What do you consider rich?

[vern_humphrey]

How does the bank get the money to lend? It has to borrow it, pure and simple. The main source of borrowing is the deposits. Some of these deposits they keep in reserves, the rest they lend out. Deposits do not represent cash on hand, they represent cash on hand plus loans and other government securities, etc.

And the bank can lend more money than it has on deposit.

The bank does not put money into index funds,

Then why did you say if you borrowed money and put it into index funds that would be “just like a bank?”

but they put the into loans, which is just another type of asset. Putting the money into an index fund is similar to me borrowing money and buying a rental property. I am borrowing the money to buy an asset, which I expect to make me money.

Which is not what the bank does.

 

[stinkcat_14]

And the bank can lend more money than it has on deposit.

Then why did you say if you borrowed money and put it into index funds that would be “just like a bank?”

Which is not what the bank does.

Where does it get this extra money to lend? Besides money from depositors, it can borrow money from the financial markets, it can raise equity capital from investors, or it can borrow from the Federal Reserve or other banks. These are the only sources of money for a bank to lend, so if I am missing a source please let me know.

By just like a bank, I meant that I would be borrowing at a low rate and investing for a higher return.

 

[vern_humphrey]

Where does it get this extra money to lend? Besides money from depositors, it can borrow money from the financial markets, it can raise equity capital from investors, or it can borrow from the Federal Reserve or other banks. These are the only sources of money for a bank to lend, so if I am missing a source please let me know.

The bank gets the money by creating it – the interest it pays to the Federal Reserve is for the “permission slip.” There is no actual cash transferred to the lending bank
B

y just like a bank, I meant that I would be borrowing at a low rate and investing for a higher return.

But the bank lends, doesn’t it? It doesn’t invest in index funds, now does it?

 

[stinkcat_14]

The bank gets the money by creating it – the interest it pays to the Federal Reserve is for the “permission slip.” There is no actual cash transferred to the lending bank
B

The bank can borrow from the Fed, but in practice, only a very small fraction (well under 1%) of the dollars lent out by banks comes from borrowing from the Fed. They primarily borrow for liquidity needs, not to originate new loans.

 

[stinkcat_14]

But the bank lends, doesn’t it? It doesn’t invest in index funds, now does it?

By lending the money, what are they doing, they are making an investment. To the bank, the loan is an investment.

 

[vern_humphrey]

The bank can borrow from the Fed, but in practice, only a very small fraction (well under 1%) of the dollars lent out by banks comes from borrowing from the Fed. They primarily borrow for liquidity needs, not to originate new loans.

Correct – and they need liquidity, why?

Because they create money to lend, and the money lent is more than the original deposits. This can result in a situiation where there is a “run” on the bank – depositors withdrawing more than the bank has. Hence the need for the Fed to smooth out the situation.

 

[Nino]

…well as a daddy of seven and gran of 11…is that being ‘rich’ living in an old over taxed home…‘rich’ …quite healthy for my age ‘rich’ on and on…I think I am rich for from studying the lives of people like Teddy Roosevelt and Lincoln, …unknown heros down thru the centuries, etc etc…I have learned that to be ‘rich’ is many things…one is to have enemies…yes enemies! for years I have taken stands that are not P:C…anti-abortion,anti-free love,anti-UN,anti no win wars, and local issues…like anti-senior privilege…because local seniors raid the town and steal and litter all over the place,and going to the school board demanding where are the tax dollars going and do the kids know how to read,write and act in a civil manner…and speaking to the town board and fighting esploitation of taxpayers money in boondoggles…etc…having enemies from high places means my street has not been paved in over 25 years.etc etc…so for me being ‘rich’ is having enemies like the Founder of our Faith had and still has…amen and amen…Nino

 

[vern_humphrey]

By lending the money, what are they doing, they are making an investment. To the bank, the loan is an investment.

Abraham Linconl once asked, “If you call a tail a leg, now many legs does a dog have?”

The answer is “four.” It doesn’t matter what you call it, a tail is not a leg.

And an index fund is not a loan.

 

[stinkcat_14]

Correct – and they need liquidity, why?

Because they create money to lend, and the money lent is more than the original deposits. This can result in a situiation where there is a “run” on the bank – depositors withdrawing more than the bank has. Hence the need for the Fed to smooth out the situation.

Wrong. The bank needs liquidity because it has lent more than it keeps in reserves. Let’s try another example. I open a bank, (let’s call it stinky’s bank) and some guy named vern deposits $1000. For simplicity we’ll assume no other assets or liabilities. The balance sheet look like the following:

Assets = Reserves of $1,000, Liabilities = deposit owed to Vern of $1,000. Now when stinky lends the money,suppose he keeps 10% in reserves, and loans the rest on a 30 year mortgage.

The balance sheet now is:

Assets = $100 in reserves, $900 in loans, liabilities = deposit owed to Vern of $1,000.

Now, until I can borrow more money, there is no way I can make any more loans. There still is the risk of a run on the bank, because if vern wants his money tomorrow the bank will have a liquidity problem. The banking system can create money, but an individual bank cannot create money.

 

[vern_humphrey]

Wrong. The bank needs liquidity because it has lent more than it keeps in reserves.

What did I say? The bank has lent more than it has!

Let’s try another example. I open a bank, (let’s call it stinky’s bank) and some guy named vern deposits $1000. For simplicity we’ll assume no other assets or liabilities. The balance sheet look like the following:

Assets = Reserves of $1,000, Liabilities = deposit owed to Vern of $1,000. Now when stinky lends the money,suppose he keeps 10% in reserves, and loans the rest on a 30 year mortgage.

The balance sheet now is:

Assets = $100 in reserves, $900 in loans, liabilities = deposit owed to Vern of $1,000.

Now, until I can borrow more money, there is no way I can make any more loans. There still is the risk of a run on the bank, because if vern wants his money tomorrow the bank will have a liquidity problem. The banking system can create money, but an individual bank cannot create money.

And how is this different from what I said?

The bank has created money – the system is essentially the bank.

 

[stinkcat_14]

What did I say? The bank has lent more than it has!

And how is this different from what I said?

The bank has created money – the system is essentially the bank.

I have said that the bank can only loan what it can borrow. You claim that a bank can create money. But, a deposit in a bank account is money, at least the way the Federal Reserve defines money. So an individual bank doesn’t really create money, it already existed.

Anyway, I have to go teach a class, so we’ll have to carry on this conversation some other time.

 

[vern_humphrey]

I have said that the bank can only loan what it can borrow. You claim that a bank can create money. But, a deposit in a bank account is money, at least the way the Federal Reserve defines money. So an individual bank doesn’t really create money, it already existed.

Anyway, I have to go teach a class, so we’ll have to carry on this conversation some other time.

When the bank lends money, the total amount of money increases by the amount lent. The details are “transparent” – money is created, and created at the time of loan.

Now, I am still trying to figure out how I can increase my income by borrowing at high interest rates and buying a Lexus.

 

[Texas_Roofer]

This appears far from the OP intention, however it points out that money is relative in value.

My understanding is the Federal Reserve(Fed) sends a “Note” to the Treasury the Treasury then prints the cash to match and subtracts a printing fee so 1,000,000 note becomes 1,000,000 cash but the Treasury keeps about $1,000 sending $999,000 over to the Fed. So $1,000 has already enter the public through the Government spending. The $999,000 then is loaned to the Regional banks which then loan to the member banks. Every bank marks up the interest rate to cover operational cost and every bank places some of the money in reserve. The reserve is a requirement so:

Fed action__$1,000,000

• Primary banks_$ 999,000 at 2%, plus 1,000 paid to US Government
• Member banks_$970,000 at 4%, plus $29,000 reserve, plus 1,000 paid to US Government
• Any Bank $940,000 at 6%, plus $59,000 reserve, plus 1,000 paid to US Government
• General Public $912,000 at 8%, plus $87,000 reserve, plus 1,000 paid to US Government
  This continues until the interest is too high or the reserve claims the money

Now concerning the Lexus the Lexus does not ever make money, The issue is who buys a Lexus and why? The answers are people who think they can afford it and people who wish to buy the car. This is significant because it shows a high velocity of money meaning the money is being used quicker as opposed to being placed in reserves. When to much money is placed in reserves the economy slows.

 

[vern_humphrey]

This appears far from the OP intention, however it points out that money is relative in value

Yes. Money is relative in value – because it has no value of its own. A dollar bill by itself literally isn’t worth the paper it’s printed on – it derives value from the goods and labor it represents.

My understanding is the Federal Reserve(Fed) sends a “Note” to the Treasury the Treasury then prints the cash to match and subtracts a printing fee so 1,000,000 note becomes 1,000,000 cash but the Treasury keeps about $1,000 sending $999,000 over to the Fed. So $1,000 has already enter the public through the Government spending. The $999,000 then is loaned to the Regional banks which then loan to the member banks. Every bank marks up the interest rate to cover operational cost and every bank places some of the money in reserve. The reserve is a requirement so:

Fed action__$1,000,000

• Primary banks_$ 999,000 at 2%, plus 1,000 paid to US Government
• Member banks_$970,000 at 4%, plus $29,000 reserve, plus 1,000 paid to US Government
• Any Bank $940,000 at 6%, plus $59,000 reserve, plus 1,000 paid to US Government
• General Public $912,000 at 8%, plus $87,000 reserve, plus 1,000 paid to US Government
  This continues until the interest is too high or the reserve claims the money

Now concerning the Lexus the Lexus does not ever make money, The issue is who buys a Lexus and why? The answers are people who think they can afford it and people who wish to buy the car. This is significant because it shows a high velocity of money meaning the money is being used quicker as opposed to being placed in reserves. When to much money is placed in reserves the economy slows.

Correct – the Lexus doesn’t make money (unless you are a cab driver, and use it in your business.) So borrowing money to buy a Lexus doesn’t increase your income.

Similarly, owning a house doesn’t increase your income – until you sell it and realize the wealth it represents.

 

[Ridgerunner]

Since I said $500,000 represents material wealth, let me give you my definition. If you have $500,000 in net worth, you are in the upper 10% of wealth for the US. Being in the top 10% of the wealthiest nation on the planet, seems to be a good definition of wealth to me.

I would like to hear your definition though.

I don’t have a definition of “rich”. I think that’s a relative thing. If, for example, someone owned $1,000,000 in CDs. That would earn him or her about $50,000.00/year. A retired judge in my state receives a pension of about $70,000/year. (Assuming he’s not double-dipping, which most do.) Now let’s say the judge has zero net worth. Who’s the rich guy here? The first guy can’t spend his million or he’ll have no income. If he spends $70,000/year, his income will go steadily down. The judge can spend $70,000/year and his income stays the same.

And as others have pointed out, being “rich” in the U.S. is not really comparable to being “rich” in Kenya.

I suppose if I had to define “rich” or die, though, I would say that it is a situation in which one’s assets or other sources give him a disposable income that would allow him to indulge the desires most people in his society think of as “lavish”, without significant impediment, and which would be inheritable. Al Gore, John Kerry or William F. Buckley, for example.

But, being “rich” is very much in the mind of the beholder, as it depends on what one thinks of as “lavish”.

Being a petit bourgeois guy, I guess I tend to think of people with a liquid asset net worth in excess of Ten million, as “rich”, even though my definition would probably require at least 100 million.

 

[vern_humphrey]

I don’t have a definition of “rich”. I think that’s a relative thing. If, for example, someone owned $1,000,000 in CDs. That would earn him or her about $50,000.00/year. A retired judge in my state receives a pension of about $70,000/year. (Assuming he’s not double-dipping, which most do.) Now let’s say the judge has zero net worth. Who’s the rich guy here? The first guy can’t spend his million or he’ll have no income. If he spends $70,000/year, his income will go steadily down. The judge can spend $70,000/year and his income stays the same.

And as others have pointed out, being “rich” in the U.S. is not really comparable to being “rich” in Kenya.

I suppose if I had to define “rich” or die, though, I would say that it is a situation in which one’s assets or other sources give him a disposable income that would allow him to indulge the desires most people in his society think of as “lavish”, without significant impediment, and which would be inheritable. Al Gore, John Kerry or William F. Buckley, for example.

But, being “rich” is very much in the mind of the beholder, as it depends on what one thinks of as “lavish”.

Being a petit bourgeois guy, I guess I tend to think of people with a liquid asset net worth in excess of Ten million, as “rich”, even though my definition would probably require at least 100 million.

J.P. Morgan defined “rich” as “able to live off the income of your income.”

So if we set $50,000 a year as livable, then a “rich” man would have to get $2,000,000 a year in interest or profit off his investments. (At 5% inteterest, $2,000,000 paid in regular increments over the year would yield $50,000.)

 

[stinkcat_14]

J.P. Morgan defined “rich” as “able to live off the income of your income.”

So if we set $50,000 a year as livable, then a “rich” man would have to get $2,000,000 a year in interest or profit off his investments. (At 5% inteterest, $2,000,000 paid in regular increments over the year would yield $50,000.)

I am still trying to understand this, how would paying $2 million yield $50,000?

 

[stinkcat_14]

Yes. Money is relative in value – because it has no value of its own. A dollar bill by itself literally isn’t worth the paper it’s printed on – it derives value from the goods and labor it represents.

Correct – the Lexus doesn’t make money (unless you are a cab driver, and use it in your business.) So borrowing money to buy a Lexus doesn’t increase your income.

Similarly, owning a house doesn’t increase your income – until you sell it and realize the wealth it represents.

Actually a dollar bill has value only because we believe it has value. The fact that we carry money is an act of faith.

Owning a house doesn’t increase your cash income, but your total income (both in kind and cash) is higher because you own a house.

 

[vern_humphrey]

I am still trying to understand this, how would paying $2 million yield $50,000?

Allow me to explain. You are receiving regular payments throughout the year, with the annual total being $2,000,000. You deposit each payment in an interest-bearing account at 5%.

At the end of the year, the** first** dollar you deposited has earned 5% – because it’s been in the account all year. The **last **dollar has earned 0% – because it was just deposited.

The mean of the two is 2 1/2%. And 2 1/2% of $2,000,000 is $50,000.

Your income is $2,000,000 a year, and the income of your income (which was J.P. Morgan’s standard) is $50,000.

 

[stinkcat_14]

Allow me to explain. You are receiving regular payments throughout the year, with the annual total being $2,000,000. You deposit each payment in an interest-bearing account at 5%.

At the end of the year, the** first** dollar you deposited has earned 5% – because it’s been in the account all year. The **last **dollar has earned 0% – because it was just deposited.

The mean of the two is 2 1/2%. And 2 1/2% of $2,000,000 is $50,000.

Your income is $2,000,000 a year, and the income of your income (which was J.P. Morgan’s standard) is $50,000.

Assuming of course, you never spent any of the money. On the other hand, I am not sure that anyone with an income of $2 million per year would consider $50,000 livable.