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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

#141

Post by guerrilla »

golergka wrote: post #137
aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transa…

> it's not that government says it is, it's the societal consensus that it's worth it.

Disagree. The government only accepts their preferred currency for payment of taxes. This is, in my opinion, its initial source of value. Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.

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

#142

Post by x87678r »

> If you have an argument why these IOUs should not be considered money, I would love to hear it. Otherwise, let’s conclude that non-bank corporations can sometimes create money out of thin air.

It comes down to the definition of money. Yes non-financial intermediaries are very similar to banks and "create money" but money is defined as the amounts on bank's balance sheets so by definition non-financial intermediaries cannot create "money", but they are doing something very similar.

Also Nonintermediated debt is probably a better example. If you own a CD from a AAA corporate its effectively money but technically isn't.

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

#143

Post by golergka »

guerrilla wrote: post #141
golergka wrote: post #137

Earlier quoted context omitted.

> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transa…

> it's not that government says it is, it's the societal consensus that it's worth it. Disagree. The government only accepts their preferred currency for payment of taxes. This is, in my opinion, its initial source of value. Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.

> The government only accepts their preferred currency for payment of taxes.

By "transactions" I also meant tax collection, yes.

> Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.

Usually, at the point where society as a whole loses confidence in government-issued currency, it no longer has resources to stop you from using alternative currencies.

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

#144

Post by aronpye »

golergka wrote: post #137
aronpye wrote: post #112

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound be…

> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transa…

That’s where the term legal tender comes from. Society is legally mandated to accept whatever is determined by the government as legal tender for the settlement of debts. However, this does not include everyday transactions, only the settlement of debt. A trader can accept or deny any currency or form of barter as long as it is not for the settlement of debt.

This is why the Scots are wrong to get in a fuss about shops not accepting Scottish bank notes, as shops are not legally obligated to accept them as legal tender does not apply in this case. Also, Scottish bank notes are not actually legal tender anyway.

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

#145

Post by ClumsyPilot »

jmtulloss wrote: post #38
jkhdigital wrote: post #22

Earlier quoted context omitted.

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.

So heavilly regulates you can hand out mortgages to people who can't afferd them, then turn around and package those loans intonCDOs, and mislead investors as to their liquidity. Then suffer no consequences when global economy crashes.

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

#146

Post by SilasX »

pjc50 wrote: post #125
roenxi wrote: post #110

Earlier quoted context omitted.

How confident are you on that point? I don't have a reference on me right at this moment but I expect it is illegal for a non-bank entity to hand out IOUs at scale. People would be arrested. I'm thinking of things like https://en.wikipedia.org/wiki/Liberty_dollar_(private_curren... which ended in FBI raids.

That's what corporate bonds are. In the extreme, every as-yet-unpaid invoice on 30 or 90 terms creates a debt and "creates money". Full Tilt Poker created a small closed e-money system which was seemingly legally fine; it was the gambling that got them raided, because only mob bosses in politically connected US states are allowed to profit from gambling and the US will go after gambling providers in other countries.…

>That's what corporate bonds are. In the extreme, every as-yet-unpaid invoice on 30 or 90 terms creates a debt and "creates money".

No, there's a big difference, in that you don't have the right to redeem ("put") the corporate bond any time at face value.[1] You do have that right for the IOU that is your bank account. This allows two people to carry on as if they both are full owners of the dollar in the bank account (both the depositor and the business it was lent to), and that mechanism is what allows the money supply to increase.

When you don't have that right, you, as the corporate bond holder, know that you can only get the money out early by selling the bond at its current market rate, whatever that is, which may force you to take a discount. This expectation -- and the necessity to redeem it for someone else's dollars on the market -- prevents it from being money creation.

[1] There are "puttable bonds" where you can do something like this, but it's over specific intervals and times, not immediate. https://en.wikipedia.org/wiki/Puttable_bond

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

#147

Post by andrewaylett »

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...

UK notes are still an IOU. The note I have in front of me says "Clydesdale Bank PLC promises to pay to the Bearer on demand Ten Pounds Sterling at their office here By order of the Board of Directors". This is one of the few cases where "legal tender" actually has meaning: if I present a wodge of bank notes to Clydesdale (or for Bank of England notes, the Bank of England) saying I want repaid in coppers, I'm obliged to accept legal tender for repayment of the debt represented by my notes. Which in Scotland means pound coins, but in England it probably means I'm getting more (although possibly different) notes back.

Interestingly, Clydesdale's office address isn't shown on the note.

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

#148

Post by vmception »

pjc50 wrote: post #118
vmception wrote: post #83

Earlier quoted context omitted.

Some of my currently unpopular opinions: The universe of investible assets available for the central banks are small, they need your help in providing a service to them in the primary market (credit markets, corporate bonds). Direct issuances were always going to happen, if it wasn't the pandemic it would have been something else. Anything that slowed down China's growth would have resulted in the same outcome. There…

This is good stuff. I see negative rates as the "stability tax", which is why the leader is Switzerland. As you say, the real work has to be done in fiscal policy.

Denmark and Poland and Sweden also have a Central Bank and unique distortions in the credit markets. Very few people pay attention to them, getting information is tricky. The nordic credit market is its own animal centered in Norway, but all the countries want business. They are trapped because the Eurozone is a behemoth and the yield curve distortions there are like a gravity well, and the cultural sentiment of speculators or general people is the same or has the same inputs, so they must go steeper in negative yields faster or expand their universe of investible assets faster.

Pay attention to the corporate credit market. The steeper the yield curve goes, the more it drags down the cost of credit for corporate issuers. Getting aggregate corporate credit information in these markets is hard but rewarding, you can predict what to expect - investment grade corporations bonds yielding 0% possibly issued at 0% - but it is hard to confirm the market appetite. This is where we are right now in market efficiency.

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

#150

Post by rusk »

golergka wrote: post #143
guerrilla wrote: post #141

Earlier quoted context omitted.

> it's not that government says it is, it's the societal consensus that it's worth it. Disagree. The government only accepts their preferred currency for payment of taxes. This is, in my opinion, its initial source of value. Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.

> The government only accepts their preferred currency for payment of taxes. By "transactions" I also meant tax collection, yes. > Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it. Usually, at the point where society as a whole loses confidence in government-issued currency, it no longer has resources to stop you from using alternative currencies.

I think you’re receiving a strange response because people think you’re advocating some sore of crypto-anarchist freeman position, and HN as a community is very much weighted against that point of view ...

I can identify with what you’re saying and there are some very well known examples of local currency being subverted. You can see Bolivia in the news recently, or Argentina or everybody’s favourite trillion dollar note the Zimbabwean kwacha. Funnily enough, all have been using dollars ...

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