tag:blogger.com,1999:blog-2761684730989137546.post9188877384374735585..comments2024-03-28T20:28:01.733-04:00Comments on Mike Norman Economics: Steve Keen to Mish — Why banks can't lend reservesmike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-2761684730989137546.post-7147795081009149242016-01-11T13:06:41.143-05:002016-01-11T13:06:41.143-05:00Not sure what you mean by "inflationary."...Not sure what you mean by "inflationary." Inflation" relates to price level. <br /><br /><i>I)The liabilities are inflationary to the money stock as would any check.</i><br /><br />When a bank makes a loan and creates a deposit, M1 money stock increases, That is, M in MV=PQ increases.<br /><br />This is not necessarily inflationary since Q (quantity or output) in MV = PQ can also increase and as long as the economy can expand, Q does tend to increase in order to make greater profit. V (velocity) is also a variable that changes with saving desire.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-3484723352446717482016-01-11T12:27:22.392-05:002016-01-11T12:27:22.392-05:00The way of credit:
1) Buyer approaches Buyer bank ...The way of credit:<br />1) Buyer approaches Buyer bank for a loan and it is approved<br />2) Buyer signs promissory note (negotiable instrument) and consequently Buyer bank creates an account for Buyer with the appropriate funds.<br />3) The Buyer funds are labeled "liabilities".<br />4) Buyer makes a purchase with the banks "liabilities.<br />5) The Seller deposits the "liabilities" in Seller bank.<br />6) The Seller redeems the "liabilities" in Buyer bank.<br /><br />Two facts about the liabilities:<br /><br />I)The liabilities are inflationary to the money stock as would any check.<br /><br />II) The liabilities are not commodities. They are created ex-niholo, and are factually endogenous to the commercial banking system. They are created entirely independent of government, hence a special fiat liability.<br /><br />Question: When the "liability" returns to the Buyer bank are the bank's not balanced by the inflation? The Buyer bank pays the Seller bank what? As soon as the Seller bank receives payment, which is basically numbers in a computer, there is inflation. With the resulting inflation doesn't the Buyer bank balance their book with either<br /><br />a)New deposits<br />b)Interbank Loans<br />c)Federal Reserve's discount window <br /><br />All of these which are the result of the additional money in the money stock?<br /><br />So where is the Consideration?se7ensnakeshttps://www.blogger.com/profile/01424554929826183455noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-49103136128343573252012-07-17T16:18:43.706-04:002012-07-17T16:18:43.706-04:00Paul:
Show me with numbers.
I kind of already di...Paul:<br /><br /><i>Show me with numbers.</i><br /><br />I kind of already did.<br /><br /><i>Create a realistic hypothetical illustrating the flows in the cycle that distributes wealth fairly so that the system doesn't self-destruct.</i><br /><br />See above.<br /><br /><i>Wealth is measured in math terms, so accounting for how it gets distributed should be easy.</i><br /><br />Wealth is actually measured in subjective value terms.Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-89578506307399435532012-07-16T20:42:24.423-04:002012-07-16T20:42:24.423-04:00"Wealth, real wealth is SOLD by those who pro...<em>"Wealth, real wealth is SOLD by those who produce."<br /><br />"I don't know if there can be a more destructive and counter-productive attitude than this."<br /></em><br /><br />Show me with numbers. Create a realistic hypothetical illustrating the flows in the cycle that distributes wealth fairly so that the system doesn't self-destruct.<br /><br />Wealth is measured in math terms, so accounting for how it gets distributed should be easy.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-22462377613172654542012-07-16T18:20:46.228-04:002012-07-16T18:20:46.228-04:00Paul:
As long as we have a system where all of t...Paul:<br /><br /><br /><i>As long as we have a system where all of the wealth is captured by the few, I'm in favor of things that devalue that wealth.</i><br /><br />I don't know if there can be a more destructive and counter-productive attitude than this.<br /><br />Wealth, REAL wealth, is not "captured" by those who produce and earn money. Wealth, real wealth is SOLD by those who produce.<br /><br />If those who sell goods and services for money, choose to hoard their money and not spend it, then, and seemingly counter-intuitive to people who think like you, they are effectively working for your real standard of living benefit <i>for free</i>. <br /><br />For consider. Suppose I sell you a good for $100, and then "hoarded" the money. Suppose I then sold you another good for $100, and again I "hoard" the money. As I am hoarding cash, you are receiving REAL goods. Since I am not spending the money you are giving to me, what happens is that you are benefited doubly in the following way:<br /><br />You receive goods worth $200. With the remaining money you have, it is MORE valuable and thus can enable you to buy MORE goods compared to if I added the $200 to nominal demand in the economy and purchased goods for myself. Instead of both of us competing for goods and services with our money, only YOU are competing to buy goods. Because of that, you pay lower prices, which is the same thing as saying you can buy MORE goods.<br /><br />Oh what a boon to humanity are cash hoarders! For they are selfless producers who do not acquire as many real goods for themselves, which means there are more available for everyone else to the extent of the hoarder's real productivity!<br /><br />Imagine a population of equally productive 100 people and out of those 100 people, 50 people are cash hoarders and they don't buy any goods from anyone else. With 50 people producing and NOT buying goods, it means there are TWICE as many goods available for the remaining 50 people who don't cash hoard! The money they spend is TWICE as valuable!<br /><br />What you are doing is conflating riches and wealth. <br /><br />Not only that, but the destructiveness of your attitude goes even deeper. For not only does inflation NOT benefit "the poor", those who spend most of that they earn, but inflation HURTS the poor the most, because newly created money is typically received by wealthy people FIRST, and so the money the wealthy DO spend, is in part NOT a result of them producing in the past for other people's benefit, but merely being the initial recipients to inflation, which redistributes wealth from poor to rich!<br /><br /><i>…compared to what you otherwise would have had your entire life and not "notice" it.</i><br /><br /><i>No one can know what they could have had otherwise but I already have more than I need.</i><br /><br />We can use logic to set constraints on what COULD possibly have occurred otherwise.<br /><br />And you don't have more than you need, or else you would cease acting. Clearly since you're still acting, you're not satisfied.<br /><br /><i>My quality of life depends to a large degree on other folks also having a good quality of life.</i><br /><br />In what way?<br /><br /><i>Society is meant (for me) to be a step up from the Law of the Jungle.</i><br /><br />Then why do you advocate jungle tactics of aggression and why do you treat economic competition as zero sum as it is in the jungle?<br /><br /><i>If I am succeeding at the expense of someone else it concerns me, as does needless human suffereing.</i><br /><br />Inflation allows others to succeed at your expense.Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-65581977276090206532012-07-16T18:20:26.552-04:002012-07-16T18:20:26.552-04:00Paul:
Yes. I've been pointing that out for se...Paul:<br /><br /><i>Yes. I've been pointing that out for several years now. Especially in comparison to the top 0.1%</i><br /><br /><i>It's a problem of distribution of wealth, not inflation, and it has been caused largely by the lowering of taxes on the rich.</i><br /><br />No, it's a problem of inflation. The last vestiges to gold was dropped in 1971, and made effective 1973. Thereafter, worker real wages could be continually eat into in a stealthy manner.<br /><br />Increasing government deficits also contributed, as it lead to more real resources directed to government plans for its power, and fewer real resources directed to producer plans for the consumer.<br /><br />Redistribution of wealth is in large part caused by inflation, since inflation always tends to enter the market at distinct points, where relatively wealthier people tend to do business. Wall Street, Washington DC, etc. Look up Cantillon Effect.<br /><br /><i>Letting the few accumulate that much wealth gives them too much power, and removes dollars needed for transactions (spending) from the economy.</i><br /><br />That just makes the remaining dollars in circulation more valuable. People cannot get as wealthy by hoarding money as they could in investing it for profit.Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27887028452684858482012-07-16T17:12:28.624-04:002012-07-16T17:12:28.624-04:00"The real wages of goods producing laborers f...<em>"The real wages of goods producing laborers for example, have stagnated since the early 1970s."</em><br /><br />Yes. I've been pointing that out for several years now. Especially in comparison to the top 0.1%<br /><br />It's a problem of distribution of wealth, not inflation, and it has been caused largely by the lowering of taxes on the rich.<br /><br />Letting the few accumulate that much wealth gives them too much power, and removes dollars needed for transactions (spending) from the economy.<br /><br />As long as we have a system where all of the wealth is captured by the few, I'm in favor of things that devalue that wealth.<br /><br /><em>…compared to what you otherwise would have had your entire life and not "notice" it.</em><br /><br />No one can know what they could have had otherwise but I already have more than I need.<br /><br />My quality of life depends to a large degree on other folks also having a good quality of life. Society is meant (for me) to be a step up from the Law of the Jungle.<br /><br />If I am succeeding at the expense of someone else it concerns me, as does needless human suffereing.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-42948872399005134382012-07-16T15:34:59.596-04:002012-07-16T15:34:59.596-04:00Paul:
Inflation doesn't concern me, I've ...Paul:<br /><br /><i>Inflation doesn't concern me, I've been around for 65 years and I've never even noticed it.</i><br /><br />Of course you won't "notice" what is unobservable, i.e. a world without inflation. You can experience a gradually declining standard of living <i>compared to what you otherwise would have had</i> your entire life and not "notice" it. <br /><br />A world without inflation must be understood. We can understand the possible world without inflation by identifying the logical categories that constrain <i>all</i> possible worlds, which enables us to know the extent of what is empirically possible. It's not much, but it's something.<br /><br /><i>It was just as hard to pay for gas then as it is now, and I have a better standard of living than i did growing up.</i><br /><br />The fact that it is just as hard to pay for gas then as it is now for you should signal to you the possibility that maybe it could have been easier to pay for gas had it been for ideas and actions being different than they were. Instead of gas being the same in terms of real costs, maybe it would have been far lower in real costs, but we just never experienced it because of the ideas and actions that past generations and current generations of people have made.<br /><br />Yes, most people your age do have a better standard of living now then when you grew up. But for those who are a lot younger than you, those born in the 1970s and after, their standard of living has not appreciably changed at all, regardless of what GDP statistics say (which of course includes all government spending, no matter how wasteful, dollar for dollar).<br /><br />The real wages of goods producing laborers for example, have stagnated <a href="http://i.imgur.com/EEBmi.jpg" rel="nofollow">since the early 1970s.</a>Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-64084360044105216432012-07-16T13:44:01.262-04:002012-07-16T13:44:01.262-04:00@Major
Sorry, forgot this…
"What is the sol...@Major<br /><br />Sorry, forgot this…<br /><br />"What is the solution? End the credit expansion and inflation so as to prevent the boom from occurring."<br /><br />I'm with you on the credit expansion part 100%.<br /><br />It makes no sense to me to consume stuff in excess of savings and future income earned. It's a trap that cannot be reversed without a lot of pain.<br /><br />Inflation doesn't concern me, I've been around for 65 years and I've never even noticed it. I remember when gas was $0.20/gallon.<br /><br />It was just as hard to pay for gas then as it is now, and I have a better standard of living than i did growing up.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-11613337871912132912012-07-16T13:38:25.450-04:002012-07-16T13:38:25.450-04:00"A bank issuing a loan unbacked by prior savi..."A bank issuing a loan unbacked by prior saving will generate more "financial assets" AND "financial liabilities" than real assets"<br /><br />Assets is a slippery term but you have to start somewhere.<br /><br />Total wealth in the U.S is estimated to be in the $200 Trillion range.<br /><br />The total amount of Net Financial Assets is obviously the National Debt™ or about $16 Trillion, $10.5 Trillion of which is bonds and $5 Trillion of which is held by foreigners.<br /><br />Currently there is $54.5 Trillion in credit outstanding in the U.S.<br /><br />So it looks like "real" wealth exceeds nominal wealth by quite a bit.<br /><br />The problem is, a great deal of the real and financial wealth is held by less than 1% of the population, and a substantial percentage of the liabilities are held by us regular folks.<br /><br />There is no mathematically possible way (under the current system) for us to claw back any of that wealth to extinguish our liabilities (without new money creation by the government).paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-76161478132201876512012-07-16T13:23:32.800-04:002012-07-16T13:23:32.800-04:00Paul:
I assume you mean new real assets created t...Paul:<br /><br /><i>I assume you mean new real assets created through production financed by the loan, because nominal amounts have been accounted for.</i><br /><br />No, I mean an accounting entry that Keen ignored. A bank that owns reserves will have an asset entry corresponding to those reserves. If the bank lends those reserves, which is what Keen assumed for argument's sake, then we have to include along with the reduction in assets due to lending the reserves, a corresponding increase in loan asset. Keen ignored this. He just assumed that lending reserves will result in only an entry for the reduction in reserve asset, and an entry for the increase in deposit liability. He didn't add the increase in loan asset.<br /><br /><i>So, new real assets are created and the total amount of real assets is levered up since the net amount of financial assets has remained the same. This means there is less money chasing more goods which leads to price deflation including wages. In the meantime, debt service remains denominated in the "old" value of dollars. Debt becomes a greater burden over time, crushing the ability of workers to spend.</i><br /><br /><i>Got a solution?</i><br /><br />I would say you have things backwards. A bank issuing a loan unbacked by prior saving will generate more "financial assets" AND "financial liabilities" than real assets. A bank issuing a loan is not a bank producing a real capital asset like a factory or machine. So what happens is that there is MORE money chasing the SAME goods. And in the meantime, because the credit expansion misleads investors into acting as if there is more saving than there really is, credit expansion alters the productive structure of the economy in such a way that requires accelerating credit expansion to sustain. This of course is not possible in the long run, which is why at some point, banks will stop sufficiently accelerating credit expansion, and the result is a "credit crunch", corrections to investments dependent on accelerating credit expansion, unemployment, drop in output, etc.<br /><br />What is the solution? End the credit expansion and inflation so as to prevent the boom from occurring.Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-1405824929475190492012-07-16T12:11:54.378-04:002012-07-16T12:11:54.378-04:00"Keen ignored the asset creation that is brou..."Keen ignored the asset creation that is brought about by the loan."<br /><br />I assume you mean new real assets created through production financed by the loan, because nominal amounts have been accounted for.<br /><br />So, new real assets are created and the total amount of real assets is levered up since the net amount of financial assets has remained the same.<br /><br />This means there is less money chasing more goods which leads to price deflation including wages.<br /><br />In the meantime, debt service remains denominated in the "old" value of dollars.<br /><br />Debt becomes a greater burden over time, crushing the ability of workers to spend.<br /><br />Got a solution?paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-63935549578700954952012-07-16T03:38:42.436-04:002012-07-16T03:38:42.436-04:00Keen's accounting is off.
He wrote:
"Th...Keen's accounting is off.<br /><br />He wrote:<br /><br />"The way that accountants keep track of the "assets equals liabilities plus equity" rule is to record an increase in assets as a positive and an increase in liabilities as a negative (your liabilities rise, so a negative gets bigger). Reserves are an asset [of the bank], as are loans, and shown as a positive. Deposits—which are created by a loan—are a liability and shown as a negative.<br />So to lend to a customer, a bank has to show a negative on that customer's accounts. This can be matched by a positive on the loans entry--because the loan has increased in size. No problem.<br />But if banks were to lend from reserves, they would need to record a minus there--reserves have fallen. And on the liabilities side, they want to ... also show a negative. Whoops! No can do."<br /><br />Keen ignored the asset creation that is brought about by the loan.<br /><br />His statement "If a bank were to lend reserves", should be followed by "they would convert the reserve asset into a loan asset."<br /><br />If the borrower deposited the loan money back into the same bank, then the bank would record an increase in asset (reserve) and increase in liability (deposit).<br /><br />Typically though, the borrower will spend the money and the money will end up in another bank, in which case that other bank would record an increase in assets (reserves) and increase in liabilities (deposits).<br /><br />There is no accounting violations implied in lending reserves.Major_Freedomnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67384638512558800752012-07-15T11:39:29.800-04:002012-07-15T11:39:29.800-04:00@ Viorel Teodorescu
Good points, Viorel. This is ...@ Viorel Teodorescu<br /><br />Good points, Viorel. This is the kind of analysis that philosophers/logicians now do to make clear what is being talked about. Lots of confusion results from mixing the physical, nominal, informational, and conceptual.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-77939331945339471972012-07-15T09:54:21.689-04:002012-07-15T09:54:21.689-04:00hey, guys - I think it is important to see that th...hey, guys - I think it is important to see that there are various layers here, and if we mix the layers up, great confusion will arise. <br /><br />1. There is a conceptual layer: I get a loan from a bank, the bank extends credit.<br /><br />2. the accounting layer: my promise to pay gets registered as an asset, my account balance is increased and that gets registered as a liability.<br /><br />3. The reserve accounting layer. The liability has to get worked out through the system of inter-bank and reserve accounting<br /><br />4. A physical layer: I walk into a bank and sign some big white bits of paper with legalese on them, and they hand me over smaller bits of paper with nice colours on them<br /><br />They all represent the same thing, just in different ways. Also, the lower layers suppport the higher layers, making them possible.<br /><br />Similar things happen in computer communications supporting, among others, the blog and the reply I am writing. <br /><br />Conceptually, I am writing a reply to a blog. This message gets picked up by the lower layers, diced up in various ways, ultimately packaged as electrons going down the wire, until it gets to the Mike Norman Economics blog, where it gets re-packaged and displayed for all to enjoy.<br /><br />Very similar process in banking. My conceptual loan gets split up in its components by the bank systems and inter-bank systems, until it makes its way into my back pocket. <br /><br />If we stay within one layer, all is clear. If we try and mix up layers, or try and interpret the answer of one person into a different layer, all sort of confusion will arise.Anonymoushttps://www.blogger.com/profile/13952399787017839385noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-2164794368074865532012-07-15T06:02:43.234-04:002012-07-15T06:02:43.234-04:00Does this solve the problem?
To the extent that a...Does this solve the problem?<br /><br />To the extent that a bank is expanding its lending FASTER than other banks, it must run down its reserves (or assets that can easily be turned into reserves, e.g. Treasuries). That is because lending $X will result in the $X being deposited at other banks, which in turn means shifting $X from the “quickly expanding” bank’s account at the central bank to the accounts of other banks. In this case, reserves ARE BEING lent out.<br /><br />In contrast, to the extent that all banks are expanding their lending by the SAME AMOUNT, their accounts at the central bank can be left pretty much untouched. So reserves are not being lent out.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-36099857661622479592012-07-14T15:01:38.185-04:002012-07-14T15:01:38.185-04:00Banks take risk assessment and capital cost as wel...Banks take risk assessment and capital cost as well as interest rate cost into account wrt to loan extension and pricing. What I mean by, "Banks make loans and then do liquidity, risk and capital management based on loans extended," is that banks look to their reserve balances for adjusting reserve level, and they look at changes in risk in figuring how much capital is needed as loss provision. It's not just make a loan and then forget about it. The bank is risking its capital to turn a profit, while meeting requirements, and this requires constant management of the loan portfolio. Banks like to stay as close to requirements as comfortable in order to maximize use of capital, while leaving enough leeway for the unanticipated, e.g., having to pay the penalty rate is a cost that management does its best to avoid.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-64801401584261044652012-07-14T14:51:52.056-04:002012-07-14T14:51:52.056-04:00Dan K: "Do changes in reserve quantities caus...Dan K: "Do changes in reserve quantities cause loan activity to change, or do changes in loan activity cause changes in reserve quantities?"<br /><br />That is indeed is the question, Dan. When a bank lends AND the funds are withdrawn however the banks reserves fall until the netting is intra-bank. As long as the deposit is not drawn upon, there is no change in reserves, either rb or vault cash.<br /><br />The loan creating the deposit is only the accounting entries, loan as bank asset and deposit as bank liability, and deposit as borrowers asset and the loan as borrowers liability. When and how the borrower draws down the deposit is at the borrower's discretion.<br /><br />The relevant question is the direction of flow, since that determines the causation. No explanation of "loaning out reserves" changes that. Banks make loans and then do liquidity, risk and capital management based on loans extended.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-17385862331119677582012-07-14T14:21:42.166-04:002012-07-14T14:21:42.166-04:00Right, Tom. And not necessarily directed at you, ...Right, Tom. And not necessarily directed at you, actually; just a general point. <br /><br />In my published research, I've been very careful with that distinction. I notice that I haven't always done so in my blog posts, unfortunately, and that's become a dangerous standard in cyberspace as well as in research and textbooks. <br /><br />The NY Fed's annual reports on open market ops are very specific on this point.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-62077083250785100312012-07-14T13:36:52.734-04:002012-07-14T13:36:52.734-04:00Tom, it's sort of like the question, "Can...Tom, it's sort of like the question, "Can I sell my property?"<br /><br />On the one hand, someone might say, "No, because once you sell something it is no longer your property. So nothing can be both (a) your property and (b) something you have sold at the same time." But a more natural answer is, "Sure, if something is your property, you are allowed to sell it, and if you do sell it, then you have sold your property."<br /><br />I think we should say the same thing about the question, "Can a bank lend its reserves?" One answer might be, "No, because once a bank has lent some money, that money is no longer part of its reserves. So no money can be both (a) a part of bank reserves and (b) money the bank has lent at the same time."<br /><br />But another viable answer would be "Sure, because a bank's vault cash is part of its reserves, and the bank can lend its vault cash."<br /><br />But,these are really just logical and semantic questions - What does "reserves" mean? What does "lend" mean. But the real debates in economics take place after the meanings of terms are fixed, and are empirical questions about the propagation of causal influence, about what actions and events do or do not cause other things to happen. The big question in this area is, "Do changes in reserve quantities cause loan activity to change, or do changes in loan activity cause changes in reserve quantities?" A lot of mainstreamers seem to think its the first disjunt that is true. But MMT and other post-Keynesians say it is the second.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-53390840931896984452012-07-14T13:10:31.604-04:002012-07-14T13:10:31.604-04:00Ugh, what a mess. This is the shoddiest thing I...Ugh, what a mess. This is the shoddiest thing I've ready all week:<br /><br />> The way that accountants keep track of the "assets equals liabilities plus equity" rule is to record an increase in assets as a positive and an increase in liabilities as a negative (your liabilities rise, so a negative gets bigger). Reserves are an asset, as are loans, and shown as a positive. Deposits--which are created by a loan--are a liability and shown as a negative.<br /><br />First of all, NO.<br /><br />Accountants DON'T treat assets as positive and liabilities as negatives. BOTH sides of the balance sheet have positive entries. The asset side shows all the STUFF that is owned by the business. The liability side shows WHO OWNS that stuff.<br /><br />If the business acquires an asset, it gets dumped on the asset side AND a corresponding "who owns this" is dumped on the liability side.<br /><br />The bank can start with cash assets and pure equity (the investors in the bank). The bank could have also started with cash assets and a mix of equity + bonds on the right side (if the bank issued bonds to raise money.<br /><br />Now let's trace through the "banks lend reserves" model.<br /><br />If the bank gives out a loan that is withdrawn, cash leaves the bank. The asset side cash balance goes down by the size of the loan. But an asset ALSO gets added ... the promise to pay back the loan by the customer. The liability side does not need to change AT ALL.<br /><br />If the bank gives out a loan that is not withdrawn yet (say a line of credit), the undrawn cash stays on the asset side AND a promise to pay gets added to the asset side. The balance sheet size increases. However, something ALSO gets added to the liability side. The borrower's claim (to the line of credit) is added. The balance sheet stays balanced.<br /><br />This is the simplest "banks lend reserves" framework, and it is perfectly consistent. Steve Keen can't "trick" it into inconsistency.<br /><br />The only question is whether this model is APPLICABLE in the real world. For example, in this "lending reserves" model, banks cannot lend out until they have cash reserves.<br /><br />In a "no lending reserves" model, banks can immediately give out 10x (or whatever the capital ratio inverse is) and expect the CB to provide reserves as needed.marrishttp://leavesofliberty.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-78804325142620199042012-07-14T12:27:00.775-04:002012-07-14T12:27:00.775-04:00STF: "Reserves = reserve balances + vault cas...STF: "Reserves = reserve balances + vault cash"<br /><br />Thanks for clarifying Scott. I was not precise in stating that in terms of reserves as a category and rb as a component.<br /><br />This doesn't change the thrust of the argument. It implies it is logically impossible to "loan out" reserves through cash withdrawal, since as soon as the cash changes hands at the window it is no longer vault cash and no longer considered under the category of reserves as def=rb + vault cash.<br /><br />Monetary base/HPM def= reserves <i>(rb + vault cash)</i> + cash in in circulation outside the FRS and depository institutions. Again, a clear separation.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-54832204185982442692012-07-14T12:24:39.519-04:002012-07-14T12:24:39.519-04:00A simple way to look at it is a bank can only lend...A simple way to look at it is a bank can only lend its reserves to another entity with a reserve account.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-21830946194874209812012-07-14T12:03:59.419-04:002012-07-14T12:03:59.419-04:00Reserves = reserve balances + vault cash
Very imp...Reserves = reserve balances + vault cash<br /><br />Very important not to confuse reserves and reserve balances.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-12040823782131978102012-07-14T11:38:28.262-04:002012-07-14T11:38:28.262-04:00Dan, I am so insistent because you are heading for...Dan, I am so insistent because you are heading for the same trap that Krugman fell into. In no sense do banks lend reserves when deposits resulting from loans are drawn down in cash. Cash and are not the same bank reserves. It counts for required reserves in accounting. Both cash and reserves are currency and make up HPM. Vault cash and reserves in the bank's reserve account at the Fed are both bank assets. They are recorded in separate accounts and are in no sense the same thing. <br /><br />Banks don't "loan out" anything. That idea is nonsense. Banks make loans against their capital, which puts capital at risk. It's not like making a loan to a friend from one's wallet. This a false analogy.<br /><br />Loans create deposits and both exist on the banks books as corresponding assets and liabilities. Reserves are bank assets on the cb spreadsheet and cb liabilities. As Keen correctly says, it is logically impossible to loan out reserves since it is an accounting nonsense. <br /><br />Deposits can be withdrawn in two ways, in cash or by issuing a physical or electronic check, which gets settled in reserves after netting. The loan and deposit are separate from the use of the deposit by the customer, as Chris Cook emphasizes. <br /><br />Deposti account drawdowns that are not saved (cash under the mattress) are used in transactions, the final settlement of which is either spot in cash or through intermediation in bank reserves (after netting). No sane person borrows at interest to save; people borrow to spend, or their spending constitutes borrowing (credit cards). Settlement comes afterward, both temporally and logically.<br /><br />I am persistent in this because it is important to MMT to get the terminology and operations right. A seemingly small slip can lead to great mistakes.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com