Sign Nevada Banking IOU Later

Industry sign banking nevada iou later

in this video I will explain how our monetary system works it may come as quite a surprise to you it's actually useful to consider for a moment how most people think that money works it's natural to assume that the government prints it either on paper or electronically and then it circulates in the economy forevermore we could label this everlasting money in the real world everlasting money does indeed exist but it now only constitutes a tiny fraction of the money that circulates in the economy the vast majority of money we spend is a second type which can best be described as spendable IO use the concept of a spendable IOU may sound a little odd and in order to explain it we should first consider the behavior of an ordinary IOU the kind you or I could write say that Mick wish to borrow ten pounds from his friend Jim he could write I owe you ten pounds on a piece of paper and had it to Jim in return for a ten pound note it's important to note that the IOU did not exist previously Mick did not need to obtain the IOU from somebody else it was just created on the spot by virtue of writing it on a piece of paper the IOU that Mick created now has value it acts as a record or proof of the loan and could be referred to if Mick tried to claim that the loan never took place but despite its value Jim would find it almost impossible to purchase anything with it we will return to this issue of non spend ability in a moment when Mick repays the loan Jim should no longer keep hold with the IOU because Mick will no longer Oh Jim any money the IOU has now gone it's job it has no further purpose and Mick will now dispose of it to summarise the lifecycle of an IOU is as follows Stage one it gets created out of nothing it did not exist previously and did not need to be obtained from anybody else stage - it has value as a legal record in stage 3 when the loan is repaid the IOU has no further meaning and expires let's go back a few steps and consider the fact that the IOU was not spendable in a bit more detail the reason the shopkeeper would not accept the IOU as payment for food was because he didn't know anything about Mick's creditworthiness in all likelihood he wouldn't even know whom it was if the shopkeeper just by coincidence happened to know Mick and he thought Mike was a reliable fellow he may have considered taken the IOU in payment but in general this will be a rare event but now consider this what if a bank had given its official seal of approval to the IOU say that everyone knew about and recognized this seal this would then allay the shopkeepers worries about whom it was and whether he was good for the money a bank seal of approval could turn an on spendable IOU into a spendable IOU so now we know in theory or to spendable IOU might look like but how does this come about in practice in the real world to see a non spendable IOU get converted into a spendable one look no further than an ordinary bank loan the phrase bank loan is in fact highly misleading the bank is not lending anything at all if you wanted to borrow say a thousand pounds from the bank the bank will ask you a series of questions to assess your creditworthiness and then get you to sign some sort of loan agreement this loan agreement is essentially an IOU you are handing to the bank what the bank will give you in return is generally not everlasting money what they give you will be a checkbook or a debit card which is essentially an IOU from the bank but because this IOU is so official and recognizable shopkeepers everywhere will accept it in exchange Goods a so-called bank loan is essentially an IOU swapping exercise your non spendable IOU is exchanged for a spendable IOU from the bank and just like any other IOU the bank's IOU never existed before this moment it did not have to be obtained from anywhere else it was just created on the spot out of nothing and also just like any other IOU it will expire when the loan is repaid so to summarize money is created when loans are made and disappears when loans are repaid mummy is continually being created and destroyed we can visualize this dynamic by imagining a bathtub with water flowing in from a tap and out through the plug hole the flow into the bath from the tap corresponds to new loans being made while the water flowing out through the plug hole corresponds to loans being repaid so the total amount of money circulating in the economy depends critically on the relative rates of flow into and out of the system the consequences of this unstable dynamic on the economy are critical and profound yet few economists and even fewer politicians are even aware of it when people hear this explanation of our monetary system they are sometimes skeptical this is because they thought that when a bank lends say a thousand pounds they must be borrowing a thousand pounds from and paying interest to somebody else therefore the idea of banks creating money out of nothing must surely be false but there is in fact no contradiction between that idea and this explanation to see why let's look at a bank loan again and this time follow-up what happens to the money for the sake of simplicity let us imagine for a moment that there is only a single bank in the system let us also imagine that someone wants to borrow a thousand pounds to buy a second-hand car so step one is to go to the bank and get 1,000 pounds of freshly created spendable I use step two is making the purchase ie the buyer swap suspend herbal IO use to the car now the car seller has a check or debit card payment step three is that the car server stores his 1,000 pounds of spendable IOUs in his own bank account the car seller is now essentially lending his money to the bank and will be expecting his bank to pay interest on that money in reality steps one two and three all take place instantaneously and we now end up in stage four where the bank is earning interest from the car buyer and is simultaneously paying interest to the car seller the bank is now making its money on the difference between the two rates of interest in the case that there is more than one bank things become rather complicated for short video like this to explain but the principle remains the same so it's true the banks make the money on the difference between what it ends in interest making loans and what it pays in interest to depositors and it is also true that banks create money out of nothing there is no contradiction congratulations if you've understood everything so far then you are more knowledgeable about our monetary system than most professional economists if you're happy with the explanation given so far and it doesn't contradict anything you've heard elsewhere then this is as much as you need to watch part 2 will be addressed to anyone watching this who has been taught a different explanation of our monetary system perhaps at University and is skeptical that this explanation is in fact true I hope to convince you that it is it may seem incredible but the descriptions of our monetary system given in most university level textbooks is wrong it is wrong because the full details of how it works are so arcane and complex that it is considered too hard or too time-consuming for undergraduate students to understand because of this simplification is needed to be made and sadly the choice of simplifications were poor and don't just take my word for it professor david miles member of the monetary policy committee of the Bank of England said and I quote the way monetary economics and banking is taught in many maybe most universities is very misleading professor Charles Goodhart also member of the monetary policy committee describes some aspects of university teaching of our monetary system as misinstruction something is clearly wrong with the way we are taught and that money so at this point I'd like to start correcting some of the widespread misinformation about money spread by the oversimplified textbooks but before I do that I'd like to discuss one issue people sometimes find hard to believe the idea that banks create money out of nothing this is one thing that the textbooks actually get right and so amongst economists this issue isn't controversial pretty much all economists know that banks create money out of nothing but you will hear many non economists insists that it's not true well we can settle this one easily with a quote from the current governor of the Bank of England who said when banks extend loans to their customers they create money moving on to something trickier the idea that when loans are repaid the money ie spendable io u--'s expire this is not really controversial so much as little known it is discussed in technical literature but only ever in terms of jargon most commonly with the phrase reducing the balance sheet it's very rare to hear a leading monetary expert use ordinary language such as making money disappear but in 2011 a period in which the money supply was falling Mervyn King did say what the banking system has been doing is destroying money note that he didn't say that the banks are hoarding money he quite correctly used the word destroying it's very common to find explanations of the monetary system that only bother explaining the first of the process the money creation part and they omit the money destruction part altogether this common omission leads to a situation where many professional economists are simply unaware of the bathtub dynamic they are falsely under the impression that the plug is in and nothing is leaking out these people often think that when there appears to be less money in the economy it is because the banks are somehow hoarding it banks can indeed hoard so-called excess reserves but the quantities are relatively minut the real reason that there appears to be less money around in the economy right now is because huge amounts of money are expiring out of existence now I wish to address the commonly taught idea that there are mechanisms that put an upper limit on money creation the so called capital adequacy regulations and the reserve ratio limits let me assure you that neither of them work at all they are rather like the regulations that supposedly compelled multinational organizations to pay their fair share of taxes we all know that these regulations are just too easy to sidestep they are completely ineffective what's more the reserve ratio system doesn't even exist in many countries including the UK so if your university towards you a capping mechanism called the money multiplier model you have been sadly misinformed it is simply irrelevant junk some of you may be wondering about the sources I have relied upon for this video and the answer is academic papers by monetary specialists and central bankers themselves you can find a collection of high-quality resources at fractional reserves com sources I have been careful not to rely on are the writings of economists who are not monetary specialists and simplified teaching materials like undergraduate textbooks it is likely that the false ideas about how our monetary system works held by economists and politicians was a significant contributor to the economic crisis and is hampering our efforts to get out of it so correcting this information is important if you are currently studying economics and you are being taught misinformation about a monetary system consider protesting to your tutors and get them to change their teaching you can make a difference take a look at these websites for more information