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The Gold Bull is DEAD. Long Live The Gold Bull.; It ain't over yet flyboy.
Topic Started: 18 Jul 2013, 12:53 AM (16,419 Views)
stinkbug
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goldbug
19 Jul 2013, 12:38 AM
HA Ha, true, and a point timmy chooses to ignore. How much has your perth home risen in value over the last 4.5 years pigiron? 80%? 50%. Or 6.2% lol lol.
Is he allowed to include 4.5 years worth of yield in that number...?
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peter fraser
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propertymogul
19 Jul 2013, 12:18 PM
Peter you say we are not in a fractional reserve banking system. Can you explain where my understanding falls down? I know in 1988 the reserve requirement was abolished in Australia, essentially allowing a zero fraction as reserves.

Would you say that the US has a fractional reserve banking system? They need to hold a certain fraction of high quality liquid assets in order to meet cash requirements. To me that is a fractional reserve banking system, i.e. they must hold a certain fraction of quality liquid assets as reserves. The difference with Australia and 5 other countries throughout the world is that they have a zero reserve requirement, relying on the central bank to backstop them when there is a shortage of reserves to pay out deposits on demand.

I'm aware that at university the way fractional reserve banking started operates a little differently to todays banking system in how loans are created, but imo with the same result i.e. lending is restricted only by the fraction of reserves that must be held as high quality liquid assets.

I'm keen to learn so please tell me where my knowledge is lacking.

Just read this, pretty much answers my question. So is the only difference for Australian banks that they have no restriction on the amount that they can lend compared to banks that a have a reserve requirement? Wouldn't this make them more risky? I've read somewhere recently that this places an added reliance on the central bank to bail them out when there is a shortage of funds to pay out deposits?
The USA has much the same fiat system as we do. fiat money is based on the value of production, not on a precious metal. Even if we were using gold, we would use that to buy food, goods etc - in other words we swap gold for production - so it's production that has the real value, the gold was simply a means of storing our buying power, it wasn't the object of value per se.

If we don't produce anything our money is worthless, and of course if we are productive our money is valued.


The banking system "looks" the same as it always did when it was a FRB system because banks have to hold deposits based on the risk weighting of their loan book, even though operationally they don't require any deposits. So each bank chases deposits from depositors because that is cheaper than borrowing from another bank or the RBA. They must maintain the required deposit cover. Their funding cost therefore is the aggregate cost of the deposits and other funding that they hold to meet their commitment to APRA. If they don't meet their commitment they lose their banking licence.
If it wasn't setup like that then banks would not need depositors and we would not have the banking system that we need to do business, pay bills etc.

Banks don't lend deposits, they create money with each loan, that's what their licence entitles them to do.

some light reading from APRA - http://www.apra.gov.au/adi/prudentialframework/documents/aps-112-12-12-07-final.pdf Read attachments A, B and C to get some information on Risk Weighting as it applies to loans and deposits.


Here is the APRA prudential standard on Capital Adequacy from January 2013 (the Basel III standards) I don't believe these standards have been introduced yet as globally there is still much discussion on them and final arrangements have not yet been settled. Remember that this will be a global standard with some local differences to suit different economies - APRA Basel III You may get a little confused reading it but it still should start to make sense after awhile.

The best person to speak to on the monetary system is b_b who is a Modern Monetary Theorist.

I've found it very difficult to find any literature that explains the inner movements of the system, but I did read this work by Cullen Roche who isn't an MMT'er but he is close. Try reading this and see what you think - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

Warren Mosler also has a free downloadable publication that I just can't locate at the moment. I have it saved as a pdf but I haven't read it yet - it will probably be somewhere here - http://moslereconomics.com/

You do have to think alternatively to understand MMT or MMR, and the theory doesn't predict anything, it just explains the inner workings so that you have a better chance of knowing what is likely to happen as different monetary events unfold.

Happy reading.

Edited by peter fraser, 19 Jul 2013, 03:21 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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propertymogul
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peter fraser
19 Jul 2013, 03:01 PM
The USA has much the same fiat system as we do. fiat money is based on the value of production, not on a precious metal. Even if we were using gold, we would use that to buy food, goods etc - in other words we swap gold for production - so it's production that has the real value, the gold was simply a means of storing our buying power, it wasn't the object of value per se.

If we don't produce anything our money is worthless, and of course if we are productive our money is valued.

The banking system "looks" the same as it always did when it was a FRB system because banks have to hold deposits based on the risk weighting of their loan book, even though operationally they don't require any deposits. So each bank chases deposits from depositors because that is cheaper than borrowing from another bank or the RBA. They must maintain the required deposit cover. Their funding cost therefore is the aggregate cost of the deposits and other funding that they hold to meet their commitment to APRA. If they don't meet their commitment they lose their banking licence.
If it wasn't setup like that then banks would not need depositors and we would not have the banking system that we need to do business, pay bills etc.

Banks don't lend deposits, they create money with each loan, that's what their licence entitles them to do.

Here is the APRA prudential standard on Capital Adequacy from January 2013 (the Basel III standards) I don't believe these standards have been introduced yet as globally there is still much discussion on them and final arrangements have not yet been settled. Remember that this will be a global standard with some local differences to suit different economies - APRA Basel III You may get a little confused reading it but it still should start to make sense after awhile.

The best person to speak to on the monetary system is b_b who is a Modern Monetary Theorist.

I've found it very difficult to find any literature that explains the inner movements of the system, but I did read this work by Cullen Roche who isn't an MMT'er but he is close. Try reading this and see what you think - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

Warren Mosler also has a free downloadable publication that I just can't locate at the moment. I have it saved as a pdf but I haven't read it yet - it will probably be somewhere here - http://moslereconomics.com/

You do have to think alternatively to understand MMT or MMR, and the theory doesn't predict anything, it just explains the inner workings so that you have a better chance of knowing what is likely to happen as different monetary events unfold.

Happy reading.
Thanks for this Peter. I'll have a read through and see if it makes sense.

At first glance it still sounds like a fractional reserve banking system though, just that the way loans are created is different now. That is where loans used to be funded from deposits (reserves) multiple times, now the banks simply create the loans independent of deposits, but under both systems the total loans banks can lend is restricted by deposits held (the fraction). Obviously for Australia though the reserve backing requirement was abolished. This might have been what you were trying to say, but anyway I'll have a read through all those links maybe I'm still not understanding it.

What is the APRA requirements for Australian banks? I know of the capital adequacy requirements, but that refers to shareholder funds. Is there an APRA requirement regarding depositors funds? I assume there must be. In the event of a bank insolvency, what is the order of priority of payments? We did this at uni, but all I remember now is that shareholders are last and will probably get nothing, and the liquidator is first. Secured creditors are near the top, along with employees. I can't remember where depositors slip in though.

Why did the government need to guarantee deposits during the GFC? If Aussie banks create money independently of deposits, and there is no deposit backing requirement, then why was it necessary? Is it something to do with the APRA requirements?

Sorry to bombard with so many questions. I do find this interesting, and I know just enough to be dangerous, would like to know a little more so that I'm a little less dangerous.
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goldbug
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stinkbug
19 Jul 2013, 01:08 PM
goldbug
19 Jul 2013, 12:38 AM
HA Ha, true, and a point timmy chooses to ignore. How much has your perth home risen in value over the last 4.5 years pigiron? 80%? 50%. Or 6.2% lol lol.
Is he allowed to include 4.5 years worth of yield in that number...?
Well of course, but he has to deduct the interest attached to the loan over the period from it first. But either way, I can't see it summing up to a 60% increase, can you?
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Sydneyite
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propertymogul
19 Jul 2013, 12:18 PM
Just read this, pretty much answers my question. So is the only difference for Australian banks that they have no restriction on the amount that they can lend compared to banks that a have a reserve requirement? Wouldn't this make them more risky? I've read somewhere recently that this places an added reliance on the central bank to bail them out when there is a shortage of funds to pay out deposits?
Think of it like this:

* Fractional reserve banking systems require that banks maintain a theoretical fixed ratio of DEPOSITS to ASSETS (loans). Australia does not have this system anymore (changed in 80s). So Australian banks lending is not constrained by deposits.

* Instead, AU regulations (via APRA and RBA) require that banks maintain a certain ratio of CAPITAL to their ASSETS (loans). These are the capital adequacy ratios. So they *are* CAPITAL constrained.

* Capital adequacy rules have some complexity, as different asset/loan types attract different weighting (ratio) and other details with regards to the required backing capital. Riskier lending needs more capital and/or of a higher quality (more liquid). Low risk lending (like for residential housing) has a lower capital requirement. These rules are defined and enforced by APRA and the RBA.

* The effect of the capital rules is really that banks are risk constrained as well as capital constrained - as if they try to grow their loan books too aggressively with say risky lending, then they quickly increase the amount of capital they must maintain.

Where depositers come in is that the capital requirements are there to ensure the banks the ability to repay depositers funds when demanded or required. In the case of an insolvement bank, they hopefully provide enough of a buffer such that any bad loans can be absorbed, leaving viable assets + retained capital able to cover all bank depositer funds. Note that even in this scenario, a bank run is still possible, and would result in deposit redemption freeze, as the banks capital is always likely to be far less than their total deposits. This is why the deposit guarantee was brought in during the height of the GFC - to remove panic and the potential for a run on our banks by depositors at that time.

Here is a paper that explains the rules and history reasonably well: http://www.rba.gov.au/publications/bulletin/2010/sep/pdf/bu-0910-6.pdf
Edited by Sydneyite, 19 Jul 2013, 03:54 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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peter fraser
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propertymogul
19 Jul 2013, 03:27 PM
Thanks for this Peter. I'll have a read through and see if it makes sense.

At first glance it still sounds like a fractional reserve banking system though, just that the way loans are created is different now. That is where loans used to be funded from deposits (reserves) multiple times, now the banks simply create the loans independent of deposits, but under both systems the total loans banks can lend is restricted by deposits held (the fraction). Obviously for Australia though the reserve backing requirement was abolished. This might have been what you were trying to say, but anyway I'll have a read through all those links maybe I'm still not understanding it.

Banks use a double entry bookkeeping system. they create a loan and a deposit at the same time. Even if the funds are quickly transferred to someone else (eg car purchase) the money is still in the banking system.

Quote:
 
What is the APRA requirements for Australian banks? I know of the capital adequacy requirements, but that refers to shareholder funds. Is there an APRA requirement regarding depositors funds? I assume there must be. In the event of a bank insolvency, what is the order of priority of payments? We did this at uni, but all I remember now is that shareholders are last and will probably get nothing, and the liquidator is first. Secured creditors are near the top, along with employees. I can't remember where depositors slip in though.


Different risk loans require different deposit levels to be carried, so low risk loans cost the bank less than a high risk loan does. hence they have tended to favour housing, which has low processing costs as well, unlike business lending.


Quote:
 
Why did the government need to guarantee deposits during the GFC? If Aussie banks create money independently of deposits, and there is no deposit backing requirement, then why was it necessary? Is it something to do with the APRA requirements?

Simply to stop people taking their money out and putting it into their mattresses.
The government also allowed the banks to use their AAA rating via those guarantees.
That also allowed the banks to keep selling their RMBS to the market and often the government bought them as well. I don't know exactly how much was purchased by the government, but it was done to keep banking moving and stop a credit freeze, which would have been disatrous.


Quote:
 
Sorry to bombard with so many questions. I do find this interesting, and I know just enough to be dangerous, would like to know a little more so that I'm a little less dangerous.


Well I think we are all a danger to ourselves here, but what's a boy to do once he's found a box of matches.
Edited by peter fraser, 19 Jul 2013, 03:54 PM.
Any expressed market opinion is my own and is not to be taken as financial advice
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Shadow
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Evil Mouzealot Specufestor

goldbug
19 Jul 2013, 03:28 PM
Well of course, but he has to deduct the interest attached to the loan over the period from it first. But either way, I can't see it summing up to a 60% increase, can you?
Are you trying to compare a leveraged investment in property with a non-leveraged investment in gold?

If so, then you would be aware that the gains in property also need to be multiplied by the leverage used, right?

Perth is up 10% since mid 2012. An investor with 90% LVR would have seen a 100% return on his capital. How did that compare with gold over the same period?

I think gold would have made roughly a 30% loss? And if the investor borrowed at 90% to buy that gold... ouch!
Edited by Shadow, 19 Jul 2013, 04:08 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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propertymogul
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Sydneyite
19 Jul 2013, 03:48 PM
Think of it like this:

* Fractional reserve banking systems require that banks maintain a theoretical fixed ratio of DEPOSITS to ASSETS (loans). Australia does not have this system anymore (changed in 80s). So Australian banks lending is not constrained by deposits.

* Instead, AU regulations (via APRA and RBA) require that banks maintain a certain ratio of CAPITAL to their ASSETS (loans). These are the capital adequacy ratios. So they *are* CAPITAL constrained.

* Capital adequacy rules have some complexity, as different asset/loan types attract different weighting (ratio) and other details with regards to the required backing capital. Riskier lending needs more capital and/or of a higher quality (more liquid). Low risk lending (like for residential housing) has a lower capital requirement. These rules are defined and enforced by APRA and the RBA.

* The effect of the capital rules is really that banks are risk constrained as well as capital constrained - as if they try to grow their loan books too aggressively with say risky lending, then they quickly increase the amount of capital they must maintain.

Where depositers come in is that the capital requirements are there to ensure the banks the ability to repay depositers funds when demanded or required. In the case of an insolvement bank, they hopefully provide enough of a buffer such that any bad loans can be absorbed, leaving viable assets + retained capital able to cover all bank depositer funds. Note that even in this scenario, a bank run is still possible, and would result in deposit redemption freeze, as the banks capital is always likely to be far less than their total deposits. This is why the deposit guarantee was brought in during the height of the GFC - to remove panic and the potential for a run on our banks by depositors at that time.

Here is a paper that explains the rules and history reasonably well: http://www.rba.gov.au/publications/bulletin/2010/sep/pdf/bu-0910-6.pdf
Thanks Sydneyite. I feel I'm getting closer to understanding the system.

However I'm still a little stuck on the depositors funds. I understand what you're saying about the capital requirements being in place to cover deposits. However why do they even need or want deposits? If I'm getting it when they lend money for a house they simple create the money through an accounting entry i.e. DR Accounts Receivable CR Accounts Payable (they then make their money through the difference in interest between the receivable and payable). The accounts payable side of the entry I still have some questions on, I believe they borrow that money from another bank? Anyway back to point why do they need or want the deposits? Do they actually lend out deposits? Perhaps the amount of funds on deposit affects the rate they can borrow at? But why would it if there is no requirement for deposits?

Once again apologies for the mountain of questions.
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Blondie girl
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Ooooooohhhh
Bank Johnny suck jobs ,,,,

Yeah,,,

Goldbug/mmm....Frankenstein????

Yes the bull market is out
Prices to the moon...
No way
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$
It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged
Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do.
Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
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MMM
Unregistered

Yet central banks all around the world have been buying it like no tomorrow over the last few years in record numbers, they all went from mass sellers to mass buyers. Why do they buy it ? Do you think they know something you don't.....

We only ever went off the gold standard because it allowed the US to borrow money they did not have to pay for things they could not afford and now look, almost 20 trillion in debt. It has simply allowed them to borrow money to purchase things they cannot afford or produce anymore. Basically borrowing to consume , not to produce, very bad debt that can now never be repaid because they produce very little yet consume a shitload, just look at their tummies , consuming a lot yet producing nothing. Things don't work like this and that's why we are where we are now.
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