don21stc

It may seem like an elementary question, but I genuinely do not understand how new money is created rather than existing money just being temporarily diverted in another direction by trade amd commerce.
The so-called wealth creating industries like manufacturing have, in days gone by, made whole nations prosperous but where did the people who bought the American automobiles or the Japanese electronics (and cars) get the money from to buy them?
I know you can't just print money, apparently, but that's what the Bank of England did to minimise the effects of the credit crunch and it seems to have had some success, at least short term.
I'm not an economist but would be interested in a simple explanation.

Alternative Views on Mind Power and Success

Mark Emerson

Hey don,

I will try to make this as simple as possible!!!

The best explanation is by Paul Grignon and the video
'Money as debt' is available on YouTube.

New money is rarely printed, (aside from the BoE printing
a bunch of it recently which they call quantative easing)
instead it is written into existence as debt.

Take a mortgage for instance. People assume that your mortgage
provider takes a stack of money out of the safe, gives it to the seller
and you pay the money back over a number of years plus interest.

Guess what? Never happens.

The seller is paid by electronic transfer and a bunch of numbers moves from
one account to another. No real money has ever changed hands. The bank had no money to start with and the seller only has electronic money in their account.

The clever part is the bank now has your pledge or mortgage, ( did you know mortgage means 'death grip'?), as an asset. Now they can make some real money.

You see each bank by law only has to carry 10% of its liabilities or debts as reserve. So if their mortgage and debt book stands as 10,000,0000, they only have to have 1,000,000 in hard cash.

But the scary thing is your new mortgage is counted as reserve. So they can issue new loans or mortgages with you as the security. So if your mortgage is 100,000 they can now lend and earn interest on 1,000,000 (100,000 x 10).

They have no liability, they have no risk and worst of all they have no money!
Their assets and reserve are all the loans and mortgages they have issued.

That is why the whole system ground to a halt when people realised that all the world economy rested on all the dodgy loans and mortgages that had been issued.

When these loans defaulted there were no reserves. The whole pack of cards was, and still is, on a tightrope. The BoE had to pump the banks full of our cash to prop up the system.

So in a nutshell, we provide all the reserves for the banks by taking out loans but they charge us interest. Then the banks use our money as collateral to lend to some other suckers and they charge them interest too. Finally the government has used our taxes to bail out the banks which they then lend to us and charge us interest again!!!

Boy are we in the wrong business.

Hope this helps but the video on YouTube is excellent

mark z

Well explained, Mark.

Don21stc, did you check these clips?
It is simplified, but very impressive explanation of money flow and credit crisis itself.

don21stc

Hi Mark Emerson & mark z,
Is it just coincidence that you're both named for a major world currency?
Anyway, thanks very much for the excellent information, which leaves me even more certain that the problem will return in the future, firstly because so many people with their hands on the financial levers (hence the word 'leverage' ?) have made millions already and will want to do so again whether they went bust or not this time round and secondly, at least in the UK , our goverment effectively said we can't sack these money-grabbing crooks or lock them up because there would be no one left to run the banks so our economy would collapse!!! They seem to have missed something to my simple mind.
This seems to me to be related to the sort of reasoning that says we can't get rid of warmongering dictators because there would be no one left to start wars so the population overload would get even worse.
Both are cases of the lunatics running the asylum!
My original question was really how was the wealth created by human endeavor in the first place, which was then converted into cash, seemingly to enable smart-aleck 'investors' to get rich by committing financial genocide?
I can't really think of an example to illustrate what I'm talking about, but what I'm wondering is, in a reasonably stable world economic situation, how can everybody's standard of living increase through increased production and/or output which I assume would translate into their having a higher disposable income? And if such a utopian situation is possible, would it only be short term because it's the nature of things that 'investors' will eventually find a way to get their hands on the wealth that others have so obligingly created for them?
Don

Alternative Views on Mind Power and Success

broker12

I think it would have to be a socialist system for everybody's standard of living to rise together. In most capitalist systems there will always be a disparity of wealth as there is competition for scarce resources.

kozmotm

Check out "The Money Master" video. Or get the "Self-Made Wealth" from Eben Pagan. He explains all very well.

Also, in Zeitgeist-The Movie, you will find some things about money.

highrider21

Another great book to read is "Modern Money Mechanics". It was printed by the Federal Reserve and explains how the Federal Reserve and banks work. You can download it for free in pdf format. Just search for it on google.

Kay King

It's a good explanation as far as it goes but there was much more to it than that. The system ground to a halt because lack of regulation or oversight (pick one) allowed huge financial institutions to use mortgages as investment vehicles. Instead of being sold in the second mortgage market - they began to be sold to wall street to be repackaged and resold.

The profits were so great that risk factors were ignored. There was a huge demand for mortgages as "investment vehicles", new strategiees such as credit default and synthetic credit default were utilized by high paid bankers who didn't fully understand what they were doing. There was a strong belief on Wall Street and in the banking world that home prices would never, ever fall. Warnings to the contrary were ignored.

Greed led to mortgage lenders anxious for more paper to sell to wall street - so they lowered lending standards again and again. Firms buying the mortgages didn't investigate (or care) how the mortgage decisions were being made as long as they could buy (and package and resell) more and more.

The packages were rated AAA by rating agencies who had no idea what the risks were but were rating based on faith in the financial firm offering the investments as much as anything. With that rating the investments could be sold around the world for top dollar. Then the interest adjustments and foreclosures began.

One of the most insightful books I've read on the subject (that is written in a way regular people can understand) is "And Then the Roof Caved In". I think the author is Faber.

I knew in general what had happened but that book explained many of the investment vehicles that brought the economy to its knees. It was a house of cards ...and it still is.

kay

mayapearl

Hi Don,
sacking the bankers would be a bit like get rid of crooks and therefore we would have a unemployed police force. Surely this would'nt do
Maya

Maya's Own
Living green made simple and easy @ Green Living Temple

Kay King

The attitude here at the moment is one of "business as usual" and it is frustrating. Big banks were saved but now are appalled at any attempt to regulate their activities and the lobbyists are working overtime.

Many countries are now left with a core problem - they have demonstrated they will not allow big financials to fail so there is no restraint to keep the same problem from happening again.

Risk must be balanced by reward and by consequences. If wild risks can be taken by the financial markets while the potential consequences are born by the public, nothing will change.

The argument from some banks is "we paid back the money" but without public money they would not have survived and they seem to forget that part. Without regulatory change, they will take the same increasing risks confident in the knowledge they are "too big to fail".

In the US wall street financials were the recipient of taxpayer billions while small banks were left to survive on their own - and many didn't.

Profit-smart

Money is created with big machines.

Who owns those machines? In most countries the government, in our country "The Federal Reserve" (Not a federal/government entity) does it.

Something to do with the stock market crash in the 30s....



http://www.federalreserve.gov/pf/pf.htm

thriftgirl62

This is a good start: "Modern Money Mechanics" Only 3% of the World's money
is on Paper...If you really want to know the truth, it's right here:

Zeitgeist - The Movie


WARNING: The real-life images in the 2009 Addendum
are VERY disturbing with extreme graphic reality
that leaves nothing to the imagination. Watching
the first 10 minutes will send chills THROUGH
BOTH young and old alike. That includes YOU.

Nemanja

Money comes from debt, it is an illusion to make people modern slaves in monetary society.

Nemanja

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Mr. Enthusiastic

It's not a simple question at all. The answers can completely transform your understanding of world history, politics, economics, and the opportunities and challenges present in your own life. A full study of the implications of these answers can keep a mind busy for a lifetime.

I'm not an economist either, but I'll see if I can provide some ideas that help. If I'm wrong, I'm sure my mistakes will get promptly corrected here.

Money is a convenience so that we don't need to find a barter partner each time we want to make an exchange. We trade the value we have to offer for a symbolic placeholder that is agreed to represent value. Later on we can trade the symbol for value we want from someone else.

If you have some spare eggs and would prefer bananas, and I want eggs but don't have any bananas, we can use money. I'll trade you money for eggs and you can later find someone with bananas who'll accept that money. At a marketplace, chances are good that an egg buyer and banana seller might both be there, and both will accept money. Think of how complex and tedious economic life would be if you could only use barter for what you wanted, right at that moment.

The dictionary definition of money includes two parts. The first part is that it's a medium of exchange. That simply means that many people are willing to accept a symbol of appreciation for what they have to offer. The symbol is not immediately useful. But they (and we) accept it anyway, because they know they can provide this symbol to other people in order to get what they desire.

From this point of view, the U.S. dollar - or computer accounts that, by law, represent dollars - may be the most prolific, widely accepted medium of exchange on the planet today.

The second part of the definition is that money is a store of value. This means that if you accept money in exchange for what you offer, later on you can exchange the money with someone else and get back as much as you put in. Trade eggs for money today, and a hundred years from now, your money will be tradeable back for as many eggs from a farmer in your great-grand-kids' hometown.

Precious metals, especially gold, work very well for this purpose. A gold coin can survive thousands of years without rusting or being eaten by bugs, and its metal is still as beautiful, electrically conductive and shapeable as ever. A gold coin can be a work of art, and it can also be an artifact whose substance has industrial value in production. The difficulty of getting a scarce material out of the ground means that the coin is rare, and difficult to counterfeit.

Some people point out that although the price of suits in dollars has changed significantly in the last century, a hundred years ago and today the price of suits in terms of gold has remained pretty much the same.

Our current money is obviously lousy by this part of the definition. A dollar bill or coin is pretty much useless as either art or artifact. It takes more dollars to get the same suit than a hundred years ago. This is inflation, when the supply of exchange symbols grew faster than the supply of what people are willing to trade for using the symbols.

The reason is that what we have to work with as money is really only half of what money should be. It's a superb medium of exchange and a miserable store of value.

The U.S. Constitution says "no state shall... make anything but gold and silver coin a tender in payment of debts." An interesting history lesson comes from answering this question: Why aren't we using gold and silver coins to pay our debts in any U.S. state today?

Some other questions to ask: If money throughout history has had inherent value stored by money itself, why today do we use money with no instrinsic value? Did the American people get sick of having to use gold coins, and vote in whatever politicians campaigned on a platform of replacing gold with paper? Who came up with the current system, why did they come up with it, and who benefits from the system? Was it a grass roots response to what is most helpful to the largest number of citizens?

Who is allowed to create new symbols that are used to exchange value? Why are they allowed to do that? What punishments occur if other people try to replace those symbols with their own symbols?

Are there risks that the creation of exchange-token symbols could be poorly managed? If so, who is hurt by mismanagement, and are the mismanagers held accountable?

Some places to look for the answers:
Grunch of Giants by Buckminster Fuller
A Happy Pocket Full of Money by David Cameron Gikandi
Google searches for the terms "fiat currency" and "fractional reserve"
Wikipedia's article on the Federal Reserve

I hope this inspires you to look for some deeper answers.

Chris

nehaluck11

Hmmmm....! Let me think
From World Bank . . . .???????