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How much money can banks create – Banking 101 (Part 4)
Published on Jan 18, 2013
What does actually limit the ability of banks to increase the money supply?
In this video you’ll see that the type of reserve ratio that’s discussed in the textbooks has never even existed in the UK. We’ll see that the liquidity ratios that did exist have been reduced and eventually abolished, and that even when they did exist, they only limited the speed that the money supply could increase, but put no limit on the total size that it could grow to.
You’ll learn that the Capital Adequacy Ratios and Basel accords are about preventing banks from going bust when loans go bad, rather than limiting their dangerous lending or limiting how much money they create through lending. And although the capital adequacy requirements can restrain lending after a banking crisis, it doesn’t do anything to restrain lending in a boom.
You’ll also see that there is no natural limit on how quickly the banks can create money. They know that even if they don’t have the actual central bank reserves to make payments, they’ll be able to borrow those reserves from other banks, or even the central bank.
All this comes together to imply that the only thing that truly limits the creation of money, is the willingness of banks to lend. And their willingness to lend depends on their confidence.
In other words, the money supply of the nation depends on the mood swings of banks and the senior bankers that run them. This is surely an insane way to run an economy.
If you’d like to translate this video into other languages, please let us know. We’ll send you the transcript with timecodes.
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Positive Money is a not-for-profit research and campaign group. They work to raise awareness of the connections between our current monetary and banking system and the serious social, economic and ecological problems that face the UK and the world today. In particular they focus on the role of banks in creating the nation’s money supply through the accounting process they use when they make loans – an aspect of banking which is poorly understood. Positive Money believe these fundamental flaws are at the root of – or a major contributor to – problems of poverty, excessive debt, growing inequality and environmental degradation. For more information, please visit: http://www.positivemoney.org/
Animation by Henry Edmonds
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The Gold Series: Gold as an Investment (Part 4)
Must Watch. DOW 14,000, A Grand Deception. By Gregory Mannarino
Published on Feb 1, 2013
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Pedro Schwartz on the creation of money out of thin air
Published on 19 Sep 2012Subscribe to our newsletter at http://www.goldmoney.com/goldresearch. GoldMoney’s James Turk interviews Prof. Pedro Schwartz who is the president of the Economic and Social Council of Madrid. They talk about bank regulation, the creation of money out of thin air and the beauty of the free market system.They discuss how banks have expanded despite of government regulation which Schwartz in large attributes to the granted privilege of fractional reserve lending. Using this procedure a bank can create loans above the actual amount of deposits at hand and therefore create new money. This also leads to fragility in the banking system and to boom and bust cycles. Schwartz argues for a leaner and more effective regulation of financial markets as the current regulation has not worked in regards to the financial crisis.They talk about the “tennis” between the Federal Reserve and the European Central Bank when it comes to the creating money out of thin air. Schwartz states that the ECB is disregarding the rules that were aimed to guard it from being influenced by political pressure. Despite the opposition of the German Bundesbank they are buying government bonds. This is equal to digital money printing and Schwartz scents that it is not being done for monetary policy, but for the stimulation of the economy which goes beyond the original remit of the bank.However despite the injections of new liquidity by the ECB Europe is still in recession, because interbank lending has dried up. That means that banks are parking much of the liquidity back at the ECB. The big question will be what will happen to inflation once the economy starts to pick up again and those funds find their way into the real economy. Schwartz also questions whether it is a productive business when banks can make a profit by borrowing money from the ECB at 1% interest and then turning around to buy government bond which yield 5% or 6%.A serious inflationary disaster will only be prevented if governments will succeed in reducing their deficits and stop selling bonds. Schwartz states that cutting government spending is the only viable solution to the problem. To accomplish this there has to be a change in social mentality so that people recognise that nothing is free and that the government sector has to shrink. In the end the market is the most efficient mechanism of allocating resources according to the wants and needs of people.This video was recorded on 14 September 2012 in Madrid.
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