# Thread: Where does the money come from?

1. NNY
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## Where does the money come from?

One thing that hasn't been mentioned yet is, where does all the money come from?

The State creates very little of the money that exists in an economy.

I'm not an economist but my understanding is, the Blue line is M0, which is money created by the federal reserve. And everything above that, M1 and M3, is created by the banks from deposits.

The way deposits are turned into more money is by Money Multiplying :
But, this article from The Australian explains, what is supposed to happen, doesn't happen.

So where is all the money that is created by the banks?
Well, it's not in my bank account, that's for sure.

Whoever controls the banks most probably has control over all the money.

I remember a conversation with a lawyer, who worked for some social/human rights group, dealing mostly with cases for indigenous people in Sydney. He told me, if you want to become rich by way of lawyering, become a lawyer for a bank.

NNY, I'm not an economist either. Banks keep money circulating around the economy. If you have $1,000 under your mattress that money is out of the economy. If you have$1,000 in the bank and the bank lends $900 to someone else, then effectively you have$1K and someone else has $900. They pay for something, the payee puts that money in their bank account, the bank lends it out again. It's the same money but the bank keeps it circulating. A reserve bank or central bank can issue genuinely new money. Obviously we know what happens if a central bank issues too much new money. You can do thought experiments by imagining you decide to be the "Smith Street Bank" for example, and your neighbours give you money to look after for them, which you lend out. It's fairly easy to understand that way. 3. NNY Member Join Date Mar 2018 Posts 49 ## Re: Why income/wealth equality is getting worse Hi 142857, The maths for Money Multiplication should be as follows; Deposit$1000, $100 goes to reserve,$900 lent out
that $900 is deposited,$90 goes to reserve, $810 lent out that$810 is deposited, $81 goes to reserve,$729 lent out
that $729 is deposited,$73 goes to reserve, $656 lent out and so on. Effectively, if somebody deposits$1000, the banks can then lend $10,000 based on that$1,000 deposit. And that $10,000 then becomes part of the money circulating in the economy. But The Australia article says that that isn't what is happening. A far greater amount of money, far greater than$10,000, is being lent out based on the original $1,000. Last edited by NNY; 11th April 2018 at 12:47 AM. 4. ## Re: Why income/wealth equality is getting worse NNY said Hi 142857, The maths for Money Multiplication should be as follows; Deposit$1000, $100 goes to reserve,$900 lent out
that $900 is deposited,$90 goes to reserve, $810 lent out that$810 is deposited, $81 goes to reserve,$729 lent out
that $729 is deposited,$73 goes to reserve, $656 lent out and so on. Effectively, if somebody deposits$1000, the banks can then lend $10,000 based on that$1,000 deposit. And that $10,000 then becomes part of the money circulating in the economy. But The Australia article says that that isn't what is happening. A far greater amount of money, far greater than$10,000, is being lent out based on the original $1,000. Yes, good point. I looked at your other links but not at the Australian article until just now. The thing about banking these days is that "household deposits" (which are subject to reserve requirements in some countries) make up only a small portion of what the banks lend out. Banks have far more creative ways of raising funds for lending now. So the multiplier effect can be a lot more than$10K on most of the money that banks lend out.

Remember when banks started putting fees on savings accounts? This was because most savings accounts cost a bank more to administer than the bank can earn by lending that money out, and banks are actively discouraging accounts with small balances. That is a big shift that has happened within the past couple of generations.

My professional background is mostly on the systems side of lending and accounting at banks, more in the nuts and bolts side than the conceptual side which is what these articles are dealing with. So I'm likely wrong on some of it.

One thing that people get mixed up is the idea that banks are allowed to "create" money to lend out. This leads to the misconception that banks pluck money out of thin air. In reality every dollar that a bank lends out has to come from somewhere. It's the financial system that generates money by recirculating deposits. I think economists tend to do a lousy job of explaining that side of it to the rest of us.

NNY, how do you think all of this ties into the increase in wealth inequality? I can think of one way off the top of my head which I'll expand on after I get some sleep.

5. ## Re: Why income/wealth equality is getting worse

Money multiplication and its contribution to increasing wealth inequality:

Back when we were kids, people put money in a savings account. Banks lent this money out and added a margin of about 3% to the interest rate. The bank employed tellers, accountants, security guards etc. And the traditional money multiplier effect applied.

Now... most people don't save much, not compared to the vast amount of money that banks lend out for things like mortgages these days. But we have forced savings, and people who have been accumulating super for 2 or 3 decades often have hundreds of thousands of dollars in their super accounts. The money in your super goes back into the economy, used to fund bank lending among other things. And there's no reserve to worry about.

The people who run those super funds, who invest your super, are taking a hefty cut and joining the ranks of the wealthy. They don't call Macquarie Bank, for example, the "Millionaire Factory" for nothing.

6. NNY
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## Re: Why income/wealth equality is getting worse

142857 said
NNY, how do you think all of this ties into the increase in wealth inequality? I can think of one way off the top of my head which I'll expand on after I get some sleep.
With The Australian newspaper article and the Wikipedia article on Money Multiplier, there is the assumption that M0, being money created by the reserve bank, is the only money that affects M1 and M3. What the 2 articles don't take into account is massive investments from overseas.

In the link, $3.2 trillion was invested in Australia from overseas in 2016. If that money was initially deposited into a bank, then step one of the Money Multiplier would allow banks to 'create'$320 billion on that deposit that could be used for loans, with a potential of a maximum $32 trillion being created. So who is getting a share of that$320 billion to $32 trillion in the form of loans? I'm sure the reserve bank keeps an eye on all the money from overseas being deposited in Australian bank accounts, in order to keep inflation under control and stop money laundering etc. But, I'm also sure I will never find out who is receiving massive loans that were generated from that$3.2 trillion from overseas investors.

I have met one Sydney lawyer who charges $6,000 per hour as an arbitrator for large companies when they have conflicting opinions about contracts they've entered into. It seems a lot, but if he can solve a problem in 5 hours ($30,000) it is still much much cheaper for the companies to use him than going to court for several years. (He doesn't earn that much money constantly everyday though)

So, with massive amounts of overseas investment and the massive amounts of money 'created' from those investments via the money multiplier, I can see why lawyers who work for banks can earn lots of money.

Finally, I can't say the opinions I have written are true. They are just the only plausible reasons I can think of as to why M1 and M3 in the chart are so high compared to M0.

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NNY said

In the link, $3.2 trillion was invested in Australia from overseas in 2016. The 3.2 trillion is not per year but rather like a capital deposit which fluctuates up or down from year to year, with withdrawals or deposits. I'm not quite sure how you're understanding it. Last edited by wadaye; 12th April 2018 at 12:49 AM. 8. NNY Member Join Date Mar 2018 Posts 49 ## Re: Why income/wealth equality is getting worse wadaye said The 3.2 trillion is not per year but rather like a capital deposit which fluctuates up or down from year to year, with withdrawals or deposits. I'm not quite sure how you're understanding it. In the article from the Australia newspaper, it stated the M1 and M3 are far far greater than they should be compared to the M0. So where does this disparity come from? My guess is overseas investments coming into the country which are initially placed into bank deposit accounts. Looking at the stats of the link. 2014 had$2.8 trillion in overseas investments. Which could be used as 280 billion in loans by way of the first step in the Money Multiplier and potentially 28 trillion using the full effect of the Money Multiplier.

2015 had $3 trillion in overseas investments. Which could be used as 300 billion in loans by way of the first step in the Money Multiplier and potentially 30 trillion using the full effect of the Money Multiplier. 2016 had$3.2 trillion in overseas investments. Which could be used as 320 billion in loans by way of the first step in the Money Multiplier and potentially 32 trillion using the full effect of the Money Multiplier.

I'm sure the Reserve Bank of Australia limits how the banks use the Money Multiplier though. If rules and regulations weren't put into effect, inflation and other abuses would be out of control.
Last edited by NNY; 12th April 2018 at 07:55 AM.

9. ## Re: Why income/wealth equality is getting worse

NNY said
I'm sure the Reserve Bank of Australia limits how the banks use the Money Multiplier though. If rules and regulations weren't put into effect, inflation and other abuses would be out of control.
The money multiplication effect is not really a "tool" used by the banks to make money. It's more a by-product of the financial system. Banks make money by raising money at a lower rate and lending it at a higher rate, although that is the easy part of the equation and if that was all there was to it then you or I could start a bank and make lots of money. Risk management is really what banks traditionally need to be good at, although if financial institutions can make money off lending margins while getting someone else to wear the risk.... that's even better (that was what the sub prime mortgage disaster was about).

That $3.2 trillion foreign investment is not subject to fractional reserves, which is the traditional control that the reserve bank has over the money multiplication effect. Overseas investors are buying land, buying equipment, paying wages and all of that generates economic activity and more money obviously. We are part of a global economy, and Australians invest large sums of money overseas as well. 10. ## Re: Why income/wealth equality is getting worse 142857 said The money multiplication effect is not really a "tool" used by the banks to make money. It's more a by-product of the financial system. Banks make money by raising money at a lower rate and lending it at a higher rate, although that is the easy part of the equation and if that was all there was to it then you or I could start a bank and make lots of money. Risk management is really what banks traditionally need to be good at, although if financial institutions can make money off lending margins while getting someone else to wear the risk.... that's even better (that was what the sub prime mortgage disaster was about). That$3.2 trillion foreign investment is not subject to fractional reserves, which is the traditional control that the reserve bank has over the money multiplication effect. Overseas investors are buying land, buying equipment, paying wages and all of that generates economic activity and more money obviously. We are part of a global economy, and Australians invest large sums of money overseas as well.
Money isn't created by borrowing at one rate and lending at a higher one. Because if I deposit money in the bank, and it's then lent to you, you have to get that money from somewhere. It's a zero sum game, if I have a dollar more, then someone has a dollar less.

The only way that you can get more money is by depriving it to someone else.

At least that's my simplistic understanding.

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