Given the stormy (but still too warm) afternoons of the recent weekend I stumbled over the following piece of documentation on YouTube:
It was quite thought provoking. Even given my financial education I cannot answer the questions that did arise for me. Main one being: Why is it the USA carries debt anyway? Why is money created the way it is done?
As far as I understand, money creation follows two ways (and I use the USA as example as I must admit - shame on me - I do know even less about the European institutions):
1) Either the FED issues money, creates, prints it, mostly in digital form these days. Eg. it buys some troubled assets like Asset Backed Securities (ABS) from some banks, uses fresh money to do so and thus creates new dollars. Or - as lender of last resort - it buys US treasury bills as nobody else wants them and thus helps the state to finance its deficit. Especially in the later case, these means the US government (read: the tax payer) has to pay interest on the money created.
2) Other banks are allowed by regulation to create new credits based on the assets they have. Take the case where the FED bought some illiquid ABS from some banks. The money the banks got they can lend out to business and private persons - but not only the money they got but a multiple of this, as they are allowed to leverage up to a certain degree. The leverage allowed is calculated in complicated formulas I am not educated enough to go into detail. But whenever you raise equity or you hold less risky assets (like less risky loans given out, cash instead of ABS, ...) you can hand out additional loans 5x, 10x, 25x that value. Its called fractional banking system.
What 1) creates is: Unlimited profit ratios, as you create money out of thin air and loan it out to get interest or you get (maybe depreciated but not worthless) assets for free.
What 2) creates is easy profits. For 1000 bucks I deposit at a bank they might pay me 20 interest a year. Leveraging my 1000 bucks 10 times they (the whole banking system) can hand out 10.000 bucks and get maybe 500 interest a year.
Immediately 2 questions arise - number one of course 'what does it take to become a bank'. Cause the leverage model is so clever, I would love to do it on my own. Okay - i get no bank license and maybe there are reasons why - this would be illegal. I cannot create money.
Question 2 and here I stumble: Why are governments all over the world that stupid and allow such a process of money creation? The easy way would be to print the money just for themselves, never issue any debt obligations, never pay interest, never be on the verge of default (or close to). Just distribute the currency to teachers you have to pay, build roads, and so on and so on. Banks could still exist but would not be allowed to leverage up or create money .
The only issue governments would have is devaluation of their currency when they overdo it and the paper they print gets worthless (which can also happen under the current system).
It opens a whole lot of questions, also on ethics and social fairness. Why shall a small group have the right to profit on money creation. And no: the FED is no governmental institution distributing its profits to the USA.
Any insights appreciated! I must admit I did not learn all too much at the university about this and would appreciate a good reading list on 'Money Creation'.
As far as I understand, money creation follows two ways (and I use the USA as example as I must admit - shame on me - I do know even less about the European institutions):
1) Either the FED issues money, creates, prints it, mostly in digital form these days. Eg. it buys some troubled assets like Asset Backed Securities (ABS) from some banks, uses fresh money to do so and thus creates new dollars. Or - as lender of last resort - it buys US treasury bills as nobody else wants them and thus helps the state to finance its deficit. Especially in the later case, these means the US government (read: the tax payer) has to pay interest on the money created.
2) Other banks are allowed by regulation to create new credits based on the assets they have. Take the case where the FED bought some illiquid ABS from some banks. The money the banks got they can lend out to business and private persons - but not only the money they got but a multiple of this, as they are allowed to leverage up to a certain degree. The leverage allowed is calculated in complicated formulas I am not educated enough to go into detail. But whenever you raise equity or you hold less risky assets (like less risky loans given out, cash instead of ABS, ...) you can hand out additional loans 5x, 10x, 25x that value. Its called fractional banking system.
What 1) creates is: Unlimited profit ratios, as you create money out of thin air and loan it out to get interest or you get (maybe depreciated but not worthless) assets for free.
What 2) creates is easy profits. For 1000 bucks I deposit at a bank they might pay me 20 interest a year. Leveraging my 1000 bucks 10 times they (the whole banking system) can hand out 10.000 bucks and get maybe 500 interest a year.
Immediately 2 questions arise - number one of course 'what does it take to become a bank'. Cause the leverage model is so clever, I would love to do it on my own. Okay - i get no bank license and maybe there are reasons why - this would be illegal. I cannot create money.
Question 2 and here I stumble: Why are governments all over the world that stupid and allow such a process of money creation? The easy way would be to print the money just for themselves, never issue any debt obligations, never pay interest, never be on the verge of default (or close to). Just distribute the currency to teachers you have to pay, build roads, and so on and so on. Banks could still exist but would not be allowed to leverage up or create money .
The only issue governments would have is devaluation of their currency when they overdo it and the paper they print gets worthless (which can also happen under the current system).
It opens a whole lot of questions, also on ethics and social fairness. Why shall a small group have the right to profit on money creation. And no: the FED is no governmental institution distributing its profits to the USA.
Any insights appreciated! I must admit I did not learn all too much at the university about this and would appreciate a good reading list on 'Money Creation'.
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