3 Theories on How Banks Create Money - this time, with some accounting.

[JohnfrmClevelan]

Ideological rhetoric ?

Oh the friken irony.

After 8 Trillion in new debt and we still have a economy propped up on QE and Stimulus ?

How much more should Japan ' borrow " Kush in order to finally get their economy up and going again ? Another few hundred Trillion Yen should do it
That " practice has failed miserably Kush and you're just to proud to admit it

Stimulus doesn't fix the underlying issues so the economy never gets to heal properly.

Its just a way for Progressives to hide the extent of their failed policies and its ar the expense of the consumer and the private sector.

You're predisposed to Political talking points from left wing ideologues, I get that Kush

You're easy to lie too and Politicians love that in a citizen. But don't project your naivete upon the resr of us.

Who know when some Jackass like Obama promises shovel ready jobs, hes lying.

It's an interesting read, only 19 pages, not terribly wonky. Understanding how banks actually operate is pretty central to understanding the rest of the economy, so if you aren't willing to read the article and put some effort into learning, please stay out of the discussion.

...or did you miss the OP?

 

[Fenton]

And you can't have demand for credit unless you have "free money" introduced via fiscal stimulus. IF we rely on just private sector credit expansion you get what Austrians call the business cycle. The government can't create such cycles, they can only actively prevent them, this is all very basic supply and demand stuff that the Austrians taught us.

Wow, stimulus is " Free " ? Tell that to the Japanese. Who have been forced into a endless and destructive monetary exapansion just to keepingp from defaulting on their debt

Oh thats right, you ideologues claim no Nation with a sovereign currency can ever go bankrupt....Lol


I guess you're saying that massive debt arbitrarily distrubted is better than real wealth distributed in a Free market economy ?

Because the Trillions in Stimulus thats been distributed all okver the world says different.

You people have only one answer to right the negative effects of stimulus and its more stimulus.

unreal

 

[Fenton]

...or did you miss the OP?

Yes, you ideologues want to sit around in a circle jerk and congratulate yourselves on your mindless repetitions.

Start your own forum then if you dont want someone to interfere with your pompus bull ****.

Because this is still a debate forum where all are allowed to participate.

Go start a chat room if thats all you're here for. Backslaps from like minded ideologues is a bit cowardly for my taste.

 

[JohnfrmClevelan]

Yes, you ideologues want to sit around in a circle jerk and congratulate yourselves on your mindless repetitions.

Start your own forum then if you dont want someone to interfere with your pompus bull ****.

Because this is still a debate forum where all are allowed to participate.

Go start a chat room if thats all you're here for. Backslaps from like minded ideologues is a bit cowardly for my taste.

I don't care to have you actually DEBATE something, Fenton, but I can't remember a post you have made in the time I've been here that has a speck of merit to it. You add nothing to the discussion - any discussion. Nobody wants to hear what you have to say, because we've heard it all before, and it's just as useless as it was the first time.

You obviously didn't bother to read the article. And since you knew less about banking than anybody else here going in, that puts you even further behind. Now, shut up and do your homework for once.

 

[JP Hochbaum]

Wow, stimulus is " Free " ? Tell that to the Japanese. Who have been forced into a endless and destructive monetary exapansion just to keepingp from defaulting on their debt

1) How does monetary expansion prevent defaulting?

2) How does a monetarily sovereign nation default, with debts in its own currency?

 

[JP Hochbaum]

I guess you're saying that massive debt arbitrarily distrubted is better than real wealth distributed in a Free market economy ?

l/QUOTE]
No I am saying that morally speaking there is a difference between government distribution and free market distribution and that is it. In economics I go by outcomes, not morality or ideology. If you go by morality and ideology economics then becomes a religion. If we go by results and outcomes you go by the science.

And the outcomes have proven through history that stimulus works and austerity doesn't. Just look at current events today a meager stimulus in the US and Japan has kept the economies afloat, and Chinese massive stimulus has kept it growing. Where in Europe austerity is showing its ugly head.

 

[Lakryte]

Deposits are automatically converted to reserves, which can be used to settle loans. If by any chance a bank goes below the required reserve ratio after making loans, they will be required to obtain them in the fed funds market, discount window, or asset markets (via selling some of their assets).

You just made up the "neither deposits or loans are reserves" comment and hoped nobody who understands banking would call you out.

Deposits created by the issuance of a loan are not automatically converted to reserves--that is total nonsense. Reserves are held in the form of vault cash or deposits with Federal Reserve Banks. You are conflating deposits created by the issuance of a loan with deposits at Federal Reserve banks. The latter constitutes reserves, the former does not. When a bank creates a loan, it is not simultaneously creating reserves, period.

 

[Lakryte]

You are full of nonsense. Read the thread for the reasons why your post is based on a lack of understanding of banking.

If you disagree with what I say, point out why. Otherwise, don't bother responding.

 

[JP Hochbaum]

Deposits created by the issuance of a loan are not automatically converted to reserves--that is total nonsense. Reserves are held in the form of vault cash or deposits with Federal Reserve Banks. You are conflating deposits created by the issuance of a loan with deposits at Federal Reserve banks. The latter constitutes reserves, the former does not. When a bank creates a loan, it is not simultaneously creating reserves, period.

IF a bank has the capital requirements it lends money when it can (not reserve requirements), so loans come first here before reserve requirements are needed to be met. If its reserves don't meet requirements at the end of the day, it then acquires the reserves, this is averaged requirements over a 14 day period so adding to reserves isn't a day to day decision.

 

[Fenton]

I don't care to have you actually DEBATE something, Fenton, but I can't remember a post you have made in the time I've been here that has a speck of merit to it. You add nothing to the discussion - any discussion. Nobody wants to hear what you have to say, because we've heard it all before, and it's just as useless as it was the first time.

You obviously didn't bother to read the article. And since you knew less about banking than anybody else here going in, that puts you even further behind. Now, shut up and do your homework for once.

A critique on merit from a MMTer... that's rich...And ironic

 

[Fenton]

I guess you're saying that massive debt arbitrarily distrubted is better than real wealth distributed in a Free market economy ?

l/QUOTE]
No I am saying that morally speaking there is a difference between government distribution and free market distribution and that is it. In economics I go by outcomes, not morality or ideology. If you go by morality and ideology economics then becomes a religion. If we go by results and outcomes you go by the science.

And the outcomes have proven through history that stimulus works and austerity doesn't. Just look at current events today a meager stimulus in the US and Japan has kept the economies afloat, and Chinese massive stimulus has kept it growing. Where in Europe austerity is showing its ugly head.

If you go by outcomes then you should be willing to accept that Fiscal stimulus when its been tried has only masked the underlying economic issues and simultaneously grown debt.

You're ignoring obvious examples and calling it a Science, which economics is not.

I see Government intervention weather it be monetary, fiscal or via regulations and laws passed under the pretext of " equality " as destructive.

You point to the Business cycle and ignore the massive intervention that led us to the last Financial crisis.

This notion that Government should intervene to " increase aggregate demand " is a fallacy.

Demand or a lack of is already taken care of in a free market economy. Massive intervention has only corrupted the most efficient means of running our economy.

Its a contradiction. The Progressives think that they can interject to improve a process that they oppose on principle. The left is opposed to the free market economy on principle therefore they dont seek to improve it, they seek to undermine it and it SHOWS.

As far as Austerity goes lets just wait and see what happens in Greece now that they've elected a low life Socialist to run their Country.

 

[Fenton]

1) How does monetary expansion prevent defaulting?

2) How does a monetarily sovereign nation default, with debts in its own currency?

1) By making debt cheap....for now.

2) By screwing its creditors and debasing its currency.

Think Argentina, Venezuela, Japan.

 

[Lakryte]

So we would artificially drive up the interest rate, and create a huge disincentive to borrow, which would harm producers of expensive goods that we typically borrow money for, such as cars and houses. This would also deincentivize business expansion, at least expansion that is done on credit.

I'm not sure how this would keep banks from "creating" money though. If banks were able to lend deposits (regardless if they are savings accounts or not), the effect of creating new money (if that's what happens at all), would still exist. That's what we do know, just on a different scale.

Sounds to me that everything would be about the same, except that there wouldn't be as much demand for credit due to much higher interest rates, and bank fees would be much higher.

Nobody is artificially driving up the interest rate. If there is a low supply of savings (loanable funds) the price of loanable funds will increase (aka interest rates will increase). If there is a high supply of loanable funds, interest rates will decrease. There is nothing artificial about basic market forces.

In what I discussed, banks are not lending deposits. When a person agrees to put money in a bank that cannot be withdrawn for a set period of time (as I described) that is not a deposit--that is essentially a loan to the bank. The bank then takes those funds loaned to it and loans them out to others. In this way the bank acts as an intermediary and central source of loanable funds. Where is the new money created in this process?


What clarified the whole process for me was an understanding of the types of contracts involved. Below is a detailed (if not longwinded) explanation of the difference between mutuum contracts (monetary loan contracts) and irregular deposit contracts (monetary deposit contracts).

A Mutuum contract refers to the contract by which one person—the lender—entrusts to another—the borrower or mutuary—a certain quantity of fungible goods (i.e. money), and the borrower is obliged, at the end of a specified term, to return an equal quantity of goods of the same type and quality (tantundem in Latin). During the term of the contract, the borrower receives temporary ownership of the money lent to him, and the lender has no access to that money. At the end of the term, the borrower is obliges to return the tantundum plus interest.

A deposit contract is a contract made in good faith by which one person—the depositor—entrusts to another—the depositary—a movable good for that person to guard, protect, and return at any moment the depositor should ask for it. The ownership and availability of the good, contrary to the mutuum contract, is not transferred. The depositor still owns the good, while the depositary serves to safeguard it. As an example, say I deposit a rare painting. I still own the painting, and the depositary is merely safeguarding it for me.

An "irregular" deposit contract is similar to the above but pertains to fungible goodrs, like money. In a regular deposit contract, I expect to receive the exact good that I deposited. In an irregular deposit contract, the fungible goods are stored together, and I only expect to receive the same quantity and quality that I deposited (the tantundem), not necessarily the exact same units.

Fractional reserve banking conflates a mutuum contract with an irregular deposit contract. A person deposits cash in a demand deposit account and are told they can access it at any time. This suggests an irregular deposit contract. But banks do not hold all of their cash on reserve. They treat the funds as if they are part of a mutuum contract, and use them as they wish. It is this conflation that facilitates the creation of money. There is only $100 cash in the bank, but the bank can issue $1000 worth of claims to that cash if it so wishes. So long as not everyone wants the cash, no problems will result. And even if everyone did want the cash, the Fed will be there to provide more cash.

In full reserve banking, mutuum contracts and irregular deposit contracts are separate. If I open a checking account (a demand deposit), my money will always be at the bank. If I enter into a mutuum contract (what we call time "deposits" such as CDs, even though they are not deposits at all), I temporarily transfer my ownership of the money to the bank, which then uses that same money to finance loans. There is no money creation here. If I directly loaned my $10000 to someone to buy a car, that would transfer, not create, money. Likewise, when I put my money in a time deposit (read: loan it to the bank) and the bank then loans that money to someone to buy a car, that too is merely transferring, not creating, money.

 

[Fenton]

I don't care to have you actually DEBATE something, Fenton, but I can't remember a post you have made in the time I've been here that has a speck of merit to it. You add nothing to the discussion - any discussion. Nobody wants to hear what you have to say, because we've heard it all before, and it's just as useless as it was the first time.

You obviously didn't bother to read the article. And since you knew less about banking than anybody else here going in, that puts you even further behind. Now, shut up and do your homework for once.

Lol...


A critique on merit, from a MMTer no less.

Now thats funny

 

[Lakryte]

IF a bank has the capital requirements it lends money when it can (not reserve requirements), so loans come first here before reserve requirements are needed to be met. If its reserves don't meet requirements at the end of the day, it then acquires the reserves, this is averaged requirements over a 14 day period so adding to reserves isn't a day to day decision.

I don't dispute any of the above. It is well known that banks will create loans in excess of reserve requirements, and then get reserves from other banks in order to meet the requirement. But that doesn't change the truth of my comment. When a bank creates a loan, it is not simultaneously creating reserves.

 

[imagep]

Nobody is artificially driving up the interest rate. If there is a low supply of savings (loanable funds) the price of loanable funds will increase (aka interest rates will increase). If there is a high supply of loanable funds, interest rates will decrease. There is nothing artificial about basic market forces....

Money can be created from nothing, at virtually no cost, and in huge supply. It can also be utilized over and over and over again without "wearing out". There is no reason for it to be scarce, or expensive.

You are suggesting that we artificially constrain the supply of money, in order to make it scarce and expensive. I scarcely see how such a policy would add any value to our economy.

 

[Lakryte]

Money can be created from nothing, at virtually no cost, and in huge supply. It can also be utilized over and over and over again without "wearing out". There is no reason for it to be scarce, or expensive. You are suggesting that we artificially constrain the supply of money, in order to make it scarce and expensive. I scarcely see how such a policy would add any value to our economy.

First let's distinguish between "money" and "loanable funds." The price of money is the array of goods and services it can be exchanged for. If the price of a TV is $1000, the price of $1 is 1/1000 of a TV, or 1 pack of gum, or whatever other exchange ratio there is. In other words, the price of money is it's purchasing power. The price of loanable funds, by contrast, is the interest rate.

There may be a massive supply of money, but that does not mean the supply of loanable funds will be equally large. If people are spending all of their money, saving none of it, the supply of loanable funds will be zero. Interest rates would be high to reflect this short supply, encouraging people to save money which could then finance loans. The more people save, the greater the supply of loanable funds, and the lower the interest rate will be. If the expanded supply of money is used as loanable funds (as it is today) that only increases the nominal amount of loanable funds. The value of each unit of loanable funds, however, is lower, and in real terms there truly are no more loanable funds than before.

Creating more fiat dollar money doesn't do any good. The more money is created, the less value each unit of money has. Creating money merely transfers wealth from those who are currently holding money to the receivers of the newly created money. It is ultimately analogous to theft. And since investments are useless if people do not have the savings to pay for the products they produce, projects financed in excess of actual savings are doomed to bust. Expanding the supply of money not only has no economic benefit, but causes economic harm.

 

[imagep]

First let's distinguish between "money" and "loanable funds." The price of money is the array of goods and services it can be exchanged for. If the price of a TV is $1000, the price of $1 is 1/1000 of a TV, or 1 pack of gum, or whatever other exchange ratio there is. In other words, the price of money is it's purchasing power. The price of loanable funds, by contrast, is the interest rate.

There may be a massive supply of money, but that does not mean the supply of loanable funds will be equally large. If people are spending all of their money, saving none of it, the supply of loanable funds will be zero. Interest rates would be high to reflect this short supply, encouraging people to save money which could then finance loans. The more people save, the greater the supply of loanable funds, and the lower the interest rate will be. If the expanded supply of money is used as loanable funds (as it is today) that only increases the nominal amount of loanable funds. The value of each unit of loanable funds, however, is lower, and in real terms there truly are no more loanable funds than before.

Creating more fiat dollar money doesn't do any good. The more money is created, the less value each unit of money has. Creating money merely transfers wealth from those who are currently holding money to the receivers of the newly created money. It is ultimately analogous to theft. And since investments are useless if people do not have the savings to pay for the products they produce, projects financed in excess of actual savings are doomed to bust. Expanding the supply of money not only has no economic benefit, but causes economic harm.

Businesses expand every day, using worthless money that they borrow from the bank. It's a system that seems to work fairly well.

Can you point to any existing lending systems in any part of the world that are more successful than what we have in the USA?

 

[JP Hochbaum]

I don't dispute any of the above. It is well known that banks will create loans in excess of reserve requirements, and then get reserves from other banks in order to meet the requirement. But that doesn't change the truth of my comment. When a bank creates a loan, it is not simultaneously creating reserves.

True, it only creates a deposit at another bank. It only creates more reserves if that bank needs to obtain reserves from excessive lending. That is really what this thread is likley alluding to.

 

[JP Hochbaum]

1) By making debt cheap....for now.

2) By screwing its creditors and debasing its currency.

Think Argentina, Venezuela, Japan.

Nope, explain the United States, largest QE on the planet and yet rising against Japan and Euro.

 

[Lakryte]

Businesses expand every day, using worthless money that they borrow from the bank. It's a system that seems to work fairly well.

Can you point to any existing lending systems in any part of the world that are more successful than what we have in the USA?

It works fairly well until the inevitable bust occurs. If you could modify the system to replace the boom and bust cycle with steady economic growth, why wouldn't you? There is no need to point to a better existing lending system. The existence of such a system or lack thereof has no bearing on anything I have said.

 

[Lakryte]

Nope, explain the United States, largest QE on the planet and yet rising against Japan and Euro.

I am not sure what Fenton was trying to argue, but the effect of QE is largely unnoticed because the money is just sitting in excess reserves at the banks. As far as the money supply is concerned, it's as if those excess reserves were never created.

 

[imagep]

It works fairly well until the inevitable bust occurs. If you could modify the system to replace the boom and bust cycle with steady economic growth, why wouldn't you? There is no need to point to a better existing lending system. The existence of such a system or lack thereof has no bearing on anything I have said.

Yet we had booms and busts before we even had fiat money.

And recessions/panics have become shorter an less frequent after we established the federal reserve system.

I believe that booms and busts are more the result of irrational behavior, than any particular monetary policy.

 

[Lakryte]

Yet we had booms and busts before we even had fiat money.

And recessions/panics have become shorter an less frequent after we established the federal reserve system.

I believe that booms and busts are more the result of irrational behavior, than any particular monetary policy.

And we had fractional reserve banking before we had fiat money.

Fractional reserve banking is the cause, not fiat money. Fiat money, coupled with central banks, just makes fractional reserve banks less prone to bank runs.

Neither fiat money nor central banks can stop the inevitable boom bust cycle caused by fractional reserve banking's expansion of the money supply.

 

[imagep]

And we had fractional reserve banking before we had fiat money.

Fractional reserve banking is the cause, not fiat money. Fiat money, coupled with central banks, just makes fractional reserve banks less prone to bank runs.

Neither fiat money nor central banks can stop the inevitable boom bust cycle caused by fractional reserve banking's expansion of the money supply.

So can you list any countries which don't have a fractional reserve banking system, but which have a higher standard of living or are more productive than the US? I would be interested in learning more about their banking system.