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Doom and Gloom

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Doom and Gloom

Old 13th Jan 2009, 03:54
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Doom and Gloom

So here I am and I hear the news headline...

"It's bad, VERY bad, a One News look at the economy...."

For Pete's sake, how is this going to encourage a country to try and recover from the current economic downturn?

Why is it that this scaremongering and sensationalism is acceptable? Also why is it acceptable that those who have caused the world economic issue to remain unpunished.

Not really a rant, but more of a question (with a hint of a rant)
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Old 13th Jan 2009, 06:00
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Recent news of companies going under or cutting back, the one thing I've heard recently is that either the company concerned cannot get credit or loan facilities from the banks for expansion (eg. Oilexco NS, McLeish Bros both locally) or their customers (in the case of JCB).

Proves the banks, which helped start the crisis, are a law unto themselves.

The Govt in the UK are apparently due to announce a scheme to guarantee the banks that they will be paid if any company defaults on a loan facililty given by the banks. In other words, the tax payer will foot any bill - again.

Bloody banks.
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Old 13th Jan 2009, 06:21
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Yes, but the "money" which Government uses to bail out said Banks is imprest supply credit, ie new money issued by Parliament, not taxpayers' funds.

In the same way as the "money" which was "lost" by the Banks was fractional reserve credit, ie new money issued by the Bank in question under the terms of its Banking Licence, and not depositors' funds.

So money which didn't exist before it was lent, gets "lost", and is refunded with money which didn't exist before it gets spent. No-one loses anything.
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Old 13th Jan 2009, 06:58
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Thanks for that Blue Wolf, it is 0855 here and I now need a drink! I suppose one way or another we are being stuffed - again
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Old 13th Jan 2009, 07:14
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so if no-one loses anything, there shouldn't be a problem with the banking system?

but when I last looked...it seemed the banking system was having real difficulty, and a few big banks and broker dealers had gone bust. And the industry still seems to be having problems.

so something must be wrong with your logic BlueWolf, impeccable as it may sound.
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Old 13th Jan 2009, 07:58
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Hark - - - - I hear a "whoosh" sound!

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Old 13th Jan 2009, 08:43
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Well, the last time I checked my account, all my money was there where it should have been, which makes me suspect that it can't also have been lent to anyone else.

And yet someone else HAS borrowed money from my Bank.

So what did they borrow and where did it come from?

Please don't say Belgian dentists and Japanese housewives, because the whole world works this way. Earth is a closed system as far as economics, banking, and money is concerned. We don't have off-planet investment by aliens. All new money which enters circulation here on earth is created here on earth. Parliamentary imprest supply money is issued into circulation by Governments, who then take most of it back again in tax. If they take back more than they issue, they make a surplus. If they issue more than they tax back, they run a deficit. What is a deficit?

Bank money comes into existence and enters circulation in the form of interest-bearing debt. It is taken back again in the form of repayments, plus interest, which is in turn funded from yet more interest-bearing debt. The capital portion of the repayment cancels out the loan, and the Bank keeps the interest as profit.

Banks can only lend out to a maximum proportion of the deposited funds which they hold (90% fractional reserve is common in many jurisdictions). But this doesn't mean that they lend out an actual proportion of those deposited funds. What they lend is credit to the equivalent of that proportion.

The deposited funds can be from any source. Bonds from a foreign Bank are as good as any other. Mrs Yakashima deposits 1000 currency units with the 1st Tokyo Bank, which then lends 900 currency units to the BNZ, which allows the BNZ to lend 810 currency units to Yours Truly. I pay the BNZ back 923.4 currency units (at 14%), the difference being 113.4 CU. BNZ refunds 1st Tokyo its 900 CU, plus 63 (7%), and they keep the other 50.4 CU as profit. 1st Tokyo then gives Mrs Yakashima back her 1000 CU, plus 35 (3.5%) in interest, and they keep the other 28 as profit. Not a bad return for lending something which didn't exist beforehand, based on the holding of something which belongs to someone else.

But if I default on my loan, Mrs Yakashima doesn't lose her savings, because I never borrowed them. They were always held safely on deposit with 1st Tokyo. 1st Tokyo doesn't lose either, and neither does the BNZ, because they were both lending money which didn't exist before they lent it. Yes, they lose out on potential profit from interest, and if they have to compensate the next Bank up the chain for that, then they take a hit, but in the case of the BNZ, that's a 63 CU hit, not a 900 CU hit.

This really is how it works. Go check your bank balance, I dare you.

The Banks have got themselves into trouble by lending out more than they ever should have, to people who were never going to be able to pay it back, against collateral which was never worth enough to provide a backstop. In other words, they got greedy. For the system to work, people still have to be able to service their debts. If they can't, the currency becomes devalued, just as it would be if Governments spent too much while taxing too little.

However the system will heal itself, because at the end of the day, Mrs Yakashima still wants to make an interest profit on her 1000, and the only way she can do that is to put it in the Bank, and the only way the Bank can make a profit is by lending at interest, and thus people have to be allowed to borrow. But the Bank has never been allowed to lend Mrs Yakashima's actual funds, because they are the Bank's liabilities.

This is the reality of fractional reserve banking, and if it sounds unbelievable, that's perhaps because it should be. But it isn't. And the Government has to prop it up, because what would happen if they didn't? But don't worry, because once again, the bail-out isn't funded from taxpayers' pockets. I mean does anyone seriously believe that the Irish Government has 400 billion Euro, of the NZ Government has $150 billion, or the British or the Germans or the Americans have however many billions in cash just sitting around in a vault somewhere, ready to bail out the Banks? That would be three years' worth of GDP for us. But guarantee the Banks they have, and furthermore, they have also guaranteed the finance companies, who DO on-lend their depositors' funds. No, the money for the bail-out comes from imprest supply, i.e. thin air backed by legal authority, same as the original Bank loan money.

Taking a stake in the holdings or portfolios of the Banks and other financial institutions in question, in return for the bail-out, is really a way of making sure that the new bail-out money is backed by assets, and therefore non-inflationary.

Happy thoughts
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Old 13th Jan 2009, 08:55
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The problems will only start to heal, when the banks are given back to bankers to run and the economists, accountants and politicians are shown the exit door.

What makes these people think they no more about banking than bankers.
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Old 13th Jan 2009, 09:13
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BlueWolf, absolutely brilliant you should be running for Governer. what an informative explanation.

Latest news is that the Irish Government are in such deep st that they are borrowing 55million euro a day just to balance the books so where are they 'borrowing' that from will they be using the 'fractional reserve' approach and borrowing from themselves?
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Old 13th Jan 2009, 09:45
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Yes, they're doing well to have tapped into such a rich vein of credit, in these times of supposed crunch, eh.

55 million Euros a day...that's a lot of clams.

Actually it's about 13 Euros a day for every man, woman, and child in Ireland, or 91 Euros a week for each and every aforementioned Paddy. I wonder how long they're going to keep it up, because that's an awfully big required tax increase to pay it all back (with interest, presumably) if and when they eventually do.

If they don't, who do we suppose will go bust as a result?

Good job it's all made up money, eh.
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Old 13th Jan 2009, 09:54
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Wow man! ... BlueWolf, you been smoking some serious weed there
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Old 13th Jan 2009, 10:01
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BlueWolf
Irish Government already of the case with rumours that big TAX increases on the way including a return of 'rates taxing' on houses. They have already placed a 1% levy on all PAYE workers over and above normal income TAX levels. VAT increased to 21.5% already.
Pity the poor Irish paying the cost of a failed economic policy the Celtic Tiger is well and truly dead!
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Old 13th Jan 2009, 11:28
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Bluewolf

good try - but that is not how it works.
the money in your bank account? all you have done is lend money to your bank. those numbers? those numbers are not money - they are just evidence of a debt the bank owes to you as a depositor if you want your money back.
but the cash - i.e the money - you once held in your hand....it is no longer in your hand. it is either in the bank's vault (and you get numbers on your bank statement), or they have given the cash to someone else either because that someone else wants their deposit back, or they want to borrow money.
If they borrow money, then they get money in their hand....and the numbers on their loan statement are evidence of debt from them to the bank - like the bank's statement to you.
now hey ! there is a loan out there.....but no extra money has been created.

I'm with Flying Binghi - you are on some good stuff.
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Old 13th Jan 2009, 11:37
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Perhaps someone could explain why my bank expect 11% interest on a proposed loan, bearing in mind the 1.5% rate they would give me on savings?
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Old 13th Jan 2009, 11:49
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Irish Government already of the case with rumours that big TAX increases on the way including a return of 'rates taxing' on houses.
Why not abolish all taxes to get the economies going?

Here's an interesting clip from Atlas Shrugged:-

Galt: "You want me to be Economic Dictator?"

Mr. Thompson: "Yes!"

"And you'll obey any order I give?"

"Implicitly!"

"Then start by abolishing all income taxes."

"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"

"Fire your government employees."

"Oh, no!"

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.
Atlas Shrugged
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Old 13th Jan 2009, 12:05
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Yes but......Yes but....It's not my fault, it's "Global"

You all must remember, I am "Determined" to do "All in my power" I will "Announce" the solution in my own time.

I was Chancellor only for 10 years, I never had a chance!

The solution Gordon is in the door handle at number Ten. Please close it, from the outside.
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Old 13th Jan 2009, 12:12
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Seems like Brown is taking us down the path to a command economy. Fecking champagne socialists cannot change their spots. The first, and possibly only, wedge of public spending I'd authorise if I was in charge would be to build a not so nice new jail to put these politicians in for fecking up so many lives.
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Old 13th Jan 2009, 12:20
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Yes but......Yes but....It's not my fault, it's "Global"

You all must remember, I am "Determined" to do "All in my power" I will "Announce" the solution in my own time.

I was Chancellor only for 10 years, I never had a chance!

The solution Gordon is in the door handle at number Ten. Please close it, from the outside.
Amen to that! More than perhaps anyone in the present government Incapability Brown would have had a grandstand seat and impeccable information from many sources during the last 10 years. He (and his minions) have orchestrated and allowed the financial mess that he now 'discovers' that we are in, where every unborn child in the UK already owes Ģ13,000 or so to pay off the newly printed money that is supposedly plugging the toxic hole in the finances..

It's so wrong as to be a joke, if it wasn't so serious a fraud perpetrated on the population.


regards


SHJ
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Old 13th Jan 2009, 12:55
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" What makes these people think they no more about banking than bankers. "

Because a ten year old child does??
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Old 13th Jan 2009, 18:04
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Originally Posted by BlueWolf View Post
Well, the last time I checked my account, all my money was there where it should have been, which makes me suspect that it can't also have been lent to anyone else.

And yet someone else HAS borrowed money from my Bank.

So what did they borrow and where did it come from?
Ah, but your money isn't really there, is it? If all a bank's customers get it in their heads that their money should not be "in" the bank, and all try to take it out at once, it's called a "bank run".

So the bank has your money on its books as an asset, along with other kinds of assets (such as money owed in e.g. mortgages), and so it uses those assets as collateral to borrow more money. It then invests that money in other ways e.g... by loaning it to people, or buying bonds, or various "securities".

So far, so reasonable, and the system has worked before, so what went wrong this time? It's complicated, and I'm only a "punter", but I see two classes of problem:
a: banks and other institutions, including insurance companies like AIG, borrowed too much relative to their assets (too much leverage), to invest in:
b: new forms of unregulated "securities", which included credit-default swaps (CDS) and other derivatives (securities that are collateralized and repackaged to be sold on).

It's not as if everyone was blind to the potential problems. Warren Buffet famously described derivatives as "financial weapons of mass destruction"... but he still had one whole leg in the pond, and has been financially amputated at the knee, as it were. (He still has a leg to stand on, financially, so he'll be OK.)

So all these banks had obligations going in booth directions, all leveraged up the wazoo, all hoping to make money off everyone else. One bank takes a knock, e.g. another bank defaults on a CDS, so it has to pay out, so it calls in a loan from another bank, which has to get money from somewhere... other banks get wind of this, and they all start demanding money back from each other. It's the bank run all over again, except that the customers are other banks. As I heard it described, this is why the commercial credit markets seized up back in September-October, and there was an immediate knock-on effect on the credit lines of other (non-financial) businesses.

It's like a game of musical chairs, except that the chairs are missing half the legs, and only stand up when leaned against each other. When the music stops, lots of bums try to hit the seats, and they all crash to the ground. The one guy without a chair stands there, wondering what the hell happened.
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