All money is created out of debt? -or not?

[jack hershey]

I empathize for all of you.

I view money as a commodity.

Workers add value to that on which they work.

The resources organized workers use can come from the earth of even processed information which gains in value.

All of this is wealth creation.

Signatures on sheets of paper create more leveraged wealth within regulations. Banks are either "country" or "urban". The leveraging in country banks is greater that is where land and resources within land are found.

Another type of sheets of paper are market instruments for pooling capital. Bonds are typical and reselling them is a practice in markets. "Yield" allows for comparison as does ratings by cheaters.

Market owners and operators create instruments as well. They are sold for money of a given mutually determined value.

I createed a parasitic role for myself. I extract money from the system of markets.

By defining the human nature of others, I get to do "takings" at the capacity of the market size times 5.

My takings are usually given away since I have no need for the excess profits. My target to give to the components of "Occupy"

You will notice more and more that families and people who play by the "rules" get screwed by the financial industry who does not play fairly. The FI is becoming understood to not have "integrity". They feel all is fair in "love and War".

You may have been educated (the posts do not look like it). Part of that education was about how to live life fairly. I was an Adj Prof at a top tier MBA school in the Ivy League. Top tier Ivy League meant something. Now they cannot teach integrity because of whom they depend upon. Those who have power no longer carry their responsibilities with integrity.

Congress is lobbied by paying ill gotten gains for votes on laws and subsequent regulations that are not enforced.

I am immune because above the heirarchy of money then power is more more level. It is the resource called information in the form of being a successful parasite of the system.

I give away valuableinformation to those who work with their minds. These people get to be successful parasites of the system who give money to "occupy" type people who are getting screwed by playing by the rules.

"Occupy" is like those who wrote the Declaration of independence, the Constitution, its Ammendmentments and the Bill of Rights. Academia has figured out the concerns of "Occupy are correct and MUST be institutionalized. Occupy has no power nor lobby money, however. All they have is willpower.

Cheaters are being elected. The FI operates as cheaters. Voters do not do their duty.

As you seee more and more volatility of an uungoverned and un rgulated system, you will also see the people who played by the rules destroyed at all ages.

The West was taken away from its Stewards with guns. People who do not play by the rules are going to begin to use guns to TAKE. Money will not matter since there will be no economy. People will only have what they TAKE and what their work produces where they live.

 

[jbperez]

Quote from Newmoney24:

They say all money is created out of debt because when a loan is given, it is due back with interest,
OK, but my question is, Is this always the case?

The way I understand it, in our current money system, money is borrowed into existence.

The Fed creates money ("out of thin air"), but in order for the Fed to inject it into the economy it has to be borrowed first from the Fed by either the Treasury or the commercial banks.

Because this money is loaned out with interest, it does seem to be the case that there really will never be enough money to pay back the Fed.

Back whe each dollar had to be backed by gold, I'm not sure if this was the case.

For instance, if the Fed gives $1T to the US government, but gives it in exchange for government bonds/treasuries, then isn't this an EXCHANGE? (not a loan)

That's a loan. A T-bill is a debt instrument, Treasury is borrowing from the Fed in this case.

The Fed remits most of the interest income it earns on the T-bills back to the Treasury.

 

[StarDust9182]

Quote from PhuQuangLe111:

Just for get all the economics its all for donkeys...

........ CL

Hey! Let's not be trashing donkeys here! Economists yes, Government yes, Donkeys No!

 

[achilles28]

Quote from ronblack:

Money is tangible stuff the government prints. Debt is credit that is repaid with tangible money or with more credit. .

What is money the government prints? Could you be specific?

 

[achilles28]

Quote from the1:

True, but only by a fractional amount - i.e. the fractional reserve system. What most people don't understand is $1 can be lent at a fraction over and over, thereby creating leverage in the system. Example.....some guy deposits a dollar. The bank can turn around and lend 90 cents (10% reserve) of that dollar, then 81 cents of that dollar (10% of 90 cents), then 73 cents (10% of 81 cents), and keep repeating up to their allowable level of leverage, which is different depending on the type of bank you operate. This is why the banking system collapsed in 2007/2008. There were reports that LEH was leveraged as high as 70x and couldn't be saved. Bear? Same deal. BAC had to swallow MER, can't recall what happened to MS, and, of course, GS came out looking like the Golden Child because they were "hedged" against such risk because they are so much smarter than all the rest. It wasn't until a few years later that the truth about GS came to light.

What a depressing period in the history of US Capitalism (Greed).

This is the classical explanation Keynesian textbooks use to illustrate fractional reserve lending. The less discussed (yet more relevant) example - under a 10% reserve ratio, a bank receives a deposit of 1$, uses that 1$ as it's "reserves", then loans 9 new dollars into existence.

 

[Ed Breen]

Newmoney24 et. al., yes money is quite literally debt. Look at it, it says 'note' right on it. What we call money, 'Dollars', is a non interest bearing demand note issued by the U.S. Government. There is no collateral for the note...it is a promissory note...backed only by the 'full faith and credit of the U.S. government. We use unsecured government debt as money for trade of value in exchange and for payments of both public and private debts.

Money, dollars, are created when the Fed enters a liability for money on its balance sheet. The Fed has a unique power to create a balance sheet liability and then use the paper evidence of that liability like it was an asset...it can buy things with. The liability for the money created by the Fed is the promise of the U.S. government to accept the paper specie evidence of that debt for the settlement of all debts and payments. Indeed, as achille's has explained, the utility of this government promise liabilty paper is based on confidence that the government and the law that provides for negotiation of this paper in trade will persist; that the promise will have value in use.

Money used to be collateralized debt of the government. That was when it could be redeemed for something...gold or silver. That collateral limitted the creation of the paper money claims...for liquidity in redemption there had to be a managed relationship between the money and the collateral.

Today, when the Fed creates Dollar liabilities it collateralizes those Dollars with longer term Treasury debt. The Fed creates a liability on its balance sheet and prints Dollars....the Fed exchanges those created dollars for Securities issued by the Treasury or acquired from Banks and private holders. The Fed books the securities acquired with the Dollars as a corresponding asset on its books....Dollars Created liabilty equals Treasury assets acquired in exchange. On the Treasury side the Treasury books a liability when it issues securities...it receives cash crated by the Fed as an asset that it uses in exchange for value in goods and services.

So, money is created by the Fed as a demand liabilty of the Federal Government and it is exchanged for longer term debt securities of the Federal Government. Its all debt and we use it for value in exchange.

This is only part of the idea of money though....the idea of a money supply. The money supply expands through private credit formation. When credit is expanding privately we call that velocity. Velocity is private credit expansion. When government debt is exchanged between the goverenment (Fed) and itself (Teasury) there is no velocity, no effective change in the money supply in a way that can create 'inflation.' There is no velocity created. When the Fed buys Treasury debt from the Banks in a context where private credit not growing or is contracting (as now) there is no velocity created and so no inflation. What happens here is that finacial assets (Teasuries) owned by the banks and providing income to the banks are transferred to the Fed in exchange for non interest bearing demand debt. Income moves from the private banking sector to the Fed and the Fed then returns that income to the Treasury.

So, money supply expansion requires private credit expansion. The velocity in the system is etirely dependent on private credit expansion.

Recapping, Dollars today are indeed debt and they are not backed by any collateral, only the credibility of the government that issues them to maintain thier value in trade by maintaining credibility of its longer term debt.

'Money' should not be confused with 'wealth.' Money is a measure of value in exchange...its like a yard stick...it measures land but it is not the land. The point of using money in exchange is to acquire goods and services and build 'wealth.'

Understood properly, 'Wealth' is the possessory right to future income after tax discounted to the present. Changes in the legal right to possess, the range of future income to be realized or the tax on that income will all change 'Wealth' presently. Wealth is all about expectations about the future and wealth changes as future expectations change.

'Wealth' is based on 'assets'. Assets are claims on future income streams that can be possessed. Notions of wealth can be understood as the continuing possession of assets.

So, wealth depends entirely on acquiring assets and maintaining the future income streams of those assets.

I am explaining this becuase it relates to fiat money in that money expansion is based on private credit expansion which is in turn based on collateral asset value. Private credit, unlike government money debt, is limitted by the value of assets used as collateral. The present value of assets and the right to possess those assets limits the amount of private credit expansion which in turn determines the velocity of money.

Now, is that all clear?

 

[CT10Gov]

Quote from achilles28:

This is the classical explanation Keynesian textbooks use to illustrate fractional reserve lending. The less discussed (yet more relevant) example - under a 10% reserve ratio, a bank receives a deposit of 1$, uses that 1$ as it's "reserves", then loans 9 new dollars into existence.

Excuse me, but where does the $9 new dollars come from?

 

[Ed Breen]

Sorry Achilles, but the 10% reserve requirement is applied only to demand bank deposits, reserve for other types of deposits are less. Bank reserves you refer to are based on the quality and nature of bank deposit liabilities...not bank loans.

Bank loans are assets and the banks' ability to make these loans are based on the quality and nature of banks' capital...which limts how much money banks can borrow inorder to relend and make a spread, thier income. Banks earnings add to capital and banks losses deduct from capital and it is capital that limits thier ability to make loans.

Banks make a seperate kind of reserve for loan lossess...this is a mark down of assets that results in a loss of present income...writing off some of the assets becasue they are not worth what they were when they were acquired, this in turn can create a reduction in capital and a need to reduce lending.

This reserve for the quality of loan assets should not be confused with reserve for deposits which is an issue of bank liquidity. Most earnings of banks today are being created by writing up thier assets which they previously wrote down...they thought they were worth less so they took losses as reserve against loan loss...now they think the assets are worth more, so they are wirting up the assets by reducing loan loss reserves and booking income in that process.

There is no money created when a bank posts reserves against deposits. Banks actually borrow the money they lend and do not rely on deposits to fund loans.

Money is created when aggregate private credit expands, when more banks make new loans than retire old loans, when more banks write up thier loans assets than write off thier loan assets. Money is destroyed when aggregage private credit contracts, when more loans are paid off or written off than are made.

 

[billyjoerob]

So we have a genesis story in which there is no immaculate conception of money - first the banker must get with debt before giving birth to dollar bills. But this is complete nonsense - he can just print them! No debt was involved in the creation of those dollar bills. Do you think Mugabe bothered to issue debt before he paid gov't salaries in printed money? No. So I just don't get this whole debate.

 

[trefoil]

Quote from Ed Breen:

Sorry Achilles, but the 10% reserve requirement is applied only to demand bank deposits, reserve for other types of deposits are less. Bank reserves you refer to are based on the quality and nature of bank deposit liabilities...not bank loans.

Bank loans are assets and the banks' ability to make these loans are based on the quality and nature of banks' capital...which limts how much money banks can borrow inorder to relend and make a spread, thier income. Banks earnings add to capital and banks losses deduct from capital and it is capital that limits thier ability to make loans.

Banks make a seperate kind of reserve for loan lossess...this is a mark down of assets that results in a loss of present income...writing off some of the assets becasue they are not worth what they were when they were acquired, this in turn can create a reduction in capital and a need to reduce lending.

This reserve for the quality of loan assets should not be confused with reserve for deposits which is an issue of bank liquidity. Most earnings of banks today are being created by writing up thier assets which they previously wrote down...they thought they were worth less so they took losses as reserve against loan loss...now they think the assets are worth more, so they are wirting up the assets by reducing loan loss reserves and booking income in that process.

There is no money created when a bank posts reserves against deposits. Banks actually borrow the money they lend and do not rely on deposits to fund loans.

Money is created when aggregate private credit expands, when more banks make new loans than retire old loans, when more banks write up thier loans assets than write off thier loan assets. Money is destroyed when aggregage private credit contracts, when more loans are paid off or written off than are made.

...and it depends on demand. The more demand, the more credit and therefore the more money is created. Vice versa in a bust.