that their Central bank is public and therefore, belong to the country, to the government and therefore there is no charge of interest when the government needs money?

You say too that money is created just when a family sign a loan (mortgage, for instance). Well, shouldn´t that be illegal?. I mean: the bank is lending something it does not have. BUT I THOUGHT THIS: THE BANK BOUGHT THE HOUSE WHICH IS GOING TO SELL TO THE BORROWER, DIDN´T IT?. I MEAN, IN A WAY, THE BANK GIVES THE HOUSE TO THE BORROWER AND THIS (THE BORROWER) HAS TO PAY BACK THE PRINCIPAL PLUS AN INTEREST, that is the purpose of a bank, that is the social goal , the function of a bank, isn´t it?

 

Yes, that is exactly what they do. Whether they actually borrow the money directly from private banks or other organisations, the money they borrow was created by private banks in the first place. Normally, a government issues bonds when it wants to borrow money, which means the amount of the bond and it's interest, adds the same amount to the national debt.

Indeed, that is what many people think happens, but under the current system nations don't create their own money supplies. They must always borrow it. A government has to borrow money just as individuals do.

I read that this was the case in Australia until around the 1920s. Australian national debt is low in comparison to other advanced economies, so that could be true, as interest wouldn't have compounded nearly as much.

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

I also read that Libya under Gaddafi was the last notable country in the world to reject the system, and that they did print their own money without taking on debt. I also heard that interest free loans were available to newly married couples and farmers in Libya under Gaddafi. According to the wiki article, Libya was the only notable country in the world to have no national debt in 2010, but by 2011 they had acquired one. You may also recall that the ''rebels'' in Libya took time out of their ''rebellion'' early on in 2011 to set up a new central bank. As money cannot exist without debt in the system we have, it would indeed seem that Libya under Gaddafi must have had a different system.

That's a very good point and one I have seen used as an argument before, against banks having the power to create money. That would of course be illegal if you or I did it, but it's not illegal for a bank. In fact, this is the main purpose of banks, and is why bankers are extremely wealthy and banks are extremely big.

No, because the house didn't belong to the bank in the first place. Furthermore, if you don't pay your mortgage, the bank gets the house. So it would be you who would be giving the house to the bank.

Banks don't have social goals. Like any other corporation, their goal is to make money for themselves. That is their main function. They are also the same as other corporations in that they manufacture something. A bank manufactures money by typing numbers into a computer, and a steel company manufactures steel by doing so in it's factory. Where banks differ from other corporations is that their goal is to obtain what they make. For example, a steel manufacturer's goal isn't to obtain more steel, his goal is to make money which the banks create. Whereas a bank's goal is to make money, that they themselves create.

Banks will always be corporations, but money should indeed exist for the benefit of society. And the only way to do that is to let society, i.e. governments, create it for themselves. We should be letting banks use our money, rather than having them let us use their money.

I'm glad you're approaching this with an open mind. So many people seem to think that this must somehow be wrong, or that it doesn't really matter. Whereas the history of government versus private money creation beginning on page 12 of the IMF report demonstrates just how important is has been throughout history. Here's the link again, in case anyone missed it:

http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Here's are a couple of more recent examples of the importance of this issue, from the paper:

People who don't believe that banks create money out of thin air, should ask themselves, where does money come from? Central banks can and do lend money to commercial banks, but if all the money that exists was borrowed from the central bank, that means it would all be owed to the central bank, which is clearly not the case. If the government did issue money, then it would be able to do so without having to simultaneously issue debt in the form of bonds. Or if a nationalised central bank such as the Bank of England was able to create money, it could just give it to the government. But the British government has to borrow money in exactly the same way as the US government does. The fact is that we and our governments both, rely on private banks letting us use the money they create.

Dusty

 

The transition for one may prove extremely contentious and economically damaging.

State banking is always subject to the whims of the government and that is what is proposed with the government running the entire banking sector. This would be so easily strangled by low level bureaucracy, cronyism, and graft that it becomes imbecilic as a general policy to be applied across the banking system. Even China, which tried it, had to give it up.

That is not to say it has no application since there is a long history of successful government directed lending as a part of industrial policy but that is a long way off from letting low level bureaucrats make all lending decisions throughout the economy.

Besides, there are far less disruptive means for the government to capture revenue from the banking sector if that is the goal, a transaction tax, government ownership stakes in banks, a direct tax on bank lending, etc.

It has proven far better if those making lending decisions have skin in the game.

Economic growth is not actually possible with zero inflation. Monetary velocity is too unpredictable to meet a zero inflation target while maintaining economic growth. It takes time for money to circulate through an economy and there is always pockets of temporary and long term inflation and deflation in different sectors and locales. It is fiendishly difficult and problematic to discern which is which and despite the best efforts of the so-called experts there is no indication that anyone yet understands how economies actually function.

There are not enough resources available on the planet to fuel 10% economic growth indefinitely and once you consider that this proposal ties governments to maintaining that pace......

The bankers will not lose much since they will just slide into the bureaucracy and gain control over the entire economy rather than the tiny portion their private banks could control. They may not get such big pay relatively, but they will gain power and influence and the IMF will be at the forefront of this disaster just as it has in so many economic disasters in the past. And in a few years they could successfully lobby to take their public banks private.

It is interesting that such a paper comes to light at this time because applied to a nation currently in distress, like say Spain, whose banking sector is collapsing with the economy due to the end of a housing bubble, the primary accomplishment would be the nationalization of private banking risk and its debts. While a nationalization of the banking sector would allow the Spanish government to supposedly gain all the future banking income it would also place the vast debt of the banking sector on the government's books.

Once again, the IMF is trying to turn turds into diamonds.

 

It's bound to be contentious for the banks, but most of it would appear to benefit the economy immediately, particularly the dramatic reduction in debt.

All of China's major banks are currently state owned. The World Bank identified the fact that the Chinese government instructs it's banks to invest in productive means, as opposed to speculative means that our banks mostly choose to invest in, as being the main reason for China's phenomenal growth back in the mid 90s. However, state owned banks are not being proposed here, only that the money supply should belong to the people.

Nobody is suggesting that either. As I mentioned, banks could still arrange loans, i.e. decide who gets the money.

The goals are wider than that. Banks can and do invest in other countries. Tax them too much and they will simply move as much of their business elsewhere as they can, then we would face a situation where banks would effectively be controlling our currencies from other countries. Keeping the existing system and trying to tax it more isn't the answer.

Exactly. And as has they have demonstrated, lenders borrow commercial bank money and quickly sell the loans the make onto investment banks, so that they can make as many more loans as possible, so the lenders don't have a skin in the game, only their bosses telling them to sell as many loans as possible. The investment banks package up those loans into CDOs and sell them onto investors such as pension funds. Investment banks insure them against going bad with credit default swaps, and if they think they are going to go bad, they advise their mates to do the same. Which is a bit like if it was possible to take out an insurance policy against someone else's car, selling someone a car with dodgy brakes, then taking out an insurance policy on his car, and advising your mates to do the same, so you all get paid if he crashes. So the investment bankers have also shown they don't have a skin in the game. Who has been shown to have the skin in the game, is the taxpayer, because they have to bail out the ''too big to fail'' banks, when they fail. Profits are privatised while losses are nationalised. The proposed system would put an immediate end to all of that.

The fees I mentioned that banks could receive for arranging loans could be paid over the course of the loan, on condition that it's repaid. Then the bankers who would arrange the loans, would have a skin in the game.

Investment banks would be more like they were in the 70s when they used their own money and their wealthy clients' money to invest, and invested it wisely.

The value of the GDP of our economies relies directly on monetary velocity, and it is normally accurately predicted to within around 1%.

This is caused by depending on banks' willingness to lend, which would no longer be a factor.

The rate of increase of the money supply would be considerably more stable, because it would no longer depend on banks' willingness to lend.

It doesn't tie the government into maintaining that pace, or any other pace.

They would lose their right to supply the nation's currency. How much more could they lose? And again, nobody is suggesting that any bank should not be privately owned.

Apart from the fact that the EU is so corrupt that it's auditors have refused to sign it's annual accounts off for over a decade now, the main problem they face is that they have a common currency and central bank, but separate economies. So the currency is weaker in the stronger economies than it should ideally be, and stronger in the weaker economies that it should ideally be. The populations in the weaker countries can afford to buy more imports than they would be able to if their currencies were valued lower, while their exports are similarly less competitive to the exports of the stronger countries. And as the Eurozone countries don't have their own central banks, and their commercial banks are governed centrally, they cannot create endless amounts of money as countries such as the US, UK and Japan can.

In any case, as a large proportion of any country's national debt is internally held, the proposed plan would recapitalise the banks as government bonds are repaid, without causing inflation as the banks' reserve requirements would be simultaneously increased.

There would also be an end to housing bubbles and the other boom and bust cycles we have.

Debt free government issued money has proved to be considerably more successful that privately issued money in the past. The former has been shown to cause next to no problems, while the latter has been shown to cause plenty.

How much of the paper did you read?

Dusty

 

That is how things stand now, but I meant that in the past, long long ago, when a country "invented" a coin, a currency, named pound, dollar, dracma, or xyz, I think that that government minted the coins, issued the coins, itself, the government didn´t borrow to anyone, I am referring, let´s say , the year 800 a.c (just hypothetically of course, or not, probably I think it was this way)

Regarding this, I heard that neither Lybia nor Iran had a Central Bank, and that they didn´t borrow money, they just issued it through a governmental institution. I mean, wouldn´t that be great, normal, useful, helpful to people, the normal thing to do?. It is okay if these governments had to borrow SOME money to do bridges, infrastructures, big projects, but not to borrow EVERY penny from a private institution, I think, well, not that I think it, it is what was happening in Lybia. By the way, what are you suggeting when you say "while in the rebelion, they had time to set up a Central Bank.? , that interests me a lot. An another one: Is this newly created Lybia central bank then issuing the money on debt, so the Lybia government has to borrow it from it?

I just can´t make sense of that, of Fractional Reserve Banking, I find it unfair, but why was that banking system created?

I would like to say: Doesn´t the bank buy the house to the constructor/builder of the house , and then the bank is able to sell it to you?. If I were the builder of the house, and I finish building it, I would ask my money to the bank, and then the bank can sell the house.

I like to think that there are good banks, and that the ONLY goal for a bank to have is lend money at little interest for the people to put up new businesses, like the micro-credit in India now. Other purposes maybe too, but THE AIM OF A BANK MUST BE TO LEND MONEY WITH LITTLE INTEREST (THAT INTEREST IS THEIR PROFIT, AND, AS ANY BUSINESS, WE WANT ALL TO HAVE PROFITS TO MAKE A LIVING, DON´T WE?)

I just can´t understand how we let someone to issue our own currency, a currency is invented for a purpose, by a state, by the people of that state, by the constitution, by the law, to exchange goods.