Money Creation 'ex nihilo'

[unparlor]

Don't see the difference between the 9x the deposit money a commercial bank is lending out and the money the Central Bank is lending to the government.

All money is spent in the system (market place), there is no reserve, only a promise of the borrower to put energy into the system in the future and pay back the loan. The government let its citizens do the work.

Why is the borrowing of the government money creation and the borrowing of the above reserve money through the commercial banks not?

[unparlor]

Derived from this is the question:

How do Central Banks create money out of thin air?

[yokonirami]

In economic activity we can discriminate three levels:

1. creating value (production, goods and services)

2. transferring value (exchange of goods and services, money)

3. storing value (credit, financing)

[yokonirami]

Each of the higher levels depend on the previous level. There have to be created values first before you can document them with a document called money. Money documents your work and enables you to claim the work of somebody else in exchange. If you don't want to use your money for purchasing you can save it by lending and actualize your claim at a later time.

[yokonirami]

Issuing money against debt merely documents a promise to be redeemed. It does not document any actual value offered on the market. This practice means turning the top to the bottom. And that's why financing has less and less to do with the real economy. It's triggering enormous damage in the real economy.

'Money' and 'credit' are two different information technologies which have to be clearly distinguished!

[unparlor]

Could you explain why the monetary economy becomes greater and greater while the real economy stays behind (grows less)?

Both are built on debt .

Why is the debt within the monetary economy hurting the real physical economy?

[yokonirami]

See the video "Monetary Growth 1-4", especially part 2/4.

"Debt" is the wrong kind of information as far as money is concerned. In an organization based on division of labour somebody produces food, another produces cloths, a third one constructs houses. They offer their products in the market and exchange them. There is no need for making debts. The driving force behind economic activity are needs and wants, not debt. Debt distorts the economic activity.

[unparlor]

True, but because of desires people want to spend money now before working for it. They don't want (and can't now) wait until they have enough money to buy a house.

So, what would be the solution for buying big things in a debt free society?

[yokonirami]

Don't confuse money issuing "credits" of central banks with normal money lending credits of commercial banks. There is no need to issue money via credit. Today's money issuing practice is a relic of feudalism.

[unparlor]

Another question:

Does the money supply (money in circulation) in the economy (monetary and physical) rise when the commercial banks are lending out more money (more debt)?

[yokonirami]

No. Granting short-term credits from short-term deposits on current accounts only optimizes the use of money.

The German Hypo Real Estate Bank financed long-term investments with short-term deposits - and went bankrupt. Banks are increasingly suffering from a lack of good debtors. That's why they are taking refuge to very dubious practices.

[unparlor]

That's true, but in our system of debt, the banks bring more debt in circulation. You could say the debt supply is increasing. This debt is stimulating the economy. Do you agree?

But more interest has to be paid. That's a huge problem. Exponential growth is necessary and it causes inflation.

[yokonirami]

In Germany the total money supply of central banks has been lent out by commercial banks more than 30 times over 60 years. This resulted in an accelerating growth of monetary assets and debts that cannot be reversed any more. These debts don't "circulate" as you say, but only increase macro-economically. Eventually the economy gets suffocated. The situation is pretty much the same in all other nations.

[unparlor]

Thank you for your explanation

[unparlor]

What if the reserve ratio is zero?

[unparlor]

The government with the loan of the Central Bank in its hand writes a check and pays a company with it. The company goes to the bank and gives the check to the bank. Now the amount is put on a bank account.

When does the amount become money?

When the central bank gives the government the right to write a check or when the commercial bank lends the amount of the check out to borrowers who use it to buy something on the market place?

[se7ensnakes]

this video is incomplete, it does not tell the whole story. i dont know if it is talking about England or the USA but in the USA banks do make money on a promisory contract. If you are in the USA and want to know exactly how banks (private corporations) create money out of thin air read MODERN MONEY MECHANICS, publication put out by the Federal Reserve. Google MODERN MONEY MECHANICS and you will find a pdf booklet.

[yokonirami]

The whole story is a collective blindness. The CENTRAL BANKS issue money out of thin air with two contradictory functions: 1) facilitating exchange, 2) storing value. This conflict inherent in our monetary systems creates the mess we're in RIGHT NOW. These two conflicting functions have to be decoupled. "We shape our media and they in turn shape us." (M. McLuhan)

[SilverbladeGR]

Yes, this is all nice, commercial banks don't create money, but it does not touch where the Central Bank finds money to lend and what happens with government bonds?

[yokonirami]

Thanks for your comment. You are right: money creation out of nothing happens through Central Banks. It is largely based on debts of the state (treasury bonds), i.e. a promise for redemption some time in the future. I call this kind of money creation a relic of the past feudal system. Today all states are eagerly increasing their debts as a measure against the present crisis. I wonder, how and when they will repay their debts...

[haydont]

Another brilliant video. Again well built and efficient. From this we can understand the source of debt and money circulation.

I particularly liked the fact that it does not try to propose a simplistic solution, but just presents the current facts so that we don't lose focus on the origins of the current credit crisis.

Thanks for your work.

Noviant

[yokonirami]

You perfectly understood my aspiration. The Chinese ideogram in your channel emblem, the Japanese reading of which is "hikari" - "light, a beam of light". Your comment is an encouraging beam of light to me. Thank you.

[tomtok05]

Thank you 4 the truth!