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"Cash and electronic cash are interchangeable." Not all the "electronic cash" is created equal. Money is an IOU, so, the important thing is: who is backing tha

"Cash and electronic cash are interchangeable." Not all the "electronic cash" is created equal. Money is an IOU, so, the important thing is: who is backing that IOU? If you ask a credit for 200 millions and the bank think that it's a good business they will credit your account with the money, but it's important to realize that this money comes from nowhere. The bank just created this money, not the government, and it's an IOU backed by the bank. So this IOU is not the same that the money the government use to pay providers (that is really a IOU from the government). The bank is creating money and it has to meet legals requirements for doing this, for instance, getting, a posteriory, enough reserves (this is why is called a fractional system). If you want to move your 200 millions to other bank, what would happen is the two banks would try to balance, at the end of the day, the movement of money in both directions. Maybe somebody is moving 200 millions from the other bank too. In the case there is not a balance, the one in the negative has to borrow from the other banks. When banks lost trust in each other we have situations as we have seen in the last crisis. Seriously, anyone interested in those things should check MMT.

Retric 11y ago
"creating money" is not really it. Banks are only required to keep a percentage of there deposits on hand. So, if a bank has 10 million in deposits and the reserve is 10% then they can only send 9 million to another bank end of story. The really important thing is that 9 million is not an IOU. It's deducted from the banks account at the FED. The IOU is to the banks depositors. Now, Bank B, who got 9 million could then lend out 90% of that. But, with X money the entire banking system can only 'make' 10X assuming 10% reserve requirements. It's a little more complex because the reserve requirements can change, and the FED does not require the entire reserve in cash. But, the important point is banks can only make a finite amount of IOU's. PS: Now a sudden shock of failed banks can suddenly force the FED to make cash to cover FDIC. But, the FDIC has enough money to cover normal bank failures.
- RobertoG 11y ago
  Seriously, banks don't lend reserves: http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#6d97ffea3594 http://www.forbes.com/sites/francescoppola/2014/01/21/banks-... It's a fascinating subject when you start to dig in it.
  - Retric 11y ago
    Link bait, but it's in agreement with what I said. "Rather a ratio of two loosely connected numbers has fallen dramatically" In other words banks create a 'fixed' multiple of the money supply worth of debt. In the long term inflation comes from new money not normal bank loans.
    - RobertoG 11y ago
      About the 'fixed' multiplier: I'm going to paste from the paper that this, already old, thread is discussing. This come from the Bank of England and it's not precisely hidden in the text: "Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits." I doubt I could be more clear than that. About the 'link bait' thing: I'm not related to none of those sites so, if you are suggesting that I'm linking those because I get some kind of profit consider me offended.
      - Retric 11y ago
        'fixed' might have been unclear. 'Limited' is probably a better description. Which is why 'in practice' is such an important part of that statement. Banks are old and they have already added that multiplier. So, the multiplier effect is real, it's just already baked into the current money supply. Of note, it's the reverse that's important. When banks stop making loans or loans default the money supply shrinks. PS: By link bait I mean the title is provocative and on tangentially related to the article. Like a title that said "future earnings irrelevant to stock price" and then saying future earnings don't alter stock price as there already baked in, its changes to future earnings projections that's important.

Retric 11y ago

"creating money" is not really it. Banks are only required to keep a percentage of there deposits on hand. So, if a bank has 10 million in deposits and the reserve is 10% then they can only send 9 million to another bank end of story. The really important thing is that 9 million is not an IOU. It's deducted from the banks account at the FED. The IOU is to the banks depositors. Now, Bank B, who got 9 million could then lend out 90% of that. But, with X money the entire banking system can only 'make' 10X assuming 10% reserve requirements. It's a little more complex because the reserve requirements can change, and the FED does not require the entire reserve in cash. But, the important point is banks can only make a finite amount of IOU's. PS: Now a sudden shock of failed banks can suddenly force the FED to make cash to cover FDIC. But, the FDIC has enough money to cover normal bank failures.

RobertoG 11y ago
Seriously, banks don't lend reserves: http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#6d97ffea3594 http://www.forbes.com/sites/francescoppola/2014/01/21/banks-... It's a fascinating subject when you start to dig in it.
- Retric 11y ago
  Link bait, but it's in agreement with what I said. "Rather a ratio of two loosely connected numbers has fallen dramatically" In other words banks create a 'fixed' multiple of the money supply worth of debt. In the long term inflation comes from new money not normal bank loans.
  - RobertoG 11y ago
    About the 'fixed' multiplier: I'm going to paste from the paper that this, already old, thread is discussing. This come from the Bank of England and it's not precisely hidden in the text: "Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits." I doubt I could be more clear than that. About the 'link bait' thing: I'm not related to none of those sites so, if you are suggesting that I'm linking those because I get some kind of profit consider me offended.
    - Retric 11y ago
      'fixed' might have been unclear. 'Limited' is probably a better description. Which is why 'in practice' is such an important part of that statement. Banks are old and they have already added that multiplier. So, the multiplier effect is real, it's just already baked into the current money supply. Of note, it's the reverse that's important. When banks stop making loans or loans default the money supply shrinks. PS: By link bait I mean the title is provocative and on tangentially related to the article. Like a title that said "future earnings irrelevant to stock price" and then saying future earnings don't alter stock price as there already baked in, its changes to future earnings projections that's important.