I prefer to use the term "currency" for the real money in notes or coins in circulation, which as you said is only 2% of the total. I would then call "money" all the electronic entries in Banks’s computers.
Let us agree that whether we use ‘money’ or ‘currency’ as a descriptor, we both know that they are similar, but not the same. I think you are in a way clouding the issue, you are mixing wealth into the creation of money/currency which is only the medium of the measurement of wealth. You do not NEED collateral to create money, like you would need ‘H’ and ‘O’ to create water?
In addition I will use the term "sleeping/hidden money" being the value in "money" units of immovable properties, resources etc as shown on the diagram below.
Immovable property , resources etc cannot be described as either currency or money as they do not meet the criteria for either term. What you are referring to as ‘sleeping money’ already has a name, it is ‘assets’. Assets are neither money or currency but can be converted by exchange i.e. you exchange your asset for currency when you sell it. You do not convert it when you use it a collateral.
To meet the criteria required to be money/currency:
• It has to be portable, sub-divisible, fungible, durable and, for money ‘, .....a store of value over time’.
I find your concept of sleeping money fascinating and a concept I have never considered in that term.
All these summed up make up the VALUE of an economy. All that can be measured in money units (be it Euro, US$ etc) and that usually increases over time.
We are not talking about assessing the country’s economy, we are talking about how banks create money out of nothing. The ‘value’ of these assets does not usually increase over time, the currency you use to measure their value decreases in value due to increasing supply (creation) and this devalues it. Therefore you need more money to acquire the same value of the asset, whether that be a house, a piece of land, an ingot of gold.
You stated that "Commercial banks really do create new currency out of thin air". Imo you are partly right in that. Yes they do create what I call new "money" but it’s not out of thin air. They just facilitate the waking up of "sleeping money" usually because the borrower has chosen to do so by putting his immovable property as collateral.
I disagree, and the reason? Until the bank created the debt, allowed you (or a country) to spend money you did not have and thus allowed the creation of a deposit in another account....... it did not exist ANYWHERE. Not on the banks books, not in their vaults, not sleeping ..... it plain didn’t exist in any way, shape or form. That is why it is called NEW money. When you repay the loan ....... it is written off the books, as you have said it is not a profit to the bank only the interest is profit. It returns to what it was before it was created ...... zero, it ceases to exist, it does not go back to sleep, it just disappears into the Cosmos. The bank has no liability to repay what they claimed they lent you because they created it out of nothing.
What you seem to be missing is that it is the collateral that the banks are interested in because it has true value. What they give you against this true value has no value, it is merely a debt that will earn them some interest.
Collateral is wealth ..... that is why the banks demand it; it has intrinsic value .... currency does not, as there is no physical limit on its creation and as such it continually declines in value. Money/currency is a receipt for wealth manifested as a number in a bank account; it is an IOU and unlike assets has no intrinsic value.
There’s absolutely nothing wrong about that, the new money is NOT profit or anything for the Bank, the only profit the Bank would ever get would be from the interest. You correctly stated that this new "money" is eventually (after the borrower would pay back his loan) get killed - I would rather say it goes back to sleep as the then freed collateral, would still keep it’s money value that could be used again and again in the future.
I agree with that and accept that you see it as ‘going-back-to-sleep’, but i don’t agree with that concept. Let me ask you a question:
You refer to property used as collateral being ‘sleeping money’ to the value of 30% if there is a 70% mortgage ....... where did that 30% come from initially?
Would it not be true to say that it was originally as the result of a debt? After all, it is only money creation that creates new money and that 30% would have been derived initially from debt. Its perceived ‘value’ now in monetary terms, increased not because the value of the asset has increased but because what you are using to value it has depreciated in value over time!
So to claim that the Banks create money out of nothing, is like claiming that mother nature creates rain out of nothing. It doesn’t. It just takes water from the seas, evaporates it, makes clouds, and throws is back as rain. Total amount of H2O on Earth remains the same.
You cannot create rain, that is true but you can create currency .... ad infinitum, without physical limit and without the need for any primary ingredients such as hydrogen and oxygen.
You may not like the fact that the Banks use the deposits of their clients to do that, and you may say it’s illegal, unethical etc but that’s how the Banks work. It’s based on the fact that not more than 2-3% of their depositors would ever withdraw their money at any given time.
However you look at that, in LAW it is fraud! They are issuing IOU’s for something they do not have, they are also guilty of deception as, contrary to law they are not giving ‘consideration’ i.e. ‘.... of equal value’.
Banks do not need your money to create new money. It is debt that creates deposits, not the other way round. See the BoE bulletin 2014 ‘ When a bank creates a debt by giving credit it creates new money in another’s account’.
I don’t consider it bad. It’s just another service to our society. They get rewarded for that service with some profit.
I have no problem with then making a profit for providing a service. Although I question the legality of their services. A prostitute provides a service ..... but it is an illegal service punishable under law. Plenty of these ladies of the night are arrested and punished for breaking the law but I see little sign of this high moral attitude being applied to Bankers.
Suppose they just use ONLY MY deposits to lend someone. If the borrower never pays back, and the Bank has to suspend it’s activities they could very easily come to me and tell me, "sorry we gave your money to person A, he doesn’t want to pay back, take his immovable property it’s yours now, it’s worth 30% more, no need to thank us.
The bank does not use your money to lend to others. Banks are not intermediaries between depositor and borrower. Neither do they lose or steal your money, as many Cypriots believe. You lend the bank your money when you make a deposit, it is not your money anymore it is the banks money, on deposit and in their name. All you have from the bank is an IOU. The bail-in, enacted in Cyprus, was the banks defaulting on their liability to repay you and writing off their debt to balance the books. They didn’t lose it, they just refused to give it back.
RH said:
The Central Bank would create the electronic currency, out of thin air, just like commercial banks do now. To provide you with the currency for a mortgage or a car loan the banks would borrow the currency from the BoE and at a very low interest rate, maybe even zero. So you, as an individual borrower would see no difference except for the fact that it would be the BoE that would determine the interest rates, and the collateral would be held by the bank on behalf of the State. As the primary lender the State, not the bank, would seize the collateral if you were to default.
OK fine, although I don’t see how anyone could force a 3rd party - the Banks- to hold collaterals, on behalf of the Central Bank, without them getting at least some commission for their service. Basically that’s illegal imo. For the sake of discussion let’s correct this and assume the collateral would held by the Central Bank.
Who actually holds it is not really important but, before the bank could apply to the CB for a mortgage on your behalf, they would need collateral. If you fail to repay the bank the money they have borrowed from the CB, the primary lender is the CB ......then they do just as you said above ‘.....sorry we gave your money to person A, he doesn’t want to pay back, take his immovable property it’s yours now, it’s worth 30% more, no need to thank us’.
RH said:
If you now transfer the creation of the electronic currency from the banks to the State, the currency is spent as before into the economy by government expenditure ...... but with a big difference! It is NOT a loan, it is effectively an investment by the State (Who now own the Central Bank) in the State, just as if it were buying shares in itself.
Hold on for a minute here. The newly created new "money" in the form of an electronic entry is presumably a transformation via a collateral of "sleeping money" to electronic money. This doesn’t mean the Government would gain a surplus that she could spend into the economy! The one and only who can spend this newly created money in the economy is the borrower! You may say the Government would get a surplus by the minute the borrower starts paying back. Well, no, by the minute he starts paying back the newly created electronic money gets less and less until it finally gets killed, in the same manner as it would if it was created by any of the commercial Banks.
You are overlooking the simple fact that, in the proposal I have posted, money issued to the State by its central bank is NOT a loan. It is an investment in the country and is never intended to be repaid. The State asks for X amount of money and the CB transfer that number as a computer entry. When the State spends it into the economy, it is then new money! Money that did not exist at all until the State spent it into circulation and it will remain in circulation indefinitely.
Over time it is all recovered through taxation, whereby it returns to the Treasury who then re-spend it into the economy. It is a perpetual currency it never gets ‘killed’. Thus, once this starts circulating the need to create more money declines. The CB keeps checks on the balance between money going into the system and money being collected by taxation. If income is greater than expenditure, it can divert the surplus into the ‘Rainy Day Account’. If income is less than outgoings the CB banks dips into the rainy day account to balance income to expenditure.
Capital projects that need vast sums of money, as the Paphitis Ltd building project, with The State as the employer of Paphitis Ltd, his employer (The State) pays the bills directly. Paphitis Ltd. does not have to raise the capital on his own back as he would have to now.
On personal loans to individuals, through banks, you would not be aware of any difference. But the bank would now be doing the borrowing, but as I said this could well be at zero interest to a bank, but it would charge the borrower for its services, which is normal economic practice.
I believe this a serious disagreement, and there’s no point continuing unless we clarify this matter. Am I missing something?
I think you are missing the fact that the difference between the current system of State funding and what is effectively Corbyns proposal, is that the State would no longer have to borrow at interest from private commercial banks to fund the country and it would therefore have no debt or interest to pay, because it would be funding operations by issuing it own currency.
I answered Paphitis earlier when he asked for an example of where this system has been used and was successful? Look up how the US economy worked from the declaration of independence up to the advent of the FED. (or First/Second Bank of America ... as I believe it was initially called) Was it coincidence that in the same year the FED came into existence ..... so did income tax?
Some of the quotes at the end of my last post are also relevant because it shows how Presidents of America, bankers and politicians felt about the ‘evils’ of the FED banking system.Another similar example is Monaco. It has no public debt and funds everything it needs to fund from tax receipts. It does not need to borrow money at all but although NOT a member of the Eurozone it does use the Euro as its currency.
BTW: Having just read Paphitis remark regarding the ‘colonials’ it is obvious that even though he has been offered an explanation to prove the point ..... he hasn’t bothered to look it up.
