bordsilver said:
hawkeye said:
Have been very busy at work but managed to start reading this (about halfway through). So far it is very good. It builds a lot on Rothbard etc and explains the simple mechanics from a different viewpoint. Importantly, so far nothing really differs from Rothbard (which I believe more people have read) but Keen does skip over any ethical discussion which some people may prefer.
Have skim read most of the posts and I agree with you Hawkeye. I think OC is focussing on how a bank operates if it was a single small entity within an economy and not how it operates once there is extensive trust, multiple banks etc.
Correct! My original understanding of FRB (which is now under review after your posts) lead me to believe that FRB could not exist with one bank alone but many banks make up the system. So if we were starting from day dot and there was no currency in the system but two banks (say NAB and CBA) without any deposits or loans. And a few individuals and a central bank-RBA.
Let's stick with pure cash and credit for now, because this is where I believe this all started and why physical ink and paper cash is so small now we are so far down the Rabbit hole
Let's say the central bank issues $100 in $1 notes and buys say one ounce of gold from Bob fully redeemable for example (it's irrelevant really but the RBA has an ounce of gold and Bob has $100 ).
Bob goes into NAB and deposits the $100 and now has credit of $100. NAB has a liability of $100 and an asset of $100 in actual cash.
Jane comes into NAB and borrows $90 to buy a car and NAB gives her $90. NAB now has a liability to Bob of $100 and assets of $10 in cash and a $90 loan to Jane that they also consider an asset. Balance sheet balances.
Jane pays Steve $90 for the car and Steve deposits the $90 at CBA. CBA now has a liability of $90 and $90 in cash as an Asset.
James borrows $81 from CBA and deposits it with NAB who is offering more interest than CBA is charging (just for arguments sake to cut humans out of the loop here and to highlight that with all this cash no interest is possibly payable)
CBA now has a Liability of $90 to Steve and assets of $9 in Cash and $81 in loan to James.
NAB now has $181 in "deposits" (liabilities) $100 to Bob and $81 to James yet assets of just $91 in physical cash and the remained is made up in promises to pay of $90 by Jane.
The whole system has a grand total of "deposits" of $181 at the NAB and $90 at the CBA totaling $271 in the "monetary system". Reality is that there only ever existed $100 and the extra $171 has been created by credit in the banking system from thin air with a few banking entries from less than a handful of transactions.
So now let's forget for a second that NAB was offering more interest than CBA was charging and that both institutions pay 5% and charge 10%.
Where the F is that interest coming from? There only exists $100. Without the bank created "credit" being thought of as, as good as cash (which under this scenario is as good as gold) the interest could never be paid.
Ok so I am being told that now days this isn't exactly how it happens because the huge numbers we are talking about mean everything is simply moving "credit" around on computer screens, which is entirely plausible and probable.
But the key thing for me that puts OC's myth to rest (busted) is the M3/broad money supply growth thread. We know from that thread (RBA figures) that broad money is about 1.3 Trillion from memory. We also know that this increases roughly a minimum of 10% every year up to 20% some years (2008?). We also know that OF THAT GROWTH, the RBA is only responsible for adding about 3% of that. So if the Australian banking sector isn't responsible for the other 97% of money supply growth, who the hell is?
