Fiat currency and fractional reserve banking

[Haroki]

Quote from thenewguy:

I think what the autor is sayins is a twist of what you are saying. Money isn't really being backed by assets, it just so happens that some of that money is used to buy assets. The total monetary supply is still far greater than the value of all assets it's used to buy, expecially when you consider massive corporate loans used for business development, and the uber massive loans given out to third world countries for infrastructure development which will never be repaid.

I would say that if the loan money was being used to buy assets, it would be backed by assets. However, I believe the vast majority doesn't buy assets.

Also, there's the case of the asset dissappearing. What if your house burns down and you have no insurance. You still owe the money, but the asset is gone.

TNG

Ok, I'm watching the video again as I write this.

First thing that I feel is wrong is the guys statement that banks create money from the borrower's promise to repay. I'd say that's false, the bank controls the asset (house). So when you go 'borrow' money from a bank, you're not really borrowing money, you're asking the bank to take control of the house, and you'll slowly pay them for it over the next 30 yrs. And since the bank really owns the house, the bank now can go on with its' pyramid scheme of creating new loans, which 'create' more money, etc, etc.

You also need to consider that business loans aren't made without collateral either, no matter how good an idea you may seem to have for a new business. So while your statement that the vast majority of loans aren't being made to buy assets may be true, I have no idea, there is always collateral ( in some form of an asset ) backing that loan. Banks are very conservative about loaning money - I have some experience with that, re: why I'm not working today. My bosses got into the same spiral of pledging assets (wine in the bottle - at an unrealistic price - and vineyard property) to be able to fund a massive marketing plan - definitely not an asset. But when they couldn't sell the wine at the price that they figured on, the house of cards all fell apart. But the bank was fine. Matter of fact, they could now, again , continue the pyramid scheme of loaning money cuz they now controlled an asset - wine and real property.

I would agree on your statement about foreign loans, however there may be some mechanism where the US govt pledges to repay the loan to the bank if it goes bad. Maybe the govt hopes to make some good will or something similar. So again, the bank is fine.

And I can recall very few instances where a house is not insured. The bank would call in the loan cuz I'm sure that it's written in the 'loan' agreement that the home buyer must have insurance, otherwise the bank will kick you out and sell the property. And again, the bank is fine. But these risks are a known %age anyways - statistics - so I'm sure there's some formula that they use to factor this in. Maybe that's why one needs 20% down to cover this and property prices going down, etc.

And what Ronblack said about the time factor of money is a huge statement, I believe. Do you agree with what I said about repaying the 30yr loan off with devalued money? If you agree with trefoil's "yep", then one has to argue how else can a bank remain solvent, unless it's allowed to pyramid the loans? They could, I suppose, if inflation was zero, then they would be paid back with a constant dollar. But I think it's unreasonable to expect that. And I'm sure that there's other ways to achieve that, but won't try to list them ....

 

[Matt24SPFL]

Money is nothing more than potential power. It is only as powerful as its beholder believes it to be.

Unfortunately the value of our money is taking a nose dive. It's only a matter of time before the entire country stops and asks "WTF is going on??"

 

[ronblack]

Quote from thenewguy:

His argument is not a strawman argument, you are using that term incorrectly. He's putting forth a contention, a hypothesis or a theory. It's what every Phd ever written did, so by your logic, every Phd is a strawman argument.

incidentally, what you wrote above is a perfect example of a strawman argument. I never said, or even hinted that I thought money should be backed by gold or that a currency backed by gold was a better system. Yet you refute that contention (which I never made), which is what a strawman argument really is.

Refusing a contention is not a straw man argument. Why don't you open a book on logic to read what a straw man is.? It is exactly what the author of the video does. He creates the artificial image that money is debt and then attacks this image using all sorts of irrelevant references to archaic financial systems, wrong perceptions of how the modern financial system works, and worse yet, a hidden dogmatism which has probably religious roots.

Quote from thenewguy:

No, I think you've misunderstood his position. Again, have you actually watched the video? He never once says that currency holders are in debt. What he's saying, is that the ISSUER is in debt, which was not the case with prior monetary systems. With commodity currencies, there was no debt, which fractional reserve banking there is a regulated amount of debt, and with fiat money there is only debt.

The above conclusion is wrong. If you believe that you have highly distorted views of how the modern financial system works, especially modern Money Markets.

Quote from thenewguy:

Calling me a fool doesn't strengthen your argument, it weakens it. Why are you mentioning conspiracy theories, the moon and people who think the world is flat? What does that have to do with anything?

TNG

I do not understand why you feel so attached to the author of the video? Are you the author by the way? I did not call you fool, I called fool anyone who does not understand the difference between debt and money and attempts to equate the two.

Ron

 

[thenewguy]

Quote from ronblack:

Refusing a contention is not a straw man argument. Why don't you open a book on logic to read what a straw man is.? It is exactly what the author of the video does. He creates the artificial image that money is debt and then attacks this image using all sorts of irrelevant references to archaic financial systems, wrong perceptions of how the modern financial system works, and worse yet, a hidden dogmatism which has probably religious roots.

"Refusing a contention is not a straw man argument". Ron, that was exactly my point. My point is that he's putting forth a thesis, and you are simply stating that his thesis is incorrect. Therefore, it's NOT a strawman argument. I know very well what a strawman argument is.

He doesn't "create an artificial image" that money is debt... that's his premise! YOU'RE the one attacking that image, he's trying to support it!

The above conclusion is wrong. If you believe that you have highly distorted views of how the modern financial system works, especially modern Money Markets.

That's fine if you believe that, but telling me I'm wrong with no other facts or opinions to support it doesn't really do much to support your side of the argument, does it? You tell me to open a logic book, but your rebuttals are simply "you're wrong, I'm right".

I do not understand why you feel so attached to the author of the video? Are you the author by the way? I did not call you fool, I called fool anyone who does not understand the difference between debt and money and attempts to equate the two.

Ron

LOL, you make a lot of assumptions about me, don't you? I am not attached to the author in anyway, and incidentally, there is a lot about that video I don't agree with. However, I believe most of what you said is incorrect, so that's why I'm debating you.

There wasn't a shred of a rebuttal in this post. Are you going to write more with some facts or some logic to refute my claims in your next post?

Also, if you want to call me out on logic, let's look at your last paragraph.

[/B][/QUOTE]
Money is a standard of deferred payment, the only accepted way to settle a debt. Only a fool will argue that the standard of deferred payment is debt. I mean it, only a fool...

1. You believe I'm arguing that money is debt
2. You state that anyone arguing that money is debt is a fool

Therefore by the property of transference, you are calling me a fool.

But don't worry about it Ron, I've got a thick skin and I'll let that one slide...

TNG

 

[thenewguy]

Quote from Haroki:

Ok, I'm watching the video again as I write this.

First thing that I feel is wrong is the guys statement that banks create money from the borrower's promise to repay. I'd say that's false, the bank controls the asset (house). So when you go 'borrow' money from a bank, you're not really borrowing money, you're asking the bank to take control of the house, and you'll slowly pay them for it over the next 30 yrs. And since the bank really owns the house, the bank now can go on with its' pyramid scheme of creating new loans, which 'create' more money, etc, etc.

Let's look at a house purchase in detail. Let's say Mr. Wannasell has a house worth 90k. I have 100k I want to deposit in the bank. I deposit that money and 90k of it is loaned to you to buy the house, and you pay Mr. Wannasell. The total net worth of this equation is now 100k + 90K + house (90k), right? But wait, before the transaction it was just my 100k + house (90k). So we have an extra 90k now.

The author's real point, in my mind, just like everyone who makes this case is that the accounting is faulty. They claim liabilities as assets. The deposit of 100k is an asset on their books, the loan for 90k is an asset on their books, so now their total net worth has increased by 190k from a 100k loan.

You also need to consider that business loans aren't made without collateral either, no matter how good an idea you may seem to have for a new business. So while your statement that the vast majority of loans aren't being made to buy assets may be true, I have no idea, there is always collateral ( in some form of an asset ) backing that loan. Banks are very conservative about loaning money - I have some experience with that, re: why I'm not working today. My bosses got into the same spiral of pledging assets (wine in the bottle - at an unrealistic price - and vineyard property) to be able to fund a massive marketing plan - definitely not an asset. But when they couldn't sell the wine at the price that they figured on, the house of cards all fell apart. But the bank was fine. Matter of fact, they could now, again , continue the pyramid scheme of loaning money cuz they now controlled an asset - wine and real property.

OK, you're really going to get me in trouble here....

I think at the level your winery was at, you are absolutely correct. However, the money that flows through the world bank or the IMF does not have any collateral, whatsoever. In fact, it's my belief that it is not intended to be paid back, ever.

While I think it's fair to say that banks seem conservative in lending money because it's difficult for people like us or your business owners to secure a loan, it really isn't. Look at the sub prime crisis right now. They certainly weren't conservative. Look at the loans going to bankrupt companies, into russia just after they defaulted, into the middle east into completely unstable countries.

I would agree on your statement about foreign loans, however there may be some mechanism where the US govt pledges to repay the loan to the bank if it goes bad. Maybe the govt hopes to make some good will or something similar. So again, the bank is fine.

Yes, there is a mechanism. The government will issue bonds, treasuries, whatever to make up the difference. That's the issue I have with all this. They make shoddy loans out to countries with the obligation that they use US engineering companies to build the infrastructure, and the companies make a ton of dough and we get stuck with the inflation from a suddenly MUCH larger monetary supply. Your last sentence, however is dead on. The banks are ALWAYS fine. They are backed by the FED (a collection of bankers and banking families). Sometimes, during a bank run, however, the shareholders will get screwed, but that hasn't happened since what, the late 70's?

And I can recall very few instances where a house is not insured. The bank would call in the loan cuz I'm sure that it's written in the 'loan' agreement that the home buyer must have insurance, otherwise the bank will kick you out and sell the property. And again, the bank is fine. But these risks are a known %age anyways - statistics - so I'm sure there's some formula that they use to factor this in. Maybe that's why one needs 20% down to cover this and property prices going down, etc.

Yes, most houses are insured, for sure. To be honest, I'm not sure what bank's policies are on insurance. The bank is always protect, the only thing they fear is a bank run, and they fear it because they have obligations that they can't meet, because they have created the money.

And what Ronblack said about the time factor of money is a huge statement, I believe. Do you agree with what I said about repaying the 30yr loan off with devalued money? If you agree with trefoil's "yep", then one has to argue how else can a bank remain solvent, unless it's allowed to pyramid the loans? They could, I suppose, if inflation was zero, then they would be paid back with a constant dollar. But I think it's unreasonable to expect that. And I'm sure that there's other ways to achieve that, but won't try to list them ....

I haven't had a chance to sit down and really think about what you wrote, but I will, and I'll let you know!

TNG

 

[Haroki]

Quote from thenewguy:

Let's look at a house purchase in detail. Let's say Mr. Wannasell has a house worth 90k. I have 100k I want to deposit in the bank. I deposit that money and 90k of it is loaned to you to buy the house, and you pay Mr. Wannasell. The total net worth of this equation is now 100k + 90K + house (90k), right? But wait, before the transaction it was just my 100k + house (90k). So we have an extra 90k now.

 

[Haroki]

Quote from thenewguy:

Let's look at a house purchase in detail. Let's say Mr. Wannasell has a house worth 90k. I have 100k I want to deposit in the bank. I deposit that money and 90k of it is loaned to you to buy the house, and you pay Mr. Wannasell. The total net worth of this equation is now 100k + 90K + house (90k), right? But wait, before the transaction it was just my 100k + house (90k). So we have an extra 90k now.

__________________________________________________

But's that's how it should work, IMO. The liability isn't the bank's, it's mine. They still have your 100k as an asset. And they have 90k as an asset too, namely a 90k interest in my house.

____________________________________________________

OK, you're really going to get me in trouble here....

I think at the level your winery was at, you are absolutely correct. However, the money that flows through the world bank or the IMF does not have any collateral, whatsoever. In fact, it's my belief that it is not intended to be paid back, ever.

While I think it's fair to say that banks seem conservative in lending money because it's difficult for people like us or your business owners to secure a loan, it really isn't. Look at the sub prime crisis right now. They certainly weren't conservative. Look at the loans going to bankrupt companies, into russia just after they defaulted, into the middle east into completely unstable countries.

__________________________________________________

I'd say the subprime thing was bad business decisions. The banks believed that real estate prices would go up when they made the no down loans, but they were wrong. It happens.

__________________________________________________

Let me know what you think of the time value thing.

 

[thenewguy]

Quote from Haroki:

__________________________________________________

But's that's how it should work, IMO. The liability isn't the bank's, it's mine. They still have your 100k as an asset. And they have 90k as an asset too, namely a 90k interest in my house.

Yes, the banks shouldn't have the liability, but they have a special privledge that no other business has.

Can you imagine if your winery took out a loan for 100k, then spent it on equipment, but on their books they said "we have 100k in the bank, and 90k in equipment". So, in reality, it's not a liability at all. They lent money they didn't have, so what if it's not repayed?

____________________________________________________

OK, you're really going to get me in trouble here....

I think at the level your winery was at, you are absolutely correct. However, the money that flows through the world bank or the IMF does not have any collateral, whatsoever. In fact, it's my belief that it is not intended to be paid back, ever.

While I think it's fair to say that banks seem conservative in lending money because it's difficult for people like us or your business owners to secure a loan, it really isn't. Look at the sub prime crisis right now. They certainly weren't conservative. Look at the loans going to bankrupt companies, into russia just after they defaulted, into the middle east into completely unstable countries.

__________________________________________________

I'd say the subprime thing was bad business decisions. The banks believed that real estate prices would go up when they made the no down loans, but they were wrong. It happens.

__________________________________________________

The fractional reserve banking system encourages them to make loans like this. Banks make money by making loans, when loans are defaulted on they take the assets. When there are too many defaults and not enough assets, or when a bank run happens, the FDIC steps in and bails them out, and if it all goes down to the worst case the shareholders get fleeced and the bank's CEO's and so on come out fairly unscathed. It's a crappy system, but I don't have any better suggestions at the moment. I think a long time ago the move from commodity backed currencies to fractional reserve banking was a big mistake, but who knows how history would have turned out. Hindsight is always 20/20 right?

I'm not suggesting that banks take on more liability, but I do think that if the people in power were motivated by being fair, they could come up with a much better solution. The bank owners and their families are some of the wealthiest people/families in the world.

Let me know what you think of the time value thing.

Will do!

TNG

 

[fibonelli]

Quote from ronblack:

Hi Gregg,

............

Yes, it is true that banks issue loans, it is true that the system is leveraged, it is also true that there are a lots of people on debt but it is also an undeniable fact that there is a huge amount of currency circulating in the form of tangible notes and coins.

...........................


Ron

Ron,

Can you tell me what percentage of your country's total money (including credit) supply is notes and coins in circulation?

I'll give you a little clue, in the UK, it is a disgracefully low 3%.

Fibonelli

 

[thenewguy]

Quote from Haroki:

The video prompted a question that I hope that someone could answer :

A hypothetical situation -

1-Mr Joe Average works for a credible company that gives COL raises to offset inflation/devaluation of say, 3%.

2- His biggest debt, like most middle income families, is his house, which he has a 30 yr loan on.

3- The loan payment amount never changes over those 30 yrs, and he's paying - say 6% to make the math easier me to understand.

So, after 2 years paying the loan, is the bank essentially getting zero interest, since the money it receives is now devalued 6%? And after that, is the money it gets paid actually LESS than the devaluation rate? Is this a good thing for Mr Joe Average, since his raises have kept up with the devaluation of his dollars?

It seems like it would, for every year that passes, his money supply increases by an equal amount that his money is devalued. Hence, the % of his total income that goes to paying off his house gets smaller and smaller. Granted, everything else in his life will get more expensive, but that should be offset by his COL raise and leave more 'cushion' for him to send his kids to college, etc.

And if this is right, wouldn't it make the most sense to continually take out home equity loans whenever you need to make major purchases? Assuming of course that one could borrow that money for a long term loan, again gaining the advantage of repaying with devalued money?

I'm not sure I'm understanding this, but when you say the loan payment amount is %6, do you mean he's being charged %6 interest annually on the loan?

If that's true then he's losing %3 every year on that money.

I think the basic model of banks is that they charge a slightly higher interest rate than inflation, no?

TNG