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Eurozone and Target 2 monopoly

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Sorcery
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Eurozone and Target 2 monopoly

#244380

Postby Sorcery » August 14th, 2019, 11:10 pm

Picked this link up from John Enright in the Telegraph comments. It's a nearly 30min video of a German economist(?) describing Target 2 to a New Zealand audience.
Fairly scary in that Target 2 looks like an unsustainable process which means it will go pop perhaps with the Euro.
https://www.youtube.com/watch?reload=9& ... 2QYaJGgtw8

My only problem with it, is that his outline missed what happened when the Greek farmer pays off his tractor debt.
Food for thought anyway.

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Re: Eurozone and Target 2 monopoly

#244725

Postby NeilW » August 16th, 2019, 10:50 am

Target 2 is entirely sustainable because the 'debt' is just a balancing figure in the bank accounting. Since central banks can create their own equity if they want to, it ain't a problem. That's the advantage of having your balance sheet denominated in your own liabilities.

Always remember that when you are 'in credit', that is because the bank has issued 'credit' - which is the accounting term for a debt.

Bank debts are your assets, your debts are bank assets. The accounting of banks and bank like structures is necessarily backwards.

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Re: Eurozone and Target 2 monopoly

#244844

Postby Sorcery » August 16th, 2019, 5:16 pm

NeilW wrote:Target 2 is entirely sustainable because the 'debt' is just a balancing figure in the bank accounting. Since central banks can create their own equity if they want to, it ain't a problem. That's the advantage of having your balance sheet denominated in your own liabilities.

Always remember that when you are 'in credit', that is because the bank has issued 'credit' - which is the accounting term for a debt.

Bank debts are your assets, your debts are bank assets. The accounting of banks and bank like structures is necessarily backwards.


As described in the video it's a real balancing figure on the Bundesbank's balance sheet. It only came in when the banks stopped lending to each other in roughly 2008/2009.
Germany makes a tractor, Greek Farmer wants a tractor & seeks loan from Greek Bank, Greek Bank has no liquidity, German Bank lends to Greek Bank who loans money to Greek farmer. Greek Bank presumably gets its loan repaid + interest. German bank gets nothing but a call on the Eurozone (whatever that means). So Bundesbank ends up with almost a trillion in "assets" (loans to other Eurozone banks) that don't pay interest and no clear way of getting the loans repaid.
I may have missed something important but that seems to be the gist of whats been happening.

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Re: Eurozone and Target 2 monopoly

#245341

Postby NeilW » August 19th, 2019, 6:49 am

Sorcery wrote:Germany makes a tractor, Greek Farmer wants a tractor & seeks loan from Greek Bank, Greek Bank has no liquidity, German Bank lends to Greek Bank who loans money to Greek farmer. Greek Bank presumably gets its loan repaid + interest. German bank gets nothing but a call on the Eurozone (whatever that means). So Bundesbank ends up with almost a trillion in "assets" (loans to other Eurozone banks) that don't pay interest and no clear way of getting the loans repaid.
I may have missed something important but that seems to be the gist of whats been happening.


It works like this.

Greek bank creates loan out of nothing. Lends Euros to Greek Farmer. Greek farmer then has a loan *and a deposit in the Greek bank* (the advance). All created by balance sheet expansion. Greek farmer pays German tractor manufacturer into their bank account.

The natural function of *any* bank transfer is that the target bank takes the place of the deposit holder in the source bank. Precisely the same happens when you pay somebody with an account at Lloyds from a Barclays account. Barclays changes the tag on your deposit in Barclays from you to "Lloyds Bank". Lloyds bank then marks up its "Payments from Barclays" account and the account of the payee.

All this shows up as interbank lending. The German bank appears to 'lend' to the Greek bank, but really what has happened is that the Greek bank has just changed the tag on the deposit it has created from a Greek farmer to a German bank, and the German bank created a mirror deposit in its own accounts.

Then the function of the interbank transfer through the hierarchy of the Eurozone (up to the Hellenic central bank, to the ECB, down to the Bundesbank and on to the German bank) creates mirror transactions that looks like trillions of assets and trillions of liabilities. But it is all just balancing accounting in the system. No money is being dragged out of the hands of anybody. It is literally being created out of thin air on demand - because that's what banks do.

The video you watched assumed a fixed amount of this thing called 'money' and an individuals understanding of money. It then uses those two misconceptions to weave a narrative of fear. It's a common propaganda technique.

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Re: Eurozone and Target 2 monopoly

#245353

Postby Spet0789 » August 19th, 2019, 8:10 am

NeilW - you’re dangerously close to sounding like an expert. If you want the Brexit crowd to listen you’ll have to tone down the specific detail. It gives them headaches and makes them want to go back to reading one of their Brexit comics (DM, DT, Express).

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Re: Eurozone and Target 2 monopoly

#245377

Postby JoyofBrex8889 » August 19th, 2019, 9:15 am

I am entirely convinced that money represents a claim on real wealth. In the mirror world of the Eurozone, thus appears not to be the case. Vast debts and so called deposits seem to lack any link to base reality.

When money ceases to represent a claim on a real asset, it surely ceases to have meaningful value.

There is logically a finite amount of real wealth available in the world: the globe is demonstrably not infinite after all. And yet modern monetary theorists tell us that our spending power is infinite.

Someone is wrong here, and I am pretty certain it isn’t the geographers.

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Re: Eurozone and Target 2 monopoly

#245479

Postby Sorcery » August 19th, 2019, 3:33 pm

NeilW wrote:
Sorcery wrote:Germany makes a tractor, Greek Farmer wants a tractor & seeks loan from Greek Bank, Greek Bank has no liquidity, German Bank lends to Greek Bank who loans money to Greek farmer. Greek Bank presumably gets its loan repaid + interest. German bank gets nothing but a call on the Eurozone (whatever that means). So Bundesbank ends up with almost a trillion in "assets" (loans to other Eurozone banks) that don't pay interest and no clear way of getting the loans repaid.
I may have missed something important but that seems to be the gist of whats been happening.


It works like this.

Greek bank creates loan out of nothing. Lends Euros to Greek Farmer. Greek farmer then has a loan *and a deposit in the Greek bank* (the advance). All created by balance sheet expansion. Greek farmer pays German tractor manufacturer into their bank account.

The natural function of *any* bank transfer is that the target bank takes the place of the deposit holder in the source bank. Precisely the same happens when you pay somebody with an account at Lloyds from a Barclays account. Barclays changes the tag on your deposit in Barclays from you to "Lloyds Bank". Lloyds bank then marks up its "Payments from Barclays" account and the account of the payee.

All this shows up as interbank lending. The German bank appears to 'lend' to the Greek bank, but really what has happened is that the Greek bank has just changed the tag on the deposit it has created from a Greek farmer to a German bank, and the German bank created a mirror deposit in its own accounts.

Then the function of the interbank transfer through the hierarchy of the Eurozone (up to the Hellenic central bank, to the ECB, down to the Bundesbank and on to the German bank) creates mirror transactions that looks like trillions of assets and trillions of liabilities. But it is all just balancing accounting in the system. No money is being dragged out of the hands of anybody. It is literally being created out of thin air on demand - because that's what banks do.

The video you watched assumed a fixed amount of this thing called 'money' and an individuals understanding of money. It then uses those two misconceptions to weave a narrative of fear. It's a common propaganda technique.


NeilW,
Are you saying the person in the video does not have a good enough understanding and/or is being alarmist?
I will happily bow to someone with superior knowledge :)
I keep finding references to Target 2 potential problems all over the place, here is another one https://insights.abnamro.nl/en/2017/05/ ... time-bomb/

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Re: Eurozone and Target 2 monopoly

#245537

Postby NeilW » August 19th, 2019, 6:06 pm

Sorcery wrote:Are you saying the person in the video does not have a good enough understanding and/or is being alarmist?


They are being alarmist. It's a common problems with bank accounting.

It looks wrong because it appears backward and can easily be used to frighten people.

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Re: Eurozone and Target 2 monopoly

#245553

Postby dealtn » August 19th, 2019, 6:48 pm

NeilW wrote:
Sorcery wrote:Germany makes a tractor, Greek Farmer wants a tractor & seeks loan from Greek Bank, Greek Bank has no liquidity, German Bank lends to Greek Bank who loans money to Greek farmer. Greek Bank presumably gets its loan repaid + interest. German bank gets nothing but a call on the Eurozone (whatever that means). So Bundesbank ends up with almost a trillion in "assets" (loans to other Eurozone banks) that don't pay interest and no clear way of getting the loans repaid.
I may have missed something important but that seems to be the gist of whats been happening.


The natural function of *any* bank transfer is that the target bank takes the place of the deposit holder in the source bank. Precisely the same happens when you pay somebody with an account at Lloyds from a Barclays account. Barclays changes the tag on your deposit in Barclays from you to "Lloyds Bank". Lloyds bank then marks up its "Payments from Barclays" account and the account of the payee.

All this shows up as interbank lending.


Remind me how all that "interbank lending" worked out when the "Great Financial Crash" happened! As Barclays lending matured and Lloyds found it, shall we say "difficult" to roll it over, were there no implications for shareholders/employees/depositors in Lloyds (just to use your example), let alone the wider UK economy and population as a whole?

How do you think the German banks, and people, will be satisfied if/when these real financial claims will be written off as mere accounting?

It is already several years on from the "rescue" of UK banks, and the "people" bailing them out, yet in many quarters the associated anger at this solution is still in abundance. The European success, at least so far, has been in the "people" being happy with the situation, but should German (or other nationals) be convinced they are being "tricked" out of their wealth by Greek (or other) nationals, then that balancing act becomes many times harder to perpetuate.

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Re: Eurozone and Target 2 monopoly

#245559

Postby scrumpyjack » August 19th, 2019, 7:06 pm

Money only has value if people think it has value. There is no underlying wealth backing it up. We abandoned the gold standard many many decades ago.

For some reason the Bank of England has been able, so far, to get away with printing loads of money (quantitive easing). People still continued to believe our currency has value and so, for the time being, inflation has not taken off.

Contrast this with Zimbabwe where people did not have confidence in the currency and Mugabe’s printing huge quantities of it resulted in it having virtually no value.

Unfortunately confidence takes a long time to build up slowly and can be lost surprisingly quickly.

As for wealth being finite, perhaps it is, but it can be created pretty quickly, and also destroyed. Take Amazon for example. It is a business that people have valued hugely – a trillion $ is it? That ‘wealth’ (ie the market value of its shares) has been created simply by people thinking its future returns will justify that current valuation. Expectation has created massive value – for the moment.

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Re: Eurozone and Target 2 monopoly

#245729

Postby NeilW » August 20th, 2019, 12:08 pm

dealtn wrote:[
Remind me how all that "interbank lending" worked out when the "Great Financial Crash" happened! As Barclays lending matured and Lloyds found it, shall we say "difficult" to roll it over, were there no implications for shareholders/employees/depositors in Lloyds (just to use your example), let alone the wider UK economy and population as a whole?.


It can't be difficult - unless the central bank makes it difficult.

If Lloyds decide not to take a deposit with Barclays then the payment system fails. The central bank is tasked with making the payment system work.
The only thing Lloyds can do then is deposit with the central bank rather than Barclays. The central bank then takes the place of lloyds in becoming the depositor in Barclays. In other words the man in the middle

If the central bank tries to avoid doing that then the payment system rapidly fails - as we saw in 2008 - and a load of emergency measures spring up which force it to become the depositor in Barclays. Again as we saw in 2008.

Essentially the inter bank system is like a water balloon. It has to go somewhere.

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Re: Eurozone and Target 2 monopoly

#245730

Postby NeilW » August 20th, 2019, 12:10 pm

scrumpyjack wrote:Money only has value if people think it has value


I tax you at §1000 and offer to pay you at §10 per hour. I can enforce the taxation by force of arms if necessary confiscating all you have.

What's the value of §?

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Re: Eurozone and Target 2 monopoly

#245772

Postby dealtn » August 20th, 2019, 3:12 pm

NeilW wrote:
If Lloyds decide not to take a deposit with Barclays ...


I'm struggling to believe you understand what happened in 2008 if you think (in this example) Lloyds decided not to take interbank lending from Barclays (or anyone else for that matter).

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Re: Eurozone and Target 2 monopoly

#245773

Postby NeilW » August 20th, 2019, 3:21 pm

dealtn wrote:I'm struggling to believe you understand what happened in 2008 if you think (in this example) Lloyds decided not to take interbank lending from Barclays (or anyone else for that matter).


Taking a deposit = lending to. It's the same thing described from the other side of the balance sheet. In my example above the payment is from Barclays to Lloyds which requires Lloyds to take a deposit in/lend to Barclays.

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Re: Eurozone and Target 2 monopoly

#245777

Postby dealtn » August 20th, 2019, 3:30 pm

NeilW wrote:
dealtn wrote:I'm struggling to believe you understand what happened in 2008 if you think (in this example) Lloyds decided not to take interbank lending from Barclays (or anyone else for that matter).


Taking a deposit = lending to. It's the same thing described from the other side of the balance sheet. In my example above the payment is from Barclays to Lloyds which requires Lloyds to take a deposit in/lend to Barclays.


You really don't get it. Interbank lending isn't obligatory, Barclays have no obligation to lend, or deposit with, Lloyds, And they didn't. They had enough problems themselves. It is only with respect to a payment mechanism that this takes place, to consider this is the same as interbank lending is simply wrong.

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Re: Eurozone and Target 2 monopoly

#245791

Postby NeilW » August 20th, 2019, 4:51 pm

dealtn wrote:
NeilW wrote:You really don't get it. Interbank lending isn't obligatory,


It is if you want the payment system to clear. It can't clear otherwise and the payments between banks will fail. That's why a central bank is 'lender of last resort'.

Do a payment between two banks without the central bank in the way. Then you'll see what I mean. The central bank system is just a collateral optimisation of that process.

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Re: Eurozone and Target 2 monopoly

#245843

Postby dealtn » August 20th, 2019, 8:21 pm

You really need to understand the difference between interbank lending, and making a payment from one bank to another. There are completely different transactions, albeit the former also requires a payment between one bank and the other.

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Re: Eurozone and Target 2 monopoly

#246912

Postby WorkShy » August 25th, 2019, 4:31 pm

Any currency area, including the Euro area, needs a payments system that settles payments in central bank money (reserves). Because the Euro area, however, includes many countries cross-border payments are also settled via a regional payments system called TARGET2. As a result, net outflows of money payments from one country to another lead to imbalances in TARGET2, whereby the national central bank (NCB) in one country ends up with an exposure to the NCB in another country. Effectively, the NCBs of the current account surplus countries end up with large claims on the NCBs of the deficit countries. These exposures are technically via the ECB balance sheet.

The only limit to TARGET2 cross-borders flows of money occurs if banks in a stressed country run out of eligible collateral, as was the situation in Greece and Cyprus. For a while, such banks can tap into the ECB’s emergency liquidity assistance (ELA) and only in extreme circumstances are capital controls imposed. Thus, capital controls which limit the buildup of TARGET2 imbalances are a last resort. In fact, TARGET2 has been kept open until payment outflows and TARGET2 imbalances have reached very high levels.

Before the financial crisis, TARGET2 imbalances were tiny, as flows of money into Germany (to pay for German exports) were in effect reinvested by German banks in more rapidly growing countries such as Spain and Ireland. These reinvestment flows dried up during the sovereign crisis, causing TARGET2 imbalances to increase sharply. TARGET2 imbalances then narrowed after the announcement of Outright Monetary Transaction (OMT), before rising sharply again after the launch of QE. The increases during the QE period were caused by the uneven distribution of the sellers of governments bonds, many of whom had their settlement accounts at the Bundesbank. The Bundesbank now has a claim on the rest of the Eurosystem of almost €1 trillion (30% of German GDP). This could possibly lead to losses if a country with a deficit decides to leave the Euro area.

In reality, TARGET2 has been a highly effective absorber of balance of payment stress. It has also become a source of controversy from critics, even though it has to be an integral part of the plumbing of any currency area, because TARGET2 balances are viewed (incorrectly) an involuntary and unsecured loan from one country to another. Critics often suggest that TARGET2 imbalances should somehow be “settled” or “collateralized” but this is unlikely as it would undermine the single currency.

As an aside it seems that some posters on this thread don't seem to understanding how the modern fiat monetary system works. They seem to think that money is somehow finite. It isn't. In a modern monetary system, only the price of money is controllled (via monetary policy), not the quantity. Commercial banks create inside money ab initio through loan creation. That money is sterilized when the loan is paid off. The sovereign creates outside money ab initio through expenditure. The sovereign usually then sterilizes this money creation through taxation or bond issuance. Please read this BoE piece that explains why "fractional reserve banking" is a myth https://www.bankofengland.co.uk/-/media ... E476E01654.

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Re: Eurozone and Target 2 monopoly

#246925

Postby scrumpyjack » August 25th, 2019, 5:31 pm

Of course this trade imbalance between Germany and the rest of the EU means that eventually Germany will end up owning the rest of the EU.

That is not healthy politically. One can envisage a scenario where the main deficit countries (Italy, Greece etc) exit the EU and declare insolvency.

That would be interesting!


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