How to avoid economic collapse and break down of civilization?

[Loren Pechtel]

Why make it so complicated? You don´t agree that only a new loan can pay for the interest on the global level?

Why should I agree with something so obviously untrue?

Will you agree that the only way to get anywhere is by internal combustion engine powered car?

 

[Loren Pechtel]

"97% of money in the modern economy is created by banks when they make loans. The government only create 3% of money."

1) You're quoting, but you aren't specifying what you're quoting.

2) Go back to my post about a dollar on a wheel. If your statement is correct it simply means the wheel spins 30 times.

 

[Swammerdami]

And I note the standard created out of thin air bit that's the hallmark of such misunderstandings. Banks can only loan what is on deposit. And a loan does not create money, it moves money.

Picture a wheel. There's a dollar bill fastened to it. You can look at the wheel, see the dollar. Now, the wheel turns (economic activity happens.) In time the dollar you saw comes around again and you see a dollar. You are making the mistake of thinking it's a new dollar, when it's really the same dollar you already saw. The faster the wheel spins (the more money moves around) the more often you see the dollar but it's still the same dollar.

Note that for purposes of inflation/deflation each time the dollar comes past counts. This is why the Fed uses interest rates to control the economy--lowering the interest rate makes loans more attractive, the wheel spins faster. Raising them makes the wheel spin slower. The spinning "produces" far more dollars than the actual dollars that are on the wheel, but money is not actually being created. Only the Fed can actually put dollars on the wheel, everybody else just spins it.

No. You're conflating different things. A single dollar bill (or the equivalent in "keystroke money") can pass through many hands, quickly or slowly, but whatever importance an economist might place on money velocity that has nothing to do with money creation.

And, AGAIN, private banks DO create money by making loans. For definiteness we'll measure M1 specifically, but the process does not depend on specific details of a money measure. Watch:
(a) George deposits $1500 cash at the First National Bank of Oshkosh and receives a checkbook good for $1500. M1 did not change; the checkbook counts as M1 money but the bank's vault cash does not.
(b) Harvey arrives at the same bank, needing money to repair his boat. The bank agrees to lend him $1200 in cash. That $1200 is newly created money.

Fed auditors show up at the bank, demanding to count the cash in the vault. No problem. The bank is liable for $1500 in demand deposits, so it needs to keep 10% ($150) as cash in its vaults. (This is the "fractional reserve.") In fact it has $300 (1500 minus 1200), more than enough. (If you don't understand why cash in the bank's vault is NOT counted as M1 money, but cash in Harvey's pocket IS counted, then assume Harvey is just given a checkbook instead of actual banknotes.)

I thought this was all very basic. No?

 

[Loren Pechtel]

And I note the standard created out of thin air bit that's the hallmark of such misunderstandings. Banks can only loan what is on deposit. And a loan does not create money, it moves money.

Picture a wheel. There's a dollar bill fastened to it. You can look at the wheel, see the dollar. Now, the wheel turns (economic activity happens.) In time the dollar you saw comes around again and you see a dollar. You are making the mistake of thinking it's a new dollar, when it's really the same dollar you already saw. The faster the wheel spins (the more money moves around) the more often you see the dollar but it's still the same dollar.

Note that for purposes of inflation/deflation each time the dollar comes past counts. This is why the Fed uses interest rates to control the economy--lowering the interest rate makes loans more attractive, the wheel spins faster. Raising them makes the wheel spin slower. The spinning "produces" far more dollars than the actual dollars that are on the wheel, but money is not actually being created. Only the Fed can actually put dollars on the wheel, everybody else just spins it.

No. You're conflating different things. A single dollar bill (or the equivalent in "keystroke money") can pass through many hands, quickly or slowly, but whatever importance an economist might place on money velocity that has nothing to do with money creation.

And, AGAIN, private banks DO create money by making loans. For definiteness we'll measure M1 specifically, but the process does not depend on specific details of a money measure. Watch:
(a) George deposits $1500 cash at the First National Bank of Oshkosh and receives a checkbook good for $1500. M1 did not change; the checkbook counts as M1 money but the bank's vault cash does not.
(b) Harvey arrives at the same bank, needing money to repair his boat. The bank agrees to lend him $1200 in cash. That $1200 is newly created money.

Fed auditors show up at the bank, demanding to count the cash in the vault. No problem. The bank is liable for $1500 in demand deposits, so it needs to keep 10% ($150) as cash in its vaults. (This is the "fractional reserve.") In fact it has $300 (1500 minus 1200), more than enough. (If you don't understand why cash in the bank's vault is NOT counted as M1 money, but cash in Harvey's pocket IS counted, then assume Harvey is just given a checkbook instead of actual banknotes.)

I thought this was all very basic. No?

The bank loan is velocity of money, not creation of money.

 

[laughing dog]

The bank loan is velocity of money, not creation of money.

You are mistaken. The entire point of fractional reserve banking is that it permits bsnks to lend more than their deposits .

 

[Jason Harvestdancer]

Never mind all that, the actual source of recession has been found.

What causes a recession? Maybe it’s you and how grumpy you are about the economy

 

[Swammerdami]

White privilege is being a lifelong racist, then being sent to the White House twice because your running mate is a minority.

No Biden, no KKK, no Fascist USA

The word "know" has one silent k.
The word "knuckle" has two silent k's.
The word "Democrat" has three silent k's.

Lack of business or consumer confidence DOES lead to a vicious cycle and possible recession. FDR's famous quote "The only thing we have to fear is fear itself" was not referring to impending war: It was meant to bolster economic confidence and break a recessionary cycle.

This is why I was so disgusted when George W. Bush started predicting recession soon after his election in November 2000. For him it was less important to reduce the severity of an economic downturn than to hasten it, so the blame could be clearly placed on Bill Clinton.

 

[Canard DuJour]

Money sure is a fascinating topic! Is it all just debt? Precious metal? Worthless fiat paper issued by incontinent government? I think ANY of these dogmatic views will mislead. Simplest is often to focus on a single transaction in a simple economy. Farmer Joe borrows from a bank to pay laborers to construct irrigation ditches. He hopes to repay the loan with bags of barley from his now-more-productive farm. (The bank might not accept the barley and require that Joe travel to the market and trade his barley for pieces of paper — so what?) No new debt is created: the interest is paid with NEW production (or, if the farming investment is a failure, by a transfer of wealth from Joe to the banker).

You make great points (big respect) but that, there, ain't "a single transaction in a simple economy". It invokes banks, money and an external economy of additional payers and payees.

Looking at the early history of money, or the use of money in primitive societies is fascinating, but would muddy the waters here. But as recently as a century ago, and for thousands of years before that, money was gold, silver or promises to pay with gold or silver. The first use of fractional-reserve banking, similar to the systems of today, was in the distant murky past. A good test of one's monetary viewpoint is to see how well it would have applied a century ago.

Fiat money (or promises to pay precious metal that can never be fulfilled) has usually become worthless.

That is NOT fiat money in today's usage. And modern fiat money has not become worthless.

(One notable exception is the base-metal coinage issued by the Roman Empire; these coins were widely accepted because of Rome's great power.) I think it best to distinguish central bank money from other forms of fiat money. This is mainly because most central banks are run by hard-nosed managers INDEPENDENT of government who are under orders to avoid or limit inflation. And recall that when the FRB was created, paper dollars could still be traded for gold at a fixed price.

Which is not good reason "to distinguish central bank money from other forms of fiat money". Today's form of fiat money is bound to central bank money, and central bank money is bound to govt "debt" issuance. Such independence as "hard nosed managers" are granted - by govt- is in exchanging central bank money for govt debt in order to control interest rates.

As the Fed avers :

"What does it mean that the Federal Reserve is "independent within the government?

The Federal Reserve, like many other central banks, is an independent government agency but also one that is ultimately accountable to the public and the Congress.

(...)

The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury."

- https://www.federalreserve.gov/faqs/about_12799.htm

Two arms of govt which use each others' IOUs on opposite sides of their balance sheets. Modern central banks like the Fed are ineluctably creatures of govt, with ultimate authority residing in govt.

Private banks have been financing government debt for many centuries.

But now don't, despite misleading language which persists from when they (arguably) did. It's that misleading language which leads people like the OP poster into thinking that there is some form of "real" money, independent of credit and debt relations. Or why others can't accept that commercial banks are authorised to create money as credit and debt relations.

"QE" (at least as applied in U.S.A.) is a very recent innovation in which central banks take on large quantities of such debt. This can be important conceptually, but those trying to understand money creation would do well to see if their viewpoint applies to the 20th century, before QE.

QE is standard monetary policy as practiced by most central banks for at least a century - just on an unprecedented scale - see HERE.

 

[Swammerdami]

I won't answer point by point. I will note that focusing on a single simple transaction IS the way to wrap one's head around topics like money creation. And the success (so far!) of modern (post-Nixon) "central bank money" IS afaik almost unprecedented in the history of fiat money.

"QE" (at least as applied in U.S.A.) is a very recent innovation in which central banks take on large quantities of such debt. This can be important conceptually, but those trying to understand money creation would do well to see if their viewpoint applies to the 20th century, before QE.

QE is standard monetary policy as practiced by most central banks for at least a century - just on an unprecedented scale - see HERE.

Can you be more specific? I clicked your link and scrolled down to Figure 1. It shows Bank of England with very small assets prior to 2009. I skimmed through the rest of the document and noticed no graph showing pre-2000 data let alone "at least a century" ago.

"QE" does NOT mean buying a bond every now and then. It refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation.

 

[Canard DuJour]

I won't answer point by point. I will note that focusing on a single simple transaction IS the way to wrap one's head around topics like money creation. And the success (so far!) of modern (post-Nixon) "central bank money" IS afaik almost unprecedented in the history of fiat money.

But you didn't "focus on a single simple transaction". Your example invoked banks, money and an external economy of additional payers and payees.

"QE" (at least as applied in U.S.A.) is a very recent innovation in which central banks take on large quantities of such debt. This can be important conceptually, but those trying to understand money creation would do well to see if their viewpoint applies to the 20th century, before QE.

QE is standard monetary policy as practiced by most central banks for at least a century - just on an unprecedented scale - see HERE.

Can you be more specific? I clicked your link and scrolled down to Figure 1. It shows Bank of England with very small assets prior to 2009. I skimmed through the rest of the document and noticed no graph showing pre-2000 data let alone "at least a century" ago.

"Monetary policy is set the by Monetary Policy Committee, which decides, among other things, on the appropriate level of interest rates. The MPC’s ability, indeed any central bank’s ability, to influence short-term nominal interest rates derives from the fact that financial institutions have some demand for something only the central bank supplies: reserves.

Reserves are simply deposit balances held at the central bank. By definition, only the central bank can provide central bank deposit accounts. So only the central bank can provide reserves. Those reserves are created through open market operations, as shown in Diagram 1. In general, open market operations are a mix of outright purchases of government bonds by the central bank, or temporary purchases with an agreement to sell back later (repos)2. In the case of outright purchases, you can think of it as the central bank selling reserves in exchange for government bonds. Or purchasing government bonds financed by issuing reserves. Or purchasing government bonds financed by “printing” reserves. These are all accurate descriptions of the same operations, which have been part of standard central banking operations for at least a century.

(...)

So far, I have described conventional monetary policy, i.e. setting the policy rate. Now let’s discuss unconventional monetary policy, i.e. quantitative easing (QE) or asset purchases. In such operations, the central bank purchases government bonds, financed by issuing reserves, shown in Diagram 3. If you think that sounds very similar to conventional policy, you are correct. It involves the same basic balance sheet transaction as conventional monetary policy: buy government bonds, sell (or create, or “print”) reserves. It is just on a larger scale."

"QE" does NOT mean buying a bond every now and then.

Indeed not (see above) . It means buying govt bonds whenever inerest rates might otherwise go above target, and on whatever scale necessary.

It refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation.

Indeed. Like keeping interest rates near zero for over a decade.

 

[Swammerdami]

Again: Perhaps details of U.K. BoE operation differ from U.S. FRB operations (though I doubt differences are significant). My remarks are specific to FRB.

"QE" (at least as applied in U.S.A.) is a very recent innovation in which central banks take on large quantities of such debt. This can be important conceptually, but those trying to understand money creation would do well to see if their viewpoint applies to the 20th century, before QE.

QE is standard monetary policy as practiced by most central banks for at least a century - just on an unprecedented scale - see HERE.

Can you be more specific? I clicked your link and scrolled down to Figure 1. It shows Bank of England with very small assets prior to 2009. I skimmed through the rest of the document and noticed no graph showing pre-2000 data let alone "at least a century" ago.

"Monetary policy is set the by Monetary Policy Committee, which decides, among other things, on the appropriate level of interest rates. The MPC’s ability, indeed any central bank’s ability, to influence short-term nominal interest rates derives from the fact that financial institutions have some demand for something only the central bank supplies: reserves.

Reserves are simply deposit balances held at the central bank. By definition, only the central bank can provide central bank deposit accounts. So only the central bank can provide reserves.

NO! This is very wrong for several reasons.

(1) Holding trillions of government debt paper long-term is VERY different from providing overnight money to member banks. (For starters, the former is in effect a loan to government; the latter is loaned to a private bank.
(2) The FRB has NEVER encouraged member banks to borrow from FRB (except perhaps during 1930's crises). And recently banks are specifically asked NOT to borrow their mandatory reserves from the FRB, but to attend to these needs by borrowing from another private member bank. It's just the opposite in fact: banks have huge "excess reserve" accounts which are in effect loans BY the private banks TO the FRB.

The FRB sets an interest rate on those excess reserves, but the interest rate for "overnight FedFunds money" is just a TARGET or advisory. The actual loans are arranged BETWEEN private banks.
(3) If you believe that ALL money originated from FRB then you may think that private banks got their assets by taking deposits (or borrowing) from government (or FRB). NO. Just as tracing land ownership in England (or places like Pennsylvania) will take you back and back through time to the Conquest by William the Bastard, so tracing the origin of money (while ignoring the huge expansion due to PRIVATE banks' money creation) will take you all the way back to the time of the gold standard.

The rest of your latest post either
(a) tells us what we already knew, or
(b) continues to conflate overnight loans between private banks with the massive long-term debt now being issued by governments, or
(c) acknowledges that QE "refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation" while trying to defend your earlier claim to the CONTRARY.

 

[Canard DuJour]

Again: Perhaps details of U.K. BoE operation differ from U.S. FRB operations (though I doubt differences are significant). My remarks are specific to FRB.

"QE" (at least as applied in U.S.A.) is a very recent innovation in which central banks take on large quantities of such debt. This can be important conceptually, but those trying to understand money creation would do well to see if their viewpoint applies to the 20th century, before QE.

QE is standard monetary policy as practiced by most central banks for at least a century - just on an unprecedented scale - see HERE.

Can you be more specific? I clicked your link and scrolled down to Figure 1. It shows Bank of England with very small assets prior to 2009. I skimmed through the rest of the document and noticed no graph showing pre-2000 data let alone "at least a century" ago.

"Monetary policy is set the by Monetary Policy Committee, which decides, among other things, on the appropriate level of interest rates. The MPC’s ability, indeed any central bank’s ability, to influence short-term nominal interest rates derives from the fact that financial institutions have some demand for something only the central bank supplies: reserves.

Reserves are simply deposit balances held at the central bank. By definition, only the central bank can provide central bank deposit accounts. So only the central bank can provide reserves.

NO! This is very wrong for several reasons.

(1) Holding trillions of government debt paper long-term is VERY different from providing overnight money to member banks. (For starters, the former is in effect a loan to government; the latter is loaned to a private bank.

Pfft.. see above. Yes and no.

(2) The FRB has NEVER encouraged member banks to borrow from FRB (except perhaps during 1930's crises). And recently banks are specifically asked NOT to borrow their mandatory reserves from the FRB, but to attend to these needs by borrowing from another private member bank. It's just the opposite in fact: banks have huge "excess reserve" accounts which are in effect loans BY the private banks TO the FRB.

I've no idea what you think you mean by that. Encouraging and discouraging commercial bank borrowing from central banks is pretty much the raison d'etre of central banks.

The FRB sets an interest rate on those excess reserves, but the interest rate for "overnight FedFunds money" is just a TARGET or advisory. The actual loans are arranged BETWEEN private banks.
(3) If you believe that ALL money originated from FRB then [etc..]

I certainly don't believe that "ALL money originated from ther FRB."

you may think that private banks got their assets by taking deposits (or borrowing) from government (or FRB). NO. Just as tracing land ownership in England (or places like Pennsylvania) will take you back and back through time to the Conquest by William the Bastard, so tracing the origin of money (while ignoring the huge expansion due to PRIVATE banks' money creation) will take you all the way back to the time of the gold standard.

The rest of your latest post either
(a) tells us what we already knew, or
(b) continues to conflate overnight loans between private banks with the massive long-term debt now being issued by governments, or
(c) acknowledges that QE "refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation" while trying to defend your earlier claim to the CONTRARY.

What "earlier claim to the contrary" of what?

 

[Swammerdami]

Sorry. I'm not going to keep repeating the same answers to the same misconceptions.
I'll answer your final question.

. . .
"QE" does NOT mean buying a bond every now and then.
. . .

The rest of your latest post either
. . .
(c) acknowledges that QE "refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation" while trying to defend your earlier claim to the CONTRARY.

What "earlier claim to the contrary" of what?

QE is standard monetary policy as practiced by most central banks for at least a century . . .

 

[Canard DuJour]

Sorry. I'm not going to keep repeating the same answers to the same misconceptions.

It isn't me you appear to think is mistaken, but central bankers.

I'll answer your final question.

. . .
"QE" does NOT mean buying a bond every now and then.
. . .

The rest of your latest post either
. . .
(c) acknowledges that QE "refers to MASSIVE intervention to make a MAJOR change to a country's monetary situation" while trying to defend your earlier claim to the CONTRARY.

What "earlier claim to the contrary" of what?

QE is standard monetary policy as practiced by most central banks for at least a century . . .

". . . but on an unprecendented scale." - is the bit you've mysteriously edited out.

The basic balance sheet operation is nonetheless standard, as practiced in the 20th century, with the same credit and debt relations.

Both are true, no contradiction.

Also, most central banks state that the purpose of their asset purchases - regardless of scale - is not to finance govt deficit spending. If that's somehow "a loan to the govt", then it's one which

a) makes no difference to the govt's ability to spend
b) is 'financed', at one remove, by the govt's own IOUs
c) was initiated to relieve a liquidity crisis in the commercial banking system
d) was perfectly possible under the monetary system as existed in the 20th century.