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

[throwaway4372]

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?

Dan's account becomes £0 and the £100k is added to the destination account. That's it.
It's right that it doesn't seem legit, because it isn't legit, DanBank created money - that's the whole point.

 

[Slam62]

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.

This, a debt becomes an asset when it is owed to you, so the more they lend the more they have.
However the quality or risk in that debt also matters and those are not set in stone. If you want to offload some dodgy loans you throw them in a box with the best ones on the top, get your friendly rating agency to rubber stamp it and flog it to some other smuck.
The whole system is amazing and makes no sense.
The banks do have to keep a small amount of real assets for when people want actual money, this only becomes a problem when confidence is lost and everyone wants their money.

 

[dlockers]

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.

You are over simplifying a different process

 

[Hades]

It always makes me smile looking at some proper cash such as a £5 note. It is actually only a promissory note which says the chief cashier of the BoE "I promise the pay the bearer on demand the sum of £5". So cash isn't actually money. But money doesn't really exist as a physical asset anymore. So what would the chief cashier pay you with and where would you exchange it for an actual sum of £5?

 

[danlightbulb]

Dan's account becomes £0 and the £100k is added to the destination account. That's it.
It's right that it doesn't seem legit, because it isn't legit, DanBank created money - that's the whole point.

There has to be something else that is being missed here.

Otherwise why don't lots of people establish banks and just pay themselves with newly created money. Why would a current bank even bother dealing with customers at all, just pay yourself enough for a good life and be done with it.

All you'd need is regulatory approval and permission to access the world banking network to push your transaction through i.e swift or visa or whatever.

That can't be all.

There must still be significant barriers to entry here, something aside from just getting the regulatory approval.

 

[throwaway4372]

It always makes me smile looking at some proper cash such as a £5 note. It is actually only a promissory note which says the chief cashier of the BoE "I promise the pay the bearer on demand the sum of £5". So cash isn't actually money. But money doesn't really exist as a physical asset anymore. So what would the chief cashier pay you with and where would you exchange it for an actual sum of £5?

he pulls it out of his .... sofa

 

[Slam62]

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.

I would love to see the bankers faces when they realised they could get away with this.
I thought qe was the boe creating money out of thin air but it was liquid so they bought assets from banks that couldn't offload them. The assets happened to be bonds the boe had sold them or something.

 

[One More Solo]

That doesn't really counter what I've said though. You shouldn't have significantly increased spending without significantly increasing tax, so the under taxing of the majority of earners in the UK is the cause of the underspending.

The UK has a major problem where taxation and spending is involved, and that is the constant desire, across the entire electorate, to make negatives someone else's problem, while benefiting from the positives.

I think we’re largely in agreement on this actually.

 

[Hades]

There has to be something else that is being missed here.

Otherwise why don't lots of people establish banks and just pay themselves with newly created money. Why would a current bank even bother dealing with customers at all, just pay yourself enough for a good life and be done with it.

All you'd need is regulatory approval and permission to access the world banking network to push your transaction through i.e swift or visa or whatever.

That can't be all.

There must still be significant barriers to entry here, something aside from just getting the regulatory approval.

Banking licences are extremely tough to get for this reason. Ever wonder why Midlanf Bank disappeared? Its because HSBC bought them for not only their customer base but significantly for their banking license to allow them to setup business here.

 

[dlockers]

Personally I prefer the currency where we use graphics card to do maths because that's much better

 

[arknor]

Personally I prefer the currency where we use graphics card to do maths because that's much better

I like gold coins and gold bars where people do work to mine it

 

[danlightbulb]

Banking licences are extremely tough to get for this reason.

it would definitely be interesting to find out what the actual requirements are wouldn't it.

If a company can demonstrate it passes the tests, strict as they are, a license should be granted. I wonder what those tests are.

 

[dlockers]

I like gold coins and gold bars where people do work to mine it

But why wouldn't they just keep the gold?

 

[throwaway4372]

There has to be something else that is being missed here.

Otherwise why don't lots of people establish banks and just pay themselves with newly created money. Why would a current bank even bother dealing with customers at all, just pay yourself enough for a good life and be done with it.

All you'd need is regulatory approval and permission to access the world banking network to push your transaction through i.e swift or visa or whatever.

That can't be all.

There must still be significant barriers to entry here, something aside from just getting the regulatory approval.

Lending yourself money isn't any good because you can't pay yourself back the interest or cover the operating costs so it's pointless.
There's significant cost in setting up a bank, loads of employees, IT, lawyers, etc. Random people can't afford it, but plenty of big businesses do set up banks. Above that, yeah it basically is just a case of getting a banking license.

 

[Slam62]

You are over simplifying a different process

Really the creation of money through loans is the easy bit, defining how likely those loans are to be paid back is the smoke mirrors bit. They all become financial instruments spawning like crazy and hidden under fancy names. Some parts of this process are better regulated than others.
The whole system relies on proper definition of the borrowers reliability. Prior to the recent financial crisis, this was all brushed under the carpet.
Actually we might get a housepricecrash if they have been doing this more recently, the terms are liar loans and ninja loans.
Supposedly the rules for financial advisors have been tightened up.

 

[throwaway4372]

I would love to see the bankers faces when they realised they could get away with this.
I thought qe was the boe creating money out of thin air but it was liquid so they bought assets from banks that couldn't offload them. The assets happened to be bonds the boe had sold them or something.

They didn't 'realise' they could get away with it one day. They changed the rules around 1930 so that money didn't have to be backed by gold, allowing them to do it. They literally created the system for themselves to abuse, not an accident.

 

[Slam62]

They didn't 'realise' they could get away with it one day. They changed the rules around 1930 so that money didn't have to be backed by gold, allowing them to do it. They literally created the system for themselves to abuse, not an accident.

Yes, wasn't it coming off the gold standard or something.

 

[danlightbulb]

Lending yourself money isn't any good because you can't pay yourself back the interest or cover the operating costs so it's pointless.
There's significant cost in setting up a bank, loads of employees, IT, lawyers, etc. Random people can't afford it, but plenty of big businesses do set up banks. Above that, yeah it basically is just a case of getting a banking license.

That was kinda the original question really. Obviously for a customer of 1 and an intended transaction of 1 item, no employees or ongoing costs would technically be needed.

There's some information here: https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit

But it talks about banks as 'deposit takers' and doesn't mention this ability to create money on balance sheets. I wonder if that requires a separate license? Can all banks create money out of nothing or do some 'lesser' entities have to have equivalent collatoral?

 

[throwaway4372]

Don't know. Looks like there's some limitations to stop the large banks being contested, they like running the show. Perhaps one of the limitations is they don't even tell you the limitations.

It's like when the girlfriend says "if you don't know I'm not going to tell you".

 

[HangTime]

Only problem with this last one is the unfair nature of the wealth divide. If everyone has to tighten their belts equally then people would probably accept it, but we are not all in this equally which is the issue.

I don't consider it any more 'unfair' than it is normally though. I mean if someone earns double what I do then they have more money to spend. If prices rise then a higher proportion of my income is probably used to fund those rising prices compared to theirs. That's just the nature of earning less money.

I would argue that in a capitalist society if everyone had to tighten their belts equally then something would be very, very wrong. That would imply that everyone was living hand-to-mouth and having to make cutbacks simply because inflation was outstripping wage increases. The reality is some people add more value and earn more money, some of those people earn enough money that inflation doesn't mean tightening their belt at all, it just means they accumulate wealth more slowly. I wouldn't say that was necessarily 'unfair', it could be they are working harder than others, working more hours, more talented at their profession etc etc.