I read the first few paragraphs of the artcile. I'm sorry but its premise is fundamentally flawed.
There is no money multiplier.
Banks do no lend from reserves.
When a bank approves a loan they make the following entries in their accounts
Dr Client Loan Account (asset to the bank) Cr Client Deposit Account (liability to the bank)
Thats it. The only major constraint is to ensure the ratio of risk weighted loans is greater than 8% of tier capital. The deposit is then spent (on a house or car etc), and the money ends up in another account and they system stays in balance. No 10% reserve requirement needed.
Banks do not walk down to the RBA and ask for cash to on lend. If that was the case their account would look like this.
Dr Loan Cr Central Bank for deposit Cr Client deposit
The numbers just don't balance.
It is truly unbelievable people still get taught the money multiplier.
Catweasel laugh. Yes, no money multiplier, no thin air money.
What created is framework to capture mouse labor in ever the increase increment. To reduce its exchange of its labor for bank loan, mouse must be the clever enough to do so. Some can do, most the can't.
Natural conclusion is why if a Australia is "rich" country, why mouse have to exchange increase work hour for mouse house? Not a make a sense. Nobody want to do a think about that one.
Yes thin air money, a beautiful game for ADI's. The only cost of doing business is satisfying Tier 1 capital requirements. Theoretically it undermines the value of capital, If allowed to run free it will eventually debase fiat dollars.
I fear future generations will study this " financial system" in their textbooks. They will think how could intelligent people be so stupid. the apologists will say "It worked really well until it didn't".
When thin air money is destroyed- "delinquency", and the underlying asset falls in value the only way enough "money" can be created to keep this highly leveraged system liquid is by Central Banks purchasing these "assets" at a mark to fantasy basis. Central Banks purchase these assets by monetising, printing or creating more money out of thin air, If a Fiat or paper currency is abused and diluted like this people will soon be looking at other stores of wealth, Fiat is only good until its not.
Enjoy The Ride!
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
Yes. Or to use an well worn term - it is created endogenously.
OK, thanks for the concise reply. i was beginning to wonder if i had misunderstood. personally i don't consider this any less remarkable than money being backed up by a relatively scarce, inert and pretty metal. potatoes for chickens is what it comes down to really.
I read the first few paragraphs of the artcile. I'm sorry but its premise is fundamentally flawed.
There is no money multiplier.
Banks do no lend from reserves.
When a bank approves a loan they make the following entries in their accounts
Dr Client Loan Account (asset to the bank) Cr Client Deposit Account (liability to the bank)
Thats it. The only major constraint is to ensure the ratio of risk weighted loans is greater than 8% of tier capital. The deposit is then spent (on a house or car etc), and the money ends up in another account and they system stays in balance. No 10% reserve requirement needed.
Banks do not walk down to the RBA and ask for cash to on lend. If that was the case their account would look like this.
Dr Loan Cr Central Bank for deposit Cr Client deposit
The numbers just don't balance.
It is truly unbelievable people still get taught the money multiplier.
OK b_b, I think I'm with you. I did study accountancy many years ago, but I didn't choose a career in it.
But I think your second example is flawed. If the bank did borrow money from the RBA or anywhere, the accounts would read
Dr Loan to RBA (liability) Cr banks cash account (asset)
and would be in balance.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
Yes. Or to use an well worn term - it is created endogenously.
OK, thanks for the concise reply. i was beginning to wonder if i had misunderstood. personally i don't consider this any less remarkable than money being backed up by a relatively scarce, inert and pretty metal. potatoes for chickens is what it comes down to really.
Bandi- If the currency is backed by gold, silver, round pebbles etc, it cannot be created out of thin air the scarcity or otherwise of the underlying asset will set the price for capital.
Sprog- you are spot on, The tier 1 capital requirements are the money multiplyer in drag.
Enjoy The Ride!
Enjoy The Ride!
The case for individual freedom rests chiefly on the recognition of the inevitable and universal ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depend. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen.” ― Friedrich A. von Hayek
"I, on the other hand, am a fully rounded human being with a degree from the university of life, a diploma from the school of hard knocks, and three gold stars from the kindergarten of getting the shit kicked out of me." Blackadder.
Bandi- If the currency is backed by gold, silver, round pebbles etc, it cannot be created out of thin air the scarcity or otherwise of the underlying asset will set the price for capital.
Sprog- you are spot on, The tier 1 capital requirements are the money multiplyer in drag.
Enjoy The Ride!
that's what i mean, whether backed up by thin air or Au is equally as arbitrary. Gold(Au) is only precious because we deem it so. it is equally as non-productive air or as say houses, more so actually - we need to breathe and shelter ourselves. we dont need bling.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy