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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

#201

Post by H8crilA »

baobabKoodaa wrote: post #159
H8crilA wrote: post #87

> For example, when you make a bank transfer to another bank, the bank can not simply send over money created by itself. Uhh, yes it can. That's what LIBOR is (supposed) to represent - short term unsecured lending between major banks. I.e. they can agree that the sending bank is now slightly more indebted to the receiving bank. It depends on what the involved banks agree on. And because such things are based on trust…

Thanks for this feedback. I have now updated the article substantially. The new version covers the possibility of banks lending money to each other as opposed to settling a transaction with cash/reserve deposits. Diffs: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...

Sure!

The various types of money usually have interest rates associated with them, and those rates tell you about the relationships between the types of money. For example there is an interest rate differential between the central bank money and the US treasuries (which are equivalent to USD money for most people most of the time), captured by the repo rate minus IOER. This differential blew up quite recently (in 2019), showing a temporary divergence between tbills and "real money".

In the past, before central banks, each region of the US had their own money, and merchants had conversion tables. They would literally tell you that, for example, Boston money is worth for me only 80 cents on the dollar. Much like today we quote prices on bonds.

Robert Shiller has some really good finance lectures on YouTube. The one about central banking:

https://m.youtube.com/watch?v=_SpIaGTq0u8

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

#202

Post by gumby »

count wrote: post #65
gumby wrote: post #40

Every 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.

Though they were obtained at the discount window, as they are not circulating they have no impact on the functional money supply until you use them...at which point you still have that $20.

But I am engaging in some hair splitting, I admit.

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

#203

Post by gridlockd »

baobabKoodaa wrote: post #194
gridlockd wrote: post #182

Earlier quoted context omitted.

You ask for empirical evidence that "private entities have the inability to create money out of thin air", but this rests on a definition of "money". You brought up the example of a private IOU (the Poker Site). If we remove the distinction between private IOUs and bank IOUs, indeed you would have an example of a private entity creating money out of thin air, for a more loose definition of money. However, as we estab…

> I believe the empirical evidence for private non-bank entities not being able to create bank IOUs is that they're not banks. Am I missing something? That's not what "empirical evidence" means. Empirical evidence is something we observe in the world. If we set a definition "all murder is illegal" and then we conclude "legal murders do not exist", do we have "empirical evidence" that legal murders can not exist? Of c…

> That's not what "empirical evidence" means. Empirical evidence is something we observe in the world. If we set a definition "all murder is illegal" and then we conclude "legal murders do not exist", do we have "empirical evidence" that legal murders can not exist? Of course not.

Hmm, you're right...

> We can conclude the claim is true by definition.

...which means we don't even need any empirical evidence to say that banks are different and unique from non-bank entities!

> I never asked for empirical evidence for non-banks' inability to create money out of thin air. Werner claimed to have empirical evidence for this.

No, he doesn't. He claims that he has empirical evidence for banks creating money out of thin air, nothing more.

> If Werner had instead said "due to accounting conventions, we declare banks' IOUs to be money and non banks' IOUs to not be money", I wouldn't have any problem with that.

Doesn't that go without saying, considering that non-bank IOUs, such as poker website deposits, aren't considered part of the money supply under pretty much any definition?

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

#204

Post by kangnkodos »

dalbasal wrote: post #123
II2II wrote: post #104

After starting to read this article, I had several random thoughts: * What makes this author's explanation credible? * Does anyone actually understand how money works, or are people trying to rationalize what we already have? * All that really matters (to me) is the value is relatively stable and it doesn't create a crazy imbalance of power. * Money does an okay job maintaining a stable value for some stuff (e.g. foo…

>* Does anyone actually understand how money works, or are people trying to rationalize what we already have? I would say, no.. considering the divergence of expert opinions. Limited consensus have formed around high profile economists (eg Keynes, Friedman) but generally erodes as history throws up new examples that don't fit neatly into popular theories. Monetarism is still the working understanding behind most cent…

I agree that no one really knows. My reasons are a little different. Look at what happens when there is a run on a bank. If the bank is insured, then some other bigger entity says they will pay all the IOU's. Either they actually pay the IOU's off, or the panic stops, or some combination.

But what happens when there is a run on the central bank of a country? If another bigger country (example Germany) bails out a smaller country (example Greece), then the panic stops. If no other country steps in, the currency becomes worthless (example Zimbabwe).

But what happens when there is a run on the largest central bank in the world (United States)? A bank so big that no other country can possibly bail them out, even if they wanted to? What happens when there is a run on the reserve currency of the world?

No one knows. It never happened before.

Also, what set of conditions will cause this run on the reserve currency? People have a lot of educated guesses, but because it has never happened in the past, there is no scientific data available on what does and what doesn't cause it.

No one knows.

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

#205

Post by hinkley »

whyhow wrote: post #20
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…

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…

And you might think, "Well, there are so many banks, that money probably won't end up back at mine," but yes, there are so many banks, all of them giving out loans. My million ends up all over town and the world, but so does yours.

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

#206

Post by baobabKoodaa »

irln wrote: post #200
baobabKoodaa wrote: post #157

Earlier quoted context omitted.

This is not entirely accurate. Suppose a fraudulent bank decided to credit my account with a trillion dollars. The federal reserve would not honor this IOU with actual dollars. This is in stark contrast to federal reserve's ability to create a trillion dollars. They could create an actual trillion dollars and give it to a corrupt politician. A regular bank does not possess this ability.

What does a fraudulent bank have to do with the fact that the FR is the ultimate backstop to loans (IOUs) created by a bank...a "power" you claim is the same as a non-bank created IOU or a an individual IOU? Further not sure how your example refutes my previous reply's accuracy, regardless, if a bank makes a bunch of fraudulent loans adding up to a Trillion dollars and it isn't discovered until those loans are cross-…

> What does a fraudulent bank have to do with the fact that the FR is the ultimate backstop to loans (IOUs) created by a bank...a "power" you claim is the same as a non-bank created IOU or a an individual IOU?

I'm not claiming it's the same. I'm saying these are differences of degree (my IOU vs bank's IOU), whereas the difference between central bank IOU and bank IOU is fundamental. We have several historic examples of central banks ruining entire economies by printing excessive amounts of money causing hyperinflation. Do you have a single example of a regular bank printing so much money that it causes hyperinflation? No. Why is that, if it's so easy for a regular bank to print a trillion dollars of fraudulent money without anyone noticing?

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

#207

Post by hinkley »

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)).

But everyone hasn't paid their debts, and they won't pay the biggest one for a very long time. All that negative money is floating around.

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

#208

Post by [deleted] »

danybittel wrote: post #107

But the bank hasn't made any money?! It just wants back "more" than it "gave". Am I missing something? The one who is forced to "create" the money is the one who has to pay back the 1$ extra in interests (which previously did not exist). But he is not allowed to create any! So he has to create anything of value and sell that for money, so he can pay back the money and the interest. But that just moves it to the next…

[deleted]

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

#209

Post by dalbasal »

kangnkodos wrote: post #204
dalbasal wrote: post #123

Earlier quoted context omitted.

>* Does anyone actually understand how money works, or are people trying to rationalize what we already have? I would say, no.. considering the divergence of expert opinions. Limited consensus have formed around high profile economists (eg Keynes, Friedman) but generally erodes as history throws up new examples that don't fit neatly into popular theories. Monetarism is still the working understanding behind most cent…

I agree that no one really knows. My reasons are a little different. Look at what happens when there is a run on a bank. If the bank is insured, then some other bigger entity says they will pay all the IOU's. Either they actually pay the IOU's off, or the panic stops, or some combination. But what happens when there is a run on the central bank of a country? If another bigger country (example Germany) bails out a sma…

Germany bailing out Greece was and is a myth. Germany (actually the ECB and IMF) bailed out (mostly) German bondholders by assuming Greek national debt. In the process, they crashed the Greek economy even worse.

It didn't help that Greece had just elected a extremist government to replace the corrupt one they had before. But all told, Greeks paid the price, not germans. The German bailout is populist rhetoric, and untrue.

In any case, every major monetary event is unique so "never happened before" is always true. That said, there have been many, many monetary collapses. The roman crisis of the 3rd century is a famous, empire-spanning one. The reason the gold standard was abandoned in 1971 was essentially a run on gold/dollars, the reserve currency of the world.

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

#210

Post by baobabKoodaa »

gridlockd wrote: post #203
baobabKoodaa wrote: post #194

Earlier quoted context omitted.

> I believe the empirical evidence for private non-bank entities not being able to create bank IOUs is that they're not banks. Am I missing something? That's not what "empirical evidence" means. Empirical evidence is something we observe in the world. If we set a definition "all murder is illegal" and then we conclude "legal murders do not exist", do we have "empirical evidence" that legal murders can not exist? Of c…

> That's not what "empirical evidence" means. Empirical evidence is something we observe in the world. If we set a definition "all murder is illegal" and then we conclude "legal murders do not exist", do we have "empirical evidence" that legal murders can not exist? Of course not. Hmm, you're right... > We can conclude the claim is true by definition. ...which means we don't even need any empirical evidence to say th…

> ...which means we don't even need any empirical evidence to say that banks are different and unique from non-bank entities!

That's correct, and I said so in the article. I said that (although there is no empirical evidence) the underlying claim is true on a technicality.

>> Werner claimed to have empirical evidence for this.

> No, he doesn't. He claims that he has empirical evidence for banks creating money out of thin air, nothing more.

Here is a direct quote from Werner's paper: "We now know, based on empirical evidence, why banks are different, indeed unique … and different from both non-bank financial institutions and corporations: it is because they can individually create money out of nothing."

When Werner claims to have empirical evidence that banks possess a unique ability to create money out of nothing, he is technically making 4 claims:

1. Banks possess said ability

2. Non-banks do not possess said ability

3. Empirical evidence shown for claim 1

4. Empirical evidence shown for claim 2

Claim 4 ("empirical evidence shown for claim 2") is patently false.

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