When a government takes a loan from the reserve bank and puts it into circulation by giving the money to corporations to pay for public projects, the government is effectively diluting the value of everyone's money and giving it to corporations. This process creates public debt for which the government will need to take additional loans from the reserve bank to keep meeting the interest repayments; which will further dilute the value of everyone's wealth while increasing corporate wealth; and the cycle will keep repeating.
"Money creation in the modern economy" (Bank of England, PDF)
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Quote:
In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
First, it isn't false at all, commercial banks create money, just as they say in the paper. Second, if you make the bold claim that the people of the Bank of England wrote a paper that is false you should provide more than a single sentence - especially when commenting here on HN.
So, your original response is to someone who said their understanding was "that reserve banks create money out of thin air", so that is the foundation of our discussion at the moment. Your response on the surface feels like a refutation of that assertion, largely resting not on content necessarily but on the weight of authority that is the BoE. Essentially, what I was trying to say is that I don't think it refutes the person you were responding to, mostly because it is some very carefully crafted wording the obscures instead of reveals the truth of the matter.
A quick dissection would go as follows: while technically correct about loans showing up as deposits in accounts and thereby creating money, it ignores the basis for those loans, which is the fractional reserve system itself. It is FRB [1] that was what spawned the system of creating those deposits based on mathematical rules such as the fractional reserve rate [3] (which many people tend to think of as being 10%, though it is often not true these days). A very crude summary of that system is this; if all deposits (created money, as according to the BoE document) are 100% of a banks money, they are only required to actually have in reserve 10% of that. Therefore, the person you are responding to is essentially right. Banks create money out of thin air by entering it on systems, even when they don't actually "have" that money to lend. The reserve rate was thought of as a minimal protection required in order to assist in preventing runs on the bank if too many depositors requested their money at the same time (because, as per the reserve system, the bank doesnt actually have all that money at any one given time). So in America for example, this is the foundation of the Federal Reserve system, wherein member banks (not all banks are) then have promises of assistance from the regional reserve bank (of which there are 12, with NY Fed being the titular head of the system), so that if your local bank gets close to a "bank run" level, that regional reserve bank will inject funds to them temporarily in order to create stability, which was part of the original mandate of the Federal Reserve.
In the response you quote, the wording might lend one to understand otherwise, and that the fractional reserve system no longer works that way, especially with the patronizing ending sentence of the first paragraph about how "some economics textbooks" differ from how money is created today. I can practically hear some posh accent with an upturned nose dripping that sentence out with disdain. Silly plebs, trying to understand banking. The part about "distraction" is that it seems the bankers don't actually want people to understand how banking really works on the underside, as it is actually in their interest to obfuscate it for various reasons.
Given what I've said so far, I'm therefore not sure how the statement: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.", nor the ending of the following sentence, "or is central bank money ‘multiplied up’ into more loans and deposits" can be actually accurate. I assume there is some word trickery I am failing to understand, (see: NSA on what "collection" means) because otherwise it seems flat out wrong. I am better versed though in the American system, so perhaps there is some nuance of the English system I am unaware of. (but it is worth remembering that the American system was founded upon the British/European system, when post 1907 Knickerbocker crash congress sent a delegation to hobnob with the central bankers of Europe to learn how they did things, which was largely the basis for the Aldrich and later Federal Reserve bills)
[1] https://seekingalpha.com/instablog/25783813-peter-palms/4549...
[2] https://en.wikipedia.org/wiki/Fractional-reserve_banking
https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...
> The fractional reserve theory where the money supply is limited by the money multiplier has come under increased criticism since the financial crisis of 2007–2008. It has been observed that the bank reserves are not a limiting factor because the central banks supply more reserves than necessary[19] and because banks have been able to build up additional reserves when they were needed.[20] Many economists and bankers now realize that the amount of money in circulation is limited only by the demand for loans, not by reserve requirements.
> ...
> Banks first lend and then cover their reserve ratios: The decision whether or not to lend is generally independent of their reserves with the central bank or their deposits from customers; banks are not lending out deposits or reserves, anyway. Banks lend on the basis of lending criteria, such as the status of the customer's business, the loan's prospects, and/or the overall economic situation.
As for gp, when I get to a real keyboard I will give you a proper response. Fair enough on the critique of my terseness.
If you take money out of the equation and just consider that we have a large pool of labor to make use of, government's purpose in spending on projects is to allocate some of that labor towards long-term goals that no company would involve itself in as the pure profit potential is too risky, distant, or difficult to capitalize on.
If you have a large 401k on the other hand it deflates the value of your retirement savings. You may have to work in old age.
TIPS also provide a way to hedge against inflation in retirement funds.
Except in cases with extremely high inflation most contracts are not inflation adjusted. By the time a company is paid the merchandise sold is worth significantly more in fiat terms. In high inflation an entity is loathe to trade assets for dollars and so the economy will slow.
This is not a criticism of current fed policy with respect to its relatively low inflation targets. While the effects I mentioned still occur, they are vastly outweighed by other concerns at low inflation levels.
Two things:
* Poor means less access to more expensive debt. Rich means more access to cheaper debt.
* Rich means one can use debt leverage to grow one's assets. How does that influence the value of necessities for the less rich...?
When the value of today-money goes down, the value of tomorrow-money goes up relatively. That explains why tech companies and speculative investments do well during expansionary monetary policy. It aslo explains why advertising and brand become so important. Because if the value of money goes up in the future, then the value of each customer will also go up; even if you have to make a net loss today to pay for advertising to get those customers.
They give a loan to someone, which means someone owes them 10,000 dollars. Now they can trade that 10,000$ worth of debt to someone else. You could say "out of thin air", but its really "out of social expectations that you pay your debt eventually"
You missed that- Since its 'out of thin air', the interest on this debt is artificially low.
When interest rates around 0, things that would otherwise be a bad decision, become feasible. Or, things that are a good idea, are sold and the cronies who get the loans make even more money.
In reality, when you look at how government debt is actually computed, you will find that government debt is the sum of all the coins and banknotes in circulation, all bank deposits at the central bank, and all treasuries. Basically it's the sum of all the savings denominated in that government's currency. It is purely an accounting illusion, governments could also create money out of nowhere without accounting for it as "debt", but that is the accounting standard we are currently using, mostly an heritage from the gold standard times. I'm not sure what the article accounted for exactly, but if they just did a sum of government debt divided by human population, what the article really means is that there are in circulation about 86k dollars for every human, so the average human has a monetary wealth of 86k (with the median being of course much much lower). We should cheer on that number increasing ,the only bad case is if inflation is higher, so that means in real terms we are on average getting poorer even if we have more dollars per capita.
In a country with a balanced trade deficit (exports are the same that imports), in order to keep the economy working at the same pace, if the public debt is reduced, the private debt have to grow. As you said, it's an accounting truth.
So, when they don't distinguish between private and public debt they are just confusing the issue.
This is not precisely correct. It is more correct to say that if the public net worth decreases, the private net worth increases. Or, in other words, if the public sector runs a deficit, the private sector runs a surplus. And the flow of funds is conserved.
And net worth is assets minus liabilities, or savings minus debt.
I don't know about globally but in the US private debt is much bigger that government debt including local, state and federal.
As far as I know, these two are the same.
In a fractional reserve banking system, when you borrow money from the bank for a car or a house, that money is then created from nothing. They just punch in the number in your account, and there you have it.
At the end of the day, the bank has to have a certain reserve, which is held in the banks account in the central bank. The central bank doesn't usually create the money itself, it lets the banks to it for them, as long as they stick within the limits.
I could be very wrong here. Not an expert. This is my laymans understanding.
This is why it's not really worrying on its own that there's a large amount of debt per person. Debt is how money is created in our system. As other countries get wealthier, you expect them to have more debt. Put another way: if you're living outside civilisation, you're not gonna get a loan for anything. But as soon as you live in a modern city with some steady income, you can borrow several times the amount you make a year, and that's generally OK as long as you expect to make that money back some time during your lifetime.
The difference is that on a large enough scale, you can make a $1 of real savings circulate as though it were $1.50 or (probably a lot more) of circulating currency and there's huge benefits to doing that (when it's backed by real productivity).
The source of things like the 2008 collapse was the dark side of that - trillions of dollars debts, backed by no possible amount of productivity that could repay them (and tons of fraud allowing these to exist on the books).
Banks do indeed make money "from nothing". If you get a loan of $1000 from a bank, they just add $1000 to your current account, and write down in another account that you owe them $1000. They don't have to "get" this money from somewhere.
This is all as it should be. Say I can make tables, and you want one, but don't have anything to give me in exchange. We can agree that you now owe me $100, say. You can write me an IOU and sign it. Suppose you are trustworthy enough that an IOU from you is considered acceptable as payment. I can now use your IOU as money - we have just "created" $100 money from nowhere (or, $100 debt, same thing).
Quite a bit more, I think.
Like, banks only need about (I think) 9% actual money. So you can lend $9 off that one dollar.
But then that $9 gets deposited somewhere, and that bank can then lend $100-something... etc.
Though I could be mistaken about how fractional reserve banking works.
I'm guessing this is the second kind of debt, but the title makes it sound like the first.