Is this the US way of defining assets & liabilities?
In india, all deposits are considered liabilities (since you need to pay the customer interest on it).
All loans are considered assets (since you make money on them)
Banks create money, but it's less impressive than it sounds
61–70 of 235 posts
Re: Banks create money, but it's less impressive than it sounds
#62> Welcome to fractional reserve banking!
I don't think that is fractional reserve banking.
FRB is the system where a bank is required to have a reserve of X% before it can issue money, while in the current system the banks first emits money and then (in the US) it attempts to get a reserve[0] for that (and in the EU, it doesn't either, tho there are liquidity requirements).
Re: Banks create money, but it's less impressive than it sounds
#63Earlier quoted context omitted.
The language used to describe fractional reserve is pretty misleading. Banks don't increase the total supply of money, all fraction reserve does is keep more of it in circulation. If a bank takes a $1,000,000 deposit one customer, and lends $850,000 of it to other customers, there isn't $1,850,000 worth of money all of a sudden. There is $850,000 worth of debt held by customers, and another customer with a $1,000,000…
> If a bank takes a $1,000,000 deposit one customer, and lends $850,000 of it to other customers, there isn't $1,850,000 worth of money all of a sudden. Not all of a sudden, as in instantly, no, but there will be. See below. > There is $850,000 worth of debt held by customers, and another customer with a $1,000,000 balance Yes, but what do those other customers do with that $850,000 of debt? They either deposit it in…
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Re: Banks create money, but it's less impressive than it sounds
#64Is this the US way of defining assets & liabilities? In india, all deposits are considered liabilities (since you need to pay the customer interest on it). All loans are considered assets (since you make money on them)
TFA says the same. Rather what's considered assets are the book value of the loan and the cash the bank actually has on hand.
Re: Banks create money, but it's less impressive than it sounds
#65Every time you use your credit card you create money as instead of pulling $20 out of your pocket you still have it to spend. Of course you sterilize (cancel out) that creation when you pay the credit card bill.
When you use your credit card, the bank fronts your spending out of their cash reserves - no new money is created.
Re: Banks create money, but it's less impressive than it sounds
#66The way I like to explain this is to start from an intensional definition of money as "something that has no value by itself but can be potentially exchanged for something of that value". And total amount of money in economy is the total amount of these things at a given point in time.
So when somebody creates an IOU trusted enough so it could be resold, they have effectively created "money" according to the above definition, because now that IOU can be traded _independently_ of the thing it was originally exchanged for.
I think what confuses lot of people about this is that creation of money is a 3-sided transaction, and we are conditioned to think of a market economy as a sequences of 2-sided transactions.
Also, what I find very funny, some libertarians want to impose government to only create money backed by a commodity, like a gold standard. Yet their fundamental axiom is to allow any two parties to enter (almost) any contract, in particular, allow them to create and resell IOUs. However, if the government has to enforce any contract that two parties can come up with, this is already giving too much freedom for the money to be created regardless of the actual commodities in existence, and regardless what the government does.
Re: Banks create money, but it's less impressive than it sounds
#67The way I like to explain this is to start from an intensional definition of money as "something that has no value by itself but can be potentially exchanged for something of that value". And total amount of money in economy is the total amount of these things at a given point in time. So when somebody creates an IOU trusted enough so it could be resold, they have effectively created "money" according to the above de…
To me, commodity money (gold/silver) is only required when the trust in the gov't enforcement of money creation doesn't exist.
and this isn't the case (yet) with the USA - despite the rampant increase in money supply. Unlike other hyper-inflating economies such as Venezuela, the USA gov't isn't printing money to meet it's obligations, but instead turning illiquid assets (such as bonds and treasuries) into liquid assets (cash), that can then be used to grease more commerce and transactions. I don't believe this can cause hyper-inflation that many fear (and thus turn to buy gold/commodities), because the money is backed by debt, which has to still be paid pack.
Re: Banks create money, but it's less impressive than it sounds
#68Earlier quoted context omitted.
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.
The interest portion is never destroyed though. If you loan 50k you might pay back 60k and only 50k is destroyed. Another wrong assumption is that loan gets paid back.
Unpaid loans and interest are not accounted for and create a need for even more loans to create more money out of thin air but of course those additional loans also have interest and are also unpaid so it spirals out of control.
Re: Banks create money, but it's less impressive than it sounds
#69Earlier quoted context omitted.
The language used to describe fractional reserve is pretty misleading. Banks don't increase the total supply of money, all fraction reserve does is keep more of it in circulation. If a bank takes a $1,000,000 deposit one customer, and lends $850,000 of it to other customers, there isn't $1,850,000 worth of money all of a sudden. There is $850,000 worth of debt held by customers, and another customer with a $1,000,000…
> If a bank takes a $1,000,000 deposit one customer, and lends $850,000 of it to other customers, there isn't $1,850,000 worth of money all of a sudden. Not all of a sudden, as in instantly, no, but there will be. See below. > There is $850,000 worth of debt held by customers, and another customer with a $1,000,000 balance Yes, but what do those other customers do with that $850,000 of debt? They either deposit it in…
>The correct way to put deposits to productive use is to make them time deposits, not demand deposits. In other words, if you have a spare $1,000,000 that you have no good use for, you deposit it in some financial institution for a period of time, say a year, or 5 years, or 10 years
That will not work for normal accounts where peoples salary are deposited in, they need to use that money over the month.
Also my savings account, I dont know when I will need the money. There might be emergency expensive repairs needed to my house or car that I need to take from that account.
Re: Banks create money, but it's less impressive than it sounds
#70> Welcome to fractional reserve banking! I don't think that is fractional reserve banking. FRB is the system where a bank is required to have a reserve of X% before it can issue money, while in the current system the banks first emits money and then (in the US) it attempts to get a reserve[0] for that (and in the EU, it doesn't either, tho there are liquidity requirements). [0] https://en.wikipedia.org/wiki/Reserve_r…
Doesn’t really matter, as the requirements were set to 0% recently