How money is created :

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    How money is created :

    Here is something everyone should try to understand : How money is created :

    Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.

    Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

    This also means as you pay off the loan, the electronic money your bank created is “deleted” – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.

    Banks create around 80% of money in the economy as electronic deposits in this way. In comparison, banknotes and coins only make up three percent. Finally, most banks have accounts with us at the Bank of England, allowing them to transfer money back and forth. This is called electronic central bank money, or reserves.


    https://edu.bankofengland.co.uk/know...money-created/

    #2
    I believe there is quite a bit about this in Das Capital, so it is hardly a new idea.

    Another thing it to remember is that when people (e.g. property investment gurus) talk about creating wealth, they are actually talking about amassing wealth, by transferring it from other people. Wealth is only created when something new of real value comes into existence.

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      #3
      "Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created."

      This is mainly correct but all banks have money from depositors so this will usually make up part of the loan. Banks should have a certain amount of deposits in order to off set losses against the loans, when this gets too small and the market crashes they risk going bankrupt.

      A bank loans you 1000 pounds to buy a car they need to have 100 on deposit from depositors of the bank - a 10% safety margin. You buy the car and the dealer deposits the 1000 pounds ion the bank. The bank now uses this fresh deposit to loan out 10,000 pounds to someone purchasing a taxi - The seller of the taxi then deposits the cash in the bank. This nice freshly deposited money enables the bank to loan someone 100,000 to but a house. The seller of the house is retired and has no mortgage so he deposits the cash directly in to the bank - Wow the bank now has 100,000 worth of deposits and can lend someone a million pounds.

      A simple example but it shows how quickly debt can spiral.

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        #4
        The level of the safety margin (reserves) was one of the key issues in the aftermath of the last banking crisis.

        Comment


          #5
          Back to the good old days. A pound being a pound weight of silver.

          Artful: with a few kilo bars of Silver!
          I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

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            #6
            Originally posted by hech123 View Post
            "Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created."

            This is mainly correct but all banks have money from depositors so this will usually make up part of the loan. Banks should have a certain amount of deposits in order to off set losses against the loans, when this gets too small and the market crashes they risk going bankrupt.

            A bank loans you 1000 pounds to buy a car they need to have 100 on deposit from depositors of the bank - a 10% safety margin. You buy the car and the dealer deposits the 1000 pounds ion the bank. The bank now uses this fresh deposit to loan out 10,000 pounds to someone purchasing a taxi - The seller of the taxi then deposits the cash in the bank. This nice freshly deposited money enables the bank to loan someone 100,000 to but a house. The seller of the house is retired and has no mortgage so he deposits the cash directly in to the bank - Wow the bank now has 100,000 worth of deposits and can lend someone a million pounds.

            A simple example but it shows how quickly debt can spiral.
            Yup. And charge interest on all those loans too.

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              #7
              No wonder they are Fat Cats

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                #8
                Originally posted by hech123 View Post
                No wonder they are Fat Cats
                BTW, doesn't it strike you guys that it is an inordinate privilege for private companies to be able to do this?

                It would be like a landlord magicking up properties to let out for rent.

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                  #9
                  Although it is the core business model for banks, it applies to all lending. If you lend a friend money, that money is still an asset on your books, even though the friend now has money to spend. Although the friend now has extra assets, in terms of a sum in a bank account, or products purchased, they also have a corresponding liability, to you.

                  When you deposit money in the bank, it is shown as a liability on the bank's balance sheet. In fact, the use of DR and CR on bank statements actually reflects what is on the banks accounts. On your own accounts, the desirable case is a large DR balance allocated to the bank.

                  The risk with fractional reserve banking is that large numbers of people may want their money out at the same time. Although the bank has assets, in terms of loans it has made, that cover all its borrowing (the money you are saving in the bank) it cannot gain access to those assets quickly.

                  Comment


                    #10
                    This was posted up by Daily Mail Online last year ( 2017 ) about "Northern Rock Mortgages" :- see below :

                    Analysis of annual reports from 2007 onwards shows at least 43,000 homeowners have suffered a repossession or voluntarily surrendered their house – nearly 12 a day.

                    The way these are recorded in accounts has changed during that time, and up-to-date statistics are not available for many parts of the business later sold off, so the true number could be far higher.


                    The current owner, state-controlled UK Asset Resolution, said that of those who had lost their homes, 23,000 were enforced repossessions.

                    Around 32,000 borrowers still own less than a quarter of their house, and 2,532 are more than three months behind on their payments, owing £407.5million. Liberal Democrat leader Sir Vince Cable said last night: ‘The run on Northern Rock marked the start of the biggest economic disaster in our lifetimes.

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                      #11
                      Northern Rock has been one of the top five mortgage lenders in the United Kingdom in terms of gross lending according to Council of Mortgage Lenders statistics.

                      As well as mortgages, the bank also deals with savings accounts and insurance. Home and contents insurance was dealt with by AXA while L&G , whose mortgage book Northern Rock took over, arrange life insurance investments.

                      The bank sold credit cards until 2003, when it sold the business to Co-op Bank in order to free capital for its rapid growth in mortgage lending, making a profit of more than £7 million. Northern Rock continued to sell credit cards under its own brand through The Co-operative Bank until November 2007; the decision to stop was made before the 2007 crisis.

                      In 2006 the bank had moved into sub-prime lending via a deal with Lehman bros . Although the mortgages were sold under Northern Rock's brand through intermediaries, the risk was being underwritten by Lehman Brothers.

                      Comment


                        #12
                        Originally posted by leaseholder64 View Post
                        Although it is the core business model for banks, it applies to all lending. If you lend a friend money, that money is still an asset on your books, even though the friend now has money to spend. Although the friend now has extra assets, in terms of a sum in a bank account, or products purchased, they also have a corresponding liability, to you.
                        But I would have to have the money to lend in the first place. Banks don't.

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                          #13
                          Originally posted by JK0 View Post

                          But I would have to have the money to lend in the first place. Banks don't.
                          Banks lend the money that savers put into them. They can't lend without either a corresponding deposit, or money they have earned in their own right (reserves).

                          I'd point out that most landlords don't have all the equity in the property they rent out, and some don't have any.

                          Building societies also work on a fractional reserve basis.

                          In England, only the Bank of England can pay out money without having to have an equivalent amount on the other side of the balance sheet.

                          Comment


                            #14
                            Originally posted by leaseholder64 View Post

                            Banks lend the money that savers put into them. They can't lend without either a corresponding deposit, or money they have earned in their own right (reserves).
                            .
                            Yeah. That's what I used to think.

                            Consider one day's house purchases:

                            Say two Nat West customers are getting mortgages to buy £1m houses from two Barclays customers & two Barclays customers are getting mortgages to buy £1m houses from two Nat West customers.

                            There is no money transferred between either bank. Neither bank needs to have a penny in it, though each seller will be £1m richer.

                            A bank only needs funds to make up the difference between their house purchases and house sales on a given day.

                            Comment


                              #15
                              I suggest everyone should watch "How the economic machine works" by Ray Dalio. A very good video which really educates on all of this. He is the founder of Bridgwater Associates

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