[Closed] Difficult question - philosophy/economics

Stoner to the thread please.

thatcher?

Maybe somebody else could give me an answer first?

Start here [url= http://distributedresearch.net/blog/2008/10/11/how-is-wealth-destroyed-and-where-does-wealth-come-from ]http://distributedresearch.net/blog/2008/10/11/how-is-wealth-destroyed-and-where-does-wealth-come-from[/url]

[url= http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/the_tls/article6518502.ece ]this[/url] is quite a good article on the Greek philosophy around money.

I would say wealth comes from knowledge. If you know more than you need to know, you are in positive equity.

ahem.

First things first.
This is an excellent book on how money works
[url= http://ecx.images-amazon.com/images/I/61pXWViAfxL._BO2,204,203,200_PIsitb-sticker-arrow-click,TopRight,35,-76_AA240_SH20_OU02_.jp g" target="_blank">http://ecx.images-amazon.com/images/I/61pXWViAfxL._BO2,204,203,200_PIsitb-sticker-arrow-click,TopRight,35,-76_AA240_SH20_OU02_.jp g"/> [/img][/url]

The Oil/Climate change thing is a whole big argument, but my own opinion on it is that you can either leave the issue well alone until the market for utility of a non-f***ed world makes it worth while for people to pay for the world to NOT get any more damaged or you manipulate the relevant markets to encourage substitution. As you can imagine the greenies are not a huge fan of the former, using the argument that by then it's all too late and any environmental damage done will be irreversible.

The problem with the latter is that the total cost to the economy of encouraging substitution is usually higher than the total cost of leaving things alone [i]assuming[/i] that the full cost of environmental damage continues not to be paid for under the status quo (which it generally isnt. See [url= http://en.wikipedia.org/wiki/Polluter_pays ]"polluter pays" principals[/url] of economics and the fact that they often dont). Increasing the total costs to the economy has the effect of sending it backwards (tax receipts fall, the wealth of the nation and individuals in it also falls). It will take real bravery to make economies take on the full burden of an environmentally conscious structure.

This is where the guilt trip approach comes in, but its all a bit prisoners dilemma ( http://en.wikipedia.org/wiki/Prisoners_dilemma) and so there's no individual incentive to wear the hairshirt.

On the money thing, the book is good at answering that. But as simply as possible think of money being the mechanism of liquidity - translating objects, services, utility, desire...anything, into a transferable concept. Money allows people to compare value and worth, to bargain for finite supplies of goods and utility, to give and receive, and to trade all of this with anyone else that they want to.(^)

What some people object to (particularly Muslims* for example or indeed anti-bankers) is the making of money from money. ( http://en.wikipedia.org/wiki/Usury)

To reject "usury" though is to reject one of the key elements of liquidity. Liquidity is vital, in that it is the mechanism of redistribution of wealth by commercial process (capitalism) rather than the state (socialism)...and that takes us into a whole other thread... 🙂

(^) gold is still the base derivative of all global money since it is the one physical manifestation which is consistent and ubiquitous yet sufficiently scarce and so easier to settle accounts with.

* that's a bit unfair, [url= http://en.wikipedia.org/wiki/Islamic_banking ]as Islamic banks have worked on ways of allowing for "loans" but doing it by sleight of hand so that it is not contrary to their religious guidance[/url]. As a matter of fact Im off to do some work in Tripoli soon...and I assure you my field of work is very usurious 🙂

Is this not a more historical question, as in where does the concept of money come from?

If so, it's merely a construct to allow a more sophisticated form of batering than, "I will give you one pig in exchange for half a cow, now let us quaff ale!"

confidence and a lack of it equals a recession either way it is NOT real.

in what way is it not "real"?

I would agree if what you really mean is that money itself has no value, but then that has never been the idea. Money is little more than the promise to settle a value. What makes money so valuable is that it is a transferable promise.

If you are trying to say that value is ephemeral, then you are probably narrow-mindedly focussing in the current fashion on just the "bubble" element of asset values and not the greater function of money which is trade and allocation of resources.

Just to clarify, as we seem to be heading off on some tangents already. What I am asking is; if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

presumably by the production of commodities.

surely money is just a way of lending someone elses wealth, be it in the form of actual goods or the promise of some form of return for profit

In the short term loads of huge printing presses 🙂

i do need to get me one of those 🙂

two main reasons to my mind.

first is inflation
second is "added value".

In the first case, more money exists from one day to the next because prices [i]generally[/i] rise as global overall demand is constantly (except in a recession, natch) rising. i.e. there is greater demand for what is usually a scarce resource, which means the marginal price at which it can be bought will go up. (see supply/demand curves)

In the second, growing economies that are productive increase the total value of their "assets" by increasing the individual value of a given resource, often by refining, or manufacturing or enhancing somehow.

mrmw -

surely money is just a way of lending someone elses wealth, be it in the form of actual goods or the promise of some form of return for profit

That is the act of liquidity, not an act of "money". Money makes it possible, but money is just as important to many other economic actions as investment and liquidity.

Yes, money is just a token.

The pig seller doesn't always want ale.

So the pig seller gets a token to the value of said pig and he can go out and buy the wheat he wants with the tokens.

The wheat seller uses the tokens to buy ale.

And the pig seller uses the wheat to make ale, for which he exchanges for a greater number of tokens, creating a free marketplace.

SIMPLES.

simples indeed,
and nothing to do with lending for profit either 😉

i see

i think Nick has it though really (the answer, not money)

give me a tenner and I'll tell you

To be honest though - have any one of you ever wished for a return to such a simple life. All living in little villages, with our trades and bartering for stuff.

I would have been a village idiot. Not sure how much bartering tokens that would get me...

Just to clarify, as we seem to be heading off on some tangents already. What I am asking is; if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

5 people each deposit 10 pounds with bank.

Bank then lends 10 pounds out to 6 different people.

Money didn't come from anywhere. Wealth did.

Money is a token in the same way time is a unit of measurement.

5 people each deposit 10 pounds with bank.

Bank then lends 10 pounds out to 6 different people.

Not quite, that's essentially it but the banks are not allowed to lend more than what is deposited. In fact they can't actually lend the full amount of deposits. I'm not sure what they are called here but there is legislation as to what proportion of deposits banks can re-lend.

person 1 deposits £10
person 2 borrows £9

Collectively they now have £19 where there was previously only £10. When everyone 'actually' wants theirs back that is what causes banking collapses - like Northern Rock last year.

Basle II rules dictate capital adequacy ratios.

This set requirements for asset holdings ranked by their liquidity as a proportion of all assets, and then what proportion of Assets can be used in value terms to issue to borrowers.

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

A nice [url= http://www.lrb.co.uk/v30/n01/lanc01_.html ]article in the LRB on banking and the city[/url]

Some people will tell you that Marx is worthless (badum-tish) but he was actually pretty astute in his analysis of commodity capitalism - it was his 'solutions' that were a bit iffy - a great deal of his analytical work is still useful. [url= http://www.internationalviewpoint.org/spip.php?article286 ]Ernest Mandel's summary of his theory of money is quite good.[/url]

Edit: Oh! [url= http://www.marxists.org/archive/marx/works/1844/manuscripts/power.htm ]And Marx himself[/url]

Stoner - Member
in what way is it [momey]not "real"?

in the sense that if we all went to the bank and tried to withdraw it it would not be there you know MLR , velocity of money and all that stuff.

Banks are essentially relending the same money over and over
Do I need to do a table now?

Sam said:

Not quite, that's essentially it but the banks are not allowed to lend more than what is deposited.

Are you *sure* about that?

geoffj,

Haven't had time to read the article yet but I will - it looks interesting. In the meantime I'll keep stabbing around in the dark.

I said:

if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

Stoner said:

two main reasons to my mind.

first is inflation
second is "added value".

In the first case, more money exists from one day to the next because prices generally rise as global overall demand is constantly (except in a recession, natch) rising. i.e. there is greater demand for what is usually a scarce resource, which means the marginal price at which it can be bought will go up. (see supply/demand curves)

In the second, growing economies that are productive increase the total value of their "assets" by increasing the individual value of a given resource, often by refining, or manufacturing or enhancing somehow.

So how does inflation *create* more money?

And in your second example - what's the mechanism? If country A mines some gold how does that actually *create* money? Why doesn't the presence of more gold in the economy just reduce the price of gold?

junkyard - if we all went to the banks to withdraw money reflective of the value of our holdings of course it wouldnt all be there. See the capital adequacy stuff further up. Money is the promise to pay, not the value itself.

Imagine if a bank had to hold 100% of its deposits just in case all its creditors wanted their money back all in one go? Then there's be no capacity to lend would there.

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)

Inflation creates more money, it doesnt create more value. Money is just the reflection of relative worth between various entities. The creation of money comes through growth in economies and, as nickc pointed out, the printing of more cash. The printing bit is relatively small proportion of the production of "money". The vast majority is the issuance of new government bonds. (see Quantitative Easing in the news currently)

If a country turns more of its iron ore into windmills it has increased value and the monetary worth of the country.

Gold supply does effect gold price but it is a fine interplay between two markets - one is the use of gold as a monetary tool, the other in manufacturing (electronics, jewellery, space ships etc)

junkyard - if we all went to the banks to withdraw money reflective of the value of our holdings of course it wouldnt all be there. See the capital adequacy stuff further up. Money is the promise to pay, not the value itself.

What use is the promise to pay then if it has no value ?
It is not real as long as we have faith that the tokens equate to something it is fine I shall call that BOOM
Once we realise that some people cannot repay the money we dont have that we lent them and those whose money it really is want it back as they realise we dont have it i shall call BUST

person 1 deposits £10
person 2 borrows £9

Collectively they now have £19 where there was previously only £10.

person 2 pays that £9 to person 4, who deposits it.

person 5 borrows £8.10, and pays it to person 6, who deposits it.

person 7 borrows £7.29, and pays it to person 8, who deposits it.

person 9 borrows £6.56, ...

...and so on.

Collectively the depositors now have (almost) £100.

Thus is the magic of banking.

It is not real as long as we have faith that the tokens equate to something it is fine I shall call that BOOM
Once we realise that some people cannot repay the money we dont have that we lent them and those whose money it really is want it back as they realise we dont have it i shall call BUST

well done youve passed 101 in risk and return, but have missed your own point.

Investment bears risk
Deposits dont (search for an earlier thread where all this was explained)
The creditor ranking between depositors recovering the value of their funds versus shareholders in banks not recovering the investment gamble is distinct and usually well protected.

There is a marked difference between the two that you have got yourself confused over with your run-on-the-bank analogy and then the bank going bust analogy.
In both cases money is the mechanism through which value is transferred, it is not the value itself.

person 2 pays that £9 to person 4, who deposits it.

person 5 borrows £8.10, and pays it to person 6, who deposits it.

person 7 borrows £7.29, and pays it to person 8, who deposits it.

person 9 borrows £6.56, ...

...and so on.

Collectively the depositors now have (almost) £100.

Thus is the magic of banking.

good grief.
If you really believe that then you should stick to shells and goats.

Well of course the money lent out won't [i]all[/i] end up back in deposit accounts. Some (after being spent) goes to servicing other debts, some more ends up under a mattress somewhere. But the rest has to be deposited or invested in [i]some[/i] sort of instrument or institution from where it'll inevitably get recycled...

shells and goats

Dunno about that, but I've got a fortune locked up in Flainian pobble beads, know anywhere I can exchange them? 😉

I would say wealth come from work

and work = force * displacement

Well kind of people doing work creates wealth

epiliptic - its not the location of the loans that matters, you're missing a big point:

If £10 is deposited [i]in Bank A[/i], Bank A can now lend, say 80%, or £8.

The borrower can spend it or deposit it.

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.

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.

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

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.

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.

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

What if the assets are junk based on mortgages that will never be paid back taken out on properties that are now declining in value because they were only worth the previous price when banks were effectively creating money to throw at US/UK/Irish consumers because Chinese/German businesses needed to invest the profits they made from selling things to US/UK/Irish consumers who'd borrowed money to buy the things made by the Chinese/German businesses?

What then? 😉

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 [i]total[/i] 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 [b]but as I said has £8 simultaneously on deposit with the bank - if he didnt then the next borrowing could not take place[/b]
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 :

[img] [/img]

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[b] NET SPENDING[/b]
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 [i]does[/i] 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.

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: [url= http://en.wikipedia.org/wiki/Fractional-reserve_banking ]http://en.wikipedia.org/wiki/Fractional-reserve_banking[/url]

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.

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:
[i]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),[/i]

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

Before the internet, [i]"buy a book"[/i] 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 🙂