Credit Growth Drives Economic Growth, Until it Doesn’t

[Lafayette]

yes you are. your post did nothing to counter or address anything I said in comment to you.

why can you not keep a consistent argument? you are constantly dodging and posting irrelevant argument to back peddle what you said previously.

Blah, blah, blah. Learn how to read English!

Start with a book on "good debate habits" and stop bitching-'n-moaning like a child ...
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[Lafayette]

My apologies for all the unintended repeats of the same comment.

The site had a very bad "502 bad gateway" error this morning (or last night, depending upon where the server exists), but apparently has got over it ...

 

[ludin]

Blah, blah, blah. Learn how to read English!

Start with a book on "good debate habits" and stop bitching-'n-moaning like a child ...
________________________

you concession is noted. your failure to actually address any argument is noted as well.

 

[Lafayette]

you concession is noted. your failure to actually address any argument is noted as well.

Ten-year old. I'm done with your puerile nonsense.

You get an "F-" in economic history.

M... r... a...
__________________________

 

[Absentglare]

You mean we should have run a large trade surplus in 2008/2009 to get us out of our recession, like we did in 1921?

What caused the post '21 "expansion"...was the massive increase in credit, that fueled not one, but 3 bubbles.....all which caused the 1929 crash.

Good grief.

http://www.bis.org/publ/work137.pdf

Good grief, the post 1921 expansion WAS driven by credit!

I can't believe this nonsense!

It directly paralleled the post 2001 "expansion".

I often cannot believe that conservatives make such ridiculous arguments.

 

[Gimmesometruth]

I often cannot believe that conservatives make such ridiculous arguments.

Especially in light of the fact that they went nuclear in blaming 08....on poor people "getting" loans they couldn't afford.

 

[Lafayette]

I often cannot believe that conservatives make such ridiculous arguments.

What is impossible to believe is that some financial tools, like Stimulus Spending, actually work. And they are within the tool-shed of many countries that employ them.

And yet, the conservatives - true to their foundational ethos - keep repeating the same nonsensical obstructions to the such tools. Which is how many, many people end up suffering income disparity from below the Poverty Threshold.

Remember, nearly 50 million men, women and children in America are incarcerated below the Poverty Threshold. Where a family of four must live on $24K per year, or $2K a month.

And there is no-one (besides Bernie) who even pretends to be concerned about them. Rather strange, doncha think, for this "Christian Nation" of ours?

Just roadkill on the Highway of life ...
_____________________________________

 

[JohnfrmClevelan]

No expansion has been driven by credit. Credit is the tool by which the savings - which are the driver of expansions - have sometimes (but sometimes not) been put to use.

This is completely incorrect. Growth requires an increase in demand over and above income, and savings is just a portion of income. If our national income is $15 trillion, even if we spend all $15 trillion on consumption and investment, there is no growth.

There are four ways to increase demand and grow the economy: increased private sector credit; federal deficit spending; a trade surplus; and net dis-saving. We never run a trade surplus, and we very seldom spend more out of our savings than we put in - if fact, both our savings and our balance of trade are normal, year-in-and-year-out subtractions from demand. Deficit spending is a given, although it varies. And we normally have growth in private sector credit. If our growth in credit and our deficit spending together outweigh our saving and our trade deficit, then we have growth; if not, we have a recession.

Also - savings has nothing to do with credit. Banks do not loan out your savings. Banks create credit out of thin air.

 

[ludin]

This is completely incorrect. Growth requires an increase in demand over and above income, and savings is just a portion of income. If our national income is $15 trillion, even if we spend all $15 trillion on consumption and investment, there is no growth.

this is simply false. you forget ROR. if that 15 trillion is invested wisely then it will generate more than the 15 trillion paid.
if you invest it unwisely then you would be correct.

There are four ways to increase demand and grow the economy: increased private sector credit; federal deficit spending; a trade surplus; and net dis-saving. We never run a trade surplus, and we very seldom spend more out of our savings than we put in - if fact, both our savings and our balance of trade are normal, year-in-and-year-out subtractions from demand. Deficit spending is a given, although it varies. And we normally have growth in private sector credit. If our growth in credit and our deficit spending together outweigh our saving and our trade deficit, then we have growth; if not, we have a recession.

there are plenty of ways to grow the economy without massive government payments. you can't grow an economy on credit alone as at some point in time
that has to be paid back and many businesses want to pay off their loans as quickly as possible. they would rather seek investors than get loans.

Also - savings has nothing to do with credit. Banks do not loan out your savings. Banks create credit out of thin air.

100% wrong but that is ok. they do loan out your savings. however they are required to keep a reserve on hand so that if
you make a transaction that they can cover that transaction.

 

[JohnfrmClevelan]

this is simply false. you forget ROR. if that 15 trillion is invested wisely then it will generate more than the 15 trillion paid.
if you invest it unwisely then you would be correct.

Explain how you get a return on your investment without some credit happening somewhere. If there is no credit, then your return is somebody else's loss.

there are plenty of ways to grow the economy without massive government payments. you can't grow an economy on credit alone as at some point in time that has to be paid back and many businesses want to pay off their loans as quickly as possible. they would rather seek investors than get loans.

No, you absolutely CAN grow an economy on credit alone. A steady growth in credit is perfectly sustainable; old debt gets paid off while new debt is created. Bubbles are a problem, but they are not an inevitability. Stability is the key, and government deficit spending (if used correctly) can be the stabilizer. So, despite what you may think, our economy grows on credit expansion and deficit spending, and countercyclical deficit spending stabilizes any hiccups in credit expansion. It has worked that way for many years.

100% wrong but that is ok. they do loan out your savings. however they are required to keep a reserve on hand so that if
you make a transaction that they can cover that transaction.

No, for the millionth time, banks do not loan out your savings, which are M1/M2. Reserves are a whole different thing, MB. Banks can and do cover your transactions on their ledgers; reserve balances are adjusted after the fact.

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

Money creation in the modern economy

 

[ludin]

Explain how you get a return on your investment without some credit happening somewhere. If there is no credit, then your return is somebody else's loss.

that is not true either. someone doesn't need credit to pay me back. they could earn more than I loaned them by the investment.
I never would have made the investment if they were going to have to borrow the money to pay me back that would
be a bad investment.

No, you absolutely CAN grow an economy on credit alone. A steady growth in credit is perfectly sustainable; old debt gets paid off while new debt is created. Bubbles are a problem, but they are not an inevitability. Stability is the key, and government deficit spending (if used correctly) can be the stabilizer. So, despite what you may think, our economy grows on credit expansion and deficit spending, and countercyclical deficit spending stabilizes any hiccups in credit expansion. It has worked that way for many years.

*sigh* when has government ever paid off any old debt they keep wracking up debt. they are not paying it off.
companies have to pay it off they have no choice.

no it doesn't. it grows on economic demand which can be had with little to no deficit spending. deficit spending should
only be used when there is an emergency need in the economy. even then it should go to people and businesses in the form
of tax credits.

No, for the millionth time, banks do not loan out your savings, which are M1/M2. Reserves are a whole different thing, MB. Banks can and do cover your transactions on their ledgers; reserve balances are adjusted after the fact.

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

Money creation in the modern economy

[/QUOTE]

wow you just went off on something I never said.

the fact is that banks do loan out savings. savings is not the reserve just a part of it.
so if you deposit 100 dollars in a bank they can loan out all but 10 of those dollars if the reserve rate is 10%.
banks can fund the reserve in multiple ways.

http://www.cnbc.com/id/100497710

 

[JohnfrmClevelan]

that is not true either. someone doesn't need credit to pay me back. they could earn more than I loaned them by the investment.
I never would have made the investment if they were going to have to borrow the money to pay me back that would
be a bad investment.

You still can't tell me where the increase is going to come from, if not from credit. If you make more than you invested, somebody else is making less.

Write it out on paper. If you have none of the inputs that I mentioned earlier (credit, deficits, trade surplus, or dis-saving), then it is impossible to increase demand just by moving money around.

*sigh* when has government ever paid off any old debt they keep wracking up debt. they are not paying it off.
companies have to pay it off they have no choice.

Companies do pay off their debt. They also take out new loans. Get it yet? You can pay off your old loans and still be in debt. This is business as usual for companies.

no it doesn't. it grows on economic demand which can be had with little to no deficit spending. deficit spending should
only be used when there is an emergency need in the economy. even then it should go to people and businesses in the form
of tax credits.

Demand comes from income. If you earn $50,000, then you can buy $50,000 worth of stuff. If you want to increase your demand and buy more, you will need credit.

If your neighbor also earns $50,000, and you borrow $10,000 from him so you can spend $60,000, he will only have $40,000 to spend, and total demand remains at $100,000, max. THAT is the same thing as "investing your savings." (It's also the same thing as your bank loaning out savings.) No outside injection of demand = no growth.

wow you just went off on something I never said.

If you bothered to read those links, they directly dispute your claim - that banks loan out savings.

the fact is that banks do loan out savings. savings is not the reserve just a part of it.
so if you deposit 100 dollars in a bank they can loan out all but 10 of those dollars if the reserve rate is 10%.
banks can fund the reserve in multiple ways.

http://www.cnbc.com/id/100497710

That is a very good article - I cite it myself pretty often. You should read it closer, because Carney agrees with my version, not yours.

Reserves are not a 10% chunk of your savings. Reserve accounts are settlement accounts, and the reserves that fill those reserve accounts remain within the walls of the Fed. When you deposit a check, all your bank gets is a check - it marks up your account. Way over at the Fed, some reserves move from one account to another to balance out that transaction. Not a chunk of your check, and not a chunk of any loan that your bank might create for you. Reserves just keep score of interbank settlement.

To demonstrate that your version is incorrect, banks can create loans without having the necessary reserves; they do this all the time. They create the loan, you spend the loan, the seller earns the money from your loan; your bank doesn't need to adjust its reserve balance until days later. Obviously, your bank didn't need anything (previous deposits or reserves) in order to give you a loan and disburse the proceeds. It is just done on their books.

 

[ludin]

You still can't tell me where the increase is going to come from, if not from credit. If you make more than you invested, somebody else is making less.

Write it out on paper. If you have none of the inputs that I mentioned earlier (credit, deficits, trade surplus, or dis-saving), then it is impossible to increase demand just by moving money around.

You really don't know how investments work do you? that doesn't surprise me.
I give someone 10k. that person takes that 10k and generates 20k with it. they pay me back 12k my investment plus interest.
they made 8k.

Companies do pay off their debt. They also take out new loans. Get it yet? You can pay off your old loans and still be in debt. This is business as usual for companies.

they only take on loans if they need them. do you get it yet.

Demand comes from income. If you earn $50,000, then you can buy $50,000 worth of stuff. If you want to increase your demand and buy more, you will need credit.

that is a single person. there are other ways to increase income than credit. you are very myopic.

If your neighbor also earns $50,000, and you borrow $10,000 from him so you can spend $60,000, he will only have $40,000 to spend, and total demand remains at $100,000, max. THAT is the same thing as "investing your savings." (It's also the same thing as your bank loaning out savings.) No outside injection of demand = no growth.

not really. if I take that 60k and invest it in something that can grow to more than 60k. the person that I invest it with
can take it and make more off of it. if he doesn't then you would be correct.

If you bothered to read those links, they directly dispute your claim - that banks loan out savings.

and mine directly says that you are wrong.

That is a very good article - I cite it myself pretty often. You should read it closer, because Carney agrees with my version, not yours.

no he doesn't he says the exact opposite.

Reserves are not a 10% chunk of your savings. Reserve accounts are settlement accounts, and the reserves that fill those reserve accounts remain within the walls of the Fed. When you deposit a check, all your bank gets is a check - it marks up your account. Way over at the Fed, some reserves move from one account to another to balance out that transaction. Not a chunk of your check, and not a chunk of any loan that your bank might create for you. Reserves just keep score of interbank settlement.

actually the article says otherwise. why didn't you read the article?
the example he gave very much says that well Mr. Smith deposits 100 dollars.
you can loan out 90 of that to someone else if the rate is 10%.

now if Mr Smith wants to write a check for 60 dollars then you have to come up with
a way to get that 60 dollars. you can borrow it, you can get more people to deposit money
you can issue CD's or bonds.

you seem to only read what you want to read that agree's with you and ignore everything else.

To demonstrate that your version is incorrect, banks can create loans without having the necessary reserves; they do this all the time. They create the loan, you spend the loan, the seller earns the money from your loan; your bank doesn't need to adjust its reserve balance until days later. Obviously, your bank didn't need anything (previous deposits or reserves) in order to give you a loan and disburse the proceeds. It is just done on their books.

no it has to maintain the reserve rate by that business day.
When an institution fails to satisfy its reserve requirements, it can make up its deficiency with reserves borrowed either from a Federal Reserve Bank, or from an institution holding reserves in excess of reserve requirements. Such loans are typically due in 24 hours or less.

 

[JohnfrmClevelan]

You really don't know how investments work do you? that doesn't surprise me.
I give someone 10k. that person takes that 10k and generates 20k with it. they pay me back 12k my investment plus interest.
they made 8k.

Where did the extra $10,000 come from? Same question I asked you before, and you don't have an answer. Try again.

they only take on loans if they need them. do you get it yet.

Yes, I get it. Do you deny that companies take on a lot of debt? That is one way that they grow. Some companies have enough income where they don't need to borrow, but most borrow in order to operate and grow. And that expands the amount of income right there - companies borrow, and they hire employees and buy supplies with the proceeds. That creates demand over and above income. If no companies borrowed, they would all be fighting over the same income; it would be a zero-sum game.

that is a single person. there are other ways to increase income than credit. you are very myopic.

No, I'm very focused. It doesn't matter how many people you add to that example - no credit, no growth.

Why don't you explain some of these other ways to increase income that don't decrease somebody else's income. And please be more specific than just claiming an investment "generates" more money.

not really. if I take that 60k and invest it in something that can grow to more than 60k. the person that I invest it with
can take it and make more off of it. if he doesn't then you would be correct.

If your investment "grows" without new money, then it is just coming out of somebody else's pocket. The same income is being redistributed - to you, your investment grew, but to everybody else, they have a little less money. Example: everybody makes $50,000. You "invest" in a new product that costs $1000, and everybody buys one. For you, your investment has paid off handsomely. But the rest of the economy, which used to collect $50,000 from every person, now only collects $49,000 from every person. Demand hasn't increased, it has only been redistributed.

and mine directly says that you are wrong.

Not if you understand it, it doesn't.

no he doesn't he says the exact opposite.

Keep reading.

actually the article says otherwise. why didn't you read the article?
the example he gave very much says that well Mr. Smith deposits 100 dollars.
you can loan out 90 of that to someone else if the rate is 10%.

now if Mr Smith wants to write a check for 60 dollars then you have to come up with
a way to get that 60 dollars. you can borrow it, you can get more people to deposit money
you can issue CD's or bonds.

The paper gives no such example. You obviously just made the above crap up. And Carney is much more exact with his language, which is important to understanding banking. That is why I am asking you to read it more carefully.

He never says that the bank loans out part of anybody's deposit, first of all. He is quite clear that the bank creates a loan out of thin air, and these liabilities give rise to both reserve and capital obligations that the bank must later meet:

Let's imagine a bank that is starting off from scratch. Scratch Bank lends $100 to Mr. Parker. It does this by crediting Mr. Parker's deposit account at Scratch Bank with $100. The bank must now immediately figure out how to meet its two new liabilities: its reserve requirement and its capital requirement.

you seem to only read what you want to read that agree's with you and ignore everything else.

I have already read and studied that paper and more, well before this thread. I'm not ignoring you. You are just wrong.

no it has to maintain the reserve rate by that business day.

Wrong.

When an institution fails to satisfy its reserve requirements, it can make up its deficiency with reserves borrowed either from a Federal Reserve Bank, or from an institution holding reserves in excess of reserve requirements. Such loans are typically due in 24 hours or less.

That is different. The bank must satisfy Friday's deficiency within 24 hours. But Friday's reserve requirement is based on Tuesday's numbers. And the bank made their loans on Tuesday, the check was transferred and cashed on Tuesday; the whole real-world transaction occurred on Tuesday. But the bank doesn't have to have reserves equal to 10% of Tuesday's liabilities until Friday.

 

[thenotorious]

Look up the meaning of words before emphatically insisting upon a meaning!

Much "wealth" is held in ... well, Picasso paintings, which have a money market-value. Money is one measure of financial wealth; but there can exist wealth without money. For instance gold-diggers who had gold but were penniless until they "sold" it.

Or, there is something we call a "wealth of knowledge", wherein "wealth" is simply a repository. Dictionary meaning of "wealth".

There are thus both fundamental definitions of the meaning of "wealth".
____________________________

I suggest rereading my statements, before 'emphatically' declaring I said money could be the only definition of wealth as you are insinuating I said.

SPOILER: You won't find it.

I also suggest using an even less proper dictionary, and not one that disproves your point after only a few words.

 

[Lafayette]

I also suggest using an even less proper dictionary, and not one that disproves your point after only a few words.

M... r... a...

 

[fmw]

Taxation is one of the things that gives money value and stability, so we probably shouldn't eliminate it, but we probably could reduce it, without cutting spending, and with no negative effects.

Perhaps for a while.

 

[James972]

A very interesting read that makes a whole lot of sense.
Credit Growth Drives Economic Growth, Until it Doesn’t - The Daily Reckoning

^ The last sentence is the most important thing people need to understand.

This was written in 2011, but it's still incredibly relevant.

Those who wish to slash government spending should bear that in mind.

It is always important to slash govt spending since they are spending other peoples money and therefore wasting most of it

 

[JohnfrmClevelan]

...The entire point of this article is that credit growth drives economic growth, and in order for growth to occur, either the private sector or government must take on additional debt.

The above is absolutely correct, except that for a single country, they can also grow through net exports.

I just wanted to bump this thread up, because it's a great topic, and the debates ended too early.

 

[imagep]

You still can't tell me where the increase is going to come from, if not from credit. If you make more than you invested, somebody else is making less.

Write it out on paper. If you have none of the inputs that I mentioned earlier (credit, deficits, trade surplus, or dis-saving), then it is impossible to increase demand just by moving money around.




Companies do pay off their debt. They also take out new loans. Get it yet? You can pay off your old loans and still be in debt. This is business as usual for companies.



Demand comes from income. If you earn $50,000, then you can buy $50,000 worth of stuff. If you want to increase your demand and buy more, you will need credit.

If your neighbor also earns $50,000, and you borrow $10,000 from him so you can spend $60,000, he will only have $40,000 to spend, and total demand remains at $100,000, max. THAT is the same thing as "investing your savings." (It's also the same thing as your bank loaning out savings.) No outside injection of demand = no growth.



If you bothered to read those links, they directly dispute your claim - that banks loan out savings.



That is a very good article - I cite it myself pretty often. You should read it closer, because Carney agrees with my version, not yours.

Reserves are not a 10% chunk of your savings. Reserve accounts are settlement accounts, and the reserves that fill those reserve accounts remain within the walls of the Fed. When you deposit a check, all your bank gets is a check - it marks up your account. Way over at the Fed, some reserves move from one account to another to balance out that transaction. Not a chunk of your check, and not a chunk of any loan that your bank might create for you. Reserves just keep score of interbank settlement.

To demonstrate that your version is incorrect, banks can create loans without having the necessary reserves; they do this all the time. They create the loan, you spend the loan, the seller earns the money from your loan; your bank doesn't need to adjust its reserve balance until days later. Obviously, your bank didn't need anything (previous deposits or reserves) in order to give you a loan and disburse the proceeds. It is just done on their books.

That article also has some mistakes.

Like making a $100 loan doesn't create a net -$20 liability for the bank like the author claimed. He was thinking that 10% of the loan, plus 10% of the deposit created from the proceeds of the loan would be set aside as "required reserves". Of course reserves are assets, not liabilities.

 

[James972]

Credit growth has always been the engine of economic growth for all advanced economies for decades.

1) actually the huge economic growth from the stone age to today came from new inventions, not credit growth. Do you understand.

2) govt should not be involved in financing the growth since it is slow, stupid, bureaucratic, and uncaring about other people's money.

 

[JohnfrmClevelan]

That article also has some mistakes.

Like making a $100 loan doesn't create a net -$20 liability for the bank like the author claimed. He was thinking that 10% of the loan, plus 10% of the deposit created from the proceeds of the loan would be set aside as "required reserves". Of course reserves are assets, not liabilities.

No, Carney is spot on. (He used to be a lawyer in the business, so he knows exactly what he's talking about.) $100 loan is a $100 liability, and the bank then needs to bring its reserve balance up by $10 and it's capital balance up by $10.

The loan proceeds do not give rise to any reserves. The loan itself just results in a $100 account balance and a $100+ promissory note. Besides, loans (and checks) are M1, bank-created credit dollars; reserves are MB. They are two very different things, and not interchangeable.

 

[csbrown28]

Absolutely - we should eliminate all taxation and simply borrow our way to prosperity.

That economic policy would seem to please both the left and the right; the right opposes (excessive?) taxation and the left wants (unlimited?) spending.

What is it that the US government is borrowing?

Who is it being borrowed from?

What is the constraint on government borrowing?

 

[James972]

What is the constraint on government borrowing?

Common sense. It is stupid for govt to borrow money, waste it, and have to tax us always more to pay it back. We're $20 trillion in debt already and no better off to prove the point perfectly. Do you understand now?

 

[imagep]

No, Carney is spot on. (He used to be a lawyer in the business, so he knows exactly what he's talking about.) $100 loan is a $100 liability, and the bank then needs to bring its reserve balance up by $10 and it's capital balance up by $10.

The loan proceeds do not give rise to any reserves. The loan itself just results in a $100 account balance and a $100+ promissory note. Besides, loans (and checks) are M1, bank-created credit dollars; reserves are MB. They are two very different things, and not interchangeable.

Nope.

Banks do lend from excess reserves, and lending results in deposits which become reserves. That's not to say that the bank has to have the excess reserve prior to making the loan, it can make the loan first and then acquire the reserves either from the resulting deposit or by borrowing it from a bank with excess reserves.

I don't think that either of us are going to cave on this issue, so we will just have to agree to disagree on exactly how banks create money.

However, when a bank makes a loan, that's not a liability to the bank, its an asset to the bank. It's only a liability to the person who borrowed the money. And the $10 isn't a liability to the bank, it's a liability to the fed, it's an asset to the bank. Now if you are assuming that the bank obtained the money it loaned by borrowing money, then yes a new liability was created but the newly created asset (the loan note) offsets that liability, so there is no net increase in liabilities.

Even if you are assuming that the bank created the money out of thin air just by adding digits to an account and without having to mark down some other account by a corresponding amount, there is still no increase in liabilities, because if the bank can directly create money, it's creating assets, not liabilities. If I printed a million bucks in my print shop (not that I would ever do that), then I didn't create a liability, I created an asset at of thin air (ignoring the fact that I might go to jail for doing so).