I disagree "money is loaned into existance"

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Roy's picture
Roy
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Posts: 11
I disagree "money is loaned into existance"

Small point I suppose, but I don't think the part about loaning money into existance is correct. The part about paying for bonds out of thin air would be creating money. In the loan senario, the argument is that several bank accounts could be created from one deposit that could be much larger than the initial deposit. True, but you cannot think of this as "created money" because there is no increase in the net worth of the depositors, there is no more money in circulation. This is merely an example of money re-use. No more than if one person sold a car, then used the proceeds to by a plasma TV, and the store owner used the money to pay his employees. You wouldn't add up the transactions and declare that since more money was spent or recieved than was initially available, money was created.

1440 minutes's picture
1440 minutes
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Joined: Dec 29 2008
Posts: 51
Re: I disagree "money is loaned into existance"

My limited understanding is that although money deposited in the bank does not multiply, it is used as if multiplies.  If a large group of depositors demands withdrawls simultaneously, then the bank cannot honor their requests.

Woodman's picture
Woodman
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Re: I disagree "money is loaned into existance"

Roy,actually it is true that money can be created by loaning it into existance.  You've hit on a big problem though; not all that created money is backed up by real assets.  If I understand it right, the more money we create, the less it is worth if corresponding assets are not created. 

James Wandler's picture
James Wandler
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Posts: 219
Re: I disagree "money is loaned into existance"

Roy,

Not a small point at all.  This is a fundamental part of Chris' material but it is something that takes a lot of time to become comfortable with.

There are two kinds of money creation.

The first (which Chris presents second in the Crash Course) is currency creation - the Federal Reserve buying a bond and printing money out of thin air.  Since that bond was originally issued by the US Treasury what is actually taking place is that the Federal Reserve is giving money from thin air to the US Treasury.  By keeping these two institutions separate this hides the creation of money.  This creation of money is electronic so it can be done on a vast scale - which the Fed has been doing lately.

The second (which Chris presents first in the Crash Course) is credit creation.  When the money from the US Treasury ends up in a bank account this allows the bank to issue new loans after withholding a small part (fractional banking).  These new loans are real money - identical to the currency creation (I'm just identifying them separately here to identify the source of the money).  So $1000 of currency created becomes a $900 loan and then a $810 loan and so on until $10,000 of total money has been created.

Hope this helps,

James

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: I disagree "money is loaned into existance"

Roy,

This is actually correct.

John Kenneth Galbraith, Economist wrote:

The process by which banks create money is so simple that the mind is repelled.

You may also view Paul Grignon's video "Money as Debt"

Some words of caution, though. I do not like some messages used in this video. In particular:

The author cites persons which have been assasinated. He tends to imply the citation is the cause of the assasination, which is not the case.

A sequence depicts an octopuss grasping the earth. The very same image have been used by Nazi antisemit propaganda

Other sequences depict free masonry (pyramid & eye on 1$ bank note) and a slave chained to a ball (so-called Illuminati conspiration), a banker lynched...

Surely not a neutral video. Nevetheless, it explains money creation out of thin air.

Hope this helps.

Roy's picture
Roy
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Joined: Dec 31 2008
Posts: 11
Re: I disagree "money is loaned into existance"

fujisan,

Thank-you for the video. It does three things for me, 1. Confirms my original statement by saying that when the loan is paid back the created money is lost. 2 I now realize that what is important is that yes, the created money is relevant because it remains in the system for a long time. So I really have to say that money is loaned into exisance. 3. Most importantly the video explains what the solution to this problem is.

Now how do we go about implementing the solution?

 

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