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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Original Post - Oct 1, 2008 - 11:24am PT
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SInce many of you are losing thousands, and since this financial crisis is beating our country and the world, it's critical to understand a basic principle of our modern money supply and how it relates to the sustainability of our system and the environment.
Banks essentially create money out of thin air and the economy requires continuous growth to sustain the system. Unfortunately, it doesn't take a rocket scientist to see that continuous growth in any closed system leads to disaster (basic ecology)
To understand this, it simple to read one or both of the following links
the Wiki article covers the money aspect
http://en.wikipedia.org/wiki/Fractional_Reserve_Banking
This is even simpler and covers the environmental risk
http://gilliganscorner.wordpress.com/2008/04/01/debt-based-money-a-guarantee-to-destroy-the-planet/
The simplest explanation is fun and a cartoon but it's 45 minutes long. Well worth it
http://video.google.com/videoplay?docid=-9050474362583451279
If you don't really understand where money comes from (and many "smart economic" folks like TIG having been "getting it") you can't understand the current crisis.
Nobody like to talk about this. It helps you understand why bankers have the juiciest cushest job on the planet, but the party will end someday. The current mess should educate us and get us thinking before it's too late.
The banking system demands constant growth or it will collapse. Do you see where constant growth can't last?
PEace
karl
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bobinc
Trad climber
Portland, Or
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Damn you, Karl.
Things were going great in my False Paradise until you showed up.
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Fresh
Trad climber
meffa, ma
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"Do you see at this point? The bank loan actually reduces the amount of money in circulation over its lifetime! It transfers wealth out of the economy and gives it to the bank for the bank’s unearned work (their right to mint “checkbook money”)! Normally, this system would collapse!"
the writer of the second article fails to take into account real gdp growth, or the concept of the "invisible hand." a pretty glaring hole in the argument. the increase in national debt corresponds to the increase in GDP. over time, incomes increase correspondingly with prices. yes, money comes out of thin air, in real terms, because services and products have increased.
I used to think that the whole system was effed because as loan terms become longer, people can effectively borrow more and push the burden of debt onto the next generation. it doesn't work this way. price increases in reality correspond to GDP increases.
I think a much more germane discussion of consumerism is found here:
http://www.thestoryofstuff.com
there are holes here too, but at least it doesn't blame a system that's old as civilization itself.
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TradIsGood
Chalkless climber
the Gunks end of the country
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http://en.wikipedia.org/wiki/Reserve_requirement
Karl, maybe you will understand this better. Read the section with $100, etc. Note the important words:
If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81.
Now if the deposit ends up back in the same bank it has 190 of deposits and must still retain 10% ($19). It has lent $171 on $190 borrowed (deposited).
You can keep your money. It would not be fair for me to take your bet.
BTW. You are also ignoring the income side which is also important. The bank pays a lower interest rate on deposits than it charges on loans.
And more critically, you aren't even taking into account the real problem, which is the time you borrow and lend need to nearly match.
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:02pm PT
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Fresh writes
"the writer of the second article fails to take into account real gdp growth, or the concept of the "invisible hand." a pretty glaring hole in the argument. the increase in national debt corresponds to the increase in GDP. over time, incomes increase correspondingly with prices. yes, money comes out of thin air, in real terms, because services and products have increased. "
The writer doesn't ignore GDP growth but points out that growth isn't ultimately sustainable. At some point there are too many people who have extracted too many resource and the system crashes. It should be self-evident that nothing can grow forever, even cancer.
Peace
Karl
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:06pm PT
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Ok TIG, how about this...
I'm off the hook as an ignorant climbing guide/photographer, but you, as a smarty pants economic guy can buy any of my landscape images at cost and donate $100 profit if you find somehow that you're wrong.
Where's Fatty, doesn't he and his henchmen own a bank?
Here's another simple explanation for those who hate to click links
"If you want a simple explanation here it is.
Banks discovered a long time ago that the money deposited in their vaults mostly stayed in their vaults. They issued notes for the deposits and often it was these notes that people traded instead of going to the bank, getting their gold or silver deposit out and trading them for goods.
So they had all this gold and silver in their vaults which would just sit there. They found that they could safely loan out money over and above what they had on deposit and no one would notice because people preferred to keep their deposits in the bank anyway and just use the notes for the purpose of trade and currency. Over time the banks developed formulas to determine how much over the deposits they could loan out. What they had on deposit was a "fraction" of what they loaned out. That is essentially fractional reserve banking.
It was not unusual that banks would loan out seven times more than what they had on deposit in the form of notes they issued. So one seventh was the fraction they had on deposit against loans they had issued.
Central banking was the scheme developed to eliminate bank failures and the negative economic and social consequences of bank failures.
The banks made interest on their loans. It was not as profitable to just securely hold people's deposits and collect a fee. They had to give out loans and collect interest.
Governments adopted the Central bank scheme because it essentially gave them economic control of society while the banks were protected from failure and were guaranteed to make a lot of money. Most people think that the central banks are owned by the government and the government likes you to think that.
The Federal Reserve in the US is it's central bank and is easily proven to be owned by private interests. ..
peace
karl
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:08pm PT
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Fatty write
"Both Karl and ITIG are correct, that's how I (family) make money in banking. It's the run on the bank for actual green dollars that is real trouble for a financial institution"
That's BS Fatty! Quit being a politician. TIG says the bank has to have every penny on deposit to make the loan and I say they don't. They both can't be right. What's up?
peace
Karl
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JuanDeFuca
Big Wall climber
Stoney Point
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Its all about fiat banking. We need to switch back to the gold standard and get rid of the Federal Reserve System.
Listen to Ron Paul.
http://www.kwaves.com/mises.htm
I got an A in Engineering Economics but kind of slept through Enconomics and got a B.
Juan
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TradIsGood
Chalkless climber
the Gunks end of the country
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Actually Karl,
As much as I appreciate the your landscapes, I am just not into buying them.
I'd rather spend the money following you up something that was too adventurous for my lead skills.
:-)
fattrad refers to runs on deposits... That is where it matters how long the loans the banks make.
I should be obvious that the bank can't keep every dollar of deposits and not lend them AND still make money. If they had to keep 99% of every deposit in the bank, they would have to charge over 100 times the interest rate that they paid depositors to borrowers.
Example depositor puts money $10,000 in (let's just say in a 90 day CD at 2%). The bank can lend $9,000. At the end of 30 days, they will give the depositor 10,500 (10K plus 1/4 of 2% times 10K). To do that, they need to earn over $500 on the 9,000 loan. To break even, they need to charge 10/9*2% or 2.2%.
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:29pm PT
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Fatty
"I don't think TIG is saying that the bank has to hold every penny in the fault that it loans out, I think he is questioning the exponential effect of the multiplier."
He IS saying the bank has to have the money in deposits to loan it out and, since no money comes out of the vault, also not loan out the same money with another loan.
This is false. TIG, read the wiki!
Peace
Karl
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:35pm PT
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TIG, your last post and mine overlapped.
"I'd rather spend the money following you up something that was too adventurous for my lead skills."
I, like the bankers, would rather get money for nothing... but, of course, you're always welcome.
"fattrad refers to runs on deposits... That is where it matters how long the loans the banks make.
I should be obvious that the bank can't keep every dollar of deposits and not lend them AND still make money. If they had to keep 99% of every deposit in the bank, they would have to charge over 100 times the interest rate that they paid depositors to borrowers.
Example depositor puts money $10,000 in (let's just say in a 90 day CD at 2%). The bank can lend $9,000. At the end of 30 days, they will give the depositor 10,500 (10K plus 1/4 of 2% times 10K). To do that, they need to earn over $500 on the 9,000 loan. To break even, they need to charge 10/9*2% or 2.2%"
Quit sticking your neck out further and learn something. What you refer to is not a very profitable business. Banking is. For god's sake, read and learn something.
Somebody with creds please debunk the "depositor with $10,000" example above. TIG won't listen to me
PEace
Karl
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Tomcat
Trad climber
Chatham N.H.
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OK Karl,since you are the master of all things monetary,how would you run banking? Banks should only lend what they have as deposits? Or?
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WBraun
climber
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They are all fools, all of them.
They really have no idea where money really comes from and who really controls it.
No one will believe.
Lakshmi, ......
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:50pm PT
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Here's some post from somebody else on the net that explains what may be what accounts for the difference in view that TIG and I have.
Not linked because I have no accurate knowledge of the source
"No, you're confusing two fundamentally different types of reserve ratios. The one which allows a bank to multiply $100 by 10 to create $1000 only applies to central banks. The commercial banks however are only allowed to loan out 90% of their money, so on $100 deposited they can only lend out $90. Once this money is once again deposited, $81 is lent out, and so on as the amount approaches $0. So central banks multiply by the ratio (in this case 10) while commercial banks divide by it. This is also why onbooks it appears as though commercial banks always have 10% mroe deposits than loans, creating the myth that they actually loan out their deposits.
In effect, if a central bank has $1000, with a reserve ratio of 10:1, the central bank can create and lend out $10,000. This 10,000 isthen re-deposited in a commercial bank which lends out $9,000, then $8,100, etc. In the end money initially owned by the central bank is multiplied by 100 times, giving us $100,000. That is if the cycle isn't interrupted (by hoarding). Of course, if the reserve ratio is larger, and in some countries such as the UK and Canada it is no longer present at all, then a lot more money can be created."
Peace
Karl
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 12:57pm PT
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"This person or entity you referenced does not go around in the middle of the night like the tooth fairy and put checks under people's pillows."
Crap! There goes my retirement strategy!
;-)
Karl
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WBraun
climber
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Well Lois
If one has no clue to the original truth then all such management that we see is like saying 2+2=6, wrong from the very beginning no matter how complex it has evolved.
The whole world is operating on the root foundation that 2+2=6.
This is why ....
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 01:17pm PT
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LEB-I was just kidding around
But this is a fairly weighty to understand thread. Please post your request for investment advice and spiritual abundance discussion on it's own thread. This one will require some focus for people to wrap their minds around. No LEBification here pleace
Thanks
Peace
karl
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WBraun
climber
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Lois
Learn to fuking add correctly!
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TradIsGood
Chalkless climber
the Gunks end of the country
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LEB,
the fact that the "markets have always come back" before, is no guarantee that they will again, even for a broad-based aggregate. You could look it up but I think it took over 20 years for the DOW to regain pre 1929 crash levels.
Do you have 20 years? If you do, will it be enough, or will it take longer this time, or never come back?
If you owned Lehman, Bear, or WaMu, the answer is never.
That said, there is always the dart board. :-)
See A Random Walk Down Wall Street, and A Black Swan. Both good reading.
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Karl Baba
Trad climber
Yosemite, Ca
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Topic Author's Reply - Oct 1, 2008 - 01:35pm PT
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I'm wondering how all this fits in with the "bailout" If the Treasury gets the debt ceiling raised by 700 billion and issues Treasury note for that amount, does that money go directly to the liquidity crisis or is it run through the federal reserve where they could loan out 7 TRILLION dollars based on that?
Peace
Karl
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