Money creation in the modern economy (2014) [pdf] • Hacker News Board

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

#31

Post by dcolkitt » Thu, Sep 09, 2021, 8:53 PM UTC

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.

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

#32

Post by andrepd » Thu, Sep 09, 2021, 8:55 PM UTC

rahimnathwani wrote: post #22

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…

"not simply give myself 20,000€ cash" Only the ECB and national central banks can create € notes (by which I mean central bank cash money). Nothing is stopping you from creating your own notes denominated in €, but these would be obligations (IOUs) issued by andrepd. Just like bank deposits, these notes are private money, not central bank money. It might be tough for you to find a car dealer willing to accept these a…

But the point is that the money they create is 100% fungible with central bank banknotes! It is passed onto the economy as cash. It does not come with a tag saying "created by Santander" or whatever.

> Making loans changes banks' reserve requirements, so they're not zero-cost.

Okay! So give me similar requirements! Asset/liability ratios, reserve requirements, cash flow requirements, the works, to determine given my finances how much liabilities I can create.

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

#33

Post by k2enemy » Thu, Sep 09, 2021, 8:57 PM UTC

andrepd wrote: post #16

rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

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…

When banks "create money" there is a matching liability already in place -- the claim that some depositor has on that money. The bank isn't "richer" by having made that loan.

An imperfect analogy is if you buy a car for 20,000€ using a credit card. You haven't paid any real money, but now you have a liability that the credit card company will eventually claim.

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

#34

Post by gigatexal » Thu, Sep 09, 2021, 8:59 PM UTC

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.

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

#35

Post by rahimnathwani » Thu, Sep 09, 2021, 8:59 PM UTC

andrepd wrote: post #32

rahimnathwani wrote: post #22

Earlier quoted context omitted.

"not simply give myself 20,000€ cash" Only the ECB and national central banks can create € notes (by which I mean central bank cash money). Nothing is stopping you from creating your own notes denominated in €, but these would be obligations (IOUs) issued by andrepd. Just like bank deposits, these notes are private money, not central bank money. It might be tough for you to find a car dealer willing to accept these a…

But the point is that the money they create is 100% fungible with central bank banknotes! It is passed onto the economy as cash. It does not come with a tag saying "created by Santander" or whatever. > Making loans changes banks' reserve requirements, so they're not zero-cost. Okay! So give me similar requirements! Asset/liability ratios, reserve requirements, cash flow requirements, the works, to determine given my…

Sure, go ahead. Instructions here: https://www.bankofengland.co.uk/prudential-regulation/new-ba...

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

#36

Post by majormajor » Thu, Sep 09, 2021, 9:00 PM UTC

whimsicalism wrote: post #18

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…

Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160. I disagree that it is intrinsically wrong that some people can do something that you cannot do.

You don't have to be a chartered bank to have this power.

If your neighbor lent you a hundred bucks and you loan ninety bucks of it to a different neighbor, you've done the same sort of thing. Of course, if you do it at a small scale, you're at high risk of having empty pockets if that neighbor wants their hundred back at an unexpected time. But do it to a thousand neighbors on either side of the exchange, and you can probably get away with re-lending most of it for a long time.

They aren't granted special money-making abilities; more the reverse: they are under regulations to prevent this power - which is, in happy times, very good for the economy - from being abused. We can argue about if those regulations are strong enough or not, but I think the "money is bullshit cause banks print it out of thin air" arguments are intentionally misleading from opponents of a system that otherwise isn't actually terribly complicated.

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

#37

Post by luca3v » Thu, Sep 09, 2021, 9:01 PM UTC

andrepd wrote: post #16

rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

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 has $1 million in deposits it can make only $900k in loans.

Indeed, suppose you are a bank and you have $1 mil in deposits, which you keep as reserve with the central bank. Now someone asks for a $900k loan. Now you have $1.9 mil in deposits ($1.9 mil liabilities), and you have $1 mil kept with the central bank in cash, and $900k owed from the guy with the loan (total $1.9 mil in assets, it checks out).

Now the guy with the loan withdraws his $900k to pay for his house or whatever; the bank gives him the $900k from the cash account it has at the central bank. Now the bank has $1 mil in liabilities (the checking accounts of the depositors), $100k in cash with the central bank, and $900k owed from the guy with the loan. Everything still checks out, but now the cash on hand is just $10% of the assets. The bank has reached the fractional reserve limit, and it is not allowed to make any more loans.

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

#38

Post by rahimnathwani » Thu, Sep 09, 2021, 9:03 PM UTC

majormajor wrote: post #30

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…

It sounds like "creating money out of thin air" here more specifically means "increasing the amount of currency in circulation by exchanging it for liens or other obligations for payback." Not just printing money in a vaccum. I don't think a bank without deposits would get very far issuing loans. My understanding: The bank isn't required to hold 100% of the money you deposit in cash, though. It can lend it out up to…

"I don't think a bank without deposits would get very far issuing loans."

When a bank issues you a loan, it creates a deposit for exactly the same amount in your account. So what you said is true, almost by definition.

But many loans are issued by entities other than banks. You can lend profitably without being a bank. (google 'nonbank lenders')

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

#39

Post by dcolkitt » Thu, Sep 09, 2021, 9:04 PM UTC

andrepd wrote: post #16

rahimnathwani wrote: post #4

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at…

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…

Both you and the bank can create liabilities and use it to buy assets. The difference is the bank’s liabilities (e.g. deposits in a checking account) are generally viewed as interchangeable with money. Whereas Steve’s personal IOUs are not.

This all comes down to how safe and liquid people view the liabilities. Steve’s IOUs are at substantially higher risk of default than the banks checking account. There’s also not an easy or liquid market or facility for easily converting those IOUs to other money assets. Whereas with a checking account, I can just go to the ATM or send a wire transfer to another bank. With instruments like money market funds, I can easily sell the assets at the push of a button.

To a certain extent this is because the central bank guarantees the safety of the bank. Any gaps in a Wells Fargo checking account would just be made up by the Fed making the account holders whole with newly printed dollars.

But even absent that guarantee, the senior liabilities and term deposits of banks are considered pretty damn money like. That’s largely because banks as institutions bend over backwards to be as conservative and trustworthy as possible when it comes to their liabilities. A bank would never do the equivalent of spending a years income on a new car.

For example Berkshire Hathaway isn’t a bank and it’s not backed by the central bank. But when they issue 30 day commercial paper, then it’s treated as essentially equivalent to money. In fact there’s probably some in your money market fund right now.

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

#40

Post by majormajor » Thu, Sep 09, 2021, 9:05 PM UTC

rahimnathwani wrote: post #38

majormajor wrote: post #30

Earlier quoted context omitted.

It sounds like "creating money out of thin air" here more specifically means "increasing the amount of currency in circulation by exchanging it for liens or other obligations for payback." Not just printing money in a vaccum. I don't think a bank without deposits would get very far issuing loans. My understanding: The bank isn't required to hold 100% of the money you deposit in cash, though. It can lend it out up to…

"I don't think a bank without deposits would get very far issuing loans." When a bank issues you a loan, it creates a deposit for exactly the same amount in your account. So what you said is true, almost by definition. But many loans are issued by entities other than banks. You can lend profitably without being a bank. (google 'nonbank lenders')

I mean that if you created a new bank, and never accepted any customer deposits, you are going to run into problems if you simply offer a bunch of loans.

If your loan customer wants cash, or wants to move some of that loaned money into another institution... whatcha gonna do?

Your nonbank credit card company would run into similar problems if they didn't have any income and simply were letting people buy products with magic printed money, but "credit cards create money out of thin air" doesn't get tossed around in the same way as it does for banks.

(Also, your claim about the deposit is entirely false for many loans. Every car loan I've had, for instance, has been either paper or electronic checks for delivery to the dealer, I've never had that money in my own deposit accounts. It goes straight to a deposit account at (usually) another institution, where it would damn well be noticed if the lending bank couldn't actually make good on the funds.)