Financial crisis ! whats your opinion and why :)

If I have £100, and write a £100 cheque to myself 100 times, do I have £10,000? lol.

Reply 282

Original post by Classical Liberal

Maybe I am going insane, but you definitely just contradicted yourself there. Really, I thought you were more careful than that.

Its more subtle than that. The base amount of money doesn't change, but its availability does. More people are able to use the same amount of money as credit to ease their transactions, hence the "money supply" increases. The money never actually leaves the bank.

The bank is effectively just saying "go ahead and buy that, we got your back if you need it" to a load of different people, trusting that only 10% of them will ever call in the favour on any given day, and provided the bank doesn't overextend itself (hence the obligatory reserve ratio to stop this happening), they won't, and everything functions nice and smoothly.

Reply 283

Original post by Aeonstorm

Yeah, I'm just responding to his claim that we don't need reserve ratios. Plus yeah, he doesn't get in that in his situation, the money multiplier still applies, its just an infinite multiplier.

I did not say that. I said that the reserve ratios do nothing. They do not bind the money supply down as your example says they do.

Reply 284

Original post by py0alb

If I have £100, and write a £100 cheque to myself 100 times, do I have £10,000? lol.

If a bank has nothing, and writes a £100 cheque 100 times, has it created £100,000 worth of bank credit?

Yes.

Reply 285

Original post by Classical Liberal

If a bank has nothing, and writes a £100 cheque 100 times, has it created £100,000 worth of bank credit?

Yes.

Is credit money? No.

To elaborate, if Person A has $100, and lends to Person B, there is now $100 worth of credit. Now Person B lends to Person C; there is $200 worth of credit. Person C lends to Person D: now there is $300 worth of credit. And so on and so forth. Yet, there is only actually $100 in this system.

On a side note, this is why the reserve ratio is important - if you can relend everything you borrow, than this can continue forever, becoming unstable - there can be an unlimited amount of bank credit yet only $100 worth of actual money.

Original post by Classical Liberal

I did not say that. I said that the reserve ratios do nothing. They do not bind the money supply down as your example says they do.

But it does. Please learn the mathematics of limiting sums and come back.

(edited 12 years ago)

Reply 286

Original post by Classical Liberal

I did not say that. I said that the reserve ratios do nothing. They do not bind the money supply down as your example says they do.

Well they do, in that its impossible for a bank to loan out more money than 1/a times their reserves over the specified time frame.

The reserve ratio is different from one country to the next. I assure you that this has a large effect on the money supply and the economy as a whole.

For a country with a strict reserve requirement, halving the ratio effectively doubles the money supply. This isn't normally the most common tool used by the central bank, but that doesn't mean it doesn't exist.

Reply 287

Original post by Classical Liberal

If a bank has nothing, and writes a £100 cheque 100 times, has it created £100,000 worth of bank credit?

Yes.

Anyone can create credit. Only the government can create currency.

Money lies somewhere between these two definitions depending upon whether you're talking about M0, M1, M2, M3, M4 etc.

Anyway, having given you lots of examples and explanations, do you believe us now that banks do not magically create government backed money out of thin air? I think your problem comes because you are confusing M0 and M1.

Reply 288

Original post by Aeonstorm

Is credit money? No.

Actually, it is. When was the last time you saw somebody reject a credit card for payment?

To elaborate, if Person A has $100, and lends to Person B, there is now $100 worth of credit. Now Person B lends to Person C; there is $200 worth of credit. Person C lends to Person D: now there is $300 worth of credit. And so on and so forth. Yet, there is only actually $100 in this system.

Yes. I know the model you are reffering to, and it is not how the system actually works today. Most economics books on this topic are simply wrong.

Reply 289

Original post by py0alb

Anyway, having given you lots of examples and explanations, do you believe us now that banks do not magically create government backed money out of thin air? I think your problem comes because you are confusing M0 and M1.

They do not create M0. But it does not matter. They create the medium of exchange that is good for payment of taxes. And for all intents and purposes, that is money.

Reply 290

Original post by Classical Liberal

Actually, it is. When was the last time you saw somebody reject a credit card for payment?

Yes. I know the model you are reffering to, and it is not how the system actually works today. Most economics books on this topic are simply wrong.

Well, I didn't actually get that out of a book, so can you tell me what system it is? I just thought of it up as a useful example.

And it is essentially how banks work, except that they cannot relend the entire amount. They have a reserve ratio which they must adhere to by law. So Bank A would lend bank B $90, who would lend bank C $81, who would lend Bank D $72.90, etc. hence limiting sum

Reply 291

Original post by py0alb

Well they do, in that its impossible for a bank to loan out more money than 1/a times their reserves over the specified time frame.

Look at my example again. Does the bank have the bank have enough assets in the end to issue the bank credit?

The bank creates the reserves itself. That is the trick. That is why reserve ratios are irrelevant. The money multiplier is tosh.

You can take your module in banking and finance. Dust it off. Turn it sideways. And stick it straight up your candy ass. :yeah:

(edited 12 years ago)

Reply 292

Original post by Classical Liberal

They do not create M0. But it does not matter. They create the medium of exchange that is good for payment of taxes. And for all intents and purposes, that is money.

OKOKOK you wish to define it as money. No one else in the world does.

But fine, what if that was the definition of money. Then what is wrong with banks creating money? By your ridiculous definition, all you have established is that banks create money. Now what actually is the flaw?

Reply 293

Original post by Classical Liberal

Look at my example again. Does the bank have the bank have enough assets in the end to issue the bank credit?

The bank creates the reserves itself. That is the trick. That is why reserve ratios are irrelevant. The money multiplier is tosh.

You can take your module in banking and finance. Dust it off. Turn it sideways. And stick it straight up your candy ass. :yeah:

K, py0alb, I think we have determined this guy is a troll.

Reply 294

Original post by Classical Liberal

Alright chill out you :biggrin:

The bank does not "create" the reserves itself. There is no trick. The reserves have to be taken from deposits. It can loan out all of the money that is deposited apart from a set proportion.

Reply 295

Original post by Aeonstorm

K, py0alb, I think we have determined this guy is a troll.

There is a new word for troll nowdays, its called "libertarian". People who are smart enough to see the flaws in every argument apart from their own.

Reply 296

Original post by Aeonstorm

OKOKOK you wish to define it as money. No one else in the world does.

Commercial bank money, is money. It is 97% of money in circulation.

But fine, what if that was the definition of money.

Money is a media of exchange. If somebody trades with somebody for something that they personally have no use for, you can be pretty sure that thing is money. Whether it be gold, coins or commercial bank money.

Then what is wrong with banks creating money? By your ridiculous definition, all you have established is that banks create money. Now what actually is the flaw?

It is the cause of all our current economic problems, that is the problem.

Reply 297

Original post by Classical Liberal

Commercial bank money, is money. It is 97% of money in circulation.

Money is a media of exchange. If somebody trades with somebody for something that they personally have no use for, you can be pretty sure that thing is money. Whether it be gold, coins or commercial bank money.

It is the cause of all our current economic problems, that is the problem.

Right... how? All you've said is that a medium of exchange is money. Money is the cause of all our current economic problems. So therefore a medium of exchange is bad?

Reply 298