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IMHO, the easiest way for an engineer to understand "money" is as a network of debits and credits. Forget theory, ideology, and politics for a moment. Let's fo
by cs702 11y ago
IMHO, the easiest way for an engineer to understand "money" is as a network of debits and credits.
Forget theory, ideology, and politics for a moment. Let's focus on the mechanics of how things work.
When a bank lends money to a company, the bank and the company book corresponding accounting entries and money is created "out of thin air." (The bank is required to hold a minimum reserve balance, which they can borrow as needed from others in the financial system, or from a central bank).
When a central bank (like the Federal Reserve or the Bank of England) lends money to a bank, the central bank and the bank book corresponding accounting entries and money is created "out of thin air." Central banks literally click a button and create accounting entries.
When you borrow money from a bank, the bank books the corresponding accounting entries, and you probably won't record anything on an accounting program -- but your bank will keep track of all balances, to the cent.
When a borrower cannot pay back a loan from a bank, the bank writes off the loan balance, and reduces the borrower's liability by an equal amount.
The balance you have on your bank account is a liability on your bank's accounting books.
The balance on your credit card is an asset on your credit card company's accounting books.
When you buy something and pay with a check or a debit card, the financial system records all the necessary accounting transactions to update everyone's debit and credit balances.
The dollar bills you hold in your wallet are nothing less than 'certificates' indicating that the US government has a liability of the amount shown on those dollar bills, payable to the holder of those dollar bills.
In our modern economic system, the easiest way to understand money is as a global, mostly electronic network of accounting debits and credits, with balances varying as people conduct transactions.
For every debit there is an equal credit, and vice versa, so globally, total debit balances are always equal to total credit balances, and total debit transactions are always equal to total credit transactions.
Double-entry bookkeeping all the way down.
It is really quite something to behold.
- Retric 11y agoMany things that are not money get treated as money. The Fed has a database that lists each bank and the actual money they have, that plus physical cash makes up the actual money supply. On top of that we have a huge range of money like debts and credits, but that's why they talk about M1 vs M2 vs M3 etc. Remember, if you deposit a 100$ bill the bank now has 100$ and marks you down with an IOU. That does not mean there is suddenly an extra 100$, you have an IOU and the bank has 100$.
- RobertoG 11y agoYou are mixing money with cash. Cash is money created directly by the government but, when the government pay their providers in their accounts they don't use cash; they (or I should say 'we') just increment a number in a computer and that money is equally valid that cash because it's equally valid to pay taxes. It's money so real as any coin or bank note.
- ThrustVectoring 11y agoThe "can you pay taxes with this" is a really important point. It's why the US dollar is valuable - if you want to do business in the US, you have to pay taxes, and the US government only accepts dollars.
- chii 11y agoIf you do business with US dollars, you automatically have the thing you need to pay taxes. But what if you bartered instead? Does it count? Does the IRS know, since you won't have paper trail records of payment.
- ThrustVectoring 11y agoIt counts. You might get away with it, but if the IRS knows they will send people with guns to arrest you. Re: automatically having the thing you need to pay taxes - this is exactly why you can go to the grocery store and buy stuff with US dollars.
- Retric 11y agoCash and electronic cash are interchangeable. Banks can literally just exchange them. Picture Bank A with 10 million$ on hand. Now, Bank A tells Bank B, I want to transfer 200 million to account XYZ. What stops this from working? Well bank A and B are both talking to the Fed and the Fed says bank A does not have 200 million. The same thing stops Bank A from just ordering 20 million in cash. PS: Don't forget there are still plenty of small banks. If owning a bank let you create unlimited cash from thin air people would do so.
- branchless 11y ago> Globally, total debit balances are always equal to total credit balances Except for when the banks admit they've been extending credit against garbage to generate bonuses and then need the state to create money to bail them out, propping up assets underpinning these "balance" sheets and forcing young workers to pay more for land than the market can bear by underwriting even more risky behaviour with low rates.
- mempko 11y agoYou forgot important part, and that is that banks hold a very special position in society. The system of money as you described only works because of state power. It is a system that makes sure people work for the creditors. If you want to know why bankers (the creditors) who caused hardship to the whole population of the world from the last economic crash, didn't go to jail, this is why. It is a massive system but a fragile one. This is also why market economies cannot exist outside a strong state. In fact, as described in Debt the first 5000 years, market economies were inventions to the problem of how to feed and maintain large armies in empires.
- AnimalMuppet 11y ago> The dollar bills you hold in your wallet are nothing less than 'certificates' indicating that the US government has a liability of the amount shown on those dollar bills, payable to the holder of those dollar bills. I don't think that's correct. The US Treasury can print dollar bills. How and where does that show up as a liability on the Treasury's balance sheet?
- bubbleRefuge 11y agoThe US Treasury can print treasury notes. The FED can "print reserves" and banks create deposits from loans ( aka bank money). The Treasury notes are then sold and the US Treasury account at the Fed is credited.
- AnimalMuppet 11y agoIf I understand what you just said, the Fed prints the currency. The Treasury prints notes (bonds), which it sells, getting money for, but incurring a liability (the bond that it sold). When the Fed prints currency (say a $100 bill), what happens? Does the Fed just suddenly have $100 more than it did? Or does the Fed owe the Treasury $100? Or something else? I don't immediately see a way that somebody (anybody) can print a $100 bill and still have assets and liabilities net out to zero...
- RobertoG 11y agoMoney is an IOU. That is a promise of something. When the fed create money is a liability for them: https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm https://www.federalreserve.gov/monetarypolicy/bst_frliabilit... When you pay taxes, that liability is cancelled. The circle has to begin somewhere, and it begins and end with the government.
- AnimalMuppet 11y agoThat doesn't seem to answer my question. When the Fed prints currency (not yet sending it to a depository institution), they (the Fed) created an asset. They also, if you and bubbleRefuge and cs702 are correct, create a liability, so that everything nets out to zero. My question: who does the Fed owe the liability to?
- digi_owl 11y agohttps://www.youtube.com/playlist?list=PLqs7-zw9kiALv53VkVzNX-dxQX0Y5UdYm https://www.youtube.com/playlist?list=PLqs7-zw9kiALv53VkVzNX... This is a set of videos where Steve Keen is demoing his software tool Minsky that is aimed at simulating all this.
- alanwatts 11y ago>For every debit there is an equal credit, and vice versa, so globally, total debit balances are always equal to total credit balances, and total debit transactions are always equal to total credit transactions. >Double-entry bookkeeping all the way down. >It is really quite something to behold. *Assuming all the books are being kept honestly. They aren't
- VT_Drew 11y ago>The dollar bills you hold in your wallet are nothing less than 'certificates' indicating that the US government has a liability of the amount shown on those dollar bills, payable to the holder of those dollar bills. Except dollars are no longer backed by anything. So the governments liability is nothing. What are they going to do trade you a dollar for a dollar? It is literally just paper. It is a stretch to still think of it as a 'certificate'.
- jrs235 11y agoIt's a certificate that can be traded to offset taxes. But yes, the government can inflate its value away to next to nothing.
- seoguru 11y agodollars are tax credits.
- ellius 11y agoEdward Harrison has good piece on this and the concept of "currency revulsion": https://www.creditwritedowns.com/2011/10/currency-revulsion-2.html https://www.creditwritedowns.com/2011/10/currency-revulsion-...