Eric The Viking
Established Member
- Joined
- 19 Jan 2010
- Messages
- 6,599
- Reaction score
- 74
In double entry accounting you always create two accounts simultaneously, a credit and debit. The theory is that transfers in the system don't, of themselves, create or destroy money. But the system still records profit and loss, as funds move from customer accounts to a 'profit account' of some sort (or creditor accounts increase, going the other way). So the overall amounts in the system change.
When a bank makes a loan, it is not required to have 100% of that amount covered by funds on deposit with it. In reality it only needs to have about 10% of the loan actually covered by funds available to it (I may have the exact amount wrong, and it fluctuates as the BofE set the figure, IIRC).
In double-entry all it has to do is create, say, an account called "General Mortgages", and another one called "Loan account for Joe Bloggs". To represent a loan, one goes positive and the other negative, by exactly the same amount, thus setting up the debt.
So as far as the system is concerned, no money is "created" as the two numbers cancel out, BUT if the currency was broad beans, rather than numbers in a book, it couldn't be done, as the bank's sack of beans, given it by bean depositors (savers), wouldn't hold enough beans to hand out to everyone wanting a mortgage denominated in beans.
This is what makes it "fiat" money - it's imaginary, and the system is based, ultimately on honour. The miserable fact though is that the bank diesn't have a lien on an imaginary pile of beans, it has one on a real-world property. So, if the debt isn't repaid and the bank forecloses, it wins a REAL house in exchange, on the basis of creating money from thin air. This is one reason why mortgage lenders foreclose and sell off property at deep discounts sometimes: in the real world they are winning. And they can still offset the bad debt "loss" against any trading profits!
Shakespeare's maxim, "Never a debtor nor a lender be." is arguably a very wise one. A large proportion of "economic growth" is actually inflationary, meaning it's actually a drop in worth of the currency as the quantity of 'money in circulation' increases, rather than an increase in the absolute value of the country.
As has already been said by Mike, our indebtedness is staggering. It is extremely hard to get an accurate assessment of public debt as the ONS have an annoying habit of parking politically tricky stuff in hard-to-find categories. So, for example, local authority pensions obligations, nuclear decommissioning, some of the bank crash fallout, and re-nationalizing Railtrack, have all at various times been made hard to find in the numbers, because they've caused successive governments embarrassment.
My own back of stamp calculation puts it around 130,000 quid for every average, properly legal, British family. Every single one. And that number does NOT include private debt - mortgages, loans, hire-purchase on cars or household goods, credit cards and overdrafts.
Simply servicing that debt - paying the interest due on public borrowing - accounts for something like one third of all our tax take. I'm being generous with that number, too.
Politicians also deliberately confuse deficit with debt.
Debt is just debt. The deficit is the rate at which our debt is increasing, year-on-year. They haven't even managed to slow that down much! Not only are we not getting rid of our public debt, we haven't even managed to slow the rate it's getting bigger (I forget the numbers, but it's tens of millions every week).
It's also to be seen in the context that the size of the welfare state is increasing, however you measure it: government is delivering more services to more citizens and the tax take as a proportion of GDP has risen again from the lows of the Thatcher-Major period (which themselves were huge compared to pre-WWI levels).
And whatever you think the 'inflation rate' is this week, we're still actually borrowing money, at real interest rates, to give away in "aid" to other countries.
The more I dig into this stuff the more dishonest and crazy it all seems to be.
E. (sorry - grumpy as there was no brown bread for toast this morning, only cardboard!)
When a bank makes a loan, it is not required to have 100% of that amount covered by funds on deposit with it. In reality it only needs to have about 10% of the loan actually covered by funds available to it (I may have the exact amount wrong, and it fluctuates as the BofE set the figure, IIRC).
In double-entry all it has to do is create, say, an account called "General Mortgages", and another one called "Loan account for Joe Bloggs". To represent a loan, one goes positive and the other negative, by exactly the same amount, thus setting up the debt.
So as far as the system is concerned, no money is "created" as the two numbers cancel out, BUT if the currency was broad beans, rather than numbers in a book, it couldn't be done, as the bank's sack of beans, given it by bean depositors (savers), wouldn't hold enough beans to hand out to everyone wanting a mortgage denominated in beans.
This is what makes it "fiat" money - it's imaginary, and the system is based, ultimately on honour. The miserable fact though is that the bank diesn't have a lien on an imaginary pile of beans, it has one on a real-world property. So, if the debt isn't repaid and the bank forecloses, it wins a REAL house in exchange, on the basis of creating money from thin air. This is one reason why mortgage lenders foreclose and sell off property at deep discounts sometimes: in the real world they are winning. And they can still offset the bad debt "loss" against any trading profits!
Shakespeare's maxim, "Never a debtor nor a lender be." is arguably a very wise one. A large proportion of "economic growth" is actually inflationary, meaning it's actually a drop in worth of the currency as the quantity of 'money in circulation' increases, rather than an increase in the absolute value of the country.
As has already been said by Mike, our indebtedness is staggering. It is extremely hard to get an accurate assessment of public debt as the ONS have an annoying habit of parking politically tricky stuff in hard-to-find categories. So, for example, local authority pensions obligations, nuclear decommissioning, some of the bank crash fallout, and re-nationalizing Railtrack, have all at various times been made hard to find in the numbers, because they've caused successive governments embarrassment.
My own back of stamp calculation puts it around 130,000 quid for every average, properly legal, British family. Every single one. And that number does NOT include private debt - mortgages, loans, hire-purchase on cars or household goods, credit cards and overdrafts.
Simply servicing that debt - paying the interest due on public borrowing - accounts for something like one third of all our tax take. I'm being generous with that number, too.
Politicians also deliberately confuse deficit with debt.
Debt is just debt. The deficit is the rate at which our debt is increasing, year-on-year. They haven't even managed to slow that down much! Not only are we not getting rid of our public debt, we haven't even managed to slow the rate it's getting bigger (I forget the numbers, but it's tens of millions every week).
It's also to be seen in the context that the size of the welfare state is increasing, however you measure it: government is delivering more services to more citizens and the tax take as a proportion of GDP has risen again from the lows of the Thatcher-Major period (which themselves were huge compared to pre-WWI levels).
And whatever you think the 'inflation rate' is this week, we're still actually borrowing money, at real interest rates, to give away in "aid" to other countries.
The more I dig into this stuff the more dishonest and crazy it all seems to be.
E. (sorry - grumpy as there was no brown bread for toast this morning, only cardboard!)
