Cyprus-Forum.com

[RichardB]

Paphitis you may want to have a look at the following extract from Erolz's book, to understand what RH is saying:
While I don't agree that money created from loans backed up by assets, is money out of thin air, the way it's currently done by Banks resulted in stealing the right of the Central Bank to regulate the money supply and the economy. This in turn results in hundreds of distortions and unhealthy economies let aside the risk of collapsing on a global scale.The positive effect that it already produced and makes you think it's a great system would not change if this right was withdrawn from the Banks. What would change are the negative effects and the risks. We 've seen what happened in Cyprus...


Textbook descriptions: the multiplier model

Many economics textbooks use a ‘multiplier’* model of banking to explain how the 2.6 per cent of money that is cash is ‘multiplied’ up to create the 97.4 per cent that is simply liabilities of banks i.e. numbers in bank accounts. The model is quite simple and runs as follows:

A member of the public deposits his salary of £1,000 into Bank A. The bank knows that, on average, the customer will not need the whole of his £1,000 returned at the same time – it is more likely that he will spend an average of £30 a day over the course of a month. Consequently, the bank assumes that much of the money deposited is ‘idle’ or spare and will not be needed on any particular day. It keeps, or is mandated to keep by the central bank, back a small ‘reserve’ of say 10 per cent of the money deposited with it (in this case £100), and lends out the other £900 to somebody who needs a loan.

Now both the original depositor and the new borrower think they have money in their bank accounts. The original deposit of £1,000 has turned into total bank ‘deposits’ of £1,900 comprising £1,000 from the original deposit plus £900 lent to the borrower.

This £900 is then spent in the economy, and the shop or business that receives that money deposits it back into Bank B. Bank B then keeps £90 of this as its own reserve, while lending out the remaining £810. Again the process continues, with the £810 being spent and re-deposited in Bank C, who this time keeps a reserve of £81 while re-lending £729. At each point in the re-lending process, the sum balance of all the public’s bank accounts increases, and in effect, new money, or purchasing power, has been created.

This process continues, with the amount being lent getting smaller at each stage, until after 204 cycles of this process the total balance of the public’s bank deposits has grown to £10,000. Figure 2 shows this step-by-step process, with the additional lending (and the new money created as a result) shown in black.

Figure 2: The money multiplier model

figure2.PNG

Thanks pyrpolizer

That's the first post i've actually understood on this thread

[Paphitis]

Paphitis you may want to have a look at the following extract from Erolz's book, to understand what RH is saying:
While I don't agree that money created from loans backed up by assets, is money out of thin air, the way it's currently done by Banks resulted in stealing the right of the Central Bank to regulate the money supply and the economy. This in turn results in hundreds of distortions and unhealthy economies let aside the risk of collapsing on a global scale.The positive effect that it already produced and makes you think it's a great system would not change if this right was withdrawn from the Banks. What would change are the negative effects and the risks. We 've seen what happened in Cyprus...
Notice how with this system every loan has the potential to create 10 times more loans...

Textbook descriptions: the multiplier model

Many economics textbooks use a ‘multiplier’* model of banking to explain how the 2.6 per cent of money that is cash is ‘multiplied’ up to create the 97.4 per cent that is simply liabilities of banks i.e. numbers in bank accounts. The model is quite simple and runs as follows:

A member of the public deposits his salary of £1,000 into Bank A. The bank knows that, on average, the customer will not need the whole of his £1,000 returned at the same time – it is more likely that he will spend an average of £30 a day over the course of a month. Consequently, the bank assumes that much of the money deposited is ‘idle’ or spare and will not be needed on any particular day. It keeps, or is mandated to keep by the central bank, back a small ‘reserve’ of say 10 per cent of the money deposited with it (in this case £100), and lends out the other £900 to somebody who needs a loan.

Now both the original depositor and the new borrower think they have money in their bank accounts. The original deposit of £1,000 has turned into total bank ‘deposits’ of £1,900 comprising £1,000 from the original deposit plus £900 lent to the borrower.

This £900 is then spent in the economy, and the shop or business that receives that money deposits it back into Bank B. Bank B then keeps £90 of this as its own reserve, while lending out the remaining £810. Again the process continues, with the £810 being spent and re-deposited in Bank C, who this time keeps a reserve of £81 while re-lending £729. At each point in the re-lending process, the sum balance of all the public’s bank accounts increases, and in effect, new money, or purchasing power, has been created.

This process continues, with the amount being lent getting smaller at each stage, until after 204 cycles of this process the total balance of the public’s bank deposits has grown to £10,000. Figure 2 shows this step-by-step process, with the additional lending (and the new money created as a result) shown in black.

Figure 2: The money multiplier model

figure2.PNG

It's the same thing as what I have been saying Pyro.

The Banking System is fractional. cash Reserves are only 3%. Broad Money is 97%.

In fact, you and I are also fractional. I bet both of us don't have anything more than 3% of our Net Worth in Cash Form.

Government is fractional too. The only money they have is what they have as change to buy milk and coffee for their staff room.

But this is not creating money from thin air. It is broad money or established wealth.

Now, let's remove Banks and the ability of Broad Money.

Oh that's ok, so what is is left. Probably only 3% of all money. If you want to know what that would be like, then if we go to Somalia, we might find out what it would be like. Not very good at all.

GDP would only be 3% So imagine Cyprus with a GDP of less than 1 Billion Euros - even worse than the poorest African tin pot. The USA with a GDP of about 200 Billion and so on.

[Paphitis]

Paphitis you may want to have a look at the following extract from Erolz's book, to understand what RH is saying:
While I don't agree that money created from loans backed up by assets, is money out of thin air, the way it's currently done by Banks resulted in stealing the right of the Central Bank to regulate the money supply and the economy. This in turn results in hundreds of distortions and unhealthy economies let aside the risk of collapsing on a global scale.The positive effect that it already produced and makes you think it's a great system would not change if this right was withdrawn from the Banks. What would change are the negative effects and the risks. We 've seen what happened in Cyprus...


Textbook descriptions: the multiplier model

Many economics textbooks use a ‘multiplier’* model of banking to explain how the 2.6 per cent of money that is cash is ‘multiplied’ up to create the 97.4 per cent that is simply liabilities of banks i.e. numbers in bank accounts. The model is quite simple and runs as follows:

A member of the public deposits his salary of £1,000 into Bank A. The bank knows that, on average, the customer will not need the whole of his £1,000 returned at the same time – it is more likely that he will spend an average of £30 a day over the course of a month. Consequently, the bank assumes that much of the money deposited is ‘idle’ or spare and will not be needed on any particular day. It keeps, or is mandated to keep by the central bank, back a small ‘reserve’ of say 10 per cent of the money deposited with it (in this case £100), and lends out the other £900 to somebody who needs a loan.

Now both the original depositor and the new borrower think they have money in their bank accounts. The original deposit of £1,000 has turned into total bank ‘deposits’ of £1,900 comprising £1,000 from the original deposit plus £900 lent to the borrower.

This £900 is then spent in the economy, and the shop or business that receives that money deposits it back into Bank B. Bank B then keeps £90 of this as its own reserve, while lending out the remaining £810. Again the process continues, with the £810 being spent and re-deposited in Bank C, who this time keeps a reserve of £81 while re-lending £729. At each point in the re-lending process, the sum balance of all the public’s bank accounts increases, and in effect, new money, or purchasing power, has been created.

This process continues, with the amount being lent getting smaller at each stage, until after 204 cycles of this process the total balance of the public’s bank deposits has grown to £10,000. Figure 2 shows this step-by-step process, with the additional lending (and the new money created as a result) shown in black.

Figure 2: The money multiplier model

figure2.PNG

Thanks pyrpolizer

That's the first post i've actually understood on this thread

I wouldn't worry. It is all very complicated and difficult to understand.

Someone like Varoufakis would know it inside out. A lecturer in Economics so he would know the theory very well. Someone like Robin Hood is completely off on a tangent pandering to the so called conspiracy.

What I have been able to deduce is that the system is very elaborate and quite delicate and has been designed to increase everyone's wealth, including that of Government. That is in their interest too, because the more people you have as consumers, the better of they and business would be, and more borrowing will take place.

Ever since Robin started banging on about "crooked" Banks creating money, I had to look into it myself. The deeper I dug, the more I became more appreciative of the system's regulatory frameworks and the level of sophistication of it all. Having learned a great deal, I also understand there is no other way for everything to function even right down to the smallest business.

Finance is actually a great network that works very well and it engages virtually everyone whether they like it or not. Some of us avail ourselves to the system more than other's. Without it, everyone's wealth is just NOT POSSIBLE! Even your pension would not be possible.

[erolz66]

Now, let's remove Banks and the ability of Broad Money.

No one in this thread is suggesting that Banks be removed. It is being suggested that leaving the private Banks as the near sole entities that can create or not create 'new money' (or if you prefer turn the value in assets or in people's future earning potential into legally exchangeable tokens) is not necessarily the best way of doing things. That this crucial function of controlling money supply, vital for the economy, is too important to be left to the 'whim' of private banks alone. That is what is being suggested I think.

[Paphitis]

My question was:

In 1947 almost 50 % of the currency in circulation (UK) was in the form of note and coin. I think you will find that today, even though there are many more notes in circulation, it represents only 2-3%.

My question for you is .......... If this is not NEW currency....... where did the other 97% of currency, held mainly as bank deposits, come from?

Such a very easy question to answer Robin Hood. I quite frankly, I am shocked you can't grasp some basic concepts.

What was your Net Worth back in 1947 and what is it now?

My old man came to Australia with a couple of suitcases. His combines Net Worth in the 50s, would have been whatever his family horafkia were worth which is probably not much at all. So in other words, he had a Net Worth of almost NOTHING. I think that is the same for most of us.

In Australia, through the 50s, 60s, 70s,80s and so on, he got wealthier and wealthier through hard work and also using the Banks to open and set up businesses. He sacrificed a lot for his family and got ahead. By the time of this passing, he took his family from the bottom 1% to literally the top 1% of Australian society.

Yes it is all possible, but my old man would just keep buying and he never sold anything for his children. A life of dedication and sacrifice.

People got wealthier is the answer Robin Hood. Broad Money increased for the entire population of the globe.

If you want to go back to 1947 then go ahead. I happen to think that as we move forward we get better and better. And isn't that what we all want?

[Paphitis]

Now, let's remove Banks and the ability of Broad Money.

No one in this thread is suggesting that Banks be removed. It is being suggested that leaving the private Banks as the near sole entities that can create or not create 'new money' (or if you prefer turn the value in assets or in people's future earning potential into legally exchangeable tokens) is not necessarily the best way of doing things. That this crucial function of controlling money supply, vital for the economy, is too important to be left to the 'whim' of private banks alone. That is what is being suggested I think.

Private Banks are not the only entity. There is also a central Bank which actually does have the power to print currency and it can even create money from thin air, usually for the benefit of Government. However, they are limited as well, by inflation otherwise we end up like Zimbabwe.

You yourself. showed evidence of an institution giving you credit at the base rate. Now do you believe that would be possible if everything was monopolized by Government?

And do you think they would even be able to supply business with all the Trillions to even operate globally? If you want to know what that would be like, then probably have a look at North Korea and Cuba.

[Robin Hood]

Pyrpoliser:

Well I agree that it’s treated like an insurance, but you can’t deny the fact that the collateral is in fact money because it has the basic characteristics of money. It has a stored value. You could as well sell the asset to the Bank under the condition that as soon as you return the money they would return you the asset.

Wealth (collateral) is NOT money .... it does not have the characteristics of money ...... and it does not have ‘stored value’ it has ‘perceived value’ and that has very different qualities.

If you sold your land to the bank and took currency in exchange and then went back five years later to reclaim it..... you would normally pay significantly more than you got for it. Why, after all it is the same piece of land? Because the land has not changed in intrinsic value ........ it is what you are giving in exchange that has devalued, so you need more to buy back the land. Agreed?

Since you sold the land the banks have created more IOU’s into circulation and, as others have pointed out, most things are ‘wealth‘ but that wealth is finite .... you cannot (normally) create land ..... but you can create currency. Currency is NOT wealth it is a unit of the measurement of wealth and that is variable. The more currency you create the more IOU’s are attached to the object of wealth. When you buy back your land .... it is not the land that has increased in value ...... the currency you have used is now worth less, so you need more of it. Where did it come from? Answer: ...... private commercial banks created the extra currency every time it gave credit to a customer who spent it into circulation as new money and at the same time it became a debt in his account. It is called balancing the books! The currency did not exist until that moment in time and neither did the debt!

The simple truth is that person X cannot own both the stored value of the asset plus it’s value in cash via a loan. By setting it as collateral he actually loses the right to ownership of that stored value and that right is transfered to the Bank under the term that it will be returned when the loan is paid back. Notice that when the Banks get sold those rights get sold too.

In that instance you would have ‘temporarily’ sold the asset to the bank. But you don’t, you present a wealth asset for them to value ..... which they do in currency. They will then advance you that amount of currency by giving you credit ..... not money! The asset is still yours but the bank now has a claim against your assets, if you fail to repay the loan. What you are now spending is what the bank created for you by giving you credit (the ability to spend currency you do not have). That is why it is referred to as New Money it did not exist until you started spending it. The bank has created something from nothing ...... the currency is existing at the same time as the wealth. But they are not the same thing.

This is why repaying the loan destroys the money that the bank enabled you to create into existence when you spent your credit. When you make a repayment off the debt the bank simply writes off that amount off your credit account. The bank does not receive that repayment of capital as wealth or any form of benefit, it is a number they type in to reduce your debt , and that amount of currency disappears from circulation. Phutttttt .... it goes back where it came from .... thin air. But you still have your wealth.

The strange thing is that the banks ‘accounting system’ sees your debt as an asset, because they have your wealth as collateral. So, if you pay off your debt the bank loses an asset. If you fail to pay, then the bank forecloses on your debt and converts your wealth to the currency they created for you as a debt, by selling it! At that point they convert your wealth to an equivalent in currency and repay your debt that way, because whoever they sell your asset to, to recover your debt, will take that currency out of circulation to pay into your defaulted credit account.

So imo there is no new money created per se. It is a simple exchange of one stored value into another. However the Banks just use the trick of the multiplying effect of the loans to deposits circle to fund this exchange via some computer entries that are actually NEW money.While Imo there shouldn't be any new money anywhere, the exploitation of the circle effect, creates new money.

See above .... new money (currency) IS created. You need new money to expand the economy (capitalism), it is how and who does the expansion that is questionable and needs revising.

The so called ‘multiplier theory’ has been proved to be misleading! Yes it works but that is not how the banks create new money. That theory requires that a series of banks/accounts work together to produce new money. But the EVIDENCE shows that a single bank using the ‘creation theory’ can go it alone. You do not need several components to create the new money ..... just one extension of credit will do it.

That's why imo the funding should be from the Central Bank.

I agree with that!

The loan itself actually pre-buys future wealth.

It can and does, but if you (and Paphitis) are correct surely that wealth exists already? All you are doing is transferring it from person ‘A’ to person ‘B’, using currency as the medium of transfer?

The borrower through future work (usually) pays back the loan, regains his asset, plus some more assets that he made using the loan. The system is great because in some manner it applies pressure to the borrower to increase his and in extension the nation’s wealth.

Unfortunately Paphitis cannot have his cake and eat it! He claims this wealth exist already..... and so it does ..... and it is the same as currency, so therefore the currency exists. i.e. wealth = currency? Now you are suggesting wealth doesn’t exist it is being created. Which is it? I would suggest that the wealth exists in perpetuity but the currency it is valued in can be created and destroyed at will by the banks. That argument fits the evidence ..... Paphitis’ ideas and perception has gaping holes in it and does not match reality. This is understandable when you are new to the concept ...... but then I went through all this many years ago.

I understand Paphitis in this respect.

See above ......... work it out for yourself ......look at the hard evidence, not bank jargon!

But at the same time it has it’s pitfalls as it has already been discussed.

True .......... not that ‘we’ can change anything but. it is satisfying to know how and by whom you are getting screwed!

[Paphitis]

Yes it is money, as with everything else of value. You can turn it into Broad Money or an electronic IOU.

Apple has become the biggest company on the planet. It's Net Worth is 600B USD.

Now, do you think they have a secret vault with all that cash? No! It's the complete value of their market capitalization, assets, plant and equipment, buildings, land, deposits, intellectual property, trade marks etc etc.

All things of value have perceived value and they fluctuate, some more than others. land for instance is one of the safest assets.

Even currency fluctuates. All major currencies are actually floated and subject to market fluctuations.

For example, the Russian Ruble has lost over 80% of its value due to the drop in Oil Price.

Bottom line is, the value of collateral is dictated by the market and what people are willing to pay for it.

And for things of value, an intermediary could be willing to extend an IOU for it. Now imagine if that could not happen.

Then you can bet your socks that Apple would not be worth 600B or employ 500,000 people.

[Robin Hood]

Paphitis:
You really do take the biscuit! What’s this sudden urge to use ‘broad money’ in every reference? An electronic IOU is broad money! Read what I posted to explain the term .... but you used the term wrongly anyway because ‘CASH’ is known as ‘drawer cash’ or ‘vault cash’ in the bank ..... not ‘broad money’.

Apple has become the biggest company on the planet. It's Net Worth is 600B USD.

Now, do you think they have a secret vault with all that cash? No! It's the complete value of their market capitalization, assets, plant and equipment, buildings, land, deposits, intellectual property, trade marks etc etc.

.
Apples net worth is its share value as quoted by The Markets! It is certainly not cash that’s for sure! Can it be converted into cash..... I very much doubt it, they would need a fleet of trucks to move it around .......... but it could be converted to fiat currency as an electronic account entry ......... if everybody cashed in their shares! Then its value would plummet like a stone ...... the value is a perceived value not a definitive value. It’s what the market thinks it is worth.

All things of value have perceived value and they fluctuate, some more than others. land for instance is one of the safest assets.

The ‘perceived’ bit is determined by the apparent value of the currency in which you value the asset, at a given moment in time,...... the wealth locked into the asset does not change.

Even currency fluctuates. All major currencies are actually floated and subject to market fluctuations.

That is why ‘currency’ is not money ...... money is a store of value ...... currency is not! It is currency that fluctuates because it can be created and destroyed at will by commercial banks. Money i.e. a Gold Coin will always have the same value ..... its weight in Gold ..... that’s where the expression came from.

For example, the Russian Ruble has lost over 80% of its value due to the drop in Oil Price.

But the locked in wealth of their asset remains the same ...... they still have a lot more oil/gas than most other countries. If they turned the taps off, the price would rocket! The Saudis did the opposite to inflict a pain on Russia and suffered unforeseen consequences ...... their income dropped too!

Bottom line is, the value of collateral is dictated by the market and what people are willing to pay for it.

Agreed the value determined in various currencies will fluctuate, due to ‘markets’ but what the customer buys is what the customer buys. That does not change! You could of course do it the other way round; determine a price and then adjust the quantity?

And for things of value, an intermediary could be willing to extend an IOU for it. Now imagine if that could not happen.

Only if the owner of the thing of value was willing to accept it! I could swap a horse for two cows .... without the need for an intermediary .... all I would need is a truck!

Then you can bet your socks that Apple would not be worth 600B or employ 500,000 people.

If the Sun surprised us all tomorrow by giving of an EMP in the form of a massive solar flare ....... Apple would be worth SFA as would any other electronics organisation and instantly 500,000 Apple people would be jobless, they would default on their mortgage, the banks would foreclose and seize their collateral, the housing market would collapse, more jobless, more foreclosures and so on and so on ...... and there would be complete turmoil in all sectors but .............. an ounce of gold would still be worth an ounce of gold and all the land the banks acquire through foreclosures would still hold the same wealth! That’s a fact.

These Bankers are not stupid ...... unlike you, they are not new to this game ....... they have been refining their act for decades!

[Paphitis]

Paphitis:
You really do take the biscuit! What’s this sudden urge to use ‘broad money’ in every reference? An electronic IOU is broad money! Read what I posted to explain the term .... but you used the term wrongly anyway because ‘CASH’ is known as ‘drawer cash’ or ‘vault cash’ in the bank ..... not ‘broad money’.

Apple has become the biggest company on the planet. It's Net Worth is 600B USD.

Now, do you think they have a secret vault with all that cash? No! It's the complete value of their market capitalization, assets, plant and equipment, buildings, land, deposits, intellectual property, trade marks etc etc.

.
Apples net worth is its share value as quoted by The Markets! It is certainly not cash that’s for sure! Can it be converted into cash..... I very much doubt it, they would need a fleet of trucks to move it around .......... but it could be converted to fiat currency as an electronic account entry ......... if everybody cashed in their shares! Then its value would plummet like a stone ...... the value is a perceived value not a definitive value. It’s what the market thinks it is worth.

All things of value have perceived value and they fluctuate, some more than others. land for instance is one of the safest assets.

The ‘perceived’ bit is determined by the apparent value of the currency in which you value the asset, at a given moment in time,...... the wealth locked into the asset does not change.

Even currency fluctuates. All major currencies are actually floated and subject to market fluctuations.

That is why ‘currency’ is not money ...... money is a store of value ...... currency is not! It is currency that fluctuates because it can be created and destroyed at will by commercial banks. Money i.e. a Gold Coin will always have the same value ..... its weight in Gold ..... that’s where the expression came from.

For example, the Russian Ruble has lost over 80% of its value due to the drop in Oil Price.

But the locked in wealth of their asset remains the same ...... they still have a lot more oil/gas than most other countries. If they turned the taps off, the price would rocket! The Saudis did the opposite to inflict a pain on Russia and suffered unforeseen consequences ...... their income dropped too!

Bottom line is, the value of collateral is dictated by the market and what people are willing to pay for it.

Agreed the value determined in various currencies will fluctuate, due to ‘markets’ but what the customer buys is what the customer buys. That does not change! You could of course do it the other way round; determine a price and then adjust the quantity?

And for things of value, an intermediary could be willing to extend an IOU for it. Now imagine if that could not happen.

Only if the owner of the thing of value was willing to accept it! I could swap a horse for two cows .... without the need for an intermediary .... all I would need is a truck!

Then you can bet your socks that Apple would not be worth 600B or employ 500,000 people.

If the Sun surprised us all tomorrow by giving of an EMP in the form of a massive solar flare ....... Apple would be worth SFA as would any other electronics organisation and instantly 500,000 Apple people would be jobless, they would default on their mortgage, the banks would foreclose and seize their collateral, the housing market would collapse, more jobless, more foreclosures and so on and so on ...... and there would be complete turmoil in all sectors but .............. an ounce of gold would still be worth an ounce of gold and all the land the banks acquire through foreclosures would still hold the same wealth! That’s a fact.

These Bankers are not stupid ...... unlike you, they are not new to this game ....... they have been refining their act for decades!

No Bankers are not stupid. And neither are we.

Everyone enters into an agreement with eyes wide open.

2 Parties coming together to achieve an objective. Everyone happy! they offer great financial services which can be used to your advantage.

Broad Money = In economics, broad money is a measure of the money supply that includes more than just physical money such as currency and coins (also known as narrow money). It generally includes demand deposits at commercial banks, and any monies held in easily accessible accounts.

These are the created IOUs by a Bank. it is the Banks Cash reserves plus all the electronic funds or IOUs.

Not the same as creating money from thin air as you seem to put it. Broad Money exists because of the exchange of goods, services and labour or over the transaction of particular assets such as land and housing or shares as well as other securities such as Bonds and Treasury Bills. .

I repeat, a Bank will not just make "data entries" for the hell of it as you seem to think.