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Anonymous Coward writes:
"http://www.theguardian.com/commentisfree/2014/mar/ 18/truth-money-iou-bank-of-england-austerity
Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, 'there'd be a revolution before tomorrow morning.'
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window."
(Score: 2, Interesting) by sce7mjm on Tuesday March 25 2014, @06:16AM
I have studied the effects of this on a back of an envelope.
If nobody actualy Quantitively eases then the Interest Rate becomes the default rate (the rate of which money grows with no equivelant increase in bottom level cash i.e. the amount every debtor will be short if all debts wound up tomorrow).
A lot of economists and financial whizz-kids have a very blinkered view of finance. When you look at the total system it is purely based on perception and confidence mainly given by countries backing the system and the system backing the countries.
But what isn't based on some sort of faith?
That planes won't fall out of the sky?
That the police are all out to protect us?
Taking things on face value has been the downfall of the economy.
It is slowly catching up, in the UK.
Interest rates should equal the rate of Inflation which should equal the economic growth (gdp) which should equal population growth. But it is a shaky balance, and people assume a growth of 5% per annum can be sustainable, when average population growth over the last 50 years has been much lower.
(Score: 1) by dioptase on Tuesday March 25 2014, @12:22PM
Wrong. There is a time value to money. Here's a simple thought experiment:
If you give me $1000, I will give you $1000 a year from now. Assume inflation is 0% and you will get the money (no default). Do you like this deal?
No? How about if you give me $1000 and I give you $2000 a year from now? More attractive, isn't it?
The reason there is interest is that the money could be used for something else during that time period. The lost use of that money has a value.
So really, interest = time value + default (plus other stuff, but we've probably reach the limits of your interest)
(Score: 1) by sce7mjm on Tuesday March 25 2014, @02:31PM
Yes but I don't "like" the deal because I won't make anything from it. Therefore it is perception that I should like the deal more if I get more than what I gave out. Which was my point, money is what it is perceived to be.
I don't have money for a period of time makes me feel like I should have more when I get it back.
If everybody charges an interest rate on loans of a limited resource, the resource COULD run out with debtors unable to recover enough to pay back the initial loan. That is where the system grinds to a halt, unless some higher power comes in to re-organise the debts.
With money, more money can be printed to pay pack certain debts so the system can continue to move, though this has to be done with agreement of powerful parties (ie not individual depositors) to ensure confidence doesn't fall out, runs on banks etc.
Time is a factor of course because if the rates of use of a balance a depositor has made is much less than the pay back time of a loan a bank has made to someone else then the money can continue to flow. The interest that has been paid has come from somewhere potentially out of another loan from another (or the same bank). The lack of money moves around the system a bit like the hole in a semi-conductor, we see the electrons moving about, but the lack of electron exists and has an effect as well. Every so often somebody fills in a hole or two.
I don't pretend to understand the entirety of the system, but having a blinkered view and relying on "The Invisible Hand" to benefit the majority of people seems to me to be a fallacy. If people believe the system works it works better than when people believe the system doesn't work.
Clap three times and say I believe in fairy's.