Our monetary system

[JG4_Helofly]

Hi,

Since this is the off topic section, I thought that it might be interesting to discuss something which is not well known, but which has big consequences in our world.
So I would like to discuss the monetary system we currently have. That's something everyone of us deals with every day, but not many people really know how it works.

The most important aspect of it is the money creation. So the question how money is created. Most people think, that money is created by the central bank which prints the banknotes. Well, that's no exactly true. In fact, money is created by commercial banks. They create money by lending a certain amount of money to somebody. The money they lend did not existed before. This sounds strange, but it's reallity. This way, any bank can create money from thin air and they make a profit with the interest people have to pay. If the debt is repayed after some time, the money disappears again (not the interest of course).
I know, that's not very precise and really just a summary, but generally speaking it's how it works.

Now, what consequences does this have? Know that we know that money is only created by taking a credit in a bank X, it becomes clear that every cent which exists is also a debt on the other side. Every Euro, Dollar, CHF, ... you have on your bank account or in your wallet is a debt for someone else. Simply because someone had to borrow this money to give it to you, or someone borrowed it and gave it to the guy who gave it to you etc.
Interesting I would say
This also means that it's not possible to repay a debt in such a system. Because if you want to eliminate a debt, money must be eliminated too. Money = debt. If someone has 1 billion debt, someone else has a 1 billion entitlement to it. If you simply "repay" the debt by taking money from the money you put aside, then the debt has not been eliminated. It has just been transferd to another place.

But What about the interest? Well, since money is only created by borrowing, the interest must also be borrowed. And it continuesly grows for that reason.

So what is the big problem with all that? When money = debt, then some people will have very much money and some people will have the debt. And the guys with the debt have to pay the interest. The more money there is in the system, the more interest you must pay.
This would not be a problem if the money would be spread evenly, but that's not the case. I read a statistic which indicated that about 10% of the richest people owns more money combined than the bottom 90%. So who must pay for the money of the rich?...

Please note that this is not a conspirative theorie, but the basics of our monetary system.
I am very interested in it and I would like to know if some people have ever heard about it and what you have to say.

[5./JG27.Farber]

Wanna know why the worlds economy is in a mess? Its worse than you discribed.

This is what happened in America with derivatives:

http://www.youtube.com/watch?v=vhe_mQVIWVI

[pupo162]

this is hard to understand and even harder to explain. there are some good videos on youtube who explain it quite well. Its disgustign to say the least, yet while it work(ed) it had some balance, now its startign too fall apart quite rapidly, and a new default is coming i guess...

unfortunatly thsi forum as a no politics policy, and this will fall under the close banner soon.

[Wolf_Rider]

Originally Posted by JG4_Helofly

Hi,

The most important aspect of it is the money creation. So the question how money is created. Most people think, that money is created by the central bank which prints the banknotes. Well, that's no exactly true. In fact, money is created by commercial banks. They create money by lending a certain amount of money to somebody. The money they lend did not existed before. This sounds strange, but it's reallity. This way, any bank can create money from thin air and they make a profit with the interest people have to pay. If the debt is repayed after some time, the money disappears again (not the interest of course).
I know, that's not very precise and really just a summary, but generally speaking it's how it works.

Now, what consequences does this have?

Hyperinflation is the consequence.


"Cash" used to be backed by gold... so in effect, if a country had $1b they had to have $1b worth of gold in the coffers to back it. Why did it have to be backed? because the banknote (cash) isn't worth the money it is printed on (unlike coins, which btw, have also been reduced in content as to be not worth the amount printed on them) Coins, could at one time be melted down and the gold/ silver/ etc could be reclaimed.

The US has an uneveniable position of running two economies... the offshore oil economy (in which the US prints notes) and the home economy, in which the US prints notes (Quantative Easing). If the US oil economy (Reserve Currency/ FIAT) collapsed, for example by the trade in oil being done in Euro (like it was done with the USD) all those petro $'s would go back to the home economy and that economy would crash overnight (more like crash in the time it takes to run the evening news). This is why the US debased cash from gold in the early 70's... just so they could print.

Cash is just a piece of paper now, with a value printed on it

[JG4_Helofly]

Originally Posted by pupo162

this is hard to understand and even harder to explain. there are some good videos on youtube who explain it quite well. Its disgustign to say the least, yet while it work(ed) it had some balance, now its startign too fall apart quite rapidly, and a new default is coming i guess...

unfortunatly thsi forum as a no politics policy, and this will fall under the close banner soon.

Why should it be closed? It's not about politics, but about an aspect of our economy. And a very important one. No need to go into the politics corner from here.

[arthursmedley]

Originally Posted by JG4_Helofly

Hi,


I am very interested in it and I would like to know if some people have ever heard about it and what you have to say.

Er...your idea of how banking works is false. Commercial banks do not create credit out of thin air. I think you may be confusing the idea of "quantitative easing" whereby central banks have electronically created credit they transfer to commercial banks to facilitate lending (or create asset bubbles).

[JG4_Helofly]

Originally Posted by arthursmedley

Er...your idea of how banking works is false. Commercial banks do not create credit out of thin air. I think you may be confusing the idea of "quantitative easing" whereby central banks have electronically created credit they transfer to commercial banks to facilitate lending (or create asset bubbles).

No. It's not false. The money which is lend by a bank did not exist before. It's true that initialy a relatively small amount of money comes from the central bank and goes to the commercial banks, but the commercial banks can lend more money then they get from the CB. Otherwise every bank would have a 100% backed reserve and that's not the case. The min. reserve must be around 7%.

[arthursmedley]

Originally Posted by JG4_Helofly

No. It's not false. The money which is lend by a bank did not exist before. It's true that initialy a relatively small amount of money comes from the central bank and goes to the commercial banks, but the commercial banks can lend more money then they get from the CB. Otherwise every bank would have a 100% backed reserve and that's not the case. The min. reserve must be around 7%.

They borrow these funds from other commercial banks and re-lend at higher rates of interest. Thats one of the reasons our banking systems are in big trouble.

Think hard about this. Do you really think banks just 'magic' up money out of nowhere? If they did no one would have any confidence in paper money at all. We'd be exchanging lumps of gold again.

[JG4_Helofly]

Originally Posted by arthursmedley

They borrow these funds from other commercial banks and re-lend at higher rates of interest. Thats one of the reasons our banking systems are in big trouble.

Think hard about this. Do you really think banks just 'magic' up money out of nowhere? If they did no one would have any confidence in paper money at all. We'd be exchanging lumps of gold again.

So how is money created then? Does all the money come from the central bank in your view?
The reality is that commercial bank can lend more money then they have (central money from the central bank) that's why there is a cash reserve ratio which limits the amount of money a bank can lend.
As said earlier, there are some good videos in the internet about all this. Maybe you should look this up. I just know some in german and french, so probably not usefull for you?

[MD_Titus]

pushing digits round spreadsheets.