Korean Job Discussion Forums

[MoneyMike]

Hey guys,

I've just been watching a documentary, and am curious about it's claims about how money is made.

Here is the link if anyone is interested:

http://www.youtube.com/watch?feature=player_embedded&v=TwmM5Nb6hiE

The part about money creation is from 20 minutes to maybe 27 or 28 or so, but for anyone who doesn't want to watch it I'll sum up here.

The documentary claims that money is created simply by banks inventing it as debt. That a bank has to do nothing other than magically press some computer buttons and add half a million dollars to your bank account and boom, it's created.

Now I'd always thought that banking works on a fractional reserve basis, and that the bank took peoples money, and lent most of it out, thus creating more money in the economy than there had been before, but always maintaining a certain percentage of that money in the bank as the reserve.

If what the documentary claims is true, that banks dont have any check and can just create money out of thin air whenever they lend to someone, then it follows that all money is debt, and that since the bank doesn't create the money needed to pay interest, this creates a scarcity of money in a systemic way.

Would anybody who has more knowledge about this subject care to comment? How true is what this documentary says? How does that square with the idea of fractional reserve banking? Am I missing any important points?

[Squire]

There's a great 3 or 4 minute video on Youtube explaining how fiat money works. It's basically a tax on everyone except the people who create it. That's why many believe returning to the gold standard (or silver etc.) is a good idea, myself included

[UknowsI]

I would call the video emotional drivel. The video is basically a conspiracy theorist version of The Wealth of Nation by Adam Smith, including most of the same chapters and topics. While the original version is rather objective and not trying to add emotional value to jobs and money, this video has a few interesting points, but then obscuring it all with feelings.

The part you referred to was pretty interesting, but I think they are skipping some key aspects. Money printing, inflation and increased total good value should be mentioned. They are saying that somebody has to go bankrupt because the bank wants more money back than they give out. This is simply not true for various reasons. The easiest example would be by using the money press. It would be easy to pay it back if the government issue more money. But a growing economy can also sustain a larger debt. Continuously increasing debt can in fact be sustainable.

The video is completely one sided, not interviewing anyone with a different view. It would be a lot more informative if it was more balanced, but I guess their arguments wouldn't hold if they did.

[Ineverlie&I'malwaysri]

Do a search for a for any of visitorq's posts and the word "debt." He used to talk about that a lot.

I recommend any of the videos by the National Inflation Association, especially Dollar Bubble and Meltup.

[jaykimf]

[comm]

[wishfullthinkng]

fiat currency is a frightening simple concept to understand. a government or entity creates currency based on need, whim, whatever they want. it has no intrinsic value besides how many other pieces of it are going around. can you see the danger in this system?

originally currency was a tangible non-renewable resource like gold or silver. however if you tried to split up all the gold and silver to all the people in the world right now everyone would get a microscopic amount which makes it useless as tender.

governments devised fiat currency to get around that issue as well as others and now people have no idea how imaginary their money really is and ultimately how unstable it will be in the end. if the world economy ever truly collapsed the amount of mayhem would be unparalleled and nothing would be worth anything besides the human life until the dust settled where it'd be back to tangible non-renewable resources again.

[jaykimf]

[ontheway]

[jaykimf]

Banks do create money simply by making loans. However as the loans are repaid the money does not simply disappear. The money is reinserted into the economy as the bank purchases goods and services or pays interest to its account holders or pays dividends to its stockholders or taxes to the government. The recipients of the money paid out are free to spend it or pay the interest on their loans or simply hold onto it for future use. The video's assertion that there isn't any money to pay the interest except from new borrowings is ignorant nonsense parroted by ignorant people who have no understanding of how the monetary system works. In 2008 the banks had total interest income of about $487billion. In turn they paid out about $540billion for interest expense, non interest expense(salaries etc.) dividends and taxes. The figures are YTD as of Sept 30/2008. http://www.bankspider.com/financials/jp-morgan-chase-financials.html Obviously the figures will vary from year to year but the point is that the banks can easily pay out more money into the economy than they receive in interest. The reason that banks can remain profitable while doing so is simple. They have considerable non interest income. That could include anything from investment/mutual fund management fees, atm fees, foreign currency exchange fees and commissions, bank wire fees , etc. In 2008 they had about $175billion in non interest income versus net income of about $37 billion. The video's claim that there isn't any money to pay interest except from new loans is ignorant BS.