3 ms·

When you say money, you mean M0. When GP says money, they mean M2.

nicobn 11y ago
Indeed. I think what I'm trying to clear up is that the "money" created by banks is not "free money". It is a carefully crafted game of musical chairs on the bank's balance sheet. Bottomline is, the loan is an asset and the deposit is a liability. Banks don't create M0.
- jonasvp 11y ago
  No, but nobody cares about M0. It's M2 that creates demand in the marketplace. As soon as a bank fails, all that created M2 disappears from circulation and that's what crashes economies ("too big to fail"). In a full-reserve banking system (M0 = M2) nobody would care about crashing banks. > Bottomline is, the loan is an asset and the deposit is a liability. I used to be as skeptical as you about the full-reserve crowd but that point is actually what got me thinking: banks are the only players in the economy for whom giving out loans is a balance-sheet extension (what you're describing). They're worth more, the more loans they give out. For everybody else, giving out a loan doesn't change their net worth! They're just exchanging one asset (money) against another asset (an IOU from someone). In other words: banks are special and are not allowed to fail, because we let them create money.
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Intermernet 11y ago
For anyone else not up to spec on the lingo: Definition of M0, M1, M2, M3, M4 [1] >Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country. M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice. [1]: http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4 http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4

Indeed. I think what I'm trying to clear up is that the "money" created by banks is not "free money". It is a carefully crafted game of musical chairs on the bank's balance sheet. Bottomline is, the loan is an asset and the deposit is a liability. Banks don't create M0.

jonasvp 11y ago
No, but nobody cares about M0. It's M2 that creates demand in the marketplace. As soon as a bank fails, all that created M2 disappears from circulation and that's what crashes economies ("too big to fail"). In a full-reserve banking system (M0 = M2) nobody would care about crashing banks. > Bottomline is, the loan is an asset and the deposit is a liability. I used to be as skeptical as you about the full-reserve crowd but that point is actually what got me thinking: banks are the only players in the economy for whom giving out loans is a balance-sheet extension (what you're describing). They're worth more, the more loans they give out. For everybody else, giving out a loan doesn't change their net worth! They're just exchanging one asset (money) against another asset (an IOU from someone). In other words: banks are special and are not allowed to fail, because we let them create money.
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Intermernet 11y ago

For anyone else not up to spec on the lingo: Definition of M0, M1, M2, M3, M4 [1] >Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country. M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice. [1]: http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4 http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4