@dennisdorney "It is also true that taking money creating powers from the private banks has been aired repeatedly on Loomio and I thought we had reached general agreement on that fact."

Poll results do not affect reality. Every vote, my opinion has been the same:

Banks no more "create money" than petrol stations "create" gasoline.

It's just that money is small and moves fast, so it confuses people.

@marcwhinery

Marc. My understanding of banking is what I have studied from central bank websites, senior financial commentators, IMF economists, Financial Times reporters, Bank of England papers, IMF papers and other references I quoted.

I base my understanding of money on the above sources, not on Marc Whinery's opinion on Loomio!

You and I shall have to agree to disagree.

I am here to raise awareness of the system to people who accept the credibility of the sources I quote.

@davidjohnston Hi David. Of course I believe in the existence of credit. However remember this is not about what I believe in.

It is simply about supporting replacing the role of the banks creating our money supply to the Government. This privilege should benefit the nation, not the private banks.

I support the reforms proposed in Positive Money, where banks will still operate but simply be intermediaries, as people think they are now. No more asset/liability balance sheets creating loans.

If people need credit, banks can perform that function. And if they do not have enough deposits, the bank could in turn borrow from the RBNZ. Then the nation benefits from the wholesale rate of interest charged on this, rather than the banks.

@davidjohnston

You quote: "They don’t create it ‘from nothing’, they create it from the existing money supply.For every dollar of debt that the bank creates, that’s a dollar of spending they have to honor."

David there is enough information available to prove the contrary. Banks create an asset (their loan to you) and a liability (your debt to them) on a balance sheet. It balances out to zero. However when the money is in your account - it is real money because you can spend it. When you repay the loan, the asset/liability cancels itself out and the money disappears again. The interest you pay however, the bank gets to keep. Yes. They charge you interest on money they never had. They do not first need to have deposits to extend you this credit. They need to keep some so there is not a bank run, that is it.

I'm not sure I understand your second sentence, but if you default on your loan, then the banks asset is now a liability to them - and they cannot make it disappear - they must ensure this debt disappears from their reserves.

Remember all this is simply electronic money. Only 2% exists as notes and coins.

@amandavickers "You and I shall have to agree to disagree."

"Everyone is entitled to their own opinions, but they are not entitled to their own facts." - Daniel Patrick Moynihan

That you disagree doesn't mean your opinion is equal weight to the facts. Even if you don't understand the facts.

@amandavickers "David there is enough information available to prove the contrary."

So you don't understand it well enough to answer specific questions or talk on specific points, you just "believe" it to be so, like some kind of anti-banking religion.

When you understand it well enough to talk about it, let us know. But if all you are going to so is point us to someone else's propaganda, there's no value in this discussion.

Or is that what you meant with "agree to disagree" but didn't want to be so explicit about your lack of understanding of the references and cites.

@amandavickers "David there is enough information available to prove the contrary. Banks create an asset (their loan to you) and a liability (your debt to them) on a balance sheet. It balances out to zero. However when the money is in your account - it is real money because you can spend it. When you repay the loan, the asset/liability cancels itself out and the money disappears again. The interest you pay however, the bank gets to keep. Yes. They charge you interest on money they never had. They do not first need to have deposits to extend you this credit. They need to keep some so there is not a bank run, that is it."

So the bank opens, first day. No deposits. Someone walks in asking for a $500,000 loan for a house. They go in the back, print out the money, hand it out, and all is good.

That is what is required in your description of the system. They don't need money, they just make up lines in a ledger. And the money appears magically.

In reality, it works just like my loan shark example, but with so much money that dumb people get confused about the chicken and the egg, or are lied to by people who have an anti-bank agenda. The deposits come first, because otherwise there's no money for the first loan. In practice, a new bank is funded by investors, with those acting as the first deposits, and they borrow from the central bank. But those are still deposits, even if not in transaction accounts.

Banks work like my loan shark example.

"However when the money is in your account - it is real money because you can spend it. "

No, it's not. There's a pool of money to spend, called the Reserve. When someone makes a withdrawal (or EFTPOS purchase), the Reserve pays for it. There is no "money" in your account. It's an entry in a ledger, like the loans. Those deposits are (with a small Reserve held back) the real funds the loans are made from.

All loans are made from deposits. No loans are made from "created" money.

I can "prove" my point with logic. All you've done so far is point to other people's statements. They are wrong. I've explained how they are wrong. Feel free to try to explain how I'm wrong. But I'm confident in the facts.

That the system is confusing to those who don't understand it doesn't change the facts.

Banks do make up money but not in the way you are discussing....they lend against the "value of assets"
Consider a residential property. what is the value of that ? What someone is willing to pay? That is the widely accepted view. It is completely wrong! The "value" of most assets is what someone is willing to LEND on it and this is set by the LENDER. This is not the cause of inflation it IS inflation. Every such "asset revaluation" reduces the value of every other dollar held by every citizen. ie Theft

@marcwhinery

Indeed. You "prove" your point with your own "logic". I have proved mine with IMF and BoE statements and papers and other credible references also cited by international money reform movements and organisations. That you do not consider these to be "facts" is entirely your prerogative.

@fredlook Hi Fred. Yes I agree, banks have driven up house prices with large amount of lending. That does cause inflation (which reduces the value of the dollar) but we stopped accounting for property values in the CPI some time ago. So the "inflation" is not official! As house prices go up, banks lend more on them so it is a self fulfilling prophecy really until defaults start rippling through the system. Boom and bust. Another reason to change the way money works: it is inherently unstable.

Hey wow! Look what I figured out how to do!

So @marcwhinery in your example, Bob is the bank. What happens if the bank lends out to Steve, Gary, Rachel, Maria, Kirsty and Lisa also all wanting $100 but only David and Fred have made deposits back into the bank?

What happens if Steve, Gary, Rachel, Maria, Kirsty and Lisa give their loaned funds to another bank or indivuals who do not deposit it back into the original bank?

I see that banks do not have to keep the complete tally of deposits in their possession/holdings and are therefore allowed to loan out or otherwise, certain percentages of their holdings while keeping some form of reserve just in case David call for his deposits back. I guess they are also backed by a lender of last resort of sorts, the RBNZ just in case both Fred and David withdraw their $100 at the same time.

But are they permitted by law to extend themselves in this manner and if so, by how much percentage of their actual reserve? Or have I got this wrong?

@terangikaiwhiriake The reserve requirement was deregulated some time ago, so banks can choose how much they have to keep aside. This description is of fractional reserve banking that you gave, or the money multiplier model. This system creates money but is now an outdated description because banks do not have to first have deposits to extend loans.

"In the real world, banks extend credit, creating deposits in the process , and look for the reserves later." Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

I got that from this link: https://www.positivemoney.org/how-money-works/advanced/the-money-multiplier-and-other-myths-about-banking/

I agree. The proposal could be for Internet MANA to implement the Positive Money policy reform:
http://www.positivemoney.org.nz/

Brilliant idea @michaelrobinson

The exact link to their proposed bill is here:http://www.positivemoney.org.nz/Site/Legislation/default.aspx

@fredlook. Your argument is back to front. Shelter is a basic human need, like food and drink, so when there is insufficient housing stock, which has been the case for a long time now, the buyer must pay all that he can afford to get a house. The alternative is to sleep under a railway bridge. That is why, when families had only one wage earner, that one wage would buy a house. Now that families have two wage earners, it takes two wages to buy a house. So the amount a bank will lend is the absolute limit that a family unit can pay. About all you have right is that, yes, it is theft and that is why we need change.

@guntramshatterhand. I can understand that people voted " at least six times to legalise marijuana" but they probably cant remember. I thought that the definition of madness was doing the same thing repeatedly and expecting a different result. Speaking personally I would hope that once Internet/Mana had reached a decision it would last at least until the next election or we are going to look pretty stupid.

@ marc whinery "Poll results do not affect reality". Perhaps. But they should reflect reality, otherwise what's the point? "It’s just that money is small and moves fast, so it confuses people." Can you really believe that? The only person who is confused is yourself.

@dennisdorney "So the amount a bank will lend is the absolute limit that a family unit can pay" Nope the amount a bank will lend is the amount a family can pay the interest on. this interest is the only "real money" in the transaction.

I agree that its the interest that's the killer. I will repay the bank the original loan amount for my house then I will pay it again and then I will pay it again .......sure sign of madness, surely there is a better way!

@moanakiff A no-interest monetary system would be difficult to implement in my opinion. I think Democrats propose no interest. Banks should still perform this vital role of lending but only by acting as intermediaries, so there will still be interest to pay, even if we place money creation back in the hands of the Gov't. However, I agree it is a killer.

This interest business is of really recent adoption. I have done a bit of research on this and I do not believe there was ANY religion 150 years ago that did not recognise lending at interest as a sin. Whats changed now?

@fredlook "This interest business is of really recent adoption. I have done a bit of research on this and I do not believe there was ANY religion 150 years ago that did not recognise lending at interest as a sin."

How can interest be a new thing, if religions have been banning it for thousands of years?

It would seem to be at least thousands of years old.

@moanakiff "sure sign of madness, surely there is a better way!"

You could always save for the house to pay for it in cash, and never pay interest, no matter what the anti-bank nutjobs say about money creation.

The "madness" is informed and deliberate on the part of the borrowers.

All other alternatives are either price fixing, or changing the name of "interest" to make people happy. Price fixing doesn't work, and changing the name to make people feel better (calling it an interest-free rent to own where you pay for it multiple times, rather than one with interest where you pay the same amount) doesn't cause any change.

@marcwhinery I mean that accepting interest as acceptable and necesssary and founding our economy on it is recent

"What printer does that bank run to to print off that $500,000 to give them?"

They don't - they just type it into the computer.

"If you take the stance:

Banks do not create money"

Why would I take that position when it's been conclusively proven that the banks create money?

A no-interest monetary system would be difficult to implement in my opinion.

@amandavickers No, it would actually be quite simple to implement. Hard to get past the present oligarch's though.

@colinengland It would be easy to implement. You just make it illegal. But it would also result in a complete collapse of the economy. People currently rely on cheap and available credit to function. And capping interest at 0% would cause money available for borrowing to approach $0.

It's not "hard" it's easy. And impossible. Why would someone lend money in NZ when they could take that money to Australia and led it out for a profit?

@colinengland "Why would I take that position when it’s been conclusively proven that the banks create money?"

It's been proven that those who think banks create money are louder and more persistent that the truth.

But it would also result in a complete collapse of the economy.

Not really. There would be some adjustments but the economy would continue on.

And capping interest at 0% would cause money available for borrowing to approach $0.

Nope. See my post http://thestandard.org.nz/real-monetary-reform/

Why would someone lend money in NZ when they could take that money to Australia and led it out for a profit?

So, Australians will be buying stuff off us? Ok.

It’s been proven that those who think banks create money are louder and more persistent that the truth.

No, what we say is the truth backed up by cited sources and regulations. You, on the other hand, have nothing but your assertions backed up by nothing except your belief and your belief is wrong.

@colinengland

I'd like to highlight one misconception about that BoE money creation report.

(http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf)

The report early on states:

"One common misconception is
that banks act simply as intermediaries, lending out the
deposits that savers place with them.... in reality in the modern economy, commercial banks are
the creators of deposit money. "

The likes of positive money proponents point to this and say 'AH HAH! See banks create money from thin air!'.

But read, read the whole report.

When banks create loans - THEY CREATE A LIABILITY FOR THEMSELVES.

That is - the money they are lending, isn't an asset that they're lending out, it's a liablity.

"Bank deposits are simply a record of how
much the bank itself owes its customers. So they are a
liability
of the bank, not an
asset
that could be lent out. "

It's disingenious to suggest that banks create money from 'thin air', because creating a loan isn't risk free for the bank. If the borrower defaults on the debt, then the bank is still on the hook for the liablity they created.

See page 5 for info about banks and managing risk.

@ david-johnston

It’s disingenious to suggest that banks create money from ‘thin air’

No it's not as that's exactly what they do. It's says that in the piece you quoted. It specifically says that the banks create the money and a liability.

I really don't have a problem with the money creation and destruction process. Go read my post at The Standard about it and I use exactly the same process.

The three problems I have is that

1. Private, unaccountable dictators have control of our money supply and
2. They charge interest on it which requires ever more money to be created which means that a) our economy is not sustainable and b) the greatest part of inflation is due to the banks creating money
3. The banks create the money for their own purposes which are quite against that of the society (i.e, the massive increase in lending on houses pushing house prices up)

And, yes, after the GFC we're quite aware that there's risk involved with the creation of money but it wasn't the banks that the risk was on.

http://en.wikipedia.org/wiki/Fractional_reserve_banking

The Fractional Reserve Banking description is wrong. This is just one of the things that are taught about economics today that is wrong but it happens to be a major one as it means that our understanding of money is wrong.

@colinengland (from your guest post) "The banks would thus be limited to only loaning out money that they had on deposit for that purpose thus removing the massive increase in money entering the system and pushing up inflation, especially the house price inflation, that we have now."

But that's what they do now. They only lend on deposits, and nothing else. They don't create money from nothing.

@marcwhinery “What printer does that bank run to to print off that $500,000 to give them?”

@colinengland "They don’t - they just type it into the computer.."

So, a new bank opens. No money in the vault, and someone comes in, they can just type in a new loan and send the person out the door with $500,000 cash, because they typed it in a computer?

Sadly, that makes the most sense of anything you've ever said. At least it's a litmus test.

Anyone who believes a bank with $0 in deposits can lend $500,000 cash to their first customer should believe whatever else you are selling.

Anyone who thinks that's not quite how it works should look on everything else you've said in exactly the same way.

@colinengland "The Fractional Reserve Banking description is wrong. "

Yes, any cite you make (apparently mostly your own unsubstantiated blog posts) is 100% fact. And Wikipedia is wrong, because you know better.

Then go edit Wikipedia and school the rest of the world. Oh yeah, if you tried, you'd get reverted and banned, if you haven't already.

But that’s what they do now.

No they don't and we have the Reserve Bank of England, the IMF and several other peoples research showing this.

But if that was what they did then I suppose having a law saying that the banks couldn't create money wouldn't make any difference would it?

So, a new bank opens. No money in the vault, and someone comes in, they can just type in a new loan and send the person out the door with $500,000 cash, because they typed it in a computer?

Yes. Of course, a bank does have to be worth several million dollars before it can open.

Yes, any cite you make (apparently mostly your own unsubstantiated blog posts) is 100% fact.

My blog posts are backed up by links to further research. Are they 100% right? Nope but they are, I figure, better than 90% correct and that is close 100% the opposite of what is generally believed.

http://unlearningeconomics.wordpress.com/2012/09/22/endogenous-versus-exogenous-money-one-more-time/

The evidence comes down against what you say every time.

And I note that you still haven't provided a single source of research for anything you've said.

Thank you Amanda Vickers.
The fact that New Zealand does not control it's own money supply is the crux of all the problems that exist.
Until the Reserve Bank is reinstated as the sole administrator of the money supply, all fixes and patches to problems such as inequality and just that. The power to create money must be removed from private banks and restored to the New Zealand Reserve Bank

heres my video on monetary supply, sorry its so simple even a 7 year old can understand it, and Ive challenged phd's in economics with it and they said they cant poke holes in it.

https://www.youtube.com/watch?v=HHwHvKK9ijo
this is why im against the current money system. this is why I premote positive money.. money is a joke, a sick slavery joke

@colinengland "Yes. Of course, a bank does have to be worth several million dollars before it can open."

So they have real money they lend, not numbers in a ledger.

The problem is that when the list of numbers on the ledger gets big, @colinengland gets confused.

So we should outlaw anything that confuses @colinengland !

Your real problem is that you understand a little of it. "Anyone from the real world – bankers, lawyers, accountants – will tell you banks do not consider reserves when lending." is completely correct. They do not need to consider reserves when lending, because they will borrow more reserves from the Central Bank, if their reserves are inadequate.

It's not because the reserves are unrelated to liquidity or their actual loans. But once a person latches to a false idea, it's impossible to separate them from their religion. No amount of logic or "proof" will work. "Proof" is simply dismissed as false (as you did with the Wikipedia cites). And logic is countered with opinion dressed up as fact.

Banks lend money, real money, that only exists because they have more deposits than loans.

If you were right (and you aren't), banks would be able to lend more than their deposits. No bank ever has. Because it's impossible, as they operate as I describe.

If banks operate as you describe, it's possible to lend more than deposits. Why haven't they? After all, it's free to them to create the money and lend it out.

Forget deposits ! banks lend against assets! The "value" of which they determine. In so doing they devalue everyones money. Instead of calling it a monetary devaluation which it is, they call it inflation because thats harder for us to understand.

@sammcpherson So long as the "world bank" keeps loaning out $2 every 20 years, the system works forever. That's by design, and is unrelated to the role of banks in that process. The banks themselves are in the middle. They too must pay back all their money, with interest. So they charge more than the central banks charge them.

This is by design to make "money" have a cost. Ecomomic activity isn't measured by the amount of money, or location of wealth, but the movement of money. So if you borrow $2 and don't make wealth with it, then you'll always lose.

So they have real money they lend, not numbers in a ledger.

Nope, they don't. I said they have to be worth several million, not have several million. There's a fairly major difference.

The problem is that when the list of numbers on the ledger gets big, @colinengland gets confused.

You're the one who's confused Marc. I've linked the research that shows that what I've said is reality. You continue to disbelieve that.

They do not need to consider reserves when lending, because they will borrow more reserves from the Central Bank, if their reserves are inadequate.

You wrote that and still believe that banks don't create money?

@Mark Whinery by the system working forever, this infinite growth paradigm both enslaves humans, and destroys the environment. you cant have a infinite growth paradigm on a planet with finite resources. its mathematically impossibly for it to continue forever. this is why I am against the current economic model. and I want it replaced with something more balanced, like the positive money system. im not here to argue how banks make money, I understand that the deposit I put on my house lets the banks create the rest of the money. I just want a world where we are not slaves to destroying our planet, and fighting for resources.. and a movement like positive money would be a step in the right direction. I don't get why anyone would support the current system unless they were at the top earning interest from other people, it makes no sense socially or environmentally. which our government is supposed to look after both

@colinengland "You’re the one who’s confused Marc. I’ve linked the research that shows that what I’ve said is reality. You continue to disbelieve that."

I believe the truth. You are posting to blogs and such, with no actual facts. And you aren't contradicting my facts with facts, but with snide and dismissive comments.

@marcwhinery

That's just it, you aren't posting any facts - you're posting your beliefs.

I've backed up everything I've posted with actual research. And, yes, some of that research is linked to on other blogs. This ability to share information is the strength of the internet.

@colinengland
No, I posted the fact that a new bank with no cash can't make a loan by printing money. That is a fact. You don't disagree with that fact. You just change the subject.

That wasn't a fact and I didn't change the subject. A brand new bank with no cash can make loans. That bank has to be worth several million dollars but that's just a fig leaf - it still doesn't have to have any cash or money on deposit to make loans.

This is getting tiring so I won't bother responding to you any more. It's not worth the effort as you won't change you belief no matter how much evidence is provided to you.

There are none so blind as those who will not see

I fully agree with this proposal. The current banking system is fuelling inequality, devaluing the productive economy and helping destroy the planet. Like many of the excellent contributors, I am not anti bank, I just believe that they should only act as intermediaries in the lending process, which is what most people wrongly believe is already the case. Most people want a better world for everyone, not just for themselves. This would be an excellent start.

For all those who still don't believe banks create money you should listen to where Jim Mora interviews Westpac economist Michael Gordon 25 Oct 2012 Radio New Zealand
https://www.youtube.com/watch?v=sv5dRynFvOc

I have a few questions for this plan:

1a. 100% reserve banking: - If banks are requried to hold on to all of their deposits, then what do people do with money they want to save, and money on? Does this make term deposits illegal? (ie. they can only buy shares/etc, or perhaps directly lend to borrowers, and take the risk of bankruptcy themselves).

1b. If banks aren't allowed to make money by lending out deposits, then are they expected to hike up savings/chequing account fees to cover their costs?

1. Interest free borrowing for the government. Are there any limits on this borrowing? ie. Is the bank obligated to pay the money back at some time, and if they don't, then interest starts then? 0% interest sounds effectively like printing money. ie. The Government can borrow $1trillion, it doesn't cost them anything, so they can spend it on anything they want. If they have to say pay it back after 20 years, they can just take out a second $1trillion a loan after 19 years, to pay the initial one back.

2. Controlling credit cycles. Isn't that exactly what the reserve bank is there for? The Reserve Bank influences the money supply by changing the OCR. Banks are required to settle any outstanding balances they have each night, with the RB. By increasing the OCR, this increases the cost of being outstanding to a bank, and makes them less likely to create new loans.

3. Reducing debt. Is less availablity of credit a good thing for someone who wants to buy a house, or to start a business?

@brigidford The dispute isn't that banks create the money. Banks do create the money supply, but for every dollar of deposits they create, they also create a dollar of liability for themselves.

@davidjohnston If you want me to believe that you'd better provide proof.

@brigidford Read this: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

It's quite readable. The diagrams on it quite clearly demonstrate how when a bank creates a loan, it shows as deposits in the borrowers account, but the bank has also created liability for themselves, which they have to settle when that money goes to another bank.

And in the meantime charge interest on something that cost them nothing. The question I'd like answered is why is the money supply not controlled by a country's central bank.

David Johnston

1. Technically, you'd split bank deposits into two kinds. 1) A deposit account to be on call. These funds would not be loaned out and 2) A deposit account that would be loaned out. These funds would not be available to the depositor on call but through a long process of getting it back. If the loans fail then the bank takes hit but it would be spread out across these deposit accounts (Why anybody thinks that they can loan out money with no risk is beyond me).
2. Yes, there are limits. My own position is that the government would have to ramp up taxes for any increase in money created.
3. That's is supposedly what the reserve bank is supposed to do. But, as Positive money has shown, that doesn't actually work (http://www.positivemoney.org/how-money-works/banking-101-video-course/ You'll want part 4 specifically but the whole lot is essential watching). For it to work then the reserve banks would have to be willing to not lend reserve currency to private banks when they create too much money and thus let them collapse.
4. Done properly there wouldn't be any less money available. It's just be that the private banks would no longer have control of our currency.

@brigidford It essentially costs them everytime they loan money to someone who defaults.

@benjaminwood From the horses mouth so to speak: IMF economist's words "banks create money from thin air"

“banks create money from thin air"

Yes. Just like when I tell my wife "I owe you $10" I just created money from nothing. a $10 loan, and a $10 debt.

It's such a shame that so many people believe in the anti-bank religion so strongly they stop thinking.

How would a bank with no money lend money? They can't, because they don't create money.

Which bank has lent more out than total deposits? None, ever? Then that's proof that they can't "create" money.

But logic and thinking doesn't work with the zealots. They just know insults and attacks.

@marcwhinery "But logic and thinking doesn’t work with the zealots. They just know insults and attacks."...... Thats how you do it!

@fredlook Should we write to the international monetary fund, (and link their video of their IMF economist stating that banks create money) and tell them that there is a Marc Whinery on a Loomio discussion, who says they are wrong and they lack logic and thinking?

As another interesting thing: a clip on TV One - all about how banks create money from thin air (although I think the person who posted it made the important parts repeat in the video) : http://youtu.be/0McsspLZYQE

The original version is on the home page here, but I don't know how to copy it. http://www.positivemoney.org.nz/

They take your currency, hold it as leverage to cover trading against other currencies and make profit on the spread.

That's called speculation and people used to be hung for it. Between then and now the damage that speculation does to the economy hasn't changed - just the laws.

Our financial system is a construct and it can be, and needs to be, changed when it isn't meeting societies needs. And, as it is, it most definitely isn't meeting societies needs.

"Second, 100% reserve backing would completely eliminate bank runs."

What are you 100% reserving backing with?

@amandavickers I am sure this Marc is a troll. He has been round and round this argument with @kennethkopelson on how the banks do or do not create money from thin air and despite clear evidence that this is in fact how they banks operate he will keep arguing in circles and wasting your time.

@wadevuglar Yes, I will keep arguing because I don't want your lies to poison any more minds.

Banks "create" money no more than I do when I lend my wife or kids money.

Just because the zealots here refuse to think, doesn't mean I'm wrong.

For some helpful prose on the subject of money creation (based on the Bank of England papers) from the Guardian: http://bit.ly/1rfcumz

@wadevuglar - completely agree. Possibly a paid troll given the time he dedicates to this forum...

My slight reservation in supporting the proposal is that there is still the issue of 'energy return on investment' http://bit.ly/1uEfevy that we need to deal with along the way to a better future. Having said that, I think that it's clear, if you do some of the reading @amandavickers has provided, that money lent into existence as interest bearing debt is a key driver of the 'growth' imperative (or religion http://bit.ly/1jHEBDi). Needing to grow to service our debts (which are always ahead of GDP in the current system) is in turn a key driver for much that is unsustainable about our economy, and the busts we periodically suffer from.

End the imperative to grow, and we stand a chance at a steady state economy at some point. Otherwise it's boom and bust all the way back down the net energy cliff we're in the process of falling off globally... http://bit.ly/1l9ME29

Here's more on the Chicago Plan Revisited, with an NZ perspective: http://neweconomics.net.nz/index.php/tag/chicago-plan-revisited/

By the way, I hope you've all heard of, and 'got' the travesty of justice that is 'Open Banking Resolution'...? http://neweconomics.net.nz/?s=open+banking+resolution&submit=Search

@nathansurendran Who is paying me?

The only way someone could disagree with you is to be part of a global conspiracy. You should seek professional help. Such delusions are a sign of mental illness. But don't feel bad, you aren't the only one here with that problem.

It is nothing less than mental illness that would have a $10 loan by a bank from cash reserves be "creating money" but if you loan a mate $10 you didn't "create money". The double standard and cognitive dissonance abounds.

@marcwhinery - that was an unusually tardy response. Did you have to got to your handler for strategic advice? ;-p

For someone who appealed so strongly to logic earlier in this thread, I'd have thought that lowering yourself to ad hominem in your response would generate some sort of internal error...

@nathansurendran I totally agree with you about EROEI concept. However, of all the things we need to address, I thought the monetary system was most urgent. One major problem with it (amongst many) as you say, is the growth imperative which will always require more energy to ensure it grows. So another reason to address money first. However I do agree it is only one piece in a series of predicaments we are in, with respect to the economy, energy and the environment.

Here's an excellent 7 minute clip from TV one seven sharp - all about banks creating money from thin air. It truly is worth the watch especially if you are new to this: http://tvnz.co.nz/seven-sharp/paying-interest-loan-never-existed-video-5336329

I am interested to know from anyone who thinks banks dont make up money, where does it come from?

@marcwhinery It is not lies Marc. It is plain undeniable fact.

The sooner we fix this problem, the sooner a whole raft of social equality ills can be properly remedied.

@marcwhinery Here is another great video explaining how the process of money creation works, put in very simple and easy to understand language.

https://www.youtube.com/watch?v=lrQX4CF6Bxs

@fredlook Money isn't made up by banks, but is "created" by the central bank when it gives/loans money to banks.

Because of the reserve system, $1 loaned to a bank is $10 created. When the bank "creates" $9 from that $1, it isn't the bank making it up, but the central bank that made it, and the bank following the rules to multiply it as per their role in lending.

"created money" is nothing more than Alice handing a $10 loan to Bob, and Alice still counting that $10 as theirs if anyone asks.

If I'm a bank and I have $100 on me, and I lend someone $10 for lunch, I have $100 left. I didn't "create" money, I lied about how much I have left. Though banks "lie" because they are required by law to do so.

To help prevent runs on banks and such, banks are supposed to appear too large to fail, and there are regulations (some people here obviously think are silly) designed to inspire confidence in banking.

Changing the rules on reporting would "fix" the problem with banks creating money. If we made banks report only on reserves, and not deposits, they'd look much smaller, and people wouldn't confuse their role in improving the liquidity of money, without "creating" any.

@marcwhinery

Hi Marc.

The only money the central bank creates is our notes and coins. It does not give or loan money to banks. In fact, quite the reverse is true. The RBNZ sells bonds which private banks can buy through created money.

My key goal is for banks to be 100% reserve so 1) if they have your money on demand they can't relend it. And 2) if the re-lend it, you cannot access it.

I think I see now the key difference how you and I understand fractional reserve banking. In fractional reserve banking, the bank can re-lend depositor's money but it still must give the depositor their money back on demand at any time.

In a new system, with 100% reserve banking it is only been used once. Like when you lend your wife $10. She has the use of it and you can't possibly spend it also at the same time.

Banks would need to KEEP your current account money, and you could access it. And you would have to agree not to access your "investment savings" money. This is the money the bank would re-lend.

I hope I am making this clear.

However, fractional reserve banking per se is outdated:

The correct version of how banks function:

Professor Charles Goodhart of the London School of Economics and an advisor to the Bank of England for over 30 years described this (fractional reserve) model (in 1984) as “such an incomplete way of
describing the process of the determination of the stock of money that it amounts to mis-instruction.”

It is important that this is clear as there are three major implications made in the fractional reserve model:

(taken from: http://www.positivemoney.org/how-money-works/advanced/the-money-multiplier-and-other-myths-about-banking/
. This is an English example but is just as relevant in New Zealand)

"Firstly, the money multiplier model implies that banks have to wait until someone puts money into a bank before they can start making loans. This implies that banks just react passively to what customers
do, and that they wait for people with savings to come along before they start lending.

Secondly, it implies that the central bank has ultimate control over the total amount of money in the economy. They can control the amount of money by changing either the reserve ratio or the amount of ‘base
money’ – cash – at the bottom of the pyramid.

For example, if the Bank of England sets a legal reserve ratio and this reserve ratio is 10%, then the total money supply can grow to 10 times the amount of cash in the economy. If the Bank of England then increases the reserve ratio to 20%, then the money supply can only
grow to 5 times the amount of cash in the economy. If the reserve ratio was dropped to 5%, then the money supply would grow to 20 times the amount of cash in the economy. Alternatively, the Bank of England could change how much cash there was in the economy in the first place. If it printed another £1000 and
put that into the economy, and the reserve ratio is still 10%, then the theory says that the money supply will increase by a total of £10,000, after the banks have gone through the process of repeatedly re-lending that money. This process is described as altering the amount of ‘base money’ in the economy.

Thirdly, it implies the money supply can never get out of control, unless the central bank wants it to."

REFERENCES THAT MONEY MULTIPLIER IS INCORRECT:

INTERNATIONAL MONETARY FUND

“The Chicago Plan Revisited Working Paper No. 12/202
by Jaromir Benes and Michael Kumhof.

https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Page 5 second paragraph “banks generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business”.

EUROPEAN CENTRAL BANK

Speech by Vítor Constâncio, Vice-President of the ECB,
26th International Conference on Interest Rates,
Frankfurt am Main, 8 December 2011

http://www.ecb.europa.eu/press/key/date/2011/html/sp111208.en.html

Under discussion point 2. "Monetary policy, financial stability, and the separation principle" paragraph 16.

" Nevertheless, it is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non-financial sector. This fits into the old theoretical view about the credit multiplier according to which the sequence of
money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money.

FEDERAL RESERVE BANK OF NEW YORK:

Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf

page 73, paragraph 4.

"In the real world, banks extend credit, creating deposits in the process , and look for the reserves later."

BANK FOR INTERNATIONAL SETTLEMENTS

Piti Distayat and Claudio Bori, (2009)

http://www.bis.org/publ/work297.pdf

Page 2, third paragraph

"This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in
terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always
fulfill the demand for loans if it wishes to."

BANK OF ENGLAND

The Bank of England March 2014 quarterly bulletin (page 14) titled
Money creation in the modern economy

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1.pdf

By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis
Directorate states that "Money creation in practice differs from some popular misconceptions
— banks do not act simply as intermediaries, lending out deposits that savers place with them."

and

“whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

and

“The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when
households save and then lending them out, bank lending creates deposits.”

All these references say banks do not first need deposits in order to make loans.

I would like to point out that the Bank of England does say that there are some popular misconceptions about money and that it differs from the description found in most text books.

However, as it is a popular misconception it is very important that it is properly represented and understood.

Banks create money out of thin air and then charge interest on money they never had in the first place, as referenced in the material from the IMF and Bank of England above. This is how the banks make their
money.

Here is a video of Michael Kumhof from the IMF stating blatantly "banks create money out of thin air" - in the last 5 seconds of this video:

http://youtu.be/b6_SLwReMqo

is it just me or does @marcwhinery defend everything illegal and fraudulent in this country/ economy and even Globally. I would like to suggest a motion that this guy is banned from the Internet party as all he is doing is defending the status quo. we will not get anywhere with such naivety and/or corruption within the Internet party

@marcwhinery http://www.stuff.co.nz/taranaki-daily-news/news/6187162/Financial-crisis-explained

@cohenglass

Marc Whinery is frustrating when he calls me a bank-hating, nut job, money creating zealot. However, when he makes an honest post with his view, as above, without insults, that is what the forum is for. It is a very important conversation to be had. I would only like his insults banned.

we will not get anywhere if the Internet Party becomes stacked with ignorant spoiled establishment people or their children- i do not know marc but based on his 'knowledge' he may not be much help for change.

@amandavickers "In a new system, with 100% reserve banking it is only been used once. Like when you lend your wife $10. She has the use of it and you can’t possibly spend it also at the same time."

Sure I can. I borrow it back from my wife. If a bank did that, they are required by law to claim that the $100 in their pocket was $120. The banks don't "create" money. They are just required by law to call it that in their ledgers, then people complain when they comply with the law.

@amandavickers Page 5 second paragraph “banks generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business”.

They are wrong. "net-30" is common, and is a form of generating funding.

@cohenglass @amandavickers

Yes, I get insulting sometimes. Why? Because I've not posted anything in a long time on this subject that doesn't get some nutjob following it up with personal insults against me.

Since there's nothing I can do to prevent the personal insults by those too dumb to refute the points given, I give up trying to be polite to the impolite. I apologize if my general insults against the nutjobs like @cohenglass who insult me without facts every time I post were taken to be personally against anyone other than the irrational hating stupid ignorant assholes who have some compulsion to attack me at every opportunity.

The other thing that the objectionable morons don't get is that I'm anti-bank. I just want them gone for the right reasons. and with a better replacement.

But the idiots think that if I don't agree on the definition of monetary policy, there's no way I could be against banks.

They stop reading what I say, and instead read what they think I want for a result, though they haven't been right yet. Even when I explicitly state it.

Well well, @cohenglass, we are "objectionable morons" today. I give up with Marc Whinery. It doesn't matter how many references we provide, they are always wrong (today the IMF is wrong) and we are always insulted.

I still would really like to know what is the "official" way that money is created (if banks dont make it up) please not an opus or string of youtube links, just a simple one or two sentence outline. thanks

@marcwhinery Marc, your description to @fredlook is incorrect.

Please read this NZ Reserve Bank document which has some details on the topic of "Do private "Banks" create money".

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1lawrence.pdf

Here are some pertinent quotes from the RBNZ document:

"In a modern economy, money can be created either by the central bank (the Reserve Bank, in New Zealand’s case) or by private sector institutions – in practice, mostly registered banks.
Section 25 of the Reserve Bank of New Zealand Act 1989 gives the Reserve Bank the monopoly right to issue physical money (notes and coins), which enters public circulation through the private sector institutions to which it is issued."

"..any institution that can maintain the public’s confidence that its liabilities will be generally accepted as means of payment, can create money. Such an institution will, in practice, also be in the business of creating credit, which implies the issue of a greater value of claims on the institution than the value of Reserve-Bank-issued money the institution itself holds."

"In practice, by far the largest share of money – 80 percent or more...is created by private sector institutions. For simplicity, in what follows, we use “bank” to refer to any institution that creates money or credit."

"Banks...create money and credit at a volume depending on their customers’ own demand for money and credit."

"While the Reserve Bank creates fiat money, in practice, a much larger share of money is created by registered banks and other private institutions. In the process of creating money, these private institutions also create credit, which by enabling the funding of investment, contributes to the economy’s ability to grow. Payments are settled between these money-creating institutions via the interbank payment system provided by the Reserve Bank, using deposit accounts that the institutions hold with the Reserve Bank."

@fredlook I second that question. In 2012, 16 billion dollars appeared in the country. Every year more money appears. I have attached a graph of M3 in the NZ economy to show this. Where does this money come from, if banks don't create it?

@amandavickers M3 is long term money. If you have a Term deposit, and it's for 3 years, and the bank, to cover the interest they are paying you, lends it out while you can't use it, then it's M3. It's lent money that couldn't be double-spent. The rules on reserve for that is generally 0, because it's impossible to double-spend it. Reserve is reserved for M1 and M2 where someone could demand it paid in full today.

The question asked by @fredlook at present is "what is the official way money is created". M3 is money stock. Where does it originally come from and how does it increase? Who created it? (Once it exists it can be put in long term deposit, yes, but that does not answer the question about where it came from).

sorry I still dont get it. can someone put it into two sentences. The nearest thing to an answer so far paraphrased looks like.
(the reserve bank issues money and the banks "multiply" it)
is that right?

https://www.youtube.com/watch?v=bE8i-4HpKlM&list=PLxl7ssO5_r5fG9OEFsMYXUDr6hYXwRMx8

@fredlook "the reserve bank issues money and the banks “multiply” it) is that right?"

I've said that many many times on here, in multiple places. The Central bank makes money (or, in some cases can commission the creation of money they don't make themselves). That's M0 and is a small number. Then M0 is multiplied by lending (all lending, including "Net-30" and buying a friend lunch).

@amandavickers M3 isn't "money stock". M3 is counting non-money as money. M3 doesn't exist. M3 is a lie.

M3 is when a bank takes in $100 in your 3-year term deposit, and then hands it out to someone else on a 3-year loan on a car. The bank has $0. But is required by law to report that $0 as $100 M3. M3 isn't there. The person who deposited the term deposit can't get their money back. It's a 3-year contract (they can break the contract, and the bank will borrow the money from elsewhere if the depositor breaks the contract).

But the M3 isn't "usable" by anyone, other than the car dealer, who was paid for the car, who gets it as M1. M3 is huge, because it isn't there.

@fredlook @amandavickers are arguing that M3 is real, spendable money created by banks. I'm arguing that the money isn't real. It isn't "created" by putting it on a ledger. It's a fabrication used to track lending in an easy to record number. It doesn't represent "money". So calling it "created money" is like calling the thought of money "created money". Neither is real, physical, spendable, or demonstrable.

Yes, M3 is created by an entry in a ledger, but, because it isn't actually money, that doesn't create money. It's a record of moved money. Calling M3 money is calling tyre tracks a car. They may be an actual record of actual money, but aren't money, and can't be used as such,

@marcwhinery You are in danger of confusing yourself out of existence.

OK one sentence. The reserve bank creates money, the banks multiply it but the multiplied money isnt real money. is that ok?.. question: do people pay interest on this unreal money?

Yes, @fredlook, they do.

@fredlook No, they don't pay interest on the non-real money. They only pay interest on real money. The money paid to the dealer is real money, as I noted. And that's what the borrower is paying for.

The "issue" is that the bank borrows from millions of people at near 0% rate (savings and transaction accounts), and takes the real money deposited and loans it out for 6%, 10% or more. The person who "owns" the real money gets none of the returns.

But the idiots (the ones in the YouTube links sent out, not the fine gentlemen and ladies posting here) focus on whether loaned money should be counted 2 times or 3 times, and not on the fact that the real money being deposited and re-lent is profiting the middleman, and not the people that "own" that real money.

$10 Billion a year sent out of NZ as profits for banks, and the "issue" for new money zealots is how many times you count money on the bank's ledgers.

Personally, I'd like to fix the actual problem, rather than lie about the problem to satisfy some personal insanity (again, the people in the links, not the fine people posting here).

And, for all the assertions of global conspiracies, has nobody thought that all the claims of "created from thin air" are plants to stir up the zealots, identify them, and discredit them? After all, a believable lie thrown like a bone to the dogs, would do wonders to discredit the anti-banker zealots in a time when banks are low popularity.

doesn't that break things ?

@brigidford Your inability to understand reality is not a reflection on my confusion.

@marcwhinery

Well, the people in the youtube links have done the research and identified the problem. You're just spouting the crap that comes out of economic textbooks - the stuff that's been proven to be the problem.

And now you're trying to say that it's all a conspiracy theory.

@colinengland
Interesting theory. Do you have any proof that I haven't done research? Do you have any proof the YouTube people have?

Or do you have confirmation bias because they say what you want to hear, so you take them as more credible?

Because, though my master's degree is not in Psychology, my bachelor's was, and confirmation bias is standard operation of the human brain.

And I didn't say it was a conspiracy theory. I said that some of the links posted indicate that it is. Your inability to separate the argument from the person making it prevent you from understanding things. You should try to stop that bad habit.

Do you have any proof that I haven’t done research?

Yes. You haven't linked to any.

Do you have any proof the YouTube people have?

Yes, they've linked to it several times.

And, for all the assertions of global conspiracies, has nobody thought that all the claims of “created from thin air” are plants to stir up the zealots, identify them, and discredit them?

That was you implying that the whole “created from thin air” was a conspiracy theory. This despite all the evidence provided to you.

@fredlook Put simply, the banks create money by book keeping entries, creating deposits and loans. All money is backed by debt. Yes you need to pay interest on the money they create, and yes this leads to many problems.

The reserve bank creates currency. This base money would be multiplied if a fractional reserve model was used. This model is out of date.

In fact, banks create money by book keeping entries. They loan it in to existence. There is an asset and a liability and it balances out to zero. When the money is repaid it disappears again. Yes, @fredlook you do have to pay interest on this loan the bank creates from nothing. That money comes out of the real economy. The economy must grow so there is enough new money (loans) being made to meet yesterday's interest payments. While the loan money disappears, the bank keeps the interest. So,

There is always more money owed to the bank than there is money in the system, and

If we paid back all our loans there would be no money left in the economy.

It's a rort.

so there is some small amount of actual money that the banks have. they then create a heap of nonmoney and charge us to use it. these charges mop up any real money that might have escaped. ?

@Marc Whinery What, would you say, IS a reflection on your confusion?

it would seem then that the amount of nonmoney in circulation would naturally grow to equal the amount where the interest charged would total the real money generated by the factory worker, farmer, etc ? .... If it exceeds this amount we crash?

@brigidford My only confusion is on what I can say to get people here to understand the truth.

I've even had people tell me "A bank makes money from nothing" then clarify with "A bank must have money before it loans money", yet see no contradiction between those statements. My confusion is how someone can be so comfortable with such cognitive dissonance, and be so certain in it they are posting in public forums and insulting anyone who doesn't agree.

@fredlook the amount of money grows and the amount of debt grows. Debt grows faster due to interest. We have unprecedented amounts of personal debt in NZ. If these debts are repaid, money disappears. Money is taken out of the economy and if enough people do this - we get recession.

If they do not pay their debt, they continue to pay interest. Interest that comes from money in the economy, growing, to pay the interest .... it is a game of musical chairs. Our total debt levels are near or at 100% of GDP - a worryingly high level. Unsustainably high, a lot of commentators say. So debt cannot continue sustainably, and our environment and resources are reaching limits too.

Also the system contributes to the growing inequality problem we have, too.

So the biggest problems are: 1. We have a growth imperative on a finite planet. 2. We need increasing debt but servicing it is becoming unsustainable. 3. We have an inequality problem (causing child poverty).

We simply must re-design the system.

@fredlook "it would seem then that the amount of nonmoney in circulation would naturally grow to equal the amount where the interest charged would total the real money generated by the factory worker, farmer, etc ? …. If it exceeds this amount we crash?"

Assuming rational people, the amount of money expands as the economy does because people are willing to pay more for it. The cost of money artificially restrains the economy. But those who put the system in place think that's a good thing, because it gives an easy number (the OCR) for a central authority to manipulate the economy.

If I can make 2% buying houses and renting them out, if I pay 6% for the money to buy the houses, then it's a bad business decision to lose 4% per year. But if the money was 0%, then I should buy as much as I can, and I'll be making 2% from "nothing" as borrowed money isn't "mine", it's borrowed. If everyone borrowed all they could for tiny gains, then we'd have piles of money, but nothing of value.

Money having a cost makes people think, consider, and justify expenditures, presumably making the use of money more rational and productive.

Why are so many people here arguing against a rational use of money?

Marc Whinery. The government creates central bank money (sometimes called high powered money) which other than notes and coins, stays as reserves in the payments system.

Banks create bank credit, which is redeemable for central bank money i.e. when you withdraw notes or coins from your bank.

Bank credit is created by double entry book keeping. A simultaneous credit and debit on the issuing bank's balance sheet. There are no reserves or prior deposits required for a bank to do so.

So the banks are adding money to the system but no new net financial assets.

Only government spending can create net financial assets to the non-government sector by the act of purchasing goods and services or by transfer payments.

It destroys net financial assets by taxation or other government charges.

@johng1 well said.

Amanda Vickers
"We simply must re-design the system."

The system is fine but very badly used and generally completely misunderstood. The rentiers have far too much power because macroeconomics has been subverted and perverted by the neoclassicals that took over in Milton Friedman's time.

The problem is neoliberalism and its monetarist view of how the system works, which is completely wrong.

@marcwhinery "Assuming rational people"........ sorry you lost me at the start, I cant see rational anywhwere in this. The system appears to drive environmental systemic breakdown. not rational. "Assume desperate people" might work

@johng1 "A simultaneous credit and debit on the issuing bank’s balance sheet. There are no reserves or prior deposits required for a bank to do so"

My question to everyone who says that is the same. If a bank opens, day-1. And they have $0 reserves. The first person walks in and borrows $500,000 to buy a house. How do they pay the borrower (or their solicitor) the $500,000 for the house? They can double-entry all they want on the books, but that never creates money.

The borrower has a $500,000 deposit in their account. The bank put it there by computer keystroke.

@marcwhinery

“A bank must have money before it loans money”

Nobody has said that. In fact, I specifically refuted it.

The cost of money artificially restrains the economy. But those who put the system in place think that’s a good thing, because it gives an easy number (the OCR) for a central authority to manipulate the economy.

That's the hypothesis. Unfortunately it's load of codswallop. Hence the massively expanding amount of money and high inflation in housing (See previously linked videos).

But if the money was 0%, then I should buy as much as I can, and I’ll be making 2% from “nothing” as borrowed money isn’t “mine”, it’s borrowed.

There are other, more effective methods of managing money creation that prevent such a scenario. One such method is being able to borrow from the government at 0% interest eliminating the possibility of loaning it out at interest. (This is actually the rational position else the private banks go nuts creating money eventually resulting in a financial crash).

Assuming rational people

And that is one of the reasons why the entire modern financial systems fails. It's based upon false assumptions.

They can double-entry all they want on the books, but that never creates money.

It creates bank money which is treated as the real stuff, i.e, $1 of bank money = $1 of reserve currency.

Why are so many people here arguing against a rational use of money?

We're not - we're arguing for a rational monetary policy.

Marc Whinery
I think you may be thinking of money as a tangible resource. Which is a very common misconception.

It isn't a resource at all.

Money has always been an accounting system for credit. That's what makes it money.

Amanda, this part of your letter is quite wrong ....

" The New Zealand national debt of $60B comes about from the sale of bonds to investors such as privately owned banks and private equity funds. The RBNZ is wholly Government owned and only creates 2% of our nation’s money supply as notes and coins, and a small amount of digital money for overnight interbank settlements.

Borrowing and injecting an extra $50 billion into the economy over the last six years has not created unruly inflation, but has created large debt levels. We are now paying interest of $10 million per day. To repay our total debt we need to find $60 billion and take it back out of the real economy.

It goes without saying that if New Zealand had ownership and control of it’s own sovereign money supply, it could have ensured we do not have a national debt at all. We simply would have created our own money as needed with the same inflation outcome as we have seen during the last six years. Imagine yet another $10 million per day available to spend in to the economy, rather than paying interest."

The NZ government is the sole, monopoly issuer of the NZ$.
The ' national debt' is the sum total of net government spending and is an asset of the non-government sector and the interest paid is private sector income.
So called government debt never has to be ' paid off' because it isn't debt. It is not bank credit or anything like a loan per se. It should be thought of more as like an interest bearing deposit account of the non-government sector.

@johng1 So there's fabricated $500k in the account. How can someone else accept it as payment? The fabricated money is sent to me as a payment, and I try to take out $1000 of it. Where does that $1000 come from?

@colinengland "One such method is being able to borrow from the government at 0% interest eliminating the possibility of loaning it out at interest. (This is actually the rational position else the private banks go nuts creating money eventually resulting in a financial crash)."

Then I'd like to borrow $1,000,000,000,000 from the government. At 0% interest, there's no reason not to. Where's the limit in the system? The government has to approve me, and my purported use?

It isn't fabricated. It is credit money. It is created ex nihilo by the bank in exchange for your promise to pay i.e. the mortgage document or note.

Are the repayments less than 25% of your income? No? Then you can't afford it.

As I said, there's other means of limiting money creation - ones that actually work. Rather than the one we have now that incentivises private banks to create excess money.

@johng1 John that is a really interesting way of looking at things. However most bonds and securities are sold offshore. Plus, a lot is purchased by banks from created money. Second, the public debt is not a huge concern of mine - it is the private debt. Private debt is all created by private banks (mostly for housing loans)

@johng1 Regarding your other comment:

John the system is not "fine". It has an inbuilt growth imperative and it has every dollar backed by debt. The interest for this debt is built in to the price of all our goods and services. Also we have unprecedented debt levels, poverty and inequality.

A debt backed money system is not "fine"

@amandavickers

Private debt is all created by private banks
You go to the top of the class Amanda

Amanda Vickers.

Money is credit. That's what it is.

What PM wants money to be, isn't money. It would be a resource.

And it would be a deflationary disaster.

Amanda Vickers

The monetary system that we have could work perfectly.

The problem is political. The power of the bankers is a political problem.

Amanda Vickers

" However most bonds and securities are sold offshore. Plus, a lot is purchased by banks from created money. "

All NZ$ bonds are bought with reserves. Foreign ownership of NZ$ sovereign debt is a function of trade.

If we wish to trade with other currency zones we have to accept that foreign entities will hold NZ$ debt and NZ will hold foreign currency debt.

@johng1 Can you please provide links or references or proof all bonds are bought with reserves.

Your second statement is only relevant if the first statement is true. And I don't believe it is.

Bond sales necessarily involve debiting a reserve account. Same as tax.

it is the main reason they sell them, to drain reserves from the payments system at the governments target rate.

It's nothing to do with borrowing to 'fund' spending.

No John G you are quite wrong about that. If you want to disagree, please provide proof, references and links that "bonds necessarily involve debiting a reserve account"

It's a self evident truth. It can't be otherwise.

Oh here we go .....

Ok well let's agree to disagree then.

How could these New Zealand dollars not come from the reserve system?

It is not possible for them to come from anywhere else.

They do not come from existing reserves. They come from thin air.

The dealer bank has it's reserve account debited. That's the main purpose of the bonds.

The government isn't taking out bank loans in its own currency.

@amandavickers "Ok well let’s agree to disagree then."

OK, In your presence, reality ceases to exist.

"“Everyone is entitled to his own opinion, but not to his own facts." - Daniel Patrick Moynihan

The problem with your implication that we can agree to disagree on whether the dinosaurs are extinct is that it's a matter of fact, not opinion.

Unless you can name a bank with more loans than deposits, then banks can't create money from "thin air". They create money from deposits by re-loaning money that "belongs" to someone else. The "created" part is a legal construct, not an economic one (though economists use that legal construct to report on what can be referred to as the "velocity" of money, and other things that indicate economic health.

I note, whenever I boil it down to simple analogies, @amandavickers refuses to "play along". I can only assume it's because she knows she's wrong, and refuses to "play my game" because it proves it.

So, try again. If I have $100, and I lend a friend, Bob, $10 for lunch, and I draw up a contract for that loan, and count it as a $10 debt and $10 loan in my personal books, I then have $100 "cash", plus $10 debt, and $10 liability (and $90 reserves, but those don't apply to a person lending out of personal money), for a total "money" of $110. Then, I lend the $10 cash out, and am left with $100 money, what I started with, and Bob has $10 cash and a debt for $10, for a total of $10 money.

Did I create $10? Based on the arguments @amandavickers has put forth here, I started with $100 cash, was left with $90 cash and "created" $10.

This is all an artefact of The Great Depression. To help prevent runs on banks, rules changed to help (force) banks to change how they reported financial stability.

The most accurate report is deposits to reserve, but that makes the numbers look like the banks are about to fail, $100 deposits served by $10 of reserves. If 10% of the depositors took their money out, then the bank would be insolvent (bankrupt). So the decision was made to report deposits to loans. $100 deposits serving $90 in loans. So deposits always look larger, implying a stability and security.

The problem with this is that it required the bank to claim $190 in "money" when it had $10 in "money". So "money" was re-defined.

Yes, @amandavickers you've discovered a (nearly) 100 year old accounting fiction that's been around so long that even the people that administer it are confused about it (hence all the quotes from bankers about how "money" is created from thin air). But that's only because "money" means "anything the bank can claim as a deposit or loan" and not "anything that can be used to buy something".

The problem isn't the bank creating money from thin air, but the definition of "money" having been changed long before you were born to something different than your parents told you. Your parents lied to you, but rather than doubt the obvious definition of money used by the people (an act that would make your parents liars, and yourself ignorant about one of the most common words, so your brain won't even let you consider that possibility), you take the wrong definition of money, apply it to bank's use of the word, and find that, yes, they don't match up.

Something is amiss. That is true. But you are 100% wrong about what it is. The definition of "money" has been a lie for 100 years, deliberately to cause confusion among the masses.

This is not the fault of banks, but is forced upon them by the government. If the IRD declared tomorrow that you will call your income "flowers" or go to jail for income tax fraud, would you then say you are paid in "flowers"? The banks did, and so they loan out "flowers" that say "dollars" on them. And everyone else on the planet thinks they are "dollars" and the government reports an increase in "flower" sales. Would you blame the bank for calling the dollars flowers?

Even if none of you agree. I'm satisfied I finally found the problem. I kept arguing with you brick walls for the goal of figuring out what your error was. I did. None of you know the definition of "money".

I'm done. Feel free to argue amongst yourselves.

Marc Whinery "Unless you can name a bank with more loans than deposits, then banks can’t create money from “thin air”. "

Marc, there are banks that don't take deposits at all. Investment banks.

Money is a credit system. It always has been. You and Amanda both seem confused about that.

I say again forget deposits! banks lend against assets the value of which is determined by "the market" which in this case means what a bank will lend! creating a loop that endlessly devalues currency.

@fredlook Thank you Fred. I agree.

For the benefit of the Marc Whinery followers:

The bank does not lend deposit money! It does not need a deposit to lend (as referenced).

It does not need to have the $100 to lend any of it.

The bank creates money as credit. The asset and liability balance out to zero. Just like that. A book keeping entry. Not first needing a deposit - as referenced. (+$10-$10=0).

The bank has a total book-keeping balance of zero. You on the other hand have purchasing power of $10 (and a $10 debt)

When repaid, the money goes back whence it came - to thin air. That is, it disappears.

While you DO have this money in your account though, you can call it what you want: real money, not-real money, or flowers.

The bank balance sheet is still zero. But you are still spending $10.

It is in your bank account ready to be exchanged for goods and services in the economy. Also, what makes feel even more real is that you have to earn more money to pay the interest on it.

"The process by which money is created is so simple, the mind is repelled" John Kenneth Galbraith

Money is created as credit. It is that simple.

Amanda Vickers
"Money is created as credit. It is that simple."

Which begs the question, why would you want to make it a commodity?

Money was turned into a commodity centuries ago. We're trying to reverse that and turn it back into the tool that it is - a tool of government.

John G.

I propose reclaiming our nations' sovereign right to issue our own money - and remove this privilege from the banks.

Draco T Bastard
Even under commodity backed currency regimes, money was still created endogenously. The gold standard just limited its creation as an arbitrary constraint.
Every time governments reached its limits they went off it. It's madness.

Amanda Vickers
John G.

I propose reclaiming our nations' sovereign right to issue our own money - and remove this privilege from the banks.

The NZ government IS the sole, monopoly issuer of the NZ$. It is the only entity that can create net non-government sector NZ$ denominated financial assets.

It creates those NZ$ assets in the act of spending.

John.

The RBNZ only creates approx 2% of our money supply in the form of notes and coins, as detailed on their website.

I am proposing - as is Positive Money and others - that they issue ALL our money (within inflationary limits). Banks would act solely as intermediaries. That is it. Simple.

Amanda Vickers
John.

The RBNZ only creates approx 2% of our money supply in the form of notes and coins, as detailed on their website.

The (consolidated) government issues all net financial assets into the non-government sector. That includes the so called national debt, which is a private/foreign sector asset.

It isn't the nature of money as credit that needs changing. It is the political structure and the neoliberal consensus that needs overthrowing.

Turning money into a commodity would be a disaster.

At this point, I will leave you to your Modern Monetary Theory. That is not the scope of this discussion.

(but for the record the proposals of the IMF and positive money are not to turn money in to a commodity)

" No, you are wrong."

Tell me how I'm wrong.

If your 'positive money' system is no longer a credit system, your 'money' would be a resource. We'd be back to the middle ages.

Sorry, commodity, not resource.

If your ‘positive money’ system is no longer a credit system, your ‘money’ would be a resource/commodity.

No it wouldn't, it'd be a tool to utilise the nations resources.

It isn’t the nature of money as credit that needs changing.

Yes it is because the nature of interest on that credit forces unsustainable growth and exponential accumulation by the wealthy few.

"No it wouldn’t, it’d be a tool to utilise the nations resources."

The government has that tool now. It issues NZ$s when It pays the private sector for goods and services.

At the moment it won't issue enough to utilise capacity, so we have unnecessary unemployment.

But this is a problem of neoliberal monetarist dogma, which PM falls into when they talks about government debt. The deficit/debt hysteria is a hoax.

They simply don't understand basic macroeconomic sectoral balance accounting. And they view money as a stock where it is a flow.

I'm all for levelling the system and getting big finance out of the game but PM won't do it.

Amanda Vickers
"At this point, I will leave you to your Modern Monetary Theory. That is not the scope of this discussion."

So you are having a discussion about the monetary system without discussing the monetary system?

And you cite the IMF as an ally in your crusade to make a fairer system?

You've probably never seen the IMF at work stripping nations of their assets for Wall St and City of London banksters.

The government has that tool now. It issues NZ$s when It pays the private sector for goods and services.

It certainly has the capability but it won't use it - and it should. Until it does so money remains a commodity controlled by the private banks.

But this is a problem of neoliberal monetarist dogma, which PM falls into when they talks about government debt.

No political party except IMP are even suggesting changing the monetary system. David Cunliffe, when directly asked about it on the radio said that Labour would not be making any changes.

The deficit/debt hysteria is a hoax.

Yes, it is. It's a hoax performed by the rich on everyone else to benefit the rich, to hold the nations of the world to ransom.

I’m all for levelling the system and getting big finance out of the game but PM won’t do it.

It's not up to the PM at all but the people of NZ. This is why it's crucial that we help educate people about how the banking system works and how it prevents us from being well off.

"This is why it’s crucial that we help educate people about how the banking system works and how it prevents us from being well off."

Well then you need to get it right. You haven't done so. How can you educate people when you don't understand the system as it is?

Not THE pm. Positive Money is what I meant.

Money as it is, is decidedly NOT a commodity. Positive money would be so.

Government deficit spending IS net money creation. Instead of throwing the entire monetary system overboard, why not educate people to be not afraid of deficits and so called government debt?

Wouldn't that be a bit less drastic? And a bit more achievable?

How can you educate people when you don’t understand the system as it is?

I do understand the system as is. You seem to be confused.

Money as it is, is decidedly NOT a commodity.

Yes it is. That's why economists can come out with idiocies such as 'the cost of money'.

Government deficit spending IS net money creation.

That depends entirely upon how it's done. If it's done by borrowing or selling of bonds then it isn't.

@colinengland Hi Draco:

My understanding is the majority of Gov't bonds are not sold to the public (and bought with existing money) but are bought by banks with newly created money. I am not sure of the proportion of each or how to find out. If bonds are bought by public then govt deficit spending is not net money creation - you are right. I believe only a small proportion of bonds are sold this way. Any info on this would be appreciated that anyone has.

Private loans to the public create our private debt. That's really my concern. All money backed by debt.

Draco, well said answers by the way.

Also, to clarify, I am only advocating the banks do not create our money supply as debt and charge us interest on it. The exact solution is another debate.

There is a definite cost of money now. Interest is hidden and built in to all money in the economy. Because every dollar is created as debt, somebody, somewhere is paying interest to the bank on that debt. That cost is built in to all our goods and services. As a whole, our economy has to pay "rent" or "interest" to the banks for having money to spend in the economy.

The reason we need money is to enable exchange of goods and services. It is not a law of nature it has to be backed by debt. It can be re-designed. That is the key message.

@amandavickers
"the majority of Gov’t bonds are not sold to the public (and bought with existing money) but are bought by banks with newly created money."

This is my understanding of Govt bonds as well.

If the Govt can create bonds to sell to banks who buy it with funny money they create out of thin air, then the Govt can create its own funny money with they debt incurred by bank created funny money.

My understanding is the majority of Gov’t bonds are not sold to the public (and bought with existing money) but are bought by banks with newly created money.

It's both but I don't what the proportions are.

Two points:
1. The government shouldn't be borrowing money at all
2. Even if the banks weren't creating the money the interest being paid on it would still crash the economy as it causes an exponential accumulation of money in the hands of those who already have too much.

@wadevuglar @amandavickers
""the majority of Gov’t bonds are not sold to the public (and bought with existing money) but are bought by banks with newly created money.”

"This is my understanding of Govt bonds as well.""

I wondered if this was the case but hoped it wasn't.
If we don't change this system we're fucked.

Draco T Bastard
"I do understand the system as is."

I don't think so. You appear to have a monetarists view like the Positive Money people.

"Yes it is. That’s why economists can come out with idiocies such as ‘the cost of money’."

No, it just means most economists are wrong. Like you.

" That depends entirely upon how it’s done. If it’s done by borrowing or selling of bonds then it isn’t."

Selling bonds is not borrowing and the $ swapped for bonds are not spent.

So no. You're wrong.

Amanda Vickers
@colinengland Hi Draco:

My understanding is the majority of Gov’t bonds are not sold to the public (and bought with existing money) but are bought by banks with newly created money

Your understanding is completely and utterly wrong. Bond sales are an asset swap of reserves for term deposits.

Their purpose is to drain reserves from the payments system at the governments target rate.

Wade Vuglarl.

"If the Govt can create bonds to sell to banks who buy it with funny money they create out of thin air,"

This cannot happen.

Selling bonds is not borrowing and the $ swapped for bonds are not spent.

Yeah, I got the same lecture when I went to uni economics. Thing is:

http://www.nzdmo.govt.nz/securities/infrastructurebonds

It is borrowing and it is spent. You really should stop listening to university lecturers about economics - they rarely show any understanding of what's happening in the real world.

Their purpose is to drain reserves from the payments system at the governments target rate.

If the government really wanted to do that then the only option is taxes. You certainly don't promise to pay people even more later.

Amanda Vickers

"The reason we need money is to enable exchange of goods and services. It is not a law of nature it has to be backed by debt. It can be re-designed. That is the key message."

Commodity money has never ever worked.

@johng1

http://thestandard.org.nz/real-monetary-reform/

We're talking about how to change money from the broken system that it is now to one that works. Interestingly enough, no one is talking about commodity money - except you.

Your proposal is to make money a commodity.

Money is a credit system. It always has been.

Read David Graeber's "Debt: The First 5000 Years".

@johng1
com·mod·i·ty
noun \kə-ˈmä-də-tē\
: something that is bought and sold
: something or someone that is useful or valued
Of course money is used as a commodity. What the hell do you think makes banks so rich if it isn't that they treat it as a commodity? How the hell did Jongkey get so rich? That is not to say it is exclusively used as a commodity. It's often used as a means of exchange. Funny that.

Draco T Bastard

OK. Having read your piece I understand that you are not proposing what Amanda Vickers and the PM cranks are.

Brigid Ford

Commodities are finite resources that have intrinsic value.

Money is neither. It is a unit of account.

77a4c21ba182708e13a17003604ceb5d
Draco T Bastard
Selling bonds is not borrowing and the $ swapped for bonds are not spent.
Yeah, I got the same lecture when I went to uni economics. "

I'd bet good money that you didn't. I'm pretty sure that I didn't. And that was before the monetarists and neoliberals took over.

We read Keynes and Marx back then.

Draco T Bastard
http://www.nzdmo.govt.nz/securities/infrastructurebonds

So when they sell these retail bonds is there not a drain on reserves?

Of course there is.

If I have a million NZ $ in my account and I decide to purchase a NZ$ bond. My account will be deducted by 1milllion $ NZ as will my bank's reserve account.

Double entry book keeping.

@marcwhinery
"So there’s fabricated $500k in the account. How can someone else accept it as payment? The fabricated money is sent to me as a payment, and I try to take out $1000 of it. Where does that $1000 come from?"

Hi Marc, these are great questions.

1: "So there’s fabricated $500k in the account. How can someone else accept it as payment?"

To answer this, you also have to ask "What is money"?

Money, both physical and electronic is not wealth. Wealth is the things we need to survive, the things we want; money is the symbol of those things. As long as people accept the symbols (both physical and electronic) that the banks provide as legitimate symbols, then they will accept these symbols as payments.

Just like Bitcoins, how do people accept Bitcoins as payments for goods and services?

People are accustomed to the electronic ledger money that banks provide and so they accept them as payments for goods and services, which they can then swap with others for their goods and services. It is a wonderful system.

2: "The fabricated money is sent to me as a payment, and I try to take out $1000 of it. Where does that $1000 come from?"

Basically your account will be reduced by the $1000. The bank will give you the physical equivalent and the banks ledger for how much physical money they have in their tills will be reduced by $1000.

That physical $1000 was originally printed by the Reserve Bank.

The "fabricated money" in your account was created originally in the form of credit/debt in someone else's account by their bank when they took out a loan.

@marcwhinery
"My question to everyone who says that is the same. If a bank opens, day-1. And they have $0 reserves. The first person walks in and borrows $500,000 to buy a house. How do they pay the borrower (or their solicitor) the $500,000 for the house? They can double-entry all they want on the books, but that never creates money."

Marc, this is another fantastic question!

Let's take the example of "Mr. Jones", a manufacturer in your town. He wanted to enlarge his factory. Everyone thought it was a good idea. But Jones doesn't have the money to pay for the materials, the builders, and the machinery. He figured out that with $500,000, he could carry out his plans; later on, with increased production and sales, he could easily pay back the $500,000.

What did Jones do? He went to the bank. He did not bring money with him to the bank. But he came out of the bank with $500,000 in his account.

Where did this $500,000 come from?

He borrowed the $500,000 of course!

The wonderful thing about it is the way the bank made the loan.

If you were rich, and Jones had come to you to borrow the $500,000, he would get his $500,000, but you would actually have $500,000 less in your account. At the bank, it's quite different: Jones comes out with the $500,000 he needed, but the bank doesn't have one cent less in its accounts.

Instead the bank now has on its books the rights the security offered up by Mr. Jones. He has to deposit collateral. Not money, because he did not have any — that's what he came to get. He is perhaps asked for insurance policies or titles to property for a total value exceeding the $500,000. These are called guaranties, or collateral.

It's the gospel truth.

Now, here comes the answer to your question.

Then the bank manager credits his account to the amount of $500,000.

Mr. Jones is not going to ask for $500,000 in paper money, and walk out of the bank with this money on him. The electronic money is now in his account. The amount is credited to him (just as for you when you deposit your savings). Mr. Jones leaves the bank with credit on which he can use to pay his bills for materials, equipment, wages, as the construction progresses. This money is all electronically transferred to suppliers accounts, staff accounts etc.

He thus puts this money into circulation.

Its all electronic, once it has been created in Mr. Jones account, he can then electronically transfer this via EFTPOS, internet banking etc to someone elses account, who can then go and buy what they need with it.

It is a wonderful system, we just need to have the Reserve Bank and some Monetary Authority take control of it for the benefit of New Zealanders and not for the benefit of overseas banksters.

Again, there three quotes from the Reserve Bank of New Zealand:

“In practice, by far the largest share of money – 80 percent or more…is created by private sector institutions. For simplicity, in what follows, we use “bank” to refer to any institution that creates money or credit.”

“Banks…create money and credit at a volume depending on their customers’ own demand for money and credit.”

“While the Reserve Bank creates fiat money, in practice, a much larger share of money is created by registered banks and other private institutions. In the process of creating money, these private institutions also create credit, which by enabling the funding of investment, contributes to the economy’s ability to grow. Payments are settled between these money-creating institutions via the interbank payment system provided by the Reserve Bank, using deposit accounts that the institutions hold with the Reserve Bank.”

@colinengland " You really should stop listening to university lecturers[...]"

Yes, education is bad. The less you know, the smarter you are. Experts are all ignorant liars.

The Internet Party. The party that's looking to fully fund uni, and full of members who hate education and the educated.

(no comments on the money, still a dead end in this crowd)

Yes, education is bad.

No, generally speaking, I'm in favour of education but economics is taught wrong in schools and university. And the misconceptions that come from that are then used to justify the rorting of the economy and the return to feudalism.

I’d bet good money that you didn’t.

Actually I did. In the same lesson the lecturer also told us that the government sold bonds to raise money. She didn't seem to realise the contradiction.

If I have a million NZ $ in my account and I decide to purchase a NZ$ bond. My account will be deducted by 1milllion $ NZ as will my bank’s reserve account.

Your asset account at the bank decreases by $1m and the banks liabilities decrease by $1m making the transaction neutral for the bank (except that they would have charged the government for selling the bonds). You will, of course, get the money back when bond matures - along with a helping of interest. The money raised by the selling of the bond will be spent by the government which just makes it borrowing and no reduction in reserves in the economy. Essentially, the selling of government bonds increase reserves by the amount of interest paid over the life of the bond.

the government could, and should, have just issued more money. It would have been easier and cheaper but the rich would have complained as they would no longer have a government guaranteed income source.

And, after all that, you have no guarantee that the $1m in your bank was reserves or bank money. Chances are it was the latter.

"Your asset account at the bank decreases by $1m and the banks liabilities decrease by $1m making the transaction neutral for the bank (except that they would have charged the government for selling the bonds)."

But the bank's reserve balance has still been debited a $ million. That's the point. It doesn't matter who the retail purchaser is, it still drains reserves.

I agree that government debt is largely corporate welfare and is largely unnecessary but you've got the mechanics of it wrong.

All you need to do is repeal the legislation that says the government must match deficit spending with bond sales.
It's a gold standard era hangover anyway. A convention that became irrelevant in 1971.

And a further point is that the purpose of the bonds is not to reduce the excess reserves in the system per se, but to set a floor on the interest rate in the interbank market.

But it can just as easily do that by paying interest on excess reserves.

Draco T Bastard
" I’m in favour of education but economics is taught wrong in schools and university. "

I agree wholeheartedly. Which makes your cheap shot at me rather ironic.

@johng1

It doesn’t matter who the retail purchaser is, it still drains reserves.

No it doesn't as the money will be spent back into the economy and end up back in the bank.

But it can just as easily do that by paying interest on excess reserves.

The government shouldn't be paying interest at all. That would be 0% lower bound.

Which makes your cheap shot at me rather ironic.

You were using the same contradictory rhetoric that I got from University professors. And still are in fact.

Oh dear. You appear to be as clueless as Amanda Vickers and her Positive Money cranks.

About as is informed as the gold bug Libertoonians.

@johng1 If you don't agree with Amanda Vickers proposal all you need to do is register your vote. Considering voting closed 9 days ago and you don't appear to have voted, joining the discussion to express your opinion of people is of no use to anyone.

Brigid Ford
I wasn't able to vote.

I'm sorry that you find discussion useless.

You have the last word, such as it is, @johng1 what there is of it, needle noddle noo.

Brigid Ford

Are you the official censor here? Or just a volunteer?

If New Zealand Government has a 60b debt that will remain where as bank have a +60b Loan lent, would rather lend from the bank? or the New Zealand Government's money which would be worth less than nothing, borrowing for them would be like borrowing debt instead of capital.

1. The nzd is recognised to be worth something compared with other currencies.If New Zealand Government created it's own currency and it was working the banks would boycott this by loading the currency up with investment then dumbing it so that local people lose trust in the concept. Read again @colinengland

@isaactannerdempsey1

After reading that twice I still can't decipher what you said.

@isaactannerdempsey1 "If New Zealand Government created it’s own currency" It did that a while ago. New Zealand introduced its own currency in 1933.

Obviously, but isnt this thread is suggesting that we have a local bitcoin
type thing that might lock the banks out of the equation

A pretty good take on Positive Money here .......

http://heteconomist.com/remarks-on-positive-money/

@isaactannerdempsey1 No. This thread is to discuss the policy regarding our nation’s sovereign right to create our own money. Refer to Amanda's references.

Rather than continuing to allow the banks this privilege.

The NZ government is the sole issuer of NZ$s.

The NZ government is the sole issuer of NZ$s.

You keep saying that but it's not true. The private banks also issue money which is accepted as NZ$.

It is true. You just haven't made the leap.

Horizontal and vertical.

@johng1 Hi John, the Reserve Bank even says that private banks create money:

Please read this NZ Reserve Bank document:

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1lawrence.pdf

Here are some pertinent quotes from the document:

"In a modern economy, money can be created either by the central bank (the Reserve Bank, in New Zealand’s case) or by private sector institutions – in practice, mostly registered banks.
Section 25 of the Reserve Bank of New Zealand Act 1989 gives the Reserve Bank the monopoly right to issue physical money (notes and coins), which enters public circulation through the private sector institutions to which it is issued."

and:

"..any institution that can maintain the public’s confidence that its liabilities will be generally accepted as means of payment, can create money. Such an institution will, in practice, also be in the business of creating credit, which implies the issue of a greater value of claims on the institution than the value of Reserve-Bank-issued money the institution itself holds."

and:

"In practice, by far the largest share of money – 80 percent or more, depending on the measure (discussed below) – is created by private sector institutions. For simplicity, in what follows, we use “bank” to refer to any institution that creates money or credit."

and:

"Banks...create money and credit at a volume depending on their customers’ own demand for money and credit. "

Cheers,

Wade

Wade Vuglar

I understand all that. These are not revelations to me, believe me.

But both statements are true.

Banks create deposits out of thin air but they do not create net dollars.

Only the government creates net financial assets. We call that the national debt.

The NZ government is the sole issuer of the NZ$.

Good article for non-economists here that goes some way to explaining where the PM people go wrong. It's about the US but NZ has exactly the same currency system.

Bank Dollars & Sovereign Spending

By J.D. Alt

http://neweconomicperspectives.org/2014/09/bank-dollars-sovereign-spending.html

Why do so many people—including the authors of most economics textbooks—believe the U.S. banking system creates the U.S. dollars we earn and spend and pay our taxes with? It’s because the U.S. banking system does, in fact, “issue” the great majority of the dollars we use—by making loans to businesses and citizens which are not backed by “real” dollars the banks have on deposit. What everyone overlooks, however (for reasons not entirely clear) is the fact that these new loan dollars are “made real” by the U.S. government’s solemn promise to convert them at any time, on demand, into actual, “real”, sovereign U.S. dollars. The U.S. government is able to make this promise because, by law, it can issue the necessary actual dollars by fiat (by simply “declaring” the dollars into existence.) A lot of people (again for reasons not entirely clear) don’t like to hear that last part. But it’s simply a fact of life: the cash dollar bills you get from an ATM machine are not printed up (created) by the banks—they are printed (or created electronically as needed) ONLY by the U.S. sovereign government.

This seamless transmutation of bank dollars into U.S. sovereign dollars has the unfortunate side-effect of hiding the real distinction between the two kinds of money—a distinction (I think) I’m now starting to get a handle on: Bank dollars are created specifically to facilitate the production and exchange of private goods and services. Sovereign dollars, in contrast, are created to facilitate the production of collective goods and services—and, furthermore, one of the PRIMARY collective goods the sovereign dollars create is the private banking system itself (which, as we have just noted, is made possible and viable by the promise of the sovereign-issued dollars.)

Just found this: http://blog.greens.org.nz/2013/05/27/private-money-printing-takes-off-again/ pretty clear, and a hopeful sign if Greens get in...

In the debate around monetary policy, it is often forgotten that the default position is that the private banks create most of the money and lead the increase in the monetary supply. They then charge interest to the users of the money that they have created.

The public authorities create very little money. The notes and coins created by the Reserve Bank are only a small fraction of the ‘money’. See this interesting Seven Sharp story if you want to see a MSM story about how this works – essentially banks can lend out far more money than they have as deposits.

So quantitative easing, or as John Key likes to call it “money printing”, is simply government extending to itself the right that it has given to the private banks to increase the money supply – except doing it for public purposes rather than simply private gain.

So what is happening with money supply in NZ?

We can measure the increase in the money supply by looking at two indices produced by the Reserve Bank – M3 and M1. M3 is the broad definition of money and M1 is the narrow definition (official definitons at the end of the post). They are graphed here (also CPI):

M1 M3 CPI 1988 2013

The first point to note is that all of this huge increase in the money supply, what Key would call ‘money printing’, happened without the government engaging in any kind of government led increase in the money supply. It was private led increase in money supply.

Secondly, as you can see there was a huge increase in money supply through the early 2000s – it peaked at an annual 17% increase in the 2006 year alone! Presumably the big increase in bank lending into the housing market (partly funded offshore) through the early 2000s let to this surge in money supply This lending was grossly irresponsible by the banks and led to a doubling of house prices in 5 years.

Thirdly, this growth in M3 dropped off as the GFC hit and it shrank through 2009.

And fourthly it has now taken off again and has been increasing at an annualised rate of around 7%, linked to the new housing bubble as the banks create money to expand the bubble.

So the debate shouldn’t be whether NZ should be ‘printing’ money, in fact the private banks are increasing the money supply dramatically (partly funded offshore) – our money supply (M3) has increased by $28.5 billion in the 2 years to March 2013.

The debate should be: what constraints should apply to the private creation of money given the banks’ irresponsible behaviour in the past; and should the public institutions be expanding money supply as a policy tool, to what extent, and to what purpose? Should the state be allowed to also increase the money supply for public purposes such as refilling the Natural Disaster Fund and to see what effect it can have on reducing the very damaging high NZ dollar?

The answers to these questions aren’t black and white but for my pick I think we need to restrain the banks lending into the housing bubble and use a trial public creation of money to restock the Natural Disaster Fund – both to be prepared for future disasters and to see what impact it would have on the dollar.

It is of course difficult to have a rational conversation around these issues in the current political context (ie Key’s scaremongering) but it is an important conversation for rational adults to have. We do have an out of control current account deficit and if we want to be masters of our own destiny we need to change policy settings as under Key’s plan our deficit and debt increase dramatically.

Notes

M1 – Includes notes and coin held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits.

M3 -The broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits.

They're as confused as the PM people.

The government does create money by spending. Fiscal policy.

QE does NOT create any new money. It is a monetary operation only. It is an asset swap. Bonds for reserves.

The fixation on "the money supply" is misleading. It is income and spending as a flow which is important, not the quantity.

The government does create money by spending. Fiscal policy.

But it should. This discussion is as much about what we should do as what presently happens.

QE does NOT create any new money. It is a monetary operation only. It is an asset swap. Bonds for reserves.

No, it's not - as I've pointed out to you before.

The fixation on “the money supply” is misleading. It is income and spending as a flow which is important, not the quantity.
And that's what we're trying to achieve. Government creates the money and spends it into the economy and then taxes it back out. A nice, even flow and no more business cycles that have a habit of benefiting the already well off..

The government DOES create money by spending NZ$ into the private sector.

That is what happens now.

You've stated your belief about QE but you haven't made your case.

Again, you are confusing the narrative for the operational reality.

QE is a monetary operation. It adds no new money to the system.

You've gone part way through the system and stopped short. You need to clear your mind of the monetarist view.

Only the government can create net NZ$s.

The government DOES create money by spending NZ$ into the private sector.

Yeah, I misread you. ATM, it doesn't create new money by spending it into existence. It can do that but it doesn't. Instead it borrows from the private banks and by selling bonds which I showed two or three pages back. Borrowing from the private banks does increase the money supply while selling bonds shifts money from private hands into government hands so that the government can then spend it. Both forms come with debilitating interest that the government doesn't need to pay.

QE is a monetary operation. It adds no new money to the system.

In fact, the whole point of Quantitative Easing is to produce more money. To state that it doesn't do that is to either be completely ignorant or to lie.

You need to clear your mind of the monetarist view.

You keep coming out with that and yet it has nothing to do with what I say.

" ATM, it doesn’t create new money by spending it into existence."

Yes it does. The annual total is called the deficit. The NZ government does NOT take out loans from private banks. Bonds are existing money. There is no balance sheet expansion when reserves change hands for bonds, unlike a loan.

QE creates no new money.

I keep saying it because you keep repeating the monetarist mantra. It's wrong. It isn't how the system works.

The system actually works much more like you appear to want it to be.

With all due respect, you maybe need to learn some macroeconomic sectoral balance accounting to see where you are going wrong.

" To state that it doesn’t do that is to either be completely ignorant or to lie."

Either demonstrate the accounting procedure in your theory or apologize.

The NZ government does NOT take out loans from private banks.

Yes, it does.
http://www.treasury.govt.nz/government/financialstatements/yearend/jun13/051.htm

I'd say that it's the Retail Stock and Other Borrowings on that sheet.

There is no balance sheet expansion when reserves change hands for bonds, unlike a loan.

Actually, there is but it's indirect. It's slower than taking out a loan but it's still there. The money supply has to increase to cover the interest paid on the bonds. This will be supplied by taking out new loans (which the government doesn't need to do either).

The government issuing bonds is probably the most stupid thing ever.

QE creates no new money. Either demonstrate the accounting procedure in your theory or apologize.

http://en.wikipedia.org/wiki/Quantitative_easing

The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further.

Can't get any clearer than that. And it's not my theory but how central banks in the US, UK and EU have put it in practice.

Good grief, these are not bank loans.

You're quoting Wiki?

You are seeing the narrative as the reality. The narrative is the hoax.

These are old gold standard era views on how currency works that no longer apply.

It is not 1971 any more, Dorothy.

"The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further."

The government cannot increase or decrease the broad money supply.

Government money is vertical, bank credit is horizontal.

QE increases reserves (vertical) which are not lent into the horizontal "money supply".

You've already agreed that banks do not lend reserves, so how does your fantasy work in the real world?

Show me the accounting entities to support this rubbish.

You’re quoting Wiki?

Yes. Independent studies have proven it to be reasonably accurate. I could have linked to other sources that said the same thing.

You’ve already agreed that banks do not lend reserves, so how does your fantasy work in the real world?

What fantasy?

Show me the accounting entities to support this rubbish.

How about you start showing some research to back up what you say. I've backed up what I've said time and time again in this thread.

"I’ve backed up what I’ve said time and time again in this thread."

No, you've thrown a few red herrings like the debt statement that does not say what you're inferring.

Riddle me this.

Where does bank capital come from?

Then show me how a bank would create a loan for a government bond. Given that the cost of capital is greater than the target rate in the payments system.

There is no balance sheet expansion when reserves change hands for bonds, unlike a loan.
Actually, there is but it’s indirect. It’s slower than taking out a loan but it’s still there. The money supply has to increase to cover the interest paid on the bonds."

What does this have to do with the banks' balance sheets?

Slow double entry book keeping? WTF?

“ To state that it doesn’t do that is to either be completely ignorant or to lie.”

Cat got your tongue?

@colinengland @wadevuglar @nathansurendran

Why are all the proposals the equivalent of "abolish money and start over"?

To "fix" the problem of banks creating money, wouldn't it work just as well for the government to fund home loans directly with newly printed money, bypassing the banks for the initial issuance of money? That'd be a minor change, and still work toward the purported goal of eliminating private money creation.

Or will improvements only be considered if they destroy the economy?

@marcwhinery

To “fix” the problem of banks creating money, wouldn’t it work just as well for the government to fund home loans directly with newly printed money, bypassing the banks for the initial issuance of money?

If you read my Real Monetary Reforms you'll note that that is exactly what I propose.

Or will improvements only be considered if they destroy the economy?

Not looking to destroy the economy but save it from the financial sector. This does seem to involve destroying the financial sector to a large degree but the financial sector is not the economy.

Marc Whinery

Indeed. Or even a mixture of government and private banks like we used to have.

@johng1

The NZ government does NOT take out loans from private banks.

Yeah, they do. And here as well:

Tender counterparties are primarily private sector banks.

Can't see where it says the government is taking out loans.

Selling a bond is a loan - I know you don't want to believe that but it really is.

And that's not the only credit vehicle that the government uses.

They are not loans in the sense that any credit is created.

They are not taking out loans.

They are swapping reserves for treasuries. The so called national debt is the non-government sector's net financial assets.

They can stop issuing bonds if they change the legislation, but that would only mean that their net spending remained in the payments system as excess reserves.

There is a guy, Oliver Heydorn, coming to NZ in October to speak on this topic. Should be very interesting. I am going to try an make it.

Ellerslie War Memorial Community Hall
138 Main Highway
Ellerslie, Auckland

4pm Saturday, October 11 2014

http://uncensored.co.nz/2014/09/24/oliver-heydorn-is-coming-to-town/