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  1. #1
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    Question why borrow offshore?

    Hi, I am in the process of attempting to edumacate myself in economics. I have been reading a lot online since the onset of the Global Karbunkle and I am finding it very interesting and addictive. This is the first forum I have joined and I want to start by asking for some help to understand why the Ozzy banks have borrowed so much dinero offshore. My understanding from reading Steve's work and others is that money/credit creation is in the hands of the banks so why not create the necessary credit here in the Australian system in $AU instead of borrowing offshore? Is it true that the bulk or all of the offshore debt had occurred since the introduction of APRA? Was it not possible for the banks to get offshore funds before that? Surely offshore borrowings are much riskier because of exposure to exchange rates and other outside factors such as the current crisis with rising interest rates due to sovereign debt risks overseas. Any comment or links to info on this area of Ozzy banking would be much appreciated. Tazzy.

  2. #2
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    Default

    Tazzy there are others here such as SIM and co who could give you a wide range of discussions that have been held in these pages re the topic you raise. Indeed it has been a rather hot topic with a certain lot of disciples believing exactly the question you raise. I won't go there!!!
    My answer to you is simple...we buy things from offshore. We spend, and have done pretty much continuously for the last 50 years, more offshore than we sell offshore. Hence we have needed to borrow. We have also needed to sell off our Australian assets to finance this spending.
    In our economy, if a Bank raises a credit, much of that money will be eventually spent offshore. So our ability to raise credit here also depends on our ability to borrow offshore.
    Admittedly, over a 50 year time frame, we have tended to ignore this simple fact. That is why we have huge external debts and have sold off most of our industry and resources to Foreign owners.

  3. #3
    Community Team SIM's Avatar
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    Default Great Question

    That is such a great question - if all money/debt is created by the government/banks - why can't we just create some more when we need it?

    The simple answer is that we are not a closed system, but the full answer makes my head hurt. It all comes back to that deceptively simple question - what is money?

    I'm going to bump it to someone who knows what they're talking about

  4. #4
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    Hi flawse and SIM, yes it is very complicate in't it? I do envy Steve and others who have such a great understanding of it all. However I have learned a huge amount over the last couple of years, no doubt if I stick at it I can get a fairly comprehensive overview. I have just finished Mullins book, 'Secrets of the Federal Reserve' which is a real detective story . One of the major US networks should do a mini series on it, call it 'the creature from Jekyl Island', problem is I doubt if it could happen with the way things are with media so concentrated. Where could I start to look here for past postings on the Ozzy offshore borrowings subject? I understand that we do have a serious balance of trade issue , so yes I guess it is connected to that. Tazzy.
    Last edited by tazzy; 24-06-2010 at 07:58 PM.

  5. #5
    Senior Member Pat's Avatar
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    Here's my understanding:

    When banks create money its actually a zero sum. A loan is made to the borrower and a loan asset exists for the bank. By selling the loan asset overseas the bank receive's the money straight away instead of waiting for 30 years of repayments. This has allowed the Australian banking system to continue to make bigger and brighter loans on ever increasing asset values. If the banks can no longer sell these assets to international debt markets then they will be forced to absorb the loans themselves meaning reduced lending.

    This was answered quite well by a few others in this thread: Off Balance sheet items definition
    Last edited by Pat; 24-06-2010 at 09:36 PM.

  6. #6
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    SIM, the reason that money creation does not work is that it is not increasing wealth, but rather redistributing it.

    If we double the money supply overnight, then prices will generally double, but this takes time.

    The first receivers of the money will enjoy increased purchasing power, as they will buy before prices have doubled. Conversely the later receivers of the money have suffered a decrease in purchasing power.

    Lets not forget that fiat currencies are inherently worthless, and only held to have value due to the coercive monopoly of government.

  7. #7
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    Hi Pat , so the 40% wholesale funding of the banks from o'seas is off balance sheet? It is dissapointing that the public is so poorly informed on economic matters in Oz. For example the history of the US fed is widely available and I mean the real inside story of how it was founded. So far my searches for the real story of the creation of the Oz fed only finds history book stuff, very simplistic, not very informative. A US site that gets a lot of good economic articles together under one roof is here. The Automatic Earth

  8. #8
    Senior Member Pat's Avatar
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    Quote Originally Posted by tazzy View Post
    Hi Pat , so the 40% wholesale funding of the banks from o'seas is off balance sheet? It is dissapointing that the public is so poorly informed on economic matters in Oz. For example the history of the US fed is widely available and I mean the real inside story of how it was founded. So far my searches for the real story of the creation of the Oz fed only finds history book stuff, very simplistic, not very informative. A US site that gets a lot of good economic articles together under one roof is here. The Automatic Earth
    The Australian banks off balance sheet activity currently tops $14 Trillion AUD. RBA Off balance sheet business

    This has been noted by many, no one seems to care though....

  9. #9
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    Quote Originally Posted by Berks View Post
    SIM, the reason that money creation does not work is that it is not increasing wealth, but rather redistributing it.

    If we double the money supply overnight, then prices will generally double, but this takes time.

    The first receivers of the money will enjoy increased purchasing power, as they will buy before prices have doubled. Conversely the later receivers of the money have suffered a decrease in purchasing power.

    Lets not forget that fiat currencies are inherently worthless, and only held to have value due to the coercive monopoly of government.
    Berks, you have missed the core logic that drives Steve Keen's excellent analysis.

    As an economist, I do something very unusual: I treat money seriously.
    Though this may be hard for those who have not done an economics degree to believe, economists have it schooled into them that “money doesn’t matter”–that it is just a “veil over barter”, there to make it easier to swap commodities than it would be if you actually had to find someone who had what you wanted, and wanted to sell what you wanted to buy.
    The argument that persuades them goes something like this: ”what would happen if you simultaneously doubled all prices and all incomes? Nothing!” In other words, if consumers are rational (now there’s a much abused word, but I digress), they shouldn’t care about the absolute prices of goods, just their relative prices. So doubling all prices and doubling a consumer’s income shouldn’t cause her to do anything different (but of course, changing relative prices would alter behaviour).
    Bollocks. Double all prices and my income, and I’d be much better off because my mortgage payments would take less of my income (even if interest rates were also doubled). That’s because I’m in debt–I have a mortgage. And you can’t simply double interest rates to reach the same outcome as doubling prices, because debt repayment dynamics make the whole thing “nonlinear”: include debt seriously in your analysis of consumption, and the “veil over barter” vision of money collapses. But this “inconvenient truth” is omitted from economics–not because economists are deliberately hiding it, but because they have deluded themselves about the nature of money.
    I take it into account, and as a result I get a very different picture of how the economy operates than do conventional (“neoclassical”) economists.
    I won't go so far as Bill Mitchell, and claim that you can always print your way out a depression, but it is clear that because money interacts with debt, the effects of printing money are more complex than Friedman or Hayek's slogans would suggest.

  10. #10
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    Default banks create velocity

    Banks do not create money they create velocity. My understanding right now is that in the US there are two entities that can create money. Theses are the Fed Reserve and the and the Federal Government. The each do this by simply writing checks with nothing to back them. Banks used to create money by issuing "Bank Notes" but modern central banks have put a stop to that practice.
    Today banks lend money that is on deposit with them and when the loan is deposited they lend it again.
    If there is too much actual money in circulation, the economy does better and more people qualify for bank loans. All that is really necessary to create a loan in a qualified borrower. This can create a domino effect as the bank loans create velocity (demand) causing inflation.. Total demand is the same as total money X velocity. Lenders hate inflation.
    It really does not take very long to spend a dollar.With electronic banking maybe a millisecond. All this does is take it from one persons account and put it in another's but it is still in the banking system ready to be loaned again.
    I know all of the textbooks say that fractional reserve banking creates money but it does not.
    Robert

 

 

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