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Thread: Who or what creates money?? Debt maybe?

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    Registered User Magic Hans's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by grahamg View Post
    I've enjoyed your debate so far very much (though I admit to not reading every word of it!).
    Hi Graham

    I'm glad that you find the topic interesting, and worthy of consideration. The more that I'm looking into the subject, the deeper, a seemingly simple subject, it seems to be. And I, for one, find it increasingly alarming. I hope that I'm not being duped, but don't rule it out.

    Quote Originally Posted by grahamg View Post
    I too have been shocked by reports of the level of bonuses paid to bank executives (Leyman brother reportedly having paid 31Bn $ out in the last few years, the same amount of mony as they were said to have been drawn into liquidation by according to Private Eye).

    Good old Private Eye!!! Where all of the real news seems to be!!
    Quote Originally Posted by grahamg View Post
    Even so recent declarations by government minister or others about the need for new banking regulations or controls on bonuses seemed just as incongruous to me. Doesn't "free enterprise" mean banks or other employers must decide remuneration levels for themselves?[/FONT]
    I fully agree. Whatever opinion I have on these quite obscene (at times) bonuses, this practice is simply a symptom of an underlying issue (or problem as I would say). I feel that all this short term gain will inevitably end, at some indeterminate time in the future, with long term loss .... or collapse. Time will be the ultimate test.

    "Always prefer a loss to a dishonest gain.The one hurts for the moment, the other for all time" - Chilon
    Quote Originally Posted by grahamg View Post
    Quote:
    "It is not possible to increase basic economic rights at will simply by responding to increased demands, because economic growth is determined by ecological limits. The human struggle for survival and world domination cannot be carried out at the expense of nature, since in that case "ecological death" would anyway prepare the way for the end of human life altogether."
    Again, a wonderful insight; however, this really only leads to this quoted conclusion when most people are deeply scripted in what can be termed as the scarcity mentality. Again, this underlying issue creates the symptom.
    Quote Originally Posted by grahamg View Post
    Trying to link all this to the credit crunch now it seems to me government's do try to boost business confidence, with varying degree's of success. For example Norman Lamont was said to cause drops in confidence in the Pound whenever he appeared on TV talking about the economy whilst Ken Clarke could steady markets perhaps. Then there has been New Labour and declarations that they had ended "boom and bust" which everyone feels will hang around their necks like an albatross at the next election - however, it isn't entirely certain that people will choose to blame them or hold them solely responsible.
    The perils of a chaotic system. It's a wonder (and quite likely a credit, though I begrudge it, to how the stock market works) that there isn't more violent market turbulence triggered by well meaning politics.
    Quote Originally Posted by grahamg View Post
    Personally I don't feel the need for endless choice of goods in our shops (but would my sense of taste or fashion be satisfied with only a limited choice I wonder). Still, people wastefully choosing to discard items they are fed up with, like those who rip out their kitchen after a couple of years or whatever, I am instinctively against (though how you can legislate for this behaviour I don't know).
    I wonder if this lies at the heart of the underlying issues. Ill-considered consumerism with little or no regard to available resources can, surely, do our green planet no favours.
    Quote Originally Posted by grahamg View Post
    Apologies if this contribution is a bit disjointed but to sum up now all any of us can say about the current crisis, or the worse we can say has to be tempered by considerations as to what might have happened if our governments or banks hadn't tried to stimulate demand. That said, a BBC article recently looked at economic conditions in France or the use of credit in France and pointed out that personal debt there is half UK levels - which certainly sounds more sustainable doesn't it.
    I'm sure that the government is doing the best it can given the current situation and underlying circumstances. However, I wonder if any long term sustainable stability is realistically achievable without addressing underlying issues.

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    Registered User Magic Hans's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by bigdjiver View Post
    ... If lending money drives up the price of property, and the rising value of property allows more money to be lent using it as security we have just that sort of money amplifier. If what has been said about the reserve ratio is right then the current circumstances should have been predicted.
    Property values certainly seems to have been consistently inflated year on year for a good 20+ years.

    Thankfully, I'm not faced with the almost impossible task of getting onto the property ladder.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38 View Post
    The reason why Northern Rock got into trouble was other banks stop lending it money ??

    The run on it was a consequence of that
    Northern rock had a liquidity crisis, caused by their inability to raise funds in the capital markets. As a result, they didn't have enough cash (or near cash) to meet their operating needs. They did have sufficient assets to cover their debts (at least in theory; it's not clear to me whether those assets had been revalued due to sub-prime collapse). So they took asked the Bank of England for liquidity support, which was granted. This basically meant that they borrowed money off the public.

    When people felt that their deposits were under threat, they tried to withdraw them en masse. This moved it from a simple liquidity crisis to a major problem with the balance sheet (the deposits are a big part of the assets on their books; cutting them out damages the balance sheet).

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    Formerly known as DavidJames David Bailey's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by philsmove View Post
    I just started re-reading it last week. Banks crashing, "what is money", the value of trust... I stopped reading it, I want escapism from my fantasy not gritty reality.

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    Registered User stewart38's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by geoff332 View Post

    Credit is a bit trickier, but is essentially a mechanism for offsetting the expenses against revenue. I need a plough horse to plough my field so I can grow potatoes. Right now, I have a field and some seed potatoes, but can't make any money out of them. So instead of giving your 10 sack of potatoes for the horse now, I promise you 12 sacks in 4 months. In practice, we use money for that exchange. A banker will give you the 1,000 shillings, you will give them the 1,200 later. You use the 1,000 shillings to buy the horse and sell the sacks of potatoes, to give me my money back.
    What I donít get so itís a open question is something like Oil, it clearly doesnít follow the old supply /demand graph more Ďspeculationí ?

    Price of a barrel has gone down from cira $140 to $70 and demand about 3 or 4 % if that ?

    Explain that ??

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38 View Post
    What I donít get so itís a open question is something like Oil, it clearly doesnít follow the old supply /demand graph more Ďspeculationí ?

    Price of a barrel has gone down from cira $140 to $70 and demand about 3 or 4 % if that ?

    Explain that ??
    Oil does follow a basic supply and demand graph. A few points are worth remembering:
    • Oil is a strategic commodity: everyone needs it. This means the demand curve is highly inelastic (which means that small changes in quantity have a large impact on price).
    • The price boom was mostly demand driven: increasing basic demand for oil from China and India shifted the curve to the left: thus increasing prices.
    • OPEC believes that the demand was magnified by speculators: people buying oil now to sell later, expecting basic demand to continue to increase, supply to drop off and the price to go even higher.
    • The current crisis has reduced basic demand.
    • The drop in price has also reduced the speculation, further reducing demand.
    • The drops in demand have resulted in the drop in price.
    • Because of the inelasticity of demand, this might be as small as a 5% drop in demand to cause a 50% drop in price.


    OPEC typically manage price by adjusting their production levels to maximise their own returns. OPEC argued that a reasonable amount of the demand was based on speculation and thus refused to increase oil production. This forced prices even higher; as price goes up, so does the speculator's risk; ultimately, the prices would reduce the level of speculation.

    Markets are highly susceptible to psychology: everything is based on people's perceptions of reality. This isn't a big factor when you're dealing with immediate issues (buying oil now to use this week) but when dealing with the future, perceptions are very important.

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    Registered User Magic Hans's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by David Bailey View Post
    I just started re-reading it last week. Banks crashing, "what is money", the value of trust... I stopped reading it, I want escapism from my fantasy not gritty reality.
    Scary hey??

    Funny how some of these very clever 'fantasy' writers, actually seem to have more of a grasp on reality than so-called 'experts' in the real world!!!

    .... maybe that's my own reality .... errrr .... I mean illusion!!

  8. #28
    Registered User Magic Hans's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38
    What I don’t get so it’s a open question is something like Oil, it clearly doesn’t follow the old supply /demand graph more ‘speculation’ ?

    Price of a barrel has gone down from cira $140 to $70 and demand about 3 or 4 % if that ?

    Explain that ??
    The Centre for Research on Globalisation seem to think that ...

    Quote Originally Posted by GlobalResearch.ca
    The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

    Furthermore ...

    All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”
    These two extracts from here

    So ..... errrrrr ..... yes. Seems like it might be speculation after all!! Fan tastic!!!!
    Last edited by Magic Hans; 20th-October-2008 at 12:44 PM.

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    Registered User stewart38's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by Magic Hans View Post
    The Centre for Research on Globalisation seem to think that ...

    These two extracts from here

    So ..... errrrrr ..... yes. Seems like it might be speculation after all!! Fan tastic!!!!
    This tends to make sense

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    Re: Who or what creates money?? Debt maybe?

    Quote:
    I'm glad that you find the topic interesting, and worthy of consideration. The more that I'm looking into the subject, the deeper, a seemingly simple subject, it seems to be. And I, for one, find it increasingly alarming. I hope that I'm not being duped, but don't rule it out.

    Yes, it has been useful to read comments about how financial systems are set up, and what money really means etc. especially when the stories peddled in the media seem so useless or uninformative in my view (maybe I'm not reading the right newspapers?).

    Ernst and Young, financial advisors or whatever they are, apparently claim the economy will shrink for a year or so and then start to grow again, according to this morning's radio reports (I wonder if they were able to forsee the crisis?). Then there is Evette Cooper, a government spokesperson who seems to me to be extremely dull when interviewed on the TV (- a Blair babe perhaps? Apologies to her if she is really clever afterall).

    On radio one today (I know I shouldn't be listening to such mind deadening radio but at work you can't always choose can you) commentators seem to wish to scare the wits out of everyone from what I can tell. Of course a recession is said "not to be working" if it isn't causing "pain", and I guess a reassessment of people's priorities or the way business is run could be a positive thing to come from it.

    In the US there is an elcetion going on (you may have noticed!). Differences between the candidates include the view as to whether taxing the richest people will effect the economy in a beneficial way or not. In a phone in on Sunday Morning - the Washington Journal, a caller said "Socialism" is everyone being "equally poor", whilst "Capitalism" is making people "unequally wealthy". and I do accept forcing people to abandon self interest and work according to how the state deems does create all kinds of negative effects (who dare stick their necks out if you feel no one will isten or the organisation is too big to take any notice for example).

    Hope these comments are useful.

    Graham

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by grahamg View Post
    Ernst and Young, financial advisors or whatever they are, apparently claim the economy will shrink for a year or so and then start to grow again, according to this morning's radio reports (I wonder if they were able to forsee the crisis?).
    Ernst and Young are one of the big four accounting firms. Among other things, they provide economic analysis and advice.

    Exactly what will happen to the economy is little more than guess-work. When it comes from someone like E&Y, it will be informed guess-work, but that won't guarantee they're right. What really matters is not whether the economy will grow or not, but what their analysts see as the key drivers and tipping points at the moment. That is where all the information can be found.

    There are two big issues as I see it.

    Firstly, despite all the chicken-littlesque panic, this isn't a total failure of the entire system: the sky isn't falling; it's just a bad storm. Unfortunately, very few people were prepared (despite some warnings), so there has been some damage. But it doesn't mean the entire system has collapsed. The arguments from ignorance are quite amusing, but not really that helpful. To use another analogy: most people don't know all the details of how their car works, but that doesn't stop them using it every day.

    The question is, how to address the problems. Nothing in the current problems suggest that the whole system is ready to collapse. But there are clearly problems that need to be managed. My opinion is they left the market too open and unregulated. The result is that risks weren't well managed and were seriously under-estimated. The basic risks around mortgages and other consumer credit can very easily be reduced (lend people less and make the requirements to get a mortgage tougher).

    Secondly, it's not clear to me that this crisis has seriously damaged the foundations of the economy (if E&Y are saying a year to get back on track, then they obviously think it hasn't). There will be a bunch of pain over the short term (mostly due to the increased cost of credit). But if the fundamentals are OK, then the economy will bounce back quite nicely.

    That said, the economy wasn't in the best shape for the past six months. A lot of that was caused by problems with credit and the oil price bubble. Oil prices have come down and the speculators have been burnt badly enough to keep them out of the market. The big questions are how long before the credit market recovers and how much impact this has on consumer spending?

    Quote Originally Posted by grahamg View Post
    In the US there is an elcetion going on (you may have noticed!). Differences between the candidates include the view as to whether taxing the richest people will effect the economy in a beneficial way or not.
    Tax decisions are largely ideological. One can usually defend any position, depending on what one wants to be true. The reality is the difference between left and right in the US is very small on tax. Neither party is going to tax heavily and neither can afford to drop taxes very far. This is because the basic US ideology is strongly anti-tax - going right back to their little party in Boston.

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    Re: Who or what creates money?? Debt maybe?

    I wanted to bump this topic up again as I've found it so useful and informative (and have printed off your comments for others to read too).

    Also, alot seems to have happened once again in the week or so since it was started.

    In particular there has been more comment by various people portraying themselves as experts. One of those was a "Hedge fund manager" on I think it was Channel 4, or ITV last night - did anyone see it?

    He went around speaking to financial brains, such as the former boss of the Royal Bank of Scotland, and made the accusation that the bank had got it horribly wrong by buying up a huge Dutch bank, in October last year, just as the "Sub-Prime" crisis in the US and Northern Rock here were kicking off. The response was yes, no one could argue mistakes had not been made but at the same time alot of good decisions were taken too, and alot of "good banking" had been done (anyway this wasn't the most recent chairman, Sir Fred Goodwin, who resigned over it all, so he couldn't be expected to take responsibility for his mistakes).

    Next the hedge fund manager went off to the US ("where the crisis began" - as he kept telling us) and he met alot of people who explained the now familiar story of how bad debt, or high risk debt was "wrapped up" as good risk - the institutions responsible for granting credit ratings appearing to be culpable, but not apparently too keen to admit any liability for their failings!

    A chap was interviewed who claimed he'd forseen the whole crisis but no one would listen and so on, but he appeared a bit "dodgy" himself to me (he talked about "hanging" some of those responsible for banking failures for example).

    Summing up in the programme the hedge fund manager said interest rates must fall in the UK - perhaps halving them if he had his way, and even this might not be "enough" to stave off recession. He said one member of the Bank of England committee who decides their rate has consistently called of for falls in interest rates, whilst two others have consistently resisted such calles (there being nine people withj a "vote" on this).

    My opinion, for what it is worth, is that the Bank of England has limited room for manouvre, if they don't appear to wish to control inflation then that will impact upon the Pound, which is in any case already weak, and would of course be made weaker by reducing interest rates (unless all major countries across the world do it together, as is being muted).

    Finally the hedge fund programme maker did refer to the need for people to accept "austerity measures" until this crisis is over in maybe two or three years.

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by grahamg View Post
    ... My opinion, for what it is worth, ...
    The main problem is that no opinion is worth enough. The financial system is far too complex for anybody to understand. The problem with regulation is that nobody knows exactly what regulation to apply, the problem with freedom and market forces is that the system becomes chaotic.

    ...is that the Bank of England has limited room for manouvre...
    No-one would try controlling every train on the railway with one master speed control.

    A major problem has been the instability of house prices. People have been speculating, expecting the prices to continue rising. That could have been controlled by taxation, VAT. No government would get a chance to apply that, the electorate would not stand for it. However a VAT refund would have helped those now in distress who have seen the price of their properties fall. VAT on property would reduce speculation and stabilise prices.

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    Registered User stewart38's Avatar
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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by grahamg View Post

    ).

    My opinion, for what it is worth, is that the Bank of England has limited room for manouvre, if they don't appear to wish to control inflation then that will impact upon the Pound, which is in any case already weak, and would of course be made weaker by reducing interest rates (unless all major countries across the world do it together, as is being muted).
    Inflation isnt a issue

    A cheaper pound makes our exports more competitive , will they be worried if we cant buy so many foreign imports and white goods ?

    Looks like the government will spend its way out of the recession

    ps I was at shopping centre on sunday and it was packed

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    Re: Who or what creates money?? Debt maybe?

    Quote Originally Posted by stewart38 View Post
    ps I was at shopping centre on sunday and it was packed
    My gut feeling is we are for a bout of rip roaring inflation, although hopefully stopping short of a wheel barrow economy

    So if you have money or credit you might as well spend it or use it

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