Are we starting to see the wage increase vs inflation increase death spiral?

A while back I read a book called The Creature from Jekyll Island which explains how fiat currency became sketchy as a result of deliberate decisions by fat cat bankers and politicians. Hard to tell how much of it is conspiracy theory, but it does feel true.

 
Mr Jack said:
Because banks are regulated.
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Yes.

But in principle, what if I complied with the regulations? Is there anything stopping, assuming all above board, someone setting up a bank with some equity then lending money out to yourself?

In practice I imagine the start up costs are prohibitive but in principle can it be done?

What is the actual mechanism by which a bank credits some money to you from its own balance sheet? Anyone can change a number on a piece of software, but when you come to actually use that money (i.e withdraw it) how does it actually get created at that moment?
 
danlightbulb said:
Yes.

But in principle, what if I complied with the regulations? Is there anything stopping, assuming all above board, someone setting up a bank with some equity then lending money out to yourself?

In practice I imagine the start up costs are prohibitive but in principle can it be done?

What is the actual mechanism by which a bank credits some money to you from its own balance sheet? Anyone can change a number on a piece of software, but when you come to actually use that money (i.e withdraw it) how does it actually get created at that moment?
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Against an asset on their balance sheet (your loan). Here is an interesting take from the airline industry:

 
When someone borrows from a bank, e.g. a mortgage, the bank hands over 'computer money' which they don't have, then to avoid going broke they add your debt plus interest as an asset to their balance sheet, hey presto they're profitable.

Average folk like you and I can't magic money out of thin air. So why is it okay for banks to have that ability? Answer: it isn't okay.
 
danlightbulb said:
Yes.

But in principle, what if I complied with the regulations? Is there anything stopping, assuming all above board, someone setting up a bank with some equity then lending money out to yourself?

In practice I imagine the start up costs are prohibitive but in principle can it be done?

What is the actual mechanism by which a bank credits some money to you from its own balance sheet? Anyone can change a number on a piece of software, but when you come to actually use that money (i.e withdraw it) how does it actually get created at that moment?
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Why would the costs be prohibitive? Just take a money-print-loan.
 
dLockers said:
Why would the costs be prohibitive? Just take a money-print-loan.
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Im just trying to understand the actual mechanism of it.

Lets say DanBank just gets set up as a new bank and gets approved by the regulator.

DanBank started off with an equity injection of £10k. So on its balance sheet it simply has +£10k.

DanBank then wants to loan its only customer, Dan, £100k. So it creates a loan on its balance sheet of -£100k.

It also credits Dan's account with DanBank with +£100k.

However that 'transaction' is still all within DanBank on a couple of spreadsheets. How does Dan actually withdraw his money? How does DanBank send Dan's money to whereever it needs to go? That would require other banks to trust that DanBank is allowed to send money into the system that it doesn't actually have in practice - so how does that come about?
 
danlightbulb said:
Im just trying to understand the actual mechanism of it.

Lets say DanBank just gets set up as a new bank and gets approved by the regulator.

DanBank started off with an equity injection of £10k. So on its balance sheet it simply has +£10k.

DanBank then wants to loan its only customer, Dan, £100k. So it creates a loan on its balance sheet of -£100k.

It also credits Dan's account with DanBank with +£100k.

However that 'transaction' is still all within DanBank on a couple of spreadsheets. How does Dan actually withdraw his money? How does DanBank send Dan's money to whereever it needs to go? That would require other banks to trust that DanBank is allowed to send money into the system - how does that come about?
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You basically just described all the online-only challenger banks.
Dan can spend it digitally, e.g. a credit card, or DanBank can get an ATM and put enough cash in it to make it seem like a legit bank, or Dan can transfer it to another bank who already have ATMs.
Of course if you actually tried to set up a bank I'm sure you'd encounter obstacles, requiring a bunch of money and lawyers etc. Can't have random Dans opening banks...
 
dLockers said:
Okay clever people, if loans are fictional money being created - what happens if I then immediately go to the cash machine?
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what do you think happens when everyone does it? you know why they close the cash points right? because a bank has to maintain a leverage ratio
 
throwaway4372 said:
Dan can spend it digitally, e.g. a credit card, or DanBank can get an ATM and put enough cash in it to make it seem like a legit bank, or Dan can transfer it to another bank who already have ATMs.
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But DanBank doesn't actually have £100k. All it has it an entry on a spreadsheet saying £100k. So how does it transfer it to another bank say, that needs to be able to trust or somehow recognise that DanBank's £100k is legit?
 
I think we need to differentiate between permanent and transitional changes in prices. We're in a situation where base costs are rocketing due to the effects of COVID and the situation in Ukraine. If we continue to increase salaries to address temporary changes in base costs then we'll enter that spiral which is why I think the government are giving 'one off' payments' and trying not to give into to enduring salary increases. If we take a real world example, there's been chaos with rail in the last week and I needed to spend more to get into work, we could answer that by [A] giving me a salary increase that would last indefinitely or giving me a one off payment to cover the increased cost for the time of the rail strikes. Its quite clear to me what's the best option to both help me afford the increase in commute costs whilst trying to keep inflation in check.
 
danlightbulb said:
But DanBank doesn't actually have £100k. All it has it an entry on a spreadsheet saying £100k. So how does it transfer it to another bank say, that needs to be able to trust or somehow recognise that DanBank's £100k is legit?
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DanBank doesn't need 100k, it isn't the one doing the transfer. Dan is, Dan's account contains a magic 100k which was created from nowhere by DanBank, Dan can transfer that wherever. It all still 'works out' for DanBank because technically Dan still owes them 100k plus interest, the fact that Dan spent the 100k is.. normal.. because people don't borrow money for the lulz, they generally want to use it for something. Over time Dan will earn the money and repay the loan, or default.
 
danlightbulb said:
Im just trying to understand the actual mechanism of it.

Lets say DanBank just gets set up as a new bank and gets approved by the regulator.

DanBank started off with an equity injection of £10k. So on its balance sheet it simply has +£10k.

DanBank then wants to loan its only customer, Dan, £100k. So it creates a loan on its balance sheet of -£100k.

It also credits Dan's account with DanBank with +£100k.

However that 'transaction' is still all within DanBank on a couple of spreadsheets. How does Dan actually withdraw his money? How does DanBank send Dan's money to whereever it needs to go? That would require other banks to trust that DanBank is allowed to send money into the system that it doesn't actually have in practice - so how does that come about?
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People have over simplified the "loan equals print money" equation. Only Central banks have the option to literally invent money. They then use this money to "buy" IOUs that the high street banks create. The banks then each have a tonne of cash that they need to do something with - and because supply is high, they offer it to consumers at low interest rates.
 
dLockers said:
People have over simplified the "loan equals print money" equation. Only Central banks have the option to literally invent money. They then use this money to "buy" IOUs that the high street banks create. The banks then each have a tonne of cash that they need to do something with - and because supply is high, they offer it to consumers at low interest rates.
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Nope. Banks can create money out of nowhere via their balance sheets. That other thing also happens, but that allows governments to create money out of thin air.
 
throwaway4372 said:
DanBank doesn't need 100k, it isn't the one doing the transfer. Dan is, Dan's account contains a magic 100k which was created from nowhere by DanBank, Dan can transfer that wherever. It all still 'works out' for DanBank because technically Dan still owes them 100k plus interest, the fact that Dan spent the 100k is.. normal.. because people don't borrow money for the lulz, they generally want to use it for something. Over time Dan will earn the money and repay the loan, or default.
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Hmm no that still doesn't sound right to me. If Dan says he wants to withdraw his £100k, DanBank still needs to action that transaction somehow and send that £100k it created out of nothing into the rest of the banking system. What gives it the legitimacy to be able to do that?
 
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