The Crash Course

[Rajiv]

The Crash Course

[santafe2]

Re: The Crash Course

The Crash Course

One of your finest digs Rajiv. This is excellent.

[FRED]

Re: The Crash Course

One of your finest digs Rajiv. This is excellent.

It's good except that he makes a number of classic errors. For example, in "Section 7: Money Creation" he explains how money is loaned into being by banks. He's confusing the money multiplier effect with the process of money creation.

All money is borrowed into existence. It may be loaned by a bank when you take out a mortgage, a credit card company when you buy dinner, a car company when you finance through them, Dell when you buy a latptop on lay-away, and so on. Once created, the money then flows throughout the economy: Dell pays its suppliers, who in tern spend the money, the resaurant pays the wait staff and taxes to government and so on who all go spend the money, and so on. That is the important thing to understand about the modern money system, that is has far less to do with banks but credit issued by tens of thousands of organizations, the interest rates set by the credit markets, which is why the Fed is so much less relevant today.

[pococansado]

Re: The Crash Course

i knew money was abstract, but this is nuts. in the case of the car dealership, i walk in, sign a contract to make some number of payments of an agreed upon amount, and drive off. where is the money created in this case? whose bank account was increased as a result of this transaction? mine? no. the dealerships? i don't think so. i thought for money to be created, somebody's bank account had to be incremented. i'm confused.

[raja]

Re: The Crash Course

All money is borrowed into existence. It may be loaned by a bank when you take out a mortgage, a credit card company when you buy dinner, a car company when you finance through them, Dell when you buy a latptop on lay-away, and so on. Once created, the money then flows throughout the economy: Dell pays its suppliers, who in tern spend the money, the resaurant pays the wait staff and taxes to government and so on who all go spend the money, and so on. That is the important thing to understand about the modern money system, that is has far less to do with banks but credit issued by tens of thousands of organizations, the interest rates set by the credit markets, which is why the Fed is so much less relevant today.

Isn't money also printed into existence?

[metalman]

Re: The Crash Course

Isn't money also printed into existence?

'printing' simply means the gov't borrows money into existence instead of the private sector.

[raja]

Re: The Crash Course

'printing' simply means the gov't borrows money into existence instead of the private sector.

If it's "borrowing" who is the lender that the government is "borrowing" from? And what is the mechanism for paying back the loan?

[Rajiv]

Re: The Crash Course

The US Treasury borrows from the Public by selling T-Bills and paying interest on them. The dollars by which these T-Bills are bought have been borrowed into existence by the US Banking system - including the Fed

As for paying back, since the US has been running deficits there is no question of paying back.

The U.S. debt is $9.4 trillion, and is the sum of all outstanding debt owed by the Federal Government.

Over half is the public debt, which is owed to individuals, corporations and foreign governments, who have purchased Treasury Bills, Notes and Bonds.

The rest is owed by the government to itself, and is held as Government Account securities. Most of this is owed to the Social Security and other trust funds, which have been running surpluses. The securities are a promise to repay these funds when Baby Boomers retire over the next 20 years. (Source: U.S. Treasury, Debt to the Penny; Debt FAQ)

From federalbudget.com

In Fiscal Year 2006, the U. S. Government spent $406 Billion of your money on interest payments* to the holders of the National Debt. Compare that to NASA at $15 Billion, Education at $61 Billion, and Department of Transportation at $56 Billion.

[raja]

Re: The Crash Course

The US Treasury borrows from the Public by selling T-Bills and paying interest on them. The dollars by which these T-Bills are bought have been borrowed into existence by the US Banking system - including the Fed

Sorry to belabor this, but I still don't get it . . . .

If I am "the Public", and I buy $100,000 worth of Treasuries, I am loaning the government my $100,000. No money is created in that initial transaction. When the government pays me interest, are they borrowing the interest money from somewhere, i.e., "borrowing it into existence"? Who are they borrowing it from?

You say that the money I used to buy the Treasuries was "borrowed into existence by the US Banking system - including the Fed." Who was the lender that loaned that money to the US Banking system and Fed?

[Rajiv]

Re: The Crash Course

See Money as Debt

[metalman]

Re: The Crash Course

Sorry to belabor this, but I still don't get it . . . .

If I am "the Public", and I buy $100,000 worth of Treasuries, I am loaning the government my $100,000. No money is created in that initial transaction. When the government pays me interest, are they borrowing the interest money from somewhere, i.e., "borrowing it into existence"? Who are they borrowing it from?

You say that the money I used to buy the Treasuries was "borrowed into existence by the US Banking system - including the Fed." Who was the lender that loaned that money to the US Banking system and Fed?

check double entry book-keeping. clever idea invented back in 1494. call it a bank or whatever, if it has the authority to create an entry on its books of an amount as a asset to offset an entry on someone else's books as a liability, it is creating money.

[BrianL]

Re: The Crash Course

I'm still trying to internalize all of this myself.

You promised to pay a lender that amount of money over time. The dealer gets cash up front. Depending on how that loan is originated, that could be the created money.

Assuming the lender is a bank, they don't need to actually have cash backing the money they gave to the dealer - after all, you are going to pay it back in the future, right? The debt you have to the bank effectively becomes a 'currency' until the debt is repaid, as they could sell your debt to them to someone else.

Once you repay the debt fully, the created money is destroyed. The problem is interest. Assuming a fixed money supply, no one would be able to pay interest. It is possible that interest can be covered by the creation of value resulting from your use of the loan; for example, if the loan was used to convert natural resources into goods, the value of the goods may cover the loan. In the case of a car loan, nothing of value is added to the economy so the interest is either inflationary as the debt has value or someone has to get poorer/default somewhere in the economy to cover it.

I probably got a bunch of details wrong there, so be careful. ;)

[marvenger]

Re: The Crash Course

I don't understand how these organisations creating loans is adding to the money supply. I thought it would be adding to the debt but not the money supply. To add to the money supply, money has to be loaned(created out of thin air) from the fed through double entry accounting. the double entry accounting supposedly making it ok because obviously its going to be paid back.

[marvenger]

Re: The Crash Course

Wait sorry, banks can create money using this double entry accounting system themselves. I didn't know that non-banks could do it as well. Whats the point of calling banks banks then. Can I set up my own non-bank bank?

[Rajiv]

Re: The Crash Course

The example Fred gave of a car loan is actually done through a bank (e.g. GMAC) -- the dealer does not make the loan. I believe the Dell example is quite similar. Similarly, Department store credit cards have a bank sitting behind them -- even though the accounting may be done by the store itself. Macy's had its own Bank - FDS Bank

For the other stores - from the above link

Other retailers' branded credit cards are usually issued and serviced by a third-party bank; Federated was so huge that it ran its own private bank, FDS Bank, which for many years issued and maintained the majority of its own consumer credit card portfolio with a portion at one time owned by General Electric Credit Corporation, an arrangement inherited from when R.H. Macy & Company sold their credit portfolio in an attempt to prevent filing for bankruptcy. In 2005 Federated finalized an arrangement with CitiGroup to sell its consumer credit portfolio, reissuing its cards under the Federated-CitiGroup Alliance name Department Stores National Bank (DSNB) and allowing Federated to continue servicing the credit accounts from its Financial, Administrative and Credit Services Group (Macy's Credit and Customer Services)