Fixed-rate Loans

Personally I don't see how that statement is justified. First of all the banking industry does not create money, the Government does.

Fixed rate lending is simply a gamble, a bet, by the Banking industry that inflation in the future will not cause bank rates to exceed their chosen 'fixed rate' gamble.

If the actual bank rates in the future do exceed their gamble, then they risk losing potential future earnings. If it does not exceed their gamble them they will be ahead. It is similar to how the futures market works.

Does the very limited sector of lending where fixed rates are applied affect inflation ? I believe not. Inflation is far more influenced by government spending and borrowing, worker earnings etc.

When banks introduce low rate 'fixed rate' lending, it says to us that they have a lot of confidence, however well-placed or mis-placed, that inflation and bank rates will not rise more than their 'fixed rate' in the next 10 years.

Your comment about Germany is, I believe, not accurate. The prevalent use of fixed rate lending was a reflection of their confidence in the economy and their control over inflation - not the reverse.

Banks can lend roughly 10 times the amount of money they receive as deposits.

It is not controversial to assert that they create money.

Technically the Central Banks create money. Commercial banks create credit.

It is not controversial... maybe... but it is inaccurate and unjustified.

Banks have to borrow money if they don't have it, in order to lend it. To borrow it they have to pay for it.

In no way can this be described as creating money.

Indeed. And they cannot 'create' credit. They have to acquire the money somewhere else... by borrowing and paying for it.

Howard, no matter how often and strongly you assert that banks don't create money, you are wrong. They do. Anybody who survived Leaving Certificate Economics can (or should be able to) explain this to you.

It goes like this: John has ?1000 and deposits in his bank account. The bank has an extra ?1000 in its coffers (I like that word) and lends Mary ?900 which she uses to buy a widescreen TV and stuff. The retailer banks the ?900. The retailer's bank has an extra ?900, and lends ?800 to Peter...

and so on.

John still has his ?1000 in the form of a balance in the bank; Mary has managed to spend ?900 (and owes the bank that much); Peter is now ready to spend ?800 (and owes the bank)...

Got it?

In message , Féachadóir

Jeeez... I didn't realise it was a comedy thread...........

In message , Howard9 writes

Well that monetary theory down the drain then together with the measures of money supply and inflation and the effect of interest rates to control money supply, i.e.allmodern day monetary economics must therefore be wrong..

It works like this.

The BoE issues a £10.00 note

HSBC draw cash from the BoE. I draw £10 from my bank account and the note is given to me.

I give it to you in payment for a CD you nicked. I am prepared to pay so much because it is a rare live bootleg of Capt Beefheart & The Magic Band that I havent got.

You pay the tenner into you account.

Your bank then see this new tenner in your account. They have a look at current interest rates and decide that the could lend out about £9 of it. They lend it to me, so I now have another £9 to spend. I see on ebay that you have anpther CD I want, so I buy it and give the £9 to you so you now have £19 in you account. The bank sees this extra £9 and decides to lend out £8 of it which they lend to me...

You can see where this is going.

Scríobh John Boyle :

"John Boyle" wrote

Yes, you'll owe the bank more and more, but have a pile of CDs to compensate.

But where's the newly created "money"? ;-)

"Padraig Breathnach" wrote

OK, so (including the retailer who is introduced later) :-

John asset (cash): +1000. Retailer asset ("widescreen TV and stuff"): +900. TOTAL: +1900.

"Padraig Breathnach" wrote

That gives :-

John asset (bank balance): +1000. Bank1 liability (owes John): -1000. Bank1 asset (cash): +1000. Retailer asset ("widescreen TV and stuff"): +900. TOTAL: +1900. Same!

"Padraig Breathnach" wrote

John asset (bank balance): +1000. Mary liability (owes Bank1): -900. Mary asset (cash): +900. Bank1 liability (owes John): -1000. Bank1 asset (owed from Mary): +900. Bank1 asset (cash): +100. Retailer asset ("widescreen TV and stuff"): +900. TOTAL: +1900. Same!

"Padraig Breathnach" wrote

John asset (bank balance): +1000. Mary liability (owes Bank1): -900. Mary asset ("widescreen TV and stuff"): +900. Retailer asset (cash): +900. Bank1 liability (owes John): -1000. Bank1 asset (owed from Mary): +900. Bank1 asset (cash): +100. TOTAL: +1900. Same!

"Padraig Breathnach" wrote

John asset (bank balance): +1000. Mary liability (owes Bank1): -900. Mary asset ("widescreen TV and stuff"): +900. Retailer asset (bank balance): +900. Bank1 liability (owes John): -1000. Bank1 asset (owed from Mary): +900. Bank1 asset (cash): +100. Bank2 liability (owes Retailer): -900. Bank2 asset (cash): +900. TOTAL: +1900. Same!

"Padraig Breathnach" wrote

John asset (bank balance): +1000. Mary liability (owes Bank1): -900. Mary asset ("widescreen TV and stuff"): +900. Peter liability (owes Bank2): -800. Peter asset (cash): +800. Retailer asset (bank balance): +900. Bank1 liability (owes John): -1000. Bank1 asset (owed from Mary): +900. Bank1 asset (cash): +100. Bank2 liability (owes Retailer): -900. Bank2 asset (cash): +900. TOTAL: +1900. Same!

"Padraig Breathnach" wrote

Yes, see above.

"Padraig Breathnach" wrote

So she is even, see above.

"Padraig Breathnach" wrote

So he is even too, see above. As are both the banks. The retailer also still has assets of 900 (now a bank balance; previously "widescreen TV and stuff").

"Padraig Breathnach" wrote

Where is the extra money that has been created?

I'll answer the question here rather than where you posed it more directly to me (because the other post is so long).

It's moving around (in circulation). The fact that it is matched by bank debits is unquestionable and is not a weakness in the explanation. The issue of a single £10 can, over a series of transactions, lead to the creation of £90 credit. That £90 is money (it is used to buy CDs, so you can see it actually performing as money).

It is true that John will eventually have to pay it back but, when he does, the bank can lend it out to other people.

Most of the money that we deal with is not in the form of cash; it exists as numbers in banks or other financial institutions.

It seems there is a real problem for some people distinguishing between money and credit. I think that this is becoming a comedy thread all right ...

"Padraig Breathnach" wrote

No, there is only 10 moving around (in circulation). The 10 cash is being passed around all the people/banks (no more bank notes are being created in the above example), and the bank balances also still add up to what they did at the start (negatives cancelling against positives) ...

"Padraig Breathnach" wrote

Isn't it? Whether your definition of money supply is narrow (eg paper note cash only, where we always have

"Padraig Breathnach" wrote

... and at the same time, 90 debit. They cancel out!

"Padraig Breathnach" wrote

You are conveniently "forgetting" about the "negative" 90 which is owed. They cancel out.

Consider this example:

If you lend a mate 20, then s/he immediately lends it back to you, and so on a few times, you can quickly create a situation where each of you owes the other (say) 1,000.

Both of you are owed 1,000, and owe the other 1,000, and so are even. Do you think that you are both 1,000 better off? :-(

"Padraig Breathnach" wrote

And when they do, the **totals** will still add up to the same amount!

"Padraig Breathnach" wrote

Yes. But for some reason, you only want to count the "positive" balances, and you are ignoring the "negative" balances. Why is that?

There is no distinction. Bank credit is money. Basic economics.

It seems there is a real problem for some people distinguishing between money and cash.

"Padraig Breathnach" wrote

Yep, but that works for *both* positive and negative bank balances.

"Padraig Breathnach" wrote

It seems there is a real problem for some people adding up

There is no distinction. Cash is money. When you have a pocketful of cash and put it in the bank, it's still cash.

You slipped up there, old boy. You forgot to change Bank2's assets from "(cash): +900" to:

Bank2 asset (cash): +100 Bank2 asset (owed from Peter): +800