I finally understand "out of thin air"

[Pianist4Freedom]

I know to many of you it may seem painfully obvious but I played devil's advocate for a while to truly understand how banking works. Now I finally understand what the "out of thin air" phrase really means. When a bank loans out money, the only time that money can possibly mean anything is if:

the loan and the interest can be paid back in full, either with money or collateral worth the difference

but the problem is, people who take out loans spend the money (duh) and the bank can't get that money back. So ANY time someone cannot pay off a loan, that money went into the economy having never really "assumed" any real value. It's just numbers in computers, or pictures of numbers printed on paper.

Thus, the easier the banking system makes it to take out loans, the more frequent defaults there will be, thus there will be more money injected into the system which was spent having never been paid back in order for it to represent real "value." Eventually this will lead to high inflation because people will have more "money" to spend, so prices go up. The more fake money in circulation the faster inflation will grow.

I don't know how clearly I reasoned all that out but for now I think lowering interest rates as the fed has been doing is probably just going to exacerbate inflation.

In the meantime, I'm going to be buying more gold & silver...

 

[Dr.3D]

Sometimes, they just type some numbers into a computer and suddenly, money is created.

Where did it come from? Answer, out of thin air! They do this on a regular basis. They don't even have to print it.

 

[Cleaner44]

Sometimes, they just type some numbers into a computer and suddenly, money is created.

Where did it come from? Answer, out of thin air! They do this on a regular basis. They don't even have to print it.

In fact most of the money created is not printed. Purely numbers on a balance sheet.

 

[Pianist4Freedom]

Yes, I recognize that printing money is merely putting numbers on paper and then deducting from a bank's balance to hold cash physically. I think people tend to use the phrase "printing money" to describe both adding numbers to a balance sheet and the physical printing of it.

I feel like I heard about a bank bailout the other day, like the fed just gave 300bil to banks for free pretty much. Is that true?

 

[Apparition]

I feel like I heard about a bank bailout the other day, like the fed just gave 300bil to banks for free pretty much. Is that true?

Don't worry.. it isn't free.
You and me will pay for it.

 

[INforRP]

Another way this happens is the banks only have to physically have something like 10% of what they loan out, the rest is in fact not real money. A bank that has 1 million dollars can loan out 10Mil (if I have my percentages correct, either way the concept is correct). The other 9 million never existed, but since it is in play in the economy as if it did exist, it is "created out of thin air"

I made a post a few minutes ago in regard to this, that some of you may find interesting (I hope). If it is true, the money loaned to you by the bank, as non-existent federal reserve notes, has actually been ruled as fraud.

http://www.ronpaulforums.com/showthread.php?t=124647

 

[AceNZ]

the loan and the interest can be paid back in full, either with money or collateral worth the difference

but the problem is, people who take out loans spend the money (duh) and the bank can't get that money back. So ANY time someone cannot pay off a loan, that money went into the economy having never really "assumed" any real value. It's just numbers in computers, or pictures of numbers printed on paper.

Thus, the easier the banking system makes it to take out loans, the more frequent defaults there will be, thus there will be more money injected into the system which was spent having never been paid back in order for it to represent real "value." Eventually this will lead to high inflation because people will have more "money" to spend, so prices go up. The more fake money in circulation the faster inflation will grow.

When a loan isn't paid back (when the borrower defaults), then the lending bank is required to write off the loan. That write-off is taken against reserves, which reduces the money in circulation. So a loan default destroys money, just like paying off a loan does -- it's just different money in one case vs. the other.

The main cause of high inflation is the ever-increasing creation of reserves by the Fed (primarily through the growing national debt), which then allows banks to create more money through new loans. If lending standards are lax, then even more money is created.

 

[misa]

Pianist, have you read this comic by Irwin Schiff? It's really good, and i think it shows what out of thin air realy means.

comic