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

bankofengland.co.uk

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

#51

Post by NovemberWhiskey »

kgwgk wrote: post #42
OscarCunningham wrote: post #25

Earlier quoted context omitted.

When banks create money with a matching liability, they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank. In order to accommodate this they actually have to have the cash on hand, or borrow it from another bank with interest. Likewise if you have 20,000€ on hand, or can borrow it from somewhere, you can use it to buy a car. You can then keep a me…

> they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank “They face the risk” seems a huge understatement. It would be quite unusual for someone to take a loan from a bank and leave the money sitting there at the bank.

Almost the entire business of a bank is to profit from maturity mismatch by borrowing short, lending long and taking the interest margin.

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

#52

Post by ubercow13 »

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…

>and it is not allowed to make any more loans.

No. From the paper

>In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.

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

#53

Post by pphysch »

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…

Key subquote:

> More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation.

In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE".

The end result: the financial sector will eventually pop and flood the rest of the economy with endless amounts of worthless money, i.e. massive inflation.

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

#54

Post by luca3v »

NovemberWhiskey wrote: post #48
luca3v wrote: post #37

Earlier quoted context omitted.

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…

This is right, but then the house seller now has $0.9mm in cash. When she deposits it in her bank, that bank can make another loan but only for $0.81mm and so on and so on. The geometric sum to infinity ends up being 1/reserve_ratio; so if that's 10% in this example, the theoretical money creation is 10x.

Yes, this is correct! But some people, and perhaps not the grandparent comment, understand the "money creation" point as that money can be replicated infinitely, that is a bank get $1 mil deposit and makes $10 mil loans, and those loans, if deposited, could lead to $100 mil loans and so on

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

#55

Post by [deleted] »

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…

[deleted]

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

#56

Post by IncRnd »

gigatexal wrote: post #34
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…

Cogent take. Waiting for the crypto crowd to come in screaming about inflation or the like.

In today's environment it seems more apt to say stagflation. I'm sure there is a coin for that.

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

#57

Post by n8cpdx »

pphysch wrote: post #53
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…

Key subquote: > More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. In other words: "The interest rates are already at the bottom, but we need them to be lower, so we are going to make them effectively negative through QE". The end result: the financial sector will eventually pop…

I was predicting hyperinflation from 2008 and for years after, but the evidence just isn't there.

Maybe things will eventually pop. The actual happenings of the economy (people buying and selling) are insulated from financial markets enough that a huge rally can happen without affecting lived reality for people. Maybe a pop in the financial sector can happen without actually affecting the economy? I don't see why the fed can't just make that money go away if it really needs to.

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

#58

Post by kodah »

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…

I'm curious how we'll clear the hurdle of instrumenting the economy enough to meaningfully measure inflation. This seems to be the big hold up with proponents of MMT, nobody wants to guess anymore.

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

#59

Post by pessimizer »

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…

> This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being.

It's central to MMT, but it's really just a factual observation, and the theory about it is orthodox Keynesian economics.

It's the Chicago School types that have to constantly come up with magical tripwires that deficits supposedly cause.

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

#60

Post by jollybean »

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…

1) The other 'missing giant' is credit. Credit is a couple of orders bigger than currency in circulation and it's really what makes the world go around. We probably should start talking about credit when we talk about currency.

2) " especially as the world's governments find it increasingly difficult to avoid deficit spending" - this has always been the case.

a) Raise taxes, b) Raise debt c) Print money.

Option 'c' is generally not on the table.

And so 'Governments' are 'constrained' by the realities of economics, which is kind of what we want them to be constrained by.

It's worth noting the pretty scary nature of MMT proposals, which 'from a different perspective' amount to 'very loose monetary policy bordering on printing money to pay for stuff' and irrespective of the underlying theoretical ideals of MMT, the practical reality is that the money printing press is the 'Absolute Power' that can hardly not corrupt anyone with the power to use it, even under the cover of some intellectually grounded idea.

All government fights are, at the end of the day, really about money, the rest is mostly a distraction. It's a giant war over budgets and spending, it always is.

To give one party the magical power to do as they please without severe constraints is scary. It's even scary what we have today with the Fed (I think QE and artificially low rates to bail out home owners is really bad). I have much less faith in politicians.

I believe for MMT to work, it has to have a framework around it even more rigid than the rules we apply to Central Banks because if there's a gap that can be exploited, it will be.

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