[permaculture] Fwd: Where does the "lost" money go ? can we find it and get it back ?
adam @ ets
adam at eatthesuburbs.org
Sun Jan 4 02:57:40 EST 2009
Q: "Where does the "lost" money go ? can we find it and get it back?"
A: No, that particular money is gone forever.
It's worth spending a bit of time thinking about how money is created and
"The process by which banks create money is so simple that the mind is
-- John Kenneth Galbraith
Money, it turns out in our system, is created from thin air. Here's how it
*Money for nothing.*
> Creating money out of nothing first emerged in the 13 century, at
> goldsmiths' benches (or bancos) in Italy, when receipts issued for deposits
> of gold, goldsmiths' "tokens of promise to pay", began to be used for trade
> because they were much easier to exchange than the gold itself. Goldsmiths
> soon realised that depositors would never try to retrieve all of their gold
> at the same time, and so cleverly, or perhaps deviously, began to issue
> tokens (i.e. create money) for gold they didn't have (i.e. out of nothing).
> This was the beginning of both western "promise to pay" paper currencies
> and of the so-called "fractional reserve banking" systems that persist today
> - "fractional reserve banking" being the fancy name given to the process
> that enables banks, like the goldsmiths before them, to create more money
> than they hold, out of nothing.
When you take out a bank loan, that money is created then and there, these
days in the form of electronic digits in a computer.
The bank actually doesn't need to have the money in its vaults to create the
loan. A banking license is the the license to create money in this way, as
Although it sounds like magic, it's not without risk for the bank, who still
need the loan to be repaid to avoid being dangerously overstretched. Also,
according to banking laws, they can only create so much money in relation to
their deposits. In practice they can create about 10 times as much money as
they have in deposits. The equivalent of a goldsmith creating $1000 of
promissory notes on the back of a $100 actual gold. A fairly shaky
situation, since if only 11% of the promissory notes are cashed in at once,
the system falters.
When you pay back a loan the money disappears again, completely out of
existence. (The equivalent of a goldsmith ripping up the returned
promissory note exchanged by a client for real gold).
So -- when lots of people are taking out loans, there's lots money in
Conversely, when people stop taking out loans (but are still obliged to pay
back existing loans) the money supply shrinks.
The amount of money in circulation tends to grow exponentially.
When the Fed Reserve lowers their interest rates, what they're doing is
attempting to increase the money in circulation, by encouraging more loans.
When they lift the interest rate, they're trying to slow money supply
In fact if everyone paid back their loans there would be no money left in
circulation (except minted coins and notes which are created separately but
represent only a tiny fraction of money in circulation).
So money really can simply disappear, just as it can appear out of no
This book explains it well, The Future of Money by Bernard Leitaer:
And Richard Doutwaite's The Ecology of Money which also explains it is
online. He explores many different models for money creation, with very
different implications for the type of world they create.
I interviewed Douthwaite a few years ago and he explained how fractional
reserve banking is only stable in a growth system, and indeed is core to why
governments are terrified of 'non-growth'. Ie. our money system creates the
doctrine of growth.
It works like this:
When there is pessimism about the economic outlook (for whatever reason)
people and businesses are less inclined to take out loans. This shrinks the
money supply. When the money supply shrinks, it becomes more difficult to
do business, as businesses spend more time chasing up debt from customers,
and they find it difficult to find money to buy their own supplies. It's
like the lubrication of the economy dries up and gears no longer work so
well. This in turn makes for more concern about the economic outlook. As
businesses become even less confident to take out loans, and banks less
likely to give them, the money supply shrinks. And so on...
We have a positive feedback loop -- the feared deflationary cycle in which
prices go down, while people's ability to afford things diminishes. Federal
banks lose all their power in this cycle, because they can not loan money at
less than 0% interest. It will end in total monetary catastrophe if
governments can not spend their way out of it. All governments are
terrified of losing control of scenario (and yet are currently facing it),
as it would mean the destruction of the economy and their govt.
Because 'steady state' is far too close to the edge of abyss, only 'growth'
-- at all costs -- is a viable national financial policy, shared by all
leading political parties. And so govt's have adopted the embarrassingly
illogical doctrines of endless growth on a finite planet because they have
very little option, and they must tie their interests to corporations, the
drivers of this growth.
Adam in Melbourne, Au
On Sun, Jan 4, 2009 at 3:45 AM, Nicholas Roberts <
nicholas at themediasociety.org> wrote:
> ---------- Forwarded message ----------
> From: <nicholas at themediasociety.org>
> Date: Sat, Jan 3, 2009 at 5:16 PM
> Subject: Re: Where does the "lost" money go ? can we find it and get it
> To: Dean Baker <t>
> Cc: Noam Chomsky <chomsky at mit.edu>
> happy new year Dean
> who takes it out of circulation ? how ?
> is it destroyed ? made null ?
> how much of the wealth from a bubble gets accumulated by the rich
> promoting the bubble ?
> how much gets taken out of circulation ?
> is there a good reference to this ? a website or book ? I am
> interested in the formal process and also the reality...
> thanks in advance
> On 1/3/09, Dean Baker <dean.baker1 at verizon.net> wrote:
> > Hi Nicholas,
> > It's just like counterfeit money that has been seized by police. It is
> > wealth that is taken out of circulation. It means in principle that the
> > people who did not own stock and did not lose wealth can be better off,
> > assuming that the demand generated by this stock wealth (people spend in
> > part based on the wealth they hold in stocks) is replaced by other
> > regards,
> > dean
> > Nicholas Roberts wrote:
> >> hi Dean
> >> this is a really obvious question, but I have yet to find a good answer;
> >> where does the money "lost" in the stock and housing bubbles go ?
> >> is it destroyed ? how and where ?
> >> is it transferred ? how and where ?
> >> is it accumulated ? by whom, how, where ?
> >> can we get it back ?
> >> are there any good flow diagrams that explain this in plain terms for
> >> regular folks...
> > --
> > Dean Baker (baker at cepr.net)
> > Co-Director
> > Center for Economic and Policy Research 1611 Connecticut Ave., NW
> > Washington, DC 20009
> > 202-293-5380 (ext 114)
> > 202-332-5218 (H)
> > www.cepr.net
> Nicholas Roberts
> [im] skype:niccolor
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