I heard this figure recently for the UK, and its probably similar in other Western countries (though the UK, being home to the world’s largest financial centre, might be an extreme case).
A bank lends you some money, and you then use this to buy something. The person you buy it off gets money in payment, and puts it in the bank. The bank has literally just conjured up money out of thin air.
Is the fact that fully 93% of all money in circulation is invented out of nothing like this not a cause for concern? Is capitalism just a massive Ponzi scheme?
Capitalism is just a game of musical chairs. The assumption is that your butt will always hit a chair when the music stops. Sometimes, it doesn’t work out. Oops.
Just to be perfectly clear, the mechanism you just described above is not necessarily ‘creating money out of thin air’. A bank can lend you money, and then you buy something, and then a guy puts that money in the bank, without having created money out of thin air. The way banks currently do loans does create money out of thin air, but the mechanism requires a bit more of a detailed explanation than that.
I’d bet that some people would read that and doubt what I say, so I’ve come up with a concrete explanation of a simple situation in which the exact same narrative takes place, and yet no money is created out of thin air:
There is a 4-person economy, consisting of 4 guys with the following names and total savings
Joe, $600
Rich $600
Tristan $30
Bank $2000
Tristan has an idea for a new technology, but he doesn’t have enough money to buy the gear he needs to build it. He takes a $300 loan from the bank and receives the money. He’s agreed with the bank to pay $310 back for the loan.
Joe, $600
Rich $600
Tristan $330 (owes bank 310)
Bank $1700 (owed 310 from tristan)
Tristan then purchases the equipment he needs from Rich’s shop to build his idea. The equipment costs $300
Joe, $600
Rich $900
Tristan $30 (owes bank 310)
Bank $1700 (owed 310 from tristan)
He takes the equipment, rearranges it to the specifications of his idea, it works like a charm and joe wants to buy it. Joe and Tristan agree on a deal of $500 for the new technology.
Joe, $100
Rich $900
Tristan $530 (owes bank 310)
Bank $1700 (owed 310 from tristan)
Tristan then pays the bank back
Joe, $100
Rich $900
Tristan $220
Bank $2010
The amount of money at the end is equal to the amount of money at the beginning. There doesn’t have to be any money conjured out of thin air in order for banks to give out loans. The mechanism by which money is conjured, as I said, is more complex than what was described.
FJ, you’ve demonstrated that people can trade what they have.
I don’t think this is news to most people, nor do I dispute it.
But it doesn’t demonstrate, prove or say anything about that which this thread is concerned, which is when “Bank” lends “Tristan” (or whoever) more than “$2000” (what they actually have), which they do much more frequently than they lend less than “$2000”. Essentially they are just trading risk, which is what all of the leading world economies have learned to manage to the point that they outperform economies that only lend what they actually have to lend.
To understand what’s actually going on, it helps to perform the following thought experiment:
imagine (to borrow from your concrete example) Joe, Rich, Tristan and Bank perform the transactions you spoke of, and thus the successful business is set up. This is evidence that Rich is physically capable of giving his equipment to Tristan, and that Tristan is physically capable of transforming this equipment into something that Joe wants.
So why did any money need to change hands in order to achieve this?
Because of the value in “ownership” and in “permission”. If the equipment was just lying around unclaimed, Tristan could have made something for Joe if he wanted to, for free. Perhaps he would have anyway, though let’s just say his sole motivation was to make money ($190). We see the value in “keeping score” such that the comparative measure of who “owns” the right to “permit others to trade” shifts in the favour of some (and inevitably away from the favour of others).
We see that money is grounded in nothing more than human values and motivations.
Creating money out of nowhere is literally creating opportunity.
More opportunity is permitted than if people only lent what they actually had. With careful management of this opportunity, successes will outweigh failures and the economy will thrive. And the possibility is left open for the failures to outweigh the successes because the future cannot perfectly be predicted, causing the entire economy to grind to a halt (opportunity is no longer created).
All I said was that Maia’s narrative was missing detail, as I read her post and thought she was implying that the narrative she gave was all that was needed to explain how money is created out of thin air. The narrative was missing detail, and your post is maybe filling in some of that detail, the missing detail required to go from ‘normal lending’ to ‘creating money out of thin air’. I don’t see what you’re saying as disagreeing with me, just…filling in the detail I said was missing.
Yeah I agree, that’s what I was saying: “nor do I dispute it.”
What do you think of the interpretation of “money being invented out of thin air” as “the creation of extra opportunity within a context of private ownership”?
As tent says, mis-given opportunity (realised in hindsight) means that sometimes it doesn’t work out when the music stops and there is no chair for your butt.
It’s all about risk.
Risking the means to live of an entire society, by those with most “permission” (money).
Money by itself is just specially constructed paper/digital data - that is all it physically is. “Concretely” it has no direct use.
It comes to life in itself ONLY as an abstract representation of permission/ownership/score-keeping - and through the indirect concrete effects of these intangible human concepts.
Without that, what actually is the phenomenon of “banks creating money out of thin air”?
I guess what I’m trying to say is, if someone came in to this conversation and said, ‘Wait, I want to understand, how do banks create money out of thin air?’ and you were to reply, “through the creation of extra opportunity within a context of private ownership”, that person would leave the conversation without any sort of functioning mental model about what happens. They would have this abstract sentence, and they might be able to repeat it, but they still wouldn’t understand what was happening.
That’s because “the creation of extra opportunity within a context of private ownership” isn’t a cause of banks creating money out of thin air. The latter doesn’t arise “through” the former - as you say. I never said it did - I described what creating money out of thin air actually is, in order to open up the understanding of the significance of such a phenomenon. What are banks ACTUALLY doing? They’re doing what I described, which I described (filling in the missing detail, as you said) in my first post on this thread. That first post contains the meaning of “through the creation of extra opportunity within a context of private ownership”.
What they physically do is create money out of thin air by typing out paperwork that details the figures of loans, that when added up, greatly exceed what the bank actually has to give. Why they do it is to create opportunity, which has the potential to make us better off than if they didn’t, and which can also screw us over if predicted wrongly.
This genuinely doesn’t make sense to you/clarify anything for anyone?
In the case that it does, which I think it should do, I have the following to ask in order to expand on what I have said:
what happens when people no longer wish to take the extra opportunities given to them, despite the “permission” given to them?
If delving into your credit no longer seems sensible, and you have insufficient opportunity without it - because all the money is in the hands of those dishing out extra opportunity - where can an economy go?
The answer is nowhere “upwards”. I believe this is what has happened. There is no more “give” in the economy, for others to “take” (make money) - people are closing down their willingness to take opportunity. What is there left to improve anyway? There are new technologies that are extremely hard to accomplish, which are in their infancy, but for most of us, we have everything we need and have only “things which would be cool to do/own” to want. People have been pushed to either living beyond their means, living hand to mouth, or having the “disposable income” to afford frivolity. Growth (real growth beyond that which is afforded by increasing populations and speeding up transactions and squeezing working methods that little bit more) is dead.
Conjuring money from nowhere no longer has any purpose.
You have not explained what money the bank ‘conjured up out of thin air’. The money it lends is owed to the depositors. It earns profits by letting borrowers use the money for a fee.
There doesn’t have to be, but, as you seemed to imply in your first post, banks do create Money out of thin air these Days. They literally create Money in the system when they makes loans and can, on a base of ten dollars loan out many times that.
me you other people. when we loan a buddy Money, we give them Money we have. Banks do not have to do this and as standard practice do not. They loan out Money they do not have. They need only have a certain percentage, which I Believe has been going down.
They just type Money into the computer and there is your loan. But default and they will not take just numbers from your bank account, they will take your house and car.
Let’s not forget that money too has an intrinsic base value based on minerals or gold or whatever reserves a country owns. That’s why simply printing more money does not create more money, it merely devalues the currency you have, you can say have 10 billion in printed bills and own only 1 billion in actual reserves of valuable items, it means your money is worth much less than the printed value. Hence inflation can run amock and money can become worthless as it did in Germany at the end of WWII and as it is in some modern dictatorships, with inflation at thousands of percent.
Where I think money is fictional isn’t even in stocks and shares which are based on actual capital and worth of a company it’s on futures (taking a punt on value in the future of stocks that don’t exist yet) options and various other ways of playing around with capital money can become little more than an abstract of an already abstract value system. It’s not a bad system per se, but as some people have pointed out when you invent capital, and trade on bad debt, you can create a vacuum in an economic global netwok into the which the world can be sucked as it has been recently. Asking for responsibility in the herding world of bullish traders and banks though is difficult to do.
Yes, that’s the sort of thing I’m thinking of. However one wishes to juggle the figures, and some evidently still do, the fact is that this is artificial money, not based on any instrinsic value, but merely on trust. The sum lent remains an obligation to the person who borrowed it (until he goes bankrupt), but as soon as he pays for something, it transforms into “real” money, for the person who receives it in payment.
Money is quantized desire. Bankers rent the desire of other people to people. This is called “usury”. It is no different than renting out slaves who aren’t aware that they have become slaves.
There are several major problems with the now world wide scheme.
A) In order to ensure the ability to gain more money (and thus influence), more desire must be caused. Desire is caused by ensuring the perception of need, aka “threat” = “If you don’t attend to the perceived need, you will suffer.” Thus at very least the perception of threat is required which in turn becomes real threat. This is called “terrorism”.
B) The people doing it are most often not the citizens of the country they are usurping the money/desire/influence from and thus the desire/money/influence and labor of countries is being leached out of the people of one country and pooled into a specific different country. In the US for over 100 years, anyone attempting to stop this has been assassinated (paid for by the money/influence). Abraham Lincoln with his “greenbacks” being an obvious example.
C) Creating such desire in other people requires deception and chaos which in turn creates genuine threat, suffering, and loss of life due to the obscurity of the actual source of the troubles. Lying, cheating, stealing, spying, and hidden conspiratorial manipulations must be encouraged amongst the majority of the population. False flags must be created in order to aim the passion away from the actual schemer and toward a chosen enemy of the scheme. Wars and desperate times; depressions, famines, and so on, are created dispassionately for sake of the money/influence/power being made by the schemers. The state of suffering, insecurity, and fear must be maintained in order to maintain the income.
D) People become unknowing enslaved to foreign powers who use them as merely a mechanism for profit and have no other use or care for them. Threat of suffering and death must be maintained upon the majority so that a very small minority can ensure joy and health for themselves alone. People become merely a utility (one soon to be outmoded by newly designed, more technically reliable models).
