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The truth is out: money is just an IOU, and the banks are rolling in it

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

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http://www.theguardian.com/commentisfree/2014/mar/18/truth-m...

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G Edward Griffin & Gary Franchi joined forces to help...

End the Fed...

http://www.dailypaul.com/323111/g-edward-griffin-and-gary-fr...

"First they ignore you, then they laugh at you, then they attack you, then you win!"
GANDHI

"The belief is worthless if the fear of social and physical punishment overrides the belief."

Its amazing what is passed off as knowledge when it comes

to banking and even less about history or accounting.

If you are getting your information from videos on YouTube chances are you are less educated then if you had not got any information at all......didn't Thomas Jefferson say something like that about newspapers. Especially if you are getting your information from the Money Master or Web of Debt videos.

If you didn't know or don't know that a dollar created by the Fed is a liability you quite simply don't have a clue about banking.

When a bank takes in someone's money it becomes a liability on the balance sheet of the bank, there are regulations that require that the bank keep a certain portion of that liquid in case the person wants it back. The "excess" of the requirement can and is lent into the banking system in the form of Fed funds. They place these excess reserves at the fed and other banks that are short reserves borrow from the system. The Fed controls the amount of reserves to determine the amount and interest they want someone to pay. This is how they control short term rates. There is a 2 week maintenance period in which this takes place....come up short to often and the chances increase that you will be audited.....and no one wants that.

Banks are in the business of borrowing short term and lending long term.....and as long as the yield curve stays positive they earn the net interest margin.

On the other side of the balance sheet,The banks can lend out money and when they do this becomes an asset on the banks balance sheet and yes it is money created out of thin air but the amount of loans are control by the amount of leverage the bank is allowed by regulation, they must maintain a certain amount of capital to remain solvent. Assets = Liabilities + Shareholder Equity.

The trick is how much to hold back and keep in shareholder equity in cash and cash reserves......and how much to lend out either to the Fed Funds market or as an assets....the bank cannot just lend without the restrictions of sound financial judgment.

Every time a financial crisis hits this flawed analysis come out of hiding because people see the banks sitting on all these excess reserves and think that all loans can be created and financed by the Fed......If that was the case then answer this one important question.

Why in the world would the banks need or want securitization?
Your theory just fell apart.

This is a nonsensical

This is a nonsensical article; the only purpose of which is to incite people to demand the continuation of government spending and Quantitative Easing. Most people here already knew that the Central Banks could theoretically print an infinite amount of money; however, what most people who are in favor of such action do not seem to take into account is the fact that while the money supply would be increasing, the number of goods -at best- would stay static or possibly worse, would decrease. This would thereby be creating inflation due to a greater quantity of money chasing equal or fewer goods. This is a situation which favors the wealthy, not the poor. In reality though, inflation and deflation both favor the wealthy, the only difference is inflation destroys the poor and middle class while deflation doesn't, at least not to the extent that inflation does. Deflation also, doesn't leave the poor and middle class as vulnerable as inflation does.

The poor and middle class, no matter if in times of inflation or deflation, need to spend money for their very survival, therefore, in times of inflation, the poor and middle class are destroyed via running them -the poor and middle class- out of money just due to the need to survive.

The article also erroneously states that the central banks have kept the fractional reserve banking to a minimum; however, fractional reserve banking was suppose to be at a 10 to 1 ratio, but it has been reported that it had -at times- gone up to over a 40 to 1 ratio. This is not keeping fractional reserve banking to a minimum; nor could fractional reserve banking be kept to a minimum if people demand that the government spend more money.

Where is Rand?

?????

It's about time. End the Fed.

This is another "conspiracy theory" that has been proven to be true. For years if one mentioned this on many online forums the result was a barrage of abuse. This has lessened in recent times as people have woken up. Now the Old Lady of Threadneedle Street, the Mother of all Western Central Banks, has confessed that what we have said all along is true.

This is the main reason the Western nations have invaded other countries like Iraq, Afghanistan and Libya...they were not using the Western central banking system that gives the bankers the monopoly to issue their debt money and buy up everything. The first thing they did in Libya was to open a new central bank in Benghazi to replace the one in Tripoli owned by the Libyan people.

Why now? My guess is that either they know it will make no difference, since people are comatose and will do nothing, or they are preparing the people for a change in the system to one of State issuance of debt free credit. It is very unlikely that they plan to introduce the gold standard but in this regard they will, in my opinion, be pre-empted by China, Russia and the other BRICS countries. These latter are already preparing to issue a Gold Trade Note that will be 100% gold backed and the instrument of settlement for international trade. This will then be the foundation of all national currency systems without fractional reserves.

For anyone who is not up to speed on all the shenanigans that have gone on over the centuries there is a series of 50 videos on youtube that will cover the ground:

https://www.youtube.com/watch?v=jqvKjsIxT_8&list=RDjqvKjsIxT_8

"Jesus answered them: 'Truly, truly, I say to you, everyone who commits sin is a slave to sin. The slave does not remain in the house forever; the son remains forever. So if the Son sets you free, you will be free indeed.'" (John 8:34-36)

i made a video about this i hope people understand this issue...

https://www.youtube.com/watch?v=-Cu2o_k3aKk

Albert Camus — 'The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion.'