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He's referring to something in specific that many people do not consider. Most of our money is not printed, but created by fractional reserve systems through de
by rjf72 7y ago
He's referring to something in specific that many people do not consider. Most of our money is not printed, but created by fractional reserve systems through debt. Banks in general are only required to hold 10% of their deposits on hand. The rest can be lent/invested. If there's a run on the bank they rely on a central bank to give them money to cover it. Most people know this stuff, but consider this:
- Bob deposits $100 of 'real' money at a bank.
- Joe takes out a loan of $90 and uses it to buy something from Jane.
- Jane deposits $90 at the bank.
- Mike takes out a loan of $81 ...
And this process recurses on downward with a smaller and smaller share each time. But the mathematical result of this is that $100 of "real" deposits ends up creating $1000 of debt. And that's before interest which, for long term loans, can be multiplicative. So $100 of "real" money may end up creating thousands of dollars of debt. We've created a system where banks end up, quite rapidly, being owed literally more money than exists. Great time to be a banker for sure.
This is why the Fed and other financial entities are so obsessed with inflation. Inflation makes everything more expensive in the present, but it also reduces the cost of loans from the past. Imagine I take out a loan for $1000 and somehow the next day we see 100% inflation. Well now my loan can be paid back with only $500 of 'value' as measured from the time I took out the loan. If inflation is higher than the interest rate on my loan, I actually earn money by not repaying it. By contrast, deflation makes older loans more expensive. And of course there is also the investment outlook. Inflation is a penalty on wealth. If there's 2% inflation per year, my billion dollar piggy bank becomes worth ~$20 million less each year. So I'm incentivized to invest actively. By contrast with deflation I can sit on my money and become relatively richer by the day.
But this also puts us on a roller coaster. Old debt is only paid off with new debt which will only be paid off with new debt which ... And the money definitely does trickle downward, but at the same time it gushes upward. And the ride keeps going faster, and growing bigger. Not hard to imagine a different system as ours is grossly counter intuitive. Of course different doesn't mean better so, as a recurring theme in human history, we're only like to change once things go boom.
- captn3m0 7y agoThanks a lot. Can you recommend a book if I’d like to read more on this explained similarly.
- chimi 7y agoThis is one of the first things you'll learn studying Macroeconomics. Any introductory book on that topic will teach you about the concept. In general, you can look for information pertaining to "How banks create money," which refers to your $100 deposit turning into $1000 after it completes the ownership ladder. If you're still in college and have the opportunity to take some electives, I highly recommend Micro and Macroecon.
- maneesh 7y agoA great book on the creation of the fed and fractional reserve is The Creature From Jekyll Island
- captn3m0 7y agoI almost bought this, but the author looks very shady: >G. Edward Griffin (born November 7, 1931) is an American author, filmmaker, and conspiracy theorist. Griffin's writings promote a number of views and conspiracy theories regarding various of his political, defense and health care interests. In his book World Without Cancer, he argues that cancer is a nutritional deficiency that can be cured by consuming amygdalin, a view regarded as quackery by the medical community.[2][3][4] He is the author of The Creature from Jekyll Island (1994), which promotes false theories about the motives behind the creation of the Federal Reserve System.[2][5] He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[2] He also believes that the biblical Noah's Ark is located at the Durupınar site in Turkey. https://en.wikipedia.org/wiki/G._Edward_Griffin https://en.wikipedia.org/wiki/G._Edward_Griffin
- crdoconnor 7y agoThe flip side of money being created by creating loans is that it is extinguished when those loans are paid back. Taxes also effectively perform the same function - destroying money (consider what would happen if all current tax money were burned and all government spending were printed - economically no different). This side of the equation doesn't get a commensurate level of attention.
- pjkundert 7y agoAll except the interest component, of course... That requires the creation of additional money, borrowed into existence by someone else and then earned by the interest payer, in a never ending exponential cycle.
- princeb 7y agoideally, the loan is directed towards productive activity- the sowing of seeds purchased today for a harvest tomorrow, the construction of a factory today for gadgets tomorrow, the stocking of a store today for sales tomorrow, a home loan today for a person getting a job at a new city tomorrow - that will generate utility in the future. then the wealth generated from the interest is also wealth generated from new economic activity that never existed until the loan enabled it. credit is only problematic when the expected activity fails to come to fruition, which is why the credit shrinkage acutely accompanied the economic shrinkage in the last crisis.
- pjkundert 7y agoAll those observations are true, and there isn’t anything wrong with borrowing money and paying interest. It’s the creation of money and paying interest that’s problematic. This interest demands new money to be brought into being to pay it — to someone doing nothing but seeking rents due a monopoly position bestowed by the government; the banks. This stream of interest payments is going out of the economy to whomever owns the commercial bank, but must be paid by people within the economy, who must borrow more money into existence to pay it — from the very people to whom it is “owed” (for no reason at all; they bear no risk, and provided no capital of their own).
- ClumsyPilot 7y agoFractional reserve banking does not exist, and did not for a long time. The real situation is even worse. https://www.forexlive.com/centralbank/!/fractional-reserve-banking-is-a-myth-20180606 https://www.forexlive.com/centralbank/!/fractional-reserve-b...
- Jommi 7y agoWell, you just linked a forum post on a forex trading website, I'm not sure how much weight I would put on that. However, I did read the link and did some own research. I do see the argument that we need to revisit the causality of bank loans through the demand side argument. This however does not need to mean that "Fractional reserve banking does not exist". I'm not sure what makes you think that.
- ClumsyPilot 7y agoApologies, this is indeed a shitty link. The commonly held belief that banks require a deposit before they can hand out loans is a myth, the financial system has not worked that way for at least 40 years, if ever at all. A bank's ability to create new money is enormous, and proper explanation can be found in this paper by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- Jommi 7y agoSo in a sense we agree right?