By Olly Newland
I have always been surprised by how some people react when I suggest they should investigate commercial property investment because it provides a very a good alternative to residential investment.
It’s "too complicated", they say. Or "too hard to understand" is another common response, as well as fear of vacancies with a consequent loss of income.
Yes, I agree, residential property is the more 'liquid' of the two forms of investment, but successful residential investment is, in my view, the hardest subject to master by a country mile.
We all know the advantages of residential property and they are persuasive, that has to be said, but let me give you some of the disadvantages - just for the sake of the argument.
The main problem with residential is that it’s 'political' in every sense of the word. From one day to the next there is a steady drum beat, criticising those who own or invest in residential property.
The media run one story after another on overcrowding, shortage of rentals, rising rents, unfair profits, and lately pressure to introduce a capital gains tax or reduce so-called ‘tax rorts’.
It’s no wonder that there is a growing rental crisis, and increasing homelessness, all aided and abetted by the recent tax disadvantages which have, as expected, had the exact opposite effect from what was intended.
See: Sleeping rough is street legal
All this was predicted by me for over a year or more. And let me quietly tell you something else in the strictest confidence mind you. Draw close, I don’t want to shout.
As the rental crisis grows, especially with the approach of winter, be prepared for more headlines and yet more controls on residential rents. You have been warned.
On the subject of Capital Gains Tax, I have yet to see a skerrick of evidence showing what a capital gains tax would achieve. Yes, it does exist in other countries but such taxes did absolutely nothing to stop runaway property booms (and busts) in the USA, Europe or Australia … just to name a few.
In the news at present time, we learn about the troubles in Spain and Greece where the foreclosures (mortgagee sales in our parlance) are staggering and getting worse by the minute.
see: The ghost towns of Spain: Images that are desolate symbols of collapsed property market
Spain already has a capital gains tax. To call it 'complex' is a gross understatement
Or how about Greece, where matters are just as bad? They too have a capital gains tax, but it will likely only create tax credits for years to come. See Greece’s house price falls continue, amidst economic woes
The call for a Capital Gains Tax in this country are supposedly to encourage investors to put their spare funds into 'more productive investments'. But again, I am still waiting to hear what, exactly, these more productive assets are.
Another problem with residential property as a landlord is the bothersome control over the market by bureaucracy and the well meaning but cumbersome Tenancy Tribunal.
I would be the first to agree that tenants need some form of protection, and we probably DO need some form of third party control by way of a Tribunal, but the system should allow tenants and landlords to agree to opt out of the system if both parties so choose.
Why should expensive homes, for instance, be subject to government control in regard to bonds or rents? Parties to high end properties hardly need a government watch-dog to breathe down their necks.
And what law applies in the case where a property is rented out fully-furnished as many are? The current bond limitation is totally inadequate to cover damage in this instance.
There’s no doubt that, if done correctly, and with due diligence and forethought, residential investment can be very profitable mainly because it’s (supposedly) understandable, easy to finance with the aid of mortgages, and is happily used by banks as security when advancing other loans … especially for further residential investments or business use.
But there are great advantages for those who make the effort to understand commercial property.
The upsides
Commercial property has become far more popular in recent years and rightly so for the following reasons:
(a) There are no controls from any outside body so long as parties act reasonably
(b) You can charge whatever rent and whatever terms you and your tenant mutually agree upon
(c) You can ask for any bond you like — again as may be mutually agreed upon
(d) You can evict bad tenants rapidly under the terms of the lease with little or no outside interference
(e) The only “control” that exists is the lease that is agreed between you and the tenant (and that can be varied as when it suits)
(f) Depreciation allowances are often higher than on residential especially for fittings and fixtures.
See NZ Management: Substantial property depreciation allowances remain
Even more importantly, depending on the lease, your commercial tenant pays for all the out-goings as well, such as rates, water and insurance. Commonly these are spelt out in the lease (i.e. a net lease) but if not then these costs are built into the rent (i.e. a gross lease).
Either way, the tenant pays … which makes your returns that much better.
A few years ago the traditional return on the average commercial property (whether retail, office or industrial) was around 10%. For example a property valued at $500,000 would pay a net rental of $50,000 per annum after payment of all outgoings.
Over the past few years this return has fallen dramatically, to as low as 5% plus. I suspect it will go even lower for prime properties in the future.
In other words, lower and lower yields means that investors are paying more and more to buy a certain income stream.
In the example above, where the net income is $50,000, investors could now well be prepared to pay almost twice as much as before especially if the property was good. e.g. at a 5.5% yield the same property would be worth over $900,000.
Not a bad return if you you play your cards right - and a darn sight easier than slogging away with a bunch of slum properties filled with druggies and misfits.
The trick is to find commercial property which can genuinely be “improved” so that is goes up in value … no matter what inflation or deflation are doing.
A little study and perseverance can find these deals and often such value increases can be achieved in short order with little more than a stroke of a pen.
My team and I recently assisted a client into buying a run-down block of shops. With a little expense, and our constant advice we pushed the value up from $1.4 million (being the purchase price) to an estimated value if $2.0 million … and all done within 6 months from date of purchase and while collecting the rent at the same time .
And just to prove the point that it wasn’t just wishful thinking on our part, this particular block was on- sold at auction for$1.95M which was just a whisker under its estimated value.
Set out below are actual examples of the latest commercial auction results in the Auckland region. You can see for yourself what the prices achieved and do the maths . Make sure you carefully read the introduction by the impartial observer so that you cannot accuse me of any exaggeration:
Recent commercial sales
Bob Dey report - published 30 March 2012It was a feeding frenzy – as has happened a few times when a batch of retail units has been taken to the market, the crowd at Bayleys’ Total Property auction on Wednesday was big, the bidding on the first 4 offerings was frenetic and the yields were under 6%.
After those first 4 sales of units in the Merton East convenience centre in St Johns, the yields were softer – but 2 were under 7%. 2 unusual factors at this auction, though, were that the auction room stayed crowded well after the first flurry of activity – and the yields were still firm.
Yields on the first 4 Merton Rd units were 5.33% for a Columbus Coffee outlet, 5.6% for a sushi shop, 5.75% for an Indian & kebab shop and 5.7% for a stir fry takeaway outlet.
The centre is at the roundabout intersection of 3 busy roads – Felton Mathew Avenue, Merton & Morrin Rds in St Johns, leading down to Auckland University’s Tamaki campus & the Auckland Netball courts, then to Glen Innes.
The centre, developed by Argyle Estates Ltd (Graeme Edwards & Nigel Powell) opened late last year, has 8 ground-floor shops ranging from 71-297m² and 309m² of office space above. It’s on a 5436m² site which also has 76 parking spaces plus another standalone building incorporating a Carl Jr fast-food chain drive-through.
Progressive Enterprises Ltd has plans for a 4200m² Countdown supermarket opposite this site, to be operating next year.
Auction details below contain the 16 sales and 2 of the properties passed in Another dozen properties were also offered at the auction:
St Johns
Unit 1, 208m², St Johns Butchery, returning $59,950/year from 10-year lease to established operator of Greenwood Corner Butchery, rent reviews 2-yearly to market, sold for $861,000 at 6.96% yieldUnit 2, 207m², Liquor Spot, a new store concept for New Zealand’s largest liquor chain, Liquor Centre; returning $59,125/year from 10-year lease, rent reviews 2-yearly to higher of CPI or market, sold for $855,000 at 6.92% yield
Unit 3, 297m², Green Fresh Fruit & Vege store, returning $82,500/year from 10-year lease, rent reviews 2-yearly to higher of CPI or market, sold for $910,000 at 9.07% yield
Unit 4, 95m², Spice Traders (Bombay Blue) Indian & kebab food takeaway, returning $37,412 from 8-year lease, rent reviews 2-yearly to market,? sold for $651,000 at 5.75% yield
Unit 5, 76m², Global Stir Takeaway, returning $33,150/year from 8-year lease, rent reviews 2-yearly to market, sold for $585,000 at a 5.7% yield?
Unit 6, 71m², Bruce Lee Sushi outlet, returning $28,476/year from 8-year lease, rent reviews 2-yearly to market, sold for $513,000 at 5.6% yield
Unit 7, 112m², Columbus Cafe with outdoor seating area, returning $51,714/year from 10-year lease, annual rent reviews of 4% compounded, sold for $970,000 at 5.33% yield
Unit 8,?271m², Jetts 24-Hour Gym, returning $73,253/year from 8-year lease, rent reviews 2-yearly to market or CPI plus 2%, whichever is higher but capped at 6%, sold for $990,000 at 7.4% yield
Unit 9, 309m² office unit leased to steel frame designer Framecad NZ Ltd, returning $51,031/year from 5-year lease, 2-yearly rent reviews to CPI plus 2%, sold for $655,000 at a 7.8% yield
Glendowie, 20 Mt Taylor Drive, 200m² building on 1786m² site occupied by a Montessori pre-school for a decade on net rent of $83,200/year, reviewed annually either to CPI or 2.5%, whichever is the greater; the tenant renewed for 10 years & 5 months from November 2011; the site has long-term development potential with residential 6A zoning allowing subdivision into 4 house sites; sold for $1.372 million at a 6.3% yield
Newmarket, 220-222 Broadway, 301m² building on a 212m² freehold site? with 2 footwear tenants returning net $260,650/year; the vendor acquired the lessor’s interest from L&Y Holdings in 2003 for $1.8 million, then undertook an extensive restrengthening to bring the 1920s building up to modern seismic requirements;?sold for $4.1 million at a 6.36% yield
Herne Bay, 272 Jervois Rd, unit 1, fully renovated Lollipops childcare centre returning $160,000/year from 12-year lease, passed in at $2.275 million
Onehunga, 245 Church St, mortgagee sale by bank of 3-level 528m² building on 423m² site, ground-floor retail & warehouse, first-floor office and a 3-bedroom apartment with decks on the top, passed in at $475,000
Ponsonby, 1 Jervois Rd, unit 10, 130m² shop with 3 secure parking spaces, occupied by The Children’s Bookshop since 1998, returning $71,168/year from 6-year lease from February 2010, sold for $1.08 million at a 6.6% yield – $189,000 more than the vendor paid for it 2 years ago
Wellsford, 215 Rodney St, 180m² standalone commercial building on 453m² site leased to Subway at net $42,000/year on lease renewed for 6 years from September 2012, sold for $621,000 at a 6.8% yield
Albany, 31 Schnapper Rock Rd, purpose-built childcare centre on 1851m²?site, returning net $160,160/year from a Bear Park Childcare franchise; the tenant has been there since 2002 and has already exercised the second of 3?6-year rights of renewal, from September 2013; sold for $1.957 million at an 8.2% yield
Northcross, 176-178 Carlisle Rd, 48m² unit in an 11-unit neighbourhood retail convenience?centre on the corner of East Coast Rd, returning $39,824/year from a 10-year lease?to The Lovers Corner Kebab shop from 2006, with annual rent reviews to CPI plus 2% and 18-year telecommunications tower lease to Vodafone returning?$11,000/year, with? 2-yearly rent reviews to CPI,?sold for $725,000 at a 7% yield?
Glen Eden, 6 Wilson Rd, 425m² building modernised for a Lollipops childcare facility and licensed for 50 children on a 1224m² site in town centre, returning $111,283/year from an 8-year lease from February 2008 with 2-yearly rent reviews and 2 5-year rights of renewal, sold for $1.395 million at an 8% yield?
New Lynn, 3025 Great North Rd, 647m² commercial site near Lynnmall in town centre, returning net $36,996/year from a 3-year lease to a car dealer from December 2009, sold for $672,000 at a 5.5% yield
(NOTE: I have lightly edited the report to save space. For the full report go to Bob Dey Property Report
These sales are further compelling evidence that prices have moved strongly upwards as compared with the more traditional values of a few years ago . They are a harbinger of things to come.
To me and others who follow the commercial market these results are truly astounding but interestingly, so far there hasn’t been a peep about this in the media.
If residential sales results showed similar rises in values in today’s financial climate the headlines would be screaming and the calls would be coming in thick and fast to introduce new taxes and other ‘disincentives’ (i.e. punishments) for investors who dare make such gains.
Interestingly, the prices obtained are not that far away from those achieved for average “Mum Dad and the three kids” residential properties in the Auckland region (slum-boxes excepted) but as the subject is commercial, it has no sex appeal and it’s therefore not a headline grabber.
‘Commercial Property Prices Rise Dramatically’ will never be found on page 3 of any newspaper. That’s fine for us in the business, thank you very much. We prefer it that way, actually.
There are more such deals out there just waiting to be found as many commercial property owners are still asleep at the wheel.
Before long investors will wake up to what is happening - so now is the time to start learning all about the subject.
If you are tired of the stress that residential tenants can give - not to mention poor returns, mounting repairs or vexatious complaints - then the commercial property market is just the right place for you.
You could become a part of this very fascinating multi-billion dollar investment niche - an area where big profits can be quietly made providing you know what you are looking for and obtain a good working knowledge in conjunction with impartial advice.
---------------------------
Olly Newland
April 2012 www.ollynewland.co.nz Used with permission.
303 Comments
I have got two small commercial properties worth $300k eack (one retail shop and other 10 self storage units).
Self storage units are great as risk is spread over 10 units, next to no maintianence and built of colour steel etc.
Purchase price was $190,000 2 years ago with currently weeky rent over $400 and are due to increase rent to $45 per week as new tenants come on (and we are still a third cheaper than likes of Kennards etc) . Fully tenanted with calls weekly from people looking for units.
Retail shop has had same business in it for over 20 years and had it for 8 years and return is now 20% based of purchase price.
Portfolio is fully self servicing on P & I loans.
Would never consider residential investment property now.
NZ Heads
You couldnt have read Olly's book very well. His banks went under and lost his money for him just like the finance companies of today .
But to his credit he seems to have made it all back again. .
And in this article he is only discussing commercial property as an option to be considered.
He leaves no doubt that commercial is not for everyone.
NZtext book – how to make millions.
Correct – Big Daddy- the advantages of commercial buildings - they can be easy, but profitable converted into different businesses, depending on the economic situation of our society: 30 units Backpacker’s, 50 units “Kiwi Student Squeeze”, 80 units “Foreign Students Squeeze” 100 units “Immigrant Squeeze” - two or three new Finance Companies – two Loan Shark Companies or for JK- our PM - a new casino.
- What about the new Shanghai Pengxin office ?
Retail has changed thanks to the internet but the only changes are to the types of businesses.
Such items as books and printing, basic foodstuffs, or stock items that do not need personal inspection are suffering from the changes.
But it is not really possible to get hairdos, eat out, go to a pub, try on clothes or buy good cuts of meat without physically going to a "shop".
That's why retail areas are still packed with "shoppers" who want something more than just a screen to look at.
Retail will never die, only the types of services will change.
And that applies to industrial as well .
Just because it is commercial property doesn't change the fact that property investment is criminal like bahaviour and definitely antisocial in intent.
Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits. They then get charged interest on this free money, but the catch is new money has to be printed each year to cover the interest payments. Prices in aggregate have to rise each year no matter what. The scumbag property investor knows this, and also knows the bank will lend them this free, leveraged money and let them leverage it again to buy property. More free money and more interest to be printed, so who is on the losing end of this exchange? Anyone that doesn't own a house, which includes every young person entering the work force.
Of course the astute person will see that less and less young people are entering the work force year on year, so eventually there won't be enough suckers to keep the ponzi scheme going.
Scarfie, on that basis breathing and indeed just living must be criminal!
You are clearly a loon, only interested in denigrating anyone who actually gets off their backside.
Your arguments are also rubbish - retail banks don't just create money out of thin air (even if central banks do!).
Based on your arguments anyone who uses money must be criminal!
The funny thing is that anyone who doesn't engage in what you believe is our "criminal" money system is actually lawfully a criminal (as to not use money you would need to barter for everything in which case you could/would never pay tax as the law requires!).
Read my comments below about fallacious arguments, you are good at those.
There is no problem with money. The trouble is that what you call money isn't by definition, completely undermining your pathetic attempts to excuse your lecherous behaviour.
So is leeching of others acceptable because you "get off your backside" to do it. I guess you could condone all sorts of behaviour under that scheme.
scarfie: It is not fallacious to testify the fallacies of your ramblings!!!
Are you so discombobulated by criticism that you resort to blurting the same invective? Criminals, Lecherous, Leeches!! (Fortunately I find the demonstration of such intellectual deficiency (the confusion of lecherous and leeching) mildly amusing!! I can wholeheartedly state that I have never engaged in lecherous behaviour with a house!!! Other readers - with a knowledge of the English language (or at least a dictionary) could please avoid the rather coarse but hillarious homonym intimated by the previous statement!!).
Your arguments are also rubbish - retail banks don't just create money out of thin air
Actually they do. It is a much better description of what they do, than to say that they lend out deposit holders money. Scarfies argument is clearly falatious, but not because of this.
NtNZ: Creating money is more than slightly different to earning or making money.
Grow a tree and sell it for a profit - you haven't created money in the sense scarfie implied!
Scarfie implied retail banks just make up numbers in an account and loan it out - that is rubbish!
Scarfie implied retail banks just make up numbers in an account and loan it out.
Would it alarm you if that is what they did? Because thats what they do. If you imagine the bank has a pool of depositor money, when they make a loan they
1) create a loan ledger and
2) create a deposit ledger for the borrower of the same amount.
Voila, the borrower has access to the pool of depositor money up to the amount of their deposit ledger.
http://neweconomics.org/publications/where-does-money-come-from
This material is not a conspiracy theory in any way, the book discussed here distils many many official bank of england documents down to be easily understood. Its actually very surprising to me that you would be posting here and not know this fact.
NtNZ
Only a dumb nut would confuse what scarfie and you suggest and what banks actually do do!!
Beside the book you reference being written by a bunch of left wingers who want a 21 hour work week, you must realise that bank credit is not just money out of thin air as scarfie and you believe!!
It's more than a stretch to say that a bank creates money because they increase a credit limit! If I open an account with a $10k overdraft limit and zero deposited the ledger balance is still zero despite having an available balance of $10k, money is not simply being created by the bank (which they can then earn interest on as your cerebrally challenged friend scarfie suggests). If I withdraw $5000 (to buy a house!!) the ledger balance is now $5000 overdrawn and the available balance is $5000 - the net position of my account on the bank's balance sheet is now an asset of $5000 (the $5000 loan I withdrew), which has to be balanced by either another customer deposit (NOT the $5000 available balance), a money market deposit or out of the bank's other assets.
There is no mysterious creation of money simply because an available balance exists in a customer account!!
Retail bank's certainly don't earn money from money they've created! They earn money charging a margin on advances higher than they pay for deposits and of course from fees - much like a supermarket makes money charging a margin on it's grocery items!
(There is a proviso: that if you are foolish enough to have both deposits in and loans from a bank at the same time then the bank is probably earning a margin on your money that it shouldn't - but that's still not the money out of thin air scarfie talks about (it's just really a fee for the customer's convenience or perhaps stupidity!).
Pretty underwhelming answer Chris since you seem to be throwing the 'dumb' label about. Are you really that stupid that you believe that? I guess so eh. I will go toe to toe with you in an IQ test any day buddy. I can even give you a rough idea of your odds.
Might I suggest a trip over to the RBNZ website and do a search under the term 'Fiat' and 'Fractional Reserve Banking'. Documents are available there that will confirm we use both systems for out money, but which you seem to be denying.
Just keeping it simple for you scarfie.
Enough banter, but clearly you don't understand basic concepts. Keeping it simple fiat currency is basically just money which isn't backed by a gold standard and fractional reserve banking is just banks operating as they have for 300 plus years ie taking deposits and lending money - if there wasn't fractional reserve banking a bank would just be a giant vault stuffed with notes!!!
Clearly you should move back under your rock!
From you confusion of a lecher and a leech, your continued nonsense about criminality and corrupt money systems, I wholeheartedly expect that your intellect is at best diminutive.
Prove me wrong, you are clearly relatively young, I could ask your GPA /GPE but that's very subjective depending on the institution, so in your last standardised year of education in NZ (ie 7th form) what did you acheive??
I can happily tell you that my lowest grade in NZUEBS was 91% with an average of 92.8% across five subjects. My university GPA was 10.8 (out of a maximum 11 for an A+).
But achievement in life has only little to do academic ability, and certainly wasting time arguing with loons right here suggests to many (including myself) that I am indeed a fool, however your incessant and beligerent comments unfortunately draw my attention, and I wrongly feel compelled to defend logic and reason.
It is no consequence to me whether you share my viewpoint, so it baffles me why I have spent any time at all replying to your comments, especially as most readers already find yours and pdk's view bordering lunacy.
I think enough has been said.
All talk. It was a challenge not an excuse for you to mouth off again. Your school grades & university grade are meaningless, as the guilford model of intelligence would show. At best it might show you are good in a narrow defined field. It is also telling in that it shows is a complete lack of intuition, but I know from past exchanges that you are incapable of comprehending that.
And yet another fallacy when you claim to speak for everyone. The last time there was a vote on my logic DavidB failed miserably at 17:4. So contrarily it is actually you that is part of a small self serving group that only want to know about where their next capital gain might be.
You make an even bigger dick of yourself when you assume I am young.
All truth. Not talk.
I assumed that your name (a colloquialism for an Otago uni student?) together with your hatred of property owners, your childish name-calling and your poor literacy were all on account of your youth!
Clearly there is no logic to your comment that property investors are criminals and the whole line of argument you put forward is insulting to both myself, the author of this article Olly Newland and to the providers of this website.
If you have such a superior intellect, evidence us of it. What is your academic background? What is your business background?
I have stated my academic background today and given my business background here many times before.
It seems your inability to provide such details belies some inadequacy?
Not that academia or business is really correlated to intelligence and in fact quite the opposite in the latter, but I topped my first year in Architecture School. I also mentioned last week that my daughter is in her third year of a chemical engineering degree. Won't find any more demanding than those two.
So you are old.
But why are you telling us this? No disrespect but your children's intelligence isn't exactly an excuse for calling property investors scumbag criminals.
Are you an architect? Which school? Are you practising?
When I studied at Victoria in the 90s class rankings weren't given out. (I did 1st Pro Arch (200 level), and coincidently I direct entered into Honours 200 level Chemistry in my first year at Canty Uni (which was overlapped with the Chem Eng class) and got A+s - so I guess rather bizarrely I have as good or better grades in both those areas you mention as demanding! Unless of course you completed your BArch?
But none of that is relevant to the argument that property investing is criminal or that money is corrupt, which is all just loony nonsense.
Anyway I have far better things to do.
Going back to the actual point of contention, Chris described a scenario where he goes to the bank, access $5000 and then spends it. Since when he did this nobody else goes without $5000 until he pays the bank back, palpably the money has come from thin air. Additionally of course Chris has acquired a liability and is expected to work his ass of chasing down $5000 + interest and returning it to the bank. So there is no dispute, banks create money by accounting entry.
The funny thing is the positive money group are simply advocating that the banking system be reformed to function exactly as Chris thinks the banking system already functions. Unfortunately left wing ideas give Chris a rash, he comes across all scratchy and irritable when people talk about being nice to each other in some way, so the views of a group like positive money are toxic to him. You have to feel sorry for the guy.
I don't think I have ever met anybody on this site who was less qualified on an intelligence test than myself. Obviously that speaks highly of the quality of posters at interest, its really exclusive Bernard only accepts comments from super smart individuals.
"Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I 'lend out' $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the 'fraction' in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones.
No where here is there any comment in regards for the need for any deposits, infact you even say that your capital doesnt even need to be by way of cash. For this simplist bank startup you need $10k in cash in the bank to lend it out. If I rock up to your start up bank and ask for the first $10k how are you going to pay me? You need either cash in the bank or have a credit line (with RBNZ if in NZ). Goes back to Accounting 101 that Assets in any business are funded via either Sharefunders Funds or Debt (or combination of both)
If I use $10k to buy a car and the owner deposits the $10k into your Bank, yes, you can relend most of it and charge interest to the second borrower but you are also paying interest to the depositor.
You would give your cause more creditabity if you took a more balanced view and acknowledge that when credit is created via loan the Bank does not pocket all the interest paid as profit, it collects a margin only as it has to pay depositors for the funds to lend out.
Obviously Rothbards example is a minimal simplification. No bank has one customer in practise, but your supposed refutation is a poor one. You are simply quoting a situation where too many deposit holders want access to their funds at once. Thats called a bank run, they do happen occasionally, so clearly this example is consistent with fact.
The other simplification being that you do need a certain amount of money available before you can credibly start a bank, I think the RBNZ documents I quoted below say 15 million before the reserve bank will allow you to be called a bank.
I doubt this very obvious fact was lost on you in the first place. Its not in any way like, there are two kinds of potential banks from the regulations, but only one exists because the other kind can't breach startup conditions and come into existance. Banks do, as is well known, hold more deposit liabilities than they have assets.
Are you really disputing Murray N. Rothbards statements? I did quote him verbatim there.
Gee. Perhaps you should read that Dumb Nut Steve Keen. For example.
http://www.debtdeflation.com/blogs/2012/04/16/inet-presentation-minskia…
A litte bit snipped...
.....Schumpeter’s entirely theoretical arguments on both the nature of banking and the ultimate source of finance for investment received subsequent support from empirical researchers. Basil Moore (Moore 1979; Minsky, Nell et al. 1991) overturned the “money multiplier” model of money creation with empirical research which showed that bank lending preceded reserve creation (see also Holmes 1969; Carpenter and Demiralp 2010). .....
and from www.debtdeflation.com/blogs/2011/12/03/my-hardtalk-interview-transcribe…
... a little bit snipped
.... The banks can create money by extending loans. The government creates money by running a deficit. Now back in the early 60s the ratio of government created money to the overall money supply was 15%. It’s fallen so far that we’ve got an entirely debt-based system....
Not everyone agrees with Keen. Krugman and Keen having been having a bit of a disagreement about other matters
. However, on the topic of money creation..... He is quoting empirical research by neo-whatsit economists in the first link...
Don't get me started!!
Steve Keen isn't exactly an oracle.
But honestly if simply lending money "created" money then repaying debt (which is what I am doing at the moment) destroys money.
The fact is that simple people here are getting confused as to what money "creation" actually is.
Scarfie and others suggestion that retail banks simply make up money (and therefore make huge profits from their ability to do this) is not only nonsense but is entirely deluded. The corollary that borrowers are therefore criminals is just bizarre and displays the stupidity of certain posters.
Just pointing out that Keen is pointing to empirical evidence that suggests that money is created when a loan is created... That is, out of thin air...
And that while it used to be a combination of Governments & banks that created money (in the 1960's). It now appears to be almost exclusively created by Banks.
and btw... You were already started....
Not sure where the bit about borrowers therefore being criminals came from.
Well.
Some property investors are criminal scumbags. Others have good intentions.
Probably would have been better leaving the comment go through to the keeper if it upset you that much.
I would be tempted to start looking at The Tibetan Book of Living and Dying ( if I had the time ), as I think there are some philosophical insights to be found in that book that would help illuminate some of the moral compass issues that crop up when observing some of the behaviours associated with Property investment.
Now..... Time to do something else
Well ... Chris_J ... if you HAD followed scarfie's comments from the outset you would have been aware that he is referring to investors who use debt to leverage themselves into property ... he is referring to the debt and not the property ... and his main target has been the debt peddler BigDaddy ... it's interesting that he has pressed your hot button, because you appear to be a fully cashed up property investor who doesn't use debt.
But honestly if simply lending money "created" money then repaying debt (which is what I am doing at the moment) destroys money.
In fact this is exactly what Steve Keen, myself and positive money all do claim. The financial crisis is caused by a fall in aggregate private debt. But of course this doesn't contradict the fact that commercial banks created the money in the first place, and earned interest on it over the course of any loan being repaid.
One person's debt is another person's credit ...... it is a simple marketplace concept .......
..... it does seem hard to conceive of , in NZ , because we've had several generations accustomed to picking someone else's wallet , via governmental love of egalitarinism ......
But there really is no " free " money ....... property investors take a risk by leveraging up their balance sheets ...... as do the banks who fund them ....... if both parties to the transaction create a profit for themselves , then well & good , they took the risks .......
The risk is very small Gummy, which is one of my main points. An ever expanding money supply means house prices are almost guaranteed to rise over time. The small risk is being over leveraged as you say, but the reality is you only get caught in this manner if negative yielding and the prices drop excessively for more than a year, a rare combination so only the most greedy would get caught. The money obtained is still free, regardless if minute percentage get caught out & go bust
However I think the game is up in general, as the market has reached a peak in terms of finding new people unencumbered by debt to keep the ponzi going. NZ is just last in the chain.
In world wide terms I think you are right.
In NZ specific terms, maybe not.
NZ is so small that a small fraction of a percentage of wealthy foreigners can keep the market propped up
National made it very easy for wealthy foreigners to get residency/citizenship.
If NZ is viewed as a safe haven.... Which it appears to be at the moment.
As per usual GBH way off........
a) the very economists who thought this are the main ones that said we were doing fine and here we are in a worse mess than the 1930s. Steve Keen and Minsky point out why this simply phalacy of debtor balances creditor doesnt apply in the real world.......
b) Risks are not really being taken, the banks know full well if they are allowed to collapse no one eats and our society collapses, hence they hold a gun to their own heads and dare pollies to fix things as they play the roulette table...hence the bank carries no risk, its show horned off onto the un-interested 3rd parties, the voters.
So when Scarfie says they are criminal, yep I'd hangGoldman Sach's board for instance and I wouldnt lose sleep....
PIs etc produce no good as such when they leverage....what they are doing is participating in a ponzi scheme.....a decent CGT will stop that game.....
regards
.... if interferring governments hadn't bailed out the bankrupt banks , the more prudent banks would've taken up their market share ....... which is the way the marketplace is meant to work .....
..... both shareholder & bondholders of those knucklehead banks , ought to have been wiped out , and the directors sacked ( no bonuses , no severance payments ...... out ! ) ...
We do live in such a namby-pamby liliy-livered world where no one is " allowed " to fail . Nanny State is standing there to fix it all , no matter how greedy & culpable you've been !
I don't know why you bother with these confused, perverse, and none too bright flat-earth losers, Chris, I really don't. To me the scary and concerning thing is that NZ has so many of them. No wonder this country has failed to perform economically, to prosper and to stay in the top half of the OECD when you have so many queer/ wrong thinking numbskulls like this in it.
To be honest with you I wish retail banks would just create money out of thin air. No one would need to default on their loans then would they, because the banks would just create or destroy money at whim to suit the needs of their customers and themselves?
........ fair do's , DB ...... there's many of us confused , perverse & none too bright flat-earth losers in Australia now ..
.. .. and we blend in very well with the natural born Aussies ......
One does wonder where this " banks create money of of thin air " malarky springs from ..... Iain Parker has alot to answer for ......
.. .. not much chance of the team debating the crux of Olly's article , is there ....... Commercial Property vs Residential ... as an investment ..... anyone ? ( CJ & BadDiggy excepted ! )
Well I agree with Olly. I have commercial property interests, and very good investments they have turned out to be too, and for the reasons Olly has outlined. I think a lot of NZ's don't buy commercial properties as opposed to residential ones, as the better commercial properties are often very expensive, in the millions, as this is one instance when size really does matter.
What's the commercial property like over there in South Australia, gummy?
Hello DB : Truth be told , I've not looked at the commercial property market here in Sth Oz ... having too much fun picking up shares in excellent small companies on the ASX ......
.... I wish , I dearly wish that the NZX had more depth , in the way the Aussie stockmarket does ...
Pottering around Strathalbyn in the Adelaide Hills a few days ago , and there was Fulton Hogan , doing contracting work .... what a pity they're not listed on the NZX ... or even Fonterrible , for that matter .......
Seems that Paul Krugman has completely under-estimated the scale of ignorance which can be encountered in practise,
"Leave aside the continuing confusion between the argument that banks can create inside money — which nobody denies — and the claim that they can create unlimited amounts of inside money, never mind the size of the monetary base, which is what is at issue."
http://krugman.blogs.nytimes.com/2012/04/02/things-i-should-not-be-wasting-time-on/
Only 'David B' would deny something that Paul Krugman thinks nobody would deny, but there he is doing it.
To be honest with you I wish retail banks would just create money out of thin air.
Naturally, the most ignorant debater is also the most arrogant, and David B is the primary source of the 'flat-earth' monica. However, his ability to be completely and utterly ignorant of anything he is debating is once again truely absolutely flabergasting.
....... au contraire , mon ami ......DB speaks simple commonsense ; which is a breath of fresh air where so many tie themselves up in knots of well-meaning do-gooding socialist platitudes ....
He's not advocating using the government to pick the wallets of productive folks' to gift " free " money to the indigent & ne'er do wells !
Brilliant chap , DB !
...... we're a dying breed , those of us who believe that folks gotta take personal responsibilty for their lives , and for their mistakes .......
Check out the Eurozone ....... those feckless blundering socialists now want India , China & NZ to give $ mega-billions to the IMF , in case they need bailing out of their bucolic bureaucratic experiment in unified economics ...... the Eurozone is a festering corpse , bury the bloody thing !
Funny old world we live in , DB .
You appear really keen to keep your eyes closed on this one Chris. I see you don't consider amateurs reliable testimony, maybe some other quotes.
"Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I 'lend out' $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the 'fraction' in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way."
http://www.lewrockwell.com/rothbard/frb.html
"Leave aside the continuing confusion between the argument that banks can create inside money — which nobody denies — and the claim that they can create unlimited amounts of inside money, never mind the size of the monetary base, which is what is at issue. Oh, and you know, I do know about T-accounts."
http://krugman.blogs.nytimes.com/2012/04/02/things-i-should-not-be-wasting-time-on/
"In the real world a bank loan increases 'impatient's' spending power without reducing 'patient's' so that the level of private debt does matter."
http://www.debtdeflation.com/blogs/2012/03/21/my-paper-for-inets-berlin-2012-conference/
Note the the Krugman - Keen debate is about how the fact that banks create this 'inside money' should be modeled in economic models.
NtNZ you are completely nuts!!
So where did the $10,000 that was lent come from??
It came from depositors funds - not thin air. It would be lovely if it could come from thin air. Unfortunately it doesn't.
There seems to be a band of loonies who read parts of articles and form opinions based on their lack of knowledge.
Your all as bad as the pro-property loons that drove up the market in the 2002-2007 only to change tack when the market changed.
Olly Newland, myself and many others know something about investing long term that you simply don't comprehend.
Chris J,
You are 100% right.
Be great if could start a Bank with $1k and lend out $10k straight away.
Banks need to have cash in the bank to lend out at startup and can only relend monies out if the proceeds of those loans are returned to them by way of deposits.(hence Banks are compeditive over obtaining deposits and why lending ground to a halt via GFC).
Banks need funds/cash to lend out and they have to pay that by way of interest to depositors.
If in any doubt have a look at a Banks Balance Sheet and P & L to see things called Liabilities (Deposits) and Interest Expense (Interest paid to those depositors)
Agree Banks Lending is limited to amount of their capital as imposed by regulations from Central Banks and Banks can leverage off their capital up to 9 times BUT they still rely of funding to be able to make these loans.
If you listened to half the uninformed who contrubute to this blog they would think Banks simply can make any amount of loans they want without any relience on how they are going to fund them.
So, I gather that you and Chris concede that the banks do write their loans into existance as accounting entries.
We can debate also the ability of central bank regulations to constraign lending, and hence the limit on how much they can do this, but at this point Chris has to concede because he has not presented an argument. I am sure the noble southerner will be happy to accept Chris apology.
He just keeps saying that could not possibly be true, when in fact it obviously is. Its not even really in dispute in fact, the only dispute is what the effects of this are (for economic theory) and if its a sound way to implement a money system going forward.
Loans are recorded by way of accounting entries in the exact way all other assets, liabilities, income and expenses are recorded.
The point that you do not concede is that Banks are also restricted on their ability to lend by the level of deposits (liabilities) they hold.
As per Accounting 101:
Assets (Loans and other advances) = Liabilities (Deposits) + Shareholders Funds (Banks Capital)
The amount of lending is restricted by amount of deposits a bank has or the amount of shareholders funds.
(yes banks balance sheets are the reverse of a normal business but the fundamental is still the same Assets = Liabilities + Shareholders funds)
You obviously have to concede the first point, there is obviously a way for banks to create loans as accounting entries in double book keeping, Chris already pointed out what this is and that it is the method used. Double entry book keeping does not prevent banks creating money as accounting entries (which is exactly what Chris calls Scarfie a lunatic for saying), you concede this point, moving on.
No, I do not concede that banks are either restricted in their ability to lend, especially, by the level of deposits they hold. They are also not very restricted in the amount of reserves they hold.
Here is a paper, where two economists empirically show the opposite to be true of the US monetary system,
http://www.minneapolisfed.org/research/qr/qr1421.pdf
present your argument, and maybe the validity of this will be up for debate. Note they explicitely state the money multiplier is a myth, in this paper.
Your argument, that the reserve system constrains banks might be true, if they had to have their books in order at all times. But in fact they don't, they only do this intermittently I understand typically 60 days after making a loan they need to balance this entry.
NtNZ, your argument is plain loony.
A bank gets deposits or money market funding in real dollars and lends out real dollars (real as opposed to the fictitious money the above lot seem to think exists - no relation to anything Brazilian!).
If retail banks simply created money by accounting measures then everyone (including me) would be starting a bank!!
Imbecile rants confusing banks' capital reserves with the amount of funds that are available to lend is just infantile nonsense.
Show me this money creation on a retail banks balance sheet!!
A bank gets deposits or money market funding in real dollars and lends out real dollars.
Does this include paper currency and coins? Yes. Does this include electronic currency? Yes. Lets agree, for the sake of argument that this meets your definition of 'real' dollars. Please correct me if this does not meet your definition.
So can a bank then owe more in deposits than it can pay at any given moment? Yes.
You already conceded this, and this is exactly what you accused Scarfie of lunacy for saying. Frankly you owe him an apology, but I won't be holding my breath to see it.
Do you actually have an argument to present? You have completely failed to dispute the point, banks create deposits as accounting entries, and banks deposits function as money. It seems you are deeply uncomfortable with this fact. Take from it what you will, but its a fact.
For conceding that, you should apologise to the noble southerner. Maybe we could also debate the constraint on commercial banks to lend, but that is quite clearly a different question.
For the love of God, NtNZ. If a bank has to have enough cash to repay all depositors then it can do nothing but hold cash!!
Therefore the only amount of money a bank could pay in interest would be the overnight cash rate less the margin the bank needs to charge for operating banking services. Hence in the US retail banks would have to charge you something like 1.5%PA to hold your money!! Which means everyone would hoard notes and coins and banks likely would cease to exist as we know them!!!
All absolute lunancy.
The very thought of how stupid your arguments are, and your ardent belief in them .... rrrrrrr, the mind boggles...........
For the love of God, NtNZ. If a bank has to have enough cash to repay all depositors then it can do nothing but hold cash!!
Of course, and they can't possibly be doing that, and they are not, that is exactly what I said, and so they must be creating the difference, the extra deposit balance as accounting entries. The balance of the difference doesn't exist as currency, even virtual currency, and so it must exist only as an accounting entry.
In fact its exactly the accounting entry which you quoted (in double entry book keeping terms) and this is how commercial banks create money. I think we are really getting somewhere now.
So as you can see when Scarfie says banks create money out of thin air, he actually obviously means banks create money as accounting entries and thats what they do and that is why he said they do it.
I really don't understand why you have a problem with understanding this, you appear to be saying banks don't create money out of thin air, and then presenting a whole bunch of evidence to show that they do. In fact that statement is obviously consistent with the 'money multiplier' model, its consistent with Paul Krugman and Murray N. Rothbard (who think the money multiplier model is functional). If appologising to Scarfie is really that hard why don't you just sign off?
As you said, banks owe more money than they have available at any time as reserve assets or currency. That amount is the balance of 'the difference' and its created by accounting entries by banks. Ergo you own Scarfie an apology, because he said that and you called him a loon for saying it.
Does it hurt that your debating skills don't match those of a brick wall?
Wrong,
Banks do not wait 60 days to balance their entry. They are looking at their funding daily and booking funding based on known advances and settlement dates of loans.
They price their cost of funds daily and know margins which is critical especially with fixed rate lending.
Banks spend a huge amount of time and effort in managing their positions and its not like the local darts club that checks the cash in the tin once in a while.
Sorry but when you make comments like the one below:
But in fact they don't, they only do this intermittently I understand typically 60 days after making a loan they need to balance this entry.
No, I do not concede that banks are either restricted in their ability to lend, especially, by the level of deposits they hold. They are also not very restricted in the amount of reserves they hold.
It just reinforces that your comments are made from what appears to be a uninformed position with little knowledge of the NZ Banking system.
(PS I have a large amount of knowledge of bank operational lending systems and processes having been involved in it to a high degree)
Good, you concede that Scarfie has at least the first point right. The second contention is certainly debateable. Keen and Krugman are both quite eminent, and on different sides of this debate.
Are you claiming that the NZ system is different in behaviour to the US system? Or that the paper I presented is wrong, its not a long read at all.
Good to debate such an expert, maybe you can teach me something then,
"Disclosure requirements
A key feature of the banking supervision framework is the requirement for banks to make regular, comprehensive financial disclosures. All registered banks are required to make quarterly disclosures of key accounting and prudential information. The main elements of the disclosure requirements are as follows:
* Banks are required to issue disclosure statements in two forms each quarter: a comprehensive General Disclosure Statement (GDS), containing a wide range of detailed financial and prudential information; and a Key Information Summary (KIS), which is a brief document containing just a summary of key prudential and financial information (including the bank’s credit rating and recent changes to that rating). The GDS is aimed at the professional investor or analyst, while the KIS is aimed at the non-expert depositor. The KIS must be displayed and available in every bank branch and be disclosed on the bank’s website. Banks must make copies of their GDS available immediately at their head offices and within five working days from a branch or agency."
...
"* For the end of year and half-year, the financial disclosures contained in the GDS include comprehensive balance sheet, income statement, asset quality information, information on capital adequacy, large exposures, connected exposures, sectoral exposures, credit rating and recent changes to that rating, market risk position (covering interest rate risk, exchange rate risk and equity risk across the entire bank and banking group), and descriptions of the bank’s risk management systems."
http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003dec66_4mortlock.pdf
I guess you can explain why this is a poor source?
Here you are talking about disclosure which is a reporting issue vs. an operational issue I was talking about (what happens on a daily basis within a bank and its lending operation).
The way you worded the following:
Your argument, that the reserve system constrains banks might be true, if they had to have their books in order at all times. But in fact they don't, they only do this intermittently I understand typically 60 days after making a loan they need to balance this entry.
can make a reader assume that you think banks don't know their position until up to 60 days after a loan has advanced.
They know the next morning the banks position after the intecharge of payment between banks overnight.
They only have to report to public the infomation in KIS and GDS eiether 3 or 6 monthly.
You can be assured most branch or unit managers know the position of the businesses they manage up to daily as well (I know of at least one Bank where a trail balance is produced each morning for reporting purposes down to branch level).
I can't make a reader assume anything, obviously.
So maybe you should elabourate how much of a constraint this imposes on bank lending. For example what happens if the branch manager comes in and the bank is out of compliance one day, in this case do they shut up the loans window? If you want to claim this system constrains lending you need to explain clearly when it prevents lending from happening.
Then we might debate how much of a constraint this turns out to be in practise, or you could just concede now. The Kydland and Prescott paper I referenced (there are other sources) is pretty equivocal. Its not a constraint, its a myth that this is a constraint. Of course you can only measure this from the top down, and studies don't exist which show that the money multiplier is a good model, though there are many which show its a poor model.
Money Man, thanks for the support but it quite clear that NtNZ, scarfie and pdk are a bunch of escaped lunatics who defy all reason and logic on a daily basis.
They're the easily brainwashed type so fixated on an illogical ideology that no sound or reasoned argument would deter them from their irrational (and downright incorrect) understanding of a basic system.
They simply believe that the corrupt system is responsible for their own inadequacies and their failure to succeed.
Perhaps we should leave them to sit on the street corner chanting their incoherent ravings and walk away bewildered but definitely amused that such utterly stupid people manage to actually exist!!!!!
Turns out Chris that Steve Keen has just covered the entire disagreement we were having,
http://www.debtdeflation.com/blogs/2012/04/21/just-banking-presentation/
Though no doubt this subtle point will be lost on you, your criticism of Scarfie was for a statement which literally every single economist accepts. Steve quotes many economists in his presentation, and all of them agree with what Scarfie said, Banks, all banks, do create money by accounting entry.
"Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans."
http://en.wikipedia.org/wiki/Fractional_Reserve_Banking#Example_of_deposit_multiplication
You are either extremely thick, or have been trying to retain some credibility from a debate by repeated bluster, because you realise you lost the debate and have no argument to back up your position.
NtNZ the debate's over bar one final point below. But you and the others (who also recently absconded from an asylum) are welcome to rant amongst yourselves.
Final point: is that you completely miss the point on the money creation issue. Of course money supply is increased when a deposit is made at a bank and a corresponding loan is advanced, what scarfie and you other loons argue is that this is somehow free money or money out of thin air - oh what a load of nonsense!!!!! No one can create free money except central banks.
Tell me, if I lend you a dollar bill and you lend it to a friend does that create money out of thin air - free money from nothing that I can pocket like scarfie suggests?? - of course not. There's two of us who can list the dollar as an asset, plus a third with the note, so essentially money was created but it's certainly not free money!!! You, scarfie and his loons allege this is magical money that banks can produce ad infinitum, fraudulent money, to line their coffers .... what nonsense.
Come on Chris you are just playing on semantics. Where did I use the term 'all' in my statement? What so only 90% of peoples money is fraudulent, I am sure they would be completely assured to know that. Actually the stats Bernard posts occasionally show the leverage is worse than that.
Really what you have done is another fallacious technique by sidestepping the main issue and turning the debate towards a point that is no consequence to the main point I make. And then to defend this side step you resort to abuse. By resorting to fallacious argument then anyone astute enough will see you don't actually have one.
There's two of us who can list the dollar as an asset, plus a third with the note, so essentially money was created
Good, so you concede.
..., but it's certainly not free money!!!
Ok, what is the seigniorage paid on it then? What? None? So now creating money free of charge doesn't constitute free money?
You really don't learn do you, before engaging the crazy people get your facts straight and make sure you are not losing the debate, ..., again. You are not doing your profession any favours by exposing such soft headed thinking, and stating your supposed cridentials.
You should give up at this point, because if you were paying attention to the facts you will find your argument doesn't have a leg to stand on. It seems you think you can win a debate, simply with incessant name calling, but it is obviously completely meaningless what you moniker me regardless of how many times you repeat it.
ChrisJ... u are wrong on this one..!!
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf
The Private Banking sector does create money.
It does this in the form of "credit " ie. loans... which is considered money.
So.. Banks can and do create money out of thin air.... call me a loon.. :)
It is a bit more complex than that ... but that is the gist of it.. Almost all of our money supply growth is thru the Banks creation of credit.
Cheers Roelof
Clearly NtNZ you are so incredibly stupid that you believe money is fraudulent or "made up" or "free" if it is not backed directly by notes or coins!!!!!! And according to scarfie that "free" money is actually free money (ie retail banks print their own profits!!!), that of course is all the biggest load of rubbish ever.
I suspect that it is scarfie's and your own limited intellectual capacity which has left you to misinterpret the writings of some who rightly or wrongly blame recent economic woes on loose credit expansion and contraction.
The two loons have misconstrued the expansion of credit as money printing when in fact the credit is always backed by deposits. If a bank requires a 20% reserve as your example suggests, then if the bank's reserve is $100 they can only lend $500 if they have $500 in deposits!!!!! The money does not come out of thin air to lend out!!!!!!!
Would one of the lunatics please tell me: if I put a sticker saying "bank" on their forehead and they only had $100 in their pocket and no other access to cash, then how would they lend me $500?????? How?????? Only if someone gave the moron $500 in a deposit!!!!!!
Money is not free ever unless you are the Government and you chose to print it.
You show your stupidity mixing seigniorage (the money made from printing money) with what is purely an expansion of credit.
Only moronic loons could possibly confuse, or be stupid enough to believe that retail banks can make money out of thin air!!!!!!
Tell me, if 10, 50 or 1000 people in a chain of buyers and sellers use a note or notes, say they each bought a house for $1m, how much money actually existed?????
1000 transactions occurred where $1billion was spent - but only $1million dollars ever needed to exist for that to happen.
The loons that disagree are free to endlessly rant amongst themselves.
Here you are talking about disclosure which is a reporting issue vs. an operational issue I was talking about (what happens on a daily basis within a bank and its lending operation).
The way you worded the following:
Your argument, that the reserve system constrains banks might be true, if they had to have their books in order at all times. But in fact they don't, they only do this intermittently I understand typically 60 days after making a loan they need to balance this entry.
can make a reader assume that you think banks don't know their position until up to 60 days after a loan has advanced.
They know the next morning the banks position after the intecharge of payment between banks overnight.
They only have to report to public the infomation in KIS and GDS eiether 3 or 6 monthly.
You can be assured most branch or unit managers know the position of the businesses they manage up to daily as well (I know of at least one Bank where a trail balance is produced each morning for reporting purposes down to branch level).
While I have no doubt others have addressed the errors and deficiencies in your arguments, I simply cannot believe that you fail to see the obvious errors.
First of all, ‘in the absence of a Central Bank’. There is no such thing. I live in the real world, (maybe you don’t) and in New Zealand we have a central bank. That is the beginning, the middle and end of the story. There is no such thing as an absence of a central bank in New Zealand. Twisting reality as an attempt to justify your argument when we are dealing with an objective reality that exists is just bizarre. So if the very beginning of your premise is already so incredibly flawed, what possible relevance is there in the rest of it?
Does your mind work in mysterious ways, for example like this?
If Maori had lived in Britain instead of New Zealand, this is how they would be living, which in turn proves that there are no indigenous people from the Auckland Islands. No worries, mate, box of birds.
Secondly, let’s say I open a bank, as you suggest, and I take in $1000 in cash as a deposit from my very first customer. Yipee I’m in business! Now let’s see what happens when I create money out of thin air and then try to lend that out as $10,000 to another customer.
Customer #2 walks in and says, “can I have a loan of $10,000 please?” “Most certainly you can”, I say, “that will be at an interest rate of 12.5%”. “Very good”, they reply “I’m off to buy a car”. “May I take the $10,000 in cash with me now?” “Most certainly” I say, and with a flourish of my hand to create the $10,000 out of thin air, I open up my draw to withdraw the cash. Oh no, disaster. I only have $1000 sitting in the draw!
I am simply stunned that you cannot see that, and that the entire construction of your thesis is just such utter rubbish. Banks are so much more complex and regulated than you are making them out to be. I would spend some of my time reading up about it if I were you, and take extra effort to ensure that I had understood everything correctly.
I replied to this, but I will point out again, that example was invented by Murray Rothbard, its a simplification but bank runs (which is what you are describing) do happen. So the example is not contradicted, banking really works this way.
N.B everybody has been very clear on this, money is created, not currency or electronic currency. Only a central bank can create currency or electronic currency, but this is not contentious.
So would you regard your deposit account balance as money you can spend, even right now if you wanted to?
I am very simple minded, when the main stream model of banking explains banks create money out of accounting entries, I tend to believe it.
under Money creation,
"Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans."
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Maybe you should try editing this wikipedia entry, you seem to be saying its incorrect, I am sure they would appreciate the record being set straight.
Nic, a lot of people have trouble understanding how the system really works. When it's explained to them they either have A mild breakdown or they deny deny deny. Let's remember that when one has worked hard and scrimped and saved every cent, the truth of money creation makes it all seem well...a waste of time.
I didn't realise this was still going. Lol. Keep in mind my barb is targeting at those that haven't 'worked' for their money, but those who aquired it for free by leveraging against property(leverage being the key more than property) using money already leveraged by the bank. I use the term criminal sincerely, as the thinking is exactly that. Intentionally taking something without regard to the consequences of the victims. Those who howl the loudest have the greatest intent.
You are right, for most people the step from the fantasy to reality is too great. But my intent in this isn't to convert those who protest, but to hope that someone reading these threads has their curiousity stimulated to go searching for the truth themselves.
A good start point that completely undermines the argument put here by several posters, including dopey Dave above, is to search interest.co under charts for the money supply. Here people will see the physical money supply, consisting of notes and coins, listed as M0. If you compare that to the total money supply (desriptions provided), which includes all the electronic money, there is a huge disparity. A 63:1 ratio of real to electronic when I last did the calculation. Further if you divide M0 by the population then New Zealand has less that $1000 per person in cold hard cash.
So..........if everyone went bank to their bank and asked to cash up after selling their property say the banks would be fine ya reckon?
Bartering is perfectly legal by the way. There is NO law that states you must pay income tax IF you decide to reframe from EVER applying for a IRD No. I suggest you (rather than rant cause CHCH ain't working out for you) get educated about the real monetary & tax system.
It is ALL a fraud and Scarfie, Wolly and others are 100% on the ball
More illiterate loons joining in!!
I love it when people don't know how to spell commonly used words! Refrain. Demonstration of our super education system!!
BTW just because you don't have an IRD number doesn't mean you don't have to pay tax. Give me your name and address so I can pass it on to the IRD's evasion squad!!
You loonies are a laugh a second!!
Quite right. I have always spelled quite poorly. I will accept the monica of, 'the illiterate loon' but you will have to bargan for calling Scarfie 'the noble southerner' from this point forward. I mean at least he has not refuted his own accusations yet. I think thats kind of noble, in a Don Kyote way. Just because 'the don' tilted at wind mills that doesn't really mean the wind mills were not out to get him does it. Wind mills could be quite dangerous if you are not paying attention.
Well, talking about names and addresess, was that you Chirs _J , that spat details out of your local_host a couple of months back, you know the one, a MS Word Doc gone wrong? You tried to delete it , but were not quick enough.
A word to the wise. Stick to your knitting.
Everyone is entitled to an opinion.
So how about a little less of the 'give me your name and address' shit.
Seems resonable to me.
For goodness sake moa man, I don't care if people know who I am! Bernard and David know.
You miss the point of the comment, Justice suggested tax evasion was legal, I suggest if he is so convinced of his position he pass it by the IRD who may take a different view!!!!!!
No I dont think somehow you can "legally" dodge the IRD merely from not applying for an IRD number....besides which that would apply to non-NZers, pretty sure you get one at birth.
Now if you live your life bartering, well thats possible (quite how you get electricity say just with barter is mind boggling), however I believe some ppl have found out that the IRD can turn up and assess your lifestyle and "do you" for tax.....? So its a Q of when you get caught....
Now there was a bartercard, not sure if it exists any more...? but again thats a single point the IRD can tap?....sure it may not be possible/legal for the IRD to do so right now, but how long will that last?
I wouldnt say its all a fraud myself.....the banking system is necessary....its just out of control.......I suspect because its masking the high cost and availability of energy....really its making future calls on these that cannot be met.....
Also in terms of bartering its subsistence living....you get no complex societies from that, which means a very basic lifestyle....
regards
Steven I think there has always been money, and probably always some form of banking. But it is when Bankers realised they could fractionally reserve their deposits that things came off the rails. Fiat isn't necessarily a problem, but is open to manipulation. So it isn't money and banking that is the evil, it is how it is conducted. The clowns in this thread that accuse me of advocating bartering are attributing statements to me that I have not made. I short they are practicing dishonesty in their argument. There is a real problem with these guys using fallacies or argument, you can point them out in almost every post they make (to use my own :-)
IRD number, well I can remember putting my assigned number on my School Cert art portfolio. Turned out later it was also my IRD number.
Interest is also a real problem, and if you boil it right down to its root you will find that it is energy that has paid the interest. Energy has supported parabolic population growth and these new people coming in have supported the ponzi, until now. If we peaked in the rate of growth in 1961, then the problem first showed up about then. They muddled along but finally the US had to go off the gold standard. I direct correlation to money and peak resources there I believe, which it seems you also see. Everything else has simply been trickery to hide the fact we are in trouble.
I had an interesting chat with an aquaintance on Friday. Elderly PhD sort of fellow, who actually used the term 'inflexion point' in relation to the population graph before I did. He gets it, which is why this ex yank has been in NZ for 30 years.
I think you really ought to give up on this concept because its complete hog wash.
To lay out two cases compare two people similar in every was, except their manner of, buying a house,
The first person saves the deposit, and borrows the remaining funds.
The second person saves the entire purchase price and pays cash.
Who is now better off financially after this transaction? Its quite clear the second person is. So in fact the cash buyers are better off than credit buyers, because they will dedicate less of their future income to owning their home outright.
So then your entire argument comes down to an argument that the aggregate price of houses must rise each year, no matter what. However that just happens to be completely untrue, in fact its quite clearly contradicted by the house price index.
http://www.interest.co.nz/charts/real-estate/house-price-index-reinz-rbnz
In fact you are denying the existance of many a housing bubble, which has already collapsed. If house prices really had to increase anually, you would not get housing bubbles, would you, because housing would be a guaranteed win at least over a year.
For a house what is the opportunity value? I suggest its zero...
Its only an opportunity if it gives a unique payback.....ie if you dont buy you rent, so you get value that way so it cancels out.
So if I buy a tool that allows me to be 20% faster and more accurate in my work there is indeed an obvious opportunity I should take, provided the tool works out at say 50% % of that advantage.
Otherwise you have merely consumed...
regards
I think you need to consider three things provided there is no risk of deflation.
1) where do you live while you save? and if the cost pay the rent is bigger than the interest due then surely buying early makes sense?
2) The former wins on inflation....in effect its also tax free income....the latter loses on income, usually carries more risk and has to pay tax on the interest.
To save enough money in a non-bubble priced house would take how long? If I look at the old price of my house it would take me 20 years to save to buy it.....
3) Opportunity cost?
Now today of course we have a bubble (I dont agree its collapsed, this is just the start IMHO) so there is a huge risk of loss when that bursts, plus loss deflation from a Greater Depression, so the latter has advantages for now....which I might have missed being said,
a) Liquidity...you can move easily at little loss.
b) Lower eventual purchase price.
c) no significant losses.
regards
Ok, all these things would be worth considering if I was trying to explain when its a good or bad time to buy. In fact Scarfie was claiming that house buyers get an automatic, free win, due to the financial system and borrowing mechanisms. This was based on the mistaken idea that house prices have to go up, at least over a full year, due to the working of the financial system. Obviously they don't always go up. Borrowing money to buy a house is a risky business, especially at present. I think its enough just to show that borrowers are taking a significant risk to dismiss the idea of borrowing money being a morally reprehensible behaviour.
Its pretty obvious I think that the main winners from the housing bubble have been bankers, even during the inflationary period. Those people who saw their house prices double or better over 10 years were quite pleased of course. But that doesn't mean they would have been worse off if they had not contributed a lot of their income to the financial sector in the first place. Obviously not everyone can have been so lucky either. In aggregate the real economy just committed more and more income to the financial economy, this can't have been on aggregate good for those in the real economy can it.
"Of course the astute person will see that less and less young people are entering the work force year on year,
Would you kindly be "astute" enough to provide the link with the data showing that less and less young people are entering the work force each year. I would have thought that globally, not only are more and more young people entering the work force, they are doing so at an unprecedented rate. Furthermore, I would humbly suggest that the productivity and remuneration of said young people is also increasing quite nicely thanks.
And yes, we know the rate of population growth peaked about a generation ago. What I want you to do is verify your claim that less and less young people are entering the work force. Do that and your chocolate fish is in the mail :)
VF -of course more young folk are 'entering the workforce', globally, while the growth in rate of population may have peaked, there's an age-related lag in all things, including (it beats most folk, this) procreation.
Productivity may well be increasing - that measure includes the trend to slave labour/ non-wages. Renuneration is a different thing entirely, and I challenge you on that. It simply cannot be so.
Telling indeed that you would run the two together.
Scarfie is right re the first world, though. Spain (I've just had a young Spanish visitor) has 50% unemployment in the u25 bracket - he said it's worse in that the other 50% are on stuff-all.
Mish Shedlock and Karl Denninger have been putting up a fair few posts re Spain lately
easy enough to google for +spain +unemployment +mish
http://globaleconomicanalysis.blogspot.com.au/2012/04/spanish-economic-…
http://globaleconomicanalysis.blogspot.com.au/2012/04/eurozone-unemploy…
And while I didn't google Denninger, I recalled there was a recent post about Spain...
http://market-ticker.org/akcs-www?post=204874
Greece youth employment doesn't look too flash either...
Standard available Demographic data? and what about your URLs?
"Furthermore, I would humbly suggest that the productivity and remuneration of said young people is also increasing quite nicely thanks."
Also who cares "globally"? are you cherry picking? its Nation centric I would suggest.
but anyway,
The youth employment rate has dropped 8% in twenty years
http://www.businessinsider.com/9-alarming-charts-on-the-global-youth-un…
http://blogs.reuters.com/felix-salmon/2011/12/22/the-global-youth-unemp…
Yet youth un-employment is typically around twice that of "mature" workers.....debt from education would also seem to be far higher than for previous generations.....and such can mark them for life....
http://www.economist.com/node/21528614
Hence I seriously wonder about your suggestions being correct.
regards
Scarfie:
What do you do to make a living?
Have you got money in the bank earning interest?
Have you borrowed money now or ever?
Do you own house?
How did you pay for it ?
If so would you sell it for what you paid or it?
if you rent do you pay rent to a "scum bag" owner.
If so why?
Or are you a free loader on the social welfare system?
The "criminal class" ( and your landlord/mortgagee) would like to know.
Bg Daddy - I can't resist....
1 - define 'make a living'. I suggest you read Solly's 'negative pigs' piece, and that Martenson piece, before replying (negative pigs, like fiat money, doesn't exist, and therefore isn't 'earned').
2. If he has, it's earning capacity is reducing as it sits, but mostlythat's a negative pig too. Very little exists when the music stops.
3. irrelevant - even if he had, he's allowed to learn.
4. If he does, he at least has something real (there I agree with you, in that bricks and mortar actually exist).
5. History is not applicable henceforth. Borrowing is a borrow from the physical future, and unfortunately, that has reached the limit in ability-to-underwrite. Expectation (money, proxy) far exceeds the underwrite at the moment, somewhat disguised by most folk happy to accept it in dormant form (electronic '1's and '0's).
6. a conscience choice. Depends on his degree of altruism or selfishness.
7. If an owner is attempting to profit from an existing pile of bricks and mortar, then the actual underwrite has to come from somewhere else (the landlord expects to buy real stuff with that 'profit', right?)
8. I doubt he's a welfare recipient (sounds too smart and not a loser, to me) but I'd make the point that a good number of folk do worse things than many beneficiaries: i'm talking of real impacts, of course: Being involved in the production and/or burning of coal , for instance, is far worse for the planet than a drawing a DPB.
Which is where I agree with Scarfie - we need to define what 'criminal' is, and perhaps the threshold needs to be 'from the view-point of the 7th generation'.
www.facingthefuture.org/Portals/0/Documents/Articles/NIE_1b.pdf
I think we are using the wrong word in "criminal" its more like amoral, but yes, you could extend the meaning of amoral to a state/situation where eventually society makes the amoral undertaking criminal...
I certianly think we should be questioning just how the creation of money/wealth out of thin air (interest) that has to be under-written by having more energy to support it when it isnt going to be available is right.
regards
A classic fallacy of argument is to try and discredit the opponent. This isn't about my actions BigDaddy, I am proud of what I have done to serve this society and sleep quite straight at night. The question is what exactly have you done to make a contribution?
In fact because of your lecherious property investment activity the question becomes what have you done, or do you intend to do, to redeem the negative ledger you have.
You successfully describe yourself. Firstly what does your comment contribute? What do you actually contribute? I am picking bugger all. Lastly and most telling is my accusation still stands unrefuted because the scum I address don't actually have an answer. You just added yourself to that list.
Ollie, if you are just going to bitch and moan about how much tax you pay, I think you should fess up and include your personal tax summary, just to show how unfair the situation actually is. In the absense, I think people find it extremely hard to feel sorry for your whiny self.
It’s no wonder that there is a growing rental crisis, and increasing homelessness, all aided and abetted by the recent tax disadvantages which have, as expected, had the exact opposite effect from what was intended.
So, what is the connection between the government closing some tax loopholes and homelessness? Is there one as a parallel mention might imply, or is this sentance a vulgar attempt to garner simpathy for a self serving anti-tax argument.
Frankly Ollie ought to be ashamed for showing such utter contempt for homeless people.
You should, being in the financial service industry you must know all to well what I allege is correct. But you choose to dance with the devil. It won't be the Police you have to worry about, when this all gets turned on its head the Police will be powerless to defend you. Better hope our leadership vacuum continues and no one rallies the mob.
PDK, that's a moronic statement.
By that reasoning nothing you own is yours because someone else always has ultimately more control over it! A court can confiscate your assets because you didn't pay a bill or your taxes, a Government can requisition assets if it sees fit, &c, &c.
If you own a property title - you own it, it might be worthless, it might have more debt on it than it's worth but no one else can do anything to it without a High Court Order.
If you don't pay your medical bills when you get old the District Health Board can repossess your house just like a bank can. If you don't pay your rates the Council can sell it under the Rating Powers Act with very little effort required - your idea about bank debt being different is delusional and illogical.
PDK and scarfie, you guys are just plain old fashioned nuts!
Iconoclast you too are a moron. What "normal" rights of ownership doesn't someone with a mortgage have - just one as far as I recall - that is they can't do something that would destroy a property's value without the mortgagee's consent (ie you'll get in trouble if you demolish your house without telling the bank).
Ownership without a mortgage is little different - courts, councils, health boards or debtors can all claim a cut if you don't pay a bill - a bank can only do anything if you fail to make mortgage payments.
You and your friends (scarfie and pdk) who want everyone to live under a rock just love to make up nonsense about why property is bad.
You have all been proved wrong.
By the way a lot of investors don't have any bank debt. And while you lot have been bemoaning property for years, people like me have amassed 8 figure property portfolios which in a matter of months will be mortgage free.
Well you show your complete lack of understanding of what I am stating when you allege I am saying property is bad, when we are having an discussion about money. I don't know why you actually bother to post, except I guess you have to try in some way to defend your behaviour. Keep digging Chris, that hole is getting deeper.
AFM
After your fisrt post I did want to post a message of wary..
Unfortunatallly this site has been over taken by the crazies...
I remeber the good old days when wally ( artist formally known as wolly ) was the lunitic friidge.... he is now the voice of reason.....
We also have a gelaton hero as a moderate ... but they are few and far between
But Bernard let it go.. I remeber when he actually thought he was a free market guy.... lol
AFM - well aware, it was you who claimed to concurrently hold both, failing to mention proportion of equity.
Mark - cometh the time, cometh the message. Sorry, but the info is available. You're Dunedin based, no? I can point you to the lectures, they're not far away, physically.
Wee way away mentally, though. Good luck with that.
PDK since i have read your post I have actually investigated peak oil etc. You have opened my eyes to the problem...
However what you prescibe is a group of burecrates choosing what the soloution should be.. and that just doesnt seem like it will yeild the best choice..
Unfortunatly I think we need to wait until we are at a crises point..
Personally I think it will be fusion reaction
Realistially this is the only way we will get exponoential energy growth
You have to assume in the next 100 yrs we will get there
Is that not reasonable to assume?
"Personally I think it will be fusion reaction"
Two words: Coulomb barrier. Fusion is an enormously difficult challenge, regardless economic growth in the current sense is unlikely to continue forever. Below is a good post explaining the problem. The comments are a mix of people from scientific backgrounds and economic backgrounds. The differing views are quite humorous.
Finite physicist meets exponential economist
http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/
Mark s
Thanks for at least replying. Most just duck and weave, do it with bombast (always reckon it denotes fear, deep down).
I suspect the change will be bottom-up, indeed as Margaret Mead once opined; no change happened any other way.
The skill-sets of the incumbent leaders are simply honed in the previous era, and they'll be the last to change - but it's entirely valid to push them.
re waiting for the crisis (by which I presume you mean the peak) that's too late. Fiat-lending and bank-magnification thereof and profit expectations far overhang the physical underwrite at that point. Which is why QE isn't working, and why in my opinion, borrowing for property is silly at this point.
Has to happen in the next 5 years (John French, Nine-to-Noon).
I think you need to learn some economics pdk, it can help to know even why certain ideas are considered correct or incorrect. I don't think QE would have worked after the great depression, but this is exactly what Milton Friedman concluded the Fed should have done in his analysis of that era. All I see is Bernanke deciding that Friedman's analysis was correct, and trying it, and then finding that this doesn't exactly work that well (though its probably saved a few banks from collapse, but it was never going to help the real economy).
I seriously doubt you can draw physical conclusions from price signals though. William Stanley Jevons invented some early ideas in supply and demand. He went on to argue (incorrectly of course) that through the iron laws of supply and demand sun spots governed the business cycle, because they influenced crop cycles and the weather patterns in various ways. He was in fact so convinced of this that he argued the astrological record of sun spots had to be incorrect, based on his own measurement of period of the business cycle to be '10.5' years.
Nic - I came at it from an energy perspective, realised the peak flow had to mean peak work, and made sure I wasn't reliant on work to fund my future at that point. Pretty simple, really, and long predicted.
I've done my learning about economics since, and have had to laugh. It's over-the-shoulder, rear-view-mirror rote learning, in a nutshell (and with respect, your comment is that too). No amount of rearward looking will prepare you for a cliff ahead, although an astute appraisal of the Roman decline following 'peak wood', might be instructive.
(they, like all empires, did the hoovering-resource-from-others thing, theirs being firewood for Rome. When the energy required to cart the wood the distance, exceeded the energy returned when it was burnt, they were in energy deficit. They reacted by doing more of the same, the result was a need to clip the currency (ending 0.02% of starting content) to reflect the lessening return, to the point where even that didn't reflec the zero energy return. And the Fed is at? )
No, I agree that price-signals arent a good way to go, given that energy is the prime driver, money merely an accounting system. Energy has gotten along fine without money, since the BigBang. Money can't be underwritten without energy. Which would you track, then, to see where things are going?
Jevons did give us his paradox - that no matter what efficiency we come up with, it won't decrease the doing of whatever it was. A useful insight.
Well maybe you start the journey of looking at peak oil.........and No it isnt a reasonable assumption and on a grand scale....you have to start looking at a very big picture and on a huge scale.....time included....I think very few ppl can do that, and even fewer want to. I want to but I am findsing maybe I just cant grasp enough....
So some of the parts are,
Some issues with fusion,
a) Even if it works its decades away and its complex technology
Complexity,
b) The biggest problem is complexity and that means if you look at the works of Joseph Tainter etc a more complex and specialised society which means more ppl and a better standard of living ie specialisation for them.
c) To feed those more ppl and bring up their standard of living means more fossil fuels for food and also transportation...and harvesting...this means a portable source of energy and the only available, high quality, cheap and non-complex source is fossil fuels....
back to fusion
d) Fusion isnt portable and we have a transportaion fuel problem (mostly). A fossil fuel is a huge store of easily and very cheaply transportable energy...A big tank, and a fire source (spark) and some way to convert that to movement....the basic technology is dead simple....non-complex.
e) scale and time....say its 20 years to a production capability for Fusion, you then have to build them on a scale that is mind boggling.......it would take many decades....Thorium is closer and more probable.
Complexity,
f) Feeding more ppl , usuable water is now looking the hard limit as much as anything else.
g) AGW, even if you dont accept that humanss are causing it the globe is warming and that means more extremes in weather and that more than anything reduces or wipes out crops. So we at present are close to the limits of what is practical in food production, AGW will take away any safety margins.....and reserve stocks....
Expotential, the Universe only has so much energy...and we are on a finite planet.....If fusion worked and it wont we have to meet a limit eventually....and entropy will stop expotential if nothing else be that.
100 years, if [A]GW the models which have been accurate based on the last 30 years are anything to go by our present society has very probably at most 100 years left.....200 years max to human extinction....
but with Peak oil here today, its moot....
regards
Mark I don't know if you have seen my posts on the population graph in the last few weeks, but the evidence of peak resources is staring us in the face. In 1961 there was an inflextion point on the, up until then, parabolic population graph. Every year since then the rate of growth has reduced and will turn negative sometime in the next generation or so. This illustrates that we are already in overshoot and the resources available won't support growth any longer.
There has been 50 years to find and alternative and the simple fact is we haven't. Seems to me that we won't. Energy is only one issue by the way. Water is the other elephant in the room plus there is a finite amount of some minerals, less than a generation at current demand.
This is of course all quite relevant to commercial property, because without energy and minerals an awful lot of manufacturing won't get to happen.
Im not sure we have a generation or so....I expect it to start in my life time, probably this decade, I find it really hard to think there will be an population expansion after 2030 anyway.
I think we will see a Depression inside 5 years, that will cause a lot of hunger / starvation around the world....it will take 5 years or so to reach the bottom and while we might get a new new deal unlike the GD there is no energy to support a recovery.
Consider the state of many nations....In 2007~8 I think it was noted that Pakistan was in dire financial straights and it was only saudi selling it cheap oil that stopped it imploding.....what has changed since then? nothing except some more millions have been born....and this is only one tinder spot...
regrads.
ha ha, please say you are joking about the free-marketists (who naturally deny that the financial crisis had anything to do with their favourite fantasy) being the most sane people here. Wally only cares when people suggest that Labour might be a credible alternative to National, I don't observe this has ever got much to do with government policy.
Mmm, the gummy idol and the lunatic fridge, Wolly. Moderate what we should ask? Moderately in favour of the national party government? Moderately in denial about the records of previous and current governments? Moderately likely to believe that history can be used as a guide to the future?
No, in fact its moderately in accord with mark.s own opinion. Well I guess that makes it pretty clear how meaningful this characterisation is.
Actually I dont like a lot of what Nation does. I especally do not like how the are erodinding indivindunal rights
http://blog.greens.org.nz/2012/04/11/spying-not-a-solution-to-bullying/
Not that I usally agree with the greens because they are just a different type of govt control
But I would rather have the sudo capitalist/socalist than the "I've got my cloak on uber socalists/minor communists" control.
Actually I don't care which kind of partisan you consider yourself to be. The point is if you are a fringe lunatic, its really hard to justify what you are saying. If you are a centre lunatic, nobody really questions what you are saying, but of course that doesn't make it any less insane.
From what I have observed on this site, most people have a pretty severe case of derrangement, but some of them have kind of main stream justifications for their derrangement. A lot of what people think is hard 'scientific' economics is in fact completely bonkers.
There is a serious, mainstream economics paper which justifies a key assumption (the assumption is that you can expect everybody in the US to have aligned interests) with an argument going, 'Imagine America is like one big family...', uh, hello, crazy person alert. Somehow that made it past peer review in economics, well it made it past, just because its conclusions are main stream.
A typical nationalistic review of NZ government economic policy typically contradicts the record on NZ government borrowing, obviously conflating the effects of the global financial crisis with government spending. Obviously what ever point is being made about typical non-national economic policy is not valid if you can't get this correct, but that kind of partisan rubbish usually goes down pretty well around here.
On one level or another mark .s. The Communists are gaining control......our new best freinds...our go to guys....they enjoy demonstrating the shortcomings of Crony Capitalism by means of exploitation......
It's a laugh innit...?
I mean, who woulda fought it ...eh?
I thought this site was about discussing commercial property as an alternative to residential property.
Instead it's turned into a soap box for every screw ball hell-bent on destroying the western world and all the great values it has given to civilisation over the past 1000 years.
At this rate we don't have to wait for El Qaeda extremists to do the job.
The howling mob are already at the gates .
Yes Big Daddy : Here is an opportunity to discuss commercial property as an investment , and the bloggers seem to have launched into personal attacks upon one another , instead .. ..
.. it's hardly surprising that Uncle Ollie seldom replies to our blogs , when this is the low standard of response to his articles .. ..
And it is high time that Kiwi investors got their minds off residential property as an investment , and into alternatives such as shares & commercial property ....
..... they do appear to have abandoned finance companies as an investment .. .. for the time being ..
Thanks Ollie , for the information .
"On the subject of Capital Gains Tax, I have yet to see a skerrick of evidence showing what a capital gains tax would achieve. Yes, it does exist in other countries but such taxes did absolutely nothing to stop runaway property booms (and busts) in the USA, Europe or Australia"
When are people going to learn - taxes and specifically CGT aren't in place to prevent booms and busts. It is purely a form of revenue for the govt. and the idea is that it broadens the tax base so that labour isn't taxed so heavily. It also ensures that everybody pays tax on all income. Note, it is a capital gains tax, not a capital loss tax. If a capital loss is made no tax is paid, there is no tax credit.
It wouldn't be needed if existing tax law was actually enforced though. Did your client who improved the run down block of shops pay tax on the profit when he on sold? It doesn't sound like he is a commercial property "investor" more like a commercial property "trader". Big difference.
I would've thought the astute investor would prefer their yields to increase over time, not reduce.
And by the way, a productive investment would be to build property not continually buy and sell the same property at constantly inflating prices.
I'll just chuck in my two cents for the hell of it. Scarfie, you know I'm a housing bear, but I don't think investing in property is lecherous as you describe, simply because any investment in ANYTHING should have 2 things, capital and return. I don't believe that our economy gets better by trading houses by outbidding others with borrowed money or your propensity to borrow, but I wouldn't go as far as saying its lecherous. Commercial property is pretty solid and there are a lot of families that have done well from it all over the country.
So far I think going contarian is based at looking at the quality of the two sides of the argument....if one is lacking depth and rigour apart from "I want it this way" or "common sense says its right" I just now I need to probably go the other way assuming the other view is a quality one of course.....hence who do I vote for?.....blargh......
regards
You need to decide what business BigDaddy and Olly are in?
Is he peddling "property" or is he "peddling debt"
The Hollywood case study. In the mid 20th century Hollywood was dominated by the major studios. They went broke when television arrived, failing to realise they were in the entertainment business, not the blockbuster movie making business.
Wow !!!...what a cat fight eh....where's the love here ...! aaaah come on...! group hug..eh..?
It's Friday...Yay.
When I was in the pub I heard a couple of plonkas saying that they wouldn't feel safe on an aircraft if they knew the pilot was a woman. What a pair of sexist pigs. I mean, it's not as if she'd have to reverse the bloody thing.
........ not that I want to ruin everyones' fun , poking the borax at one another , but do we have any graphs showing long term trends in commercial property prices and yields , compared to those of residential property ? .....
( .... it's a weird change of events when the Gummster appears to be one of the few taking the content of a story seriously .... Chris-J excepted , of course .. good man ! .. )
It's P.O.E.T.S. day , Count ....... can't blame the gang for clearing orf , can we ......
...... why is it that the words " moron " or " moronic " have re-entered the hallowed realms of acceptable English , here at interest.co.nz ?
I prefer to see the kiddies get on well , in the playground ..... robust little tykes this morning , weren't they !
Here you go then GBH...seem to have lots of stuff on here to form a graph or two with.
ChrisJ .. this is what u said:
"Final point: is that youcompletely miss the point on the money creation issue. Of course money supply is increased when a deposit is made at a bank and a corresponding loan is advanced, what scarfie and you other loons argue is that this is somehow free money or money out of thin air - oh what a load of nonsense!!!!! No one can createfree money except central banks.
Tell me, if I lend you a dollar bill and you lend it to a friend does that create money out of thin air - free money from nothing that I can pocket like scarfie suggests?? - of course not. There's two of us who can list the dollar as an asset, plus a third with the note, so essentially money was created but it's certainly not free money!!! You, scarfie and his loons allege this is magical money that banks can produce ad infinitum, fraudulent money, to line their coffers ....what nonsense."
Tell me me how a deposit and a corresponding loan increases the money supply..????
If I deposit $100 and the bank lends out $100 the money supply is unchanged.
Tell how money supply increases..????
U are so wrong in what u say above...
U are right that the banks can't produce adfinitum, fraudulent money, to line their coffers... and it is not at all the fanciful free money out of thin air stuff that the fringe proclaim....BUT... the fact is that the banking system can and does create money out of thin air.. in the form of credit.... but is constrained in many ways, that limit their ability to do so.
Not sure why u are a tad abusive... But .. what u state above is fundamentally wrong.
I always like to read what u have to say about real estate...but u are out of your depth on this... :)
The trouble is a fella like ChrisJ has done some bulls**t degree that relies on rote learning rather than thinking. Because he got good marks in said bulls**t degree he is deluded into thinking he is smarter than he really is. See the trouble is that he wasn't actually required to think, just learn some bunkum jammed in front of him by some other clowin equally deficient in critical thinking ability. Don't worry Roelof, his abuse toward you isn't personal but just a deep seated frustration with his inability to defend being a leech. Actually I would say his abuse is generally directed at me, you just popped up at the wrong time.
scarfie I only got wound up because some loonies keep banging on about things that are so patently false.
I suggest if you understood the basic principles rather than filling the blanks yourself you would realise that property investment and banking is no dark art or act of sorcery!!!!!
I am no leech and certainly no lecher (I hope you know the difference by now! (the second is actually very offensive)).
Roelof, I apologise for getting a bit wound up over this but scarfie started the discussion by saying the looniest things about credit, banks "creating money" (in the Reserve Bank printing sense) and users of such credit being criminals.
To be clear though, you too completely misunderstand the basic principles.
If a bank accepts a deposit of $100 and then lends $100, technically money supply has increased by $100, ie total money supply is now $200: $100 in the hands of the borrower and $100 in the chequeable deposit of the depositor.
Money supply has been increased - yes.
That money came out of thin air - NO!
For a bank to make a loan it must have the money first.
I'm starting to think that you loons can't be this stupid and you are only making these comments to wind me up!
Chris you are obviously mistaken, the bank doesn't need to have all the money it owes before it can extend credit. It only needs sufficient money to meet its deposit holders (including deposits created via credit) day to day demands. As you stated for yourself, banks at all times owe more in deposits than they hold in reserves. This doesn't stop them in any way creating more credit, and there you go, they obviously don't need to have the money first or they would not be able to make any more loans until they got back to a positive deposit balance.
Are you seriously trying to claim this contradiction to be reality?
NtNZ are you seriously this stupid?????????
I pity you!!!!!!!!
A bank cannot lend money it does not have - even a ponzi scheme can't do that!!!!!
Reserves are not the amount of assets a bank has - they are the protection against bad loans etc.
If all loans were "good" then banks wouldn't need reserves at all, in which case if they got $1000 in deposits they could make $1000 in loans instead of only making $900 in loans as they might do if they are required 10% reserves.
I think the crux is that you loons are just super thicko's who don't understand the basics.
Goodbye!
Chris, are you one again seriously trying to claim that banks have 100% of the necessary cash to pay out all their deposit holder at once? I thought we already cleared that up, they don't so of course the central bank doesn't create all the money, it creates a fraction of the total. Obviously commercial banks do fabricate the remainder of it which is called credit. In fact this is exactly what wikipedia says on the subject.
That is obviously the basics, I gather you don't understand this at all.
Good grief NtNZ, just because a bank doesn't have the cash at hand (ie notes in a vault) doesn't mean they lend more than they take in deposits!!
If a bank has 10% in reserves it means they have lent 90% of their deposits. Money was never printed, created (in the sense you mean), made up or free or whatever you want to call it!!!!!!!!!!!!
Money supply was only increased via the provision of credit.
I now believe you to be the stupidest person alive!!!!!!!!!!!!
The trick Chris is that depending on the reserve requirements the original deposit can be expanded thereby increasing the money supply.
For example if the reserve requirement is 10% then from an initial deposit of $100 the bank will keep $10 lending out $90. The money supply is now $190. The next bank that receives the $90 deposit will then lend $81 and keep $9. The money supply is now $271. This will continue until the total money supply equals $1000. New money of $900 has been created.
Although no new money has been physically created in addition to the original $100 deposit new money is created through loans.
You are correct that money supply increased via the provision of credit. However, that credit is still considered to be money, therefore money has been created out of thin air and I believe that was the gist of the argument in the first place.
Yes, this was the original contention. In fact Chris said exactly this several comments up in the earlier thread, though he is now once again asserting the opposite. Anyway we should leave what ever missapprehensions Chris has about this for him to suggest, maybe he thinks only cash and virtual cash spends as money, its up to him to say as much.
If you are interested however, carrying on from there I would argue that the money multiplier model is a myth as well.
Either the central bank can always be relied on to create reserves, the actual multiplier is an extremely large multiple which is never reached, or these reserve requirements put no constraints on commercial banks in practise. Which ever it is, the money multiplier has been shown to be a poor model of banking in practise,
This fact is highlighted by many studies including this one. It also explains the existance of a credit crunch from Steve Keens further analysis,
http://www.minneapolisfed.org/research/qr/qr1421.pdf
Because I've argued the point so many times the verbiage starts to confuse the issue.
The ORIGINAL point being made by scarfie and others was that retail bank's could essentially print their own profits, that they took a deposit of say $100 and from that could lend a $1000 out of thin air.
That is just absolute nonsense.
Retail banks always have less in loans advanced than in deposits (incl money market deposits) taken.
Those that believe that retail banks are just printing money (in the counterfeit sense that scarfie suggests) are completely stupid or insane. Increasing money money supply via credit is not this kind of money printing.
Those that believe a bank accepts a $100 deposit and then can go out and lend $1000 are even more stupid! To lend $1000 a bank would need to have received $1111 in deposits or funding (assuming a 10% reserve). I don't know how I can make it any clearer.
The fractional reserve refers to the fact that the retail bank only holds "cashable" reserves which are a fraction of total deposits (say 10%), the rest is loaned out to customers.
I find it hillarious (and also deeply concerning!) that so many don't understand this incredibly basic principle, but instead take their own interpretation of systems that they don't know anything about.
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Chris, there is absolutely no secret to this. You genuinely can't apply basic mathematical formula. Using the formula from wikipedia (its a main stream source, no secret to what is happening).
"The money multiplier, m, is the inverse of the reserve requirement, R.
M = 1 / R"
So M = 1 / R = 1 / 0.1 = 10.
"This number is multiplied by the initial deposit to show the maximum amount of money it can be expanded to."
So with the deposit D, then total money T is
T = D x M = 100 x 10 = 1000
isn't that my figure?
I hope I don't have to explain that 0.1 is 10% to you.
Well, Unlike YOU Chris we've all done a bit more reading clearly. Here's a suggestion JUST for starters. Read: The creature from Jekyl Island.
You might drop your repugnant know it all attitude and actually learn something about the real monetary system.
God forbid you might even learn some humility and THEN maybe that bitterness you harbor and chip on your shoulder due to your CHCH circumstances might be relieved somewhat.
Either that or...........prozac
Conspiracy theorists can't justify the types of claims scarfie made in starting this thread.
If you believe that retail banks actually loan out some kind of fictitious multiplied money (not backed by actual deposits) and make their profits from this they you are a totally deluded loon.
Thumbs up if you are a totally deluded loon (by Chris_J rather narrow definition).
I take this to mean holding a belief that the the wikipedia article on this subject is substantively wrong,
http://en.wikipedia.org/wiki/Fractional_reserve_banking
If anybody said that, then obviously you can quote either of us saying this. In fact you can't or you would have done so already. You should give up trying to produce a straw man version of what we said and then to argue against it. As I pointed out you have hillucinated most of the debate.
However we should not of course accuse you of too much hillucination, as pdk just pointed out, yes the fractional reserve system does mean that a bank receiving $100 deposit, which accurately predicts it will only need 10% reserves to keep its deposit holders (including borrowers) liquid, will be able to lend up to $1000 out. You are flat out wrong, not hillucinating what we mean, if you think fractional reserve means anything other than this.
As I have been pointing out repeateadly, if the banks needed $1111 or whatever the multiple is first then they could never lend more credit than has been created by the central bank, this is not even predicted by the money multiplier model.
Just to point out how bad your maths, and argument is, you just said that the banks would need to receive a total of $1111 in deposits before they could owe back a total of $2111 in deposits, at the end of a loan transaction. That makes their reserves just over 52.6%, so clearly they can lend a lot more with this many deposits. They can in fact lend $11110 still retaining a 10% reserve ratio. Obviously they are more likely to do this in a series of small loans, rather than one big one.
If you want to make it more clear, why don't you show, how much money the bank takes in in deposits (which will be the total reserves), how much it lends, and the total which deposit holders can withdraw after a loan is made.
Those that believe a bank accepts a $100 deposit and then can go out and lend $1000 are even more stupid! To lend $1000 a bank would need to have received $1111 in deposits or funding (assuming a 10% reserve).
At this point we should really question if your self claimed cridentials are held by you. Please don't misconstrue this to mean I care what cridentials you have, I don't. But I would be appalled if I was an architecht to see such bibbling stupidity in a professional colleage.
I don't think there's much point continuing to explain it. He doesn't want to get it.
Question is, is he part of the minority or the majority? If everyone knew how it worked, would they act differently? It's only the demand for debt (and the supervisors of the financial system being asleep at the wheel) that allows the banks to create it.
NtNZ: Firstly, here is scarfie's original comment that started this:
by scarfie | 19 Apr 12, 4:34pm...
Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits. They then get charged interest on this free money, but the catch is new money has to be printed each year to cover the interest payments. Prices in aggregate have to rise each year no matter what. The scumbag property investor knows this, and also knows the bank will lend them this free, leveraged money and let them leverage it again to buy property. More free money and more interest to be printed, so who is on the losing end of this exchange? Anyone that doesn't own a house, which includes every young person entering the work force.
There are several comments to similar effect from yourself and others.
Secondly, please LEARN TO SPELL. It's just embarassing.
Thirdly, you actually just don't understand the basic principles.
The well used example of $100 being deposited and turned into $1000 of lending with 10% reserves DOES NOT work the way you explain it.
You certainly don't need a degree in Mathematics (which I am obviously the only one here to have) to know this. A 5th former/year 10 could easy tell you that you are completely and utterly WRONG.
The example goes like this: say there are 100 $1 coins issued by the Central Bank. Someone deposits 100 coins at the bank, the bank keeps 10 coins as a reserve and lends 90 coins to another customer, he then spends those same coins and the shop keeper deposits them back at the back. The bank keeps 9 coins as reserve and lends out 81 to another customer who then spends them at another store and the next storekeeper deposits them at the bank, the bank keeps 10% as a reserve and lends out the 90% to another customer and so forth.
Eventually despite only 100 coins ($100) being in circulation the bank could have theoretically taken $1000 in deposits (if all the money came back to the bank each time and any decimal of the coins were available). This is the idea of fractional reserve banking - it has nothing to do with retail banks just "creating money" which they could earn seigniorage on.
To make $1000 in loans a retail bank a bank needs deposits to cover this plus deposits to cover the 10% reserves.
It's simple school cert maths:
Maximium Lending (L) + Reserve Requirements (R) = Total Deposits (D)
But:
Reserve Requirements = 10% of Total Deposits
ie: R= 0.1*D
So: L+0.1*D=D
Hence: L=0.9*D
Thus: D=L/0.9
or in our case the required deposits are $1000/0.9=$1111
NtNZ: your calculations show you do not understand the basics at all and are clearly as loony as Ron Paul (who was just on CNBC and is completely cockoo!).
Note that by deposits I mean total customer deposits, money market deposits (debt issuances) and amounts due to other banks.
Yes, in case you were wondering Scarfies comment is in fact correct, at least the parts you highlighted, I disagree with some of his conclusions drawn from this. Good to see its only that you honestly don't understand rather than you dishonestly do.
It will be more than obvious to the general readership that you don't have the foggiest idea. I am quite certain that a class of school cert maths students could work out the correct formula (as given by wikipedia) for the reserve ratio. Its really not difficult.
Since I am encouraging you to honestly own to your foolishness, I should mention a relatively insignificant error I just noticed of myself.
With a $100 deposit, and 10% reserves the actual figure which the bank can lend out is $900, not $1000. Of course at the limit the bank has a total deposit base of $1000, and you need to subtract the bank owing $100 for the initial deposit. I don't think this substantively changes the point which is being disputed at all. I am not sure who introduced this error, I didn't bother to check. It was most likely me. You will notice that of course this complies with the formula you gave,
L + R = D = 1000 = 100 + 900
though for some reason you have miss-applied the formula to draw an invalid conclusion. Nothing about this formula means R is 10% of D, as you can see for yourself in the example you gave it is not 10% of D at all, meaning the bank could increase L further and be more profitable. I am sure you can work out your mistake from that.
NtNZ you just don't understand do you!
It is NOT with a $100 deposit that a bank can lend $900.
IT IS that with $100 of Central Bank issued currency in circulation a retail bank can lend $900!
The bank (to have a 10% reserve) MUST have deposits (which can of course debt issuances by the bank (money market deposits) etc but for this example just call them deposits) which 10/9 times the lending: so for $900 of lending the bank MUST HAVE $1000 of deposits, for $1000 of lending the bank must have $1111 as I mention above.
It's way worse than you think Chris J. NZ banks like their Australian and British counterparts have zero reserve requirements for deposits. Instead they have capital requirements under the Basel agreements with Tier 1 being the most important. They have to keep about 6-7% I think it is in Tier 1 capital - "cash equivalent" assets like bonds and mortgage backed securities that can readily (absent a crisis of course) be converted into cash. But on top of this they all hold substantial amounts in their Reserve Bank accounts to cover normal day to day operations through the payments system. If they have a short term liquidity problem like during the GFC they can borrow from the Reserve Bank.
They can and do create new money in the form of interest bearing credit, without deposits, as long as they are "prudent". The bonds they sell are to meet their capital requirements not any reserve requirements for there are none. NZ like other countries before deregulation used to have about a 25% deposit reserve requirement (ie only 4:1 leverage. Now its estimated by some at 30:1). Our big banks have never had a 100% reserve system lending only the money they receive as deposits. Other non bank financial institutions, including ironically finance companies work the way you think banks do. But to make a good profit they have to take outsized risks.
This has progressed a long way from the original widely incorrect arguments put forward by scarfie and others.
Obviously I entirely agree that retail banks increase money supply through fractional reserve banking (ie they create money). What I have repeatedly stated is that this "created" money is not "printed" money (money from thin air that simply is free profit for the bank) as scarfie and others originally stated and have argued it was. Those statements are just plain loony.
The hypothetical bank example above with a 10% reserve requirement demonstrates that having a low fractional reserve requirement (whether it be 10%, 1% or zero) DOES NOT create credit that is not backed by deposits (or other funding). The point that scarfie and NtNZ made repeatedly is that fractional reserve banking created this free money which is not backed by funding or deposits. This is just a loony, misunderstanding of how the system works.
Now in our hypothetical case above, those reserve requirements offer no protection for customers with deposits as the bank has no capital requirements (keeping it simple for NtNZ - if even $10 of that $1000 in loans defaults and can not be recovered then the bank only has $990 plus its $111 reserve to repay $1111 in deposits - which of course leaves it $10 short!)
Capital requirements of course limit the amount of lending the bank can do and protect depositors.
ALL lending is backed by a deposit or funding or capital (the bank's balance sheets are not in negative equity unless they have lost more in bad loans than they had in capital requirements!!).
wtf you confuse 100% reserve banking. It has NOTHING to do with the total amount of deposits/funding/capital being held to back loans.
100% reserve banking just means that the funds of all call accounts are kept in cashable liquid assets. For a bank to lend money they would have to be acting only as an intermediary matching the amount of funds put in term investments for customers (ie in term deposits etc). If a NZ bank hypothetically engaged in 100% reserve banking then they couldn't pay any interest on call deposits which would force more money into the term investments which could in theorey be loaned against which would in turn still "create" money (in the increasing money supply sense) but only M3 not M1. Of course a pure 100% reserve banking institution would just be putting all of the money in a vault and no lending would occur which would simply make banks money holders only!
Bank's use of the Reserve Bank to fund lending on some occasions also does not mean the money has come from thin air. ALL bank lending has a source and it that case it is the Reserve Bank.
It was a simple point that I was trying to make originally
- Banks DO NOT simply materialise money from air (which they profit from in the "printing" sense)
- All bank lending is backed by a deposit or funding or capital and that fractional reserve banking doesn't change the fact that any money lent out came from somewhere (customer deposits, money market funding, or their capital).
To suggest that banks make up money in the sense previously implied is just plain LOONY.
Obviously I entirely agree that retail banks increase money supply through fractional reserve banking (ie they create money). What I have repeatedly stated is that this "created" money is not "printed" money (money from thin air that simply is free profit for the bank) as scarfie and others originally stated and have argued it was.
It would be looney to believe that banks can lend themself profits, but nobody except for Chris actually said that. To add to that Chris now thinks 100% reserves and fractional reserves are substantively the same thing,
If a NZ bank hypothetically engaged in 100% reserve banking then they couldn't pay any interest on call deposits which would force more money into the term investments which could in theorey be loaned against which would in turn still "create" money (in the increasing money supply sense) but only M3 not M1.
and now Chris is disagreeing with him self again,
It was a simple point that I was trying to make originally
- Banks DO NOT simply materialise money from air (which they profit from in the "printing" sense)
- All bank lending is backed by a deposit or funding or capital and that fractional reserve banking doesn't change the fact that any money lent out came from somewhere (customer deposits, money market funding, or their capital).
Because he also said,
Yes is a bank extends credit to a customer they create a deposit and a corresponding loan at the stroke of a keyboard (and the loan will earn the bank interest while the deposit might not earn the customer the same interest)
Chris_J you just don't get it do you.
Central Bank issued currency is the physical dollars and coins classed as legal tender and is the initial deposit of $100.
Fractional reserve banking allows the banks to expand the original $100 by an additional $900 without the Central Bank needing to physically print additional notes and coins.
The additional $900 created out of thin air is still MONEY.
Anyone (other than Chris_J) correct me if my explanation is oversimplified.
Its worse because there's not even a 10% reserve anymore. The bank doesn't even need the $100 deposit to create the other $900 - it just creates $1000 as long as it is a "prudent" loan and it has enough Tier 1 capital it can do this as much as it likes. The Reserve Bank creates the physical money, notes and coin, but this is only 3-4% of the total "money" in circulation and is purely there to grease the payment system. The rest of the money started on a keyboard somewhere and has interest attached.
There seems to be conspiracy theorists all over this topic.
Yes is a bank extends credit to a customer they create a deposit and a corresponding loan at the stroke of a keyboard (and the loan will earn the bank interest while the deposit might not earn the customer the same interest), BUT as soon as the customer withdraws funds then the account, the total amount of deposits the bank has decreases and the total amount of loans the bank has remains the same; THIS MEANS that for the bank, it's assets are reduced (by the amount of cash they paid on the withdrawal) and their libilities have reduced by the same amount (the amount that total deposits reduced by), but more of their assets are now loan advances than cash at hand or other tier 1 capital so there the capital ratio is reduced (a reserve requirement would have been reduced in a similar way - less cash reserves than immediately before the loan was created). If either the capital requirement or the reserve requirement (where there is one) must be kept the same, therefore credit can not endlessly be created in this way.
Although continuous changes in customer accounts may mean that a deposit does not necessarily have to physically occur prior to a loan being made - OVERALL every loan is back by funding of some sort (customer deposit, money market deposit, debt issuance, capital, or even central bank funding etc).
To argue otherwise and to use emotive terms such as fraudulent or phony money (as is implied and stated in earlier comments) is being disingenuous.
Yep, certainly come a long way. Here is the quote of Scarfie you used, (just as far as I agree with Scarfie)
"Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits. They then get charged interest on this free money"
and now to quote Chris,
"Yes is a bank extends credit to a customer they create a deposit and a corresponding loan at the stroke of a keyboard (and the loan will earn the bank interest while the deposit might not earn the customer the same interest)"
Dispute resolved, Chris_J has been arguing a nonsense this whole time. Note that Chris has made many contradictary statements to this earlier on. To quote Chris again,
"If a bank accepts a deposit of $100 and then lends $100, technically money supply has increased by $100, ie total money supply is now $200: $100 in the hands of the borrower and $100 in the chequeable deposit of the depositor.
Money supply has been increased - yes.
That money came out of thin air - NO!
For a bank to make a loan it must have the money first."
NtNZ you continue to muddle things up!
The argument that you and scarfie have made is that banks make money out of thin air and that they profit directly from the actually printing of the money.
Overall the bank must have money first before it can lend it. You simply misunderstand (as usual) that a bank can create loans without having to actually take in a specific deposit simply because of the scale of lending (ie increasing advances by $10m on a $50b loan book makes a neglible change to ratio requirements NB the $10m comes from the banks capital/cash reserve not out of thin air) however this can't happen endlessly, all loans need to be supported by deposits etc, eg to loan a further $1b on a $50b loan book either new deposits or other funding would be required.
My ENTIRE argument has been that you don't actually understand that banks don't just create money (in the out of thin air money printing sense) and that all lending is (overall) backed by deposits or other funding.
I have pointed out exactly why I your view is RUBBISH.
You seem to believe that banks can just create money then lend it out without having to source the funding: tell me that's not exactly what you believe!
The argument that you and scarfie have made is that banks make money out of thin air and that they profit directly from the actually printing of the money.
Yep, thats exactly what even wikipedia says about this issue, except obviously they profit from lending then money, not the actual act of fabricating it itself.
"The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)."
Shortly after this the same article explains why you are so confused Chris,
"From a depositor's perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money)."
You appear to think that actual money (including, it should be pointed out, bank deposits) backs all lending because deposits are fabricated at the same time, and to the same amount as the credit extended. In other words you are confused by how the system works, precisely as wikipedia points out, because you can't tell central bank money from commercial bank money and think they are the same.
Overall the bank must have money first before it can lend it.
In what possible sense is that true? As you said they find funding after extending credit, almost always in practise. Yes, they need the $80 cash in the wikipedia example before they can fabricate $80 more loans, but this is not relevant, because as the same wikipedia article says the money supply now totals $180 and has obviously expanded through the lending actions of this commercial bank. As has been repeateadly pointed out given only, $100 of reserves the commercial banking system can then fabricate a further up to $400 in additional loans, even with an extremely strict 20% reserve requirement. Even that is 4/5ths of the money supply fabricated out of nothing, and without more deposits (or reserves) being necessary.
Also I go further, and actually accept the obvious implications of how lending transactions and regulations work in practise,
"Though not a mainstream economic belief, a number of central bankers, monetary economists, and text books, have said that banks create money by 'extending credit', where banks obligate themselves to borrowers, and then later manage whatever liabilities this creates for them, where if the central bank targets interest rates, it must supply base money on demand to meet the banks reserve requirements, after the banks have begun the lending process and that rather than deposits leading to loans, causality is reversed, and loans lead to deposits."
Clearly I am not alone, far from it. Do you have a shred of evidence to support your own position, yet to see any at all.
You are disputing the straight forward, main stream, statements in wikipedia, it is unbelieveable, but there you are.
http://en.wikipedia.org/wiki/Fractional_reserve_banking
My goodness NtNZ!!!!!
You are even more stupid than I thought.
You are using information from your misunderstanding of articles written on wikipedia!!!!!
You have also altered the argument (in part) to arguing my point as well and haven't even noticed!!!
The original argument by scarfie was that banks profit from credit creation in fractional reserve banking (in the money printing sense). You clearly agree this is untrue.
The fact is that banks don't actually benefit as greatly as the Austrians or others would have you believe. If fractional reserve banking didn't exist, no banks could lend any money they had in call accounts therefore the interest rate would be zero and fees would have to be charged on those accounts. This would in turn mean that no one would leave money in call accounts and would instead place their money with intermediaries as investments (which could then be on lent). This would essentially have the same effect as the current situation with an increase in M3 money rather than M1 money.
But the crux of what you fail to understand is that in your geometric sum where money supply has increased using a sole $100 of currency that say with 20% reserves (as you use above), $500 of DEPOSITS were made and only $400 of lending. Those deposits never disappeared - THERE WAS NEVER $400 OF LENDING WITH JUST $100 OF DEPOSITS (as you suggest endlessly) - how do you not understand that LENDING IS ALWAYS LESS THAN FUNDING.
This is the argument!!!!! How can you be so stupid??????
Chrisj..and Nic nz...
from what I can see the only thing u disagree about is which comes first..the loan ( credit ) or the deposit.
deposit/loan or loan/deposit ... for the sake of the argument.. does it really matter..???
either way.. money supply expands by 6-15% in a year. ... For it to expand something has to be created which was not there before.
someone has to be a beneficiary of that "creation"... ( no matter how large or little)
If M3 grows by $10 billion in a yr... someone is making a profit from it... ( If it is the private banking sector that creates credit... then one can assume they benefit from it )
This whole argument is about to what degree the banks profit from the process.
Scarfie says... the banks gorge themselves with profit... like a golden goose
ChrisJ says.... yes the banks profit... but not by so much at all.... hardly at all
Thanks Roelof,
The main disagreement with NtNZ is that it appears NtNZ believes loans are advanced by banks without the need to pay for them with anything real.
All lending requires a deposit or similar to pay for it.
Only the central bank can create money from thin air!
This would essentially have the same effect as the current situation with an increase in M3 money rather than M1 money.
We can see you are the one who is confused from just this, M3 money counts include bank credit today. Loans of commercial bank credit expands M3, and in no way expand M1 today.
"The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system."
http://en.wikipedia.org/wiki/Money_supply
Chrisj... I finally get where u are coming from...
What u describe applies to traditional fractional reserve banking.
Nz does not have a fractional reserve system... We have capital adequecy ratios and prudential policy.
My understanding is that Banks Can create credit without having the corresponding deposits... In the end thou... they do have to honour that credit thru the payments system..at which point they either have to borrow money form the Rserve Bank, from the interbank mkt, use their own capital...or use deposits.
the way the system works... is that it is the demand for credit that determines how much money supply grows by.. The banks do not ad hoc ...create credit at will...like some great money making machine... the banks themselves are constrained by the need to be prudent in order to maintain liquidity and be solvent.
Having said that ... they do create credit and they get paid interest on it... and even thou they pay interest on deposits... they have a very unique business that can be really profitable.
trouble with this subject is that there is hardly anyone that has a complete, and clear, understanding of it ( including u and I ).
What I have learnt has come from emailing the Reserve bank directly as much as from stuff on the internet.... ( and as u can see.. I don't know it all )
U are right...thou.. about the nonsence of the conspiricy theories that suggest that banks can simply create unlimited amounts of money out of thin air.
having said that.... as a figure of speech... one can say that the credit they do create is essentially 'out of thin air".. .. but there are real constraints on how much they can do this.
Call me a moron... :)
While this change in regulations is true, the money multiplier has always been a bit of a myth anyway. It has not really ever been a convincing model. If you look closely Chris is some how claiming the fractional reserve banking doesn't mean that banks only keep a fraction of central bank money as reserves, and they some how end up with full reserves of central bank money. I have yet to see him suggest how this happens, and it doesn't happen.
Only Chris said anything about unlimited amounts of money being created, though. He hillucinated most of the wild allegations he claims to be ranting about. It is my belief that the most significant constraint banks face is the ability to find credit worthy borrowers.
So, we know that the original $100 deposited is what we call 'central bank money', and the $900 loaned by the retail bank is credit. So if you are going to explain why there are now $1000 in deposits floating around (which incidentally the reserve bank acknowledges as money, they are counted in the M3 statistics) you should actually bring an argument.
At what stage in this process does the reserve bank issue $900 of 'central bank money'. Or use your own figures (but this time make sure you end up with the minimum 10% in reserves, just to prove your point to the maximum).
I suggest that the $100 is the only 'central bank money' involved in this example, and also constitutes the only form of reserves, e.g central bank money is bank reserves they are exactly the same thing.
You know some people do find it offensive to claim you have qualifications which you don't have. I seriously hope you are not doing this in any way, I hope you are just having a moment of foolishness.
"The example goes like this: say there are 100 $1 coins issued by the Central Bank. Someone deposits 100 coins at the bank, the bank keeps 10 coins as a reserve and lends 90 coins to another customer, he then spends those same coins and the shop keeper deposits them back at the back. The bank keeps 9 coins as reserve and lends out 81 to another customer who then spends them at another store and the next storekeeper deposits them at the bank, the bank keeps 10% as a reserve and lends out the 90% to another customer and so forth."
Lets have a maths lesson then. We will define the function which calculates the amount deposited (loaned by the public) to the bank at the nth iteration L(n), the total deposits which are owed by the bank after the nth iteration D(n) and the excess reserve ratio r=9/10 of the amount last deposited. Also we define the initial conditions L(0) = 100 and D(0)=100, and assume at each step the maximum possible is loaned out.
L(n) is a function of the excess reserves, the amount leant, spent and most recently deposited again with the bank,
L(0) = 100*(9/10)^0 = 100
L(1) = 100*(9/10)^1 = 90
L(2) = 100*(9/10)^2 = 81
L(3) = 100*(9/10)^3 = 72.9
...
L(n) = L(0)*r^n = 100*(9/10)^n
Obviously D(n) is the sum of deposits made at the bank,
D(0) = L(0) = 100
D(1) = L(0) + L(1) = 100 + 90
D(2) = L(0) + L(1) + L(2) = 100 + 90 + 81
D(3) = L(0) + L(1) + L(2) + L(3) = 100 + 90 + 81 + 72.9
...
D(n) = L(0) + L(1) + L(2) + L(3) + ... + L(n)
So actually we want to find the limit to the sum D(n) as n goes to infinity, how are we suppost to tackle that?
D(n) = L(0) + L(1) + L(2) + L(3) + ... + L(n)
= L(0) + L(0)*r + L(0)*r^2 + L(0)*r^3 + ... + L(0)*r^n
So: r * D(n) = r * (L(0) + L(0)*r + L(0)*r^2 + L(0)*r^3 + ... + L(0)*r^n)
= L(0)*r + L(0)*r^2 + L(0)*r^3 + L(0)*r^4 + ... + L(0)*r^n + L(0)*r^(n+1)
So: D(n) - r * D(n) = L(0) - L(0) * r^(n+1) (the other terms cancel)
So: D(n) * (1 - r) = L(0) * (1 - r^(n+1)) (factorise both sides)
So: D(n) = L(0) * (1 - r^(n+1)) / (1-r) (divide through by (1 - r))
and now taking the limit as n goes to infinity,
D(infinity) = L(0) * (1 - r^(infinity) / (1 - r) = L(0) * (1 - 0) / (1 - r)
= L(0) / (1-r) (see above, as n+1 approaches infinity r^n approaches zero)
= 100 / (1 - 0.9) = 100 / 0.1 = 1000
which is perfectly obvious without solving the geometric series. But now you have learned something. Yay!
Wow you can do 5th form maths!
So you totally agree with what I stated earlier then!!!!!
$100 of CURRENCY can lead to a theoretical maximum of $1000 of deposits.
(note that you don't have to prove the formula for a geometric sum (most 14 year olds can do this), it can be taken that the sum from n=0 to infinity of r^n tends to 1/(1-r) if IrI<1.)
And as I said earlier a $1000 of lending requires $1111 of deposits.
This isn't exactly university level mathematics. (No PDEs, no Hilbert Spaces, not even an eigenvalue to calculate (100 level stuff there)). I can assure you that I am reasonably competent in mathematics (I did get 1st in NZ in the Australian Maths Competition in 6th Form you can check the published prize list hard copy only though - pre interweb days!).
All very basic, but you continue to confuse the amount of currency in circulation required to create credit and the amount of deposits the bank has.
Of course, we could all look up the standard formula for solving geometric series, or you could just have accepted the wikipedia formula for the money multiplier to begin with, I decided not to do this obviously because you didn't accept the formula to begin with.
So now you don't actually have a degree in mathematics? You were only hinting at having it before? As I said, I don't actually care, because its obvious you have been miss-applying the formula even if you are qualified to apply them. In fact your qualifications (or my own) are not relevant, only the logic of the argument, and on your side this is lacking.
Actually I would like to see you quote yourself saying that $100 currency leads to $1000 deposits in circulation. The only person I thought brought this fact up was myself, quoting Murray N. Rothbard. Obviously deposits are money, so you just lost the debate there.
NtNZ you're all over the place, which clearly substantiates earlier criticism!
What are you on about? I never had any argument that bank lending didn't increase money supply. Are you disappointed that I wasn't impressed with your high school mathematics??
I definitely have a degree in Mathematics (and Physics) I also did 200 level Chemistry (which I mentioned earlier) amongst other things all with a 10.8 GPA but that is all unnecessary for this level of discussion. I also worked as an Investment Analyst for a couple of years (which I've also mentioned before).
Clearly you haven't won any debate. I'm not even sure you know what your arguing! Do you?
You accuse me of being all over the place?
I never had any argument that bank lending didn't increase money supply.
Really, because thats exactly what you claim here.
My ENTIRE argument has been that you don't actually understand that banks don't just create money (in the out of thin air money printing sense) and that all lending is (overall) backed by deposits or other funding.
Obviously the statement about deposits is not relevant, because these are fabricated to exactly the same amount and at exactly the same time as credit is extended. In fact there is a deposit backing all the lending immediately once the bank lends the money, but before the loan has been spent. The bank is in no way short of funding at this moment according to their accounts at this moment.
I am not here to impress you, buy in fact to impress apon you the fact that I have won the debate many, many times over.
Saying something a hundred times doesn't make it true.
If credit is advanced to a customer and a loan made (with the funds deposited in their call account) then AT THAT MOMENT yes the credit has been matched by the deposit. BUT AS SOON as the customer WITHDRAWS the funds the banks deposits have reduced - the customer walked out of the bank with either a cheque or cash in their pocket - this is from the bank's capital therefore to maintain capital or reserve requirements the bank either needs to reduce lending to another customer or get more deposits or more capital funding or wholesale funding.
THE MONEY DID NOT COME FROM THIN AIR.
ALL LENDING IS ULTIMATELY BACKED BY A DEPOSIT OR OTHER FUNDING
You certainly aren't able to win an argument because you are such a moronic fool you don't know what you are arguing!!!!!!
Chrisj said..." If a bank accepts a deposit of $100 and then lends $100, technically money supply has increased by $100, ie total money supply is now $200: $100 in the hands of the borrower and $100 in the chequeable deposit of the depositor. "......
This is incorrect...
How does that increase money supply..??? Even as a balance sheet entry one is an assett and one is a liability... there is no net increase..
" For a bank to make a loan it must have the money first."....
This is incorrect as well.
Another way to percieve credit money ( the money that banks create ) is to call it "IOU" money.
when a bank makes a loan ( and also when it takes a deposit) it simply writes an "IOU" on a piece of paper.... and then when it needs to..thru the reserve bank payment system..it honours those IOU's
To use the example that Chris used about a friend lending another friend $100. If, instead of handing over the $100... the friend wrote out an "IOU" for $100.. (and because of his high standing in the community..that IOU is used...and considered to be "as good as money".... then the money supply has increased)
Chris, no need to be snarky.
When you look into it the term 'money supply' is actually a far harder concept to define than on first appearances.
For a start what we term 'money' is really fiduciary media. The money supply expands and contracts as new loans are made, and some loans are repaid.
Ok, so Chris you concede the first point, banks (all banks) do in fact create money from thin air. We can call it credit, that is an acceptable term, but it looks like money and it spends like money, and so its money.
Now, I may be raving, but you are hilucinating, you claim I said a number of things which I palpably never said. So we are not going to debate your hilucinations, we are going to debate the contention that reserves place a constraint on bank lending, or not. The first of the hilucinations being can banks create unlimited amounts of credit and then claim a profit from it? No obviously not, nobody (except you) claimed anything about that, there is an obvious constraint, some credit worthy borrower must want to borrow the money, that at least is a constraint on the amount of credit and I would claim the most restrictive one.
You claim that I am miss quoting Steve Keen? In fact I am not, here is a quote Steve chooses to explain his position, its actually a quote of Basil Moore. The link explains pretty clearly what he is saying and represents my point of view on this exactly.
"In the real world, banks extend credit, creating deposits in the process, and look for reserves later"
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
This also quite clearly answers your question. The funny thing is the positive money group, who you so readily deride (because they appear a little left wing), are promoting a system of banking which functions in exactly the way you believe banking functions today.
In fact its apparant that all of the other people jumping in to support you are a lot brighter than yourself, because they quickly gave up when faced with some actual evidence. It seems likely they realised which side of the debate they were on at this point.
Also please keep in mind you are obviously a lot more uncomfortable with the facts, with the reality of how the system functions than I am. Thats why you refuse to accept that banking could possibly function in this way.
Obviously you know exactly what I mean when I say seigniorage, but if you want to play word games, why don't you explain exactly how much is paid for the privilege to 'multiply a deposit', as we both know the figure is zero. Of course this is irrelevant even if the figure is greater than zero, nobody except you has claimed this could be a constraint. The fact this is totally irrelelvant is highlighted by the fact you said central banks can create money from thin air, and they pay seigniorage profits to the government.
Oh dear.
Spell something wrong once and I may think it's a typo, twice and well hmmmm, three times and you KNOW what I'm thinking!!
NtNZ you completely miss the original lunacy suggested by scarfie.
Money is not made out of thin air by retail banks.
Credit increases money supply - yes I have always said this, however an increase in money supply does not mean that money is being printed or made out of thin air. Every loan is backed by a deposit or money market funding.
You are a total loon if you believe that a bank can multiply it's deposits!!!! Every dollar they lend out has a source, there is no free money!!!!
Go look at one of our retail banks GDS and tell me where this free money is!!!!!
Looking at ASB's 2008 GDS (which was in front of me), $52b in loans to customers, $57b in deposits (which includes $30b customer deposits and the rest money market and other bank deposits). How exactly is this multiplying a deposit??????
You are all silly loons arguing points that you know nothing about.
I bet the reply will be an illogical rant and a load of rubbish with links to articles you misinterpret to be something they are not.
More than enough was said two days ago.
That is the end.
Keep raving on the street corner if you wish.
In fact it appears this will be just the beginning, Chris.
So as we know, the transaction used by banks to extend credit changes two account balances. A loan account balance is created by the amount of the loan, and a deposit account is increased by the same amount. Certainly at this stage the credit has substantively materialised from thin air, or to be less colloquial, accounting entries.
However as you rightly point out at least some of this loan immediately gets spent, and the bank has a negative cashflow. Maybe when they balance this it could change the result of the fact the bank has just fabricated the loan money?
Well we should highlight some things here, first the banks cash flow needs to balance only after they already wrote out a loan. The bank doesn't scrimp and save in order to write loans, they write the loans first. So this means the total amount of money has increased, maybe then the action of balancing the cash flow decreases the total by the same amount? No, in fact it does not. The account balances in the banking system have increased by this amount of credit, a situation which persists even after the bank balances its cash flow.
One thing is apparant, no matter how much you repeat your crazed loon moniker, I know a lot more than you do about this. If I miss-quoted Steve Keen or his conclusions, or anybody else, show where because I didn't. You obviously have not even read any of the material I referenced, probably including the wikipedia article which explains exactly how bank lending works and does say precisely that commercial banks do in fact create almost all of the money supply.
"Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans."
http://en.wikipedia.org/wiki/Fractional_Reserve_Banking
How exactly is this multiplying a deposit??????
If you don't even accept that banks use fractional reserve banking to lend (its unclear, because you keep using evidence that they do, to apparantly claim that they don't) then of course you are arguing from a position of total ignorance. Absolutely nobody disputes this is how banks lend money, absolutely nobody (except for Chris).
In fact there is no need to feel such shame at having been arguing a complete non-sense. In fact if you admit the falacy of your position, I will think more of you, not less.
My personal hero among economists is a character, Irving Fisher. He invested heavily in the stock market prior to the great depression and infamously proclaimed that the stock market had reached "a permanently high plateau" just before it crashed. He also lost a personal fortune in the great depression.
http://en.wikipedia.org/wiki/Irving_Fisher
This brings us to the point which makes him a hero for me, he realised he was wrong about some of his ideas and he improved them. He became a major advocate for 100% reserve banking, in "A program for Monetary Reform", exactly the reform which is being advocated by positive money. He also invented the term debt deflation, which probably the best description of the credit crunch.
http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform
For brevity, I refer you to section 9, the Fractional Reserve System.
So just admit you didn't know what you were talking about, take the time to read up if you are actually interested, and anybody rational will think much more of you.
Well to start with within reason I wouldnt say quality/competance of english indicates lack of quality/competance in the area under discusion, it just says cannot write english well....and considering its an illogical language.....ho hum.
Second just putting ppl down suggests lack of any real argument on the other sides part.
Finally I think Steve Keen and a few others? put forward this argument that actually that is what really happens.........however either way what is important is the effect/consquence. "Every loan is backed by a deposit or money market funding" When we start to talk about highly leveregd banks at insane multiples, I really wonder if this is the case. I admit I dont know either way which is right but from what I can read I really doubt the conventional view (all the money is backed by deposits) is actually correct.....something stinks a bit.....the only Q is is it rotten or is it just mature (ie blue cheese, yum).
regards
It is true as Chris said that every loan ends up being backed by funding, either from deposits or from the money markets. The way this occurs, is the after the bank has written a cheque on itself and that money has been spent, then one of the other banks ends up with a surplus. In essence the banks with a deficit at the end of the day will balance their books from the banks which have a surplus.
Of course this does nothing to offset the fact that the total cheque book money has already increased.
This means actually that the closed and co-ordinated nature of the money market makes a difference to the amount of credit which the system can leverage up. The electronic system is very efficient, and can support loads of credit as a result. The reforms proposed by positive money were first implemented in 1844, as the Bank Charter Act. This stopped each bank from issuing their own notes.
http://en.wikipedia.org/wiki/Bank_Charter_Act_1844
Yes, if the money multiple is something like 100:1 then no it would not matter if this model is valid or not. The amount of money is in this situation at the discretion of the commercial financial system.
I think the suggestion is 95% of the "money" in circualtion is credit....in which case in a credit event like the Great Depression where it dries up overnight mayhem results....and I think its pretty clear we are in a position similar to 1929....
I also wonder about how solvent the US and EU banks are....if the mortgages on ther books are really not worth anywhere near what they claim then with 30+:1 leverage they are almost certainly in-solvent and the only way to keep going is in collusion with Govn by not having to report it...
So when scarfie says its a criminal/ponzi scheme I tend to agree....
regards
If loans create deposits, then of course loans can be said to be backed by a deposit - somewhere in the system.
But what does this really mean when a loan created a deposit in the first place. The loan was brought into existance, but not the interest. Where does that come from? The only way you can earn the interest is to earn money brought into existance from other loans.
The changes in the money supply do have real effects, as the money supply increases, more money in available to bid on assets, and hence you can get price inflation in assets that aren't growing inline with the growth in the money supply - simply because there is more 'money' chasing real resources.
Not wishing to gang up on Chris J, his is a common misconception. There is absolutely no doubt that our money is debt created by the act of borrowing. The resulting money never really leaves the banking system as it is returned immediately as a credit to anothers account. That credit is the banks debt - balanced by the asset of the borrower's loan debt. Cute eh.
Credit unions operate from deposits first - loans afterwards. But, for banks there is absolutely no need to have a stockpile of "money" in order to make loans. The funds will be immediately returned as deposits. They may need to draw them from other banks or, in NZ's case, from overseas banks if the country is running a current account deficit
The money supply (or total debt) reduces when loans are repaid or defaulted on, usually the balance is very much in favour of debt creation rather than debt reduction. Look at the RBNZ website http://www.rbnz.govt.nz/statistics/monfin/RegBanksNBLIs/3822930.html see C5, debt (credit) creation at double digit rates for years and decades at a stretch. You can't do that if deposits come first.
P 19 of this NZ Bankers Association document explains how the process works
http://www.nzba.org.nz/assets/Uploads/Banking-in-NZ-06-final.pdf
“cash balances in bank vaults no longer act as a constraint on bank lending in the way they might have up until the latter part of the 20th century….since 1985, New Zealand Banks have not had any specific reserve requirements applied to their deposit liabilities. This means that, in theory, banks could keep on creating credit and expanding their loan portfolios indefinitely.”
As long as a bank can meet its capital requirements with "cash equivalent" assets it is ok. Most banks don't want too many deposits as they are a potential liability to liquidity and eventually solvency if too many people want them back in a short space of time.
Nicnz said:
Yep, certainly come a long way. Here is the quote of Scarfie you used, (just as far as I agree with Scarfie)
"Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits. They then get charged interest on this free money"
The problem is that Scarfie states a "half truth".... this is only a part of the process of bringing money into existence.. (At some point the Bank has to stump up and honour the credit it has created.)
So..scarfies' statement is misleading.. People might well think that Banks can create unlimited amounts of money out of thin air.... at will
i've found that information about how monetary systems work is full of half truths... that end up leading one down the garden path.
i've learnt something from this discussion/argument... and I thank Chrisj , Nicnz et al for engaging.!!
cheers Roelof
I have been more than clear, Chris was originally trying to dispute that banks create credit using accounting entries. Scarfie draws some conclusions which I disagree with from here on, but that is it. I have brought this up with Scarfie on several occasions in fact.
I don't think there is that much half truth to actual banking regulations. But people (obviously Chris, but others as well) want to imagine that they function differently to the simple facts. In practise, as I have observed the payment system does not constrain lending very much. The main thing I see constraining lending is the ability of the bank to find credit worthy borrowers.
The payment system need not constrain lending because mostly banks can service their liquidity requirements from deposits, which obviously other banks and themselves are fabricating more of on a day to day basis. Of course they balance their cash flow to meet their reserve requirements, this does nothing to substantively change the fact that one of them already made a loan by fabricating the credit. In fact over 97% of the money used in NZ is this fabricated bank credit, as can be worked out from RBNZ bank statistics quite easily.
Of course we could argue back and forth about the relevance of this, you can only really tell by looking at the evidence. There are other sources, but here is one measuring the US banking system in practise. It draws the conclusion that the money-multiplier model of banking is in fact a myth.
http://www.minneapolisfed.org/research/qr/qr1421.pdf
Its brief enough to read through comfortably.
I think Sharfie is in fact closer to the facts in many ways than Chris. Someone who really thoroughly believes Chris point of view could easily believe that a credit crisis could not happen. On that basis I would suggest Chris is much much closer to an argument pulling the wool over anybodies eyes than Scarfie is.
Sure, especially if this is all it comes down to.
Retail banks when they extend credit create a loan entry, then they create a deposit entry of exactly the same amount. Then the borrower can withdraw and spend their loan. Thats all there is to it.
The accounting entry does not appear to be stated directly on the original wikipedia article, though it is obviously not conflicted in any way by the wikipedia fractional reserve page. If it is the onus is on you to show how it is conflicted,
"The bank makes a loan, setting up a checking account for the borrower and putting the proceeds of the loan into the borrower's account. In this way, the bank alters its balance sheet by increasing its liabilities with $100 of checkable deposits and at the same time increasing its assets with the $100 loan. The excess reserves were converted into loans, which in turn created deposits."
http://en.wikipedia.org/wiki/Talk%3AFractional-reserve_banking
Your first sentence is wrong, you just don't understand!!
Would you care to issue a retraction of any of the names you have applied now?
NtNZ you simply DO NOT UNDERSTAND!!!!
This is unbelievable.
If a bank advances a loan to a customer it creates a deposit in the same customer's account. The deposit isn't some deposit that the bank can they spend as you loony conspiracy theorists suggest.
Once the customer actually withdraws the funds, the deposit is gone and the bank must either find another deposit, reduce lending or increase capital to maintain capital or reserve ratios.
If you are so moronic that you can't understand this, try explaining your version of how the system works. Use your logic and stop getting half truths from your confused interpretation of wikipedia!!!!!
No Chris, in fact only you said anything about this, that the bank can spend this deposit. Quote me where I said this, I never said that even once. Of course the bank can't spend it without your authorisation, a deposit balance is money that the bank owes to you.
Actually once the deposit is spent then the bank often doesn't need to do anything,
Say $100 is deposited, 10% is the minimum reserve ratio, $50 is loaned to another customer. Then after deposit the bank has $100 reserves and owes $100 in deposits. After the loan the bank has $100 reserves, owes $150 in deposits and has $50 in loan accounts. After the loan is spent the bank has $50 in reserves, owes $100 in deposits and has $50 in loan accounts. So the bank has 50% reserves in cash, and doesn't need to do anything.
Gosh, you are even more stupid than the more stupid I previously thought you were!!!
In your example the bank has $100 in deposits and $50 in lending ie EXACTLY MY POINT - the lending MUST be less than the deposits (or deposits plus funding and capital).
You were telling me that a bank could take $100 in deposits and lend $400 based on a 20% reserve requirement. Show me how you can do that!!!!
Say the bank takes $100 in its first deposit and therefore now has $100 in reserves. It's second customer asks for a $400 loan which Bank Manager Nic grants since he's calculated that all he needs is a 20% reserve and with a $100 reserve right now he can loan $400. So Bank Manager Nic makes the loan: in the customer account a deposit of $400 and in the customer's account also a loan of $400. So Bank Manager Nic checks his accounts: "he's all ok" he ruminates, "$400 in lending, $500 dollars in deposits", his customer then asks to draw on the loan, Bank Manager Nic then asks "How much?", "$400" the customer replies, "$400" Nic the soon to be bankrupt gulps. "What's gone wrong?" Nic ponders to himself. The penny drops, Nic realises he's been a fool all along. He should have listened to Chris...
Clever, clever Chris_J, he really thinks he has got me on this one. Surely now his point is made, flawlessly, obviously this is the crux of the debate. Bank money is real, not made up account entries, because eventually its deposited into a bank before its loaned on. As you will suspect I am building up Chris point, in order to let him down...
First, to point out, the money multiplier is a model, a vast simplification of how the banking system actually functions. If in fact this reflected clearly how bank lending happens then nobody who has worked in the financial sector would even bother debating it. Chris says he has worked somewhere in there, he doesn't want to believe what I am saying is true at all. The nature of bank reserves is not that they are exclusively like currency at all. There are all nature of securities used as bank reserves, but the model says everything deposited in a bank is cash. Obviously a vast simplification.
Earlier on I gave a mathematical proof showing that the strict application of a fractional reserve and repeated sequence of loans and deposits eventually might lead to a bank owing (I have changed the numbers to those from Chris last statement) $500 in deposits, $400 in loans and having $100 in reserves. It is of course possible that once this final state (or a state near to it) occurs there is a bank run and more than $100 worth of deposit holders want to make a withdrawl at around the same time. In the event of this occuring of course the bank can't meet the demands of all these depositors and will become bankrupt.
So going to Chris immediate last example, is there any difference between the full drawn out series of loans and the contraction to say that the bank lends out $400 on reserves of $100? Well there is quite clearly no difference in the numbers, after both examples the loans total $400, the reserves total $100 and the deposits total $500. The resulting numbers are exactly the same, there is clearly no difference at all.
What about if more than $100 worth of deposit holders wants to withdraw funds in either case? Well in this case again there is absolutely no difference. The bank is immediately bankrupt in either case. Absolutely no substantive difference between what occurs in the case of either example at all.
Maybe this could be made this more clear, the bank could get into exactly the state it ends up in after the drawn out example by issuing a series of loans, in each case a loan is made to the individual who would have made the deposit back into the bank in the drawn out example. However no withdrawals are made until all the loans have been issued.
So $100 is deposited, and then a series of small loans are made, $90, $81, $72.9, ... and once this is completed and the reserve ratio is reached then the bank is in a state $100 reserves, $400 loans and $500 deposits. Exactly, precisely (from the banks point of view) the same state as after the drawn out example, but all the bank has done is issue loans, not a single deposit or withdrawal has been made. In all 3 cases if more than $100 worth of deposits are withdrawn then the bank is bankrupt.
So then, obviously the money multiplier model is a simplification, the bank is more likely to issue a series of small loans (small compared to their cash flow) than one big one in practise. Obviously if they issue a loan they will often anticipate the total sum of it to be immediately spent. They are also likely to receiving deposits back into the bank at regular intervals. Also its extremely unlikely that any single loan they issue will threaten to drain their cash reserves at once. Its also unlikely that the bank will anticipate its going bankrupt, that would almost certainly come as a surprise to them and is essentially out of their control.
Does this make a blind bit of difference at all? No, all 3 examples end up in essentially the same state and there is no difference in the resulting total amount of deposits or loans or reserves, which would need to be the case for this to actually place a constraint on bank lending, wouldn't it. Let's assume Chris took over managing Nic's bank after it was bankrupted and bailed out by the government. Is Chris essentially in any different of a predicament given that he followed his more 'clever' lending strategy of only loaning out the cash on hand. No in fact he is equally bankrupt when more than $100 worth of deposit holders turn up to withdraw funds in either case. Chris's mistake was essentially the same as Nic's he didn't anticipate $101 or more of deposits being withdrawn at the same time (I would probably concede Nic looks like a bigger idiot because it was more obvious what was going to happen, but neither Chris or Nic saw it coming, and guess what the government bailed Nic's bank out but they arn't going to repeat their error a second time so Chris's bank collapses causing a major financial crisis and Chris is righteously unpopular now (you can prove anything by made up example)).
In fact the worst you can accuse me of here Chris, is going over your head with what is a relatively obvious simplification, somehow a simplification which you did not understand. I didn't mean to go over your head, but I genuinely thought this would be a bluntly obvious fact, it certainly appears to be pretty obvious to everybody else commenting here.
It should also be pointed out that the money multiplier model itself has some other obvious flaws. The central bank would clearly be in a sticky situation if it didn't supply reserves on demand as far as is necessary, because this could cause a significant financial crisis. The reserve ratios are not exactly fixed by the central bank, they are changed relatively often and it certainly appears that they don't place a significant constraint on bank lending as shown by multiple empirical studies. I have not even heard of anecdotal evidence that reserve ratios do constrain lending. Though there are pleanty of stories of willing borrowers being denied credit due to being un-credit worthy this appears to be the main constraint to me.
Oh boy, I hope you didn't spend all night coming up with that weak excuse!!
You completely misunderstand how banks operate. A deposit may be created to match a loan advance in the same customer's account but this is a trivial activity within the scale of the bank and NOT how they produce credit.
EVERY DOLLAR OF CREDIT CREATED MUST BE BACKED BY A GENUINE DEPOSIT/FUNDING OR THE BANKS CAPITAL.
Say our hypothetical bank has $100,000 in owner's equity, $900,000 in deposits and funding and $800,000 in loans. The bank has a minimum 10% capital requirement for lending.
It can easily advance a $1000 loan, creating a $1000 deposit in the same customer's account. This would increase total loans to $801,000 total deposits to $901,000 and leave the capital the same at $100,000. (Keeping the calculations simple) Capital went from 11.11% of lending, to 11.10% a neglible change.
When the loan is drawn down (normally the same day the loan is advanced) Capital reduces to $99,000 and deposits reduce to $800,000. Capital reduces to 11.00% of lending.
It's all within the margins of what the bank can do with existing deposits.
Your lack of understanding that credit is not just fabricated and must be backed by deposit, funding or capital is truly astounding.
No matter how much you convince yourself that banks just fabricate loans without funding them, it will never be true across an entire banking portfolio.
Your whole argument is that banks can just fabricate credit without funding it. Clearly they can't - otherwise I would open a bank tomorrow and lend a billion dollars without having to get a cent in deposits or funding!
You lost the argument some time ago and no matter how much you carp on you have nothing to add.
Chris_J
Have you gone and read the article www.debtdeflation.com/blogs/2012/04/16/inet-presentation-minskian-persp…
If you have and you disagree with it fine.
If you haven'tt, then please read it.
Oh boy, I hope you didn't spend all night coming up with that weak excuse!!
Its so 'weak' you don't even bother to debate it. In fact you can't debate it.
You completely misunderstand how banks operate. A deposit may be created to match a loan advance in the same customer's account but this is a trivial activity within the scale of the bank and NOT how they produce credit.
So I now gather you are challenging the frequency and scale with which banks use this mechanism. The mechanism itself you have no qualms with. Also just to point out, this is clearly, exactly how they produce credit, the example is all in accord with Fractional Reserve Banking. Are you seriously trying to claim that banks don't produce credit using fractional reserve lending? No, that would be ridiculus.
No matter how much you convince yourself that banks just fabricate loans without funding them, it will never be true across an entire banking portfolio.
Lets see, the reserve bank of New Zealand publishes regular returns it should not be too difficult from this to see how much each bank loans out. Quite obviously if we take any examples then the entire balance of the loans portfolio has been fabricated by the fractional reserve mechanism, because all deposited funds are 100% owed to a deposit holder once they have been deposited.
Your whole argument is that banks can just fabricate credit without funding it. Clearly they can't - otherwise I would open a bank tomorrow and lend a billion dollars without having to get a cent in deposits or funding!
No quote me saying that, I didn't say it even once, only you have said anything about that.
You lost the argument some time ago and no matter how much you carp on you have nothing to add.
Anybody who can read this and the last post will see quite clearly you have accepted and in fact endorsed (by re-stating with different numbers) exactly what I said. You didn't even bother to challenge this, because its correct, its exactly as I describe, its exactly as I described all along. Instead you have (once again, you did this several times already) changed position. Now the claim is, its not that they can't fabricate credit as account entries but that they don't (or can't) do it on a large scale. Well lets see about the scale, because every single other one of your fall back positions has failed.
At this point, I seriously doubt you are still under any misapprehensions about how banking is carried out. Maybe this is some last ditch effort to save face, based on the mistaken idea that anybody here has any respect remaining for your avatar. The fact you have brought zero evidence to bare for your position shows exactly how much you know, and how defensible your own statements are, Chris.
More rubbish from NtNZ.
Ok, we have no minimum reserve requirements in NZ so based on your argument if Nic the banker has no deposits he can still go out and lend a billion dollars because he can create the deposits!!!
Ok, you can't understand it. So I will move on.
We have capital requirements in NZ. For a bank to lend money it has to come from somewhere.
Imagine all transactions go in and out one front door at the bank (incl the initial capital coming in). If more cash goes out the front door than comes in, the bank has no capital left and therefore doesn't comply with capital requirements.
Less cash must go out than come in hence the money on loan is NEVER more than the deposits plus capital held otherwise the bank would be bankrupt.
If you can't understand, I can't help you!!!
Chris said,
"We have capital requirements in NZ. For a bank to lend money it has to come from somewhere."
Gillian Lawrence says,
"A private sector institution can also create money by issuing claims on itself (ie, by accepting deposits) that may be transferred between, and are generally accepted by, members of the public as a means of payment. "
"Such an institution will, in practice, also be in the business of creating credit, which implies the issue of a greater value of claims on the institution than the value of Reserve-Bank-issued money the institution itself holds."
Chris said,
"You completely misunderstand how banks operate. A deposit may be created to match a loan advance in the same customer's account but this is a trivial activity within the scale of the bank and NOT how they produce credit."
Gillian Lawrence says,
"In practice, by far the largest share of money – 80 percent or more, depending on the measure (discussed below) – is created by private sector institutions." Its over 95%, but this number is a bit scary to the general public. The details of Gillians description are in a section with the title, "The banking and payment system, and how money and credit are created." Chris said, "Your whole argument is that banks can just fabricate credit without funding it. Clearly they can't - otherwise I would open a bank tomorrow and lend a billion dollars without having to get a cent in deposits or funding!" Actually only Chris said anything about a bank which doesn't accept deposits. All I said is that money is created by accounting entries. Gillian Lawrence says, "For that matter, any institution that can maintain the public’s confidence that its liabilities will be generally accepted as means of payment, can create money." Chris if some mythology about the monetary system is, as you said, the only thing stopping you from lending a billion dollars, you go right ahead. Money where your mouth is time, Chris. You said you would do it, now write up 1 billion dollars onto bits of paper which say you are good for it, and see if anybody will accept payment. http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf Chris said, "Less cash must go out than come in hence the money on loan is NEVER more than the deposits plus capital held otherwise the bank would be bankrupt." However as Chris is well aware this is because when the bank makes a loan it also increases a deposit balance with exactly the same amount of money, so this has to be true by definition. This process is also described by Gillian Lawrence in the above document.
NtNZ. You just don't understand!!
The RBNZ statements are you quote are 100% correct and 100% in agreement with what I've been telling you!!!
Could you read and understand rather than continue to make your own misinterpretations?
I've repeatedly told you there is no dispute that M1 (or at least M3) money is created when an M3 bank create a loan - any loan - and we covered that ad infinitum in the discussion about the geometric series!!
You have quoted nothing new and nothing that disputes my position.
Your silly claim about starting the billion dollar loan bank shows you just DON'T understand. For a bank to have any capital, the value of assets less liabilities needs to be greater than zero. If it is zero or less (in your billion dollar bank case it's negative a billion dollars!) then it is not possible to meet any capital requirements.
Wakey, wakey realise you have been silly, then go back under your rock, please!
Chris says
"It's more than a stretch to say that a bank creates money because they increase a credit limit!"
Gillian Lawrence says,
"A private sector institution can also create money by issuing claims on itself (ie, by accepting deposits) that may be transferred between, and are generally accepted by, members of the public as a means of payment. "
"Such an institution will, in practice, also be in the business of creating credit, which implies the issue of a greater value of claims on the institution than the value of Reserve-Bank-issued money the institution itself holds."
So congratulations, you have finally managed to reconsile these facts in your head with something vaguely like reality. But don't think you have not learned anything, or changed your statements over the course of the debate, or that I was under any miss-conception to begin with.
Chris says,
"Your silly claim about starting the billion dollar loan bank shows you just DON'T understand. For a bank to have any capital, the value of assets less liabilities needs to be greater than zero. If it is zero or less (in your billion dollar bank case it's negative a billion dollars!) then it is not possible to meet any capital requirements."
Gillian Lawrence says,
"For that matter, any institution that can maintain the public’s confidence that its liabilities will be generally accepted as means of payment, can create money."
Yes, well obviously you would be in some hot water if you went out and spent a billion dollars you didn't have, because you don't have that much income. But Gillian Lawrence said thats money, if you can spend it.
I should also point out that no, you are not bankrupt when you put money on a credit card, even if you don't have the money to re-pay this debt, even if you don't have the assets to balance this. The same is true of any business, its 'confidence' in their ability to pay which makes them solvent, not the fact that their accounts balance (though this obviously helps). What happens if you have a mortgage and your properties suddenly drop in market value putting you in negative equity? Does the bank bankrupt you, no nothing happens as long as ability to service your mortgage continues. As long as the bank is confident you can repay them.
What about if you loaned out $1 billion how would your balance sheet look then? You write on the IOU's chris owes you $1 billion, and you lend them out at face value. In this case you would have $1 billion in assets (the loan contract), $1 billion in liabilities (you have to pay some bearer $1 billion on demand, and your books balance, sounds just like what a bank does, doesn't it. Now, you said you would do it if you could, so go right ahead, you can even profit from it if you charge interest on the loan.
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf
Does your capital requirement argument have any relevance? What am I suppost to think about this? As far as I am concerned you may as well have argued that banks can't possibly create money out of thin air because in order for a bank to have any employees it must pay them a salary. If this has any relevance you have not explained what the statements relevance is.
The confusers continue to misappropriate the word create!
Create is not the same printing - that is why I was at pains to make the distinction between increasing money supply and actual central bank printing.
A home owner or bank may find themselves in negative equity but that certainly doesn't mean that banks can put themselves in that position as a matter of running a business.
Find me something reliable that states a bank can lend more than it has in assets!!
And tell me exactly how this is acheived?
As soon as a bank has lent money, it no longer controls it so it is almost certainly converted for real cash (rather than remaining as a cheque drawn on the bank). To pay out the real cash (not bank credit) the bank must have received at least the same amount in real cash so it can lend out more than it received.
Chris says
"It's more than a stretch to say that a bank creates money because they increase a credit limit!"
Gillian Lawrence says,
"A private sector institution can also create money by issuing claims on itself (ie, by accepting deposits) that may be transferred between, and are generally accepted by, members of the public as a means of payment. "
"Such an institution will, in practice, also be in the business of creating credit, which implies the issue of a greater value of claims on the institution than the value of Reserve-Bank-issued money the institution itself holds."
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf
Its surprising to me how dishonestly you argue Chris, so I once again issue the challenge which I have repeated again and again, if I actually claimed that
"Create is" "the same" as "printing", then you could quote me saying this. I never said this, and you are again trying to draw up a straw man position to argue against.
A clear and consise example of this is presented pitting your obviously ignorant statement, against those of Reserve Bank of NZ representative Gillian Lawrence. Since you have not admitted this statement is something you have changed your mind about, we can only assume you still believe that.
Chris_J still believes,
"It's more than a stretch to say that a bank creates money because they increase a credit limit!"
I'm going to make this as clear as a can for you Chris. Either STOP verbally insulting people on this forum or I will get Bernard to kick you off!
Clear? Your becoming a drain
Now, If you actually choose to investigate the NZ Tax laws you would see that without applying for a IRD number the IRD infact have no legal rights of jurisdiction into your methods of income.
You how ever will NEVER be able to apply for a bank account or have your wages/salary DCed.
This knowledge IS well known.......but due to the latter i mentioned most people can't live this way. It's still perfectly legal to sell your labour and goods ANYWAY you wish and be compensated by bartering services or goods in return.
Your such a narcissist. Sad how bitter you have become post earthquake. Seek therapy
Justice, which piece of legislation states that not having an IRD number exempts you from paying tax:
Visit legislation.govt.nz and read the Income Tax Act 2007 and the Tax Administration Act 1994!
You are just making rubbish up!
View IRD's website: http://www.ird.govt.nz/how-to/irdnumbers/
If you earn income you MUST pay tax. Without an IRD number you will taxed at the non-declaration rate which is 38%. And bartering IS taxable:
http://www.ird.govt.nz/tool-for-business/tfb-text/whats-next/income-exp…
(if it wasn't every CEO would just barter their services for tax free shares and a few tax free ounces of gold a day!!!!)
So I suspect IRD's evasion squad may well be seeking Justice!!!
This argument started with scarfie calling property investors criminal, fraudulent, greedy leeching, lecherous scumbags.
I may have referred to some illiterate loons (spelling and grammar justified that) and to stupid fools (for getting basics wrong) but perhaps imbecile morons went a bit far!
However you just called me a bitter narcissist, so is that not an insult?
this is where I get a little lost.... In USA bank reserves held at the FED is in what they call "base money"... the payment system is settled with base money as opposed to credit money...
Our Reserve bank uses the term "settlement cash". ( same as base money)
Banks have to settle their accts at the Reserve Banks with "settlement Cash".... (This is money created by the reserve bank and NOT the banks themselves.)
So... I do think the payment system can be a constraint to the growth of credit..... and is part of the transmission mechanism that the reserve Bank uses in implementing monetary policy. (OCR is the overnight borrowing rate for settlement cash money ).
http://www.rbnz.govt.nz/monpol/about/03996.pdf
http://www.rbnz.govt.nz/education/0114246.html
In the gold smith days... "settlement cash" would be gold and "credit money" would be the paper IOU notes that the goldsmiths lent out to people... and which were considered "as good as money".
in a way there are 2 different kinds of money...base money and credit money.
( this is my current understanding... I'm always learning )
Yes, what you have said is basically a correct description. To simplify it right down to be as simple as possible I would say "base money", "settlement cash", "bank reserves" are like cash (it includes cash, though the payment system is virtual as well), and "credit money", "commercial bank money" is the balance of the deposit accounts.
In terms of the regulations though it should be pointed out that
1) Banks have easily made 40x or more leverage multiples. Thats essentially the reserve ratio, in practise.
2) The actual regulation is intermittent, not frequent, they only really need to be in compliance when regulated.
3) Under Basil II rules banks can to some extent determine (and revise) their own reserve ratios. Though they have increased them significantly (after the credit crunch, not before).
4) In practise they only need sufficient reserves to stay solvent and liquid day to day, which depends on spending habbits and the ease of credit itself.
5) There are several statistical studies which contradict the money multiplier as a model. There are none I know of which actually point to it working. The one I quoted says the money multiplier is a myth, in exactly those terms.
NtNZ wrong as usual.
The start of this discussion was with scarfie claiming banks profitted directly from money printing! You backed him up!!!
I've always said that money supply was increased with bank's increasing credit, and argued that it's not money creation in the sense scarfie and his backers interpret it. It is commonly referred to as money creation but this leads unqualified, illogical loons such as yourself to interpret this as the ability to increase credit "out of thin air" as the initial argument went!
So it seems you've given up on what I thought was the main dispute: the fact whether banks could hand out more real cash then they get in - obviously they can't. Have you conceded this yet??
"The start of this discussion was with scarfie claiming banks profitted directly from money printing! You backed him up!!!"
No, if I said that you would be able to quote me saying it, you can't I didn't say that. They don't print money at all, its commercial bank money, it mostly exists as deposit account balances.
"I've always said that money supply was increased with bank's increasing credit, and argued that it's not money creation in the sense scarfie and his backers interpret it."
Obviously some facts have been extrapolated in your head. But its hardly my fault you habitually extrapolate what anybody else says. How could you possibly know what I or Scarfie interpret as money creation? If we didn't write it, you could not possibly know what either of us is thinking. Show me where either of us wrote something which is incorrect for a start.
"So it seems you've given up on what I thought was the main dispute: the fact whether banks could hand out more real cash then they get in - obviously they can't. Have you conceded this yet??"
This appears to be the problem, you have extrapolated something which neither myself or Scarfie wrote. No of course commercial banks can't create cash, show me where I wrote this, and I will of course immediately concede the mistake. In the mean time since you invented this dispute in your own head, concede the argument to yourself.
NtNZ
I said above:
"The start of this discussion was with scarfie claiming banks profitted directly from money printing! You backed him up!!!"
You said above:
"No, if I said that you would be able to quote me saying it, you can't I didn't say that. They don't print money at all, its commercial bank money, it mostly exists as deposit account balances."
Here's the original statement by scarfie 19 April 4.34pm:
"Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits. They then get charged interest on this free money, but the catch is new money has to be printed each year to cover the interest payments."
I replied to scarfie 19 April 10.01pm:
"Your arguments are also rubbish - retail banks don't just create money out of thin air (even if central banks do!)."
You replied to me 19 April 11.02pm
"Actually they do. It is a much better description of what they do, than to say that they lend out deposit holders money."
Those above exchanges alone show that your current position is a not what you originally argued!!!
From the first comment I made in reply to you (which you disputed) I stated:
"Scarfie implied retail banks just make up numbers in an account and loan it out - that is rubbish!"
So before any of this discussion started you knew what I believed scarfie to have implied!!!!
Now you are trying to claim I can't know what was implied!!!!!! I flippin' well told you what I thought the position was and you argued against it!!!!!
Now you are such an fool you don't even know what the argument has been or indeed currently is!!
The last few dozen comments have been a discussion as to whether a bank could make a loan without taking a deposit which you have argued it can because of your total misunderstanding of what fractional reserve banking is!!
You are clearly such a silly little person that you are simply trying to win a point which is entirely wrong simply by changing the argument.
State in one logical succinct sentence what you are trying to argue please!!!
Remember you said:
"What about if you loaned out $1 billion how would your balance sheet look then? You write on the IOU's chris owes you $1 billion, and you lend them out at face value. In this case you would have $1 billion in assets (the loan contract), $1 billion in liabilities (you have to pay some bearer $1 billion on demand, and your books balance, sounds just like what a bank does, doesn't it. Now, you said you would do it if you could, so go right ahead, you can even profit from it if you charge interest on the loan."
Above you have just stated that a bank doesn't need cash coming in in order to lend it out! So you are wrong again (unsurprisingly). Moreoever this proves you don't understand accounting whatsoever - in your scenario the only way the billion dollar lending can occur without any real M0 currency changing hands is if the borrower and the lender are the same person in which case no real lending occurred anyway!!
Your other problem is that if you lent a billion dollars you have to pay that to the borrower in a currency acceptable to the Reserve Bank for settlements which CANNOT be an IOU from any institution (other than the RB itself). For you to obtain that Reserve Bank currency you must have already received it from somewhere - if you haven't you can't lend the money!!!
Remember you also said:
"Does your capital requirement argument have any relevance? What am I suppost to think about this? As far as I am concerned you may as well have argued that banks can't possibly create money out of thin air because in order for a bank to have any employees it must pay them a salary. If this has any relevance you have not explained what the statements relevance is."
This proves that you are the indeed very stupid!! Capital requirements are the main prudential control the RBNZ has over NZ banks. This shows a total lack of understanding.
If you are unable to define your argument - please remain under your rock!!!!!!
Hold on there Chris, be sure to save some exclamation marks for later.
I really don't see why you dispute what Scarfie or I said. As I understand it, the statement made by Scarfie is posing the simple question, if I go to a bank and take out a loan of credit, does an existing deposit holder give up access to their money to fund that loan? Of course as has amply been discussed already the answer is no, the bank expands its balance sheet, more commercial bank money is created to fund the loan. Also the bank doesn't pay any fee for this privilege, though its not that relevant. You can take the emboldened statement to be what I thought was up for debate.
This is actually no small point to, Steve Keen, who I gather you do accept knows what he is talking about. He makes quite a big deal of this fact and the fact its opposed to how most economic theory models the financial system.
Steve Keen while debating Paul Krugman,
"Holmes, then "Senior Vice-President of the New York Federal Reserve, noted that the key Monetarist policy prescription of regulating the economy by "a regular injection of reserves" was based on a naive assumption about the nature of the money creation process:
The idea of a regular injection of reserves - in some approaches at least - also suffers from a naive assumption that the banking system only expands loans after the System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. Alan R.Holmes, 1969.
Holmes would turn in his grave at Krugman's naive assertion, half a century later, that banks need deposits before they can lend
If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn't have to represent a net increase in demand. Paul Krugman 2012
As Randy Wray observed, that is "the description of a loan shark, not a bank" - or of a hypothetical world in which banks need deposits before they can lend."
http://www.debtdeflation.com/blogs/2012/03/29/krugman-on-or-maybe-off-keen/
Steve also answers Krugman later, including a Krugman assertion that the level of currency constrains lending.
You put the statement directly Chris,
Capital requirements are the main prudential control the RBNZ has over NZ banks.
But since you accuse me continuously of quoting out of context you are going to have to read it from the horses mouth.
http://www.debtdeflation.com/blogs/2012/04/02/ptolemaic-economics-in-the-age-of-einstein/
You have been making quite a big deal of an example I quoted originally from Murray N. Rothbard, and the fact that banks do need to maintain their ability to make payments, but as I showed quite clearly the example by Rothbard is a contraction, but correct. A bank can get into the exact same state and situation by over extending itself with one loan or by over-extending itself in the course of many many loans, payments and deposits. Its equally stuffed in either case, you can even make up examples where every resulting number is exactly the same. All this is possible without any change in the amount of currency in circulation, and thats assuming a strict reserve ratio. Its quite clear why the capital requirements argument is a complete red-herring.
But I don't expect that a high level, some what abstract discussion will do. I expect Chris will demand every single detail be spelled out in excruciating detail.
As you said Chris,
"Scarfie implied retail banks just make up numbers in an account and loan it out - that is rubbish!"
Is it rubbish? Its exactly what the RBNZ describes in their own documentation. I gather you do know that commercial bank deposits are a form of money, so to make a loan they just make up some accounting entries and voila, the borrower has some freshly minted commercial bank deposits (a.k.a money). Nobody said that this means that the bank has enough cash on hand to make all their daily payments, but this is the exact process which the reserve bank describes in its own documentation.
When I said,
"What about if you loaned out $1 billion how would your balance sheet look then? You write on the IOU's chris owes you $1 billion, and you lend them out at face value. In this case you would have $1 billion in assets (the loan contract), $1 billion in liabilities (you have to pay some bearer $1 billion on demand, and your books balance, sounds just like what a bank does, doesn't it. Now, you said you would do it if you could, so go right ahead, you can even profit from it if you charge interest on the loan."
I was quite clearly talking about a balance sheet argument, and I didn't say you were going to be able to make payments, though for some reason you assumed I said that,
Above you have just stated that a bank doesn't need cash coming in in order to lend it out!
I didn't say that at all, if you thought I did you need remedial reading lessons. If you lend 1 billion, and are going to remain solvent for a significant time, you are going to need a large cash flow. In fact I stuck to that figure for my taunt because nobody is going to believe your IOUs are good for 1 billion dollars, so there was no harm to you in having to actually follow through on your bluster. But there do exist institutions which have this kind of cash flow, they are called banks, big ones and sometimes they will and do create literally billions of dollars in one day.
But as the examples I gave do show this state of needing to make 1 billion dollars in payments due to one loan is really no different to needing to make 1 billion dollars in payments due to multiple loans or a continuous stream of loans and deposits which result in your institution needing to service 1 billion in payments on a particular day. Any cash flow argument is really no different observing that bank runs happen, maybe banks are foolish or easily described as foolish when bank runs happen, but that really is not so different to what all banks do on a day to day basis. Obviously cash flow is not a constraint if you can make payment is it. Use smaller numbers if you want examples where you might personally be able to make payment from day to day.
So to sum up, there is pleanty of evidence that you lose the debate on the question, who controls the money supply. There is pleanty of evidence that commercial banks have the upper hand in control of the money supply, and can essentially make up and lend as much money as suites them. Sure there are rules, but there is an open debate about how much this is relevant, and there is pleanty of empirical evidence this has no relevance. I called time on this question quite a while ago, myself. Thats exactly Steve Keens position, its obviously Steve Keens position if you bother to actually read it.
Further more, you lose the debate on the limited question of how commercial bank money is created. It is created by accounting entries, the Reserve Bank of New Zealand describes this process as such. Clearly in the literal sense what Scarfie said is quite correct under any reasonable model of banking. This fact of how commercial bank money is created eventually leads to the situation of commercial banks having so much discretion with their lending, and so the amount of lending, and so of course the amount of monetary inflation occuring.
Of course you didn't take the time to read anything about which positive money have written, but this mechanism through which banks lend and so create money is the central question to them. It probably doesn't make sense to talk about investments as money in a 100% reserve system, as the primary idea is to create a situation where investing money means giving up instant access to that money on demand. Under such a system other statistics would be created, I don't think investments would still be referred to as money. Of course this creates a situation where money is no-longer created by commercial banks and is now under full discretionary control of central banks, probably as you think or thought banking functions at present. Maybe at some point you might be persuaded to pay some attention to what other people write.
and just in case you remain some how confused by this,
The last few dozen comments have been a discussion as to whether a bank could make a loan without taking a deposit which you have argued it can because of your total misunderstanding of what fractional reserve banking is
No, I am not debating that banks need a regular cash flow in/out in order to lend. Of course the fractional reserve examples should be thought of in the context of a normal bank, with regular deposits and withdrawal of funds. This is clearly the important question, far more so than how a bank comes into existance. When you think about the fractional reserve process in this context and the question, how does a bank in this state extend more credit? The obvious conclusion is that they do just fabricate this money (yes, obviously commercial bank money) and then they lend it out. Yes, they do need some startup funds, but once this process is underway it pretty clearly runs from loans to deposits, not from deposits to loans.
Nic NZ.... I actually think that BOTH your view AND Chrisj view are valid.... and one can reconcile the 2 views....
The difference between the 2 views ... is the same difference that limits the ability of a finance company to loan out money ..as opposed to a Banks ability to create credit.
I agree that a bank can create a loan before it has the funds to honour that loan.
I agree that creating that loan ( and at the same time a deposit ) increases the money supply.
BUT....Chris j is also correct in his view... that when it comes time to honour that loan the Bank will have to draw on existing deposits or real funding. ... ( in the same way we need funds in our chq acct. when we write a chq and it gets honoured)
This constrains the banks ability to expand the money supply.
The created Loan ( credit) behaves and has qualities that are similar to the IOU's of the goldsmith days.... ( a promise to pay)
In aggregate... all these IOUs never get honoured at any one time... and as long as there is growing demand for credit ...there are plenty of deposits to honour the newly created credit ....These IOU's take on all the properties of "money"..and are as good as money.
AND... like u say this is only limited by the amount of credit worthy borrowers that are out there.
Transactional accts. are also part of the whole credit creation process.. ( I could have $50,000 in my chq acct...BUT in reality there is nothing there..just a promise by the bank to pay me $50,000 if I demand it... the banks have used that money to honour obligations with other banks)... It is one giant merry go round.
Hope I haven't added to the confusion.. :)
Cheers Roelof
BUT....Chris j is also correct in his view... that when it comes time to honour that loan the Bank will have to draw on existing deposits or real funding. ... ( in the same way we need funds in our chq acct. when we write a chq and it gets honoured.
You mean the bank will have to draw on existing, excess reserves. Nobody (other than the consumer) has their deposit balance fall when a bank makes payment? Thats one of the reasons that these institutions are financially unstable, and bank runs happen.
There are other influences as well, I believe this can only be proved empirically. You have to measure how it functions in practise for several reasons.
I don't think these two positions can be reconciled however. I don't think that a central bank can ever take the upper hand for various reasons (for example it might cause a financial crisis, that almost happened once before 'Black Friday'), though financial prudence may mean they don't need to for long periods of time.
Comparing the arguements to the Wikipedia references given I'd score it ChrisJ : 1 - NictheNZer : 0
The link wtf provided on NZ banking above is bit of a clincher:
"This means that, when a bank makes a new loan, the proceeds of which might be credited to an account at some other bank, it needs to make sure that it raises enough funds, either in the inter-bank money markets or from customer deposits to ensure that its net cash outflows will remain near enough to zero, and so that its position in its account at the Reserve Bank will remain in credit."
Fair enough, but Wikipedia can be a little simplistic of course. If you want an authority on something you ought to check the references for such an assertion.
I don't think this fact says much however about either of these statements,
Scarfie,
"Most home owners are unaware that the money the bank has lent them is created from nothing, not matched by equivalent deposits."
Chris,
"Your arguments are also rubbish - retail banks don't just create money out of thin air (even if central banks do!)."
Scarfie clearly means that the loans are not funded by deposits which existed before a loan is made. Chris says thats rubbish, but obviously the same wikipedia page describes a process where commercial banks create more demand deposits (a form of money, as acknowledged clearly by the Reserve Bank of New Zealand documentation) as they are creating a new loan. In this most literal sense Scarfie is correct, right?
"This means that, when a bank makes a new loan, the proceeds of which might be credited to an account at some other bank, it needs to make sure that it raises enough funds, either in the inter-bank money markets or from customer deposits to ensure that its net cash outflows will remain near enough to zero, and so that its position in its account at the Reserve Bank will remain in credit."
i think this statement reconciles Scarfies view with Chrisjs view.. .. 9and it also places limits on what both Scarfie and Chrisj might be implying.)
ie. Banks have REAL constraints on how much credit they can create... Banks don't just create credit out of thin air ( there is much more to it than that )
I don't think the above wikipedia quote is simplistic.... it think it is "on the money".. I think it is very clear and is 100% correct.
Of course this is correct, the banks do need to make payments. I think the effects of this can only be measured empirically however, and here is what I think you would find if you did measure it.
When a bank makes up a loan it is typically spent and also typically deposited into another bank. The increases the velocity of money in close correlation with the rate at which money is being loaned. Also the payment system is highly efficient these days, which gives banks a great deal of certainty and confidence. There is also the point that a central bank is to a large degree obliged to facilitate payment, they can't be to hard nosed about this, because the consequences of payment problems are very dire for a central bank. They really want to avoid causing financial crisis. But I think these factors, adding up to the general amount of credit in the system, mean that the need to make payments is not a clear restriction on bank lending. At very least people want to borrow to a lesser degree than the payment system restriction prevents that borrowing from occuring. Of course this can only be measured empirically, and I referenced one such statistical study which says money is created endogenously.
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