I've made no mention of assets other than cash deposits.

Depending on the liquidity and quality of the assets that are deposited the "80%" number goes up and down. This is very very crudely what Basel regs are all about. And I've said in many earlier threads that this is by far and away the best way of tightening up the system to avoid negative net values (Loans never go down in value, assets often do – its this change over time that is the problem, not the inherent structure. To protect the balance in times of greater stress, lower lending ratios should be enforced IMO)

If the borrower deposits the £8 back in Bank A, then the Bank A can lend another £8 to another borrower (as long as total lending based on that class of deposits does not exceed 80%). Net Assets = £10 – £8 + £8 – £8 = Net Assets of +£2.

borrower 1 owes the bank £8
borrower 2 owes the bank £8
total owed to the bank = £16

If the borrower deposits the £8 in Bank B, then Bank B can lend 80% of it, or £6.40. Net Assets = £8 – 6.40 = +£1.60. And Net assets in the system = £10 – £8 + £8 – £6.40 = +£3.60.

borrower 1 owes the bank £8
borrower 2 owes the bank £6.40
total owed to the bank = £14.40

The total amount owed is never greater than 80% of the total amount deposited.

Sure, but that's not 80% of the initial £10 but 80% of the total amount deposited, £18, in which some of the original £10 has been counted twice due to being lent out and then re-deposited.

I can't be arsed to read all that; has anyone mentioned the circuit of capital yet?

crikey epiliptic are you tyring?

borrower 1 owes the bank £8 but as I said has £8 simultaneously on deposit with the bank – if he didnt then the next borrowing could not take place
borrower 2 owes the bank £8

I haven't read the thread, but if it hasn't already been pointed out, this comment in the OP repeats a common misconception that people are in denial.

Also, why the general population is still, despite all they have been told about these problems, in almost total denial about the consequences.

Most people fully accept that climate change is caused by human activity and needs to be urgently tackled, as this opinion survey in 2007 shows :

http://news.bbc.co.uk/1/hi/7010522.stm

Only 3% in Britain feel that no action is necessary, and even in the US where the petroleum industry is hugely powerful and influential, only 6% say that no action is needed.

The problem is that the conspiracy theorists who believe that the whole climate change argument is a devious plot by marxists in the federal government or New Labour socialists, to undermine capitalism and tax us more, are extremely vocal.

Plus media organisations such as the BBC in the name of 'balance' often give conspiracy theorists/denialists equal coverage of their crackpot ideas.

As a consequence, many people are misled into believing there is widespread opposition to the self-evident truth that human activity by pumping CO2 into our atmosphere, is affecting the delicate balance which dictates the Earth's climatic conditions.

In a nutshell:

Money's like energy. It can't be created or destroyed. Just changed from one form to another.

I think.

Er…

ernie_lynch, I said total denial about the *consequences*

Actually, when you say that most people accept that climate change is caused by human activity, although I'd like to agree with you I'm not sure – I've looked at the source of your graph – and it's far from clear who the 22,000 people poled were – were they 22,000 people with phones for example? Which might be a bit of a biased selection.

Anyway, for the sake of argument I will go with your assertion that most people accept climate change caused by human activity(as do I BTW). The point I'm concerned about is how many people really realise what that will mean for them and their families – and personally I think that figure is miniscule.

But now I'm going off on a tangent – please start a new thread if you want to discuss further.

Stoner said

RPRT – banks cannot lend more than a proportion (its lee than 100%, but Im not sure how much less) of their asset base. If they do, they are bankrupt. At some points in time when markets are highly stressed, the value of some of the bank's assets may be substantially depressed (potentially as far as 0) – it's not that their loans have got bigger but that there assets have got smaller (see Bear Stearns etc)

But am I not right in thinking that a bank can make a loan and simultaneously add the value of the loan (the debt) as an asset to its balance sheet? This means that it does *not* have to take deposits before making loans and can in fact increase it's asset base to cover any loans it makes.

ok and thanks for the patronising answer Stoner but with yor example we still started off with a tenner how much do we end up with in the system?
Not how much is left in the bank what was the NET spend?
That is why it is not real

RPRT – no, it cant do that as it hasnt got sufficient volume of new liquid assets (deposits, retained cash, shareholder funds, overnight loans etc etc) to maintain the liquidity ratios when it issues loans – that is the whole point of the ratio requirements.

They really dont go around inventing money and lending it. Despite all the coverage there's still too many people who rather than learn about how the system actually works are too ready to believe the banks are conjuring up "unreal" money.

Junkyard – I am not being patronising if you are being deliberately obtuse.
If you really think that banks are going around inventing large balance sheets against all the tenets of finance then be my guest. The system starts with £10 of net assets, and it stays at £10 of net assets no matter how you divvy up the loans and deposits. As WWJD alludes, you cant conjure up wealth. Im not wasting my evening on you. Buy a book on it, or enjoy your ignorance.

please start a new thread if you want to discuss further

No I'm fine thanks.

I'm not really bothered whether or not you think it's small bunch of conspiracy theorists/denialists who reject the evidence concerning the effect of human activity on the Earth's climate.

Stoner my question was about NET SPENDING
I agree net assets are never more than ten pounds how about net spending?

Stoner – Member

Junkyard – I am not being patronising ………………Im not wasting my evening on you. Buy a book on it, or enjoy your ignorance.

I like that.

each pound spent in a closed system is a pound of revenue in the same system. the system stays whole (In fact only tax screws it up).

Doesn't grow on trees then?

http://en.wikipedia.org/wiki/Money_supply

An interesting take on economic theories:

http://www.economist.com/printedition/displayStory.cfm?Story_ID=14031376

i am starting to sound like Paxman here
So how much is NET SPENDING then?

Im at a loss as to what you are getting at.
Spending "net" of what exactly?

No wealth has been created.
If you are trying to make some point about increasing consumer spending with gearing then do so. It doesnt change the fact that wealth ("Net assets" – i.e. Assets net of Liabilities) has not been magic'd up. The thread subject is money supply, not credit fuelled expenditure.

They are very different things.

Typically i have only read the OP but money was a development of the barter system , as it was difficult to divide say a cow (alive) to swap for a few chickens for example items such as stones were used as tokens 1 cow =100 stones 1 chicken = 2 stones , allowing goods to be traded more easily. Later this developed into using precious materials that had their own worth that evrybody wanted and later still in to tokens (coins ) that were assigned value . I think i have aswered the question completely 🙂

Stoner said:

RPRT – no, it cant do that as it hasnt got sufficient volume of new liquid assets (deposits, retained cash, shareholder funds, overnight loans etc etc) to maintain the liquidity ratios when it issues loans – that is the whole point of the ratio requirements.

What's fractional reserve banking then?

RPRT – no, it cant do that as it hasnt got sufficient volume of new liquid assets (deposits, retained cash, shareholder funds, overnight loans etc etc) to maintain the liquidity ratios when it issues loans – that is the whole point of the ratio requirements.

What's fractional reserve banking then?

that is fractional reserve banking.

certain fractions of the reserves (or total assets) have to have different liquidity characteristics. What banks cant do is issue a loan and call all of it 100% asset cover for that loan. A fraction of that loan value must be available as liquid reserves as well.

Yes a fraction – like 10% – in other words the bank only needs to have £10 in reserves in order to issue a £100 loan – then when they make the loan they add a £100 (as an asset) to their balance sheet and hey presto £100 has been created.

you have the process in slightly the wrong order.

Bank generates £10 of reserves (rights issue, or retained earnings say), which unlocks capacity to lend a sum of money that takes into account 1) the liquid reserves available and 2) the nature of the loan asset that they intend to issue.
It still doesnt change either a) the total wealth in the system or b) the total money supply.

A good worked example of how they measure the capital adequacy of an institution is here (note there is a distinction between cash reserve ratios and capital adequacy ratios which reflect the liquidity risk of different forms of liabilities)

http://en.wikipedia.org/wiki/Reserve_requirement#Risk_weighting_example

Local regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.

Bank "A" has assets totaling 100 units, consisting of:

* Cash: 10 units.
* Government bonds: 15 units.
* Mortgage loans: 20 units.
* Other loans: 50 units.
* Other assets: 5 units.

Bank "A" has deposits of 95 units, all of which are deposits. By definition, equity is equal to assets minus debt, or 5 units.

Bank A's risk-weighted assets are calculated as follows:
Cash 10 * 0% = 0
Government bonds 15 * 0% = 0
Mortgage loans 20 * 50% = 10
Other loans 50 * 100% = 50
Other assets 5 * 100% = 5
Total risk
Weighted assets 65
Equity 5
CAR (Equity/RWA) 7.69%

Even though Bank "A" would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.

BTW Ive just thought of a line worth giving.

The accusation is that banks lend money they dont have. To an extent I agree – they are lending based not on 100% deposits backing the loans held but as a multiple of deposits.

In the case of secured lending, the "gap" in value is filled by the loan security offered by the borrower (house for a mortgage, say) (usually between 100% and 150% of the loan at stake).

In the case of unsecured lending, they are lending on the borrower's capacity as an economic entity to service and repay the debt.

So while they are lending money they dont have, they are really lending value the borrower does have, back to the borrower, converting one illiquid form of value into a more liquid form.

Stoner said:

It still doesnt change either a) the total wealth in the system or b) the total money supply.

But wikipedia, which I think you generally respect as a source says:

The process of fractional-reserve banking has a cumulative effect of money creation by banks, essentially expanding the money supply of the economy.

and this

When a loan is made using the central bank money from the commercial bank (which keeps only a fraction of the central bank money as reserves), the money supply expands by the size of the loan.

Here: http://en.wikipedia.org/wiki/Fractional-reserve_banking

About half way down under the heading "money creation"

It sounds like they are doing just what I suggest above. What am I not getting?

sorry, I was making a distinction between commercial banks and central banks. Central banks are the only ones that can create money and so when they lend its for policy reasons, not for "commercial" reasons.

I still don't get it/agree.

What the wiki article I quote says is that commercial banks create money when they make loans, and only have to back up part of those loans with their own borrowings from central banks (because when they make the loan, the debt they are owed can be written down as an asset).

They are not creating banknotes, but they are creating (electronic) money in their ledgers.

I have to confess that Ive never seen commerical fractional banking as a money supply issue when compared to the function of central banks. My economic training made the distinction between real "money" and credit money – the latter being the "money" created by fractional reserve banking.

This distinction is important IMO, because:

This form of money is called "debt-based" because as a condition of its creation it must be paid back plus interest at some time in the future.

http://en.wikipedia.org/wiki/Criticism_of_fractional-reserve_banking

My teaching says that because of this it doesnt create the economic problems associated with normal money supply increases.

There are obviously different opinions on that.

Stoner – you seem confused, or at least you are confusing me. It is 20 years since my A-level Economics exam after all. By "real money" do you mean M0?

But the money actually in the economy is much more than that – it's the debt-created increase in M3 (or M4 if you prefer) that created, just for example, the series of consumer led bubbles of the last decade. It might be not as liquid as cash-money but that hasn't stopped people from spending against it.

To go back to the OP – money is increased by bank lending (central banks and governments in the sense of the strictest definition of money, commercial banks in the wider sense), and I guess where it comes from is "the future" – because effectively you're borrowing it against a debt to be repaid in the future.

PC – no, Im not making the distinction between M0, M1, M4 etc, but rather the creator of the money (commercial versus central bank)

EDIT: you added this to your post:
To go back to the OP – money is increased by bank lending (central banks and governments in the sense of the strictest definition of money, commercial banks in the wider sense),

This is what I was saying – my emphasis is on the stricter defintion, because commercial bank derived money production is created on condition it is repaid (it is "temporary"), government money production isnt.

Before the internet, "buy a book" was usually the solution to most problems of ignorance and incomprehension. It is now frowned upon. Which is why we will never know whether the aeroplane on the conveyor belt can take off, amongst many other things. 🙂

At the risk of going off on a tangent again, I have bought some books. The trouble is they don't all say the same thing.

When I asked my original question it wasn't because I had no clue about the answer. It was because I wanted to test my understanding of the answer, see if others would come up with aspects I'd missed etc.

I realise this is a complex subject and that with virtually no education in economics that I have a lot to learn.

For subjects like car mechanics (say – just an example – please don't bother telling me how wrong I am) I would imagine that you can safely "buy a book" and be pretty sure you are getting a definitive guide. economics seems a bit more complex/subjective though.

Stoner said:

My teaching says that because of this it doesnt create the economic problems associated with normal money supply increases.

Actually this is one of the points I was hoping to get to.

Why would it not create problems?

It would seem to me that if commercial banks create money (I don't know the definitions of M0 – M4 and I'm not going to look it up right now) by making loans, and that money has to be repaid *with interest*, then that will create a very big problem in that it means that at some point if everyone is going to be satisfied, that more money will have to be paid back than has been created.

The trouble is they don't all say the same thing.

and that's one of the best bits.

Economics, whilst a science in the language used to describe it, is so much more an art in many ways. While art always leaves itself open to interpretation, not even all science is beyond disagreement. Im happy to be proved wrong, but not by someone tripping out Daily Mailisms that lack comprehension of the subject (*not aimed at you RPRT).

Cars are definitely easier.

ON your last point, credit derived money growth can cause inflation, particularly of asset prices, but less so of commodity prices. Im not sure why, there's probably a good reason somewhere in one of my books. It may not be the same reason in another book 🙂