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Could you elaborate a bit more? I feel like I'm missing something. Let's say A puts $100 in the bank. The bank loans $50 to B while still telling A that his fu

by sirsar 11y ago

Could you elaborate a bit more? I feel like I'm missing something. Let's say A puts $100 in the bank. The bank loans $50 to B while still telling A that his full $100 is available for withdrawal. (Fractional reserve.) B pays C $50 for services. The services fail to make a profit for B and B defaults on the bank loan. The bank writes it off as a loss. In this scenario, after a default, A still has $100 and C has $50. Total money supply is $150; money supply delta is +50. Say instead that B gets $55 from D (the services were a good investment), and pays back the loan with $5 as interest. Now the money supply delta is 0: (100 0 0 55) has changed to (100 0 50 0) plus 5 profit for the bank. The only thing I can think of is fractional reserve requirements somehow cause the new money in the first scenario to disappear.

neffy 11y ago
You're missing double entry book keeping essentially. The economic textbook examples of this are mostly flat out wrong. The mistake that just keeps getting repeated in the economic literature is to confuse the two different kinds of money in the system. Banks are essentially performing statistical multiplexing between asset cash, and liability deposit accounts. So - A puts $100 in a bank. Double Entry Bookkeeping (DEB), that's: [debit cash, credit deposit account] Bank loans $50 to B: That's [debit loan (also an asset, creating it), credit deposit B] Total assets: $150, total liabilities: $150 Notice B never got physical asset cash - they got a deposit account. Only if B withdraws the cash, or transferred the money to another bank, does physical cash get touched. Let's say B just bought something from A with the money, that would be: [debit deposit account B, credit deposit account A] Loan gets written off. In this scenario, the bank has no interest income, no profits, and no capital. It would get closed down by the FDIC before it ever got a chance to lend B any money :) But in a more usual case, where is has received some interest income - which would be [debit account B, credit bank interest income], it would first deduct against its required loss reserves, then its interest income, also removing that amount of the loan, [credit loan, debit loss reserves], then from any other profits, and finally from its capital holdings. Note, credit and debit mean different things depending if the ledger is an asset or a liability - the right hand side is what you think it should be, and the left hand side isn't.
- bcg1 11y ago
  To quantify; the deposits are (generally) M1: https://research.stlouisfed.org/fred2/series/M1 https://research.stlouisfed.org/fred2/series/M1 The "created" money is the delta between M1 and M2: https://research.stlouisfed.org/fred2/series/M2 https://research.stlouisfed.org/fred2/series/M2 There is also M3 but those numbers are no longer reported so I am ignoring for the sake of brevity and because "you get the point"

by sirsar 11y ago

neffy 11y ago

You're missing double entry book keeping essentially. The economic textbook examples of this are mostly flat out wrong. The mistake that just keeps getting repeated in the economic literature is to confuse the two different kinds of money in the system. Banks are essentially performing statistical multiplexing between asset cash, and liability deposit accounts. So - A puts $100 in a bank. Double Entry Bookkeeping (DEB), that's: [debit cash, credit deposit account] Bank loans $50 to B: That's [debit loan (also an asset, creating it), credit deposit B] Total assets: $150, total liabilities: $150 Notice B never got physical asset cash - they got a deposit account. Only if B withdraws the cash, or transferred the money to another bank, does physical cash get touched. Let's say B just bought something from A with the money, that would be: [debit deposit account B, credit deposit account A] Loan gets written off. In this scenario, the bank has no interest income, no profits, and no capital. It would get closed down by the FDIC before it ever got a chance to lend B any money :) But in a more usual case, where is has received some interest income - which would be [debit account B, credit bank interest income], it would first deduct against its required loss reserves, then its interest income, also removing that amount of the loan, [credit loan, debit loss reserves], then from any other profits, and finally from its capital holdings. Note, credit and debit mean different things depending if the ledger is an asset or a liability - the right hand side is what you think it should be, and the left hand side isn't.

bcg1 11y ago
To quantify; the deposits are (generally) M1: https://research.stlouisfed.org/fred2/series/M1 https://research.stlouisfed.org/fred2/series/M1 The "created" money is the delta between M1 and M2: https://research.stlouisfed.org/fred2/series/M2 https://research.stlouisfed.org/fred2/series/M2 There is also M3 but those numbers are no longer reported so I am ignoring for the sake of brevity and because "you get the point"