Cyprus-Forum.com

[Paphitis]

Some questions:

1. Why is/was gold the standard? Just because it is rare and shiny? It still doesn't make much sense to me. I understand that products and services have value because people need them, but why should something like gold have value beyond that of a metal that can be used to produce certain products? Is it all a matter of perception... gold has certain value because people think it has that value? But in that case how is it any different than paper money?

2. What would be the ideal financial system? One that allows people to trade and generate useful products and services, that can't be gamed and wouldn't allow people to profit by simply shifting money around and doing accounting tricks?

Probably because it was rare and valuable.

I don't know for sure, but I think it might have to do with the Gold Rushes in Australia and North America. In those days, currency was based against this resource and I believe it was the US Reserve which actually changed it.

Not entirely correct to say that money is just printed. It is always based on something. And today it can be supported against any asset of value.

The benefit is that Banking and Finance just became easier for the masses.

[Paphitis]

Talking of this deposits to loans ratio one would expect the loans in Cyprus to be about 10 times those of deposits.
Yet it's not so in Cyprus.According to the official announcement here:
http://www.centralbank.gov.cy/nqcontent ... 13&lang=en
deposits reached €46,1 billion in December 2014.
loans reached €61,6 billion in December 2014.

How do you explain that?

I think you are getting confused between real cash and money that does not exist. Most money (about 97%) does not exist and just appears in your Bank account as an IOU.

What is important is that Banks maintain their CASH SUPPLY, which is what was not happening in Cyprus because many of the Banks loans were non-performing which means the Borrowers were defaulting too much.

And then with the bad news in the media and all the hype, there was a Bank Run making things even worse, forcing the Banks to close and introduce capital Controls etc.

There is an issue somewhere there, and just shows how important it is for a bank to vet its borrowers properly.

[Paphitis]

The Banks are unable to create money from thin air and that is what it comes down to.

Banks are unable to create money from thin air in the sense they can do so for themselves. If they could they would simply own everything. They could buy Apple and Google and Uber and pay for it with money they created out of thin air for themselves. Of course they can not do this. However they CAN do something than non banks can NOT do. If I want to borrow £10,000 I can borrow it from a bank or I can borrow it from my Mother. For my mother to lend me £10,000 she has to have £10,000 in liquid form that she can transfer to me in order to loan me £10,000. The bank on the other hand does not have to itself have £10,000 in liquid form in order to loan me £10,000. That is the point. They can make that £10,000 loan to me without first having an existing £10,000 they already own - they can create an entirely new £10,000 from 'nothing' to make the loan to me. Only banks can do this - non banks can not do this.

What the Banks are doing is actually extremely beneficial to the economy. There is no use in you denying it because it is undeniable. Without them, countries would not develop or even progress and virtually no one would be paid an allowance or a pension. And yes, I would go as far as saying that they indirectly do help people, families and businesses.

Extending credit to be used to create new productive enterprise, or to increase the efficiency of existing productive enterprise is extremely beneficial to the economy and indeed vital for it to be able to grow. However to make out that banks lending in the way they do today is the only way such a need can be met is not true. There are already countless ways money can be raised for productive enterprises - venture capital, mezzanine financing, private loads (borrow from my mother). These do not involve increasing the money supply so are limited by the total amount of money in existence. so yes there is still a need to be able to create new money to fund productive ventures beyond the limits of existing money supply - but agin this function does not have to lie solely with banks. You could have systems where you achieve the same amount of 'progress', people are still paid 'allowances', pensions still exist and function and yet new money is not created solely or near solely by private banks.

What they also do is put their profits before people. Which is the only criticism I have. But that is not unique to Banking. The corporate world as a whole places profits before people no matter what industry. But overall, just like the Apples offer technologies which make our lives a little easier in some way or at least keep us entertained, the Banks actually make the economy function and it is that investment which keeps people working and prospering.

It is exactly because the creation of new money that can then be used to invest in new productive enterprise (or increasing efficiency of existing enterprise) is so import to the economy in general that it is being argued that leaving this function solely or near solely in the hands of private enterprises is not therefore the best solution.

As to the Boom/Bust cycle, Banks are as much at the mercy of these market fluctuations as individuals are. It is society as a whole which trigger off these cycles because humans are very emotional creatures and can get carried away once confidence increases.

The point is it is ONLY the banks that can and do create the vital 'new money' needed to grow an economy faster than the limits of 'existing money supply' allow and thus because of this they have a far greater impact on boom bust cycles than other entities. A normal business after a bust like 2008 will scale back its growth plans, investment plans, may reduce staffing levels and the like and this has an impact on the economy of course, as its 'confidence' in the future is reduced. The Banks do the same but they do not affect just their own businesses as banks when their 'confidence' in the future goes south - they effect the whole economy, they end up driving viable business into bankruptcy, stopping new viable businesses being created. The effects of the Banks 'loosing confidence' is far far greater than that of a 'normal business' - because they today have an almost total monopoly on the creation of new money and they exercise this function NOT according to the needs of society as a whole. That is the whole point and basis for the argument that this function should not be left solely or near solely to private banks alone, or more effective means for central banks to influence and direct such money creation are needed.

Erolz, that is exactly what I have been saying. Banks are unable to create money from thin air. I also know they don't need the cash to give out loans.

Yes you are probably correct, that if they had that power, they would probably own everything. They would also go Bankrupt very quickly and lose everything. The reason for this is that Apple shareholders will be credited with an IOU, which can be converted to CASH at any time. When these beneficiaries start presenting themselves, and the Bank is stressed because it does not have the supply, you will have a Bank Run and then its Bye Bye Bank and Bankers.

The system is fractional, and only about 3% of money in the Bank is backed up by CASHFLOWS.

[Robin Hood]

Erolz:

You will have to forgive Paphitis as he only ever reads the first couple of lines of a post, if that, and then forms his opinion from that.

He has been arguing for weeks that the Banks cannot make loans without financial backing but now says "..... I also know they don't need the cash to give out loans." I don't know what they put in this 50 Lashes Australian beer but some body should patent it! Or maybe it just has something to do with being upside down all the time?

I have read all your post and agree completely with your opinions and, as I understand the content, you agree that banks DO create money out of nothing but cannot do so for themselves........ thank goodness!

[Robin Hood]

Pyrpolizer:

Talking of this deposits to loans ratio one would expect the loans in Cyprus to be about 10 times those of deposits.

Yet it's not so in Cyprus, according to the official announcement here:

http://www.centralbank.gov.cy/nqcontent%20...%2013&lang=en

deposits reached €46,1 billion in December 2014.

loans reached €61,6 billion in December 2014.

How do you explain that?

I don’t see why you would expect the ratio to be 10:1? Fractional banking is not considered as the normal operating system of banking account software. They just require reserves to whatever ratio level declared by the CB. This is today variable, in the UK they don’t have a limit, but a maximum of 10:1 is around the norm.

You will have read the link obviously and will have noticed it uses phraseology and words that are incomprehensible unless you are part of the financial circle? Basically, it is designed to confuse and make something incredibly simple look like quantum physics.

Banks have two functions. They are either borrowing or lending. What is in between could be termed ‘financial acrobatics’, it’s how they play accounting games between the two. The information provided in the link is the content of the banks trading accounts.

The link gives two pieces of information:

1. Borrowing: They have borrowed from us (you, me and the rest of the population) €46.1bn and have it lodged in their name (not ours) at the Central Bank and incorrectly refer to it as the banks ‘reserves’. This deposit they are not allowed to lend to borrowers, banks cannot lend their reserves. They did this with zero in the way of collateral because the banks actually have very little of value to put up for security. This is why, when the bank goes down, you and I are un-secured creditors of the bank. What you have in your account is an unsecured IOU from the bank, it is secured against ..... nothing!

2. Lending: They have created from nothing €61.6bn and lent this out to often dodgy borrowers. They have to ‘create’ the loan amount because they have only your deposits and cannot lend that, so they create what they need as a simple entry into the banking accounts system. To protect their investment they have required the borrower to provide collateral. Something of value they can seize and sell off to get their ‘money’ back , if you fail to make the repayments.

The banks refer to our deposits as a ‘liability’ and the loans as an ‘asset’ ........ a logic that I find confusing! The capital sum they loaned has no real economic effect on the transaction as it was created to serve a single purpose and disappears into the ether when that function has been completed.

What they also have, which is not mentioned in the is their ‘Profit and Loss account’.

€46.1bn lodged with the Central Bank brings in a tidy profit even at the current low interest rates. About €230m a year at just 0.5%. This is not included in the Trading account ...... this is a reward for the bank and its share holders! They also add monthly charges to every account, another source of income not covered in the trading account.

Some of these loans will be ‘performing’ in as much as the borrower is servicing the interest to prevent the debt exponentially increasing due to compound interest, invoking a margin call and foreclosure on his assets. Providing the interest is being paid the loan account is performing and the bank is making a profit which is added to the profit and loss account, again the way they achieve this deception has been previously explained in the thread. In reality, the interest is the ONLY profit in this deal, for the banks. This is how the banks are making profits without the problems of having to lend and it has already been pointed out in this thread, that the banks are doing very little in the way of lending into the economy.

[Paphitis]

Erolz:

You will have to forgive Paphitis as he only ever reads the first couple of lines of a post, if that, and then forms his opinion from that.

He has been arguing for weeks that the Banks cannot make loans without financial backing but now says "..... I also know they don't need the cash to give out loans." I don't know what they put in this 50 Lashes Australian beer but some body should patent it! Or maybe it just has something to do with being upside down all the time?

I have read all your post and agree completely with your opinions and, as I understand the content, you agree that banks DO create money out of nothing but cannot do so for themselves........ thank goodness!

They can't make money from thin air. No one has said they can do it either and neither has the BoE if you read the document fully. They can only make IOUs and each time they do it, they are shooting themselves in the foot potentially because they are liable immediately. The IOU"s are as an intermediary over a particular transaction and the exchange of security so that they can cover the IOU or credit to someone's account.

The only entity that can simply create money from thin air is the Central Bank. And even then, they are controlled by inflation and can't go too far which is why they oversee the Commercial Lenders so they don't go too far and they do this by controlling Interest Rates. This is what the BoE is saying to you but you are either too daft to understand or probably distorting to fit your anti Banking narrative.

Face it! The Banking system has done a lot for us the last few decades and made a lot of things possible including supporting business to employ billions of people worldwide.

Without them, YOU'RE LITERALLY FUCKED!!! The entire planet would be!

[Paphitis]

Pyrpolizer:

Talking of this deposits to loans ratio one would expect the loans in Cyprus to be about 10 times those of deposits.

Yet it's not so in Cyprus, according to the official announcement here:

http://www.centralbank.gov.cy/nqcontent%20...%2013&lang=en

deposits reached €46,1 billion in December 2014.

loans reached €61,6 billion in December 2014.

How do you explain that?

I don’t see why you would expect the ratio to be 10:1? Fractional banking is not considered as the normal operating system of banking account software. They just require reserves to whatever ratio level declared by the CB. This is today variable, in the UK they don’t have a limit, but a maximum of 10:1 is around the norm.

You will have read the link obviously and will have noticed it uses phraseology and words that are incomprehensible unless you are part of the financial circle? Basically, it is designed to confuse and make something incredibly simple look like quantum physics.

Banks have two functions. They are either borrowing or lending. What is in between could be termed ‘financial acrobatics’, it’s how they play accounting games between the two. The information provided in the link is the content of the banks trading accounts.

The link gives two pieces of information:

1. Borrowing: They have borrowed from us (you, me and the rest of the population) €46.1bn and have it lodged in their name (not ours) at the Central Bank and incorrectly refer to it as the banks ‘reserves’. This deposit they are not allowed to lend to borrowers, banks cannot lend their reserves. They did this with zero in the way of collateral because the banks actually have very little of value to put up for security. This is why, when the bank goes down, you and I are un-secured creditors of the bank. What you have in your account is an unsecured IOU from the bank, it is secured against ..... nothing!

2. Lending: They have created from nothing €61.6bn and lent this out to often dodgy borrowers. They have to ‘create’ the loan amount because they have only your deposits and cannot lend that, so they create what they need as a simple entry into the banking accounts system. To protect their investment they have required the borrower to provide collateral. Something of value they can seize and sell off to get their ‘money’ back , if you fail to make the repayments.

The banks refer to our deposits as a ‘liability’ and the loans as an ‘asset’ ........ a logic that I find confusing! The capital sum they loaned has no real economic effect on the transaction as it was created to serve a single purpose and disappears into the ether when that function has been completed.

What they also have, which is not mentioned in the is their ‘Profit and Loss account’.

€46.1bn lodged with the Central Bank brings in a tidy profit even at the current low interest rates. About €230m a year at just 0.5%. This is not included in the Trading account ...... this is a reward for the bank and its share holders! They also add monthly charges to every account, another source of income not covered in the trading account.

Some of these loans will be ‘performing’ in as much as the borrower is servicing the interest to prevent the debt exponentially increasing due to compound interest, invoking a margin call and foreclosure on his assets. Providing the interest is being paid the loan account is performing and the bank is making a profit which is added to the profit and loss account, again the way they achieve this deception has been previously explained in the thread. In reality, the interest is the ONLY profit in this deal, for the banks. This is how the banks are making profits without the problems of having to lend and it has already been pointed out in this thread, that the banks are doing very little in the way of lending into the economy.

That is because it actually is quite complicated. They don't do it to confuse you.

Just like in Aviation. The phraseology, lingo and acronyms will baffle anyone, including the most highly educated individuals from harvard or Oxford unless of course they are Aviation Graduates.

And I have provided you with sources which dumb it down significantly, and virtually explain the BoE document in full and in a manner that is easier to understand.

You don't expect the BoE to start explaining things to you in Apples now? Make it easy so that you can understand? No, it is a highly professional environment which is in fact highly regulated and controlled. It is a conservative industry, and as institutions, they are 99.999999999% reliable and prudent despite their poor image, similar to the Aviation Industry in many ways. Since when did you as a passenger or any passenger for instance (the vast majority actually) show any interest in The Mechanics of Flight, or Atmospheric Physics, the Workings of The FMS, The GPWS, the INS, an Instrument Letdown Procedure, TCAS, VNAV, LNAV, Meteorology, Emergency Procedures and yet this industry has your life in its hands just like a surgeon at the operating table. Speaking of which, do you understand their jargon? I don't most of the time unless I research the terminology.

I can however visualize the process according to the explanation, and sorry, but there is absolutely no ability for Commercial Lenders which are privately owned by shareholders having the ability to create money from thin air.

Here you go AGAIN!

Do banks really create money out of thin air?

https://www.weforum.org/agenda/2015/06/ ... -thin-air/

Do Banks Create Money from Thin Air?

http://neweconomicperspectives.org/2013 ... n-air.html

Money creation in the modern economy

http://www.bankofengland.co.uk/publicat ... 14q102.pdf

[Robin Hood]

Paphitis:

That is because it actually is quite complicated. They don't do it to confuse you.

So how come the vast majority of people do not know how money comes into being? It is not even taught in University economics courses. It is the ‘acrobatics’ and jargon that make it complicated, not the principal of operation.

And I have provided you with sources which dumb it down significantly, and virtually explain the BoE document in full and in a manner that is easier to understand.

But I understood the original BoE document without your dumbing it down for me! But it is apparent you didn’t grasp the concept of ‘money creation’ at all!

You don't expect the BoE to start explaining things to you in Apples now? Make it easy so that you can understand?

I didn't do it for the BoE. I just tried to explain it to you in a very simplistic form, that was easy for you to understand and in spite of saying you know all about these things ........ you couldn’t provide an answer! I had to do it for you, because you didn’t recognise the ‘Fractional Reserve Banking‘ principle you have often quoted, when it was staring you in the face.

Speaking of which, do you understand their jargon? I don't most of the time unless I research the terminology.

Aviation jargon? I know enough to have a PPL with both night and IMC ratings! The principal is not too difficult to understand, although remembering all the theory now would be a challenge. But I could still fly an aeroplane, the only thing you have to take into account is that there is a vertical component and it does not have a reverse gear!

As for banking ......... no, like you I check when I need to understand, because I am not interested in the acrobatics only the structure, the way it operates, the scaffolding and string. I know the risk posed by derivatives, but do I know how they work? NO! ..... and don’t tell me you do! Very, very few people understand how they work, even top bankers, as they are mathematical algorithms .... and way beyond all but the very cleaver.

I can however visualize the process according to the explanation, and sorry, but there is absolutely no ability for Commercial Lenders which are privately owned by shareholders having the ability to create money from thin air.

Here you go AGAIN! What do you not understand about “...... loans create deposits not the other way round?” You can create deposits from loans but you cannot create loans from deposits, the deposits are NOT lendable as they are reserves. This is the very basic principal of Banking! Come to terms with that simple fact and you have cracked how banks can do what they do. They get away with it because what they do is so simple it just seems unbelievable! My parents always moaned at me when I wore my shoes out or ripped the ass out of my trousers, by advising me that ‘Money doesn’t grow on trees!’ ...... but they were totally unaware of where it did come from. I was into my sixties before I found out.

[Robin Hood]

Papjitis:

I think you are getting confused between real cash and money that does not exist. Most money (about 97%) does not exist and just appears in your Bank account as an IOU.

Pyrpolizer isn’t confused ..... YOU ARE! You have frequently been referring to ‘Broad Money’? This ‘non-existent’ money IS broad money! It is the 97-98% of broad money that the banks create out of nothing as a computer entry! Cash is the 2-3% that the Central Bank creates as printed IOU’s i.e. Bank notes. In theory the 97-98% should be convertible to CASH on demand....... real money you can put in your wallet. This becomes a problem when too many people want their cash all at the same time. Most people think they have money in the ‘Balance’ column on their account ........... but they don’t! The number on your account is an IOU because the bank has borrowed your deposits to use as their collateral.

What is important is that Banks maintain their CASH SUPPLY, which is what was not happening in Cyprus because many of the Banks loans were non-performing which means the Borrowers were defaulting too much.

Correction! Cash and bank loans/NPL’s are not related! The bank does not make loans in cash ..... they type in a number (a credit limit) into a credit account. You spend on that account and it creates money in another account ..... this, non-existent broad money you refer to; that simple computer entry that theoretically you can convert to CASH!

The Cyprus cash supply was virtually constant over time. Luckily the ECB saw what was going to happen well in advance, which is why they shipped container loads of Euro’s to the Cyprus CB.

The cash supply had sod-all to do with what happened in Cyprus, it was as a result of events that transpired when the banks went into crisis when a lot of their assets became liabilities, virtually overnight! Somebody at the Central Bank suddenly woke up and hit the panic button! A sudden cash crisis occurred. Everyone wanted their money OUT!!!! But the banks lied to you, they only had 2% available to pay out in cash ...... the rest was just numbers in their computers.

And then with the bad news in the media and all the hype, there was a Bank Run making things even worse, forcing the Banks to close and introduce capital Controls etc.

They closed the banks and restricted ATM withdrawals to prevent a bank run! That is why there was no bank run ...... desperation, anger and frustration maybe ...... but a bank run is when crowds storm the banks before all their money disappears. They actually handled it very well in my view, given the rather volatile character of an angry Cypriot! They all have shotguns too!

There is an issue somewhere there, and just shows how important it is for a bank to vet its borrowers properly.

I suppose your advice would be to only lend money to people who are wealthy enough not to need it anyway? The banks are currently NOT lending to those that need it, too big a risk, but they will lend it to those that don’t need it.

[Paphitis]

Paphitis:

That is because it actually is quite complicated. They don't do it to confuse you.

So how come the vast majority of people do not know how money comes into being? It is not even taught in University economics courses. It is the ‘acrobatics’ and jargon that make it complicated, not the principal of operation.

And I have provided you with sources which dumb it down significantly, and virtually explain the BoE document in full and in a manner that is easier to understand.

But I understood the original BoE document without your dumbing it down for me! But it is apparent you didn’t grasp the concept of ‘money creation’ at all!

You don't expect the BoE to start explaining things to you in Apples now? Make it easy so that you can understand?

I didn't do it for the BoE. I just tried to explain it to you in a very simplistic form, that was easy for you to understand and in spite of saying you know all about these things ........ you couldn’t provide an answer! I had to do it for you, because you didn’t recognise the ‘Fractional Reserve Banking‘ principle you have often quoted, when it was staring you in the face.

Speaking of which, do you understand their jargon? I don't most of the time unless I research the terminology.

Aviation jargon? I know enough to have a PPL with both night and IMC ratings! The principal is not too difficult to understand, although remembering all the theory now would be a challenge. But I could still fly an aeroplane, the only thing you have to take into account is that there is a vertical component and it does not have a reverse gear!

As for banking ......... no, like you I check when I need to understand, because I am not interested in the acrobatics only the structure, the way it operates, the scaffolding and string. I know the risk posed by derivatives, but do I know how they work? NO! ..... and don’t tell me you do! Very, very few people understand how they work, even top bankers, as they are mathematical algorithms .... and way beyond all but the very cleaver.

I can however visualize the process according to the explanation, and sorry, but there is absolutely no ability for Commercial Lenders which are privately owned by shareholders having the ability to create money from thin air.

Here you go AGAIN! What do you not understand about “...... loans create deposits not the other way round?” You can create deposits from loans but you cannot create loans from deposits, the deposits are NOT lendable as they are reserves. This is the very basic principal of Banking! Come to terms with that simple fact and you have cracked how banks can do what they do. They get away with it because what they do is so simple it just seems unbelievable! My parents always moaned at me when I wore my shoes out or ripped the ass out of my trousers, by advising me that ‘Money doesn’t grow on trees!’ ...... but they were totally unaware of where it did come from. I was into my sixties before I found out.

You have absolutely no idea how it works.

Banks are actually making IOUs when ever a loan is created, and this IOU is at call at any time. Whilst it is on their asset sheet, it is also an immediate liability for them if the money is drawn. The borrower however has time.

When I say I owe you 100, then that is effectively the same thing. I have created an IOU, it DOES NOT mean I created 100. Only the central bank can do this.

Now, I am completely fed up with you making it up as you go along. The Banks making money from thin air is one of the biggest bullshit narratives and misunderstandings out there, and the Banks are partially responsible maybe for not explaining it properly, or the people are just too willing to use and misinterpret Central Bank material in order to create a particular narrative.

CASE CLOSED!