This whole "making new money" thing (1 Viewer)

[JohnfrmClevelan]

Sure, but I'm not convinced at all that simply making loans automatically creates new money. Most MMTers probably won't agree with me, but I think that banks only create money when there is not enough already existing to fund all the credit worthy loans demanded.

We know that banks don't lend out of your deposits. What pile of money do you think they make loans from? They already need to have 10% of liabilities covered by capital assets, meaning they need to add to the solid assets they hold when they make a loan. Loaning out existing money would move assets in the wrong direction.

 

[imagep]

I also think part of it is banks want to make money. So if there are people they are willing to loan money out to, not to mention education loans, what a joke, then I guess it makes sense. It very well could, or could not, be as simple as that. Because if I am a bank, I want to issue out as many loans that can be repaid that I can.

Sure, but I suspect it's pretty hard to find credit worthy borrowers, and there are lots of banks competing for those good customers.

I want to sell as much printing as I can also, but I have to find customers who can pay me.

Most people seriously underestimate how hard it is for any business to find customers.

 

[JohnfrmClevelan]

If this shovel story is an analogy to money, and how money just gets passed from one person to another, it doesn't take into account all the stuff that is given in exchange for the shovel along the way.

When my bank gives me a shovel, I promise them 1.5 shovels in return over 30 the course of years. Then when I give the shovel to the home seller, he gives me a house. Then they take that shovel and they go and give that shovel in return for their new home.

And the bank only had one-tenth of a shovel in the first place. They conjured up nine-tenths of a shovel out of thin air.

Banks conjure up the full 100% out of thin air. The other 10% you are thinking of is reserves, and banks don't lend out reserves. The whole money multiplier thing is just incorrect.

 

[imagep]

If this shovel story is an analogy to money, and how money just gets passed from one person to another, it doesn't take into account all the stuff that is given in exchange for the shovel along the way.

When my bank gives me a shovel, I promise them 1.5 shovels in return over 30 the course of years. Then when I give the shovel to the home seller, he gives me a house. Then they take that shovel and they go and give that shovel in return for their new home.

And the bank only had one-tenth of a shovel in the first place. They conjured up nine-tenths of a shovel out of thin air.

Sure.

Which is why lending actual shovels doesn't increase the number of shovels, but lending money can increase the number of dollars. there is a difference between lending something that is tangeble, and lending money which isnt tangeble.

 

[imagep]

We know that banks don't lend out of your deposits. What pile of money do you think they make loans from? They already need to have 10% of liabilities covered by capital assets, meaning they need to add to the solid assets they hold when they make a loan. Loaning out existing money would move assets in the wrong direction.

Sorry, I don't totally buy that.

If I owned a bank, I would lend from whatever inventory source costs me the least to lend from. If deposits from checking accounts are free and if deposits into savings accounts only cost me a half a percent interest, then I am going to loan from those sources of funds up to the legal limit, before I seek higher interest rates sources.

I also don't think that every loan creates additional dollars, although I agree that loans can create new money under certain conditions. It seems to me that the only time that our banking system would increase our money supply is when lending increases, and even then its only to the extent that the increases in lending are in excess of new money being created by the government.

 

[imagep]

Banks conjure up the full 100% out of thin air. The other 10% you are thinking of is reserves, and banks don't lend out reserves. The whole money multiplier thing is just incorrect.

They would only do that if no loans were being repaid, and if the demand for loans exceeded 90% of deposits.

Sorry, but I think that MMT is somewhat misleading because it's often explained in the way that it could work, but it's not always explained that it doesn't always work like that. It also tends to grossly over simplify the banking system.

Total US debt is right at $60 trillion, yet the money supply is only around 12 trillion. If every dollar lent by banks created a new dollar, then our money supply would be right around $60 trillion. But it's not. So the theory that banks create ever dollar they lend is busted.

 

[JohnfrmClevelan]

They would only do that if no loans were being repaid, and if the demand for loans exceeded 90% of deposits.

Sorry, but I think that MMT is somewhat misleading because it's often explained in the way that it could work, but it's not always explained that it doesn't always work like that. It also tends to grossly over simplify the banking system.

Hell, I thought we were complicating the banking system!

Remember that your deposits aren't assets in the bank's hands, they're liabilities, so they can't be loaned out. When you deposit a check, it's just numbers; all a bank receives are some reserves in the background.

Total US debt is right at $60 trillion, yet the money supply is only around 12 trillion. If every dollar lent by banks created a new dollar, then our money supply would be right around $60 trillion. But it's not. So the theory that banks create ever dollar they lend is busted.

I think if we sat down and figured out what all that debt was, it would all come out as expected. For instance, if that debt includes the national debt, there won't be any corresponding dollars showing up in any of the money supply calculations.

Sorry, I don't totally buy that.

If I owned a bank, I would lend from whatever inventory source costs me the least to lend from. If deposits from checking accounts are free and if deposits into savings accounts only cost me a half a percent interest, then I am going to loan from those sources of funds up to the legal limit, before I seek higher interest rates sources.

What's cheaper than making money out of thin air? Anyway, if you loan out existing dollars, you are going to have to liquidate some assets, which are probably interest-bearing. Either that, or you are loaning out a pile of hard dollars from vault cash that you have lying around not earning interest, which banks don't like to do.

I also don't think that every loan creates additional dollars, although I agree that loans can create new money under certain conditions. It seems to me that the only time that our banking system would increase our money supply is when lending increases, and even then its only to the extent that the increases in lending are in excess of new money being created by the government.

Well, if you are the bank, even if you hold more assets than liabilities, you aren't going to give anybody a loan with more assets than liabilities. If you are a bank and you loan me $100,000, I am receiving $100,000 in assets, so you are going to need $100,000 back from me (plus interest), even if you are holding some dollars outright. So $100,000 is still getting created. It's just that your balance sheet will have more assets than liabilities, before, during, and after the loan.

 

[imagep]

Hell, I thought we were complicating the banking system!

Sorry, no. MMTers tends to oversimplify things to the point that they end up with bumper sticker slogans. Anytime you take a subject that entire books have been written about and boil it down to a bumper sticker, then important information is being left out and people misunderstand the original concepts.

Remember that your deposits aren't assets in the bank's hands, they're liabilities, so they can't be loaned out. When you deposit a check, it's just numbers; all a bank receives are some reserves in the background.

The money that I deposit into a bank absolutly can be lent out, within accordance of the reserve ratio. It's simply not true that if I deposit $100 into my checking account that the banks doesn't lend directly from that money. They can and will lend about $90, which may then end up being redeposited, and they can lend about $81 from that deposit, on and on. Ultimately that original $100 deposit may end up resulting in about $900 in loans, but it's not correct that they directly take the $100 and create another $900, that's a myth that was created when a complicated series of transactions is oversimplified as if it was just one action.

I think if we sat down and figured out what all that debt was, it would all come out as expected. For instance, if that debt includes the national debt, there won't be any corresponding dollars showing up in any of the money supply calculations.

As expected by me, yes. As expected by people who believe that every dollar loaned is another dollar added to our money supply, no. If I am wrong, I would love to see the figures proving me wrong. As I mentioned, our money supply is only around $12 trillion, there is around $60 trillion in total debt, so obviously ever dollar loaned doesn't add to our money supply.

What's cheaper than making money out of thin air?

Using money that you already have a hold of. Doing that doesn't cost any more than doing nothing at all.

Anyway, if you loan out existing dollars, you are going to have to liquidate some assets, which are probably interest-bearing. Either that, or you are loaning out a pile of hard dollars from vault cash that you have lying around not earning interest, which banks don't like to do.

Nope. If I deposit $100 in a checking account, that banks doesn't have to liquidate any assets to loan $90 of my deposit to someone.

Well, if you are the bank, even if you hold more assets than liabilities, you aren't going to give anybody a loan with more assets than liabilities. If you are a bank and you loan me $100,000, I am receiving $100,000 in assets, so you are going to need $100,000 back from me (plus interest), even if you are holding some dollars outright. So $100,000 is still getting created. It's just that your balance sheet will have more assets than liabilities, before, during, and after the loan.

No, in this case, the $100,000 already existed, and it can only be spent once at a time, just like in my shovel example, even though several neighbors may hold some claim to a shovel, that shovel can only be used by one person at a time, thus there is still only one shovel.

The only time that our banking system creates new money is when credit worthy borrowers are demanding more money than is already in the system. The beauty of this system is that even absent of any monkeying around by the federal reserve, our money supply is like a rubber band, expanding and contracting as it's needed to. At least that's my theory, and I believe that the evidence tends to side with me and so far I haven't seen any that is contradictory to my theory. It's an amazing system that works pretty well.

 

[Critter7r]

The money that I deposit into a bank absolutly can be lent out, within accordance of the reserve ratio. It's simply not true that if I deposit $100 into my checking account that the banks doesn't lend directly from that money. They can and will lend about $90, which may then end up being redeposited, and they can lend about $81 from that deposit, on and on. Ultimately that original $100 deposit may end up resulting in about $900 in loans, but it's not correct that they directly take the $100 and create another $900, that's a myth that was created when a complicated series of transactions is oversimplified as if it was just one action.

.

What happens if you deposit $100 and $90 of it is loaned out and then you withdraw $100?

 

[imagep]

What happens if you deposit $100 and $90 of it is loaned out and then you withdraw $100?

the bank then has overnight to acquire the money from another source. Typically, the $100 that I withdraw ends up in another bank account somewhere in the system, and the first bank can acquire those dollars from the other bank through the interbank lending system.

At this point, no new money has been added to our money supply. I no longer have a claim to my deposit (my deposit no longer exists), there is still only $100 ($90 of it lent out and then re-acquired through the interbank lending system and $10 still held in bank reserves)

 

[JohnfrmClevelan]

the bank then has overnight to acquire the money from another source. Typically, the $100 that I withdraw ends up in another bank account somewhere in the system, and the first bank can acquire those dollars from the other bank through the interbank lending system.

At this point, no new money has been added to our money supply. I no longer have a claim to my deposit (my deposit no longer exists), there is still only $100 ($90 of it lent out and then re-acquired through the interbank lending system and $10 still held in bank reserves)

I think you are mixing up reserves with bank money. Reserves, except for vault cash, are stuck in what are basically clearing accounts at the Fed. And vault cash serves as "portable reserves." When you remove cash from a bank, it's clearing account is going to go down (and it does). If you deposit that cash at another bank, it's clearing account goes up. The exact same thing happens when you write a check and deposit it in the other bank, except the same reserves are moved from one account to the other by the Fed, not by a human courier (you).

When you deposit cash at a bank, it goes into a pile. Theoretically, they could loan you money (a smallish loan) and you could walk out of the bank with a few thousand in cash. The bank's assets go down (they lost $3000 in reserves), and the bank's assets go up (they gained a $3000 debt that you owe them). Bank liabilities didn't go up, because you didn't deposit your proceeds in an account, and they owe you nothing further. But that's the only way it can happen without creating new money - at least, it's the only way I can think of right now. And that's a rare case.

If you take out a loan that doesn't come right out of vault cash, there is no pile of anything that the bank can dip into. It's all abstracted into numbers.

 

[tomkat364]

Yes it did. You don't make these transactions if you don't want to. The storeowner wanted the booze more than he wanted the $10, and the bartender wanted the $10 more than he wanted the booze. That's why transactions happen - you want something different than what you already have, or you are willing to trade your labor for something. Wealth gets created with every transaction. When you buy a pack of gum, the folks at Wrigley are a little bit better off, and you are happy to be chewing gum.

The wealth was not 'created' because money changed hands. The wealth existed, and was exchanged for an equal value. I'm going to layout our discussion, correct any area that is incorrect in the basic facts:
1.) Money has no inherent value.
2.) The goods/services that are purchased with money have value.
3.) This gives indirect value to the money, ONLY because it can be exchanged for objects that have value.
4.) The barter system involves directly exchanging one good/service for another good/service.
5.) Money serves ONLY as a go between, allowing one to trade a good/service for something now, and exchange that value at a later time for an equal value of goods/services.

Now, you have claimed that when a bank creates a loan, they are creating money. Rather than viewing this solely as credit, and recognizing that this 'created' money does in fact come from another source (eventual loan repayment or shifting of funds), you prefer to speak of it in terms of creating money which is then destroyed when the debt is repaid. Why are we not viewing a loan as a 'hole' or a 'vacuum'? Debt is a negative transaction. It cancels out assets. For instance, your example of the farmer buying seed. If the farmer wrote the store owner an IOU for '$10 worth of seed' rather than $10 cash, we have the same situation. The farmer gets the seed now, the store-owner is out $10 worth of seed, but expects the farmer to make good on the IOU. After harvest, the farmer brings back $10 worth of seed, IOU is destroyed, and the store-owner is compensated. Would you say that this IOU resulted in "creating new seed", and that this 'new seed' is destroyed when the debt is fulfilled? It more accurately results in an exchange of an equal value of seed, and is a net of no value increase. Money is simply an exchange tool. Any debt needs to be eventually paid, or else there is a loss.

I feel like what you and imagep have been explaining is really just spin. We're all talking about credit, not 'new money,' but new money sounds so much better than credit that you want that used instead. Debt is bad for whoever owes the debt, so if we tell everyone that debt is okay because we can just create new money, it's a lie. It is at most a temporary solution which incurs long-term problems.

The only thing I can really see here that makes your argument valid is point #1. You can create all the paper bills in the world, because they have no inherent value. But without an appropriate increase in the value of goods/services available, this is just inflationary. So I think economists may be discussing physical dollar bills, and everyone else is discussing the indirect value of those bills. Would you say that is accurate?

 

[Critter7r]

the bank then has overnight to acquire the money from another source. Typically, the $100 that I withdraw ends up in another bank account somewhere in the system, and the first bank can acquire those dollars from the other bank through the interbank lending system.

At this point, no new money has been added to our money supply. I no longer have a claim to my deposit (my deposit no longer exists), there is still only $100 ($90 of it lent out and then re-acquired through the interbank lending system and $10 still held in bank reserves)

Yet they will still give you $100. Even though they've lent out $90 of the $100 that you deposited.

I'm more confused now than I was when I just thought of it as the bank having $900 to lend after accepting your $100 deposit.

Oh, and I did the math down to $0.09 and that $100 deposit getting lent out as a $90 loan, then an $81 loan, then a $72 loan, etc works out to about $650

 

[Fenton]

Yet they will still give you $100. Even though they've lent out $90 of the $100 that you deposited.

I'm more confused now than I was when I just thought of it as the bank having $900 to lend after accepting your $100 deposit.

Oh, and I did the math down to $0.09 and that $100 deposit getting lent out as a $90 loan, then an $81 loan, then a $72 loan, etc works out to about $650

You're talking about the money multplier and he incorrectly confused that with Banks borrowing on the overnight market to meet their minimum reserve requirements.

 

[imagep]

The wealth was not 'created' because money changed hands. The wealth existed, and was exchanged for an equal value. I'm going to layout our discussion, correct any area that is incorrect in the basic facts:
1.) Money has no inherent value.
2.) The goods/services that are purchased with money have value.
3.) This gives indirect value to the money, ONLY because it can be exchanged for objects that have value.
4.) The barter system involves directly exchanging one good/service for another good/service.
5.) Money serves ONLY as a go between, allowing one to trade a good/service for something now, and exchange that value at a later time for an equal value of goods/services.

Now, you have claimed that when a bank creates a loan, they are creating money. Rather than viewing this solely as credit, and recognizing that this 'created' money does in fact come from another source (eventual loan repayment or shifting of funds), you prefer to speak of it in terms of creating money which is then destroyed when the debt is repaid. Why are we not viewing a loan as a 'hole' or a 'vacuum'? Debt is a negative transaction. It cancels out assets. For instance, your example of the farmer buying seed. If the farmer wrote the store owner an IOU for '$10 worth of seed' rather than $10 cash, we have the same situation. The farmer gets the seed now, the store-owner is out $10 worth of seed, but expects the farmer to make good on the IOU. After harvest, the farmer brings back $10 worth of seed, IOU is destroyed, and the store-owner is compensated. Would you say that this IOU resulted in "creating new seed", and that this 'new seed' is destroyed when the debt is fulfilled? It more accurately results in an exchange of an equal value of seed, and is a net of no value increase. Money is simply an exchange tool. Any debt needs to be eventually paid, or else there is a loss.

I feel like what you and imagep have been explaining is really just spin. We're all talking about credit, not 'new money,' but new money sounds so much better than credit that you want that used instead. Debt is bad for whoever owes the debt, so if we tell everyone that debt is okay because we can just create new money, it's a lie. It is at most a temporary solution which incurs long-term problems.

The only thing I can really see here that makes your argument valid is point #1. You can create all the paper bills in the world, because they have no inherent value. But without an appropriate increase in the value of goods/services available, this is just inflationary. So I think economists may be discussing physical dollar bills, and everyone else is discussing the indirect value of those bills. Would you say that is accurate?

All of that is true, but money is like the grease that allows the cogs of trade to turn. No grease, then the mechanism of trade can get all locked up. When the grease starts to get a little low, you might want to consider getting out the grease gun.

 

[imagep]

Yet they will still give you $100. Even though they've lent out $90 of the $100 that you deposited.

I'm more confused now than I was when I just thought of it as the bank having $900 to lend after accepting your $100 deposit.

Oh, and I did the math down to $0.09 and that $100 deposit getting lent out as a $90 loan, then an $81 loan, then a $72 loan, etc works out to about $650

They can always be able to cover any checks I wrote on that $100 or to give it back to me, but thats a matter of getting that money from another source, such as the next deposit that someone makes, or out of vault cash. Obviously banks keep some operating capital on hand.

 

[tomkat364]

All of that is true, but money is like the grease that allows the cogs of trade to turn. No grease, then the mechanism of trade can get all locked up. When the grease starts to get a little low, you might want to consider getting out the grease gun.

It depends on multiple factors. If the cogs are not turning because there is no power behind the motor, then all the grease in the world won't help that. If the cogs ARE turning, but turning slowly because there is too much resistance, then too much grease can cause the gears to slip, actually making the problem worse. Sometimes, grease can collect dust, wood particles, etc. and actually accumulate so much filth and refuse that it can jam a mechanism and need to be cleaned out. So in your own analogy, at times a limited quantity of grease can help, but this is not an infinite or 'always works' solution to a problem.

 

[imagep]

It depends on multiple factors. If the cogs are not turning because there is no power behind the motor, then all the grease in the world won't help that. If the cogs ARE turning, but turning slowly because there is too much resistance, then too much grease can cause the gears to slip, actually making the problem worse. Sometimes, grease can collect dust, wood particles, etc. and actually accumulate so much filth and refuse that it can jam a mechanism and need to be cleaned out. So in your own analogy, at times a limited quantity of grease can help, but this is not an infinite or 'always works' solution to a problem.

I totally agree. That's why monetary policy such as QE isnt very effective (if at all). But having less money in our money supply than is being demanded for trade can obviously harm an economy. So like you said, it just depends.

 

[Critter7r]

They can always be able to cover any checks I wrote on that $100 or to give it back to me, but thats a matter of getting that money from another source, such as the next deposit that someone makes, or out of vault cash. Obviously banks keep some operating capital on hand.

I thought we were all trying to simplify the workings of a bank by assuming that your $100 deposit is all the actual cash that the bank had to work with while explaining the actual function of their system.

 

[logansrun]

Sorry, missing the point I guess. If those governments collected real, finite, physical money and used that same money to pay for the government's spending, why is our government now different? I understand that we dismantled the gold standard, and now money is less concrete. But a good bit of that government spending somehow gets turned back into real money. For instance, all those medicare payments go to hospitals and doctors who use that actual money to buy chicken sandwiches from McDonalds. The medicare tax paid by the McDonald's employee then... just... disappears? Why have a medicare tax if the money doesn't go toward medicare spending? Why not just have one, huge, 'aggregate demand reduction tax'? And if these taxes don't actually amount to 'revenue' for the government, then how does tax evasion equate to lost revenue, as this article suggests?
Federal Revenue Lost To Tax Evasion | Demos
This site specifically says that these evil tax dodgers increase the deficit AND the taxes paid by every other law abiding taxpayer. But... if the government doesn't actually spend this tax revenue, then why care about this 'deficit' which doesn't really exist? It would seem like the government is lying to us all, saying that the deficit matters when it comes to taxes, but that it doesn't matter when it comes to spending. No?

In a sense, that could be true. The budget has to be funded, part of that budget is debt service. People evading taxes increases the need to "borrow" to fill the budget deficit. When that borrowing is done by intergovernmental debt, it makes no difference. When that borrowing is from me, it makes a difference because you then have to pay me additional sums in interest which gives you less money to spend on roads in the future. Taxation is like a fountain in a pond--it primarily keeps things moving. Property taxes keep people from being able to buy up all the land because they add a carrying cost to ownership for instance. Other taxes keep people from being able to stockpile all the currency--whether that is paper, gold, or something else. The primary utility of this is that it can and has become somewhat of a Faustian drama on its face, but behind all of that it keeps civil society civil. People who have no food, property, or money historically overthrow things like governments and elites when there are enough of them to do so. The only fairness there will be to taxation, economics, etc is that they maintain social stability. Whether or not some people and entities have gamed the system with these dynastic controls of capital is not clear. My belief is that they have not because this "wealth" is more fictional than tangible (The Walton's wealth is determined by someone else's willingness to buy their stock, not in the value of the property upon which their stores sit, for instance). For a person to sell a billion dollars in stock, they would have to find someone with a billion dollars to spend on stock. If the fountain were clogged, I would expect to see stocks decreasing in value like happened in 2008.

 

[imagep]

I thought we were all trying to simplify the workings of a bank by assuming that your $100 deposit is all the actual cash that the bank had to work with while explaining the actual function of their system.

Sure. So absent the ability for the bank to acquire $100 to cover the withdrawal from a bank account, then the bank goes bust and the best it can do is to tell the depositor that it will repay the depositor when the money it loaned out is repaid. Maybe at that point, the bank issues the depositor some sort of IOU which can be used in trade, if that happened, then their would effectively be more money in existence.

I haven't been arguing that our banking system can't create new money, I've just been saying that most loans don't result in new money creation. When there is not ample money in the system for all credit worthy loans to be made, the banking system does indeed automaticaly create more money just by it's existence.

 

[JohnfrmClevelan]

The wealth was not 'created' because money changed hands. The wealth existed, and was exchanged for an equal value. I'm going to layout our discussion, correct any area that is incorrect in the basic facts:
1.) Money has no inherent value.
2.) The goods/services that are purchased with money have value.
3.) This gives indirect value to the money, ONLY because it can be exchanged for objects that have value.
4.) The barter system involves directly exchanging one good/service for another good/service.
5.) Money serves ONLY as a go between, allowing one to trade a good/service for something now, and exchange that value at a later time for an equal value of goods/services.

I would agree with 1-5. Where I would disagree with you is when you said, "the wealth existed." The wealth didn't exist, not until people were driven to produce something. When you barter, you create wealth. You grow extra corn, over and above what you would eat, so that you have some to trade for potatoes. If you had no partner to barter with, you wouldn't bother growing excess corn. Likewise, if there is no money to be earned (since we rarely barter our labor today), you won't labor. Economic activity builds wealth, and money (debt) allows for economic activity in a modern economy.

Now, you have claimed that when a bank creates a loan, they are creating money. Rather than viewing this solely as credit, and recognizing that this 'created' money does in fact come from another source (eventual loan repayment or shifting of funds), you prefer to speak of it in terms of creating money which is then destroyed when the debt is repaid. Why are we not viewing a loan as a 'hole' or a 'vacuum'? Debt is a negative transaction. It cancels out assets. For instance, your example of the farmer buying seed. If the farmer wrote the store owner an IOU for '$10 worth of seed' rather than $10 cash, we have the same situation. The farmer gets the seed now, the store-owner is out $10 worth of seed, but expects the farmer to make good on the IOU. After harvest, the farmer brings back $10 worth of seed, IOU is destroyed, and the store-owner is compensated. Would you say that this IOU resulted in "creating new seed", and that this 'new seed' is destroyed when the debt is fulfilled? It more accurately results in an exchange of an equal value of seed, and is a net of no value increase. Money is simply an exchange tool. Any debt needs to be eventually paid, or else there is a loss.

Well, I think people just find it easier to think in terms of the asset side, because that's what we hold when we have money in our pocket. Plus, there are more dollars/assets than liabilities, because govt.-created dollars have no corresponding liability in the private sector.

As for the example, why would the storeowner accept the same amount of seed in return? That gets him nowhere. He has the seed on sale in order to get money, which can get him other stuff, like booze. He doesn't need seed, and when he does get seed to sell, it won't cost him $10. That's retail price. You make exchanges when you value the thing you are buying more than you value the money in your pocket.

 

[JohnfrmClevelan]

(cont.)

I feel like what you and imagep have been explaining is really just spin. We're all talking about credit, not 'new money,' but new money sounds so much better than credit that you want that used instead. Debt is bad for whoever owes the debt, so if we tell everyone that debt is okay because we can just create new money, it's a lie. It is at most a temporary solution which incurs long-term problems.

That's not what I'm trying to say at all. Credit/debt/money, whatever you want to call it, is how trade happens. Nobody barters. Even thousands of years ago, trade ran on credit. Barter simply is too difficult to manage - how many separate barter transactions would you have to go through to trade corn worth $1000 for a radio worth $30? A bunch. But a standardized unit of debt/credit makes it all very simple.

Debt is not "OK because we can just create new money." Debt is OK because it allows for economic activity. And it's far more flexible than using gold or some other form of "hard" currency.

If you were referring to government debt when you said "debt is OK because we can just create new money," that's a whole different topic.

The only thing I can really see here that makes your argument valid is point #1. You can create all the paper bills in the world, because they have no inherent value. But without an appropriate increase in the value of goods/services available, this is just inflationary. So I think economists may be discussing physical dollar bills, and everyone else is discussing the indirect value of those bills. Would you say that is accurate?

No, I wouldn't. Bank-created money disappears as the debt is paid off, so there is no reason to think it would be inflationary, even using monetarist reasoning. The supply of bank-created money goes up and down with demand. Plus, it is not the mere existence of more dollars that makes prices go up. Prices go up when production can't meet demand. But dollars in existence don't exert demand just by existing. People have to want to spend them and not save them. So inflation isn't as easy to predict as just counting the number of dollars.

 

[Critter7r]

Sure. So absent the ability for the bank to acquire $100 to cover the withdrawal from a bank account, then the bank goes bust and the best it can do is to tell the depositor that it will repay the depositor when the money it loaned out is repaid. Maybe at that point, the bank issues the depositor some sort of IOU which can be used in trade, if that happened, then their would effectively be more money in existence.

I haven't been arguing that our banking system can't create new money, I've just been saying that most loans don't result in new money creation. When there is not ample money in the system for all credit worthy loans to be made, the banking system does indeed automaticaly create more money just by it's existence.

OK. Then I'm not losing my mind. I think I'm on the same page with you on this ...

A loan doesn't automatically create new money, but if the need arises, a bank has the ability to create up to $9 for every dollar it has "on hand", so to speak.

"Leveraging", someone mentioned earlier. I assume that's what this is.

 

[JohnfrmClevelan]

OK. Then I'm not losing my mind. I think I'm on the same page with you on this ...

A loan doesn't automatically create new money, but if the need arises, a bank has the ability to create up to $9 for every dollar it has "on hand", so to speak.

"Leveraging", someone mentioned earlier. I assume that's what this is.

You guys are getting on the wrong track. Banks don't leverage anything to make loans, and there is no multiplier of anything involved here.

Strip away the central bank, and strip away reserves. That's when you can see how little it really takes for a private bank (or banks) to operate. Banks operate on promises, I.O.U.s alone. They don't even need capital, unless a loan doesn't get repaid. Their books are a balance of assets (I.O.U.s owed to the bank) and liabilities (I.O.U.s that the bank owes to depositors). When they make a loan, there is nothing solid to dip into - they simply accept the borrower's promise to pay (an asset on their books), and the bank (not the borrower) promises to pay somebody else. And when they pay, they pay with I.O.U.s. That's money. Banks can take some of those I.O.U.s from their books and print up banknotes, which allows the holder to take some portable I.O.U.s with him for transactions. Money exists as long as there are some loans outstanding, and there are always loans outstanding. It all works out, and it requires no capital, no reserves, and no central bank. It can be started from scratch.