Why do governments borrow money?

[kimchi]

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There isnt a single one of your assumptions that is entirely correct, and the intial ones are entirely wrong.

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Could you correct my assumptions?

I remember reading an article discussing the assumptions I made in my previous post. At the time it seemed so absurd as to be untrue.

I just did some googling:

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MAJOR L .L. B. ANGUS: "The modern Banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint and unmint the modern ledger-entry currency".


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RALPH M. HAWTREY (Former Secretary of the British Treasury): "Banks lend by creating credit. They create the means of payment out of nothing".


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Richard Duncan: "In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy – remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created ¥35 trillion. To put that into perspective, ¥35 trillion is approximately 1% of the world's annual economic output. It is roughly the size of Japan's annual tax revenue base or nearly as large as the loan book of UFJ, one of Japan's four largest banks. ¥35 trillion amounts to the equivalent of $2,500 for every person in Japan and, in fact, would amount to $50 per person if distributed equally among the entire population of the planet. In short, it was money creation on a scale never before attempted during peacetime."

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It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution.

[Bedreviter]

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It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution.

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To claim that is not a governmental institution is far from correct, even though parts of the supply/distribution mechanics of the Federal Reserve System are done by private banks. You should really read more about it here, maybe you understand the complexity better http://en.wikipedia.org/wiki/Federal_Reserve_System

[Low Key]

Oh wait, I've got a good one!

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Why do governments borrow money?

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Because they never learned how to handle money when they were younger.

[Bedreviter]

Barry Bonds

[The once and future king]

No individual Bank can just "create" money, but the banking system as a whole can.

This can be easily evinced by looking at the following example:

Suppose that any one bank can lend 90% of its deposits. Now imagine that 10K is deposited at Bank A which then lends 9K, that is deposited at bank B which then lends 8100K which is then deposited at bank C which lends 7290 and so on.

10000> 9000
9000 > 8100
8100 > 7290
7290 > 6561
6561 > 5904
5904 > 5314
5314 > 4782
4682 > 4304
4304 > 3874
3874 > 3486

So you can see how from an original deposit of only 10K over 55K of loans can originate through the banking system, but at the same time each component will be able to show that deposits>loans or assets>liabilities.

The banking system can create debt backed by debt backed by debt and thus create money and in fact manages a currency system whereby debt=money.

The sleight of hand of the system is achieved by fostering the illusion that all the components are independent, therefore money can leave the doors of one bank as a liability and then arrive through the doors of another bank as an asset, where as in reality that money has just passed through components of a unified system. It is this alchemy of transforming liability into asset upon which are whole financial system depends.

[kimchi]

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Oh wait, I've got a good one!

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Why do governments borrow money?

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Because they never learned how to handle money when they were younger.

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Yes. Very droll.

So, without reference to baseball, if you've ever taken out a bank loan, mortgage or credit card, could you explain where the money the bank gives you comes from?

[kimchi]

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It seems that money is created by "monetary authorities" such as the Federal Reserve, which is a private (not a governmental) institution.

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To claim that is not a governmental institution is far from correct, even though parts of the supply/distribution mechanics of the Federal Reserve System are done by private banks. You should really read more about it here, maybe you understand the complexity better http://en.wikipedia.org/wiki/Federal_Reserve_System

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"Some people think the Federal Reserve Banks are the United States government's institutions.
They are not government institutions. They are private credit monopolies which prey upon the people
of the United States for the benefit of themselves and their foreign swindlers" -- Congressional
Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and
Currency (12 years) June 10, 1932

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[VarlosZ]

Perhaps an 85 year old quote from a politician with an agenda is not the best rebuttal to a previous poster's statement of fact. If he's wrong, I bet you can come up with something more authoritative than that. If, as I suspect, the truth of the matter is somewhat ambivalent, a realistic appraisal of the situation should reflect that.

[Low Key]

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Oh wait, I've got a good one!

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Why do governments borrow money?

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Because they never learned how to handle money when they were younger.

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Yes. Very droll.

So, without reference to baseball, if you've ever taken out a bank loan, mortgage or credit card, could you explain where the money the bank gives you comes from?

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China?

[DcifrThs]

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My (perhaps incorrect) assumption is that the government issues bonds which are bought by banks using government issued fiat currency that the banks have created (ie. don't own), so this looks like the banks are effectivley getting the bonds without paying.

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kimchi. just because banks can create money doesnt mean that money doesn't exist or isn't usable.

here's an example.

when you engage in a repurchase agreement, you are only given a loan on some % of the value of your collateral. call that % Y. X=1-Y is the haircut. in many cases the haircut is likt 5% or something.

at this rate, if you maxed it out (i.e. repo'd a bond for cash, bought another bond, repo'd that etc. etc.) you'd have 1/.05=20 times the exposure to the security you repo'd. if sh*t went bad, you'd be on the line for a ton.

similarly, the reserve requirement is like the haircut. the money that is "created" is on the banks' books. there are assets and liabilities.

the government can't just borrow from itself b/c that just wouldn't fly. you need the market mechanism i mentioned in the first place in place to get the trust of the market...otherwise, nobody would want to do business with you

further, banks aren't the only holders of govt debt. and those that are, aren't eh same banks that create the US money. look at china's central bank. they don't have the same free money creation thing we have goin on here and they are one fo the biggest holders of US govt. debt.

their money comes from foreign exchange reserves from borrowing from their citizens (mandatory) and selling those yuan in the mkt to maintain a peg to the dollar. those dollars are then invested in govt agency and treasury securities.

so US banks aren't the only holders though they are probably the largest (not sure on that, have to check it up).

hope this helps...lemme know where ic an be clearer.

Barron