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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

#71

Post by chii »

pdonis wrote: post #19
AmericanChopper wrote: post #9

Earlier 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…

> There is no need for the financial institution to treat your $1,000,000 deposit as a demand deposit

yes there is - because consumer's behaviour is irrational, and they cannot easily calculate the required interest for such a bond. A demand deposit is easy for a consumer to understand, and the bank can pay less than the equivalent bond interest, and pocket the difference.

There are termed deposits that banks offer. But consumers have overwhelmingly not chosen to use them imho, because it doesn't offer high enough interest rates, and the hassle of illiquidity isn't suitable for a consumer context.

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

#72

Post by chii »

eru wrote: post #54
baobabKoodaa wrote: post #11

Earlier quoted context omitted.

We could quibble about the definition of "special power" all day. Sure, a bank is in a better position to create money than a poker site. And a poker site is in a better position than an individual person. But these are not fundamental differences, these are differences of degree. Fundamental difference is having a literal money printer, versus not having one (central bank's ability vs regular bank). When you issue I…

Well, legal barriers aside, Amazon could print their own currency and be in the same position as the Fed. Though to make it absolutely the same position, Amazon's currency should not be tied to the dollar but freely floating. Then there can be no run on Amazon's currency, just like there can be no run on the dollar. However, of course, both Amazon's currency and the dollar can lose in value compared to goods and serv…

so if amazon came to you to buy your house with amazon bucks, would you sell it? If you worked for amazon, would you accept amazon bucks as salary?

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

#73

Post by kgwgk »

riffraff wrote: post #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). [0] https://en.wikipedia.org/wiki/Reserve_r…

So you think this is not fractional reserve banking because instead of having the fractional reserve of X% beforehand they get the fractional reserve of X% right afterwards?

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

#74

Post by justinzollars »

I recommend reading "The creature from Jekyll Island". This book opened my eyes up to the question "what is money?" and it's especially relevant today, given we are living through the largest wealth transfer in human history. But it also talks about how smaller banks work, and this notion of IOUs, credit and loans.

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

#75

Post by imtringued »

esailija wrote: post #68
jkhdigital wrote: post #33

Earlier quoted context omitted.

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.

Interest is just a fee. Your bank may charge you extra to compensate defaults which "destroys" part of the interest, it may charge a processing fee, a profit margin and then finally the actual interest rate the central bank sets.

Both the processing fee and profit margin circulate within the economy. They are not part of the loan, they are fees the bank is charging and using to pay its employees and shareholders who then spend that money. It is entirely possible that you are working for a bank and receiving that money as a paycheck, or your bank is purchasing services directly or indirectly from a company that you are working at.

When you think about it, central banks are not any different. They charge a fee and then send the profit to the government which then can spend it on services that eventually employ you.

You own a farm and borrow 50k from a bank that has $10k in its reserves. The loan has a duration of 10 years at 2% interest so you have to pay back 60k in total. You pay back $6k every year. The bank purchases $1k worth of food every year. The end result is that you have paid $60k to the bank and the bank has paid you $10k.

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

#76

Post by dwd »

kgwgk wrote: post #73
riffraff wrote: post #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). [0] https://en.wikipedia.org/wiki/Reserve_r…

So you think this is not fractional reserve banking because instead of having the fractional reserve of X% beforehand they get the fractional reserve of X% right afterwards?

According to Steve Keen[1] based on research by Kydland & Prescott[2] it's up to a year before the fractional reserve catches up.

[1] https://www.deflation.com/Articles/The-Roving-Cavaliers-of-C...

[2] https://researchdatabase.minneapolisfed.org/concern/parent/b...

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

#77

Post by kgwgk »

dwd wrote: post #76
kgwgk wrote: post #73

Earlier quoted context omitted.

So you think this is not fractional reserve banking because instead of having the fractional reserve of X% beforehand they get the fractional reserve of X% right afterwards?

According to Steve Keen[1] based on research by Kydland & Prescott[2] it's up to a year before the fractional reserve catches up. [1] https://www.deflation.com/Articles/The-Roving-Cavaliers-of-C... [2] https://researchdatabase.minneapolisfed.org/concern/parent/b...

Thanks for the reference.

Edit: I've just briefly skimmed it [1], but "The creation of credit money should happen after the creation of government money." would be true if the system was working at capacity. The fractional reserve requirements are not really a limiting factor, the banking system in aggregate is operating well below that limit if I remember correctly.

[1] The 2012 article, for a few seconds; I didn't look at the 30-year-old paper beyond noticing the date in the cover

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

#78

Post by csomar »

riffraff wrote: post #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). [0] https://en.wikipedia.org/wiki/Reserve_r…

It's still fractional reserve banking. zero fraction reserve banking. /s

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

#79

Post by QuesnayJr »

baobabKoodaa wrote: post #16
sukilot wrote: post #14

Earlier quoted context omitted.

Right, but people who get .ad that banks create "money" don't understand that "money" is not the same as "currency". Money is literally defined simply as "currency plus bank accounts" so obviously funding a bank account creates "money". Your post gets into the velocity and momentum of money, which is yet another concept.

No, there is no single, accepted definition of money. Money is not "literally defined as..." anything. For example, if you look at Wikipedia definitions for money, you will find multiple different definitions. The commonly used definitions seem to vary a lot by economic area.

I think it's better to say that the boundary of "money" is a bit vague, and things vary in their "moneyness". So sometimes a broad definition is more appropriate, and sometimes a narrow one is more appropriate.

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

#80

Post by athrun »

I found this paper from the Bank of England very enlightening when it comes to the actual mechanisms of money creation and their limits.

The paper is short and concise enough and the diagrams are very helpful to the uninitiated.

Money Creation in the Modern Economy: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

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