Credit Growth Drives Economic Growth, Until it Doesn’t

[JohnfrmClevelan]

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.

Only the Fed can change the amount of MB and reserves. Private banks are not capable of doing so; that is why deposits and/or loans don't "become" 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.

When a bank makes a loan, their net position does not change. Banks don't profit from a loan until the principle has been paid back and they are collecting the interest. Since banks cannot create net assets, their loans create both a liability for the bank (the deposit) and an asset for the bank (the promissory note). For the borrower, the asset is their bank account, and their matching liability is their promissory note.

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).

The money that the bank creates is a liability to the bank, not an asset. They create that money (and deposit it in an account) for the benefit of the borrower. It is money that they owe to the depositor/borrower, paid immediately. In return, borrower will owe the bank the same amount, plus interest, paid over time.

 

[csbrown28]

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?

So then, you are admitting you have no idea what the constraint on borrowing is?

So if I asked you, what is an acceptable level of debt, you'd just be pulling a number out of the air, right?

See, that's the difference between you and I, I have some idea of what the real constraint on money creation is. Perhaps you'd have a better idea how the economy worked and the kinds of policies you should support if you'd stopped relying on "common sense" and actually based your opinions on real world information.

As far as your comment ".....and no better off to prove the point perfectly."

So you're saying if our government was only $10 trillion in debt, things would be the same? Clearly, it's not a stretch to imagine that if the economy was missing $10 trillion dollars we would be much, much, much worse off.

 

[imagep]

Only the Fed can change the amount of MB and reserves. Private banks are not capable of doing so; that is why deposits and/or loans don't "become" reserves.

That's only true if by "reserves" you mean "required reserves". A bank can certainly add to it's reserves, and it can do so without intervention from the fed. So if I go to my bank, and deposit a million dollars, as long as that bank doesn't lend out that million dollars (and I realize that you may claim that they won't lend that money out), then that banks total reserves will have increased by a million dollars, a hundred thousand in required reserves, and 900 thousand in excess reserves.

When a bank makes a loan, their net position does not change.

It's net position doesn't change, but its positions change. The bank has more loan assets, possibly more deposit liabilities and possibly more debt liabilities if it borrowed the money from another bank. Yes, the positions will offset each other, but that doesn't mean the bank didn't have to aquire the money it lent, and the fact that the deposit generated from the proceeds of the loan fund the loan doesn't mean that the bank simply added digits to an account, those digits were transfered from one account to another.

 

[JohnfrmClevelan]

That's only true if by "reserves" you mean "required reserves". A bank can certainly add to it's reserves, and it can do so without intervention from the fed. So if I go to my bank, and deposit a million dollars, as long as that bank doesn't lend out that million dollars (and I realize that you may claim that they won't lend that money out), then that banks total reserves will have increased by a million dollars, a hundred thousand in required reserves, and 900 thousand in excess reserves.

No, only the Fed can change the level of total MB. MB and M1 are not interchangeable. Remember the fractional reserve point about the Fed being able to put a hard limit on lending by limiting the amount of reserves? Well, how could they possibly do that if MB and M1 were interchangeable? Banks would just create M1 by creating loans, and call 10% of that "reserves."

There is no difference between reserves, required reserves, and excess reserves. All are MB, not M1.

 

[James972]

So then, you are admitting you have no idea what the constraint on borrowing is?

if Republicans had their way the constraint would be a Balanced Budget Amendment which would make debt illegal and liberals, in effect illegal. Under the current regime there is virtually no restraint on the liberal US govt until its finances are worse off than than the world's other governments and people refuse to lend it money. Accordingly, the waste will continue and a GDP will stay in the 1-2 % range if we are lucky.

 

[James972]

, I have some idea of what the real constraint on money creation is. .

dear, you have decide whether you are talking about borrowing or money creation!! Sorry to rock your world.

 

[James972]

So then, you are admitting you have no idea what the constraint on borrowing is?

So if I asked you, what is an acceptable level of debt, you'd just be pulling a number out of the air, right?

See, that's the difference between you and I, I have some idea of what the real constraint on money creation is.

do you know if you are trying to talk about money creation or borrowing?

 

[csbrown28]

if Republicans had their way the constraint would be a Balanced Budget Amendment which would make debt illegal and liberals, in effect illegal. Under the current regime there is virtually no restraint on the liberal US govt until its finances are worse off than than the world's other governments and people refuse to lend it money. Accordingly, the waste will continue and a GDP will stay in the 1-2 % range if we are lucky.

Still not telling me you understand economics enough to understand the true constraint on borrowing.

Hint, there is a constraint and it's not "paper" used to "print" out new money.

 

[csbrown28]

dear, you have decide whether you are talking about borrowing or money creation!! Sorry to rock your world.

When the gold standard ended the line between "money" and "currency" disappeared at the national level.

 

[csbrown28]

do you know if you are trying to talk about money creation or borrowing?

Look, you know what I'm talking about. I only said "borrowing" because I assume that's the language you understand. I wouldn't call what the government does, "borrowing" there is only the creation of different types of assets.

Let me ask it this way. Obviously, there is no physical constraint on the number of zeros you can type in a computer (well, perhaps a memory limit, but given today's PC's that would be a big number...but I digress), so I hope it's obvious when I ask about constraints, I'm asking you in the more practical sense. What are the constrains on the creation and spending of new money into the economy (unlike QE which created over a trillion dollars of excess reserves) as it relates to inflation. That is, what are the general conditions that would cause a steady rise in the general price level (not that stupid, meaningless idea of "monetary inflation").

 

[James972]

I wouldn't call what the government does, "borrowing" .

the govt does lots and lots of things you fool!!!!!

 

[James972]

That is, what are the general conditions that would cause a steady rise in the general price level (not that stupid, meaningless idea of "monetary inflation").

1) do you have any idea what your subject is???????
2) Friedman established that inflation is a function of quantity and velocity. Next

 

[csbrown28]

1) do you have any idea what your subject is???????
2) Friedman established that inflation is a function of quantity and velocity. Next

At most, the quantity theory captures a basic truth that a sustained general increase in prices requires a growing money stock. But, while a money supply increase is a precondition for this, it is also an intermediate factor, and not generally the cause of price inflation.

You and Friedman have a lot of explaining to do given the events of the last 8 years ($5 trillion dollar deficit without the predicted inflation). Furthermore, it's possible to have inflation even if the stock of money is falling. The QToM is a best a general rule over the long term, but it has very little predicative power in the sort term. Billy Mitchell puts it like this... saying that “inflation is always, and everywhere, a monetary phenomenon.” Which, if you think about it, is much like saying that obesity is always, and everywhere, a weight problem." It's not very useful as a "theory".

So again, you've gone out to the internet looking for answers. You read them, but it's obvious you don't fully understand them.

 

[Lafayette]

AD NAUSEAM

You and Friedman have a lot of explaining to do given the events of the last 8 years ($5 trillion dollar deficit without the predicted inflation).

Neither are to blame for the particular economic predicament in which the US finds itself. Certainly not Friedman, who studied economics and got his Masters in 1933 and his Doctorate in 1946. So, he was very heavily influenced by the Great Depression. He probably knew Keynes very well, since Friedman had taken a different intellectual tack to resolve the problem of that depression he lived through.

(A good resumé of their conflicting views can be found here in this published article: Two economic theories at odds – Keynesian and Chicago School.

And I particularly like this sentence that ends the article,

As you can see, these radically differing ideas of the role government should play in the economy are fiercely debated in the nation. Two men, Keynes and Friedman, have helped to shape the arguments that are the basis for the conflicting economic Congressional views creating gridlock in Washington, D.C., today.

And so, the debate goes on, and on, and on - ad nauseam ....
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[James972]

You and Friedman have a lot of explaining to do given the events of the last 8 years ($5 trillion dollar deficit without the predicted inflation).

there was no predicted inflation by Friedman???????????????????? inflation is a function of quantity and velocity. Do you understand?????

 

[James972]

And so, the debate goes on, and on, and on - ad nauseam ....
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Actually Friedman won. There is no debate. Keynes was a typical libcommunist fool who helped prolong the Depression for 10 years and cause WW2


As Communist Party General Secretary William Z. Foster commented, "The Nazi fascists were especially enthusiastic supporters of Keynes."[65] Former Trotskyite[66] Dobbs recounted that Harvard economist Joseph Schumpeter observed that in Nazi Germany, "A work like Keynes’ General Theory could have appeared unmolested—and did." In the introduction to the 1936 German edition of his treatise, Keynes himself suggested that the total state that the National Socialists were then building was perfectly suited for the implementation of his investment schemes:

 

[Lafayette]

Keynes was a typical libcommunist fool who helped prolong the Depression for 10 years and cause WW2:

Witless sarcasm becomes you so ...
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[James972]

Witless sarcasm becomes you so ...
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if you think Keynes was smart why not provide best example for whole world to see??? Notice, you have to be told how to move a debate forward.