Money Creationcreation of money
Like bank loans really create money and why the magic money tree is not free.
City AM, on a positive money "Sovereign Money" survey, 84% of UK legislators do not know that bankers make money when they give credit. However, this is despite the fact that the EIB made a final declaration on the subject in 2014. Schocked by the politicians' lack of knowledge, Zoe Williams of The Guardian's took it upon himself to tell them how credit works:
What makes money? A few are made by the state, but usually in dire straits. Thus, the collapse led to a quantitatively loosening - money that was directly injected into the business world by the state. Most of the money (97%) is generated when a merchant makes a credit.
Meanwhile, 27% of banking loans go to other finance companies, 50% to mortgage loans (mainly on housing stock), 8% to high-cost loans (including overdraft facilities and debit cards) and only 15% to non-financial companies, i.e. the producing sector. Clicking on the hyperlink in this section will lead to the final declaration of the above mentioned Banks of England.
Do you have a magical money trees? Money comes from a magical trunk, in the spirit of money being driven out of the sky. Banking does not operate according to the money multiples approach, in which it grants credit as a multiples of existing funds. The money comes only from the belief, be it from the belief in ever higher real estate values or from another kind of invention.
That does not mean that creation is risk-free: any administration could do too much and cause hyperinflation. Every merchant could do too much and cause over-indebtedness in the business sector, as has been done. However, it means that money has no inherent value, it is just a sign of confidence between a creditor and a borrower. However, it does not mean that money has any inherent value, it is just a sign of confidence between a creditor and a borrower. lenders and borrowers.
There is no sense in the arguing against soft investments such as schooling, community and community service that it is prohibitive because there is no magical money boom. Everything comes from the trees; the actual issue is who is responsible for the trees? First, it is completely wrong to say that money is "driven out of the air".
The money comes when a bank borrows. According to the double-entry bookkeeping regulations, when a bank invests a new credit instrument, it must also establish an identical and opposite obligation in the shape of a new sight deposit. However, the double-entry bookkeeping does not require the creation of a new credit instrument. As with all client funds, this sight deposit forms part of what the CBs do to measure broadband capital.
So in this spirit, when a bank lends money, it creates money. This money hasn't been "blown up" in any way. Zoë totally disregards the credit that supports the new money. Similarly, the creation of money by business banking through credit does not demand any belief other than the borrower's capacity to pay back the credit with interest at maturity.
Mortgages do not demand constantly increasing home prices: steady home values alone are enough to prevent the ban from defaulting. The capacity of business banking to generate money is limited by capitals. In the event that a borrower launches a new credit with a related new contribution, the bank's total assets increase and the share of own resources (equity as compared to client contributions that are debts and not equity) decrease.
And if the borrower borrows so much that its own funds ratio is close to zero - as was the case with some bankers before the credit crunch - a very small drop in the price of assets is enough to lead them into insolvency. Prudential own funds rules should guarantee that banking never reaches such a delicate point.
While we can dispute whether these demands are appropriate, implying - like Williams - that credit can be granted without reluctance by a bank is just plain false. No " magical money trees " exist in merchant bank. Of course, it is possible that the bank will loan more than the public can reasonably allow.
However, we should recall that before the onset of the global recession, the policy makers promoted and promoted excess banking loans, especially property loans, in the false belief that dynamic macroeconomic expansion would last for an indefinite period of time and allow the public to meet their huge debt. On the contrary, the capacity of CBs to generate money is limited by the readiness of their governments to support them and their capacity to impose taxes on the people.
Nowadays, in reality, most of the money of the Federal Reserve is asset-backed, as the Federal Reserve creates new money when it buys Open Markets or QE funds and when it lends to them. Theoretically, however, a CB could offer virtually "aerial spirits money" without buying investments or granting loans to them.
" This would make the Federal Reserve technologically bankrupt, but if the administration were able to impose taxes on the people, it would not make any difference. A number of CBs have been in bankruptcy for years (think of the Chilean CB). Governments' capability to impose taxes on the populace is dependent on the reliability of the Governments and the production capability of the economies.
Hyper-inflation can arise when the economic side of supplies breaks down, making the populace incapable and/or reluctant to tax. There may also be times when individuals are so distrustful of a federal administration and its monetary system that they are refusing to use the money created by the monetary authority. Mistrust can arise because they think the goverment is dirty and/or unaccountable, as in Zimbabwe, or because they think the goverment will drop and the money it makes will become useless (which is why hyper-inflation is usual in nations that have suffered a war).
Nowhere in the history of Hyperinflation is the collapse of the Federal Reserve noted. Thus, the equity that Williams pulls between hyper inflation and corporate banking loans is entirely false. Money can be created indefinitely by a Federal Reserve, even though it runs the risk of causing price rises. Business lenders just can't do that. There is no longer a golden price, money is indeed a question of belief.
and who? Definitely not business banking. Humans rely on money generated by business banking, first because it can be exchanged one-to-one with money generated by the Federal Reserve, and second because government guarantees its value up to a certain level ($250,000 in the US; EUR100,000 in the Eurozone; £75,000 in the UK).
DGS converts the money generated by business banking into state money. However, the money generated by the CBs also needs a state guaranty. One of the most important reasons why the US economy is not yet in a strong position is that the US economy is not yet in a strong position to make a profit. "It is the task of federal authorities to preserve the value of the money they have generated.
The belief in money is in fact the belief in the goverment that warrants it. This in turn demands a belief in the economic performance of the industry in the near term. Since the production capability of any nation's economies comes from the work of its citizens, we could say that belief in money is belief in its citizens, both those who are on the planet now and those who will live in it in the years to come.
Magical money tree" is made up of humans, not bankers. Mr Williams complained that the creation of money by bankers prevented the federal governments from making socially responsible investments. However, the creation of banking money takes place through credit, and in no way does credit displace state investments in welfare programmes. The state can finance anything it wants, if necessary, by compelling the Federal Reserve to make the necessary payments.
It is not because of money shortages that the governments do not reinvest in the peoples of today and tomorrows, but because of the ideological convictions of those who make the expenditure choices and in the West's democratic societies of those who vote for them. Yet the fruits of the "magic money tree" are not free.
And if the Federal Reserve makes more money than the current and prospective production capacities of the economies can hold, the outcome is Inflation. When it does not manage enough, the outcome is deflation: the rationale why standard golds tends to be deferred is that the money stock does not rise according to the production capacities of the economies.
It is a challenge for government and regulators to decide what the current and prospective production capacities of the economies are, and therefore how much money the economies need now and in the long run. William's calling for a "public authority" that creates money. But given the difficulty of estimating the current and prospective production capacities of the economies, it is harder for me to understand how a government agency can be a better source of buying power compared to a bank.
Although erroneous, money creation through credit at least reacts to market demands. British banking is mainly involved in loans for property purchases and is often critical of not granting loans to small and medium-sized businesses. In order to resolve this, Williams demands that business bankers be deprived of their ability to make money.
It is difficult to see how this would make sure that banking loans are more productive in the longer term, unless she is also considering nationalising banking so that the state can control their loans. Over the past fifty years, consecutive UK government agencies have frankly encouraged and backed private mortgages to establish a "democracy of property".
" Today's administration has just suggested to increase state subsidies for the housing sector. After all, why on earth should a British administration abruptly alter course and instruct re-nationalised bankers to grant loans to companies instead of budgets? However, we do not have to alter the way money is made to have the things that Williams mentioned.
Well, we can have chopper money instead of QE. Of course, they are not free - but they have nothing to do with banking. Do not blame the banking sector for the miserable government failures to give the tax impetus so desperately needed by our troubled economies.