Some questions that I am finding very hard to discover the answers to (and hoping someone could help) are:

1. The UK consumer has borrowed vast amounts of money on credit cards/loans/mortgages.

Q) Where has this money magically come from for the banks to lend?

2. The UK public has gotten itself into 1.3 Trillion debt

Q) In all of Europe, why does the UK public choose to get into 1.3Tril debt? after all, look at the low ECB rates! Why not France, Germany, or Spain?

3. Despite a rise in:

a) Interest Rates (mortgage/rent)
Personal debt
c) Gas/Electricity
d) Car MOT
e) Council Tax
f) Bus/Rail Fares
g) Fuel tax on holidays
h) Oil/Fuel
i) Water Rates

Combined with an increase in:

a) Individual Bankruptcies and IVA's being filed.
Corporate Bankruptcies (MVC, DP Furniture, Music Zone to name a few)
c) Corporate profit warnings from many retail sectors.
d) The number of flats left unsold/empty (e.g Nottingham & Leeds)
e) Reposessions
f) Pension age (which has effectively wiped out some value of what people have already put in)

Not to mention the fact that public sector worker cost of living increase has been capped at 2-2.5% for the past few years.......

A decrease in FTB's.......

Q) Why are house prices still going up?

I thought this would be the best forum to ask as there are a lot of very smart people on this forum who know how to cut through the economic gibberish of the tabloids. Thanks guys and gals!

Money As Debt

http://video.google.com/videoplay?docid=-9050474362583451279

Its magic money made out of thin air to be repaid in the future.

Thanks for the prompt reply dnd, I will definitly watch the vid. I am familiar with the fractional reserve system (watched Money Masters) and understand how money can get created from nothing. What I have a bit of an issue with is that very few people in the UK seem to have savings, so you would think the banks have very little to be able to lend out, as peoples savings have shrunk, the loans have increased. Strange. Hope the video you posted can enligten me a bit.
i'm suspecting the yen carry trade to be a big source of fuel for uk debt, but can't seem to find anywhere that confirms.

We're spending tommorow's money today, via debt.

IIRC the US 1:9 ratio doesn't apply - they require far less reserves to generate fiat in the UK

The banks are limited by a fractional reserve system. If UK people used to save £1000 in a bank and the bank were allowed ,by the fractional reserve limit, to loan out 75% of that £1000 then that would be £750 (which I realise has a cascade effect).

So, if UK people are saving £10 now instead of £1000, then the banks only have £7.50 to lend out.

I realise this is an incredibley oversimplified way of putting it, as this money will have a multiplier associated with it as it passes throught the economy, but I felt my question wasn't being understood, and I don't really know how much simpler I can put it.

Where is all this money the banks suddenly have to loan out coming from?

Your saying US banks can lend out 90% of what they have in!!!, and UK banks can lend more?!?!

OMG, did this get loosened recently or something? I thought it was 75%

Yen carry trade!

http://www.home.co.uk/asking_price_index/HAPIndex_JULY06.pdf

See: 'Comment' section

Just finished watching that for the 1st time and it is amazing!!

Tell me if I'm wrong here but is it not the case for every 1 unit in they lend 9 units out not 90%.

It's how every central bank started by loaning the money of the population to the population, only they get interest on 9x the amount the public / country / govt. initially put in.

This is wrong. You are right about the reserve when the lent out money is placed with the same institution, but in reality it is not. If the lent out money is placed with another bank, it now becomes the new reserve... and so on.

E.g. £100 becomes the 10% reserve, allowing £900 to be created. That £900 when banked elsewhere is the new reserve, allowing £9,000 etc etc. Obviously, when someone goes bankrupt and loses that £9k, the system will colapse. In reality, you can't look at the individual transaction, you have to look at the whole system. When bad debt gets out of control, watch credit tightening happen.

Watch the vid, it is true, if you don't believe it ask the Bank of England.

The only limiting factor for the banks, in reality, is the risk - the risk that it's not paid back. I believe bad debt is around 25% of banks profits.

House prices are going up because banks are lending higher and higher amounts. The average mortgage is around 10% higher than last year, which is why HPI is 10%. If the banks offer larger mortgages in the future, house prices will go up further.

I have come to the conclusion people are thick as shit, and will happily get themselves in as much debt as possible.

Thanks for the Fractional Reserve explanation, I'll get that video watched before I ask any more about replies to question1.

Anyone able to answer questions 2 or 3?

In the vid, the guy gets a loan for $10'000 which the bank was able to create based upon the 9:1 ratio and the initial $1000.
He then buys the car from a woman who deposits this $10000 into her bank (this does imply her bank is a different bank to the one the guy originally borrowed the $10'000 from in the vid). The vid says that this money CAN'T be multiplied by the 9:1 Ratio, it has to be divided by it. (this is at about 12 minutes into the video). It says that instead it is "Divided by the reserve ratio" then goes on to demonstrate that this means (in this case) dividing by 10. $10'000 divided by 10=$1000. This $1000 becomes the bank reserve, and the 9:1 multiplier can be used on this to give a $9'000 loan. This in turn gets deposited into another bank, then this bank divides $9'000 by 10 to get 900 reserve, and $8'100 created as a loan....and so on.

Made a crude excel spread sheet to continue the above down to 1p and calculate how much the banks get back after lending each one for a year + interest.
Decided to say sod work, I'm going to look into how to start up my own bank lol :-)

Good video, had to play it a few times and discuss some of the ideas with my other-half (the brains of our finances). It's very difficult (for me anyway) to apply this concept to real life and the uk's current debt climate, and understand what the hell is going on.

The concept is amazingly sick, and I do believe the video's contents are most likely right.

Doesn't this mean that, if the limit to the house prices is limited to the limit of debt uk people can take on, then without the massive personal loan and credit/store card debt brits have to serve on a monthly basis, house prices could have gone up a lot more. So the more credit card debt etc.. is paid off, the money people will have per month for a higher mortgage. This would mean house prices in other countries in europe (e.g france/spain) should have a higher houseprice/salary ratio (as they can afford to service more mortgage debt, as they have less credit card debt)???

Is there anyone out there that could explain quetsions 2+3?

The important point is to distinguish "high powered money" from normal bank deposits and loans. The HPM is effectively the seed capital of the bank (held at the central bank) from which it can create the x9 of new money to be loaned out. Then the 90% effect kicks in i.e. 10,000 deposit --> 9,000 loan and so on. The bit which illustrates why banking is such a biased business is the starting point - from a small stake they create a large money position on which they charge interest. This position then grows even larger through the 90% effect, all recieving interest. Nice work if you can get it...

Regarding your question, there are too many different factors at play to isolate two factors such as mortgage and credit cards. It's a free asset market driven by fundamentals, but also sentiment and culture. But in essence you are correct, the limit is the maximum amount people can pay each month, versus their incomings.

" I think you have to look at cultural reasons for this. We have a different attitude to home ownership than lots of continental europeans and a lack of avaliable alternative housing options"

I confess to a lot of ignorance when it comes to other cultures, could you elaborate on what you mean by available alternative housing options. This might sound stupid, but I thought there was only renting or buying a house or flat.


"I suspect there are many using credit cards to exist, pay for the food and bills etc. "

I'm assuming from this that you mean the spiraling debt credit card trap. I saw the whistleblower (BBC) documentary on that topic. Some of the people who got trapped in the credid card spiral seemed like intelligent people, some from a generation of sensible savers that you would have thought would know better. I can see parallels to cults leaders who are able to convince intelligent people of the most absurd things. As much as I would love to condemn peoples stupidity for getting themselves into such situations, I just can't do it. I might have gotten wise and paid my debt off now, but much of it was luck of education and happening to stumble upon certain financial 'truths' that got me thinking.

"Wages are higher here in general"

Maybe in figures, but in terms of buying power, is it really the case that we have more wealth as individuals than others in continental europe? What I mean by this is that we may be paid more, but are we taxed more, and is our cost of living higher?

"therefore we may be more credit worthy"

I'm not sure I'd agree with you about the credit worthy, as credit worthiness never seems to be an issue for credit card lenders. I do wonder how much of a meaty target we are though because of the buying power of the pound against other currencies.

"The availability of credit is the main reason, as explained by Jason in earlier post."
"does't matter how much you ramp it people can only pay what the bank will lend them."

You're saying that the availability of credit is why house prices are continuing to rise.
Surely, peoples limit on what they "can pay" is not determined by what the banks will lend them, it is determined by the maximum level of monthly payment they can meet. People can't pay a mortgage at e.g £700 a month if they only bring home £600 a month. It would mean that the rise in taxes and cost of living I mentioned mustn't be stretching people enough to stop them getting a mortgage.

If the duration of the mortgage is increased, then any ftb's who can afford 25 year mortgages now, will get replaced by a generation of ftb's that all have 50 year, then eventually 60, then 70 year mortages etc..
This creep from 50 to 70 year mortgages could also be slowed (to extend affordability) by building homes that are of poorer and poorer quality, then the gardens of these new builds will shrink then disappear, then the driveways as they all become street parking, all the rooms the house will shrink also and become more flat-like, then there will be the miniflats, then a country of nothing but flats as older houses get bought up in their pairs, and knocked down to make more mini flats. People will have no choice but to buy them, and tolerate them. After all, they will be spending much less time in their homes as they have to work for longer to pay the mortgage. The land will get so valuable that graveyards will get replaced by online versions, and everyone will be cremated by law. People will no longer send their kids to college, they'll need them to get straight into work so that they're contributing to the mortgage.
More and more will volunteer to trial experimental drugs for payment to meet the mortgage payments. People will not be as fat in the future as they are now, it'll become a case of prioritising the money, being thin and having a home, or buying lots of food and renting a 6"x6" coffin like room to live in instead of a house.

Sorry, not sure what the point of that was anymore. What was the question again?

Oh yes, my point was that in theory, the credit limit could be expanded well beyond our lifetime, house prices are going up, but also what we get for the money is going down in quality. Look at new builds. They're crap and built out of cheap material. They're smaller, and could continue to get smaller etc.. etc.. etc..

Where is the limit?

F

Understand what your saying about cultural attitudes, and your probably right.
Just started downloading the vid you mentioned now, will hopefully have it soon.
I hope the limit is here now. Not so much for the housing market, but the for economy in general, as there's a lot more at stake than house prices for the common folk. If pensions are buggered now, what will it be like during a long recession/depression?

Just out of interest, if house prices do crash/correct to sane levels, what negative side affects would we see for the rest of society and the economy?

There are 4 parts (4 hours) to the century of self, worth the watch if you have the time.

If we get a credit crunch then we will enevitably have recession, i.e the economy will not be expanding. The economic growth we have experienced in recent years has largely been due to credit in my opinion. A particular driver of this is mortgage equity wealth.
As in any recession, there will be unemployment, negative equity etc. When you consider that we have no manufacturing base any more but rely on buying cheap goods from abroad and services from each other for our economy then the outcome looks bleak. The knowledge / information economy can be moved anywhere in the world. See the thread about citibank.
I personally think the outlook for the UK is the bleakest it has been in my life time, i am 37. Some people here think this time will be the worse crash ever seen. Personally i am slightly more pessimisstic than that. I think we are in for complete reordering of global systems in my life time.
1. The collapse of Fiat currencies
2. Peak oil
3. Environmental effects (global warming, soil erosion, air pollution etc)
4. Rise of religious extremism
5. War
6. Population growth
These are the main drivers i see. Change is inevitable. When is debatable as is what happens next. One thing though it will mean a significant lowering of the standard of living for those in the Uk. It could be complete anarchy.

F

Perfect for intergrating us into the global workforce - the 'middle class' are doomed IMO....




Yep, that's why they are frantically building a police state (using 'terrorism' as the excuse) - you won't have a chance of even thinking of doing it...

Furby, I've now got parts 1-3 on google video, you're sure there's a fourth part? I can't find it!

Regarding your points 1-6

1. Not sure what you mean by "collapse" of fiat currencies. You mean hyperinflation? i.e wheelbarrow of money for loaf of bread type of thing?
2. If the oil runs out, then the energy barons have nothing left to make money from, I'm sure they've already got their alternative energy empires ready to phase in.
3. The global warming issue is a bit questionable, see
http://video.google.co.uk/videoplay?docid=...ial+engineering
4. the highjackers of the planes at 9/11 didn't seem like very devout muslims, some were known gamblers seen in Vegas etc..Al-Quida was actually created and funded by the CIA to undemine the russians (they funded training camps for them and appointed Bin Laden as the head of one of the camps). I would seriously question the "it's all islam extremists rising up against us" that the government would like us to beileve. As for the other terrorist attacks, if some country invaded my country and murdered 10'000's of men women and children, I'm not sure I'd need religion as an excuse to retaliate.
I'm not sure there are as many religious extremist boogymen going about as people think.
5. Apart from remotely bombing the crap out of other less developed countries, I'm not sure we can have wars any more. Most major powers have nuclear weapons. Another major war would be pretty short.

I do get my bouts of "were all buggered" though when I've watched so many bleak vids from the internet. :-)

Yes i am sure there is a part 4. Let me know if you can't find it - i have it somewhere.

1. Yes.
2. There may well be alternative energy supplies. But will any of them be as efficient as oil in terms of energy produced for effort to process? In my view no. Though i am not an expert. In terms of the remaining oil, some people think we have already reached peak oil, remember that the free market is putting increasing demands on the current supply. It is not staying the same or decreasing - we have an ever increasing deamnd on an ever decreasing supply. Every year more oil is wanted, less of it is found. The ongoing issues in the middle east should be enough to tell anybody how important the remaining oil reserves are to the world.
3. Correct. It would seem that the causes of global warming are in doubt. Man made or natural cycle, i would suggest it is a moot point. It is here and happening. The ice shelfs are melting as is the perma frost in siberia. This will have an effect. Also about soil - With the current increase in population coupled with the decreasing capacity of soil and erosion and other factors in 40 years time there will be 2.7billion hectares of cropland to support nine billion people. An average of 0.3 hectares per person, the subsistence level of food production for the whole population. Currently the US consume on average 10.3 hectares per capita, Bangladesh 0.5 hectares. China is currently feeding 24% of the worlds population on 7% of the agricultural land.
4. I agree with regards to islamaphobia. But i do think worldwide we are seeing a rise in religious extremism - look at the christian right in america. The media have a part to play. The largest amount of explosives found on mainland britain was found last year in the home of a BNP member. Not a lot of people know that. If he had been a muslim, i am sure they would.
5. I disagree. The US is the only country in the world the can multiple strike other countries at distance. They may be a diminishing economic force but they hold a bloody big trump card. Modern warfare is different but not neccessarily quicker. Iraq, afghanistan? Incidently Iran is situated between the two.

Capitalism demands an ever increasing market. An ever increasing market puts ever increasing demands upon the worlds finite resources. Remember that everthing that is made comes from the earth in some way shape or form, from your house to your car to your dvd player. Success in the system is measured in terms of how many of the earths resources you are able to consume, how many things you can buy. It is not sustainable.

F

Hey, I'm studying Economics and did a few modules on finance and basically from what I understand is that the banks 'create' money out of nowhere is the short answer... although that is not totally true because they do create money out of somewhere.

Ok here goes, basically any commercial bank has a reserve ratio requirement set by the Bank of England. Let's take this to be 25%. That means for every deposit it gets it must keep 25% of the deposit (that is the money we stick into our account either by putting in cash, cheque, or via electronic debit such as a direct debit). The other 75% it can use to do whatever it wants, and banks lend it out to other people and businesses and they earn interest on these loans and so that's how banks earn profits.

Now to monetary creation. Say for example a bank has deposits (from its customers) of £400. It's reserve ratio states it needs to keep 25% of this as reserves, in case of a bank run, and so it keeps £100 that it cannot touch. Now the £300 can be used as loans to earn profits. Now if someone puts in £1 the bank will have reserves of £101. It has excess reserves, reserve ratio of greater than 25% which is unnecessary. That extra reserve could be better used as loans to earn profits. So, it now has £101 of reserves, £300 on loan, and £401 in total deposits. 101/401 = 25.18...% and if reserve ratio requirement is 25% then 101 x 4 = £404. This is the amount that the bank can viably have. So the discrepancy between £404 and £401 is £3. Thus £3 is 'created out of nowhere' and can be used for making loans.

I hope that's clear and if I got anything wrong or if I didn't explain something well then please feel free to comment!

Nice to hear from you Econ1. I see this is your first post. welcome!!

...but I have a slight complaint with the description that you give. It does not (I think) take account of the fact that the money the bank takes in on deposit is not all "high powered money". Most of it will be Fractional Reserve money.

We need to consider the banking system as a whole. If we only think about a single bank lending fractional money which is then deposited in another bank we forget that the original bank may also be taking in deposits which are the fractional money of the second bank (which, in turn, is using as deposits fractional money from the first bank).

Let's consider the following scenario: We have a bank which has £20 in "high powered money" on deposit at the central bank. Because the reserve ratio is 10% this bank is able to lend out up to £180. Let's imagine that the only other money in the entire economy is £20 held evenly by four individuals. Let's consider a simple round of loans where they each borrow £10 at 10% interest for one year. The Reserve Ratio (for the bank) is now 33% (£20/£60).

For the entire economy the reserve ratio is 50%

At the end of the year the 4 people pay the money back plus the interest. The bank pays the money it has borrowed back to the central bank. It now has £24 (£20 on deposit plus £4 held as assets). The 4 individuals have £16 between them.

Now for the interesting bit. Let's imagine that three of the individuals were not able to pay the money back. Instead of being prudent they end up giving the money to the fourth individual and they are incapable of earning the money to pay their debts. At the end of the year the bank would receive £11 from the prudent individual and nothing from the other three (let's say for argument that they have spent absolutely all of their money including the original £5 and used it to pay the 4th person for some purpose). The prudent individual now has the original £5 minus £1 interest to the bank plus the original £15 from the rest of the economy plus their three loans, so in total the prudent individual now has £49.

The bank, as well as not receiving the £3 interest from the profligate debtors, also does not receive the principal of three of the loans. It had expected to receive £44 but only receives £11. It owes £40 to the central bank but it has only £20 plus the £11. The bank now switches to Fractional Reserve Banking.

It pays back nothing to the central bank and works on a (semi) permanent reserve ratio of 33%.

Hi Austrian!

Thanks for replying to my message. I tried to follow your message and I think I got most of it! Haha... The model I was using was overly simplified and was upon the basis of the workings of one bank for simplicity. I was merely using it as an example to answer the original question which was, 'Where has this money magically come from for the banks to lend'?

I'm sure in reality (which we economists never work in!!!) that the process will be far more complex what with interbank lending, Central Bank lending, desired reserve ratios on top of required reserve ratios and so on, however monetary creation doesn't change. However you message made for an interesting read nonetheless! Thank you

Econ1, I want to send you a private message, but as you may be aware they do not work on this forum... could you give me an email at Edit: see address here This message will self-destruct in 10 seconds!!

No - the money supply is not dependant in any way on the amount people save.

Sure, Your savings are lent out - yes - but your savings are irrelevant to the system - (not to individual banks though who compete for them).

Credit and loans are created against new people wanting money at such and such an interest rate - and that money is printed out of thin air, with no reliance on savings, but reliance on central bank reserve rules.

That is why it is called debt-money, not value-money. It is created against debt, and not based on commodity value or fixed resources.

The only limit to this process is the fractional limit based on central banks reserves.

To the system - all this newly created money comes right back to the banks, as transactional deposits before being spent or reinvested again, which creates new loans...

just stumbled across this thread and this is unreal.i did an economic geography degree and ive learnt more here than i did in the 3 years!!!
the system is so stupidly simple yet so complicated.
in short is this a fair summary?
1. banks start with a little/nothing of something
2. lend that nothing to someone who will pay the bank something back plus more something, ie interest.
3. the banks then use the more something from 2 to lend more something out to more people? and the prosess multiplies like a PYRAMID scheme? gets exponentially bigger right?

also when the person(s) spend that money and it gets deposited in another bank they do the same and it grows even faster?

but the whole system needs to be fueled at an exponential rate in order for money to be made and not to collapse. ie it more debt needs to be created and more money lent. i presume when this stops slows then money is "lost"?
is this what explains boom and bust?

i studied multiplier effects in a geographical area at uni and thought it was bonkers when my professor said the more times money changes hands in the local economy the more it is worth. is this true and applies the same here/theory?

this is an awesome concept and this thread has got me totally thinking...... it is 12.30 am and i am drunk so i do apologise my understanding above is totally wrong. i need to see the rest of the videos.