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Maybe I don't have a full understanding- but economywide, the amount of debt and savings has to be equal, right? So if the debt of these large companies has in

Maybe I don't have a full understanding- but economywide, the amount of debt and savings has to be equal, right? So if the debt of these large companies has increased, who is doing the extra savings (and loaning the money to these companies)? And if interest rates double, we will likely see these companies unwind some of their debt positions. What will be the effects of that?

simcop2387 10y ago
> Maybe I don't have a full understanding- but economywide, the amount of debt and savings has to be equal, right? Only if you assume the total amount of currency in the system is fixed. If some of it gets destroyed (cash burned in fire) then you can easily have debt grow more than savings because the destruction of the currency doesn't destroy the debt. This also assumes that the debt has the same growth (interest) as the savings (also interest). If the debt has higher interest on it and isn't defaulted on, then the debt can also easily grow to above the level of savings. Now that happening does mean that the debt can't be paid off with savings as it is now, so you need to be able to generate enough value/profit/product to be able to keep paying the principle down and even though the savings isn't enough to wipe it out the debt still isn't necessarily uncontrollable. That said there's got to be a tipping point where you can no longer keep that up and there will eventually be no choice but to default on that debt and then all kinds of hell breaks loose because that hasn't happened very often in modern economies so nobody really knows how to handle it.
deleted 10y ago
[deleted]
cbanek 10y ago
Not exactly. Banks "create" money when they make loans, but are only required to keep a certain percentage of that loan in reserve. http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710 You've hit the nail on the head with interest rates going up. More than that, many companies have been taking out debt to buy back shares of their company on the public market at recent prices. If the value of those purchased shares go down, that could also be trouble.
- tuna-piano 10y ago
  Even with reserve banking though, banks do increase the money supply but a banks assets are still always equal to its liabilities. Someone still needs to loan the money to these more indebted companies. Who is doing the additional lending?
  - ww520 10y ago
    Simplified scenario. Bank's liability is the deposit people put in the bank. Bank's asset is its deposited cash. When people deposit money, the bank's liability and asset increase by the same amount. When the bank lends out a loan of X amount as cash, its asset is deducted with X cash, but it would book the loan as asset as well since the borrower owes the bank X cash. Everything balances out. When the bank lends out a loan of Y amount as fund in the borrower's account in the bank, the bank's liability increases by Y since Y has been deposited into the customer's account. At the same time, the bank's asset increases by Y since the bank receives the borrowed money under the customer name into its cash pile. Everything balances out. Afterward when the customer withdraws the borrowed money out of his deposit account, it decreases the liability and asset of the bank at the same time.
  - AlexCoventry 10y ago
    The Fed.
carsongross 10y ago
Debt is created ex nihilo from the banking sector, so no real savings (that is, foregone consumption) needs to match it. The only thing constraining debt in our system is the capacity of the economy to meet the ongoing payments. (If we had duration matched savings then debt would much more closely correspond to savings and there would be no danger of runs on the banking system.) When rates double it will be an economic catastrophe.
ww520 10y ago
The economy's "balance sheet" isn't accounted for the same as the balance sheet of a company or personal finance. Fractional reserve allows a bank to lend out N times more than what it has in saving deposit. With re-deposit of the lent out money, the bank can lend out more, with (N-1)/N times, and so on. Interest rate acts as a lever to limit the amount of loans people are willing to take. Higher interest rates will force companies to not take on more debt; however, the long term debt they got before with a lower rate is cheaper now compared to new debt so they would keep those.
- deleted 10y ago
  [deleted]
- IIIIIIIIIIII 10y ago
  > allows a bank to lend out N times more than what it has in saving deposit. That is not quite how it works according to the Bank of England: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... A few summary excerpts > 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. > The reality of how money is created today differs from the description found in some economics textbooks: > • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. > • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. > In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money > Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. > ... > While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality > In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.
slv77 10y ago
Your exactly right... savings and debt are always exactly balances with the small exception of the gold that is still sitting on the Federal Reserves balanace sheet. Currently the savings and debt dynamics are skewed with a large amount of savings being held or controlled by very high net worth individuals and the debt being held widely. These situations have always in the past resulted in deflationary periods like we saw in the 1890's 1929 and recently in 2008. The current economy is a lot like the old company store in mining towns where everyone is in debt to the company store and the only things that you can buy are what the company store sells. Is it any wonder that the hottest consumption items are the sectors of the economy that are financed?
pjc50 10y ago
The global 0.1% in tax havens. This stuff is rather difficult to trace; people surveying global assets vs global liabilities find over a trillion dollars of difference where there should be none. https://web.law.columbia.edu/sites/default/files/microsites/policing-litigation-conference/files/The%20Quarterly%20Journal%20of%20Economics-2013-Zucman-1321-64.pdf https://web.law.columbia.edu/sites/default/files/microsites/... "This stock of unrecorded assets is double the recorded net debt of the rich world".

simcop2387 10y ago

> Maybe I don't have a full understanding- but economywide, the amount of debt and savings has to be equal, right? Only if you assume the total amount of currency in the system is fixed. If some of it gets destroyed (cash burned in fire) then you can easily have debt grow more than savings because the destruction of the currency doesn't destroy the debt. This also assumes that the debt has the same growth (interest) as the savings (also interest). If the debt has higher interest on it and isn't defaulted on, then the debt can also easily grow to above the level of savings. Now that happening does mean that the debt can't be paid off with savings as it is now, so you need to be able to generate enough value/profit/product to be able to keep paying the principle down and even though the savings isn't enough to wipe it out the debt still isn't necessarily uncontrollable. That said there's got to be a tipping point where you can no longer keep that up and there will eventually be no choice but to default on that debt and then all kinds of hell breaks loose because that hasn't happened very often in modern economies so nobody really knows how to handle it.

deleted 10y ago

[deleted]

cbanek 10y ago

Not exactly. Banks "create" money when they make loans, but are only required to keep a certain percentage of that loan in reserve. http://www.cnbc.com/id/100497710 http://www.cnbc.com/id/100497710 You've hit the nail on the head with interest rates going up. More than that, many companies have been taking out debt to buy back shares of their company on the public market at recent prices. If the value of those purchased shares go down, that could also be trouble.

tuna-piano 10y ago
Even with reserve banking though, banks do increase the money supply but a banks assets are still always equal to its liabilities. Someone still needs to loan the money to these more indebted companies. Who is doing the additional lending?
- ww520 10y ago
  Simplified scenario. Bank's liability is the deposit people put in the bank. Bank's asset is its deposited cash. When people deposit money, the bank's liability and asset increase by the same amount. When the bank lends out a loan of X amount as cash, its asset is deducted with X cash, but it would book the loan as asset as well since the borrower owes the bank X cash. Everything balances out. When the bank lends out a loan of Y amount as fund in the borrower's account in the bank, the bank's liability increases by Y since Y has been deposited into the customer's account. At the same time, the bank's asset increases by Y since the bank receives the borrowed money under the customer name into its cash pile. Everything balances out. Afterward when the customer withdraws the borrowed money out of his deposit account, it decreases the liability and asset of the bank at the same time.
- AlexCoventry 10y ago
  The Fed.

carsongross 10y ago

Debt is created ex nihilo from the banking sector, so no real savings (that is, foregone consumption) needs to match it. The only thing constraining debt in our system is the capacity of the economy to meet the ongoing payments. (If we had duration matched savings then debt would much more closely correspond to savings and there would be no danger of runs on the banking system.) When rates double it will be an economic catastrophe.

ww520 10y ago

The economy's "balance sheet" isn't accounted for the same as the balance sheet of a company or personal finance. Fractional reserve allows a bank to lend out N times more than what it has in saving deposit. With re-deposit of the lent out money, the bank can lend out more, with (N-1)/N times, and so on. Interest rate acts as a lever to limit the amount of loans people are willing to take. Higher interest rates will force companies to not take on more debt; however, the long term debt they got before with a lower rate is cheaper now compared to new debt so they would keep those.

deleted 10y ago
[deleted]
IIIIIIIIIIII 10y ago
> allows a bank to lend out N times more than what it has in saving deposit. That is not quite how it works according to the Bank of England: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... A few summary excerpts > 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. > The reality of how money is created today differs from the description found in some economics textbooks: > • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. > • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. > In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money > Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. > ... > While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality > In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available.

slv77 10y ago

Your exactly right... savings and debt are always exactly balances with the small exception of the gold that is still sitting on the Federal Reserves balanace sheet. Currently the savings and debt dynamics are skewed with a large amount of savings being held or controlled by very high net worth individuals and the debt being held widely. These situations have always in the past resulted in deflationary periods like we saw in the 1890's 1929 and recently in 2008. The current economy is a lot like the old company store in mining towns where everyone is in debt to the company store and the only things that you can buy are what the company store sells. Is it any wonder that the hottest consumption items are the sectors of the economy that are financed?

pjc50 10y ago

The global 0.1% in tax havens. This stuff is rather difficult to trace; people surveying global assets vs global liabilities find over a trillion dollars of difference where there should be none. https://web.law.columbia.edu/sites/default/files/microsites/policing-litigation-conference/files/The%20Quarterly%20Journal%20of%20Economics-2013-Zucman-1321-64.pdf https://web.law.columbia.edu/sites/default/files/microsites/... "This stock of unrecorded assets is double the recorded net debt of the rich world".