General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsThe truth is out: money is just an IOU, and the banks are rolling in it
The truth is out: money is just an IOU, and the banks are rolling in it
http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity?commentpage=1
(snip)
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.
To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.
The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.
It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits"
"In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."
In other words, everything we know is not just wrong it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.
(more at link)
-----------------------------------
nationalize the fed
(2,169 posts)Once the secret is out change will happen.
Nationalize the Fed! It's the progressive thing to do
The public currency should be a public utility
http://www.progressivegazette.com/2013/12/nationalize-federal-reserve.html
1StrongBlackMan
(31,849 posts)I've had a long day and a great Happy Hour.
PowerToThePeople
(9,610 posts)Electric Monk
(13,869 posts)Recursion
(56,582 posts)and got pilloried for it, but it's still true. A bank puts new money in circulation when it originates a loan.
abelenkpe
(9,933 posts)According to the article. So why are governments being forced to cut back on programs for the most needy?
Recursion
(56,582 posts)It would be possible to simply monetize all social spending, but since we don't have capital controls that would eventually hurt us. A big advantage of public debt is that it's a way to predictably increase the money supply.
Part of the problem is that we look at it like "taxes fund government". But it is impossible for the government to "need" dollar-denominated money ever; it can create as much of it as it wants at any time. It's more realistic to look at every dollar taken in by the government as ceasing to exist, and every dollar spent by the government as being created when it is spent. Taxes don't fund government; they are a way of controlling the money supply.
fleabiscuit
(4,542 posts)What is the Real Definition of Inflation?
http://inflationdata.com/articles/2010/07/21/real-definition-inflation/
I believe our fractional system in another time would be called a pyramid scheme.(?)
alittlelark
(18,890 posts)I refuse to get sucked into the octopus.....
mathematic
(1,434 posts)It's all true!!! End the fed!!1!! Gold is real money!!
(It's also news to people that never cared enough about this to learn about it, which is perfectly reasonable).
Why do you think the Fed tracks credit creation? It's not because they just discovered last week that money is an IOU. The purpose of this Bank of England bulletin is educational, not confessional. Writing about this as if it's some sort of secret is irresponsible and stupid. The bulletin is not a refutation of the "common assumptions" of economists, bankers, or economic public policy makers but rather the assumptions of regular people. It does not describe populist (beyond the inherent populism of fiat money) or heterodox economics.
OilemFirchen
(7,143 posts)I got into a "conversation" with some yutz here several weeks ago. He thought it "hilarious" and "naive" that I "believed" that currency is backed by debt. Specifically, that U.S. currency is backed by Treasury debt, payable in U.S. currency. Of course, he was a bitcoin pro, so there's that...
Here's hoping he finds his way here to further school me.
rhett o rick
(55,981 posts)hunter
(38,309 posts)... and starving the unemployed and unemployable.
The proper way to deal with inflation is to clamp down on the wealthy class by progressive taxation.
blkmusclmachine
(16,149 posts)1000words
(7,051 posts)The cat's out of the money bag:
Warren DeMontague
(80,708 posts)How far do we have to dig under this pile of.... paragraphs, before we find Ron Paul?
starroute
(12,977 posts)Go read his Debt: The First 5,000 Years (all 544 pages, mind you) and then get back to me and try to argue that he's channeling Ron Paul.
http://www.amazon.com/Debt-The-First-000-Years/dp/1612191290/ref=sr_1_1?ie=UTF8&qid=1395295612&sr=8-1&keywords=graeber+debt
Warren DeMontague
(80,708 posts)Yes, money is an illusion, a valueless hoax played on the muddle-minded. A creepy magic mojo worked by spooky banksters.
Indeed, all true.
Yet you'll notice no one is in a hurry to put all theirs in a pile and burn it to exorcise the demon, are they?
So how much does he charge for that book?
hfojvt
(37,573 posts)but he'll take some of your hard-earned IOUs.
AtheistCrusader
(33,982 posts)did you beat me to that. Like seriously.
Warren DeMontague
(80,708 posts)GMTA. Or are we sure I'm not your sock?
AtheistCrusader
(33,982 posts)Argle Bargle is literally the noise I translate the words coming from Ron Paul gold bugs into, whenever they start freaking out.
It makes more sense as incoherent noise, than what they are actually saying.
adirondacker
(2,921 posts)Spitfire of ATJ
(32,723 posts)WRONG.
The wealthy NEED actual currency to be rare so their own private stockpile is worth MORE.
This is also why they want people to work their asses off for low pay.
If we suddenly started paying people to do public works projects it would expose the BIG LIE.
The BIG LIE is, "We're broke".
abelenkpe
(9,933 posts)So why are we are cutting social programs for the most needy? Because the wealthy need currency to be rare just as you mention. Really saw this as more of a pushback against austerity and the lie that we are broke, in imminent danger of default or hyperinflation ...y'know all the tired arguments put forth by the right over the years since 2008 that are really just excuses to further shred the social safety net.
Spitfire of ATJ
(32,723 posts)AtheistCrusader
(33,982 posts)This is uh... not news. Not even news this century.
Adrahil
(13,340 posts)... It think the argument is more about money is not the finite resource the austerity proponents claim it is, and that the inflationary fears are WAY overblown.
I think this argument is the exact opposite of Ron Paul.
DeSwiss
(27,137 posts)...it will only get worse.
- But we WILL have the TRUTH.
K&R
Short and simple:
hfojvt
(37,573 posts)like simple Simon.
But it is pretty funny in some ways.
DeSwiss
(27,137 posts)...just for YOU.
hfojvt
(37,573 posts)because unfortunately it got really stupid.
AtheistCrusader
(33,982 posts)Humorously presented though.
Aerows
(39,961 posts)is always an open-ended deal with arbitrary rules.
Recursion
(56,582 posts)which is just a fiat currency you have to dig out of the ground.
AtheistCrusader
(33,982 posts)No it doesn't. Not if everyone stops thinking it does, or SpaceX figures out how to bring a ten million ton gold asteroid back down to earth for us to all share.
You can't eat gold. Well, you can, but it doesn't do much for you nutritionally. It has only as much value as people desire it. No more. It's a good conductor and corrosion plating, and not very reactive, so useful for teeth otherwise, and that's about it.
Gold is absolutely a fiat currency, and the US Dollar is built on precisely the same desire.
Want to see how 'little' value the US Dollar has? ask the 'it's just paper' naysayer to withdraw a thousand bucks from the bank and burn it, before you'll take him seriously.
Short version; you'll NEVER have to take him seriously.
Aerows
(39,961 posts)Precious metals have long been a commodity simply because they can be used for many purposes. I wouldn't like to live in a world without copper conduits, silver's extraordinary energy transfer abilities or silicon and germanium have the inherent property necessary for semi-conductors.
All of these things would never be possible without metallurgy. Please take it as food for thought.
AtheistCrusader
(33,982 posts)Aerows
(39,961 posts)and true currency. If I have goats, and you want one of them, you trade me something of value to purchase that goat.
If you cannot offer me anything in trade, but have gold, you can offer me some of it, or silver. Gold and silver have material values because they can be used for many things beyond ornamentation. Paper money doesn't.
Crops in the field, ultimately, are worth more than numbers printed on paper - they have direct value.
Recursion
(56,582 posts)Just like fiat currency. They were somewhat useful as fiat currencies because the money supply could be controlled by the finite sources of the metals. But they aren't "actually" valuable.
Their industrial uses are quite limited, and essentially non-existent before the electronic age. A goat can be eaten. That's actual value.
Aerows
(39,961 posts)You are saying the gold and silver have few practical industrial uses.
You are also saying the the ornamentation value is also worthless.
Did I get that right?
Recursion
(56,582 posts)Their trade value vastly, vastly exceeds their intrinsic value. Just like paper money. In the past, when money was still gold-backed, they had no industrial uses to speak of at all.
Democracyinkind
(4,015 posts)Junkdrawer
(27,993 posts)a bunch of too wealthy, too powerful types clinging to power by controlling (badly) the World's currency, backed by an aging military, IS the problem.
AtheistCrusader
(33,982 posts)But yes, fractional reserve lending has made our entire economy possible, really.
Aerows
(39,961 posts)get better returns on their investments than hedge fund managers. You can look that up, too. Why the electorate, myself included, isn't doing anything more than shaking their fist at the sky is beyond me.
I think I just have serious outrage fatigue.
Junkdrawer
(27,993 posts)I had to take a DU break because on the one hand I wanted to explore the scandal, on the other I didn't want Romney.
Briefly, I think that, faced with a "come up with huge sums of money" problem, every thing was done - LIBOR allowed banks to 'earn' their way out at the expense of, largely the Hedge Fund guys. Some institutional investors, but largely the hedge fund guys.
reformist2
(9,841 posts)First the banks lend out too much, the money supply soars and the economy booms. Then people can't pay back the loans, so the money supply and the economy contracts. And the government and the people spend their entire lives having to deal with this see-saw, nausea-inducing pattern their whole lives. It doesn't have to be this way.
Junkdrawer
(27,993 posts)but, short term, I think WHO can create money dwarfs HOW money is created.
abelenkpe
(9,933 posts)Saw this article as a good push back against the argument for austerity. Strange that some see it as the opposite.
Democracyinkind
(4,015 posts)... our banksters.
We will start collecting signatures in May, 100'000 are needed, we already have 61'000 pledged!
While this initiative will never be accepted at the ballots (and even if it were, it would never be allowed to be implemented by the ruling elite) it is the most revolutionary thing that I have ever been involved in. I consider it a campaign in mass-education, as the general populace is absolutely ignorant about the subject and generally tends to agree with the initiative once informed.
More: http://www.vollgeld-initiative.ch/english.html
(I am involved with the initiative but have not contributed to the website in any shape or form)
Do not listen to the people yapping about gold and Rand Paul - while it is true that the libertarian rabble has similar arguments, they are actually coming from the opposite direction as far as political ideology is concerned. The majority of the foot soldiers of this initiative are only slightly to the right of Mao (this is a tongue-in-cheek comment, no need to point out that Mao was an evil bastard).
Junkdrawer
(27,993 posts)Smart, practical people, the Swiss.
Democracyinkind
(4,015 posts)Junkdrawer
(27,993 posts)You can't choose your genes. You can choose your environment.
Democracyinkind
(4,015 posts)... not being one of those "real" americans, not being one of those "real" swiss folks, I have come to consider myself a citizen of the world, as pathetic and worn as that may sound to some.
reformist2
(9,841 posts)Junkdrawer
(27,993 posts)If you want to save the passengers of an out-of-control stage coach being driven by a madman, you have to FIRST get control of the reins, bring the coach to a slow stop and THEN get everyone aboard the new, shiny bus.
reformist2
(9,841 posts)Democracyinkind
(4,015 posts)... a paradigm shift of historic proportions... Combine that with other initiatives currently under way, such as a national, unconditional guaranteed income provided by the state, not by corporations, and what you get is a a vision of a possible future in which much of the bullshit of our current system is simply left behind to rot in the dustbin of history.
And sticking it to the gnomes of Zurich... Has been a life-long dream of mine (or at least ever since I had the "privilege" of working for those fuckers). They have taken this nation hostage by offering the people a share in the spoils and that has always stricken me as a positively evil system. I do not enjoy or condone profiting from billions stolen from the people around the world. It's about time that the people change this, even if it is not in our material interest.
reformist2
(9,841 posts)That is equally revolutionary.