To wonder where the money comes from?

[TheoriginalLEM]

I just pinged DP £50 This was £50 I've never physically had if that makes sense. I know the bank of England or whoever print the notes but they have no intrinsic value.

Is there a defined amount of money in the world?

How does it even work?

I'm just thinking of the inevitable shit storm that we are entering. Could the world just not abolish debt? Not individual or corporate debt but debt between countries.

I know I'm probably being thick but what does money even mean?

Apparently we are having to borrow billions of pounds for coronavirus support etc , who who are we borrowing it from?

It's a rather complex topic which is difficult to sum up in a forum post.

Essentially, money used to be pegged to gold. We used the gold standard. Banks held gold reserves. A £50 note was a simple way of saying that you owned £50 worth of gold which the bank was holding for you. You would probably never see that gold but it was a 'note' issued by the bank to you, which you could give to others, that could be cashed in at a bank for gold if you wanted. In practice that rarely happened.

Now most currency is purely fiat. It is no longer pegged to a physical object such a gold. Fiat currency essentially has value backed by the government.

I'm waiting for hackers to up their game and abolish everyone's debt.
It would fuck the economy im guessing, but id quite appreciate it
(If any hackers are out there I'm not giving you idea... )

Actual money isn't even actually money...
That £10 note in your wallet is not £10. Read it... it is a promissory note!
@Lockheart explained it well.

Maybe we should go back to some sort of bartering system?

Could the world just not abolish debt? Not individual or corporate debt but debt between countries

Every debt is simultaneously someone else's asset. And that someone could be you, or your bank, or your pension fund, or your employer.

I wouldn't in a hurry to abolish debt if I were you.

There are quite a few YouTube videos that explain it really well.

@Lockheart that is a really good explanation, thank you. I find it so very strange when I look at my bank account, chasing figures around that mean nothing but everything! Blows my mind really!

Excellent question. For those interested in learning the intrinsics of what money actually is, I recommend reading Talking to My Daughter: A Brief History of Capitalism by Yanis Varoufakis and How to Speak Money by John Lanchester. As a totally novice to the world of finance these excellent books really helped - sorry @TheoriginalLEM I realise I haven't answered your question .

@HerRoyalCarbyLess

I'm waiting for hackers to up their game and abolish everyone's debt. It would fuck the economy im guessing, but id quite appreciate it (If any hackers are out there I'm not giving you idea... )

There's a show called Mr Robot on Amazon prime all about this idea, Rami Malek plays the main character

The only thing that prevents the banks from printing (not actually printing these days 🤣) more is the value of its currency against another. They printed loads in wartime Germany which caused hyperinflation where a wheelbarrow full of notes would only buy a loaf of bread. These days (Inc for coronavirus) they still do it (called quantitative easing) where they print enough to get by in emergencies and take the slight hit to the value of the £.

@Angeldust747

But, in many ways, wasn't the purpose to standardize currency internationally, so getting Western countries to increase their debt in fiat currency lowers, over time, the value of their currency, due to quantitative easing? So, the 500,000 house is actually worth 300,000 (materials, cost of labour to built, capital appreciation balanced out over time) and the extra £200,000 is a notional amount that encourages us to overvalue our sense of wealth, keep spending and increase our debt? Bigger house, etc

I include myself here btw, I was debt averse for years but now see it as something we all carry and that the goal of the individual is to carry this debt to the point where their assets cancel it out but still carry the debt as it is a crucial part of capitalism's mechanics. That could be student loans, mortgages, car loans, etc - it is the debt that is keeping much of job market circulating and in business.

If you really want to know, start by researching the history of banking and The Rothschilds. (And...Good luck - cos it’s terrifying AF. 🤣.)

Didn't a load of debt disappear into the ether when the World Trade Centre was destroyed?

Some very good explanations here. I'd also second looking up online resources - 'Money As Debt' is quite a good one to start with. This is one of those subjects that can easily go off down a very unpleasant avenue that ends up blaming 'the Jews' for it all, but the reality is that it is proven and documented fact that international banking is run this way - it's just that the people who pull the strings at the top are no more or less likely to be Jewish than any other ethnicity, faith or background; the same is true of the vast majority of us who have no say in it but have no choice but to live with it.

When you borrow money from a bank for a loan or mortgage, that money thereby comes into existence and, in so doing, effectively very slightly devalues all currency in the whole economy and contributes to inflation, which is planned and factored in to how the world financial cycle functions. You've effectively created money out of thin air and you automatically owe it to somebody else! The modern economy would be utterly destroyed without debt - it doesn't matter if an individual does or doesn't have any debt, but the population as a whole has to be permanently in hock for it to survive. Look at which nations have the most national debt and you'll find they'll also be the richest and most prosperous nations in the world. Where do they borrow it from, then? Nobody effectively: it's because of their influence and power that the central banks are willing to create new money and inject it into the world economy for them to use.

It makes sense, if you think about it (whether you consider it good or moral is another matter). Imagine if the government gave every individual £1m each, you'd think that would be wonderful and make everybody as happy as could be. The problem is, though, when you want to spend that money. You want to get a builder to put a huge extension on your house, but he too has £1m, so he doesn't care about doing a lot of very hard graft to earn £10-20K from you that would make no difference to him. All of the lovely things you'd want to buy: who would want to go to the effort of working in a factory, farm or other production facility to make them and who would want to work in the shops to sell them to you? The only logical conclusion would be that prices would rocket. If I already have a million, you're going to have to give me hundreds of thousands to make it worth my while to work for you - jobs I might previously have gladly done for a couple of hundred pounds or less. No point whatsoever in being a millionaire if everything still costs the same percentage of your wealth as it ever did before.

yes - it is relative and kind of arbitrary in a fiat system.

I think we see this most of all with tech companies valued at 50 billion after two years. I keep looking at them, thinking nobody is paying money and their costs are low, so how is it worth that? it is a virtual value in many ways.

@HelpMeFindAName

Excellent question. For those interested in learning the intrinsics of what money actually is, I recommend reading Talking to My Daughter: A Brief History of Capitalism by Yanis Varoufakis and How to Speak Money by John Lanchester. As a totally novice to the world of finance these excellent books really helped - sorry *@TheoriginalLEM* I realise I haven't answered your question .

Excellent choices. I would add. Economics The Users Guide by Ha Joon Chang a very easy to read starter. Also go on the BBC website and listen to Tim Harford s More or less. Indeed his books are brilliant too

There isn’t a limit to money because governments have printing presses. There are however consequences to printing money Such as (eventually) inflation

Governments could abolish debt between countries though that would blow up the banks that had leant it. For example you might remember when Greek joined the Euro and got into huge financial difficulties. Germany and others nailed them out with conditions but ultimately Germany didn’t bail out Greece they bailed out the German banking system that leant them a lot of the money

Sorry I find this stuff really interesting. I guess I was always meant to be an accountant

Here is an extract from a long post on this subject I once composed, and then never posted.

97% of money in circulation is of the type "bank deposits". Deposits are created "out of thin air" when a commercial bank makes a loan to a customer.

Imagine the bank loans 10K to a customer. To effect this, it debits a loan account by 10K and credits a bank account with 10K. A loan account balance is a debt the customer owes the bank, and a bank account balance is a debt the bank owes a customer. The 10K credited to a bank account is a called a deposit.

Deposits are transferable. When the customer uses the loan to buy a car, the deposit moves to the bank account of the car seller, possibly at a different bank. The fact that deposits are transferable makes them a kind of money. 97% of the money in circulation in the UK is transferable debt created by commercial banks.

When there is a loan repayment, a bank account is debited and a loan account is credited by the same amount, that amount of money has been destroyed.

Although neither the bank nor the customer became any better or worse off when the loan was made, because of the two offsetting debts, 10K of money was created "out of thin air", because only one of the two debts is freely transferable, and is therefore money.

For anyone who can be bothered, here is the full version that extract was take from.

The Bank of England published a paper in 2014 supporting the credit creation theory of money. The theory has been around for a long time, but for most of the last 100 years other theories have been favoured. The paper has triggered lots of web chatter about the nature of money, including this post.

97% of money in circulation is of the type "bank deposits". Deposits are created "out of thin air" when a commercial bank makes a loan to a customer.

Imagine the bank loans 10K to a customer. To effect this, it debits a loan account by 10K and credits a bank account with 10K. A loan account balance is a debt the customer owes the bank, and a bank account balance is a debt the bank owes a customer. The 10K credited to a bank account is a called a deposit.

Deposits are transferable. When the customer uses the loan to buy a car, the deposit moves to the bank account of the car seller, possibly at a different bank. The fact that deposits are transferable makes them a kind of money. 97% of the money in circulation in the UK is transferable debt created by commercial banks.

When there is a loan repayment, a bank account is debited and a loan account is credited by the same amount, that amount of money has been destroyed.

Although neither the bank nor the customer became any better or worse off when the loan was made, because of the two offsetting debts, 10K of money was created "out of thin air", because only one of the two debts is freely transferable, and is therefore money.

While its ability to create money means a bank does not have to first have 10K in order to lend it, if the 10K deposit it creates moves to another bank, the bank has to find 10K from somewhere to fund the transfer. In reality, with lots of transactions causing funds to flow in both directions, it's only the net flow of funds to the other bank that need to be funded. If the bank competes with other banks to gain deposit money, it could reduce the net outflow of funds to zero, eliminating the need to fund transfers. Or it could fund transfers by borrowing, perhaps using loans it has made as collateral. Being able to create the money that corresponds to the loans they make doesn't change the fact that overall banks do need to have a total of deposits and borrowing that matches their total lending.

The fact that banks need their books to balance helps create the illusion that they only lend money they already have, when in reality they lend (and create money) first, and work out how they are going to balance the books after the fact.

There may be reserve and capital requirements associated with making loans, which mean banks need to set aside a small fraction of the value of each loan for a rainy day. These requirements also need to be funded, but apparently these overheads are not the primary factors limiting money creation. (One of the papers linked to below describes how, when in 2008 Barclays needed 5.8 billion pounds of new capital, they created the money so it could be invested in themselves. Another wheeze is that a bank can charge an origination fee on a loan, which to the extent it covers the capital requirement means they've created the money that covers that overhead.)

The total amount of money created by banks will depend on how much customer demand there is for profitable loans. Whether a potential loan looks profitable depends on central bank interest rates, so customer demand for loans and central bank interest rates are the main two factors that determine how much money is in circulation.

Other businesses can make loans and hold customer money, but they do not create money. What distinguishes banks is that they are exempt from the general rule that customer money has to be segregated from money belonging to the business. If a stockbroker goes bust while you have cash in your account, you should get your cash back, it belongs to you and cannot be used to pay the stockbroker's debts. In contrast, the money in your bank account doesn't directly belong to you, your balance represents an amount that you have lent to the bank. If the bank goes bust, you are someone the bank owes money to, not someone it was holding money for.

Bank of England article

www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Paper investigating which theory of money is correct.

www.sciencedirect.com/science/article/pii/S1057521915001477

Paper explaining the difference between banks and other businesses.

www.sciencedirect.com/science/article/pii/S1057521914001434

www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn/source/ref_20180116_tjn.en.pdf

www.bundesbank.de/en/tasks/topics/how-money-is-created-667392

www.bis.org/events/conf140626/holmstrom_paper.pdf (on the role of debt)

Some good links here. Months ago, there was a similar thread on here that had a video explaining that debt always created a recessionary effect on society. it was made by a billionaire philanthropist type - can't remember who, but it was good - simple and clear to understand.

@Lockheart - just brilliant!
Couldn’t be clearer (or shorter) 👍👍👍

Thanks - some really excellent explanations on here, especially from @WeBuiltThisBuffetOnSausageRoll

Deposit money is just one type of money, there is also government-issued money, of which notes and coins are one type. (Apparently there's a second type called "reserves", which only circulates between the bank of England and the commercial banks. I think it is analogous to deposit money, but with the Bank of England as the "bank" and the commercial banks being the customers.)

Even notes and coins conform to the idea that all money is transferable debt. They are IOUs issued by the Bank of England. Something I find interesting is that this means they have no value when held by the bank of England. An IOU to yourself is worth nothing to you. In the past, when people paid taxes in cash which ended up in the central bank, the central bank burned the money, because it had no value to them. (Instead of reusing it, they can just print a shiny new note at negligible cost.) The £10 of value the government gets from a £10 note occurs when the note goes out, not when it comes back in. (The purpose of taxes is to create demand for the note, so the government suppliers will be willing to exchange goods and services for the newly issued money.)

Another interesting thing I learned when I was reading up on money is that the idea that money was ever linked to the value of metal (such as gold or silver) is nonsensical. A gold or silver coin can only serve as currency if it's value as a government issued debt-token is more than its value in metal. Otherwise it would hoarded, or sold for its greater-than-face-value as a commodity.

Governments could abolish debt between countries though that would blow up the banks that had leant it.

It could theoretically spell then end of the need for the existence of the central banks (no tears from me there), but they'd hardly go bankrupt as such as they could just pluck it back out of thin air and 'create' more.

It seems to me that the main currency in the world is actually power and influence - it's just that those who have all of it use invented money as a means of demonstrating their power to everybody lower down than them and exerting control over them.

I'm thinking especially of when the IMF 'bails out' impoverished and/or disaster-hit nations by lending them a whole load of 'money' that they've just typed into their computers and then not only charges them punitive rates of interest, but also dictates to them what they spend it on and how they must run their countries - euphemistically referred to as 'austerity measures' - demands that invariably leave the poor countries in a worse position at the end than when they started, especially the very poorest of the poor.

Imagine your neighbour's lawn-mower is broken and her grass is 6ft high. She's desperate to be able to cut it so that she and her family can enjoy their garden, but she's lost her job, can't afford to buy a new mower and can't get any credit facilities, as she isn't known to the lenders. You approach her and offer to sell her a spare one that you happen to have (which you stole from B&Q's depot when the security guard wasn't looking, as it happens, but you don't tell her that).

She obviously can't pay you outright, so you agree she can pay you 10% of the market value of it each month, for 72 months. She gratefully accepts your kind offer, so the deal is done: you get your legally-binding contract and she gets her mower.

But then, as she's about to start using it, you storm over there, remind her what a horrible undeserving poor person she is and demand to know exactly what she thinks she's playing at. You show her the appendix of the contract she signed that's in 4pt size print and in Latin. This proves to her that she agreed to abide by the following:

1. She must agree to use the mower for at least two hours every single day;
2. It's a petrol mower, and she's only allowed to buy petrol for it from you, at prices that YOU deem appropriate at any time;
3. [Although, over time, she's going to be paying you a massive dividend on the value that you loaned her that cost you nothing anyway], she is required to take out and pay for extensive adverts across all media to inform everybody of how pathetic and hopeless she and her plight were and what a wonderful, magnanimous philanthropic saviour you were by stepping in and making her whole life perfect again;
4. She is strictly only allowed to use her mower to cut YOUR extensive grounds and on no other land whatsoever.