Money creation in the modern economy (2014) [pdf]

Post by jonny_eh » Thu, Sep 09, 2021, 9:06 PM UTC

bko wrote: post #29

aazaa wrote: post #21

From the conclusion: > This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directl…

> Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in t…

Post by rich_sasha » Thu, Sep 09, 2021, 9:08 PM UTC

andrepd wrote: post #23

rich_sasha wrote: post #20

Earlier quoted context omitted.

Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. The money creation is a carefully choreographed juggling act where balls can’t fall on the ground. The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. When it works, it works very well, but when it doesn’t, ban…

> Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. Eehhhhhhh........ Sounds like that isn't working out so well is it? x) With the only difference of course that if _I_ fail my obligations I don't get a taxpayer-funded bailout financed by cuts to people's salaries and pensions, instead my house gets reposessed and I go live with my kids to a homeless shelter. But…

Post by ChrisLomont » Thu, Sep 09, 2021, 9:14 PM UTC

dogma1138 wrote: post #10

divbzero wrote: post #3

Earlier quoted context omitted.

I don’t think the article is outdated: US, Europe, and Japan all still use fractional reserve banking to create money. The central bank controls the base money supply using tools like open market operations or quantitative easing, but the broad money supply is some multiple of the base money supply. That multiple is determined by what fraction of deposits is lent out by commercial banks in the banking system.

Banks don’t lend out deposits to they create money that is then eliminated when the debt is paid back. To create money banks need a certain amount of capital this is governed by capital requirements most of which come from the capital invested into the bank through share purchases. Many countries have no reserve requirements at all, BOE specifically doesn’t even issue them any longer.

Post by louloulou » Thu, Sep 09, 2021, 9:28 PM UTC

luca3v wrote: post #37

andrepd wrote: post #16

Earlier quoted context omitted.

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already ques…

This is not exactly how fractional reserve banking works. I think that there is a misconception that if, for example, there is a bank regulation that allows 10% fractional reserve banking, then if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans, with $9 million being "created out of thin hair". In fact, if a bank…

Post by andy_ppp » Thu, Sep 09, 2021, 9:40 PM UTC

dcolkitt wrote: post #31

andy_ppp wrote: post #27

I sometimes wonder how anything about economics can be tested when the world’s manufacturing has been outsourced to China. All of these theories rest on the fact inflation has been largely under control in the west, not because of a lack of gold standard but because almost all physical items have had zero or negative inflation for 30 years or so. All the things not “Made in China” I would say have been massively infl…

The US is a net exporter of food, and yet the price of food has significantly undershot headline inflation over 30 years.