oioioi wrote:
OK, this might be back to basics stuff but how can the whole globe be in debt? Even if it's just digits on a screen surely the credit and debt has to cancel each other out
Quite a complicated issue to get into, but there is a long discussion of this here:
www.positivemoney.org/how-banks-create-money/balance-sheets/
The summary is here, if you want something shorter!:
Let’s review the key points that we have learnt:
The ‘money’ in your bank account does not represent physical cash that you can hold in your hand; it is simply an accounting liability from the bank to you, and only exists as a number in a computer system.
We now use these bank liabilities / accounting entries to make payments for over 99% of all transactions (by value). Therefore we could describe bank liabilities, bank credit and bank deposits (which are all the same thing) as being equivalent to money in the modern day.
Banks create bank deposits (the money in your account) when they make loans. They add liabilities to the borrower’s account, and simultaneously add an asset (the loan contract) to their balance sheet.
The repayable principal of the loan is recorded as an asset. However, the interest payable isn’t recorded as an asset on the balance sheet, but is just recorded as a profit as and when the interest is paid.
The money that banks use to pay each other – central bank reserves – is itself created out of nothing as an accounting entry by the Bank of England. The liability that the Bank of England creates to the commercial bank is balanced out by the asset that the bank posts as ‘collateral’.
In summary, what we now use as ‘money’ – the numbers in our account – is simply accounting entries made by banks. These accounting entries make up over 97% of all the money that we use today.
There is no relationship between the amount of money in circulation, the amount of debt that exists, and any actual, tangible assets. It's all completely arbitrary. Just to give you one small example, think about something like equity release. Your house has a theoretical value, so you secure a loan against the supposed value of your house from a bank, which they transfer to you instantly, and then they charge you interest against the 'money' that they've lent you, which they've just magicked out of thin air. It has no relation to anything that is actually real, but yet it actually happens in reality all the time! Don't forget as well, they're lending more 'money' on top on that based on what you pay them, and so on.
If someone gave you the right tomorrow to either print pieces of paper with £10 written on them and call them money (which is no less legal tender than existing banknotes), or gave you a billion dollar credit line to distribute digitally, or both, you could start lending people 'money' immediately (and you'd be advised to move back to Britain, where is no formal requirement for you to even hold anything in reserve). Pretty soon people would owe you billions, and you'd have nothing, but you could repossess their actual physical assets if they didn't give you back the nothing that you'd lent them!
I hope that's clear...
