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If you look at the money supply figures for the UK, it’s obvious that private banks were lending money into existence like there’s no tomorrow prior to the crunch, which money was then being deposited. However at the height of the crisis they were not doing any net money creation at all. The latter scenario is much in line with the conventional view that there is a fixed stock of money, and a bank cannot lend until it has received an adequate amount by way of deposits.
Another not unrealistic scenario where the conventional view is correct is thus. If the economy is at capacity, and private banks spot a larger than normal selection of viable lending opportunities and simply credit the accounts of relevant borrowers with money produced from thin air, the effect will be inflationary. The central bank will then raise interest rates to counteract that, which in turn cuts lending: perhaps back to where it originally was. In that scenario, private banks have to acquire deposits of some sort (from retail depositors, sale of bonds or sale of shares) before they can lend.
It's a matter of the order of operations. Of course eventually the bank will be required to either find deposits or borrow reserves, they aren't actually allowed to create credit out of thin air without limit as there are reserve requirements that must be met periodically.
If banks become capital constrained, as they were when asset values fell during the crisis, they can no longer create new credit. In fact they can be forced to liquidate the assets at a loss. That is why during the crisis, we didn't see anyone using the discount window but there were plenty of banks using TARP. It's all about capital and not about reserves.
Bob, the banks don't manufacture their own form of fiat money. Bank money is an IOU. Just like you and me, banks can issue as many IOUs as they want, but they have to make good on them.
The federal government's IOUs, issued by the Fed, are only redeemable into additional government IOUs, or to discharge tax bills, which are themselves obligations to surrender to the government some of the very same IOUs the government itself issues.
The banks' IOU's, however, are redeemable on demand into federal government IOUs, which the bank itself cannot issue. The bank depositor can also order the bank to make a payment to someone who is not a depositor at that same bank, which means that they will have to employ some payment asset which, again, they don't issue. That will probably be a government IOU once again.
Those very good BOE papers have unfortunately sparked a new round of what I have called "hyper-endogeneity", the mistaken view that banks issue their own self-subsisting form of fiat money. The banks are part of a hierarchical system of credit obligations, in which the government's obligations are absolutely fundamental, and fundamentally unlike the instruments issued by banks. The government's obligations are what I have called sometimes "loopy liabilities", because that's the place where the hierarchy of bank instruments terminates in a self-redeemable loop.
When an article states that banks create money out of thin air, then it is only natural that this statement be taken literally.
My credit card rewards me with 'cash back' points, which are then sent to me in the form of a cheque. Does this mean they are creating money - in addition to extending credit?
Surely the effect of credit on the money supply can be described without resorting to statements that only serve to confuse rather than educate.
When an article states that banks create money out of thin air, then it is only natural that this statement be taken literally.
I agree. I wish people wouldn't use that terminology, although I understand what they are saying: that in order to lend some money the bank doesn't have to get that money first.
But the key term here is "IOU". If I write up an IOU, sign it and give it to you, then in one sense I have created my promise out of thin air. I didn't have to get my promise from somewhere else in order to give it to you. And unless I have made my promise non-negotiable, you can trade it to somebody else for something you want to get from them, as long as they are willing to take my promise in trade.
But it is a binding promise, and so I am constrained in my promise-making by the nature of whatever it is I have promised, and by whatever resources and options I have available to me for obtaining the stuff I have promised.
Bob If banks can create money, why do they bother making loans?
Very good question. It involves the meaning of "money."
Money is an ambiguous term. Most people equate money with cash. Of course, banks cannot issue cash, which only the monetary authority can do. In the US, the Treasury issues coin and the Fed issues federal reserve notes ("dollar bills" in various denominations in the unit of account, the USD).
Moreover, final settlement that doesn't take place in cash is conducted in bank reserves through the payments system run by the Fed. Only the Fed can issue bank reserves
So in this sense, banks cannot create money in the way that the monetary authority does.
However, chartered banks have a special deal. They are franchises, so to speak, of the monetary authority that delegates the power to create deposits denominated in the unit of account against loans. Banks undertake some risk by doing this and they also get a reward in terms of profit-making.
What government has actually done is delegate the lending function to the private sector, other than government lending to banks through the central bank. This relieves government of the burden of risk management, which the banks perform as agents of the government in a public-private partnership. Being franchises, so to speak, the government regulates and oversees the entire process to maintain standards, just like any franchise.
So banks don't literally create "money." They create deposits and promise to settle as the agent of the depositor in the government's money (currency) as necessary. Owing to netting, this is actually not required much of the time, since mutual obligations involving counterparties are simply cancelled.
However, deposits do function as money even through final settlement is not always in currency (rb and cash are functional equivalents since banks exchange rb for cash at par).
In fact, even non-banks can created money in the same way that banks do although they cannot access the central banks and therefore do not have the same degree of liquidity.
Take the purchase of a car. Most people buy cars on credit and no longer finance the purchase through a banks, which used to be common. The auto companies realized that they were missing a good deal of profit by not self-financing so they set up their own finance companies. Now, US cars are purchased in dollars with a small downpayment and the balance financed by the auto company instead of a bank.
Is that credit extended by the manufacturer "money'? Does the auto company create money? In a sense it does since many of those sales might not take place otherwise — the auto companies give very attractive terms to compete with each other, probably better terms that banks would offer.
I should add to the above that banks are special in that franchises of government, they enjoy certain privilege that other lenders do not, like government deposit insurance, i.e., the guarantee that even if the bank fails, deposits will be made good up to the limit of the guarantee. This is another reason it can be said that banks "create money" in creating deposits. The government insures that their IOU's are good.
Once upon a time we had a gold standard. Banks issued notes and deposit accounts balances that were backed by gold. If you insisted, you could go to your bank and insist on getting some gold for your deposit. And if you wanted to pay someone who didn't bank at the same bank, the bank had to transmit gold reserves to the bank of the receiver. Of course the gold might not actually be moved physically. It would stay in some holding facility where the gold's ownership claims would be readjusted on paper.
The money multiplier and loanable funds wasn't true under that system either. The government (or the private gold industry, depending on the system) might increase the total stock of gold reserves held, but that wouldn't automatically result in an expansion of bank lending. And banks that did want to expand their lending could always do the lending and then acquire any additional needed gold reserves subsequently. Banks could acquire more gold reserves either by lending their existing reserves at interest to either the government or other banks, or by borrowing gold reserves from other banks or the government.
The system still works in roughly the same way. But now instead of gold, the fundamental financial asset is the fiat dollar issued by the US government through its central bank, in the form of physical currency notes or reserve account balances. Banks issue "notes" in the form of deposit account balances, and those notes are backed by fiat dollars issued by the government which banks must acquire from the government in order to do business.
Tom's point about deposit insurance is very important. I would add that the privilege enjoyed here is in the first instance the privilege enjoyed by small depositors at an FDIC insured institution. And of course the bank itself thereby enjoys a market advantage that it wouldn't have if the FDIC insurance program didn't exist. But bank failures result in government claims on the failed bank's assets, with the FDIC as receiver.
Right, and government provides guaranteed savings vehicles for large savers in the form of short term government securities, in the US T-bills, which is the way large savers hold dollar deposits instead of deposit accounts that exceed the guarantee. Plus they get a bit of a subsidy in the form of interest. Such a deal.
Those very good BOE papers have unfortunately sparked a new round of what I have called "hyper-endogeneity", the mistaken view that banks issue their own self-subsisting form of fiat money.
Seems to me that "hyper" view is correct for institutions explicitly backstopped by the central bank. When the central bank or any issuer of an IOU extends a promise of unlimited liquidity to someone else, they effectively franchise out issuance privileges.
The critical caveat of course being that solvency constraints are operative for banks creating this "self-subsisting form of fiat money".
When the central bank or any issuer of an IOU extends a promise of unlimited liquidity to someone else, they effectively franchise out issuance privileges
I don't think that's quite true geerussell. Ultimately we have to pay our taxes with government fiat IOUs, and the government only accepts drafts on bank IOUs in payment because clearing that payment to the general fund occasions a transfer of Fed-issued government IOUs from a bank's reserve account to the treasury's account at the Fed. If banks expand their balance sheet through lending, and thus expand the dollar value of bank IOUs in circulation, that does not necessarily occasion any change in the volume of government IOUs in circulation.
The Fed might promise unlimited liquidity in government IOUs to commercial banks, but that promise is just a promise to make that liquidity available either through a sales of assets to the central bank or borrowing at interest from the central bank, and the borrowing is collateralized by pledged commercial bank assets.
It is true that the central bank, working with the Treasury is also giving commercial banks a certain amount of additional dollars, either as interest earned on treasury securities or interest earned on reserve accounts.
Is that credit extended by the manufacturer "money'? Does the auto company create money? In a sense it does since many of those sales might not take place otherwise — the auto companies give very attractive terms to compete with each other, probably better terms that banks would offer.
In this case they have offered the immediate use of a car in return for monthly payments. I see no reason to view this as money creation. Their 'financing' consists of keeping track of how much money you owe them.
I appreciate the explanations, however we are dealing with loans, and their effect on the money supply. Loans are issued and they are settled, or defaulted on. When a default occurs, the creditor is subject to a loss.
I would imagine that this is distinct to literal money creation, which does not entail any risk of loss for the issuer, nor requires any particular settlement at a future date.
The point is that "money" is ambiguous. Warren and the MMT economists often reiterate to refrain from using the term "money" other than in the most general sense when ambiguity doesn't come into play. Otherwise, say exactly what you mean. Many if not most problems arise from failure to understand the underlying logic of meaning and truth. Being pseudo-problems they simply vanish on proper analysis. This is true of many fields including economics and finance.
That said, technically it's true that banks create money in the defined sense of the different measures of money stock. M1 includes demand deposits and M2 includes time deposits. What used to be M3 includes other forms of credit. M1, M2, and M3 all add purchasing power to the monetary base, or money created by the monetary authority. In this sense they leverage off the base, since financial IOU's are customarily denominated in the unit of account set by the monetary authority. These are all technically "money" by definition. That's a reason there is said to be a hierarchy of money, for example.
It can be, depending one whose credit. All money is a credit-debt relationship. See Randy Wray's paper entitled "Money."
Under a gold standard, gold bullion is not money. Gold becomes money when it is minted and issued as coin with a face value. That value is different from the bullion value by the amount of minting cost and seigniorage. The coin is a tax credit. Bullion is not.
State money is an IOU of the state functioning as a tax credit. In a convertible system it's also a credit for the numeraire. Bank IOU's are different from non-bank IOU's in that bank IOU's carry a limited government guarantee.
USC 26 CFR 301.6311-1 makes banks checks drawn on banks, debit cards, credit cards, and EFTs from one of the Federal Reserve payment systems -ACH or FEDWIRE (26 CFR 31.6302) acceptable forms of payment for taxes in addition to cash and coin.
Those parts of the law are significant in my mind because they specifically ensure that any bank's liability can be used to extinguish a tax obligation. It maintains the short term par value of a bank's liabilities with government's fiat. This part of the law is really well written and thought out to the most minute detail to ensure the stability of the banking system. The government even guarantee to the tax payer that if you've submitted your electronic bank-money payment, it's as good as received by treasury. If the bank doesn't pass it on or the payment system fails, it becomes a civil issue between the bank and the government, but your tax obligation has been extinguished. No detail left uncovered or any wiggle room for banks to defraud customers.
Yes, and the way I understand it, these clear through rb in the payments system as do all government-private sector transactions, although netting may be used wrt the TTL accounts. I don't know how that works at this level of detail.
In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).[2][3]
practically all Treasury spending comes out of the TGA account at the Federal Reserve. Which means all revenues have to be paid into that account. Which means all payments to the Treasury ultimately have to be made in currency (i.e. bank reserves)...
Bank money has (negligible but real) credit risk. Government money, bills, notes, certificates of indebtedness have no credit risk. Other than that, it looks like a duck and quacks like a duck.
You guys just keep on keepin' on explaining how the government and the banks create oodles of funny money out of thin air so the average folks can finally understand.
And bank money is just another name for a bank loan?
The loan creates a deposit, and it is the deposit that is spent by draws income forward. The principal and interest are then paid down from future income — if all goes as planned. That's where risk comes in.
But as I have said, lending liquifies collateral at a discount (terms). With secured loans, specific property is pledged and with unsecured loans, the borrower's asset are recoverable. It's all covered in the loan contact and commercial code.
BTW, should also mention that banks can create money without making a loan. They do so when they credit an employee or supplier's deposit account for wages or purchases and debit a bank expense account as a record of the expense. They did not need to get the money from elsewhere to do this.
BTW, should also mention that banks can create money without making a loan. They do so when they credit an employee or supplier's deposit account for wages or purchases and debit a bank expense account as a record of the expense. They did not need to get the money from elsewhere to do this.
How so? A transfer debit and transfer credit can accomplish that trick.
What happens is that when a loan is made and a deposit created, the deposit migrates into the banking system as it is drawn down and spent. It remains part of the aggregate until the loan is paid down. Then the loan and the corresponding deposit gets extinguished. In the first instance broad money increases and in the second it decreases. In this way bank money gets created and destroyed endogenously, and broad money expands and contracts depending on changing saving/spending preference ratio.
44 comments:
If you look at the money supply figures for the UK, it’s obvious that private banks were lending money into existence like there’s no tomorrow prior to the crunch, which money was then being deposited. However at the height of the crisis they were not doing any net money creation at all. The latter scenario is much in line with the conventional view that there is a fixed stock of money, and a bank cannot lend until it has received an adequate amount by way of deposits.
Another not unrealistic scenario where the conventional view is correct is thus. If the economy is at capacity, and private banks spot a larger than normal selection of viable lending opportunities and simply credit the accounts of relevant borrowers with money produced from thin air, the effect will be inflationary. The central bank will then raise interest rates to counteract that, which in turn cuts lending: perhaps back to where it originally was. In that scenario, private banks have to acquire deposits of some sort (from retail depositors, sale of bonds or sale of shares) before they can lend.
It's a matter of the order of operations. Of course eventually the bank will be required to either find deposits or borrow reserves, they aren't actually allowed to create credit out of thin air without limit as there are reserve requirements that must be met periodically.
If banks become capital constrained, as they were when asset values fell during the crisis, they can no longer create new credit. In fact they can be forced to liquidate the assets at a loss. That is why during the crisis, we didn't see anyone using the discount window but there were plenty of banks using TARP. It's all about capital and not about reserves.
If banks can create money, why do they bother making loans?
THE VIDEO:
https://www.youtube.com/watch?v=dIS9RSYm3E0
Bob, the banks don't manufacture their own form of fiat money. Bank money is an IOU. Just like you and me, banks can issue as many IOUs as they want, but they have to make good on them.
The federal government's IOUs, issued by the Fed, are only redeemable into additional government IOUs, or to discharge tax bills, which are themselves obligations to surrender to the government some of the very same IOUs the government itself issues.
The banks' IOU's, however, are redeemable on demand into federal government IOUs, which the bank itself cannot issue. The bank depositor can also order the bank to make a payment to someone who is not a depositor at that same bank, which means that they will have to employ some payment asset which, again, they don't issue. That will probably be a government IOU once again.
Those very good BOE papers have unfortunately sparked a new round of what I have called "hyper-endogeneity", the mistaken view that banks issue their own self-subsisting form of fiat money. The banks are part of a hierarchical system of credit obligations, in which the government's obligations are absolutely fundamental, and fundamentally unlike the instruments issued by banks. The government's obligations are what I have called sometimes "loopy liabilities", because that's the place where the hierarchy of bank instruments terminates in a self-redeemable loop.
When an article states that banks create money out of thin air, then it is only natural that this statement be taken literally.
My credit card rewards me with 'cash back' points, which are then sent to me in the form of a cheque. Does this mean they are creating money - in addition to extending credit?
Surely the effect of credit on the money supply can be described without resorting to statements that only serve to confuse rather than educate.
"part of a hierarchical system"
This is where we lose a lot of people imo... they can't see this as a 'hierarchy'.
They have "money" as some sort of "naturally" occurring phenom and both the govt and non-govt are subject to IT.
rsp,
When an article states that banks create money out of thin air, then it is only natural that this statement be taken literally.
I agree. I wish people wouldn't use that terminology, although I understand what they are saying: that in order to lend some money the bank doesn't have to get that money first.
But the key term here is "IOU". If I write up an IOU, sign it and give it to you, then in one sense I have created my promise out of thin air. I didn't have to get my promise from somewhere else in order to give it to you. And unless I have made my promise non-negotiable, you can trade it to somebody else for something you want to get from them, as long as they are willing to take my promise in trade.
But it is a binding promise, and so I am constrained in my promise-making by the nature of whatever it is I have promised, and by whatever resources and options I have available to me for obtaining the stuff I have promised.
Bob
If banks can create money, why do they bother making loans?
Very good question. It involves the meaning of "money."
Money is an ambiguous term. Most people equate money with cash. Of course, banks cannot issue cash, which only the monetary authority can do. In the US, the Treasury issues coin and the Fed issues federal reserve notes ("dollar bills" in various denominations in the unit of account, the USD).
Moreover, final settlement that doesn't take place in cash is conducted in bank reserves through the payments system run by the Fed. Only the Fed can issue bank reserves
So in this sense, banks cannot create money in the way that the monetary authority does.
However, chartered banks have a special deal. They are franchises, so to speak, of the monetary authority that delegates the power to create deposits denominated in the unit of account against loans. Banks undertake some risk by doing this and they also get a reward in terms of profit-making.
What government has actually done is delegate the lending function to the private sector, other than government lending to banks through the central bank. This relieves government of the burden of risk management, which the banks perform as agents of the government in a public-private partnership. Being franchises, so to speak, the government regulates and oversees the entire process to maintain standards, just like any franchise.
So banks don't literally create "money." They create deposits and promise to settle as the agent of the depositor in the government's money (currency) as necessary. Owing to netting, this is actually not required much of the time, since mutual obligations involving counterparties are simply cancelled.
However, deposits do function as money even through final settlement is not always in currency (rb and cash are functional equivalents since banks exchange rb for cash at par).
In fact, even non-banks can created money in the same way that banks do although they cannot access the central banks and therefore do not have the same degree of liquidity.
Take the purchase of a car. Most people buy cars on credit and no longer finance the purchase through a banks, which used to be common. The auto companies realized that they were missing a good deal of profit by not self-financing so they set up their own finance companies. Now, US cars are purchased in dollars with a small downpayment and the balance financed by the auto company instead of a bank.
Is that credit extended by the manufacturer "money'? Does the auto company create money? In a sense it does since many of those sales might not take place otherwise — the auto companies give very attractive terms to compete with each other, probably better terms that banks would offer.
I should add to the above that banks are special in that franchises of government, they enjoy certain privilege that other lenders do not, like government deposit insurance, i.e., the guarantee that even if the bank fails, deposits will be made good up to the limit of the guarantee. This is another reason it can be said that banks "create money" in creating deposits. The government insures that their IOU's are good.
Once upon a time we had a gold standard. Banks issued notes and deposit accounts balances that were backed by gold. If you insisted, you could go to your bank and insist on getting some gold for your deposit. And if you wanted to pay someone who didn't bank at the same bank, the bank had to transmit gold reserves to the bank of the receiver. Of course the gold might not actually be moved physically. It would stay in some holding facility where the gold's ownership claims would be readjusted on paper.
The money multiplier and loanable funds wasn't true under that system either. The government (or the private gold industry, depending on the system) might increase the total stock of gold reserves held, but that wouldn't automatically result in an expansion of bank lending. And banks that did want to expand their lending could always do the lending and then acquire any additional needed gold reserves subsequently. Banks could acquire more gold reserves either by lending their existing reserves at interest to either the government or other banks, or by borrowing gold reserves from other banks or the government.
The system still works in roughly the same way. But now instead of gold, the fundamental financial asset is the fiat dollar issued by the US government through its central bank, in the form of physical currency notes or reserve account balances. Banks issue "notes" in the form of deposit account balances, and those notes are backed by fiat dollars issued by the government which banks must acquire from the government in order to do business.
Tom's point about deposit insurance is very important. I would add that the privilege enjoyed here is in the first instance the privilege enjoyed by small depositors at an FDIC insured institution. And of course the bank itself thereby enjoys a market advantage that it wouldn't have if the FDIC insurance program didn't exist. But bank failures result in government claims on the failed bank's assets, with the FDIC as receiver.
Right, and government provides guaranteed savings vehicles for large savers in the form of short term government securities, in the US T-bills, which is the way large savers hold dollar deposits instead of deposit accounts that exceed the guarantee. Plus they get a bit of a subsidy in the form of interest. Such a deal.
Those very good BOE papers have unfortunately sparked a new round of what I have called "hyper-endogeneity", the mistaken view that banks issue their own self-subsisting form of fiat money.
Seems to me that "hyper" view is correct for institutions explicitly backstopped by the central bank. When the central bank or any issuer of an IOU extends a promise of unlimited liquidity to someone else, they effectively franchise out issuance privileges.
The critical caveat of course being that solvency constraints are operative for banks creating this "self-subsisting form of fiat money".
When the central bank or any issuer of an IOU extends a promise of unlimited liquidity to someone else, they effectively franchise out issuance privileges
I don't think that's quite true geerussell. Ultimately we have to pay our taxes with government fiat IOUs, and the government only accepts drafts on bank IOUs in payment because clearing that payment to the general fund occasions a transfer of Fed-issued government IOUs from a bank's reserve account to the treasury's account at the Fed. If banks expand their balance sheet through lending, and thus expand the dollar value of bank IOUs in circulation, that does not necessarily occasion any change in the volume of government IOUs in circulation.
The Fed might promise unlimited liquidity in government IOUs to commercial banks, but that promise is just a promise to make that liquidity available either through a sales of assets to the central bank or borrowing at interest from the central bank, and the borrowing is collateralized by pledged commercial bank assets.
It is true that the central bank, working with the Treasury is also giving commercial banks a certain amount of additional dollars, either as interest earned on treasury securities or interest earned on reserve accounts.
Is that credit extended by the manufacturer "money'? Does the auto company create money? In a sense it does since many of those sales might not take place otherwise — the auto companies give very attractive terms to compete with each other, probably better terms that banks would offer.
In this case they have offered the immediate use of a car in return for monthly payments. I see no reason to view this as money creation. Their 'financing' consists of keeping track of how much money you owe them.
I appreciate the explanations, however we are dealing with loans, and their effect on the money supply. Loans are issued and they are settled, or defaulted on. When a default occurs, the creditor is subject to a loss.
I would imagine that this is distinct to literal money creation, which does not entail any risk of loss for the issuer, nor requires any particular settlement at a future date.
Dan:
I would view IOU's as IOU creation. If an IOU can be exchanged for money, in normal circumstances that would be money that already exists.
When you borrow money from a bank, you are in effect issuing an IOU.
The point is that "money" is ambiguous. Warren and the MMT economists often reiterate to refrain from using the term "money" other than in the most general sense when ambiguity doesn't come into play. Otherwise, say exactly what you mean. Many if not most problems arise from failure to understand the underlying logic of meaning and truth. Being pseudo-problems they simply vanish on proper analysis. This is true of many fields including economics and finance.
That said, technically it's true that banks create money in the defined sense of the different measures of money stock. M1 includes demand deposits and M2 includes time deposits. What used to be M3 includes other forms of credit. M1, M2, and M3 all add purchasing power to the monetary base, or money created by the monetary authority. In this sense they leverage off the base, since financial IOU's are customarily denominated in the unit of account set by the monetary authority. These are all technically "money" by definition. That's a reason there is said to be a hierarchy of money, for example.
Is credit ambiguous?
'Money supply' refers to the M measurements.
Is credit ambiguous?
It can be, depending one whose credit. All money is a credit-debt relationship. See Randy Wray's paper entitled "Money."
Under a gold standard, gold bullion is not money. Gold becomes money when it is minted and issued as coin with a face value. That value is different from the bullion value by the amount of minting cost and seigniorage. The coin is a tax credit. Bullion is not.
State money is an IOU of the state functioning as a tax credit. In a convertible system it's also a credit for the numeraire. Bank IOU's are different from non-bank IOU's in that bank IOU's carry a limited government guarantee.
'Money supply' refers to the M measurements.
How does that relate to what I said?
The term 'money supply' is non-ambiguous, and the effect of loans can be examined here.
If an explanation contains ambiguous terms that is a problem, which the Bank of England is perpetuating.
USC 26 CFR 301.6311-1 makes banks checks drawn on banks, debit cards, credit cards, and EFTs from one of the Federal Reserve payment systems -ACH or FEDWIRE (26 CFR 31.6302) acceptable forms of payment for taxes in addition to cash and coin.
Those parts of the law are significant in my mind because they specifically ensure that any bank's liability can be used to extinguish a tax obligation. It maintains the short term par value of a bank's liabilities with government's fiat. This part of the law is really well written and thought out to the most minute detail to ensure the stability of the banking system. The government even guarantee to the tax payer that if you've submitted your electronic bank-money payment, it's as good as received by treasury. If the bank doesn't pass it on or the payment system fails, it becomes a civil issue between the bank and the government, but your tax obligation has been extinguished. No detail left uncovered or any wiggle room for banks to defraud customers.
Yes, and the way I understand it, these clear through rb in the payments system as do all government-private sector transactions, although netting may be used wrt the TTL accounts. I don't know how that works at this level of detail.
Wkipedia http://en.wikipedia.org/wiki/Money_supplyMoney Supply
In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).[2][3]
practically all Treasury spending comes out of the TGA account at the Federal Reserve. Which means all revenues have to be paid into that account. Which means all payments to the Treasury ultimately have to be made in currency (i.e. bank reserves)...
That would indicate that demand deposits (created by loans) are "money."
"The term 'money supply' is non-ambiguous"
It's actually a bit ambiguous. People use slightly different definitions.
Bank deposits are considered by most people to be a form of money. Banks create bank deposits, so banks create money.
Bank money has (negligible but real) credit risk. Government money, bills, notes, certificates of indebtedness have no credit risk. Other than that, it looks like a duck and quacks like a duck.
And bank money is just another name for a bank loan?
You guys just keep on keepin' on explaining how the government and the banks create oodles of funny money out of thin air so the average folks can finally understand.
And bank money is just another name for a bank loan?
The loan creates a deposit, and it is the deposit that is spent by draws income forward. The principal and interest are then paid down from future income — if all goes as planned. That's where risk comes in.
"And bank money is just another name for a bank loan?"
No. A deposit is a bank liability and a loan is an asset to the bank that makes it.
Deposits and loans sit on different sides of the bank's balance sheet.
When a bank makes a loan it adds the borrower's promise (the loan) to its assets, and creates a new liability for itself in the form of a deposit.
Where do the funds to create the deposit come from?
Can we say that the deposit equals the principal on the loan?
That's the "from nothing" part.
But as I have said, lending liquifies collateral at a discount (terms). With secured loans, specific property is pledged and with unsecured loans, the borrower's asset are recoverable. It's all covered in the loan contact and commercial code.
BTW, should also mention that banks can create money without making a loan. They do so when they credit an employee or supplier's deposit account for wages or purchases and debit a bank expense account as a record of the expense. They did not need to get the money from elsewhere to do this.
BTW, should also mention that banks can create money without making a loan. They do so when they credit an employee or supplier's deposit account for wages or purchases and debit a bank expense account as a record of the expense. They did not need to get the money from elsewhere to do this.
How so?
A transfer debit and transfer credit can accomplish that trick.
That's the "from nothing" part.
You and I and loan-sharks are not allowed to do this.
What happens as the loan is paid off? Is the bank required to extinguish the deposit when the loan is settled?
What happens is that when a loan is made and a deposit created, the deposit migrates into the banking system as it is drawn down and spent. It remains part of the aggregate until the loan is paid down. Then the loan and the corresponding deposit gets extinguished. In the first instance broad money increases and in the second it decreases. In this way bank money gets created and destroyed endogenously, and broad money expands and contracts depending on changing saving/spending preference ratio.
"Where do the funds to create the deposit come from?"
The deposit is a promise from the bank to the customer. It's a bank liability, i.e. a bank debt owed to the customer.
If your bank statement says you have a $100 deposit at your bank, that means your bank owes you $100.
But that bank debt (the deposit) is a form of money, in that it can be used to make payments - to other customers at the bank for example.
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