In the first example, is it possible to repay all the debt?
The bank has $100 cash and $11 promised. Customers have $10 cash and $100 promised. Assuming the person with $100 withdraws the money and wants to share it with the other person to pay off his loan, they end up with $99, but they started with $100. If they started at $0 they would be at -$1.
How is this resolved in a real banking system?
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
#92There is a fantastic book that covers this topic called "The End of Alchemy" by Mervyn King who was Governor of the Bank of England during the 2007 crisis:
https://www.goodreads.com/book/show/30231791-the-end-of-alch...
It explains how banks work today in a patient and and accessible way that helps you really "get" it.
Re: Banks create money, but it's less impressive than it sounds
#93'Richard Dawkins said in an offhand comment in The Selfish Gene that “Money is a formal token of delayed reciprocal altruism.”' (from: https://nakamotoinstitute.org/reciprocal-altruism-in-the-the... ) I was just thinking about the immutability debate in the Ethereum blockchain world, where the community split due to a difference of opinion/interests on whether their system of money should allow a transaction reversal…
Ethereum and Defi products are now creating money as well through lending.
Lock some amount of ETH up, get some amount of stable dollars out, which inflates the total amount of money in the system.
Re: Banks create money, but it's less impressive than it sounds
#94I think "fundamental" is a treacherous concept for explaining money creation.
Both this article and the stuff Atte is responding to end up with "X is merely Y" explanations. The (arguable, but widely accepted) reality of macroeconomic and monetary dynamics is that it is not merely microeconomics. A layer of emergence separates the two.
It's true that what banks do is not fundamentally different to what full tilt poker did. Even the "bank run" parallels the many bank runs in history, and associated monetary collapse.
You can find other parallels too. My favourite is employees. Say you have no money. You hire 10 people clean pools, with salaries due at the end of the month. They work. You get paid. If you get paid enough, you can pay salaries on time and make profit.
This is the same principle as monetary stimulus, where a government makes loans to stimulate economic activity. We do call that money creation, but it's not fundamentally different to what every employee does.
IRL, a poker site or pool cleaning business will (almost) always hit a point of reversal. Expansion becomes deflationary rather than inflationary. Further growth requires capital, rather than generating it. The business models that don't do reach levels where their money creation starts to have macro-scale effects. These tend to join the financial sector (eg, the stock market), where they are regulated in some fashion to curb monetary inflations and deflations.
What makes banks qualitatively different is stability. They can do this long term, continuously increasing scale, without bank runs. Quantity is a quality of its own. If banks expand mortgage lending, real estate will inflate... either with higher prices or with more building. This isn't money that was redirected from one sector to another. It's new money.
This is why monetary policy isn't just central banking. It's regulators. The regulator controls this sort of activity (eg mortgage lending) in order to regulate the supply of money.
Re: Banks create money, but it's less impressive than it sounds
#95I recommend reading "The creature from Jekyll Island". This book opened my eyes up to the question "what is money?" and it's especially relevant today, given we are living through the largest wealth transfer in human history. But it also talks about how smaller banks work, and this notion of IOUs, credit and loans.
From wikipedia, about the author: 'He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[2] He also believes that the Biblical Noah's Ark is located at the Durupınar site in Turkey.[6]'.
I would recommend learning from different sources.
Re: Banks create money, but it's less impressive than it sounds
#96The modern banking system does not use fractional reserve lending.
Highly recommend this video to understand and this channel in general: https://youtu.be/K3lP3BhvnSo
Skip to 1:14.
Re: Banks create money, but it's less impressive than it sounds
#97Would the same principle work for non national currency ? I am thinking specifically of Bitcoin.
Say a bank would accept deposit and issue loan in Bitcoin. We apply the same example as in the article. Someone deposit 100BTC. Another person takes a loan of 10BTC and owns the bank 11BTC. (that would be much bigger value than $100, but the principle is the same)
Would the total number of Bitcoin be higher than before those transactions ? That would break the hard limit on the total number of Bitcoin. My understanding was that hard limit was a key feature of Bitcoin.
Re: Banks create money, but it's less impressive than it sounds
#98The modern banking system does not use fractional reserve lending. Highly recommend this video to understand and this channel in general: https://youtu.be/K3lP3BhvnSo Skip to 1:14.
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Re: Banks create money, but it's less impressive than it sounds
#99Earlier quoted context omitted.
Would love to know more about your unpopular opinions. Too many people think the same way about money.
Some of my currently unpopular opinions: The universe of investible assets available for the central banks are small, they need your help in providing a service to them in the primary market (credit markets, corporate bonds). Direct issuances were always going to happen, if it wasn't the pandemic it would have been something else. Anything that slowed down China's growth would have resulted in the same outcome. There…
> Negative interest rates are therefore not controversial and can go much steeper than any central bank has experimented with. People would be willing to pay to keep their money.
A bank can store money in the central bank, but it can also put cash in a vault. If the central bank has steep negative rates, why would they use it for much?
Re: Banks create money, but it's less impressive than it sounds
#100"There’s a lot to unpack here. First, Werner claims that banks are special due to their ability to create money out of thin air. Second, Werner claims that the first claim is proven conclusively with empirical evidence. Werner’s second claim is patently false, because the ”evidence” he presents in his paper only describes banks’ ability to create money out of thin air — he presents no evidence for non-bank entities’…
It sounds like you are referring to "claim one", not "claim two". I noted in the article that Werner is (only) technically correct on claim 1, essentially due to the reasons you described. Claim two is about presenting empirical evidence for claim one. You might think that empirical evidence is not needed. That's fine. It still was not presented, so claiming to have presented it was a false statement.