Cyprus-Forum.com

[Robin Hood]

Pyrpolizer:

Paphitis, you may want to have a look at the following extract from Erolz's book, to understand what RH is saying:

Pyrpolizer ..... unfortunately unless this is signed in blood by someone or an institute HE regards as having credibility ..... he won’t even look at it, let alone understand it!

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The positive effect that it already produced and makes you think it's a great system would not change if this right was withdrawn from the Banks.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...

The result of this positive effect of making the Central Bank the source of currency, has far more impact on the way Governments are funded and the way it benefits all the citizens, than it does when talking just of the effect on personal loans ...... which is effectively zero !

I don’t have a problem with your statement at all .... .....it’s spot on, except the first sentence ......... “While I don't agree that money created from loans backed up by assets, is money out of thin air .......”

But it is ....... that’s exactly what Erol’s chart shows. It is the ‘backed by assets’ that causes confusion! Assets are required to get the loan, that in turn create the deposit and thus give the bank the opportunity to expand the currency supply .... out of nothing! Look at the chart ...... you start with a deposit of £1000 (which in turn will have originated as a loan. Just like all of the other deposits)and it eventually becomes £10,000 ...... I see no mention of converting wealth to currency on the chart ........ if you included that it wouldn’t balance because there would be no debt! The debt would be counter balanced by the equal value of the collateral. The only source of the extra £9,000 is a book keeping/data entry ........ there is no physical fund it only exists as a computer generated accounting entry.

Notice how with this system every loan has the potential to create 10 times more loans...

The chart is fine and is 100% accurate in its explanation of the way Fractional Reserve Banking operates. There is only one small problem:

It is not the way the banks do it!

If you read the paper by Prof. Dr. Richard Werner (Professor of International Banking, University of Southampton), he provides the proof that the method the banks use is without question the ‘Creation Concept’. What the graph shows is the ‘Multiplier Concept’ and the most common concept, that 99% of people believe to be the case, the ‘Intermediary Concept’, have both been proved not to be the method that banks apply. Werner has proved this with empirical live loan creation with a banks computer and the way the documentation was constructed and he found the only concept that fitted the evidence was the ‘Creation Concept’.

His findings been completely supported by The Bank of England, The US Federal Reserve, several newspapers , many other banking/monetary institutions and respected economists. The following blog has the links to the relevant sites .... saves me having to write them.

If you find the subject of interest but complicated, watch Werner’s videos (He is much easier to listen to and to understand than Varoufakis)....... he covers everything we have covered on this thread and explodes all the myths in a very easy to understand manner ...... even for those that doubt.

http://the-free-lunch.blogspot.com.cy/2014/03/bank-of-england-concurs-with-prof.html

[Pyrpolizer]

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.

No it HAS a stored value just like money has a stored value. It’s value may increase or decrease over time, however at a fixed point in time it has a very specific value.That point in time is the moment at which is set down as security to take a loan or get sold.

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?

That was just an example to demonstrate why the asset has a sleeping money value, that can be turned into cash if sold or if ownership is transferred to someone else. It’s value may always increase or decrease or just stay the same. What matters is the specific moment in time that it was actually set down to get a loan. Money itself has different value at different times.

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.

Inflation is not caused by this process of loans. In the economy there are thousands of loans that create the need for new currency but at the same time thousands of others that get repaid and kill currency.

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!

Agree.

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.

You don’t just present the asset, you make an agreement that temporarily sells your ownership rights, and regains them when you pay back.The asset has a sleeping value and someone has to issue new money when that sleeping value is going enter the economy as a loan. A loan means the awaken value will go back to sleep when the loan is paid back. So who is going to do that? It’s either the Central Bank (issuing new money out of thin air for this specific purpose) or the Banks using the money to loans multiplying circle. In any case new money has to be created. Is it out of thin air, or is it out of the ex sleeping and now awaken value of the asset?
Depending on what position one wants to support, he would use phraseology that implies any of the 2. One could say the new money was made out of thin air, another could say it was not made out of thin air it was the value of the asset now asking to be counted in money terms.
Regardless this is something that concerns the Banks (or the Central Bank) not the borrower. For the borrower the money he got is as good as money he would get by selling his asset.

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

I don’t think anyone who is following this thread disagrees to that, although this "thin air" thingy seems to be going on in circles.

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.

Of course! Although I don’t think there’s anything "strange" about it.

If you find the subject of interest but complicated, watch Werner’s videos

Thanks, although I don’t think I will learn anything more than what I already did.
Perhaps Paphitis is right in saying that those people just want to change the system, but imo they should go straight to the point and explain the pitfalls of the system rather than scaring people about money created by the Banks out of thin air.

[Paphitis]

No it HAS a stored value just like money has a stored value. It’s value may increase or decrease over time, however at a fixed point in time it has a very specific value.That point in time is the moment at which is set down as security to take a loan or get sold.

Yes and more often than not, this asset all being well, should increase value. Therefore, the borrower is increasing their wealth.

Sometimes the asset will decrease in value, however, very rarely. I have heard of Banks asking for lump sum payments to protect the leverage, however, more often that not that would be considered a variation to the agreement not covered in the contract and hence quite illegal.

That was just an example to demonstrate why the asset has a sleeping money value, that can be turned into cash if sold or if ownership is transferred to someone else. It’s value may always increase or decrease or just stay the same. What matters is the specific moment in time that it was actually set down to get a loan. Money itself has different value at different times.

Yes and one can argue that it is in fact the borrower who is creating the money and not the Bank. It is their Collateral, and the borrowers decision to borrow in order to buy something without selling another asset. The Bank comes in as the facilitator or intermediary, but at a price that the borrower is willing to pay otherwise they won't proceed. The Bank and borrower actually both inherit a liability. The borrower keeps all their assets and the Bank has no issue as long as payments are being made + interest.

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.

Inflation is not caused by this process of loans. In the economy there are thousands of loans that create the need for new currency but at the same time thousands of others that get repaid and kill currency.

And the beneficiary is usually the borrower, who expands their Balance Sheet. Bank gets interest from the IOUs they apply. This is money into the economy and will be extinguished from the economy as the borrower pays off some principal.

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!

Agree.

No it only becomes real money if the beneficiary draws real money. The Banks need to be prepared for this possibility.

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.

You don’t just present the asset, you make an agreement that temporarily sells your ownership rights, and regains them when you pay back.The asset has a sleeping value and someone has to issue new money when that sleeping value is going enter the economy as a loan. A loan means the awaken value will go back to sleep when the loan is paid back. So who is going to do that? It’s either the Central Bank (issuing new money out of thin air for this specific purpose) or the Banks using the money to loans multiplying circle. In any case new money has to be created. Is it out of thin air, or is it out of the ex sleeping and now awaken value of the asset?
Depending on what position one wants to support, he would use phraseology that implies any of the 2. One could say the new money was made out of thin air, another could say it was not made out of thin air it was the value of the asset now asking to be counted in money terms.
Regardless this is something that concerns the Banks (or the Central Bank) not the borrower. For the borrower the money he got is as good as money he would get by selling his asset.

No the ownership rights remain with the borrower, not the Bank.

The Bank has security over the asset if things do not go well. What usually happens however, is that the borrower will usually get well ahead of payments over time where the risk of default is diminished to non existent.

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

I don’t think anyone who is following this thread disagrees to that, although this "thin air" thingy seems to be going on in circles.

I reskon the Bank would make interest. But yes the money will disappear.

The Banks customer however, is in a stronger position the more they do this, and is therefore able to borrow more money the next time round and buy some more assets.

Usually, this is what they would do.

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.

Of course! Although I don’t think there’s anything "strange" about it.

I don't see anything strange about it either.

A loan is considered a banking asset because it makes them money. A deposit is considered a liability because if the funds are transferred electronically, the banks are being forced to accept a loan from the depositor from money that does not exist and they pay interest on that. Twists and turns as well as roundabouts for everyone.

If you find the subject of interest but complicated, watch Werner’s videos

Thanks, although I don’t think I will learn anything more than what I already did.
Perhaps Paphitis is right in saying that those people just want to change the system, but imo they should go straight to the point and explain the pitfalls of the system rather than scaring people about money created by the Banks out of thin air.

Yes they want to change the system but these people have no clue what this would mean.

For me it would mean that a migrant coming to Australia with 2 bags (like my dad) and worth about NOTHING, will never get out of that cycle of poverty, they will never be able to set up a small family business, they will never get a job because they are not a white anglo saxon, and not even most white anglo saxons will get a job.

It would also mean no pensions being paid, no social security, virtually no health system and virtually no education system.

Rewind the clock to London before industrialization, and that is what society will be like. people stealing for a loaf of bread.

The systam we have now, allows people to get ahead.

Even though our society is racist by nature, and Capitalist System isn't. it is the great equalizer. Bankers won't look at your religion or skin colour, just your Balance Sheet and income.

I remember when my old man was doing it tough, and I know what it feels like too. It was our relatives and so called "friends" who were arseholes, not the Bankers. The relies would tell my old man to see, but my old man was hard nosed and stubborn. The relies would say that out of spite and jealousy.

When a Banker tells you, it is usually out of concern not just for the Bank but sometimes when you deal with one Banker they get to know you and have an emotional investment.

End of the day, I have see this for myself, BANKERS are better than your relatives and those who pretend to have your best interest at heart.

[Paphitis]

Sorry but wrote the last post in a hurry with a few spelling mistakes.

I do recall a day my old man and I were heavily exposed to the Banks and it wasn't just 1 bank either. A lot of these loans were to businesses I was nominated as Director of and a couple of them could have gone to the wall as well. So I could have been a registered bankrupt very easily. We had a lot of debt and we were losing a lot of money. Interest Rates were 18%. In those days, businesses were going to the wall every day, people were losing their jobs every day and unemployment in Australia was 16%.

The economy was up shit creek without a paddle, and it was a bad time to be in debt. It had a huge emotional impact on my Father, because he was scared. Future was very uncertain and no one ever knew how long this recession will last.

I do recall relatives teasing my dad, and I do recall people welcoming his suffering in a snide manner. They wanted him to be taken down and I could see it too.

It was the most disgusting thing, not that my old man did anything to anyone. He was religious and very hard working. Valued education very much as is generally the case with Cypriot Families. Pretty strict he was too. Very old school and very determined.

I do remember the letters of default coming in. A standard and polite letter asking to contact the Bank immediately to make arrangements or to discuss, which is what we did.

Banks, which is more than I can say for some relatives and "friends" did treat my old man with respect at all times. I remember once when he said to me, "its not really the Banks we need to worry about, it's our so called friends and their evil eye we should worry about more". But he was pretty stressed out. And angry at the atrocious interest rates as well. Farmers were being thrown off their properties all over Australia as well.

All the relatives were telling him to sell, but all for the wrong reasons. He was one of the haves you see. I think my old man only ever sold once and that was because he had moved and that was over a period of 40 odd years. He would always buy, at least every few years and sometimes 2 or 3 times a year when things were rocking and a lot of it was prime but in those days, everything was pretty cheap too. Many people were even confused as to the reason why. I think he just wanted to do the best for us.

I remember a banker giving my old man some pretty sound advice and it was out of genuine concern. The Banker told my dad that now is not the time to hold on. Perhaps it is time you should think long and hard about offloading some debt. Don't ever let the Bank take matters into its own holds he told my old man. Always remain in control, and that there is no shame in it. The day will come, when you can get back to it he told him. But today is not that day etc etc.

He never took the Bankers advice, and somehow my old man survived. The family survived, and I reckon the Banker was pleased that he did, but not some others we knew.

Bottom line is, my old man went to a new country, had a go and achieved a lot and had no degrees from any university. The country presented many opportunities and it still does, but fortune will always favour the brave.

I see the same thing in the new migrants to Australia. Afghans and Syrians are the new wave. Old school people no one will give a job too because their name is Mohammed. We will see where they are in 30 or 40 years time. I reckon they will do alright, as did most Greeks and Italians when the arrived in the 50s and 60s.

When I was growing up, there were never many luxuries in the house. Just a normal house. Nothing in excess. he wouldn't even put Cable TV on. Not that many dinners at restaurants but he would go to the odd Greeky function.

But he always splurged on education because that was the holy grail. Even when he was getting those letters from the banks, he always had the cash in his pocket to pay for private tuition. Amazing.

They don't build em like that anymore that is what I would like to say.

[Pyrpolizer]

Just like all of the other deposits[/i])and it eventually becomes £10,000 ...... I see no mention of converting wealth to currency on the chart ........

It's implied. To become 10,000 there are what 204 cycles(?) each cycle assumes a new loan, and each new loan is backed up by some asset.

[Paphitis]

Just like all of the other deposits[/i])and it eventually becomes £10,000 ...... I see no mention of converting wealth to currency on the chart ........

It's implied. To become 10,000 there are what 204 cycles(?) each cycle assumes a new loan, and each new loan is backed up by some asset.

It's exactly the same thing as 1 million in total debt can be paid with a single $100 dollar Bill.

How? It's simple economic theory and math.

Person A owes 100 to person b who owes $100 to person c and so on... let's just assume the debt string continues into infinity or to 1 million.

If person A pays person B who then pays person C and so on....you can see that 1 million in created liabilities into the economy can potentially be extinguished with a single $100 Bill.

It's pretty freaky how it works. Just the same money going round in circles.

The key thing with a solid economy is the circulation of money. It is when the circulation of money is in decline when we all get into trouble.

[Pyrpolizer]

We pummeled on this subject ad nauseam and we only covered the issue whether Banks create new money from the process of loans out of thin air or not.
Depending on how each one of us binds the terms "new money" and "out of thin air" in a meaningful thought, ends up to a different view on the matter, but that's ok I think.
I 'd suggest we stop at this point and go one step further.
What are the problems with the existing system?
I will go first
a)People's lifetime savings /deposits to Banks run the risk of getting wiped off
b)Sets the Banks at a position that drive the economy to boom and burst cycles
c)Destabilizes the economy. The Banks lend too much when they shouldn't, and lend too little when they should do the opposite.
d)The process of the Banks going Bankrupt is way faster than any procedures of the Central Bank to detect it

Fell free to comment or add your own list of problems.

I understand the only way out of these problems is for the Central Bank to issue new currency for every new loan and destroy currency for every loan getting paid back. Banks would then be required to have 100% or near 100% liquidity.

[Pyrpolizer]

Just like all of the other deposits[/i])and it eventually becomes £10,000 ...... I see no mention of converting wealth to currency on the chart ........

It's implied. To become 10,000 there are what 204 cycles(?) each cycle assumes a new loan, and each new loan is backed up by some asset.

It's exactly the same thing as 1 million in total debt can be paid with a single $100 dollar Bill.

How? It's simple economic theory and math.

Person A owes 100 to person b who owes $100 to person c and so on... let's just assume the debt string continues into infinity or to 1 million.

If person A pays person B who then pays person C and so on....you can see that 1 million in created liabilities into the economy can potentially be extinguished with a single $100 Bill.

It's pretty freaky how it works. Just the same money going round in circles.

The key thing with a solid economy is the circulation of money. It is when the circulation of money is in decline when we all get into trouble.

Good point!

[Paphitis]

There was actually one vice my old man did have in the 70s and 80s. They were horses. Not just any horses, but race horses. They were not really top level horses you would find at the Melbourne Cup but more country race meet horses. Still, there was prize money at stake. I remember my old man owning horses outright, to other horses he had something like a quarter share in and so on.

I have no idea what he was thinking or whether it was money making. I reckon it never made any money but I do recall a childhood revolving around the race track. Meets at the Corryong Cup, Albury Cup and so on, and my old man being surrounded by stewards with a form guide and a lot of bookies.

It was interesting. I remember wanting to be a jockey as well.

I had a pretty interesting childhood in the country which is where I grew up. It was also rare for a migrant as well. We had to drive 200 kms just to go to Church. Went to a Catholic school got taught by nuns. I remember a sister Frances who once called me "Satan" I dunno but I must have been a bit bad to deserve that. Also remember some run ins with the local police police officers. They would follow me to school. In the winters there was ice on the roads etc.

There were only 1 Itslian and 2 Greek families in the area. And we experienced a lot of racism too. It was pretty bad. But there were also the best people you can meet in the country who really cared for my old man.

I think that is what pissed people off. People just hate other people being happy I guess.

[Robin Hood]

Paphitis:

It's exactly the same thing as 1 million in total debt can be paid with a single $100 dollar Bill.

How? It's simple economic theory and math.

Person A owes 100 to person b who owes $100 to person c and so on... let's just assume the debt string continues into infinity or to 1 million.

If person A pays person B who then pays person C and so on....you can see that 1 million in created liabilities into the economy can potentially be extinguished with a single $100 Bill.

It's pretty freaky how it works. Just the same money going round in circles.

The key thing with a solid economy is the circulation of money. It is when the circulation of money is in decline when we all get into trouble.

Jesus ..... I’m no mathematician but would you like to think about that? That's how you would run an economy is it?

You never had $1m, you only ever had $100, you just passed it from one person to another, you didn’t borrow anything! So, no expansion of your economy then?

If the first person had $100, kept $10 and loaned £90; you have a reserve of $10 and asset (the loan) worth $90. The next guy would keep $9 and loan $81 he has a reserve of £9 and an asset (the loan) worth $81); So far from just one step in the chain you have assets worth $190 but you only had $100 to start with ....... you magically have almost doubled your assets from ......... hmmmmm .......the computer entry that didn’t exist until B took up A's offer of credit and deposited it into his account.

You should have taken Pyrpolizers advice and looked at the chart, it is explained in simple diagrammatic form to make it easier for you to understand, try doing it with apples!

(Btw A puts his apple tree up as collateral )

A has 10 apples, he keeps 1 and lends 9 to B:
B has 9 apples, he keeps 1 and lends 8 to C:
C has 8 apples, he keeps 1 and lends 7 to D:
D has 7 apples, he keeps 1 and lends 6 to E:
E has 6 apples, he keeps 1 and lends 5 to F:
F has 5 apples, he keeps 1 and lends 4 to G:
G has 4 apples, he keeps 1 and lends 3 to H:
H has 3 apples, he keeps 1 and lends 2 to J:
J has 2 apples, he keeps 1 and lends 1 to K:
K has 1 apple, he keeps it!

Very simple question:

How many apples are there in total?

Clue: The answer depends on whether you are pragmatic and see things as they are ..... or you are an accountant and see only numbers!