# Debt and money



## JohnPW (2 Nov 2015)

One of the hand tool thread's got sidetracked onto discussing banks and how they create money from nothing.



MatthewRedStars":2ump5zhm said:


> Rhossydd":2ump5zhm said:
> 
> 
> > artie":2ump5zhm said:
> ...




Here's a good series on the history and theory of debt:

http://www.bbc.co.uk/programmes/b05447pc

I know there's this forum rule, no politics:


> (6a.) Politics.
> Over the years there has been one subject that has caused heated debates on the forums and that is politics. For that reason political discussion, in particular party political comments in a thread are not regarded as acceptable, please remember this is a woodworking forum after all. We do however understand that politics effects everyday life which is why some topics may be allowed depending on the circumstances.



But of course debt, money, banks etc are closely connected with politics and I don't know if the mods will allow this thread.


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## themackay (2 Nov 2015)

The thing that annoys me about all this is the banks create most of the money out of thin air so when you lose your job and are unable to pay your mortgage why do they reposses your house the money did not exist so they have not actually lost anything,its legalised theft in my opinion.


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## AJB Temple (2 Nov 2015)

How do banks create money out of thin air? This line is trotted out quite regularly, but I have yet to see anything credible that substantiates it in the context of commercial and retail banks. Banks are indeed leveraged, but that does not mean that they have issued money for nothing or from nothing. Balance sheets have to balance. There needs to be sufficient asset backing and solvency to deliver the required regulatory capital adequacy. In essence money is just a sophisticated form of exchange token that provides liquidity to a bartering process. Debt is a promise of delivery at a future date in exchange for an asset received today. This is not politics, it is financial economics.


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## themackay (2 Nov 2015)

AJB Temple":3spap76y said:


> How do banks create money out of thin air? This line is trotted out quite regularly, but I have yet to see anything credible that substantiates it in the context of commercial and retail banks. Banks are indeed leveraged, but that does not mean that they have issued money for nothing or from nothing. Balance sheets have to balance. There needs to be sufficient asset backing and solvency to deliver the required regulatory capital adequacy. In essence money is just a sophisticated form of exchange token that provides liquidity to a bartering process. Debt is a promise of delivery at a future date in exchange for an asset received today. This is not politics, it is financial economics.



From what I have read they just create an entry on a computer


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## RogerP (2 Nov 2015)

themackay":43150za5 said:


> From what I have read they just create an entry on a computer


A link would be nice so we can all have a go


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## AJB Temple (2 Nov 2015)

Give me strength. You don't really believe this do you themackay? Maybe I will create some wood on my computer. It will be as solid as the imaginary money ;-)


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## artie (2 Nov 2015)

AJB Temple":aolbs8m8 said:


> Give me strength. You don't really believe this do you themackay? Maybe I will create some wood on my computer. It will be as solid as the imaginary money ;-)



Not the same at all.

As far as I can figure out money is just a promise, That's all


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## JohnPW (2 Nov 2015)

http://www.bbc.co.uk/programmes/b01dtlzn

At 17min 30sec: 

presenter:"where does this money come from?"
Bank of England "we create it."

Banks lend out many many more times money than they have in deposits, something like in the hundreds. In effect banks create 90% of the money they lend out out of nothing.


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## themackay (2 Nov 2015)

http://positivemoney.org/how-money-work ... ate-money/

This may help


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## bugbear (2 Nov 2015)

Textbooks in basic economics are available at local libraries.
BugBear


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## AJB Temple (2 Nov 2015)

There is a substantial difference between leverage (or gearing) and creating money. Commercial and retail banks (as opposed to central banks operated for the state who can therefore indulge in QE) cannot and do not create money out of thin air or by making entries on computers. It is simply nonsense. However, this is a woodworking site not financial regulation site, so I won't bother to expand. The tabloid media has a great deal to answer for in creating a remarkable degree of misinformation about how banks and indeed the economy as a whole operate. It's time I cooked dinner!


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## themackay (2 Nov 2015)

“When banks extend loans to their customers, they create money by crediting their customers’ accounts.”

A quote by Mervyn King himself.


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## Flynnwood (2 Nov 2015)

Source: Bank of England

http://www.bankofengland.co.uk/publicat ... eation.pdf

"Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. 

And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. 

More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money."


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## Fatboy (2 Nov 2015)

I saw that and some of the responses and thought it was just a wind up, I didn't realise people were genuinely taken in by the 'money doesn't really exist' argument


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## bugbear (2 Nov 2015)

There's a superb explanation of how bank notes work (and how they started, and why they have value) in one of the books of The Baroque Cycle

To anyone who thinks money is "obvious", try to work out why paper money has value

a) when Britain was on the gold standard
b) now we're not

BugBear


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## Cheshirechappie (2 Nov 2015)

themackay":vrdt5gkn said:


> http://positivemoney.org/how-money-works/how-banks-create-money/
> 
> This may help



"Positive Money is a movement to democratise money and banking so that it works for society and not against it."

I think you've been taken in by a small political campaigning organisation ("we are a band of volunteers with eight payed staff in a cheap office in London") with a smart web-site and a somewhat skewed view of basic economics. There are quite a few such groups using selective quotes to support their own view of economic and political development; a view that may be a bit extreme for most.

It may well be that money is 'created' by commercial banks, but not just willy-nilly. It remains government's duty to run a stable currency - it's still the government's responsibility to balance money supply against economic activity (a duty they devolve to the Bank of England), and bank regulation is also a primary responsibility of goverment, formerly devolved to the BoE. That responsibility was taken away from the Bank in the late 1990s, and split between the Financial Services Authority, the Treasury and the BoE, in such a way that nobody was quite sure who was responsible for what. Some commercial banks exploited this uncertainty to their own advantage, with disasterous consequences.

Be very careful about believing what political campaigning organisations tell you. It seems that some are saying that 'debt is an illusion' - and some people fall for it. Would that debt were an illusion - it would solve an awful lot of problems, like having to earn a living, for a start!


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## Mike.S (2 Nov 2015)

AJB Temple":1tam2e90 said:


> Commercial and retail banks (as opposed to central banks operated for the state who can therefore indulge in QE) cannot and do not create money out of thin air or by making entries on computers. It is simply nonsense. However, this is a woodworking site not financial regulation site, so I won't bother to expand. The tabloid media has a great deal to answer for in creating a remarkable degree of misinformation about how banks and indeed the economy as a whole operate. It's time I cooked dinner!



After 25+ years in banking I think I understand how it works. In short, money (modern, fiat money) is created from nothing - it is just accounting entries. Bank creates a new asset, say = £5,000 loan; it then creates a matching liability = £5,000 deposit in say Customer 1s name. Customer 1 pays money (cheque or electronic transfer) to Customer 2 then Liability just moved in bank's ledger from Customer 1 to Customer 2. Yes, there are controls (on level and cost i.e. interest rate on bank reserves) but these don't always work, or would, but aren't applied. I agree that the media (not just tabloid) is very poor but other posters (imo) have pointed towards sources of reliable information.

I think it's essential* for everyone to have a better understanding of 'what is money' (no, it's not just notes and coins), its origins (e.g. Bank from latin/arabic for Bench, Gold as money to Gold standard to Fiat - especially post 1971) and future (hint: beware the cashless society) and how it's created. The other question to have in mind is how are our Governments (UK, USA, France, Greece, Belgium etc) intending to repay the gargantuan debt levels (positive budget surpluses, default, inflation....?) they've encumbered us with. Once you've sussed that then you can then position yourself accordingly.

For those, like me, with a deep interest, there's a quite good basic video - it's two hours long but worth perservering: Economic Truth Documentary.

* because we're all in the faeces and it won't end well.


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## MIGNAL (2 Nov 2015)

I've seen some of the videos many years ago. Recently I read a blog/website that tried to explain that it wasn't _quite_ the sleight of hand that some claim. All I can say is that it seemed very complex and it gave me a headache!
It's almost like reading one of those sh*****ing debates upstairs multiplied by 10,000.


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## Sporky McGuffin (3 Nov 2015)

Mike.S":2qfrs0bk said:


> In short, money (modern, fiat money) is created from nothing - it is just accounting entries. Bank creates a new asset, say = £5,000 loan; it then creates a matching liability = £5,000 deposit in say Customer 1s name.



I'm an engineer, not an economist, so bear with me if this is a grotesque misunderstanding; surely in the example you've cited, no money has been created overall? The asset and liability cancel each other out, no?

An evil banker type (tm) once tried to explain to me that money now has value rooted in its ability to be used to pay taxes. Is that about right?


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## MIGNAL (3 Nov 2015)

Wouldn't interest be payable on that loan? Which requires money, so it must come from somewhere.


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## Eric The Viking (3 Nov 2015)

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!)


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## themackay (3 Nov 2015)

It amazes me that there are millions of people who dont realise the banks create money out of thin air


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## Cheshirechappie (3 Nov 2015)

themackay":2dggm0x1 said:


> It amazes me that there are millions of people who dont realise the banks create money out of thin air



If banks can just create money out of thin air whenever they like, why did Lehmann Brothers go bust? Why did RBS go insolvent to the point that government decided to use public money to bail it out? Why did Northern Rock and Bradford and Bingley go to the wall?


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## MIGNAL (3 Nov 2015)

Don't know. Probably because they need a transaction to take place before they can create money and their assets were all tied up in houses that were fast losing value? I know Bradford and Bingley went big on the liar loans.
I'm guessing. 'O' level economics here.


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## Eric The Viking (3 Nov 2015)

Cheshirechappie":nii1ntix said:


> themackay":nii1ntix said:
> 
> 
> > It amazes me that there are millions of people who dont realise the banks create money out of thin air
> ...



Because they were very bad at doing what they did. And greedy. And arguably dishonest.

Google "sub-prime mortgages" and "Derivatives". 

The banking system is a mess. There's a concept known as "moral hazard" which is essential to ensure lending is properly priced, and that people who take big risks are properly accountable for them. 

Say I take a big risk for a big return, fine; fair enough. But if my risk goes bad, I'm the person who should lose out, not people who didn't want the big risk and didn't put any money in (and wouldn't have got any profit had it gone good). It's what should make investment bankers be properly cautious.

When Brown/Darling did the huge bailouts, they basically ignored moral hazard, and we have a very big mess in consequence (that's not a political point as such, but an economic one).

Furthermore, If I lie to you about an investment, so I can get your money, that's fraud - a criminal matter, not merely an ethical one. Unquestionably, that happened, yet hardly any bankers have been criminally prosecuted (Bernie Madoff in the USA being a notable exception, and arguably a token gesture on the part of US prosecutors). 

Because of the low interest rates and property boom at the moment (albeit in London and the South East), the seeds are being sown for it all to happen all over again real soon now, only bigger and badder than last time.


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## Cheshirechappie (3 Nov 2015)

Eric - I agree with you. However, my question was aimed at those saying "banks just create money out of thin air". Banks create fiat currency - fine, no argument about that. That's been the case (I think) since the 1696 Bank of England Act (sometimes called the Tonnage Act, for some reason). However, the point is that they can only create it under certain circumstances, otherwise they'd never go bust. If their sums didn't add up, they could just create some more electronic money to cover the difference, and we know this doesn't happen. Ergo, banks can't just create money out of thin air whenever they feel like it; there has to be more to it than that.

Mike S - I did try to watch that video, bearing in mind that my knowledge of finance and economics is far from perfect. However, the whole thing, whilst very slick, just screamed 'bias' and 'political agenda', so I had to give up watching it. Do you know of any other basic guides that are politically neutral?


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## artie (3 Nov 2015)

Cheshirechappie":ejjp4g4g said:


> themackay":ejjp4g4g said:
> 
> 
> > It amazes me that there are millions of people who dont realise the banks create money out of thin air
> ...



They need our promise/signature. 

We have been unwitting accomplices but I think that is changing. Slowly maybe.


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## Mike.S (3 Nov 2015)

Sporky McGuffin":32ekd9uy said:


> I'm an engineer, not an economist, so bear with me if this is a grotesque misunderstanding; surely in the example you've cited, no money has been created overall? The asset and liability cancel each other out, no?
> 
> An evil banker type (tm) once tried to explain to me that money now has value rooted in its ability to be used to pay taxes. Is that about right?



Yes, the A & L cancel each other out but that's a function of all accounting - double entry bookkeeping requires the two to balance. To try to address that further, plus MIGNALs point:



MIGNAL":32ekd9uy said:


> Wouldn't interest be payable on that loan? Which requires money, so it must come from somewhere.



Think of the transaction as being conducted in cash. Customer 1 has borrowed £5,000 - bank has an A&L of £5,000. But if Customer1 draws the £5k balance of his account in cash then the bank's liability - Cust1s account with £5k balance - goes to zero. To balance that accounting entry the bank must create another liability or reduce it's assets by £5k. It does the latter - it's stock of cash (an asset) is reduced by £5k. Aha, so new money has been created I hear you cry!

You then need to think where did that stock of cash come from. I don't think anyone disputes that there is insuffificient cash (notes and coins) to cover the value of all assets. Economists call it M0, add in other forms of money and you get M1, M2 etc - see here. So, if the demand for cash exceeds the current supply then it needs to be created. The Govt prints it - and makes a tidy profit (call seignorage) doing so. Not sure of the exact figures but say a £5 note costs 5p to print but the Govt receives £5 in value, it's a very profitable business!

In times of yore that couldn't have happened; a bank note was an IOU for precious metals deposited with the bank e.g. present a £5 note to a bank and you would receive an equivalent value in gold (or silver). A residue of that system still remains if you look at your notes - they bear the legend 'I promise to pay the bearer on demand the sum of...'. But I digress.

To go back to MIGNALs point about interest. Yes, interest is payable - so a prudent bank will create an asset, say £1,000 called 'Interest Due' and a matching liability, say £1,000 called 'Unrealised Interest Gain'. When Customer1 has bought his widget (say) for £5,000, added value to it, and sold it for say £7,000 then he can repay his debt (£5,000 principal and £1,000 interest) and the bank cancels it's A&Ls but has a surplus, or profit, of £1,000 which is recognised as Reserves (retained profits) - it's balance sheet has grown by £1,000, meaning it can do more business - everyone's a winner.

It will be realised that debt is spending future earnings - as other posters have noted. Whether those earnings are by trade (widgets) or salary, if you borrow then you are agreeing to reduce your future income - because part of it must be used to service the debt. On a much bigger scale this is what happened when the Govt created Pensions (c.1919) and the NHS (c.1947) and the Welfate state in general. It agreed that the Govt would fund all payments for pensions, NHS, dole etc to the then current population in return for taxation receipts from the current and future populations, any gap being bridged by debt (Gilts or other Govt debt instruments). That's fine when the ratio of workers/taxpayers to recipients is high but dangerous when demographics change e.g. our much higher ratio of older non-working people to young workers (a big porblem for Japan, and others, including the UK) - the burden of Govt spending falls on fewer earners. A more personal analogy would be if a working couple took out a mortgage and then one subsequently lost his/her job - suddenly those monthly repayments are less affordable.

I appreciate this will raise further questions, like 'where did the widget buyer get his money'? The essence of it is that providing economies continue to grow, then the ponzi scheme can continue. This is partly why Govts are keen to massage figures e.g. include the Drugs trade and prostitution in GDP figures - it gives the illusion of growth (and reduces the debt to GDP ratio - a kew metric in assessing a Nation's health).

One final point. Why wasn't money created to bail out Lehman's etc.? Lots of different reasons but from a 'money' perspective, if you create (print) too much you get inflation which can lead to hyperinflation, as occurred in Weimar Germany (1922/3) and, more recently, Zimbabwe. Too much and people lose faith in its ability to act as a store of value and just spend it immediately (creating more inflation) or find alternative uses - toilet paper or fuel.

Not sure if that will help or just muddy the waters more


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## Sporky McGuffin (3 Nov 2015)

Definitely helpful, thanks.


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## Mike.S (3 Nov 2015)

Cheshirechappie":10qv8ilu said:


> Mike S - I did try to watch that video, bearing in mind that my knowledge of finance and economics is far from perfect. However, the whole thing, whilst very slick, just screamed 'bias' and 'political agenda', so I had to give up watching it. Do you know of any other basic guides that are politically neutral?



I sympathise - another of my bugbears (apologies to Bugbear) is propaganda/bias etc in the media and it's extremely difficult to find simple unbiased information. I often find I have to endure two extremes e.g. USA media and RT (Russia Today) to get to the truth in the middle! Whilst not completely unbiased, try the Hidden Secrets of Money by Mike Maloney. Whilst not a fan of his speaking style (somewhat evangelical) and bias (trading precious metals) there's a core 'truth' to what he says - and it's broken down into shorter episodes than the film I first posted.

I see Eric also posted (at 10.53) , pretty much saying the same as i did but using beans instead of Gold :lol: Sorry, i hadn't worked my way through all the posts.


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## Sporky McGuffin (3 Nov 2015)

Are beans fungible?


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## Mike.S (3 Nov 2015)

Eric The Viking":27bhiwur said:


> Because of the low interest rates and property boom at the moment (albeit in London and the South East), the seeds are being sown for it all to happen all over again real soon now, only bigger and badder than last time.



=D> =D> 

Which goes to my point about understanding where we are and how these problems have been dealt with in the past and might be dealt with in the future - possibly the near future (think Cyprus, Greece, Ireland...).


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## Mike.S (3 Nov 2015)

Sporky McGuffin":1yc6cozd said:


> Are beans fungible?



Yes, at gas mark 4, according to Mary Berry :lol: 

A lot of money in the past wasn't 'exactly' fungible e.g. sea shells, salt, but near enough to be acceptable.


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## Eric The Viking (3 Nov 2015)

Mike.S":zjg4mbxh said:


> I see Eric also posted (at 10.53) , pretty much saying the same as i did but using beans instead of Gold :lol: Sorry, i hadn't worked my way through all the posts.



No biggie at all... but at least my way, if all else fails, you can still eat your own assets! 

E. 
(wondering if that's even more disturbing than anything else so far...)


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## MIGNAL (3 Nov 2015)

May not be politically impartial but this one is entertaining!

https://www.youtube.com/watch?v=DQ6T6EL9CSw


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## Mike.S (3 Nov 2015)

MIGNAL":1vbb3aep said:


> May not be politically impartial but this one is entertaining!
> 
> https://www.youtube.com/watch?v=DQ6T6EL9CSw



Yes, and here's one on Quantitative easing - there's a whole series of these which are all entertaining and true!


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## artie (3 Nov 2015)

Mike.S":1l468n93 said:


> In times of yore that couldn't have happened; a bank note was an IOU for precious metals deposited with the bank e.g. present a £5 note to a bank and you would receive an equivalent value in gold (or silver). A residue of that system still remains if you look at your notes - they bear the legend 'I promise to pay the bearer on demand the sum of...'.



It says on a £20 note blah blah promises to pay the bearer on demand the sum of twenty pounds.

But what are they going to give you,? Two £10 notes, four £5 notes or a different £20


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## Eric The Viking (3 Nov 2015)

https://www.youtube.com/watch?v=mzJmTCYmo9g

My personal favourite.


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## Cheshirechappie (3 Nov 2015)

Mike.S":pzzet2gh said:


> Cheshirechappie":pzzet2gh said:
> 
> 
> > Mike S - I did try to watch that video, bearing in mind that my knowledge of finance and economics is far from perfect. However, the whole thing, whilst very slick, just screamed 'bias' and 'political agenda', so I had to give up watching it. Do you know of any other basic guides that are politically neutral?
> ...



Thanks for that, Mike! 

Like you, I have a bit of a jaundiced view of much of the media. At least when one reads the papers, one has a fair idea where their biases lay, and can take account of it, but ii is sometimes wise to search around for background information; surprising how often journalists - even supposedly reputable ones - appear to either ignore or be in ignorance of basic facts.

One thing about this does slightly puzzle me, which is that those campaigning about 'debt' tend to be regarded as being well to the left of the political spectrum. However, those in government most keen to increase 'debt' (weasel phrases like 'borrowing to invest') tend to be on the left, and those most keen to reduce the rate of debt increase (who you'd think would be natural allies of the campaigners first mentioned) tend to lean to the right of the political spectrum. Most odd; the Browns and Corbyns of this world ('people's quantitative easing - ha!) are doing more to make the 'evil banksters' richer than the likes of Osborne and Callmedave, who you'd think were the banksters' allies.

PS - I did enjoy Eric's posting of the Bird and Fortune sub-prime crisis sketch. Very funny - and very close to the truth, I suspect.


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## themackay (3 Nov 2015)

Remember its not the politicians that actually run the country they are all the banksters allies


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## MIGNAL (3 Nov 2015)

Not sure I'd put Brown and Corbyn in the same sentence. :shock: 
Anyway Brown bailed out the banks, don't know if you would call that peoples quantitative easing. It may have been interesting to see what happened if the banks had been allowed to fail. Things could have taken a sharp turn for the worse, at least in terms of the nice docile populace.


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## Eric The Viking (3 Nov 2015)

MIGNAL":323t3zkp said:


> Not sure I'd put Brown and Corbyn in the same sentence. :shock:
> Anyway Brown bailed out the banks, don't know if you would call that peoples quantitative easing. It may have been interesting to see what happened if the banks had been allowed to fail. Things could have taken a sharp turn for the worse, at least in terms of the nice docile populace.



Actually, it would have been far, far cheaper to protect (bail out) bank depositors, usually the "small" people, and let the shareholders (the gamblers) go to the wall. 

It would also have strangled at birth the ridiculous, damaging and unsustainable property price inflation we see now. A lot of it is driven by foreign 'investors' wanting a safe haven (read 'laundry') for dodgy money. How that helps our economy completely escapes me.

And the idea that we presently don't have inflation after the bailouts is pure sleight-of-hand.


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## themackay (3 Nov 2015)

I agree with you Eric it is the ordinary people who are paying for the banksters greed as for house prices I still have my grown up kids living at home cant afford to move out I dont know if you remember when Gordon Brown sold most of our gold at rock bottom price that was to bail out at least one bank that got into trouble selling gold it did not have something like that if you google it you will find a Telegraph article.Should have let it go to the wall then.


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## Phil Pascoe (3 Nov 2015)

Sporky McGuffin":rp7uj322 said:


> Are beans fungible?


Ask a bean counter.


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## Sporky McGuffin (3 Nov 2015)

Good work!

I did wonder if anyone would reply with "no, but mushrooms are".


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## Zeddedhed (3 Nov 2015)

What is this 'money' you speak of?

I bought my house for 200 goats and 1000 shekels of Broccoli. Don't owe no one nuffink. (If only)


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## Cheshirechappie (3 Nov 2015)

Zeddedhed":1886yggy said:


> What is this 'money' you speak of?
> 
> I bought my house for 200 goats and 1000 shekels of Broccoli. Don't owe no one nuffink. (If only)



How did you get 200 goats in your wallet, and did they eat your credit card and cheque book?


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## Cheshirechappie (3 Nov 2015)

Eric The Viking":z4ri7rsz said:


> MIGNAL":z4ri7rsz said:
> 
> 
> > Not sure I'd put Brown and Corbyn in the same sentence. :shock:
> ...



I'd agree about bailing outhe banks. Some were allowed to fail; Northern Rock and Bradford and Bingley, but the big ones were propped up. Given they were private businesses, government should have let them fail and then stepped in to guarantee depositors and borrowers. They did this with NR and B&B, passing the B&B mortgage book and depositor's funds to Santander.

Not sure I agree it would have strangled house price inflation. That started much earlier. I was planning to move in the late 1990s, and had everything in place financially to move where I wanted to until prices started to shoot up, and the price differential between the house I owned and the type I wanted where I wanted became too great, and got steadily greater. Whatever was causing house price inflation was acting from about 1999 onwards, not 2008. It's certainly a major problem, though, and I don't see a simple solution. Even building new houses won't stem the rise in costs if population continues to grow as predicted (from a current 64 million to about 75 million by 2030, apparently - and they'll all have to live somewhere!).


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## Flynnwood (3 Nov 2015)

How bank forecasts got it spectacularly wrong, just 6 months before Lehman went down.







Lehman were leveraged 1 dollar : 44 dollars when they went under.

7 mins:

https://www.youtube.com/watch?v=T5pA2ToZuaQ


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## themackay (3 Nov 2015)

Not sure I agree it would have strangled house price inflation. That started much earlier. I was planning to move in the late 1990s, and had everything in place financially to move where I wanted to until prices started to shoot up, and the price differential between the house I owned and the type I wanted where I wanted became too great, and got steadily greater. Whatever was causing house price inflation was acting from about 1999 onwards, not 2008. It's certainly a major problem, though, and I don't see a simple solution. Even building new houses won't stem the rise in costs if population continues to grow as predicted (from a current 64 million to about 75 million by 2030, apparently - and they'll all have to live somewhere!).

When I bought my first house in 1979 it was difficult to borow money you almost had to beg for that last couple of hundred pound you needed letters from employer gaurranteeing overtime etc I think the max they would give me was one and a half times my earnings then somewhere down the line it was twice your earnings then 3 times or eventually just how much do you want to borrow as well as the shortage of housing I think the availability of money just chased prices up,just my opinion.


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## Cheshirechappie (3 Nov 2015)

themackay":2hp3uu13 said:


> Not sure I agree it would have strangled house price inflation. That started much earlier. I was planning to move in the late 1990s, and had everything in place financially to move where I wanted to until prices started to shoot up, and the price differential between the house I owned and the type I wanted where I wanted became too great, and got steadily greater. Whatever was causing house price inflation was acting from about 1999 onwards, not 2008. It's certainly a major problem, though, and I don't see a simple solution. Even building new houses won't stem the rise in costs if population continues to grow as predicted (from a current 64 million to about 75 million by 2030, apparently - and they'll all have to live somewhere!).
> 
> When I bought my first house in 1979 it was difficult to borow money you almost had to beg for that last couple of hundred pound you needed letters from employer gaurranteeing overtime etc I think the max they would give me was one and a half times my earnings then somewhere down the line it was twice your earnings then 3 times or eventually just how much do you want to borrow as well as the shortage of housing I think the availability of money just chased prices up,just my opinion.



My first house purchase was in 1985, when interest rates were much higher than now. I just about survived paying 16% at one point - there wasn't much left over for luxuries, even on a fair salary with regular incremental rises. When was the peak of 'negative equity' and a rash of repossessions? Late '80s or early '90s? Not fun times to have a newish mortgage.

I think the early 2000's house price inflation may have been linked to artificially low interest rates stimulating a rash of spending. Given that interest rates are currently at historical lows, Heaven help anybody with an up-to-the-eyebrows mortgage. The other problem is that if there is another recession (and they happen!) government has no margin to stimulate economic activity by reducing interest rates. The next recession will hurt ordinary people. A lot.


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## artie (6 Nov 2015)

Mike.S":2rrulefl said:


> For those, like me, with a deep interest, there's a quite good basic video - it's two hours long but worth perservering: Economic Truth Documentary.
> 
> * because we're all in the faeces and it won't end well.



I haven't got all the way through this so maybe my question is premature, but..

At one point in the vid, the narrator explains, that the treasury creates money by printing notes for 3-4p each and sells them to banks for face value. Making for themselves a tidy 96-97% profit.

Does anyone else see a flaw in this.?


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## Phil Pascoe (6 Nov 2015)

"The next recession will hurt ordinary people. A lot." - C.C.
That much is beyond any doubt. It's a "when" not an "if".


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## MIGNAL (6 Nov 2015)

We haven't recovered from the last one! This could be a double, triple, quadruple dip.


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## Zeddedhed (6 Nov 2015)

And then you'll all be wanting my Goats and Broccoli


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## Phil Pascoe (6 Nov 2015)

But you'll need my potatoes,garlic and red wine ...


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## Zeddedhed (6 Nov 2015)

Sounds like a BBQ at Phils then


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## Mike.S (6 Nov 2015)

Eric The Viking":1w2kcydq said:


> It would also have strangled at birth the ridiculous, damaging and unsustainable property price inflation we see now. A lot of it is driven by foreign 'investors' wanting a safe haven (read 'laundry') for dodgy money. How that helps our economy completely escapes me.


My son moved back home in March having previously rented in West London - from a gentleman who lived in Saudi.

He's just had an offer accepted to rent a 4 bed house (at £2,500pm :shock: ) in SW London - the Landlord lives in the U.A.E.!

I've no doubt there's some 'dodgy' money but I also think the UK is still perceived as a relatively safe haven for investment (whether in property or other assets) and/or as a bolt hole should the SHTF in the investor's homeland.

Quite how my kids are meant to get started on the housing ladder at the moment I don't know - one bed flats are over £200k round here  and his work* (in W.London) means he can't travel too far.

* By way of a positive on foreign inward investment his employer is a subsidiary of SBG - the *S*audi *B*in Laden *G*roup.


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## Phil Pascoe (6 Nov 2015)

And most of these Countries won't allow foreigners to buy property ...


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## John Brown (6 Nov 2015)

artie":2e1agob0 said:


> Mike.S":2e1agob0 said:
> 
> 
> > For those, like me, with a deep interest, there's a quite good basic video - it's two hours long but worth perservering: Economic Truth Documentary.
> ...


Yes. I'd say 240% - 330% ish
But then again, that only works for one pound notes. I think I'd stick to fifties.


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## Cheshirechappie (6 Nov 2015)

Mike.S":jt7d36cq said:


> Eric The Viking":jt7d36cq said:
> 
> 
> > It would also have strangled at birth the ridiculous, damaging and unsustainable property price inflation we see now. A lot of it is driven by foreign 'investors' wanting a safe haven (read 'laundry') for dodgy money. How that helps our economy completely escapes me.
> ...




I may be wrong, but I think government are moving to try and address that problem. They've changed the tax rules on buy-to-let property; there were several small investors bemoaning their lot as a result of the said tax changes in the Telegraph a couple of weeks ago; whether the said changes affects overseas investors acting through shell companies and such like I don't know, but I suspect the intention is to make residential property less attractive as an investment for anything other than living in as a main residence. Whether that will be enough to correct the problem, or other measures are planned or might be needed, I've no idea.


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## Mike.S (6 Nov 2015)

Cheshirechappie":oabshzfo said:


> themackay":oabshzfo said:
> 
> 
> > Not sure I agree it would have strangled house price inflation. That started much earlier. I was planning to move in the late 1990s, and had everything in place financially to move where I wanted to until prices started to shoot up, and the price differential between the house I owned and the type I wanted where I wanted became too great, and got steadily greater. Whatever was causing house price inflation was acting from about 1999 onwards, not 2008. It's certainly a major problem, though, and I don't see a simple solution. Even building new houses won't stem the rise in costs if population continues to grow as predicted (from a current 64 million to about 75 million by 2030, apparently - and they'll all have to live somewhere!).
> ...



Those posts chime with me. Bought my first house in 1985, at a time when there were 'mortgage queues' and you were lucky to be eligible. I worked for a bank and received a subsidy to bring the rate down to 5%. Worth something then but not now! Moved in the early 90s when some friends had negative equity (having bought late 80s).

Around 2000, when Brown sold our Gold at its lowest price (since known in finance circles as 'Brown's Bottom'  ) - allegedly to bail out 2 American banks (JP Morgan and Goldman?) - the money supply started increasing at a faster rate. See these graphs (click on the MAX button) : UK and perhaps clearer in USA - a pre-cursor to the boom and bust of 2007-9. Even clearer on this graph - scroll down to near the end 'Global Money Supply from Jan 1970 - Oct 2008'.

The last graph is particularly salutary as it was in 1971 that the USA broke the USD link to gold (the GBP and other 'allied' currencies were linked to the USD following the Bretton Woods agreement in 1944 - negotiated when UK and other European + Japan economies were kaput and USA was booming - having financed/supplied all sides). So, all the major currencies became backed by nothing. Nuff said....


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## artie (6 Nov 2015)

John Brown":2v343n4p said:


> artie":2v343n4p said:
> 
> 
> > Mike.S":2v343n4p said:
> ...



I was thinking more along the lines of, 

The government printed the money, what did the banks use to buy it.???


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## RogerS (7 Nov 2015)

This article is well-worth reading. Professor Kay seems to know what he is talking about.

http://www.ft.com/cms/s/0/9ed90bd2-8308 ... z3qoAVtoTZ


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## John Brown (8 Nov 2015)

> I was thinking more along the lines of,
> 
> The government printed the money, what did the banks use to buy it.???



Fair comment, but my point stands also. Making something for 3p and selling it for 100p is not 97% profit.


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## Mike.S (8 Nov 2015)

artie":358asf97 said:


> The government printed the money, what did the banks use to buy it.???



As the customer of the bank used his current account to 'buy' the cash (i.e. credit balance reduced or overdraft created) then the banks have accounts with the Central Bank (indeed, are required to). So, if Bank A wants cash the Central bank will provide it and debit Bank A's account accordingly. The Central bank ends up with an asset (money taken from Bank A or a debt by Bank A) balanced by a liability - 'Notes issued'.

This point - on a bigger scale - was made in a blog article recently: see here scroll down a bit to "Which brings us back to Adair Turner, and his note on "monetary financing." This is what he says:" and read the paragraphs that follow. A bit further down is:



> There are a number of ways in which the money could be “created” with different precise implications for the central bank balance sheet. They include:
> 
> The central bank directly credits the government current account (held either at the central bank itself or at a commercial bank) and records as an asset a non-interest-bearing non-redeemable “due from government” receivable
> [end quote]
> ...


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## artie (8 Nov 2015)

John Brown":39aqmjbd said:


> > I was thinking more along the lines of,
> >
> > The government printed the money, what did the banks use to buy it.???
> 
> ...



OK how do you calculate gross profit then.?


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## artie (8 Nov 2015)

Mike.S":1n56nulh said:


> artie":1n56nulh said:
> 
> 
> > The government printed the money, what did the banks use to buy it.???
> ...



Enjoying this, but it is hard to get "ones" head around it all.


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## Mike.S (8 Nov 2015)

artie":13n6a8tx said:


> Enjoying this, but it is hard to get "ones" head around it all.


Absolutely, only took me a couple of decades


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## John Brown (9 Nov 2015)

artie":3ttwh29a said:


> John Brown":3ttwh29a said:
> 
> 
> > > I was thinking more along the lines of,
> ...


You didn't say gross. As a layman, I was using the 0 Level maths interpretation of profit. Although sadly I was out by a factor of ten in my calculation Which you either didn't notice, or were too polite to mention. I choose to believe the latter.


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## Droogs (9 Nov 2015)

To interpret a statement about percent you need to ask "percent of what?" 
P(profit amount in cash terms) / C(cost to manufacture in cash terms) x 100 This gives you the MARK UP PROFIT %

P(profit amount in cash terms) / S(Selling price in cash terms) x 100 This is the PROFIT MARGIN %

If you want the profit as a percentage of what it cost you then it is
97/3 x 100 = 3233.3333rec% 

If you want the profit as a percentage of what you sold it for then it is
97/100 x 100 = 97% 

HTH


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## Cheshirechappie (9 Nov 2015)

It may not be too wise to regard Wikipedia as the ultimate authority on anything, but this is worth a read - https://en.wikipedia.org/wiki/History_of_money - because it reveals several aspects of money that I, at least, hadn't appreciated.

Firstly, the idea of 'debt' may have preceded the idea of 'money', in that "I owe you one" may have come before "I owe you one unit of something". Then, there's a point that those better versed in these things may have regarded as obvious, and that is that money depends on trust - a banknote is only a promise to pay, and we trust the bank to do so if necessary. Thus, you can only have 'credit' or 'debt' where trust exists. A bank can only continue to exist as long as people have trust in it. Finally, the name of the British 'pound' came about because it was originally defined as a pound weight of silver (hence 'Sterling' perhaps?) - but it's devalued a bit since then!

Thus, the world financial system can only remain functional as long as enough people trust it. What would happen if that trust evaporated, I hate to speculate....

Edit to add - Thanks to the Mods for cleaning the thread up and allowing it to remain open. There's potential to learn much more yet, I think.


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## Peter Sefton (9 Nov 2015)

Good to see it back on track


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## RogerS (9 Nov 2015)

Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.


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## doctor Bob (9 Nov 2015)

RogerS":xfjl8jhn said:


> Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.



Not really, I would hazard a guess that an Indian worker on 10p/hr is not going out at lunchtime and buying a big mac and chips for 5p.


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## RobinBHM (9 Nov 2015)

Probably not..although I can remember buying a Mcd's ice cream cone in Turkey for 250,000 lira (12.5p) the same year as 9/11 (whenever that was).

In the UK we have become accustomed to very cheap prices for many many goods that are only cheap due to the tiny labour cost element from third world manufacturing. Its crazy to think items like jeans can be bought for a fraction of their price 30 years ago.


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## Flynnwood (9 Nov 2015)

This is worth watching if only to enlighten a little.

http://www.youtube.com/watch?v=iFDe5kUUyT0

The guy has his own agenda ... take his views as they are. Worth a watch though.


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## artie (9 Nov 2015)

Flynnwood":25r586zw said:


> This is worth watching if only to enlighten a little.
> 
> http://www.youtube.com/watch?v=iFDe5kUUyT0
> 
> The guy has his own agenda ... take his views as they are. Worth a watch though.



over 4 million views. :shock:


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## Droogs (9 Nov 2015)

Cheshirechappie":a12ehhdh said:


> Finally, the name of the British 'pound' came about because it was originally defined as a pound weight of silver (hence 'Sterling' perhaps?) - but it's devalued a bit since then!.



As I was taught, the British Pound got it's name from the Libraponda, which was the pound (approx weight) of salt paid to Roman auxiliary legionaries from dominian states on occupation duties in Britain. Which is why we use a stylised L as the symbol for the pound, although when promisery notes were first issued they were indeed a legal promise to provide the bearer with X lbs of sterling ie 99.99% pure silver on demand from the creditors bank


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## RogerS (9 Nov 2015)

doctor Bob":3l48ypxw said:


> RogerS":3l48ypxw said:
> 
> 
> > Another topic that people (especially the press) get vexed about is to say that so-and-so in country Y only earns $x a month which compared to UK wages sounds exceedingly small (and usually the reason for printing this 'fact'). Yet without any mention of the prices in country Y, the earnings statement is meaningless.
> ...



Nope he won't. More like the equivalent of 0.01p. You need to check things out a bit more.


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## gregmcateer (9 Nov 2015)

RogerS":23v3uza8 said:


> doctor Bob":23v3uza8 said:
> 
> 
> > RogerS":23v3uza8 said:
> ...



Really?

My surprise lead to a moment on google, which yielded;

"While a Big Mac costs $7.80 in Norway, you can get a Big Mac for $1.62 in India" from 'The Nordic Page'

Probably just a mistake. And anyway, life for the average Indian is a doddle, whatever the price of a B Mc. I mean, the weather, cheap cotton, flexible working hours.... The benefits are endless. :lol:


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## Droogs (9 Nov 2015)

Can't see any Indian eating a Big Mac, aren't cows sacred over there


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## artie (9 Nov 2015)

Droogs":2fuo7253 said:


> Can't see any Indian eating a Big Mac, aren't cows sacred over there



http://www.indiamarks.com/what-you-can- ... lds-india/

The minimum wage varies a bit around the country but in many areas the unskilled worker makes less than £3 per day.

So a chicken burger at 85p is considerably more expensive for him than a burger here for someone on minimum wage.


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## doctor Bob (9 Nov 2015)

RogerS":if7snfyl said:


> doctor Bob":if7snfyl said:
> 
> 
> > RogerS":if7snfyl said:
> ...



No not really Roger, it's a forum ........... I'm afraid I haven't checked it out but I don't think McDonalds would do a big mac for one hundreth of a penny.


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## mouppe (9 Nov 2015)

Joking aside, the Big Mac index is used in currency analysis to look at purchasing power parity. I never found it very useful when trading FX but it was mildly interesting. 

https://en.m.wikipedia.org/wiki/Big_Mac_Index


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## RogerS (10 Nov 2015)

doctor Bob"...[/quote said:


> No not really Roger, it's a forum ........... I'm afraid I haven't checked it out but I don't think McDonalds would do a big mac for one hundreth of a penny.



Then stop trolling.


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## doctor Bob (10 Nov 2015)

RogerS":r1ihass4 said:


> Then stop trolling.



Stop being mean, or i'll tell my Mum :shock:


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## Phil Pascoe (10 Nov 2015)

Droogs":6dyp9kix said:


> Cheshirechappie":6dyp9kix said:
> 
> 
> > Finally, the name of the British 'pound' came about because it was originally defined as a pound weight of silver (hence 'Sterling' perhaps?) - but it's devalued a bit since then!.
> ...


You're correct on the Roman bit, but sorry to split hairs sterling silver is 92.5% , 7.5% copper.


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## Eric The Viking (10 Nov 2015)

And all but proof 'copper' coinage here is predominantly steel. Likewise in the USA, "nickels" are a copper sandwich*.

I've occasionally picked up 2p pieces from the pavement**, which have gone rusty.

E.

*may have steel too - need to check with a magnet.

**this may be sad, but it's not stupid!


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## Droogs (10 Nov 2015)

if you want copper coppers then you need to have pre 1991 coins as I believe tey change around about then to steel coated carp.


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## Cheshirechappie (10 Nov 2015)

Like Flynnwood above, I watched Mike Maloney's video, and another of his about the difference between money and currency. Interesting, but as he's a precious metals dealer, he wants you to invest in gold and silver, and he has a vested interest in telling you that the world's money systems are near collapse. Earlier in the thread, someone posted a link to another explaination of banking, made by a group of anti-capitalist protestors. That clearly has An Agenda as well. Consequently, whilst there is useful information in videos from both sources, they both (from opposite ends of the political spectrum) have too much baggage to be taken literally.

Does that mean I think everything in world finance is tickety-boo and hunky-dory? Well - no, but some background research shows that the history of world banking - for the last three hunderd years, anyway - could be written as a series of lurches from one crisis to the next, with brief interludes of relative calm between them. For example, in 1730 the London banking system all but collapsed, being saved by collective effort by London's merchants. The system survives because those most involved have a vested interest in it's survival - an imperfect banking system is better for world trade and thus for everybody than no banking system at all. Currently, we have too much debt floating about, at least in the Western world - the sum of personal debt is pretty much covered by the sum of personal assets, corporate debt is covered by corporate assets (illegal to trade if liabilities exceed assets), but the real problem is government - public - debt. Too many governments have spent beyond their countrys' ability to raise tax revenue for too long; debt to GDP ratios are too high. Things like QE and dodgy efforts to prop up the Euro don't help.

Having learned a bit more about how national and international banking works, I'm a bit more confident that things will be made to work out. Two main reasons - the one mentioned above that an imperfect system is better than a collapsed one for pretty well everybody, and the other which never seems to be mentioned; the people who stand to loose most if the banking system collapses are - the bankers. Think of Fred Goodwin - who would employ him, now? How much influence does he have over - well, anything? The other bankers, despite the opprobrium loaded on them by various protestors, have a very strong incentive to see that the world carries on at least reasonably smoothly. So they'll do whatever they have to to see that it does, as they have during every other banking crisis in history.

Rose-tinted glasses? Well, maybe; but history does seem to support the general idea. The banking system has always been made to survive some pretty severe crises, because it's in mankind's best interests - and the bankers' best interests - that it does. I think we'll survive this one too.


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## mind_the_goat (10 Nov 2015)

Cheshirechappie":3n5h3idg said:


> the people who stand to loose most if the banking system collapses are - the bankers.



Where have been the last 7 years? A very small number of bankers have lost anything, except maybe their bonuses for a year. It's exactly the lack of accountability and the incentives to take risks that was a major contributor to the crisis in the first place. 
Before banking reform in the 80's, investment banks were usually small privately owned companies, with the owners having an awful lot to loose if anyone on their team made bad decisions. Now the small banks are pretty much extinct and we have a small number of huge corporations where the people in charge have little idea of what actually goes on in their organisation and have no personal stake in the business. The same goes for the staff, the worst that is likely to happen if they stop making money is they may loose their job. Job security is not something that seems to go with these careers anyway. Little has really changed since the crash, a few new regulations have been put in place but even if they they were very significant I don't believe these will be enforced any better then the existing one were. 
The people with least to loose are still the bankers

I think you are overlooking one other major difference, until recently the banks function has been to support industry, now the banks ARE the industry


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## themackay (10 Nov 2015)

Its the people at the bottom that are paying for the last crisis and they will pay for the next one not the bankers most people at the top just move sideways to another job even if they screw up badly.


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## Droogs (11 Nov 2015)

phil.p":ni5fiwfn said:


> You're correct on the Roman bit, but sorry to split hairs sterling silver is 92.5% , 7.5% copper.



Thanks Phil, I like to learn something new every day


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## Phil Pascoe (11 Nov 2015)

The alloy makes it more serviceable - pure silver is very soft, which is why sometimes heavily worked and embossed items are made from pure rather than sterling. There is a grade in between which is quite uncommon - Britannia - which is 95.83% silver, the rest usually being copper.
The odd % is because of the relationship of the imperial measurements.


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