Money is debt documentary

[Asgard01]

Hey all,

I wondered if any of you have seen the documentary Money is Debt on YouTube, there are 3 versions of it but watching part 2 is probably good for those who haven't seen it. I just wondered what others thought of this and if anything contained therein is clearly wrong. It seems from reading Bank of England documents and researching that this is pretty much accurate but that it is preferable to call it credit rather than debt.

Just curious on your thoughts as sometimes it felt like a conspiracy type video and I wasn't sure if I could believe all the points made.

https://www.youtube.com/watch?v=l_IgcmsqnVM

Cheers
Chris

[Underscored]

Martin Wolf - Financial times http://www.ft.com/cms/s/0/7f000b18-ca44-11e3-bb92-00144feabdc0.html#axzz3ylrpVRUr

Lord Adair Turner -http://www.theguardian.com/books/2015/nov/25/between-debt-and-devil-adair-turner-review

The Big Short - http://www.imdb.com/title/tt1596363/

This stuff is just starting to get into the mainstream. I think debt money (hardly a new concept - babylon etc...) is fine, we just need everbody to understand the system they live in.

edit: Also you maye want to read this, whilst a recycling of older research it is nice to have it in one place (and some historical perspective) https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

[Asgard01]

Thanks for those, I did do a fair bit of research myself after watching it as it intrigued me. Very interesting stuff indeed.

[obstinate]

One person's credit is by definition debt owed by another. They are two sides of the same coin. This goes all the way back to the origin of money, which was a promise of future payment in the form of scrip (at least according to Planet Money).  I think any mainstream economist would agree that money is debt owed to you in a sense.

[milliemchi]

I got about 5 minutes into it when I noticed the first inaccuracy (as soon as you get the loan the balance is inflated), then another minute in was another thing I didn't find quite correct, so I gave up. It's possible  that the inaccuracies are not relevant to the main thesis, but I didn't stick around to find out what it is. I'm guessing that it's some version of "money is intangible and abstract", but I know that already. Is there more? What is your takeaway? Do you want to summarize? The video is over an hour long.

[Asgard01]

How the majority of money, over 95% of money is created by banks as debt. It is not money that the banks already have from deposits that they then loan out again. It is literally created by banks when they create a loan or mortgage, the fraction of money that they need to have in terms of fractional reserve banking amounts to very little due to the banking system lately operating at that level as if it's one giant bank. The fact that there has to be more loans and debt (new money) in existence to be able to pay back the interest on the debt as everyone could not pay back all of the debt with interest as there is not enough money in circulation etc.

It kind of shows how more debt is required to keep things going, more growth and that debt will always be part of the system as it currently operates.

I wondered if those who have more knowledge could comment on this, my own research seems to suggest that the central thesis is accurate. I found it interesting that banks literally create money when they sell a loan/mortgage. I have seen that particular fact confirmed by reading a Bank of England document that in part aimed to show how much economic material fails to mention that and it's a common misconception.

I just wondered if those who know the subject better could comment on the video in general.

Added Bank of England document link:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Chris

[milliemchi]

Thanks for the summary. I think the basic premise (that the majority of money is credit) is true, but I don't know if the necessity for further credit follows. This will obviously depend on the interest rate. If the interest rate is 4% (e.g., my 30-year mortgage), and the stock market grows at 8% (a proxy for economic growth+inflation), then new credit is not needed, provided that credit users share in the economic growth. How the economic gains are distributed is specific to each economy. But from purely macro-economic view, the need for more credit does not necessarily follow. (IMO)

[zephyr911]

No, banks do not literally create money when they lend. That would require a one-sided clearinghouse transaction, which most institutions cannot perform.
The money doesn't have to exist physically for it to be created in the system, moved from one institution to another, and tracked along the way.

[Asgard01]

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
•  Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

Bank of England document linked previously

No, banks do not literally create money when they lend. That would require a one-sided clearinghouse transaction, which most institutions cannot perform.
The money doesn't have to exist physically for it to be created in the system, moved from one institution to another, and tracked along the way.

Thanks for your reply, can you explain what a one sided clearing house transaction is? Sorry I misunderstand.

Thanks for the summary. I think the basic premise (that the majority of money is credit) is true, but I don't know if the necessity for further credit follows. This will obviously depend on the interest rate. If the interest rate is 4% (e.g., my 30-year mortgage), and the stock market grows at 8% (a proxy for economic growth+inflation), then new credit is not needed, provided that credit users share in the economic growth. How the economic gains are distributed is specific to each economy. But from purely macro-economic view, the need for more credit does not necessarily follow. (IMO)

I might be misunderstanding this, I probably am :) but if money is still required at the point of selling or money is paid as a dividend/income then doesn't that still come from the money supply which is mostly is 95-97% debt/credit money due to be paid back at interest, the money the buyer of the shares uses comes Mostly from a bank account and therefore most of that is debt/credit if traced back to the origin of that money. If new money is created or printed by the government, most of that is created in terms of money owed at interest again so it all comes back to more credit which in turn works fine as long as there is constant growth.

All debts could not be settled in full with interest as there simply isn't enough money in existence for everyone to pay it back at the same time. That's a take home I got from the video.

This is why I made the post, to get opinions and thoughts.

[EnjoyIt]

In general the value of money is based on its supply. That money is garuanteed by the government that issues it. The more money that is available, the less it is worth.

Let's assume I deposit $100K to the bank. The bank then takes my $100K and loans it to 20 other people who buy $100K houses each. In essence they have taken you $100K and turned it into $2 million. 100 years ago banks realized that to stay solvent they could only loan out 4 to 6 times what they had on reserve. Before the economic collapse in 2009 they were loaning out 30-40 times what they had (I may be wrong on the exact figure.) Literly creating billions upon billions of dollars. When the fed started printing more money we were afraid that due to shear supply we would have massive inflation, but instead that money was used to pay of debt. Therefor the money created in fact did not increase the money supply but kept it the same. In addition lending by banks decreased while at the people started paying down their own debt. The result is we have practically 0 inflation today.

[Asgard01]

In general the value of money is based on its supply. That money is garuanteed by the government that issues it. The more money that is available, the less it is worth.

Let's assume I deposit $100K to the bank. The bank then takes my $100K and loans it to 20 other people who buy $100K houses each. In essence they have taken you $100K and turned it into $2 million. 100 years ago banks realized that to stay solvent they could only loan out 4 to 6 times what they had on reserve. Before the economic collapse in 2009 they were loaning out 30-40 times what they had (I may be wrong on the exact figure.) Literly creating billions upon billions of dollars. When the fed started printing more money we were afraid that due to shear supply we would have massive inflation, but instead that money was used to pay of debt. Therefor the money created in fact did not increase the money supply but kept it the same. In addition lending by banks decreased while at the people started paying down their own debt. The result is we have practically 0 inflation today.

The bit regarding the bank loaning out what people deposit seems to be the main misconception according to the documentary and that Bank of England document.

[EnjoyIt]

The bit regarding the bank loaning out what people deposit seems to be the main misconception according to the documentary and that Bank of England document.

They loan out a multiple of what you deposit. They hold unto your cash and then loan out about 20 times that to other people or business. The whole thing is just an interconnected web of debt between banks, people and businesses.

[zephyr911]

Thanks for your reply, can you explain what a one sided clearing house transaction is? Sorry I misunderstand.

For a more complete answer, start here.
Then go here.
The clearinghouse regulates transactions to ensure that a credit in one place always matches a debit in another. Technically it is possible to falsely create money internally, but it's illegal and can be detected by audits.
Apologies for mostly US-centric explanations but the difference in powers ceded to commercial banks and reserved by central government banks is minimal.

All debts could not be settled in full with interest as there simply isn't enough money in existence for everyone to pay it back at the same time. That's a take home I got from the video.

But for every unit of currency owed by someone, there's someone who is owed the same unit.
I owe hundreds of thousands of dollars in mortgages, backed by an even larger amount of assets. It's true that if the loans were all called in I would be unable to pay... but the system is built around keeping that money employed, where the bank earns interest and I (theoretically) gain even larger benefits via rental income and appreciation. The bank doesn't want the principal back, they want to capture a portion of the revenue stream I generate with it. The fact that those hundreds of thousands of dollars (pounds, euros, etc) aren't sitting in a pile of cash somewhere is really not a problem, nor does it represent a flaw in the system. This is how we've designed it to work.

[Gondolin]

https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

As stated before most of the core concepts expressed are correct.

As for the tone, most of these videos seem to be made with the intent of "blowing the lid off this vast capitalist conspiracy". The videographers are often chagrined when they discover that most of their audience already knows all about fractional banking and the "unreal" nature of fait currency.

That said, it's pretty easy to see how if you grew up with physical money, received no economic education in high school (I know I didn't), and didn't go to college, you could end up not knowing and be shocked by this type of film.

Edit: Ninjaed by Zepyhr with better examples!

[Asgard01]

Thanks Zepyhr :).

I will take a look and see if that changes the take home I am getting from this video. I watched a BBC documentary which alluded to much of the same, it wasn't that it was necessarily a flaw. It has worked tremendously well, it's not that it's a dig at the government or establishment Which resembles conspiracy thinking. It was just whether there were better ways, and how credit/debt is a part of the system as is growth currently I believe and that the way banks create deposit money is not from customers deposits per say. I among many, we're not aware of such things.

I will reply back after reading up on your stuff as that might shatter my understanding hehe

Chris

[Underscored]

The single most complete summary is here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

The implications are that

1. Deminishing underwriting standards as seen in the sub-prime crisis are not to be tolerated at any cost. - Society picks up the cost for the unpayable promises

2. Why have we allowed private banks to determine what gets funded and what doesn't. 85% of new loans are for real estate speculation - not new productive technology....

[Loud Noises]

If you really want to cook your noodle, check out "The Creature From Jekyll Island" by Edward Griffin.  You can scream conspiracy theory all you want, but the truth is that the creation of our modern monetary system was the definition of a conspiracy.  How that impacts us today is up for hot debate.

[grizz]

Another book recommendation:

David Graeber Debt: The First 5000 Years