tag:blogger.com,1999:blog-2761684730989137546.post3507801600461198780..comments2024-03-28T20:28:01.733-04:00Comments on Mike Norman Economics: Peter Martin — Loan repayments destroy credit money. Right? Wrong. They don’t.mike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger62125tag:blogger.com,1999:blog-2761684730989137546.post-8070609971002543492014-09-27T08:39:01.371-04:002014-09-27T08:39:01.371-04:00Create narrow, irrelevant divisions to define spec...Create narrow, irrelevant divisions to define specific types of money, and assets and then argue for hours about how one type of transaction impacts your narrowly defined, practically irrelevant definitions. Rawr. I am economist, hear me roar.<br />Ryan Harrishttps://www.blogger.com/profile/04815033054435303399noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-26968730316886188582014-09-26T21:06:26.322-04:002014-09-26T21:06:26.322-04:00It is not important at all Tom, and it may not eve...<i>It is not important at all Tom, and it may not even be true in all cases. Whether or not this is the operational procedure in place is a completely arbitrary and conventional decision, and nothing fundamental to the underlying economics or monetary system would change if procedures were in place by which the loan is permitted to be discharged directly with the cash, with no additional credit extended and then reduced. The end result is the same, and the difference between the two systems is economically meaningless.</i><br /><br />That's true, Dan, but when the accounting is passed over even smart people make mistakes. That's a reason there is accounting in the first place. It keeps everything straight. Obviously this is especially important in the case of banks where funds are being transferred around constantly. With DE accounting there is always a clear paper trail.<br /><br />But it is also important in economics, where economist often make jumps regarding financial matters, thinking it obvious, and then make mistakes.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-49639933380513349302014-09-26T20:59:55.677-04:002014-09-26T20:59:55.677-04:00It may not be important, Dan, but it is in account...It may not be important, Dan, but it is in accounting procedure.<br /><br />If someone loans someone something, including money, the return of the item or money amount discharges the loan. No books.<br /><br />But in transactions that are accounted for, various accounts get credited and debited, and it to understand what's happened, all that is needed to consult the books.<br /><br />A cash deposit becomes a liability of the bank, and the corresponding asset is an increase in vault cash. This is similar to rb being deposited into a bank's reserve account at the cb with a direction to the bank to mark up a customers deposit account in that state money is involved. <br /><br />When a loan creates a deposit, the bank creates bank money.<br /><br />Significantly, when cash is used to pay down a loan, the cash deposit doesn't decrease M1, since M1 includes both cash in circulation and bank deposits. The cash is no longer circulating but in the bank's vault, counting toward reserves, and a deposit account is marked up — the bank has borrowed the funds from the depositor and has a liability.<br /><br />But when the customer directs the bank to use the deposit to pay down the loan, then the loan and deposit are extinguished in full or part, reducing bank deposits and therefore M1.<br /><br />I much prefer to describe what actually happens than make claims that may be ambiguous, as this thread seems to demonstrate. But I learned something thinking it through. So it can be regarded as my thinking aloud. If anyone sees an error, please alert me.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47040397956671534872014-09-26T20:38:35.437-04:002014-09-26T20:38:35.437-04:00"In think it is important to see that it is n..."In think it is important to see that it is not the cash that pays down the loan. It is the cash deposit with the cash going to vault cash."<br /><br />It is not important at all Tom, and it may not even be true in all cases. Whether or not this is the operational procedure in place is a completely arbitrary and conventional decision, and nothing fundamental to the underlying economics or monetary system would change if procedures were in place by which the loan is permitted to be discharged directly with the cash, with no additional credit extended and then reduced. The end result is the same, and the difference between the two systems is economically meaningless.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-31777979541996191762014-09-26T20:32:17.498-04:002014-09-26T20:32:17.498-04:00"I think we all agree that loan repayments do..."I think we all agree that loan repayments do destroy credit money in general. Are we trying to confuse people? "<br /><br />Nobody is confusing anybody. We are just talking about conventional banking operations and procedures, not deep laws of economics. Debts can be always discharged in two ways: either by the debtor turning over some asset to the creditor that the creditor is bound to accept, or by the creditor reducing the amount of its total obligations to the debtor.<br /><br />Yes, it is perfectly possible when employing the first method to institute some procedure whereby the debtor first hands over the asset for additional credit from the creditor, and then half a nanosecond later releases the credtor from that additonal obligation. Or you can institute a procedure whereby the asset is simply turned over and a portion of the original credit is directly reduced, without the intermediate step of bumping up and then immediately bumping down the credit balance. It's completely arbitrary and the end result is exactly the same.<br /><br />Nothing important hinges on whether or not loan repayments always destroy bank money.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-74260570582104858952014-09-26T20:14:36.976-04:002014-09-26T20:14:36.976-04:00In think it is important to see that it is not the...In think it is important to see that it is not the cash that pays down the loan. It is the cash deposit with the cash going to vault cash. This means that bank deposit and loan are being cancelled on the bank's books. <br /><br />The bank deposit created by state money becomes bank money with the state money becoming a bank asset that increases the bank's reserves. Reserves (rb and vault cash) are always state money.<br /><br />State money is only destroyed when it leaves non-government and returns to the state that created it.<br /><br />Bank money (deposits) is created by loans and is destroyed by loan payment. A loan creates a deposit and a deposit extinguishes the loan, canceling the deposit. <br /><br /><br />Reserves as a bank asset are not spendable. Clearly, rb that remains in the payments system is not spendable. But neither is cash in the vault (unless it is stolen). <br /><br />This may seem quirky to some people but cash in circulation is spendable (M1) and vault cash is not since it is part of the monetary base.<br /><br />Even among smart people, there is sometimes confusion over this.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-38910121215793810542014-09-26T19:44:59.617-04:002014-09-26T19:44:59.617-04:00"When a loan is paid down in part or full fro..."When a loan is paid down in part or full from currency in circulation, a deposit account is marked up with the deposit... Then (it) is marked down in payment of the loan" [Tom Hickey]<br /><br />Right. So "credit money" is marked down (destroyed) when the loan is repaid. <br /><br />I think we all agree that loan repayments do destroy credit money in general. Are we trying to confuse people? <br /><br />Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-56837919162870555392014-09-26T19:21:52.476-04:002014-09-26T19:21:52.476-04:00When a loan is paid down in part or full from curr...When a loan is paid down in part or full from currency in circulation, a deposit account is marked up with the deposit, and the bank marks up vault cash. M1 remains the same.<br /><br />Then is marked down in payment of the loan, with the deposit and loan/interest are extinguished in part or full. M1 decreases by the amount of the extinguished deposit.<br /><br />The bank's reserves (vault cash + rb) increase, so the bank has increased assets. The monetary base increases by the amount of formerly circulating currency to vault cash.<br /><br />So MB + and M1 -.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27918221972378722572014-09-26T19:06:36.698-04:002014-09-26T19:06:36.698-04:00Perhaps instead of "Peter Martin — Loan repay...Perhaps instead of "Peter Martin — Loan repayments destroy credit money. Right? Wrong. They don’t.", the post should be retitled, "Peter Martin — Loan repayments destroy credit money for all practical purposes (although, technically, you could say that in extremely rare situations the loan repayment take the place of new credit money creation instead of destroying existing credit money)". <br /><br />Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-20266278352903465902014-09-26T18:49:28.343-04:002014-09-26T18:49:28.343-04:00He's right about his main point that not all l...He's right about his main point that not all loan repayments result in the net destruction of bank money that was created in making the loans. Rather, in some cases, state money is just transfered from the non-bank sector to the banking sector. Nothing about this should be surprising in a financial system where the public makes use of both bank money and direct state money as money. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-37879132081666429092014-09-26T17:36:08.413-04:002014-09-26T17:36:08.413-04:00"Peter is completely right." [Dan Kervic..."Peter is completely right." [Dan Kervick]<br /><br />Uh, no. He's already admitted he's wrong in 99.99% of the cases where loans are paid back with bank money. And in the other 0.01% case, there's some thing else going on (creation of bank money by a deposit of currency) that cancels out the still existing elimination of bank money in the repayment of the loan. <br /><br />It's not that complicated...<br />Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-73637234071091323732014-09-26T12:15:19.536-04:002014-09-26T12:15:19.536-04:00Neil, that's what I was trying to get in my po...Neil, that's what I was trying to get in my posts. When you deposit state money, that actually creates a deposit (credit money). Then when you repay the loan, it destroys that credit money (the deposit).<br /><br />To me it sounds like Peter's articles are saying that when you deposit the cash, that it's the cash itself that is your asset, then it is transferred to the bank when you repay the loan, discharging your loan but not destroying any credit money. But really when you deposit the cash, the cash becomes the bank's asset and you receive a deposit in exchange. <br /><br />Or did I totally misunderstand Peter's articles?Joehttps://www.blogger.com/profile/15197727918414570446noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-3176576822019979262014-09-26T12:08:24.304-04:002014-09-26T12:08:24.304-04:00"It is a sequence of creation and destruction..."It is a sequence of creation and destruction matches from the underlying primitive transactions." <br /><br />Sure, Neil,but the net effect is the same as if you had simply paid of the loan with the state money or gold bar, without any intermediate change to your account.<br /><br />Suppose your account contains a $60,000 balance, of which $10,000 was loaned to you by the bank, and you now want to pay off that $10,000 loan with $10,000 in state-issued paper bills which you already had in your possession. If this is executed by first making a deposit to your account with the bills and then immediately paying off the loan from the deposit account, then your deposit balance temporarily goes up to $70,000 and then immediately back down to $60,000 - and the bank now has $10,000 in additional cash reserves.<br /><br />On the other hand, if you simply decide to pay off the loan from your deposit account, your balance will be reduced from $60,000 to $50,000, and the bank gets no additional cash.<br /><br />So there are two possible net effects of the loan repayment. One possibility is for the bank to end up with the same total deposit liability that it had before the repayment, but more cash reserves. Another is for the bank to end up with a lower total deposit liability, but no change to its cash reserves.<br /><br />Now let's look at all of this from a macro perspective. Let's suppose the total balance in deposit accounts held at commercial banks is $5 trillion, and that the public also holds $2 trillion in government-issued currency notes, while the banks hold $1 trillion in government notes as cash reserves. Now suppose that in Year 1, the banks advance $2 trillion in credit to the public in the form of one-year loans, and that in Year 2, all of those loans are repaid, half with pre-existing deposit balances and half with currency notes. (And to keep it simple, suppose the public withdraws no additional cash following the loans.)<br /><br />So in Year 1, the total deposit liabilities of the banks go up from $5 trillion to $7 trillion. In Year 2, depositors pay the banks back in the amount of $2 trillion, half by drawing on their existing deposits and half by turning over some of their state money. After all is said and done, total deposit balances are now $6 trillion; total cash held by the public is $1 trillion and total cash held by the banks is $2 trillion.<br /><br />So the public has $1 trillion less in cash assets offset by $1 trillion more in deposit account assets. The banks have $1 trillion more in deposit account liabilities to the public offset by $1 trillion more in cash assets. The net effect is no different than if the public had simply deposited $1 trillion in cash.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36413992284418217162014-09-26T04:27:44.880-04:002014-09-26T04:27:44.880-04:00"Is this inconsistent with anything important..."Is this inconsistent with anything important anyone has said before?"<br /><br />No, but you can read to much into it, because you've gone straight to the contra net position. <br /><br />When you pay off a loan with state money or for that matter a gold bar, first you sell the state money/gold bar to the bank in return for a deposit.<br /><br />*Then* you use that deposit to pay off the loan. <br /><br />The net result is that the assets of the bank changes. Loans down, state money/gold bars up.<br /><br />So it isn't an atomic transfer. It is a sequence of creation and destruction matches from the underlying primitive transactions. <br /><br />NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-58231697969831202762014-09-26T04:24:44.511-04:002014-09-26T04:24:44.511-04:00"For the US dollar is and always was converti..."For the US dollar is and always was convertible, into very valuable merchandise."<br /><br />That's not a conversion. That's an exchange. A very important difference. <br /><br />Conversion means that the quantity of one element is reduced, and the quantity of the other is increased. <br /><br />So with a gold standard the fiat money is deleted when the gold is released into circulation from the vault. <br /><br />No deletion, no conversion.<br /><br />NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-40689967138364302052014-09-25T23:02:30.226-04:002014-09-25T23:02:30.226-04:00This comment has been removed by the author.yhttps://www.blogger.com/profile/03233997168975370006noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-669424702058288682014-09-25T21:18:28.482-04:002014-09-25T21:18:28.482-04:00Why is this an issue? Peter is completely right. A...Why is this an issue? Peter is completely right. A borrower can repay a loan with a third party liability accepted by the bank - in this case the liabilities directly issued by the central bank. After that happens, total commercial bank liabilities held by the non-bank private sector have been increased (whether in the form of deposit balances of BoS notes in circulation) and total central bank liabilities held by the non-bank private sector have been decreased.<br /><br />Is this inconsistent with anything important anyone has said before?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-23390050038073071182014-09-25T20:55:14.934-04:002014-09-25T20:55:14.934-04:00Peter, I don't see the issue at all. When the ...Peter, I don't see the issue at all. When the loan is repaid, 10k worth of bank liabilities (deposit) are destroyed, along with 10k of bank asset (loan). All transactions net to zero.<br /><br />When the 10k of cash is deposited, the bank gets 10k of assets (the cash), and 10k of liabilities are created (the deposit). <br /><br />To say that the original deposit's credit money (created by the loan) still exists and the credit money created from depositing the cash is what is destroyed, has no practical difference. Sure, there is technically a difference, but the numbers add up the same regardless, credit/money is fungible.<br /><br />Either way, when the loan is repaid 10k of deposit(bank liabilities) are destroyed, as well as 10k of bank assets (the loan).<br /><br />In the case of cash itself, everything still nets to zero. Whoever had the cash before the borrower has 10k less of cash (-10k), and now the bank has it (+10k). And if the car vendor wanted to withdraw his bank deposit, the bank would give him 10k. Everything works.Joehttps://www.blogger.com/profile/15197727918414570446noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-88098094876007283992014-09-25T20:29:56.187-04:002014-09-25T20:29:56.187-04:00"Why would someone borrow $10k if they have $..."Why would someone borrow $10k if they have $10k in cash to repay the loan?"<br /><br />It could be a bridging or payday type short term loan to see someone through who works the black economy. So they'd get most of their income in cash.<br /><br />It doesn't really matter. The theory should hold up for all possible scenarios. However unlikely they may be.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47905027398622831742014-09-25T19:51:05.601-04:002014-09-25T19:51:05.601-04:00Hey Joe -- Your accounting makes sense I believe.
...Hey Joe -- Your accounting makes sense I believe.<br /><br />If a borrower pulls out $10k cash to repay the loan, then that reinjects commercial bank money, via the loan to the bank of $10k. Still, when the loan is repaid, the commercial bank money is decreased.<br /><br />Again, this is not whatever happens. Why would someone borrow $10k if they have $10k in cash to repay the loan? How many people keep 100 $100 bills lying around for such purposes? Total fantasy...Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-57832134973056506582014-09-25T19:37:21.784-04:002014-09-25T19:37:21.784-04:00Peter Martin -- Calgacus addressed your extremely ...Peter Martin -- Calgacus addressed your extremely atypical example above. And I think you get the gist of it, as you noted that, "Commercial bank money is destroyed whenever the payee asks for it to be converted into State money." <br /><br />Similarly, commercial bank money is created whenever the payee deposits State money to a bank account. In your (extremely atypical) example, bank money is created by deposit of state money to a commercial bank account. <br /><br />As Calgacus said (and you apparently did not comprehend), your example shows 2 instances of commercial bank money creation. The loan repayment cancels one of these (eliminating commercial bank money).<br /><br />Again, this all an extremely unusual situation you have conjured up, where a loan is taken in commercial bank money and repaid in currency (cash). Don't be an idiot. Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-59132046070816292722014-09-25T19:33:35.004-04:002014-09-25T19:33:35.004-04:00sorry guys, the formatting looked good when I type...sorry guys, the formatting looked good when I typed the comment. soo, nevermind I guessJoehttps://www.blogger.com/profile/15197727918414570446noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-19406114327536362272014-09-25T19:32:39.630-04:002014-09-25T19:32:39.630-04:00This may not be the proper way to do T acct diagra...This may not be the proper way to do T acct diagrams, but it looks to me like repayment of the loan most certainly "destroys" the deposit that was created when a loan was issued. The 10k of cash that was deposited in the bank added to both the bank's assets and liabilities. So really, in the end, there is still the 10k deposit in the vendor's account, but that's offset by the 10k cash that was put in the bank.<br />Any issues with what I have? (I hope the formatting works, if not, paste into notepad)<br /><br /><br /> Bank<br /> Assets | Liabiliies<br /> ------------------<br />1. issue loan ) 10k loan | 10k deposit(borrower) (new 10k of bank credit created)<br />2. buys car ) 10k loan | 10k deposit(vendor) (deposit transferred to vendor)<br />3. deposits cash) 10k cash | 10k deposit(vendor) (new asset & new liability created)<br /> 10k loan | 10k deposit(borrow)<br />4. repays loan ) 10k cash | 10k deposit(vendor) (loan asset & 10k deposit destroyed)<br /><br /> Borrower<br /> Assets | Liabiliies<br /> -------------------<br />1. takes loan ) 10k deposit | 10k loan<br />2. buys car ) 0 deposit | 10k loan<br />3. deposits cash) 10k deposit | 10k loan<br />4. repays loan ) 0 | 0 loan<br /><br /> Vendor<br /> Assets | Liabiliies<br /> -------------------<br />1. ) 0 deposit | <br />2. ) 10k deposit | <br />3. ) 10k deposit | <br />4. ) 10k deposit | <br />Joehttps://www.blogger.com/profile/15197727918414570446noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-60296345783814409652014-09-25T19:05:19.133-04:002014-09-25T19:05:19.133-04:00Let’s make it all as simple as possible.
Let’s c...Let’s make it all as simple as possible. <br /><br />Let’s consider the example of someone walking into the Royal Bank of Scotland to borrow one of their £10 notes. The RBS are one of those banks ‘north of the border’ who are allowed to print their own banknotes. They are essentially their IOUs . So these notes are the type of credit money we have been talking about. They tend to be well accepted in Scotland but less so in England.<br /><br />So they borrow £10 and spend it on whatever! When the time comes to repay the RBS the borrower could , leaving aside the complications of fees and interest payments, give them a Bank of England £10 note, the BoE being the Central bank of the UK, and the debt is cleared. The credit money is still in circulation. It isn’t destroyed.<br /><br />Alternatively, they could repay with a RBS £10 note in which case the credit money is destroyed.<br /><br />I probably should have said “not necessarily” rather than “they don’t” but I think that’s all there is to the argument.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-83172616174531842942014-09-25T16:42:50.921-04:002014-09-25T16:42:50.921-04:00But I am not a fan of "inconvertibility/conve...<i>But I am not a fan of "inconvertibility/convertibility" as expressed it in that blog. I prefer when he says things like there is no such thing as fiat money, there is only sovereign money.</i><br /><br />Another point of difference between the circuitist and MMT. They claim that there is no difference between bank money and state money and it's all really bank money, since bank money greatly predominates. According to MMT, it's all sovereign money and banks are agents of the state.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com