mikk -- there is nothing "neo-con" about my article. I find it odd that so many people confuse "neo-conservatism" with "economic liberalism". They are quite different. Neo-cons are often economic interventionists. Indeed, in America they were basically left-wingers who decided they liked war. That's not me. Neither am I a Liberal, nor a tory. You are quite confused about political philosophies, and seem to assume that everybody not-left is the same.

I'm surprised you asked for evidence. That's like asking for evidence that 2+2=4. It is a simple fact that if you want to spend money, you first need to have the money. Do I really need to give you evidence for this idea?

There are three places for the government to get money. Either through tax, or printing money, or borrowing. The Australian government has clearly stated they are doing the later to pay for the stimulus. When the government borrows, that can either come from Australians or non-Australians. Do I really need to give you evidence for this? If you disagree... perhaps you'd like to suggest an alternative. Pixies? Aliens? A money tree?

If the money comes from overseas, then that increases demand for the Australian dollar and puts upward pressure on our exchange rate. This is a simple fact. If the money comes from Australian savers then this increases demand for loanable funds and puts upward pressure on our interest rates. This is a simple fact. We don't know yet how much money will come from overseas, how much will come from domestic savers, how much the credit multiplier will change (if at all) and how much domestic savings will change... so we don't know the size of the effect. But we know the direction.

If you are angry about the existence of facts and logic I suggest you take it up with allah, not me.

The fractional reserve banking system works thus.When you get a loan from the bank they do conjure into existence the principal which the borrower then usually buys an asset ie shares or property.When the borrower repays the principal the bank cannot use this money again as capital.It simply is enters oblivian.The interest the bank makes on this new money is kept by the bank.The inflationary part happens when the recipient of the new loan money puts it with another bank which then becomes part of their fractional reserve to create more loan money and thus more interest for the banks.For savings banks the ratio is usually 9:1 in terms of loan money to reserves.With investment banks it can be as high as 30:1.This is what feeds the inflationary share market.

The banks are the prime drivers of inflation contrary to the popular opinion of labour v's prices.If the reserve banks were doing their jobs properly,then there would be a lot less inflation.

Inflation is compounding like interest.In 96 yrs the US currency has lost 96% of its value.$ 1.00 now will only buy you 4 cents worth goods in 1913.The banks have added 25 times the total currency to the economy above pop growth and increases in GDP to achieve this depreciation of the US currency.We have suffered a similar fate.

Inflation really hurts the poor since they cannot save to buy assets that appreciate against currency depreciation.The banking system needs an injection of fair play to really get the best out of all citizens since your wealth is in your people not in a system that treats money as a commodity.

Pericles.Jim Rogers was not drunk.Perhaps tired but right on the money in terms of bailouts and market truth.The markets are now bullish with new counterfeit money created by the US Fed but there will be another collapse soon.The truth lies in the levels of unemployment and bankruptcies.

When are you going to swap personal attacks,innuendo and character assassination for real substance?

*Pericles.Jim Rogers was not drunk.Perhaps tired but right on the money in terms of bailouts and market truth*

Arjay, it seems to me that you are cherry picking Bloomberg here.

Rogers is just one of a host of colourful Bloomberg characters,
who regularly appear and give their 5c worth, about the global
economy. He is mates with Marc Faber. IMHO those two just love
being controversial and find that in itself amusing.

If it had been up to Rogers, it seemingly would have been best to let the
whole thing collapse and no doubt he would have made a fortune,
by shorting everything. Never mind the carnage and job losses
for all those little people.

If you ever bother watching Bloomberg, there are a heap of investors
and fund managers, responsible for hundreds of billions of $, who
completely contradict him. Bloomberg is there to inform of various
opinions, not to pass judgement.

But I know, you will highlight anyone who is singing from your
present song sheet. Its human nature I guess, quite predictable.

To simplify things about the bank discussion, I have a simple
question. If I go to Westpac and deposit 1000$ at 4%, according
to FP, Arjay and others, how much can Westpac lend to borrowers at say
6% ?

Thank you for the civilized response Mr Humphreys.

I appreciate that you consider the government's reaction to have been excessive. But I still believe that on balance, an overreaction was preferable to a weaker response. Belt and braces, as it were.

But I believe you are also taking an unnecessarily political stance, when it is difficult to envisage a Liberal government's response being substantially different. It is too easy to snipe from the opposition benches, when you are not going to be responsible for the consequences.

And Arjay, you still seem to be struggling with the basic concepts.

>>When you get a loan from the bank they do conjure into existence the principal which the borrower then usually buys an asset ie shares or property.When the borrower repays the principal the bank cannot use this money again as capital<<

Arjay, when you get a loan from the Bank, it doesn't "conjure" anything. It has to borrow, or take the cash from its vaults. Either way, it is real.

>>The inflationary part happens when the recipient of the new loan money puts it with another bank which then becomes part of their fractional reserve to create more loan money<<

Once again, the misunderstanding stems from the fact that money isn't simply magicked into being.

The best way to demonstrate this is to imagine there are only two Banks.

Trace the transactions for yourself.

Bank A has $100 of capital in its vaults, and lends you $1,000 on the strength of it. To do so, it borrows from Bank B, which happens to have $1,100 in the safe, from which it takes a grand to lend to Bank A. You then lodge your $1,000 with Bank B.

Bank A has $100 of Capital, but no more lending capacity, as it owes Bank B $1,000. Bank B meanwhile has exactly the same amount that it started with, so its lending capacity hasn't changed.

The system as a whole has had its overall lending capacity reduced by the amount that you borrowed.

Which is exactly as it should be.

A bit clearer now?

Pericles says "To do so, it borrows from Bank B, which happens to have $1,100 in the safe, from which it takes a grand to lend to Bank A." This is wrong. Bank A is allowed to deposit money without borrowing it elsewhere. It is constrained by having to keep a fraction of all its loan as cash and by the fact that it must lend against an asset. Creating money this way is "disguised" by the repayment of the loan "destroying" the money. Some people argue that the money is bank money not real money and so it does not create money.

My attempts to suggest that we use other methods than loans to increase money supply has met with little support. In a recent ah ah moment I realised that we can have the equivalent of increasing money supply without loans if we pay zero interest on newly lent bank money until it is spent and backing the loan with a deposit that attracts zero interest.

If we ensure the loan is invested in productive assets that, over time, generate more money than they cost to build this will not cause inflation. As the bank does not pay any interest on the deposit and defaulting loans means the bank keeps the deposits banks CANNOT lose money with this product. The banking product will tell the borrower exactly what happens to the money invested and it will monitor the returns generated. If your loan does not perform you will know. The bank is in the happy position of not having to worry about the performance of the loan. This is in contrast to the current system where the bank has to worry about your ability to repay.

Another issue is building the system economically. Our company has built a system with many of the same elements and it is being rolled out across the banking sector. We can build a banking product as described and run it for less cost than current banking products.

WTF?

“Real money”,”bank money”, “disguised money”, “created money”
– what a bunch of nonsense phrases invented to rationalise our economic system.

These phrases are invented by those who fail to grasp that our economic system is a ZERO SUM GAME.

In fact the only form of currency is the minimum amount that an unskilled worker anywhere in the world
is prepared to accept for an hours work.

Everything else is just a bet to see who can best take advantage of this minimum currency.

Some bets will win others will lose. If you borrow to bet and win – luxury awaits.
If you borrow to bet and lose – welcome to slavery for you and probably your children as well.

The problem is now Rudd is betting on our behalf. He is hoping someone else will lose.