Money from nothing and they get it for free.

Sorry but I had to use this. For those who don't get it, I got the idea from the Dire Straights song "Money for nothing and your chicks for free"

The Misunderstanding of Debt's Fundamentals! Money that is here today and gone tomorrow!

Firstly to address Jonny's comment on yesterdays post. Without betting anything, I would suggest that the majority of home loan owners do not own shares in their bank due to not having any savings. The home loan owners in this country are largely in this category, hence the hefty amount of consumer debt. More people have loans than have savings. Making the banking profits, for the minority who may have shares.

I'd like to refer to the link that Jonny shared with us yesterday from the Daily Rekoning. I too read their material and find it insightful and therefore quite interesting. However I have to say they too seem to miss the mark when they discuss debt. Debt has come under the spotlight a lot more in the last decade, what with the GFC and all. And sometimes I wish my Dad was here to see all that is happening now. Years ago before debt was a really big subject, for the majority, my Dad and I had many conversations to do with it. And in my opinion he called it along with a few of his friends before many had a clue. How? It's all to do with the fundamentals of debt. It makes me laugh to read some of the ideas out there as to where the money comes from. But in another way it makes me feel like crying, it's that selfish.

You think you know debt? I'm now an investor, although I have for a long time been watching the markets, and I have made some silly mistakes simply because I listened to the banks. Or maybe I just simply took the view that it must be right what they say, after all they run the show. Who of you got lured into bank managed funds because of their growth portfolios and previous results. If I had have had the time to look more closely I would have seen that it was not sustainable at all. The GFC! What was it exactly?

It would seem that even after the GFC most people, including economists (also it would seem including the Daily Rekoning), still believe that they know debt. Debt apparently is made up of savers money being loaned out to borrowers for the most part. Really? Think about that for a moment. Did you say that your money in the bank could be used to loan out to someone else. I haven't said that. So savers money in the bank is loaned out to those who wish to borrow it. For being the middle man so to speak the bank charges a rate on the borrowings and then pays a portion of that back into the savers account in return for using their money. Simple right? (BUZZER) Wrong! While it may or may not work in some small way like that (mostly to make it seem like that's the way it works), there is a much bigger game at hand.

If that was the way it worked: one; why would the RBA rates have a thing to do with borrowings? two; how the heck are the majority of loans supplied for by the savers money? three; where did all that money go from the worlds economies when the GFC hit? You want the truth? If yesterdays post wasn't enough to make your blood start to pump, then get ready for this. I remember just how my Dad was when he would discuss this with me, before I guess I could really have gotten a full grasp on it.

Here goes. When we take out a loan from our bank, we are not (and if at all it's minute) borrowing money that is essentially someone else's savings. Read that again.... What we are doing is creating another opportunity for the bank to borrow some more money from the RBA (hence the Reserve Bank of Australia). The RBA has just created this money out of nothing, in order to supply your bank with the needed funds. Now it charges interest on that amount which the bank must pay (currently 3.75%). In turn the bank must as Jonny said make a profit, as they do very well here. So they charge a margin interest rate on top of the rate they must pay. The margin your banks hold onto is their profit. The rates they pay to the RBA my friend is brand new money. Money my Dad simply said to me should be everyones money.

This simple fact is clarified very simply indeed. And the proof for me was when the GFC hit hard. Over that short period of time something happened. Yes, money that was here yesterday was gone today. Where did it go? Easy! It was money that wasn't really here yet, but would have come into existence once it was paid back to it's source. The Reserve Banks of the world. The money that disappeared was perceived money treated as though it was already here. Remove growth, the very thing that feeds our economies, and that perceived money just cannot be. Money by massive majority is not borrowed money backed by saver's money, but borrowed into existence.

Yes our system works this way, it's called fiat currency, and it must have growth to survive. And yes our banks must turn a profit like all other businesses. But as we know they are currently turning very healthy profits, aren't they? Increasing margin, is that really neccessary when they're obviously paying back their loans to the RBA, while clearing the amounts they are?

As for the housing boom, bust or bubble. I might just have to leave that one for another night.

Till next time.

God Bless.!!