5 ms·

The class that lends is also the class whose marginal increases in wealth do not produce goods demand or consumption, it just goes back into lending and / or in

by zanny 10y ago

The class that lends is also the class whose marginal increases in wealth do not produce goods demand or consumption, it just goes back into lending and / or investment / and or bonds. The best way to grow an economy is to give a dollar to its poorest participant, not its richest, because the poor class will immediately spend it on goods, creating demand, where the richer you are the less of your income goes to consumables that drive production.

WalterBright 10y ago
This is another variation on the "rich people hoard money" theory. The reality is that rich people's lending, investment, and bonds all spend that money, too. Nobody borrows money unless they plan to spend it (otherwise it would make no sense). Nobody hoards cash.
- dpark 10y ago
  That's not really true. If you're truly poor, you'll spend every dollar basically as soon as you get it. If you're moderately wealthy, an extra dollar you receive might pay off a dollar on a loan, or turn into an extra dollar in your savings account, both of which actually reduce the amount of money in circulation. This isn't "hoarding" but has a different effect on the economy than spending.
  - nstj 10y ago
    So if you're wealthy and that dollar goes to pay off the loan - where does it go? The person you're giving it to will either spend it on consumption, or loan it to someone else until (ultimately) it is spent. And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. It won't reduce the amount of money in circulation[0]. Side note: "How the Economic Machine Works"[1] by Ray Dalio (manager of one of the world's largest hedge funds) is fantastic in describing these concepts in non-academic-economics terms. [0]: https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/ [1]: http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf http://www.economicprinciples.org/wp-content/uploads/ray_dal...
    - dpark 10y ago
      > So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person you're giving it to will either spend it on consumption Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. > or loan it to someone else until (ultimately) it is spent. The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) > And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... https://chaseonline.chase.com/resources/RateSheetForCons70219132016.pdf https://chaseonline.chase.com/resources/RateSheetForCons7021... > It won't reduce the amount of money in circulation. When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
      - WalterBright 10y ago
        > The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.
- Locke1689 10y ago
  In a low-inflation, sparse investment landscape it's actually quite likely that people will hoard cash.
  - nstj 10y ago
    Physical cash under the bed? "Hoarding" cash in a bank account isn't really "hoarding" as those deposits are "loaned" into the economy.
    - Locke1689 10y ago
      Buy treasury notes, actually.
nstj 10y ago
Sure. So if you're wealthy, you invest your money. Let's say that the money which you would have received from the student loans which aren't forgiven was earmarked to invest in a new AI startup (with neural nets!). Those funds would be transferred to the startup's bank account, and then used to pay the salaries of people who work at that startup (who theoretically have a high marginal propensity to consume their income than the person who invested money in their employer). These employees then go out and spend money on stuff like Soylent and iPhone 7's and a bunch of other stuff which would be as you describe it "goods demand or consumption". Even if these wealth hoarding lending class members had just left their money in the bank, remember that these funds have a corresponding entry on the left side of the bank's balance sheet (not much cash/reserve balances in the banking system) and would also have to be loaned out to someone else in the economy by the bank. So I still don't see how lending money leads to guaranteed lower amounts of consumption in the economy?

by zanny 10y ago

WalterBright 10y ago

This is another variation on the "rich people hoard money" theory. The reality is that rich people's lending, investment, and bonds all spend that money, too. Nobody borrows money unless they plan to spend it (otherwise it would make no sense). Nobody hoards cash.

dpark 10y ago
That's not really true. If you're truly poor, you'll spend every dollar basically as soon as you get it. If you're moderately wealthy, an extra dollar you receive might pay off a dollar on a loan, or turn into an extra dollar in your savings account, both of which actually reduce the amount of money in circulation. This isn't "hoarding" but has a different effect on the economy than spending.
- nstj 10y ago
  So if you're wealthy and that dollar goes to pay off the loan - where does it go? The person you're giving it to will either spend it on consumption, or loan it to someone else until (ultimately) it is spent. And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. It won't reduce the amount of money in circulation[0]. Side note: "How the Economic Machine Works"[1] by Ray Dalio (manager of one of the world's largest hedge funds) is fantastic in describing these concepts in non-academic-economics terms. [0]: https://www.federalreserve.gov/releases/h6/current/ https://www.federalreserve.gov/releases/h6/current/ [1]: http://www.economicprinciples.org/wp-content/uploads/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf http://www.economicprinciples.org/wp-content/uploads/ray_dal...
  - dpark 10y ago
    > So if you're wealthy and that dollar goes to pay off the loan - where does it go? It gets wiped off the books and a dollar leaves the economy. > The person you're giving it to will either spend it on consumption Did you take a loan out from a person? No. You took a loan out from a bank. They don't spend deposits on consumption. They cover their expenses and profits with the interest you pay. > or loan it to someone else until (ultimately) it is spent. The amount of lending a bank makes is almost unrelated to the amount of deposits they hold. Reserve regulations impact this somewhat, but the reality is that banks make profitable loans whenever feasible. If they don't meet reserve regulations at the end of the day, they borrow at exceedingly low interest rates to cover the gap. A bank can make a billion in loans at 5%, borrow at 3% to meet regulations nightly, and still come out ahead. (Specific numbers made up. Overnight rates are actually closer to 0.25%. So a loan at 5% with no reserves is actually crazy profitable.) > And if you deposit the dollar into the bank then the bank have to loan it to someone (they need to make money too!) who will then spend it on consumption. The fed pays 0.5% on reserves that banks hold. As of a few minute ago, Chase's interest rate sheet showed <0.5% for all checking, all money market, and most savings accounts. So in reality, Chase can hold your deposit and pay you interest and still make money. If your savings has a "good" interest rate of, say, 1%, a single loan of $100K at 4% could still cover the cost of $800K in deposits. Banks absolutely do not have to loan out every dollar deposited to make money. http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... https://chaseonline.chase.com/resources/RateSheetForCons70219132016.pdf https://chaseonline.chase.com/resources/RateSheetForCons7021... > It won't reduce the amount of money in circulation. When a bank loans you money, they are creating money. When you pay it back, you are destroying money. The view that your deposit is "loaned" to someone else is very inaccurate and misleading in a modern banking economy. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
    - WalterBright 10y ago
      > The fed pays 0.5% on reserves that banks hold. The Fed does require a certain reserve percentage that the bank cannot loan out. It's only fair that they pay some interest on that. However, making 0.5% is losing money because of inflation. Furthermore, no bank is going to loan you money for 0.5% - they're going to charge you a lot more. > Banks absolutely do not have to loan out every dollar deposited to make money. No legal requirement, sure. But they have every reason to loan out as much as possible. It's why they advertise loans, credit cards, etc. Banks have plenty of expenses, too, which means if they don't make loans, they go bankrupt.
Locke1689 10y ago
In a low-inflation, sparse investment landscape it's actually quite likely that people will hoard cash.
- nstj 10y ago
  Physical cash under the bed? "Hoarding" cash in a bank account isn't really "hoarding" as those deposits are "loaned" into the economy.
  - Locke1689 10y ago
    Buy treasury notes, actually.

nstj 10y ago

Sure. So if you're wealthy, you invest your money. Let's say that the money which you would have received from the student loans which aren't forgiven was earmarked to invest in a new AI startup (with neural nets!). Those funds would be transferred to the startup's bank account, and then used to pay the salaries of people who work at that startup (who theoretically have a high marginal propensity to consume their income than the person who invested money in their employer). These employees then go out and spend money on stuff like Soylent and iPhone 7's and a bunch of other stuff which would be as you describe it "goods demand or consumption". Even if these wealth hoarding lending class members had just left their money in the bank, remember that these funds have a corresponding entry on the left side of the bank's balance sheet (not much cash/reserve balances in the banking system) and would also have to be loaned out to someone else in the economy by the bank. So I still don't see how lending money leads to guaranteed lower amounts of consumption in the economy?