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Banks create money, but it's less impressive than it sounds

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Re: Banks create money, but it's less impressive than it sounds

#31

Post by whyhow »

AmericanChopper wrote: post #23
whyhow wrote: post #20

Earlier quoted context omitted.

So the depositor put $1,000,000 in the bank and the bank loans $850,000 to a small business so it can buy more inventory. The small business goes to the widget manufacturer and writes a check which the manufacturer deposits into the bank. So now the bank has 1,850,000 in deposits and 850,000 in loans. The bank takes the new deposits and loans out 85% of it ($723k) to another small business. This small business goes a…

Because doing it one time, or 10 times, or 1,000 times doesn't change anything about how it works. If everybody pays all their debts, it all adds back up to $1,000,000 in cash (plus interest for the bank(s)).

No it doesn't. In my example the bank loaned out $850k to the first small business and $723k to the second. That's $1,573,000. The bank started with $1million.

It absolutely matters how many times the dollars come back to the bank because that is the pathway that lets the bank loan the same original dollar out multiple times.

Re: Banks create money, but it's less impressive than it sounds

#32

Post by baobabKoodaa »

omazurov wrote: post #27

>Suppose you have $100 in cash... Now if you realize that that $100 is a mere IOU from the U.S. of A. you may get a feeling you are onto something...

A hundred dollar bill has not represented an IOU since giving up the gold standard.

Re: Banks create money, but it's less impressive than it sounds

#33

Post by jkhdigital »

AmericanChopper wrote: post #25
baobabKoodaa wrote: post #17

Earlier quoted context omitted.

If you go and read the article you will find that it agrees with everything you posted here, with the exception of your weird conclusion that "banks do not create money out of thin air". The article uses a simple example to illustrate that, using Eurozone M1 definition for money, loaning factually increases the amount of money which exists. Perhaps you are thinking of a different definition of money?

Because Eurozone M1 doesn't account for the debt that backs some of those balances. That's like suggesting you can increase your net worth by taking out a loan. You can increase the amount of money you have to spend right now by taking a loan, but you're not "creating net worth out of thin air".

But debt isn't "negative" money. In fractional reserve banking, money and debt are like matter and anti-matter: money is created along with debt, and when the debt is repaid the money is actually destroyed. The money is purchasing power now; the debt is a claim on future purchasing power.

Re: Banks create money, but it's less impressive than it sounds

#35

Post by magicsmoke »

baobabKoodaa wrote: post #32
omazurov wrote: post #27

>Suppose you have $100 in cash... Now if you realize that that $100 is a mere IOU from the U.S. of A. you may get a feeling you are onto something...

A hundred dollar bill has not represented an IOU since giving up the gold standard.

It represents not going to jail for failing to pay taxes.

As a example of how much the value of fiat currency depends on taxation: https://www.irs.gov/taxtopics/tc420

Even if you barter without using any currency, the IRS wants a cut.

Re: Banks create money, but it's less impressive than it sounds

#36

Post by [deleted] »

AmericanChopper wrote: post #25
baobabKoodaa wrote: post #17

Earlier quoted context omitted.

If you go and read the article you will find that it agrees with everything you posted here, with the exception of your weird conclusion that "banks do not create money out of thin air". The article uses a simple example to illustrate that, using Eurozone M1 definition for money, loaning factually increases the amount of money which exists. Perhaps you are thinking of a different definition of money?

Because Eurozone M1 doesn't account for the debt that backs some of those balances. That's like suggesting you can increase your net worth by taking out a loan. You can increase the amount of money you have to spend right now by taking a loan, but you're not "creating net worth out of thin air".

[deleted]

Re: Banks create money, but it's less impressive than it sounds

#37

Post by AmericanChopper »

whyhow wrote: post #31
AmericanChopper wrote: post #23

Earlier quoted context omitted.

Because doing it one time, or 10 times, or 1,000 times doesn't change anything about how it works. If everybody pays all their debts, it all adds back up to $1,000,000 in cash (plus interest for the bank(s)).

No it doesn't. In my example the bank loaned out $850k to the first small business and $723k to the second. That's $1,573,000. The bank started with $1million. It absolutely matters how many times the dollars come back to the bank because that is the pathway that lets the bank loan the same original dollar out multiple times.

I think you’re forgetting the bit where the business that took the $850,000 loan is left with $850,000 debt and $0 balance after they spend all of it. Every time it passes through the system the amount recirculated simply decreases by the reserve %. It all still adds up to the original amount (plus interest).

In your example though, the bank has a different problem of offering unsecured loans, which could lead to some losses for them.

Re: Banks create money, but it's less impressive than it sounds

#38

Post by jmtulloss »

jkhdigital wrote: post #22
mehrdadn wrote: post #18

This is a fantastic page. I just have an issue with one of his points though: > That banks do not have any special powers in relation to money creation They most definitely do though: FDIC insured accounts have legal government backing—a random IOU from me can't achieve that, no matter how much anyone trusts me. Put another way, a bank deposit seems less like an "IOU" and more like a "WeOU"—"we (the bank or the gover…

Exactly... not all IOUs are created equal. Any bank that is part of the Federal Reserve System can create US Dollars, the most liquid and trusted form of money in the world presently.

It comes with the downside of being highly regulated. I have no idea if the weights and balances are correct, but it makes sense at the surface level that if you are risking the government’s money, you have to do it on their terms.

Re: Banks create money, but it's less impressive than it sounds

#39

Post by baobabKoodaa »

magicsmoke wrote: post #35
baobabKoodaa wrote: post #32

Earlier quoted context omitted.

A hundred dollar bill has not represented an IOU since giving up the gold standard.

It represents not going to jail for failing to pay taxes. As a example of how much the value of fiat currency depends on taxation: https://www.irs.gov/taxtopics/tc420 Even if you barter without using any currency, the IRS wants a cut.

That doesn't make it an IOU, though.
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