Tuesday, September 13, 2016

Dirk Ehnts — Investment equals savings: Keynes in the General Theory (1936)

Bank loans that create "new money" finance investment and create saving.

When bank approves a loan it creates a deposit equal to the loan amount in the borrower's account at the bank. This deposit circulates as money is spent and the money that created by the loan is destroyed when the depositor pays off the loan in full.

This means that the funds that resulted from credit extension both fund the amount of investment and remain in the money supply until the loan is paid down.

A bank creates "new money" by crediting accounts. Banks do not lend out deposits or bank reserves. they "lend against" capital, that is, put equity at risk in making loans. For this risk-assumption, they receive interest, which they calculate as commensurate with risk plus associated costs, including the interest rate set by the central bank.

Thus the loan creates the saving that funds it, and the loan funds investment.

This is how a monetary production works in the context of endogenous money.

econoblog 101
Investment equals savings: Keynes in the General Theory (1936)
Dirk Ehnts | Lecturer at Bard College Berlin

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