How correct is money mechanics described in Zeitgeist film series? (loans, transaction)

[RememberMee]

Short excerpts from the transcript http://www.wanderingsandmusings.com/...t_addendum.pdf. I didn't include pieces on charging interest on the fresh money, that would make text too big for a post.


A translation of which goes something like this:
• The United States government decides it needs some money.
• So it calls up the federal reserve and requests say 10 billion dollars.
• The FED replies saying: "sure, we'll buy ten billion in government bonds from
you".
• So the government takes some pieces of paper, paints some official looking
designs on them, and calls them treasury bonds.
• Then it puts a value on these bonds to the sum of 10 billion dollars and sends
them over to the FED.
• In turn the people of the FED drop a bunch of impressive pieces of papers
themselves. Only this time, calling them federal reserve notes.
• Also designating a value of ten billion dollars to the set.
• The FED than takes these notes and trades them for the bonds.
• Once this exchange is complete, the government than takes the ten billion in
federal reserve notes, and deposits it into an bank account.
• And, upon this deposit the paper notes officially become legal tender money.
• Adding ten billion to the US money supply.

And there it is! Ten billion in new money has been created. Of course, this example is a
generalization.

Now, government bonds are by design instruments of debt. And when the FED
purchases these bonds with money it essentially created out of thin air, the government
is actually promising to pay back that money to the FED. In other words, the money was
created out of debt.

And now, ten billion dollars sits in a commercial bank
account. Here is where it gets really interesting. For, as based on the fractional reserve
practice, that ten billion dollar deposit instantly becomes part of the banks reserves. Just
as all deposits do. "Under current regulations, the reserve requirement against most transaction accounts is ten percent". This means that with a ten billion dollar deposit, ten percent, or one billion, is held as the required reserve. While the other nine billion is considered an excessive reserve, and can be used as the basis for new loans. Now, it is logical to assume, that this nine billion is literally coming out of the existing ten billion dollar deposit. However, this is actually not the case. What really happens, is
that the nine billion is simply created out of thin air on top of the existing 10 billion dollar
deposit. This is how the money supply is expanded.

As stated in "Modern Money Mechanics": "Of course they" (the banks) "do not really pay
out loans for the money, they receive as deposits. If they did this, no additional money
would be created. What they do when they make loans is to accept promissory notes"
(loan contracts) "in exchange for credits" (money) "to the borrowers transaction
accounts." In other words, the nine billion can be created out of nothing. Simply because
there is a demand for such a loan, and that there is a 10 billion dollar deposit to satisfy
the reserve requirements.

Now let's assume that somebody walks into this bank and borrows the newly available
nine billion dollars. They will then most likely take that money and deposit it into their
own bank account. The process then repeats. For that deposit becomes part of the banks
reserves. Ten percent is isolated and in turn 90 percent of the nine billion, or 8.1 billion
is now available as newly created money for more loans. And, of course, that 8.1 can be
loaned out and redeposited creating an additional 7.2 billion to 6.5 billion... to 5.9
billion... etc... This deposit money creation loan cycle can technically go on to infinity.
The average mathematical result is that about 90 billion dollars can be created on top of
the original 10 billion. In other words: For every deposit that ever occurs in the banking
system, about nine times that amount can be created out of thin air.

Here is a chart of the US money supply from 1950 to 2006. Here is a chart to the US
national debt for the same period. How interesting it is, that the trends, are virtually the
same. For the more money there is the more debt there is. The more debt there is the
more money there is. To put it a different way. Every single dollar in your wallet is owed
to somebody by somebody. For remember: the only way the money can come in to
existence is from loans. Therefore, if everyone in the country were able to pay off all
debts including the government, there would not be one dollar in circulation.

[EmeraldCityWanderer]

What you need to do is go learn about fractional reserve banking instead of insane conspiracy films.

Just the first Zeitgeist film alone is a shotgun of 9/11 conspiracies (some that contradict each other), the fed is part of the international bilderberg/illumanati/whatever controlling the world, RFID's are the mark of the beast, and that income tax is a lie because of a vomit of sovereign citizen crap.

Have more respect for your beliefs.

[RememberMee]

Originally Posted by EmeraldCityWanderer

What you need to do is go learn about fractional reserve banking instead of insane conspiracy films.

Just the first Zeitgeist film alone is a shotgun of 9/11 conspiracies (some that contradict each other), the fed is part of the international bilderberg/illumanati/whatever controlling the world, RFID's are the mark of the beast, and that income tax is a lie because of a vomit of sovereign citizen crap.

Have more respect for your beliefs.

Assuming that you've learned about fractional reserve banking, any specific objections to the Zeitgeist outline? After all even a broken clock is right twice a day. Let's not go in other topics. They described fractional banking in no uncertain terms, any specific objections to that outline. I don't request detailed analysis of each sentence, if you see a gaping error, let us know.

[Swingblade]

I think the interest factor is left out of the OP's equation and the word buy treasuries should be exchange. The FR loans money to the gvt for a exchange of treasuries that are interest bearing. If I am not mistaken that is why the U S gvt owes like 300 plus billion interest payments that must come out of the general fund. Other then that I see no errors.

[buickm75]

The OP is pretty much correct with the exception Swingblade mentioned.
People think that theres something inherently wrong with this way of operating an economy/currency. It all makes perfect sense to me.

[Swingblade]

Originally Posted by buickm75

The OP is pretty much correct with the exception Swingblade mentioned.
People think that theres something inherently wrong with this way of operating an economy/currency. It all makes perfect sense to me.

I think there is a lot of things wrong with this system but to respect the OP I will not hi jack the thread.

[Mircea]

Originally Posted by RememberMee

A translation of which goes something like this:
• The United States government decides it needs some money.
• So it calls up the federal reserve and requests say 10 billion dollars.
• The FED replies saying: "sure, we'll buy ten billion in government bonds from
you".
• So the government takes some pieces of paper, paints some official looking
designs on them, and calls them treasury bonds.
• Then it puts a value on these bonds to the sum of 10 billion dollars and sends
them over to the FED.
• In turn the people of the FED drop a bunch of impressive pieces of papers
themselves. Only this time, calling them federal reserve notes.
• Also designating a value of ten billion dollars to the set.
• The FED than takes these notes and trades them for the bonds.
• Once this exchange is complete, the government than takes the ten billion in
federal reserve notes, and deposits it into an bank account.
• And, upon this deposit the paper notes officially become legal tender money.
• Adding ten billion to the US money supply.

It doesn't work that way.Governments --- all of them -- collect revenues via some form of taxation, user fees or imposts. Often, the governments spend more money than they collect in revenues, resulting in a budget deficit for that year.
These governments --- and this is key now --- have already consumed the goods or services for which they've contracted, whether it is the Greek government buying military aircraft from the US, or Germany importing natural gas from Russia, or the US government paying construction workers to refurbish federal courthouses.

Let's assume a $10 Billion budget deficit. The US would then package that $10 Billion attractively as securities in the form of bills, notes or bonds for sale. Consumers -- and that would be foreign governments, foreign banks, US States, US cities, philanthropic groups, unions, banks corporate pension plans, State/city employee pension plans and the like -- purchase the securities.

Why? Because they benefit.

You run a charity, someone dies and wills you $2 Million. You don't need to spend that money now, so what should you do with it? Find a safe investment that can be easily liquidated and give you a return on your money. So you might by a 1 year T-Bill, or maybe a 3 year treasury note.

So the government gets cash to pay for goods and services it already consumed and the price or cost of that is the interest paid on the securities.

Originally Posted by RememberMee

Now, government bonds are by design instruments of debt. And when the FED purchases these bonds with money it essentially created out of thin air, the government is actually promising to pay back that money to the FED. In other words, the money was created out of debt.

There's the flaw in their argument right there.

Money is not "created out of thin air."

Someone has already provided $10 Billion worth of goods and services. That $10 Billion worth of goods and services exists.

If any money is "created out of thin air" then it would be the interest paid on the $10 Billion, but not the $10 Billion itself, and even that is a stretch to claim the interest is money "created out of thin air."

Originally Posted by RememberMee

And now, ten billion dollars sits in a commercial bank account.

They got that wrong, too.The money is not sitting in a commercial bank account, rather the $10 Billion went to all the people who worked so hard to provide $10 Billion worth of goods and services to the government.And then those people spent that money on goods and services.

Originally Posted by RememberMee

What really happens, is that the nine billion is simply created out of thin air on top of the existing 10 billion dollar deposit. This is how the money supply is expanded.

That is not how the money supply is expanded.Fractional reserve banking expands the supply of credit, not the supply of money.

The world revolves around credit. It always has. Without credit, the economies of the world would come to a standstill and nothing would happen very slowly. Even for a small rural town, without credit, the town would crash and burn.

How could you own an home without credit? Sure, you could save your money and pay cash, but it might take you forever. Suppose the local bank has $1 Million in deposits. If the bank loaned you $250,000 to buy property, then the bank's deposits are now only $750,000. Suppose the bank loans out another $250,000 on a mortgage and then loans $400,000 for a business start-up and then $90,000 to people to buy new cars....what's left?

You go down to the bank to withdraw $12,000 to pay for your daughter's wedding and you can't even withdraw $12,000 because the bank only has $10,000 on deposit.

Fractional reserve banking increases the supply of credit. That credit is not free -- it comes with a price and the price is the interest rate. The interest rate is determined by Supply & Demand.

As you can see, if you create too much credit, then you artificially inflate the price of those things tied to credit -- like houses and the cost of tuition for college.

Originally Posted by RememberMee

Now let's assume that somebody walks into this bank and borrows the newly available nine billion dollars. They will then most likely take that money and deposit it into their
own bank account. The process then repeats. For that deposit becomes part of the banks reserves. Ten percent is isolated and in turn 90 percent of the nine billion, or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion to 6.5 billion... to 5.9 billion... etc... This deposit money creation loan cycle can technically go on to infinity.

That's all wrong too...the Laws of Economics would prevent that by causing Real Inflation --- too many dollars chasing to few goods.

Originally Posted by RememberMee

Here is a chart of the US money supply from 1950 to 2006. Here is a chart to the US national debt for the same period. How interesting it is, that the trends, are virtually the same.

Do they have a chart showing how GDP trends? Why not?

You might want to ask them what the point of all this is. I'm sure they're selling some kind of snake oil cure.

Mechanically...

Mircea

[gwynedd1]

As long as you take it as a thought provoking exercise that isn't entirely unbiased or factually correct. It does a good job of describing money as a debt instrument. It does fail to mention that the Fed rebates its profits to the Treasury meaning that the national debt is mostly a fiction from any true debt. Its basically just printing money. Bank credit on the other hand is closer to the model they describe.

Don't think the fractional reserve lending argument as only creating credit holds any water at all. No one knows a dollar from bank credit. No one knows if a dollar has been used to count bank loans 5 or 10 times. Bank credit would really not be so bad if:

* Banks took the loss for bad loans. Looks like now they don't.
* Banks created money for products that can expand in supply like the prototypical widget. Too bad most of it involves monopoly assets and real estate ground rents. How many deep water ports in Singapore will there be? Same amount as before no matter how much a bank loans against it.

So in other words bank credit at interest would be proper compensation if they were placing loans to create industrial capital while taking a risk. What good are they doing creating credit to bloat the price of an empty lot? If people can't make it. it should not allow the creation of credit. So why should we circulate bank credit at such a high cost when its a non productive junk loan that bloats asset prices? May as well just run deficits and leave the private sector in full equity.

But in the end money is always an accounting for debt.

[RememberMee]

Originally Posted by Mircea

[/i]
It doesn't work that way.Governments --- all of them -- collect revenues via some form of taxation, user fees or imposts. Often, the governments spend more money than they collect in revenues, resulting in a budget deficit for that year.

To collect revenue money must be injected in the economy first. Free market doesn't create money, neither it decides who gets freshly minted money first. Free market determines flows of transfers of money i.e. money that was brought into existence by poorly understood institutions and rules. You do not make money (as saying suggests), you get transfers of money already in existence. Who created that money? Who have gotten that money first?

Even governments cannot spend more money than they collect by sheer will power. Governments project expenditures and revenues and decide what to do about projected shortfalls. To tax more, to borrow more or to cut services. In the past Governments had a fourth choice - to create money. It makes sense, government is a sole sovereign and as such it's responsible for maintaining faith in money. Absurdly, many governments decided that they are not to be trusted with money creation and outsourced money creation to the private banking institutions. It doesn't make any sense, economic, moral and in between. Governments finance their deficits by borrowing money from the private institutions, and those private institutions create new money for the governments and charge governments interest for something that governments could do interest free.

And it's not an abstract topic from a commoner point of view. IRS would shake you for all you've got for the taxes owed in order to pay off interest on the money private bankers "created" with a single keystroke. You must work for countless hours (serving the needs of other people, including bankers etc.) in order to "make" that money, so government could make interest payments to the bankers for their money creation services that don't take neither sweat nor time. It's nothing short of parasitism, to be exact.

These governments --- and this is key now --- have already consumed the goods or services for which they've contracted, whether it is the Greek government buying military aircraft from the US, or Germany importing natural gas from Russia, or the US government paying construction workers to refurbish federal courthouses.

Again, it doesn't make any sense. Most of government expenditures has little to do with consuming goods and services. Contractual obligations usually involve terms of payment and penalties if terms are not met. Thus, Greek government buying aircraft today and paying bulk of the money later doesn't make your point. Since Greek government must budget for those payments in the future. To make those payments Greek government must tax more, spend less elsewhere or borrow $ from elsewhere. Greek government cannot create neither $ nor it's local currency - euro.

Let's assume a $10 Billion budget deficit. The US would then package that $10 Billion attractively as securities in the form of bills, notes or bonds for sale. Consumers -- and that would be foreign governments, foreign banks, US States, US cities, philanthropic groups, unions, banks corporate pension plans, State/city employee pension plans and the like -- purchase the securities.

FED is the largest buyer of US debt instruments, not consumers. What is FED? Where does FED get trillion$ to purchase all those securities. This was the question, and your answers have little to do with the question.

Yes, soliciting of money already in existence is important tool to finance government deficits. But let's just imagine that US consumers coughed up $1 trillions to purchase US securities. What would removal of $1 trillion from consumer pockets do to the economy, especially short term? Same with foreigners. Most of the deficit is financed by "new" money.

Government creates fancy pieces of paper and call them securities, bankers create new "credit" to purchase those securities as a result new money/credit is injected in the system. Any counterfeiter may print pile of authentic looking money in his basement and purchase goods at their current prices today, it's the suckers who buy those goods tomorrow would see prices going up. In essence bankers do just that. Reminder, dollar lost 95% of its value since 1913.

You run a charity, someone dies and wills you $2 Million. You don't need to spend that money now, so what should you do with it? Find a safe investment that can be easily liquidated and give you a return on your money. So you might by a 1 year T-Bill, or maybe a 3 year treasury note.

What does this have to do with the topic? I'm not talking general utility of banking. I'm trying to understand who creates and injects new money in the system and how.

So the government gets cash to pay for goods and services it already consumed and the price or cost of that is the interest paid on the securities.

Most of the money paid for government securities never existed (since FED is the largest buyer of those securities). It's not the money that old ladies with a cat invested in their retirement. It's crispy fresh money that never existed before that buys those securities. Yet, peons must apply very real physical efforts to pay taxes so interest payments could be made on those freshly crisp loans out of nowhere.

Money is not "created out of thin air."

Someone has already provided $10 Billion worth of goods and services. That $10 Billion worth of goods and services exists.

If there is enough of goods and services for everyone, what's the point of money? Money is just another way to ration goods, resources and services. A guy with money gets fed, a penniless starve. Simple. So, yes, there is always something for money to buy, because people with less money give up their share to a guy/institution with more money.

If any money is "created out of thin air" then it would be the interest paid on the $10 Billion, but not the $10 Billion itself, and even that is a stretch to claim the interest is money "created out of thin air."

Bankers create money for the principal of a loan. Money for interest payments simply doesn't exist (yet). For this system not to collapse, economy must continuously grow because even 0% growth rate would mean that there is not enough of new money injected in the system to pay off old debts + interest.

They got that wrong, too.The money is not sitting in a commercial bank account, rather the $10 Billion went to all the people who worked so hard to provide $10 Billion worth of goods and services to the government.

They've made a simple point. $10 billion worth government security obligation is traded for $10 billions Federal reserve notes, Government takes this bond to a bank (hypothetical example), at this point $10 billions worth of FED notes becomes $10 billions of new money. This excerpt is somewhat eludes my understanding, since it claims that not only FED can create new money, any commercial bank has the power of credit (money) creation out of thin air.

And now, ten billion dollars sits in a commercial bank account. Here is where it gets really interesting. For, as based on the fractional reserve practice, that ten billion dollar deposit instantly becomes part of the banks reserves. Just as all deposits do. "Under current regulations, the reserve requirement against most transaction accounts is ten percent". This means that with a ten billion dollar deposit, ten percent, or one billion, is held as the required reserve. While the other nine billion is considered an excessive reserve, and can be used as the basis for new loans. Now, it is logical to assume, that this nine billion is literally coming out of the existing ten billion dollar deposit. However, this is actually not the case. What really happens, is that the nine billion is simply created out of thin air on top of the existing 10 billion dollar deposit. This is how the money supply is expanded.

As stated in "Modern Money Mechanics": "Of course they" (the banks) "do not really pay out loans for the money, they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes" (loan contracts) "in exchange for credits" (money) "to the borrowers transaction accounts." In other words, the nine billion can be created out of nothing. Simply because there is a demand for such a loan, and that there is a 10 billion dollar deposit to satisfy the reserve requirements.

The world revolves around credit. It always has. Without credit, the economies of the world would come to a standstill and nothing would happen very slowly. Even for a small rural town, without credit, the town would crash and burn.

You wouldn't go to a friendly counterfeiters for your "credit" needs? For one thing, both counterfeiter and a bank mighy not have $250,000 worth of money to loan. It's one thing when banks loan out the money that Paul, John and Sarah have deposited. It's quite another thing when banks have the power to create credit out of thin air. In essence you trade years of your life (it takes to pay off loan) for bank's monopoly on credit creation. They have no $250,000 to loan without you signing loan papers. It's your signature on loan papers magically creates $250,000 worth of credit just for you. It's inherently parasitic and unfair arrangement. And that's this unfairness and parasitism that modern economy is built around. Simple paying back the money that didn't exist before you signed the loan papers is not quite easy to swallow (since, again, you trade years of your life for a keystroke it took to create that credit). Paying principal+interest on the money that didn't exist is nothing short of the modern slavery.

[RememberMee]

I couldn't find exact rationale why US District Court in Utah think that Daly like cases are "baseless", it would be very interesting. Yes, money has value because society made those pieces of paper valuable. Thus private bankers do give you something "valuable" when you sign loan papers. But they don't have physical money to loan, they turn your signature into credit and their lavish lifestyle. They turn you into their peon because they hold monopoly on credit creation. Why? Is it a part of the "free market" too? If so, since when? First bankers who invented "credit" and "interest" did give their victims something that old styled bankers actually had - gold, silver, coins, etc. Since when free market decided that bankers may loan something that they don't actually have?


An attorney named Jerome Daly was a defendant in a civil case in Credit River Township, Scott County, Minnesota, heard on December 9, 1968. The plaintiff was the First National Bank of Montgomery, which had foreclosed on Daly's property for nonpayment of the mortgage, and was seeking to evict him from the property.
Daly based his defense on the argument that the bank had not actually loaned him any money but had simply created credit on its books. Daly argued that the bank had thus not given him anything of value and was not entitled to the property that secured the loan. The jury and the justice of the peace, Martin V. Mahoney, agreed with this argument. The jury returned a verdict for the defendant, and the Justice of the Peace declared that the mortgage was “null and void” and that the bank was not entitled to possession of the property.[1][2] The Justice admitted in his order that his decision might run counter to provisions in the Minnesota Constitution and some Minnesota statutes, but contended that such provisions were “repugnant” to the Constitution of the United States and the Bill of Rights in the Minnesota Constitution.
The result

The immediate effect of the decision was that Daly did not have to repay the mortgage or relinquish the property. However, the bank appealed the next day, and the decision was ultimately nullified on the grounds that a Justice of the Peace did not have the power to make such a ruling.[3]
This nullfied case and its reasoning have nevertheless been cited by groups opposing the Federal Reserve System and, in particular, the practice of fractional-reserve banking. Such groups argue the case demonstrates that the Federal Reserve System is unconstitutional. Because the Credit River decision was nullified, the case has no value as precedent. A U.S. District Court decision in Utah in 2008 mentioned half a dozen such citations, noting that similar arguments have "repeatedly been dismissed by the courts as baseless" and that "courts around the country have repeatedly dismissed efforts to void loans based on similar assertions."[4]