This whole "making new money" thing (2 Viewers)

[imagep]

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.

exactly!!!

 

[imagep]

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. ...

So why do banks even bother to have tellers and to allow people to have accounts? Whey don't they just lend?

Depositless "banks" actually exist, we call them small consumer finance companies. But these lenders can't create money, they have to actually either have the money they loan or a source for that money.

 

[JohnfrmClevelan]

So why do banks even bother to have tellers and to allow people to have accounts? Whey don't they just lend?

They still make money on those accounts, I'm guessing, from fees. Also, not so long ago, before QE, taking in deposits was a way to get cheap reserves.

Depositless "banks" actually exist, we call them small consumer finance companies. But these lenders can't create money, they have to actually either have the money they loan or a source for that money.

Well then, they either hold large amounts of cash in a vault and loan that out, which I doubt, or they work through a bank. You or I could act as a loaning agent if we had a bank account and enough credit.

 

[dpcal]

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.

I wasn't aware of this thread or MMT until last week. I took a few econ courses in college 40 years ago and have no expertise in banking or economics. I have read through the whole thread, and read the bank of England site, and a couple short articles about MMT. So while I am fascinated by MMT, still have a way to go... However, I wanted to see if my understanding of banks creating money is consistent within that framework. I understand that when a bank gives a loan for $1000, they simply punch in $1000 into the borrowers account... nothing else needs to move. However, when the borrower, goes out writes a check for $1000 for a TV and that check gets deposited with another bank, then reserves are shifted from the lending bank to the bank receiving the check... regardless of the mechanics. The dollars created by bank 1, just keeping swapping owners, until they are gradually extinguished by the loan being paid off. However, since at each step along the way, reserves are moving back and forth, it seems that what is really occurring when the bank takes the note, and puts those digits into the borrowers account, the bank s is creating "money" from their own reserves or reserves somewhat in the system, that the bank will need to acquire to "make good" on the digits they created in the borrowers account.

 

[JohnfrmClevelan]

I wasn't aware of this thread or MMT until last week. I took a few econ courses in college 40 years ago and have no expertise in banking or economics. I have read through the whole thread, and read the bank of England site, and a couple short articles about MMT. So while I am fascinated by MMT, still have a way to go... However, I wanted to see if my understanding of banks creating money is consistent within that framework. I understand that when a bank gives a loan for $1000, they simply punch in $1000 into the borrowers account... nothing else needs to move. However, when the borrower, goes out writes a check for $1000 for a TV and that check gets deposited with another bank, then reserves are shifted from the lending bank to the bank receiving the check... regardless of the mechanics. The dollars created by bank 1, just keeping swapping owners, until they are gradually extinguished by the loan being paid off. However, since at each step along the way, reserves are moving back and forth, it seems that what is really occurring when the bank takes the note, and puts those digits into the borrowers account, the bank s is creating "money" from their own reserves or reserves somewhat in the system, that the bank will need to acquire to "make good" on the digits they created in the borrowers account.

Welcome, dpcal! I'm always happy to hear of interest in MMT.

Reserves are really just separate accounts that facilitate settling up between banks. It's easy to think of them as the "real" money behind loans, but they're not - that's why I ask people to strip away reserves and capital to understand what is being loaned out (like I did above). Reserve accounts are kind of like capital requirements - not essential to making loans, but a handy add-on feature. Yes, banks have to adjust both reserves and capital requirements as their liability positions change, but only because regulations say they have to, not because it is operationally necessary. Assuming that a bank already has enough reserves and capital, a new $1000 loan, deposited in the same bank, will just be a matter of the bank expanding its own balance sheet: assets go up by $1000, and liabilities go up by $1000, while neither reserves nor capital changes. M0 stays the same, while M1 goes up by $1000.

The total level of reserves does not change when a loan is created, or when a loan is paid off. They shift around, that's it. If necessary (and it's seldom if ever necessary after QE), the Fed will accommodate with new reserves. You have probably already read that only the central bank can change the number of total reserves, which is true. Reserves themselves never see the light of day, except for when we want to hold cash, which sort of bypasses banks altogether.

 

[dpcal]

Reserve accounts are kind of like capital requirements - not essential to making loans, but a handy add-on feature. .

I have some difficulty with the concept that banks don't need to have reserve accounts. or some account at the fed that has sufficient funds available for the checks written by those who received the loans or have checking accounts can clear. While I recognize the banks can borrow what is needed for their checks to clear, without showing they had sufficient capital, or other reserves available who would lend. Or have I totally missed what you saying?

 

[JohnfrmClevelan]

I have some difficulty with the concept that banks don't need to have reserve accounts. or some account at the fed that has sufficient funds available for the checks written by those who received the loans or have checking accounts can clear. While I recognize the banks can borrow what is needed for their checks to clear, without showing they had sufficient capital, or other reserves available who would lend. Or have I totally missed what you saying?

Banks can (and have) operated without governments before. All they need is a way to settle up their imbalances. This can be done with the same dollars that banks create when they make loans - banks always take some of those dollars for themselves (interest), so they do have something to settle up with.

Capital is just there in case loans fall through, and banks have to make up for the losses. Banks buy it with the dollars they earn. If everybody pays on their loan like they are supposed to, why would a bank need that store of money?

MMT puts a big emphasis on the government's role in creating dollars, but I see the government (these days, at least) as fitting into (and complementing) the private banking system, because the government is not a necessary feature of banking.

I'm just trying to simplify banking by removing reserves and capital requirements, for illustrative purposes. Sure, in real life there would be problems without capital, because loans fail. And sure, without the Fed's ability to create liability-free dollars, there would be confidence problems and bank runs. Both are good features. But neither are theoretically necessary.

 

[Tetron]

Banks can (and have) operated without governments before. All they need is a way to settle up their imbalances. This can be done with the same dollars that banks create when they make loans - banks always take some of those dollars for themselves (interest), so they do have something to settle up with.

Capital is just there in case loans fall through, and banks have to make up for the losses. Banks buy it with the dollars they earn. If everybody pays on their loan like they are supposed to, why would a bank need that store of money?

MMT puts a big emphasis on the government's role in creating dollars, but I see the government (these days, at least) as fitting into (and complementing) the private banking system, because the government is not a necessary feature of banking.

I'm just trying to simplify banking by removing reserves and capital requirements, for illustrative purposes. Sure, in real life there would be problems without capital, because loans fail. And sure, without the Fed's ability to create liability-free dollars, there would be confidence problems and bank runs. Both are good features. But neither are theoretically necessary.

In instance of banks operating without governments wouldnt they fall outside of the MMT theory. As these institutions would have to provide actual currency to their borrowers because of the lack of a centralized system of transaction. These banks would have to give out, and receive back hard currency in order to function. The purchases the borrower wants to make would not accept the banks assurance that it would eventually cover the costs they would want currency from the borrower.

As for the concept that banks dont need capital because everyone should repay their loans that works only in the theoretical. In the actual it is known that not everyone repays their loans. It is also known that even low risk loans, and large loans can default due to changes in the market that cannot be accurately predicted. Due to this banks need capital, it is not a luxury it is a necessity. This is the same as needing car insurance or health insurance, it is theoretically possible that you will never get into a car wreck or never get sick, but only theoretically possible. The majority of people will get in an accident and will get sick, thus insurance is mandated by law. This is the same reason banks are mandated to keep reserves.

While banking is possible without government MMT based banking is most certainly not possible, not even theoretically.

The problem with removing reserves and capital requirements is that this can only be done for theoretical purposes, due to a lack of 100% repayment rate, and market instability reserves and capital are necessary, and so pretending they are not does not provide an accurate picture of the process.

 

[JohnfrmClevelan]

In instance of banks operating without governments wouldnt they fall outside of the MMT theory. As these institutions would have to provide actual currency to their borrowers because of the lack of a centralized system of transaction. These banks would have to give out, and receive back hard currency in order to function. The purchases the borrower wants to make would not accept the banks assurance that it would eventually cover the costs they would want currency from the borrower.

First, I want to say that the name "Modern Monetary Theory" was an unfortunate accident - it is not "theory" at all. It is simply a description of how fiat currency economies operate. Nothing theoretical about it. But the name stuck, and it's probably here to stay. Because it describes the system as it works today, it is far less "theoretical" than Austrian economics, or neoclassical economics, etc.

Second, the operation of any fiat currency economy can be understood if you understand MMT, even one without a central bank.

When you say "actual currency" and "hard currency," you are incorrect. None of that is necessary for a private bank to function. All that is necessary is that the bank's I.O.U.s are accepted. That's easier for a government to accomplish, because they can make you pay taxes in their currency, but it can be done by banks as well (and it has been, in the past). No gold was necessary. People certainly like banks to have piles of gold and other forms of capital lying around, but it is not necessary. Credit and banknotes work just fine. "Costs" are covered by the I.O.U.s themselves - the banks get a portion of them through interest payments, and these profits are available for the bank to spend.

As for the concept that banks dont need capital because everyone should repay their loans that works only in the theoretical.

That's why I said it was theoretical.

In the actual it is known that not everyone repays their loans. It is also known that even low risk loans, and large loans can default due to changes in the market that cannot be accurately predicted. Due to this banks need capital, it is not a luxury it is a necessity. This is the same as needing car insurance or health insurance, it is theoretically possible that you will never get into a car wreck or never get sick, but only theoretically possible. The majority of people will get in an accident and will get sick, thus insurance is mandated by law.

Profits in the form of I.O.U.s are perfectly acceptable capital. These are dollars, after all. Banks can hold dollars, or they can buy other forms of capital with those dollars, but those dollars all come from the bank's profits. Meaning, they are simply bank I.O.U.s that the bank holds outright (where some other party holds the liability).

This is the same reason banks are mandated to keep reserves.

No it's not. It's why banks have to keep capital. If a bank fails, they don't distribute the reserves to depositors.

While banking is possible without government MMT based banking is most certainly not possible, not even theoretically.

No, this is how banking is done today. Read that Bank of England article if you don't believe me.

The problem with removing reserves and capital requirements is that this can only be done for theoretical purposes, due to a lack of 100% repayment rate, and market instability reserves and capital are necessary, and so pretending they are not does not provide an accurate picture of the process.

Yeah, that's why I said it was for illustrative purposes. (Do you not read all of the posts leading up to the one you are responding to?) It's easier to understand the whole picture when you understand what is essential and what is not. Trying to integrate debt, reserves, and capital all at once is too much for most people. It is not "pretending" that they don't exist, it is deconstructing a complicated system into smaller, more understandable pieces.

 

[dpcal]

MMT puts a big emphasis on the government's role in creating dollars, but I see the government (these days, at least) as fitting into (and complementing) the private banking system, because the government is not a necessary feature of banking.

When you say "the government is not a necessary feature of banking", are you referring to a banking system that uses notes other than dollars, or do you mean a banking system that uses dollars and has a private mechanism to settle accounts between banks, and no set capital or reserve requirements? (I assume you mean the latter)

 

[JohnfrmClevelan]

When you say "the government is not a necessary feature of banking", are you referring to a banking system that uses notes other than dollars, or do you mean a banking system that uses dollars and has a private mechanism to settle accounts between banks, and no set capital or reserve requirements? (I assume you mean the latter)

Either one, really. Banks used to issue their own notes. I suppose the value of those various notes could float relative to each other based on people's perceptions of each bank's strength.

On the latter, you can imagine any number of ways that the government/central bank might or might not be involved. A central bank might serve as the settlement mechanism, but not issue any money itself, for instance. Or it might just serve to standardize the notes of various private banks to a national currency that is accepted by the govt. for tax payments.

The purpose (for me) of stressing the private banking side is that some people interpret MMT as encompassing ideas like "Positive Money" (which doesn't fit in with MMT at all) and other government-centric ideas about banking. A lot of people "find" MMT when they are really looking for anti-bank movements. MMT is not anti-bank at all; it just recognizes (or even dwells on) the government's ability to create liability-free money and spend it into the economy.

 

[dpcal]

In a completely private bank system giving loans in bank IOUs, instead of dollars the banks are clearly are "making new money" out of nothing except the willingness of the public to accept the bank IOUs as payment. If the banks are giving loans in dollars, and have to settle their accounts with dollars, its not clear to me that they are creating dollars except for the "total float" of the system. I have no idea what that figure is, but its going to be a very large number. For example: Assume a new bank opens and they make a loan and before they've received any deposits (checking, savings or cd's). If the recipient of the loans write a check to someone who deposits it in another bank, the dollars they deposited in their account at the Fed are used to clear the check. No new money is created except float. On the other hand I do understand how a fractional reserve system, increases money supply if that's what is meant by "making new money".

The purpose (for me) of stressing the private banking side is that some people interpret MMT as encompassing ideas like "Positive Money" (which doesn't fit in with MMT at all) and other government-centric ideas about banking. A lot of people "find" MMT when they are really looking for anti-bank movements. MMT is not anti-bank at all; it just recognizes (or even dwells on) the government's ability to create liability-free money and spend it into the economy.

But I'm not anti-bank, and REALLY have a hard time comprehending how "Positive Money" would be a win for the public. (or perhaps for anyone)

 

[JohnfrmClevelan]

In a completely private bank system giving loans in bank IOUs, instead of dollars the banks are clearly are "making new money" out of nothing except the willingness of the public to accept the bank IOUs as payment. If the banks are giving loans in dollars, and have to settle their accounts with dollars, its not clear to me that they are creating dollars except for the "total float" of the system. I have no idea what that figure is, but its going to be a very large number. For example: Assume a new bank opens and they make a loan and before they've received any deposits (checking, savings or cd's). If the recipient of the loans write a check to someone who deposits it in another bank, the dollars they deposited in their account at the Fed are used to clear the check. No new money is created except float. On the other hand I do understand how a fractional reserve system, increases money supply if that's what is meant by "making new money".

If what you mean by the float is that bank dollars exist in the time between the loan and when the principle is paid back, then yes, this is exactly right. And they are all balanced out by that matching liability, so banks just don't create net new dollars.

Think about the fractional reserve system, though - if it worked that way, the bank would still be creating new dollars in the same fashion, by expanding their balance sheets. (There could be no other way to make loans, unless they simply hoarded cash and loaned out of a pile of existing cash.) They just wouldn't expand it by 100% of the loan.

But banks don't lend out anything but new I.O.U.s. Your savings balance doesn't decrease when your bank makes a loan. Nor does the bank lend out of accumulated profits. Nor are they constrained by the amount of reserves they have on hand, nor do reserves or capital diminish when a bank creates a loan. The loan proceeds have to come from somewhere, and they come from the bank expanding its balance sheet - 100% of the loan.

It would be impossible to loan out deposits anyway. When you deposit a check into your account, the bank increases its liabilities (the money they owe you), plus there is a matching transfer of reserves (assets) to their reserve account. But they cannot lend out reserves. And were you to deposit cash, that cash is immediately added to their reserves (vault cash), so they don't lend that out, either.

This guy actually conducted an experiment that demonstrated all of this. With the cooperation of a small bank, he took out a loan and monitored the bank's books to see where the changes occurred. The paper also contains a good discussion of the different theories of how banks operate. (Even Keynes had it wrong.)

Can banks individually create money out of nothing? ? The theories and the empirical evidence

But I'm not anti-bank, and REALLY have a hard time comprehending how "Positive Money" would be a win for the public. (or perhaps for anyone)

I didn't mean to imply that you were. I was just explaining myself, because I approach MMT from a diffferent angle than some others. I used to think that the government made all of the money (since they do make all of the "net financial assets"), and I disregarded the role of private banks.

 

[dpcal]

If what you mean by the float is that bank dollars exist in the time between the loan and when the principle is paid back, then yes, this is exactly right. And they are all balanced out by that matching liability, so banks just don't create net new dollars.
Think about the fractional reserve system, though - if it worked that way, the bank would still be creating new dollars in the same fashion, by expanding their balance sheets. (There could be no other way to make loans, unless they simply hoarded cash and loaned out of a pile of existing cash.) They just wouldn't expand it by 100% of the loan.

First a clarification. It was the title of this thread that caught my interest… ‘This whole "making new money" thing’ . As the definition of M1 is a given, and only the US treasury can create dollars, I have presumed, possibly incorrectly, that “new money” at least somewhat distinct from M1, and is not a US treasury dollar ( cash or digital). For the purpose of any further discussion I’ll use the term digims (‘bitcoin’) for digital dollars.

What I mean by “float” is the interval between when the account of someone depositing a non US treasury check is credited and the check is cleared by the fed…. That’s why I put it in quotes, as the bank is ‘balancing their books” with another bank’s IOU. That bank money (IOU) is extinguished by the digim they receive from the other bank when the check clears the fed. On the other end, when the bank pays off with some of their digim (which they had on deposit with the Fed) , a matching amount of the “bank money” in the check issuer’s account is extinguished.

I did read the link, although not interested in the literature references or the modeling implications. I never did think a bank collected digim, and then shifted the digim into account of people receiving loans. Rather I believe banks take in digim from depositors, and credit them with “bank money”. They take the digim and dump it into their “stash”, and any digim or cash they don’t need to meet operational needs gets invested in interest bearing instruments with the necessary maturities.

 

[JohnfrmClevelan]

First a clarification. It was the title of this thread that caught my interest… ‘This whole "making new money" thing’ . As the definition of M1 is a given, and only the US treasury can create dollars, I have presumed, possibly incorrectly, that “new money” at least somewhat distinct from M1, and is not a US treasury dollar ( cash or digital). For the purpose of any further discussion I’ll use the term digims (‘bitcoin’) for digital dollars.

(I'll apologize up front, because I'm so used to writing this stuff in my own words that I'm sure I'll forget to use your terms. So don't get confused if I don't.)

The dollars that banks create (the asset side of a loan) are indistinguishable from government-created dollars. Both exist mainly as digital dollars. Banknotes, while they can only be printed by the government, are printed at the request of private banks - when consumer demand for cash warrants it (like around Christmas), banks tell the Fed to change some of their digital dollars (in reserve accounts at the Fed) be converted to banknotes and shipped to the banks. (The conversion to vault cash, btw, is the only way that reserves see the light of day.) This operation does not change M0/MB, it just changes the location of some reserves.

New money can enter the economy in two ways - government deficit spending and private bank loans. In the case of govt.-created dollars, the government holds the liability indefinitely; in the case of bank loans, both the asset and the liability exist in the private sector until the principle is paid off. We say that only the government can create net dollars, because those dollars enter our economy liability-free (to the private sector). But to the holder, either dollar is exactly the same. The liabilities from bank loans exist in the private sector, but they are not attached in any way to the assets, which get spent and cannot be recovered.

What I mean by “float” is the interval between when the account of someone depositing a non US treasury check is credited and the check is cleared by the fed…. That’s why I put it in quotes, as the bank is ‘balancing their books” with another bank’s IOU. That bank money (IOU) is extinguished by the digim they receive from the other bank when the check clears the fed. On the other end, when the bank pays off with some of their digim (which they had on deposit with the Fed) , a matching amount of the “bank money” in the check issuer’s account is extinguished.

Reserve banking isn't at all intuitive. I like to think of reserve accounts as complementary accounts that serve one purpose - as the way banks settle up between one another. That's it. Only the Fed can change the amount of (reserves + cash) in existence.

So when someone deposits a check from a private bank, reserves move from the reserve account of the originating bank to that of the depositing bank. When you get a check from the government, the Fed adds reserves to the account of the depositing bank. That's how a bank's books are balanced, with deposits as their liability and reserves as their matching asset.

If I'm understanding you correctly, you and I weren't talking about the same thing when you said "float." Bank-created dollars exist from the time of the loan until the time the principle is paid off. If you buy a house on a 30-year mortgage for $300,000, then the builder will immediately get his $300,000, while you will continue to pay off the principle for 30 more years, during which time your unpaid principle will continue to "exist."

As far as the lending bank is concerned, your loan is one of a giant pile of assets (to the bank) and liabilities (deposit accounts, where the bank owes the depositor money on demand). When you make a payment on your loan, the bank marks down your deposit account (the bank's liability), and it also marks down your loan amount (the bank's asset) - the net result is that both sides of the bank's balance sheet have shrunk, and M1 shrinks by the same amount. Money has been extinguished.

 

[JohnfrmClevelan]

(cont.)

I did read the link, although not interested in the literature references or the modeling implications. I never did think a bank collected digim, and then shifted the digim into account of people receiving loans. Rather I believe banks take in digim from depositors, and credit them with “bank money”. They take the digim and dump it into their “stash”, and any digim or cash they don’t need to meet operational needs gets invested in interest bearing instruments with the necessary maturities.

Here is where things get counterintuitive. Your deposit, which is an asset in your hands, becomes a liability in the bank's hands. You give them some other bank's I.O.U., and now your bank owes you that money. The bank's matching assets are the reserves that are transferred. And reserves aren't much of an asset, because banks can't really use them for much. Banks don't make money by taking in deposits; deposits just represent cheap reserves to them. Banks make money by creating loans, then collecting interest; when you pay interest, your deposit account goes down, and their deposit account goes up. Or, put a different way, when you make a payment, the spread between the bank's assets and the bank's liabilities increases.

 

[dpcal]

Reflecting over our exchange, I’ll start with where we agree in our descriptions of banking. I also believe that almost everyone and possibly everyone who I’ve read in this thread basically agrees on all but a couple things. However, IMO the areas of agreement are often not apparent due to the noise created by miscommunications.

Banks make money by lending money at higher rate than their cost of acquiring money.

New Money enters the economy through government deficit spending and private bank loans, although I am uncertain what you consider to be “private bank loans”, as there all kinds of loans and loan like activities that move money into the economy. I need some clarification on what type of loans you consider to be “private bank loans” and what type of loans you don't.

I agree with your description of liabilities and assets, but I only think about assets and liabilities when forced to do so by my bank, and I dread it. Similarly I can look at a balance sheet and usually understand it, but I only do so when its necessary.

I agree that only the Treasury can print bank notes(‘dollar bills’ for most of us) and the ‘technical’ description you gave.

Where I think we agree, but may have a “language problem” is:

“We say that only the government can create net dollars, because those dollars enter our economy liability-free (to the private sector). But to the holder, either dollar is exactly the same.”

I don’t believe or least I can’t “see” where banks create dollars or have any need to so. Just as the link you gave identified, nothing is transferred from deposits, reserves etc when a bank makes a loan. All that happens is the bank credits the borrower’s checking account or provides a bank check for the amount of the loan. No dollars created. Except for cash(bank notes), the rest of the dollars are digital and move back and forth between banks accounts at the Fed. For example, if the Treasury were to decide it was going to apply a digital signature to their digital dollars, I believe you would find virtually all Treasury digital dollars moving between accounts at the Fed.

We agree that banks have a financial incentive to minimize the number of Treasury digital dollars that they hold.

 

[JohnfrmClevelan]

Banks make money by lending money at higher rate than their cost of acquiring money.

This is false. Banks don't loan out pre-existing money. They create money by marking up both their assets and their liabilities for the full amount of the loan. You promise to pay them, and they promise to pay somebody else, that's it.

The real costs to a bank when they make a loan come if and when they have to increase their capital and/or their reserves. And these days, they usually don't have to increase their reserves. But the loan doesn't come out of either one, of course.

New Money enters the economy through government deficit spending and private bank loans, although I am uncertain what you consider to be “private bank loans”, as there all kinds of loans and loan like activities that move money into the economy. I need some clarification on what type of loans you consider to be “private bank loans” and what type of loans you don't.

Well, a store owner can extend credit to a customer without any formalities, and he probably won't be able to use that I.O.U. for anything else, so I wouldn't call that money. But these days, pretty much any credit can be traced back to banks. Credit cards, certainly. In order to avoid creating money with a loan, you would pretty much have to save up a bunch of pre-existing dollars and loan those out. I suppose that happens now and again, but banks certainly don't do that.

Where I think we agree, but may have a “language problem” is:

“We say that only the government can create net dollars, because those dollars enter our economy liability-free (to the private sector). But to the holder, either dollar is exactly the same.”

I don’t believe or least I can’t “see” where banks create dollars or have any need to so. Just as the link you gave identified, nothing is transferred from deposits, reserves etc when a bank makes a loan. All that happens is the bank credits the borrower’s checking account or provides a bank check for the amount of the loan. No dollars created.

But those are dollars. When they are in your account, you have access to them. You can write a check, or you can take it out in cash at the ATM. Government-created dollars are no different - when you get a check from the Treasury, you either get a check or you get it directly deposited into your account through your bank. No paper is necessary.

...Except for cash(bank notes), the rest of the dollars are digital and move back and forth between banks accounts at the Fed. For example, if the Treasury were to decide it was going to apply a digital signature to their digital dollars, I believe you would find virtually all Treasury digital dollars moving between accounts at the Fed.

There is also movement between banks of liabilities. When you write a check, neither your bank nor the receiving bank profits from that move. The liability (the check) is exactly balanced out by the asset (the reserves). So when you write a check for $1000, your bank marks down your balance by $1000 (which lowers your bank's liabilities by $1000), and they transfer $1000 in reserves from their account (which lowers their assets by $1000) to the receiving bank's account. And the receiving bank marks up depositor's account by $1000 (which increases their liabilities by $1000), plus their reserve account goes up by $1000. Nothing is created nor destroyed.

As for a digital signature on govt.-created dollars, you are correct, you would find that only the dollars in reserve accounts and banknotes had a digital signature. Bank-created dollars would not. And you would never see a govt.-created digital dollar unless it had been converted to a banknote; except for vault cash, reserves remain in accounts at the Fed, in digital form.

We agree that banks have a financial incentive to minimize the number of Treasury digital dollars that they hold.

Do you mean they have an incentive to keep their reserve balances at a minimum? Why do you say that? They earn a bit of interest on reserves.

 

[dpcal]

Do you mean they have an incentive to keep their reserve balances at a minimum? Why do you say that? They earn a bit of interest on reserves.

I am somewhat time constrained, but your last statement indicates a problem that frequently exists, in debate/discussion with people with widely different familiarity with the subject matter. I didn't use the term reserves, as I don't know what you mean by reserves.

The short summary of "reserves" from Investopedia states: "Bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request." (Wikpedia's is somewhat different.) Read more: Bank Reserve Definition | Investopedia

If that's not what you mean, you probably are referring to a term that is widely understood by those who are well informed on banking. I don't mean that as a criticism, as the same would likely happen in reverse if the topic was in one of my areas of expertise.

I do plan on replying to some of your other responses but unable to so at this time.

 

[Fenton]

I am somewhat time constrained, but your last statement indicates a problem that frequently exists, in debate/discussion with people with widely different familiarity with the subject matter. I didn't use the term reserves, as I don't know what you mean by reserves.

The short summary of "reserves" from Investopedia states: "Bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request." (Wikpedia's is somewhat different.) Read more: Bank Reserve Definition | Investopedia

If that's not what you mean, you probably are referring to a term that is widely understood by those who are well informed on banking. I don't mean that as a criticism, as the same would likely happen in reverse if the topic was in one of my areas of expertise.

I do plan on replying to some of your other responses but unable to so at this time.

I could save you some time and effort and just tell you that you are debating a ideologue.

What I mean by that is that poster is more loyal to a process that applies only in the theoretical than he is in the truth or reality.

MMT is presented as a " new " and productive alternative when in reality its just a poorly veiled description of just massive deficit spending " to increase aggregate demand " and Government growth on a exponential scale.

When given actual examples of the failures of these types of iniatives that poster and those who subscribe to the failed models used to grow economies out of stagnation just resort to insults amd conceit and nevet admit theyre limitations.

There's only two possible endings to a debate with ideologues such as these.

You either agree 100 percent or you are not " educated " and deserve every bit of their toxic charges amd blame.

 

[JohnfrmClevelan]

I am somewhat time constrained, but your last statement indicates a problem that frequently exists, in debate/discussion with people with widely different familiarity with the subject matter. I didn't use the term reserves, as I don't know what you mean by reserves.

The short summary of "reserves" from Investopedia states: "Bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request." (Wikpedia's is somewhat different.) Read more: Bank Reserve Definition | Investopedia

Wikipedia has the better explanation of reserves. Reserves are basically accounts used only for settling up between banks. Vault cash serves the same function - you can think of cash as portable reserves. When you move cash from one bank to another, you end up with the same net result as when you move a check from one bank to another. Reserves and cash together make up M0/MB. This is really government-created money, which is why I thought you were referring to reserves when you said "Treasury digital dollars."

When the government writes you a check for $1000, the Fed increases your bank's reserve account by $1000. Your bank marks up your account by $1000; so the bank's assets (reserves) and liabilities (dollars in your account) balance out. So "Treasury digital dollars" end up in Fed accounts as reserves, I suppose. There really is no transmission of anything tangible between the Treasury and you when they write you a check - your bank gets some (tangible) reserves from the Fed, and you get an I.O.U. from your bank.

 

[dpcal]

"I need some clarification on what type of loans you consider to be “private bank loans” and what type of loans you don't."

Well, a store owner can extend credit to a customer without any formalities, and he probably won't be able to use that I.O.U. for anything else, so I wouldn't call that money. But these days, pretty much any credit can be traced back to banks. Credit cards, certainly. In order to avoid creating money with a loan, you would pretty much have to save up a bunch of pre-existing dollars and loan those out. I suppose that happens now and again, but banks certainly don't do that. .

Let me clarify, I’m not trying to play “gotcha”. I’m good with the concept that one can view credit as “new money”. Although IMO the money is not really “new”. Existing money is moving from the hands with no or a lower current desire to “spend” to those with an immediate or a higher desire to spend, increasing economic activity. But if credit can’t be restrictive, then there would need to be a set of rules that identify what is or is not a "private bank loan". For example, a loan for a house or car is restrictive, and some of those loans are only for a specific car or house. But if the distinction between private bank loans and other loans, is just loans given from the owner of desired good, service or asset to those who want it, then I understand what you mean when you say “private bank” loans.

 

[JohnfrmClevelan]

Let me clarify, I’m not trying to play “gotcha”. I’m good with the concept that one can view credit as “new money”. Although IMO the money is not really “new”. Existing money is moving from the hands with no or a lower current desire to “spend” to those with an immediate or a higher desire to spend, increasing economic activity.

But this isn't what happens. You can track pre-existing money and see that it isn't used - that's what Werner did in that paper of his. When banks make loans, or when credit card companies (who work through banks) extend credit, they aren't pulling dollars from a pile of savings. Nobody's deposit account goes down when loans are made, including the bank's.

It's a difficult concept to get past, I know. It's hard to conceive of something as tangible as a dollar (paper or electronic) that can be balanced out by something as ethereal as somebody else's liability, but that is what happens. Banks create new dollars.

But if credit can’t be restrictive, then there would need to be a set of rules that identify what is or is not a "private bank loan". For example, a loan for a house or car is restrictive, and some of those loans are only for a specific car or house. But if the distinction between private bank loans and other loans, is just loans given from the owner of desired good, service or asset to those who want it, then I understand what you mean when you say “private bank” loans.

What I mean is that banks have the ability to create U.S. dollars that are the same as any other U.S. dollar. If a furniture store uses a bank to extend credit in a formal way (credit card), opening up a line of credit for you, they are just an intermediary, and your loan is creating new dollars through a bank loan. But if you go to a furniture store and they let you take the chair home and tell you that you can pay them later, with no formalities and no security, I don't see where any money has been created. If you default on a formal line of credit, the guaranteeing bank will have to extinguish that debt with some of their assets. If you fail to pay the furniture dealer in the second scenario, banks aren't even involved.

 

[costnerri]

This isn't true at all. Taxation has nothing to do with government spending. Think about it this way: when you pay the government taxes, the government takes the money you paid and destroys it. When the government spends, it creates money out of thin air and then spends it. This is a simplification of what is going on that makes it easier to understand.


The government doesn't take your money to pay for its costs. The government collects taxes to reduce aggregate demand in the economy. Also, the government taxes because if it didn't, there would be no need for its currency. Taxation is a macroeconomic policy tool, not a funding mechanism. Note, though, that this only applies to the federal government. State and local governments must tax to fund as they cannot create their own currency.

where does the funding come from then? and what gives the dollar any value? just because 'they' say its worth this or that doesn't give anything much value. just because I say my vehicle is worth a million bucks doesn't mean it is. and already asked but ill ask again this money that comes out of 'thin air' why cant that be used to pay off our nations debt? instead of not worrying about the debt because we could always pay it off with this 'thin air money' why not just get it over with and pay it off. obviously these papers flying around must not be worth mut if anything.

 

[JohnfrmClevelan]

where does the funding come from then? and what gives the dollar any value? just because 'they' say its worth this or that doesn't give anything much value. just because I say my vehicle is worth a million bucks doesn't mean it is. and already asked but ill ask again this money that comes out of 'thin air' why cant that be used to pay off our nations debt? instead of not worrying about the debt because we could always pay it off with this 'thin air money' why not just get it over with and pay it off. obviously these papers flying around must not be worth mut if anything.

Our nation's "debt" is not really a debt, it's dollars that have been previously earned and exchanged for U.S. bonds. China and Japan have earned many billions of dollars over the years through trade surpluses, and they choose to buy bonds with those dollars rather than spend them. The U.S. government does not have to borrow the same dollars that they can create for free. Bond issuance is a matter of choice; the U.S. chooses to continue issuing bonds, and the world chooses to continue buying them. So "paying off" the debt should not be an issue. Dollars, just like bonds, are liabilities of the U.S. govt., and paying off the bonds would not change the total number of those liabilities.

Dollars, whether they are fiat or gold-convertible, are valuable because they can buy goods and services. It doesn't really matter how they come into existence, as long as people are willing to work to earn them. You don't create dollars with "funding," you create dollars with the promise of future returns. That is what drives people to produce.