[davep]

You're right. I don't understand how you can think that money can be kept on a leash like you seem to propose. Nor do I see how, simply because it is out of your control, that it has to be engendered by a conspiracy of bankers. The simple truth is that the value of money is based upon the faith of the people. Whether that faith is registered in the complexities of markets, in the voodoo of market dynamics representing what everyone believes about the value of something over time and somehow pulled out in a quote at any one time, or in the actions of people borrowing and, therefore, causing expansion of the money supply based upon their faith represented in that action the value of money is always based upon what people believe it to be.

Being based upon the faith of 'the people' and not one man, money can never go onto a leash for any one man. If you seek to understand it that way, if you fall in love with it like that, you will always see a conspiracy or cabal or whatever behind its machinations. It's simply a tool that we use to communicate our faith to and with each other, and that not necessarily in the value of the instrument itself. Often it represents our faith in each other, in the direction our society is taking or in the possibilities we see in our collective futures.

There's more to it than that. Money is currently created as debt. The money creation process depends on credit. This is a bad scenario as it requires payment of more than the initial amount to pay off the debt. So therefore it requires continual growth to function correctly (in order to pay back the interest element). It's not about having money on a leash, it's about who creates it. If Governments are good for bonds they're good to mint coin, it's as simple as that. The IMF Chicago plan is one of potentially many ways of getting out of the current short-termist system. Remember the rationale for the Chicago plan:

At the height of the Great Depression a number of leading U.S. economists advanced a
proposal for monetary reform that became known as the Chicago Plan. It envisaged the
separation of the monetary and credit functions of the banking system, by requiring 100%
reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this
plan: (1) Much better control of a major source of business cycle fluctuations, sudden
increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.
(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous
debt creation. We study these claims by embedding a comprehensive and carefully calibrated
model of the banking system in a DSGE model of the U.S. economy. We find support for all
four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state
inflation can drop to zero without posing problems for the conduct of monetary policy.

There are huge problems with the current monetary system and it needs to be changed in a world where energy is becoming scarcer and growth is no longer sustainable (nor desirable, given the ecological effects). Therefore a monetary system that isn't predicated on debt and growth is required. I've looked at a couple. I'd be interested if anyone had other ideas.

[davep]

I am admittedly somewhat naive over the workings of economies and money as it is not my area of strength knowledge wise but I was thinking about what would happen with a severe economic depression. No doubt the poor would suffer most as always has been the case. In reference to the severe disparity we see between the rich and the poor am I right in assuming that the vast amount of wealth from the 1% that make up this disparity is really fictitious fiat paper wealth tied up in hedge funds and all the other financial fancy instruments. If this is the case won't we see in the aftermaths of a severe economic correction a degree of a more level playing field in terms of severe disparity as it would seem that the major loss will be paper wealth as apposed to physical assets.

On the other hand there will be the ability of the 1% to buy up all the physical assets which will depreciate as a result of severe economic contraction and failed businesses, farms etc.

On one hand I can imagine a contraction of disparity and on the other hand I could see a further consolidation of wealth as a result of a severe depression. How do others see this? Just curious.

Sorry if this question if off topic. I was looking for a thread to post this and it seemed the most relevant.

Consolidation of assets happens in every contraction of the "business cycle" imposed by the current monetary system. It's a no risk system for bankers as politicians have to bail them out as they're the only means of generating money. So there is little in reality to stop the banks being irresponsible as they have engineered a situation where the state and the citizenry depend on them.

I really recommend watching the Money Masters video. Take it in chunks if you like. It'll explain how we have come to such a bizarre system. It really is excellent and well researched https://www.youtube.com/watch?v=iDtBSiI13fE

[evilgenius]

Davep,

I think what you are really getting at is not what you purport to with the blasphemy of the Chicago Plan. I think you are addressing the efficiency of the lending process vis a vis the control of lending practices. In short, whether a person borrows in order to invest or borrows in order to take pleasure. This balance can, largely, be controlled via political means, as it was under George Bush in order for him to gain re-election.

Otherwise, to assume that perpetual growth is necessary for payback of a loan is the same as assuming that a share price valuation at any arbitrary time should and ought to describe the value of that corporation across all time. You do this because to deny that an economy can pay back is to collapse the time within which an economy functions in the same way that valuing a corporation outside of all consideration of time collapses time for the market within which that corporation's shares trade. You can't collapse that market in that way and assume a true value any more than you can collapse an economy across time and assume a true value. Accountants also know that this way of thinking doesn't make any sense, so gains are only recorded when they are realized gains, and losses when they are realized losses. This current way of valuing would also have to change, for the worse, under the Chicago Blasphemy.

Don't you see, if you want that world you do want to put money on a personal leash rather than attach a value to it based upon the faith of the people? The value of it would always relate to the decided moment, and that would always be relative to a moment in history, which would be attached for its meaning to an individual or corporation standing outside of time.

[davep]

You are ignoring how money is created. Read the Bank of England report: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

As explained in ‘Money in the modern economy: an
introduction’, broad money is a measure of the total amount
of money held by households and companies in the economy.
Broad money is made up of bank deposits — which are
essentially IOUs from commercial banks to households and
companies — and currency — mostly IOUs from the central
bank.
(4)(5)
Of the two types of broad money, bank deposits
make up the vast majority — 97% of the amount currently in
circulation.
(6)
And in the modern economy, those bank
deposits are mostly created by commercial banks
themselves

Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not
typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank
deposit of the size of the mortgage.
At that moment, new
money is created.
For this reason, some economists have
referred to bank deposits as ‘fountain pen money’, created at
the stroke of bankers’ pens when they approve loans

All I'm suggesting is that money creation be decoupled from credit so that money is equity rather than tied to debt.

[davep]

Some more from the intro, just so you understand how money is created in a "modern" economy:

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits

This is a huge privilege that even Governments no longer have. We can't leave money creation in the hands of private companies whose own interests do not align with society at large. And there's no need to understand the mechanics of how it works to understand that. Whoever creates the money has power over the borrower. And banks create money for Governments and people/businesses to borrow.

That's how we end up with huge national and private debts. And coincidentally, no doubt, the financial elite is getting even richer during a time of austerity.

[evilgenius]

So, fractional reserve banking. What's the big deal? In a properly regulated economy it works very well to create money. The bankers are not "in charge" of it. The people, under the auspices of the regulating government bodies are. The government is the people, short and sweet. If it isn't, then the banking system is not your problem, you have a coup on your hands.

Don't mistake the borrowers at the hog trough for a coup either, nor Bush in his desire to entrance them and maintain power. We accept that as the American way. They aren't any more than a morbidly obese person isn't responsible for their own obesity, one fork full at a time. They may have a lot of helpers, but in the end losing weight comes down to their own behavior.

[davep]

So, fractional reserve banking. What's the big deal? In a properly regulated economy it works very well to create money. The bankers are not "in charge" of it. The people, under the auspices of the regulating government bodies are. The government is the people, short and sweet. If it isn't, then the banking system is not your problem, you have a coup on your hands

I'll re-quote something you may have just missed:

The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits...

...For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans

So it's not fractional reserve, they can create loans to create money based on whatever they value your house at. And the bankers are totally in charge of it. Which "regulating government bodies" are you referring to?

As for the coup on our hands, it happened in 1913 in the US. As Henry Ford said "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

[evilgenius]

So, the absence of regulation is a political decision, if it is truly absent. The fact that a domestic animal will act like a wild animal in the absence of a society of humans doesn't, essentially, change its nature.

[davep]

So, the absence of regulation is a political decision, if it is truly absent. The fact that a domestic animal will act like a wild animal in the absence of a society of humans doesn't, essentially, change its nature.

It was a political decision when politicians were duped into allowing the current system to exist. The current encumbents can no longer do much about it.

If you want to learn about the machinations that led to the current setup, watch the Money Masters video I linked to. The scales will drop from your eyes.

[Pops]

Again, banks don't create money, they create IOUs. I've been looking around for a good analogy, this is from another board and shows how all those IOUs increase the "velocity" of money (how many times a buck changes hands) but not the real, free and clear (like a US dollar) money supply:

... replace money with shovels, and it makes it much more clear that lending shovels doesn't actually create more shovels.

So I have a shovel, and I lend it to my neighbor. Now we both have some claim to a shovel, he has a claim to the shovel because he physicallly posesses it, and I have a claim to that shovel as it's my property. But if we counted shovels, how many would we have between us? Obviously two claims, but just one shovel. And the reason there can be more than one claim to the same shovel is because we forgot to subtract for the offsetting claims.

Now what if he lent it to his neighbor, who lent it to his neighbor, and it eventually was lent to everyone in my 100 person neigborhood. Do we have 100 shovels in our neighborhood? Nope, just 100 claims, of which 99 are offset by offsetting claims, and there is still just one shovel, that has circulated 100 times.

The reason there is an M1 money supply and an M2 money supply is to seperate currency and demand deposits (checking accounts) from timed deposits and M3, everything else.

[Ibon]

Consolidation of assets happens in every contraction of the "business cycle" imposed by the current monetary system. It's a no risk system for bankers as politicians have to bail them out as they're the only means of generating money. So there is little in reality to stop the banks being irresponsible as they have engineered a situation where the state and the citizenry depend on them.

I really recommend watching the Money Masters video. Take it in chunks if you like. It'll explain how we have come to such a bizarre system. It really is excellent and well researched https://www.youtube.com/watch?v=iDtBSiI13fE

You know, this might sound pathetic but I would rather not watch this. The whole subject bores the hell out of me. That is why I am so ignorant on this topic. And I just drank some white rum with mint, lemons and wild raspberries.

I have always been good at business but clueless when it comes to money.

[ralfy]

My understanding is money itself is an IOU.

[davep]

The reason there is an M1 money supply and an M2 money supply is to seperate currency and demand deposits (checking accounts) from timed deposits and M3, everything else.

IIRC, the UK only has M0 and M4 (broad money). They're all artefacts of fractional reserve and central banking anyway.

[Ibon]

Davep,

I started my day listening to part of the video.... I'll get through it.......thanks for the link...

[Pops]

Different levels of liquidity;
the further up the ladder from "currency" you go the less the liquidity
and the greater the risk - basically everything above M0 is just a claim on an actual gov issue, M0, FRN.







I like that one because it breaks down the individual location of the IOUs, here is another more up to date plot:



What these show more than anything is that we are much more comfortable using digital bucks than we were just 20 years ago. Look at that ramping of digital money in the '90s! Between '95 and 2005 M2 went from 4 times M1 to 8 or 10 times!

M2 is timed savings accounts, IRAs, CDs, consumer Money Market Accounts - where most personal retirement funds are located we've handed them over to the bank in return for their IOU. Basically Privatized Retirement Savings handed over to the gamblers - just as BushCo wanted.

--
I guess my point in all of this is not that everything is peachy but that it is not a "money" problem or a Fractional Reserve problem and especially not a "capitalism" problem. All of those things were in effect prior to those charts. I think the problem is right here:




By definition a cashless society has no money, the banks own it all.

What do you expect them to do with it?
.

[evilgenius]

Again, banks don't create money, they create IOUs. I've been looking around for a good analogy, this is from another board and shows how all those IOUs increase the "velocity" of money (how many times a buck changes hands) but not the real, free and clear (like a US dollar) money supply:

... replace money with shovels, and it makes it much more clear that lending shovels doesn't actually create more shovels.

So I have a shovel, and I lend it to my neighbor. Now we both have some claim to a shovel, he has a claim to the shovel because he physicallly posesses it, and I have a claim to that shovel as it's my property. But if we counted shovels, how many would we have between us? Obviously two claims, but just one shovel. And the reason there can be more than one claim to the same shovel is because we forgot to subtract for the offsetting claims.

Now what if he lent it to his neighbor, who lent it to his neighbor, and it eventually was lent to everyone in my 100 person neigborhood. Do we have 100 shovels in our neighborhood? Nope, just 100 claims, of which 99 are offset by offsetting claims, and there is still just one shovel, that has circulated 100 times.

The reason there is an M1 money supply and an M2 money supply is to seperate currency and demand deposits (checking accounts) from timed deposits and M3, everything else.

Nice try, but a single shovel does not an economy make. Substitute something like a piece of software instead. Now, make it so the original users of the software can share it, but those they share it with have to get the ok from the original supplier in order to use it. At the end of the same period that the shovel would have been used you can begin to figure out what you've got, not by how many copies of the software were used, but by polling the people who used it concerning its value. You could ask them how much time they would have been willing to give in place of it. That's what money is really, isn't it, an idea of fungibility that is supposed to take its basis in time. We mostly think of it as something we get in exchange for working. Only, just as in this analogy, that really isn't the case. The value of money, like anything else, is derived from a market. We're polling the people and they can say anything they like. That's how we can sort of approximate a market situation under this analogy. To get a truer valuation, that more truly reflects how valuable the thing was to them, you have to allow the voter's peers to know how they voted as well. That's right, you have use both shame and encouragement. When you are done you add up all of the times. This is the sum total of all your pseudo money. It'll be way more than the time period over which the software was actually working, that period over which your shovel was doing work. It probably won't be as much as the total time over which all copies were working, or anything like that. That total time might be the high value in some chart, though, that sees a valuation reach that level once in a blue moon.

[Pops]

huh?

The question is do banks create money. The people who borrowed the shovel didn't create any new shovels but merely clams to the same shovel. Likewise banks do not create money, just multiple claims to the same money.

Point being, claims aren't money any more than they are shovels. And while it is true that banks can create claims out of thin air, they don't create money.

[evilgenius]

huh?

The question is do banks create money. The people who borrowed the shovel didn't create any new shovels but merely clams to the same shovel. Likewise banks do not create money, just multiple claims to the same money.

Point being, claims aren't money any more than they are shovels. And while it is true that banks can create claims out of thin air, they don't create money.

You're still seeing it as if there was this vast God-given abstract thing that we call money, and that our actions carve that up. We create money, by believing in it. There are all kinds of money, and money substitutes. The best money is the money that all people can most transparently understand and engage with. When a bank loans out money under a fractional reserve scheme they are pinching time so to speak. They are providing a way for our beliefs to work more frequently over a period, if you will.

The love of money is so evil because it works against that. It doesn't see money as a tool, but as a thing that has some kind of value unto itself (this means you too, certain gold bugs). The love of money actually works against the faith of the people.

[Pops]

You're still seeing it as if there was this vast God-given abstract thing that we call money, and that our actions carve that up. We create money, by believing in it. There are all kinds of money, and money substitutes. The best money is the money that all people can most transparently understand and engage with. When a bank loans out money under a fractional reserve scheme they are pinching time so to speak. They are providing a way for our beliefs to work more frequently over a period, if you will.

The love of money is so evil because it works against that. It doesn't see money as a tool, but as a thing that has some kind of value unto itself (this means you too, certain gold bugs). The love of money actually works against the faith of the people.

I think we are talking about different things.

I agree that money is just an abstract representation of work/value and FRNs are no different than gold in that they have no intrinsic value other than what the "market" gives them.* I also agree that the current banking scam scheme (post Glass Steagall) is pretty well out of control. The whole thing was originally designed to increase the number of times a buck is recycled rather than sitting stationary under the mattress, not sure what it is now.

In my mind the only question about any of this is how should I store my value in the event of economic trouble that unravels part or all of those IOUs.

*(of course gold doesn't tarnish and is popular for jewelry but lots of other stuff has the same characters)

[careinke]

huh?

The question is do banks create money. The people who borrowed the shovel didn't create any new shovels but merely clams to the same shovel. Likewise banks do not create money, just multiple claims to the same money.

Point being, claims aren't money any more than they are shovels. And while it is true that banks can create claims out of thin air, they don't create money.

Your analogy breaks down when you realize only one person at a time can use the shovel regardless of the number of claims. The same is not true for fiat currencies.