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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]

#71

Post by n8cpdx »

jollybean wrote: post #67
n8cpdx wrote: post #57

Earlier quoted context omitted.

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…

"but the evidence just isn't there." 1) The average home price in Canada increased in value more than the average workers income. Just digest that for a second: buying a home and doing nothing, is 'more productive' than literally working. That's a devastating situation to be in. 2) Equities are valued quite highly. 3) Esp. after COVID we are now starting to see very real inflation, we're not sure how much of it is fr…

Completely agree with everything you've said.

I think I've divorced housing prices from the concept of inflation because I spend so much time thinking about the underlying causes (zoning, NIMBY's, environmental reviews, etc). But the crazy price increases are enabled by the financial sector and all the money lying around.

It seems the more financialized the sector (housing, higher Ed) the worse the inflation is.

I don't know that my thinking on the boundary between finance-driven inflation and fundamentals-driven inflation is as clear as it should be.

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

#72

Post by ubercow13 »

IncRnd wrote: post #70
ubercow13 wrote: post #52

Earlier quoted context omitted.

>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.

That's just randomly quoting sentences out of context. What you quoted is from the standpoint of a particular central bank , not from the standpoint of an arbitrary lending bank . Absolutely, many lending banks have reserve requirements imposed upon them, just not in the particular country of this paper!

Well yes, this article is about the UK. But the paper is quite clear that in practice, it is not any reserve requirement that effectively determines how many loans a bank will create. I am guessing this applies equally to other modern economies even if they have such a limit?

It's one sentence but the context is that the whole paper is arguing against the textbook explanation of fractional reserve banking GP stated - the "two common misconceptions" stated in the introduction.

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

#73

Post by soVeryTired »

IncRnd wrote: post #70
ubercow13 wrote: post #52

Earlier quoted context omitted.

>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.

That's just randomly quoting sentences out of context. What you quoted is from the standpoint of a particular central bank , not from the standpoint of an arbitrary lending bank . Absolutely, many lending banks have reserve requirements imposed upon them, just not in the particular country of this paper!

In most counties in the west, reserve requirements don't constrain lending. For example, Canada, the UK, and Australia have a reserve requirement of zero. Fractional reserve banking doesn't really exist anymore outside of economics textbooks.

Capital requirements are what constrain lending in the west (I think the Chinese government does try to control lending in part via a reserve requirement). For example, the "Core Tier 1 Capital Ratio" [0] is extremely important in this regard.

https://www.investopedia.com/terms/t/tier-1-capital-ratio.as...

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

#74

Post by 1vuio0pswjnm7 »

"Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay-that "someone else" is you. There is no such thing as public money; there is only taxpayers' money."

https://web.archive.org/web/20110606031420/http://www.margar...

In England, sometimes we need to explain to us where money comes from, just in case anyone forgets. :)

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

#75

Post by kgwgk »

louloulou wrote: post #47
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…

You should read the article, because it seems you're the one with the misconception. how it works -> "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" not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"

What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits.

“By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”

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

#76

Post by carnitine »

n8cpdx wrote: post #57
pphysch wrote: post #53

Earlier quoted context omitted.

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…

You don’t understand hyperinflation if you think you can print your way into it. Hyperinflation has only ever occurred due to real problems in the country, a total breakdown of normal operation.

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

#77

Post by pphysch »

n8cpdx wrote: post #57
pphysch wrote: post #53

Earlier quoted context omitted.

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…

Believe it or not, Beijing propped up the global financial system in the immediate wake of 2008 by pledging to spend trillions on infrastructure, including $568B in the short term [1]. Beijing also accelerated purchases of US treasuries during this crisis, with their holdings reaching a peak (over $1T total) in 2013. These surges of spending from China aligned with the burst of asset purchases (~$1T) by the US Fed.

Needless to say, this is not going to happen again. China is no longer interested in propping up the USD. Instead, it is rapidly insulating its economy from toxic USD financialization, from its "dual circulation" domestic policy to its successful launching of the largest "USD-free" trade agreement ever in Nov 2020 [2].

2008 was already a crisis that could not be managed without global cooperation. By the numbers, 2020-2021 is far worse. The $3T surge of Fed asset purchases in 2020 has been extended by ~$1.5T in regular QE policy, with no end in sight. And there is no mega economy across the ocean that is going to sacrifice itself for the USD. There's a reason George Soros, champion of neoliberalism, is having an op-ed driven public meltdown this week.

Best case scenario, the global elite are conspiring to let the global USD have a nice gentle death and we won't even notice. Otherwise, we are looking at a massive crash and inflation.

Do you really think this monstrosity (https://fred.stlouisfed.org/graph/?g=GFV3) can continue forever?

[1] - https://www.nytimes.com/2008/11/10/world/asia/10iht-10china....

[2] - https://en.wikipedia.org/wiki/Regional_Comprehensive_Economi...

[3] - https://fred.stlouisfed.org/graph/?g=GFV3

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

#78

Post by gandalfian »

Though todays big question is "How do you destroy money?" ie get it back?.

You can tax and not spend but so much money has escaped abroad and hidden where you can't touch it.

There is inflation but that is a dangerous pandoras box.

Or you can say boost productivity and just create enough extra stuff to match all the extra money. Easier to say than to do though. You just have to live in hope that someone invents some wonderfully productivity enhancing something, fusion, robots or ai perhaps. Come to think of it perhaps Apple is really a government conspiracy to soak up consumers excess dollars? The Apple Tax suddenly fits hmmm.

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

#79

Post by nO0b »

vkou wrote: post #65
n8cpdx wrote: post #57

Earlier quoted context omitted.

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…

I would like to point out that in order to put the economy into hyperinflation (50% month to month inflation), it would require the Fed to print and parachute somewhere between 50 and 200 trillion dollars in one year. It's not very likely to happen.

[citation needed]

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

#80

Post by kgwgk »

ubercow13 wrote: post #72
IncRnd wrote: post #70

Earlier quoted context omitted.

That's just randomly quoting sentences out of context. What you quoted is from the standpoint of a particular central bank , not from the standpoint of an arbitrary lending bank . Absolutely, many lending banks have reserve requirements imposed upon them, just not in the particular country of this paper!

Well yes, this article is about the UK. But the paper is quite clear that in practice, it is not any reserve requirement that effectively determines how many loans a bank will create. I am guessing this applies equally to other modern economies even if they have such a limit? It's one sentence but the context is that the whole paper is arguing against the textbook explanation of fractional reserve banking GP stated -…

> it is not any reserve requirement that effectively determines how many loans a bank will create

But according to that article it may be, because that bank will need to increase reserves to expand lending and acquiring them has a cost.

“But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, [……] whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending. And the cost of that needs to be measured against the interest the bank expects to earn on the loans it is making,“

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