14 ms·

Money creation in the modern economy (2014) [pdf]

227 points by adamnemecek 9y ago

ThomPete 9y ago
Can't recommend "The end of alchemy" by Mervyn King former CEO of Bank of England enough.
namelost 9y ago
You can't miss the accompanying videos that they recorded down in the basement: 1) https://www.youtube.com/watch?v=ziTE32hiWdk https://www.youtube.com/watch?v=ziTE32hiWdk (beginner) 2) https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw (advanced)
freejulian 9y ago
“QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier. This will raise the value of those assets and lower the cost to companies of raising funds in these markets.” The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). They buys whichever bonds they decide which then enables the holders of those bonds to collect free money. All the new money slowly works it’s way into the rest of the economy, inflating away the value of our savings. Crap like this is precisely why bitcoin will succeed. Eventually people will realize what the Central Banks are doing and will decide they’ve had enough.
- skybrian 9y ago
  It's not "free money". Investors get the money by selling assets. But it might be at a better price than they could have gotten elsewhere. One lesson is not to use a savings account as the only place to keep your money. Anyone who has looked at interest rates in the last few decades already knows this. Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people. This gets talked about as "helicopter drops" but never happens. (It probably requires an act of Congress.)
  - freejulian 9y ago
    It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! Without conflating savings with investment, how would you propose an individual save money?
    - fwdpropaganda 9y ago
      > It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! If you had to put it away and couldn't use it for 30 years, it's not really free, is it? It cost you 30 years of not being able to use it. Plus you're taking inflation risk, default risk, depending on the bond you might also be taking liquidity risk, etc. You're talking out of your ass dude.
      - freejulian 9y ago
        Ummmmm, you’ve got it around the wrong way friend. The central banks are buying the bonds. You had already taken on the risk of buying the bond. The fed then came and said, “I’d like to buy your bond and give you 20 years of interest payments on top of your principal.”
        fwdpropaganda 9y ago
- fwdpropaganda 9y ago
  > The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). If you believe this, isn't the rational thing to use your dollars to buy assets? I think you're betraying a deep mis-understading of how money works. QE has been raging for 10 years, but inflation is incredibly low (2.5% US, 1.5% EU). In other words, even though you claim that the FED "gives asset holders free money", when you hold cash you're not really losing purchasing power. How do you square the two things?
  - freejulian 9y ago
    Absolutely, had I realized what the fed was doing when QE was happening I would have definitely done that. And a lot of people smarter than myself did do precisely that! Inflation is only “incredibly low” if you cherry pick the basket of goods used to measure it.
    - fwdpropaganda 9y ago
      So. No need for bitcoin. You're just running away from a complex thing you don't understand but has a lot of traction, to a simple thing which you understand but has no traction. My strategy is stick with the former and educate myself more. Different strategies.
      - whytaka 9y ago
        I think an alternate money system that works alongside government issued currencies would be a huge boon to society.
        _jal 9y ago
        Long term, you will either have government as we know it now, or an alternate currency, but not both. The monopoly on currency is closely related to the monopoly on force. I generally think a lot of anarcho-capitalist theory to be obvious nonsense, but on that, they have a point.
- ethbro 9y ago
  > Crap like this is precisely why bitcoin will succeed "Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time" I'll believe you when the entire world economy has run on non-Keynesian cryptocurrency economics through a couple of recessions...
  - freejulian 9y ago
    Well, I mean, the greatest economic booms in American history happened when our money was backed by gold. When the dollar came off the gold standard in the 70s, we saw wages decouple from productivity. This is not a coincidence.
    - skookumchuck 9y ago
      Most people who claim that fiat money is essential for a growing economy are unable to explain the US economy from 1800-1914. The real purpose of fiat money systems is so the government can spend more than it takes in by printing the difference (or the more modern variation of just creating it with accounting gimmicks).
      - ethbro 9y ago
        The real point of fiat money is that it affords a government the option to increase the money supply at will. Whether they do that for good (e.g. to attempt to combat a recession) or for evil (e.g. to invalidate government debt / inflate their way out of deficits) is a political exercise. And knowing that, I actually think the US Fed is a pretty decent system. I shudder to think what would happen if Congress controlled monetary supply.
        skookumchuck 9y ago
        An 1800 dollar is worth the same as a 1914 dollar. A 2018 dollar is worth about 4 cents.
- squaresmile 9y ago
  Right after the part you quoted: "That, in turn, should lead to higher spending in the economy.(1) The way in which QE works therefore differs from two common misconceptions about central bank asset purchases: that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system, as might be described by the money multiplier theory. This section explains the relationship between money and QE and dispels these misconceptions. ... Two misconceptions about how QE works Why the extra reserves are not ‘free money’ for banks While the central bank’s asset purchases involve — and affect — commercial banks’ balance sheets, the primary role of those banks is as an intermediary to facilitate the transaction between the central bank and the pension fund. The additional reserves shown in Figure 3 are simply a by-product of this transaction. It is sometimes argued that, because they are assets held by commercial banks that earn interest, these reserves represent ‘free money’ for banks. While banks do earn interest on the newly created reserves, QE also creates an accompanying liability for the bank in the form of the pension fund’s deposit, which the bank will itself typically have to pay interest on. In other words, QE leaves banks with both a new IOU from the central bank but also a new, equally sized IOU to consumers (in this case, the pension fund), and the interest rates on both of these depend on Bank Rate"
  - mac01021 9y ago
    I think maybe that is beside the point. If new money is created, and the new money is not distributed evenly among all citizens, all those citizens who receive less than an equal share are harmed while those who receive more than an equal share benfit. It seems like the central bank, in this way, harms most people on a regular basis. I am not prepared, however, to argue that Bitcoin is any better in this respect.
nosuchthing 9y ago
It seems quiet ironic that Bitcoin/Cryptocoin advocates claim the minting and production using algorithms like Satoshi's BTC will be better than fiat when it just creates a new oligarchy... easier to co-opt due to the consolidation of control within the cryptocoin ecosystems. Banks and the finance sector took note of BTC prior to 2014, and with the way BTC is produced anyone with enough capital entering into BTC - especially during the first few years would be in a position to take vast amounts of BTC at low cost and simply wait and attempt to convince other people to exchange their wealth for BTC which due to how the supply begins to be cut off, serves to enrich the minority of oligarchial squatter-speculators. Bitcoin is often misunderstood as "deflationary" yet checking the math under the hood and we see that's a half truth. The supply inflates every 10 minutes, and for the first few years Bitcoin was hyperinflationary, granting a small group of users the majority of the supply. Satoshi Nakamoto Thu Jan 8 14:27:40 EST 2009 I made the proof-of-work difficulty ridiculously easy to start with, so for a little while in the beginning a typical PC will be able to generate coins in just a few hours. It'll get a lot harder when competition makes the automatic adjustment drive up the difficulty. first 4 years: 10,500,000 coins next 4 years: 5,250,000 coins next 4 years: 2,625,000 coins next 4 years: 1,312,500 coins ____________________________________________________ ____________________________________________________ https://medium.com/@balajis/quantifying-decentralization-e39db233c28e https://medium.com/@balajis/quantifying-decentralization-e39... : One important point: if we actually include all 7 billion people on the earth, most of whom have zero BTC or Ethereum, the Gini coefficient is essentially 0.99+. And if we just include all balances, we include many dust balances which would again put the Gini coefficient at 0.99+. Thus, we need some kind of threshold here. The imperfect threshold we picked was the Gini coefficient among accounts with ≥185 BTC per address, and ≥2477 ETH per address. So this is the distribution of ownership among the Bitcoin and Ethereum rich with $500k as of July 2017. In what kind of situation would a thresholded metric like this be interesting? Perhaps in a scenario similar to the ongoing IRS Coinbase issue, where the IRS is seeking information on all holders with balances >$20,000. Conceptualized in terms of an attack, a high Gini coefficient would mean that a government would only need to round up a few large holders in order to acquire a large percentage of outstanding cryptocurrency — and with it the ability to tank the price. With that said, two points. First, while one would not want a Gini coefficient of exactly 1.0 for BTC or ETH (as then only one person would have all of the digital currency, and no one would have an incentive to help boost the network), in practice it appears that a very high level of wealth centralization is still compatible with the operation of a decentralized protocol. Second, as we show below, we think the Nakamoto coefficient is a better metric than the Gini coefficient for measuring holder concentration in particular as it obviates the issue of arbitrarily choosing a threshold. ...However, the maximum Gini coefficient has one obvious issue: while a high value tracks with our intuitive notion of a “more centralized” system, the fact that each Gini coefficient is restricted to a 0–1 scale means that it does not directly measure the number of individuals or entities required to compromise a system. Specifically, for a given blockchain suppose you have a subsystem of exchanges with 1000 actors with a Gini coefficient of 0.8, and another subsystem of 10 miners with a Gini coefficient of 0.7. It may turn out that compromising only 3 miners rather than 57 exchanges may be sufficient to compromise this system, which would mean the maximum Gini coefficient would have pointed to exchanges rather than miners as the decentralization bottleneck. Conversely, if one considers “number of distinct countries with substantial mining capacity” an essential subsystem, then the minimum Nakamoto coefficient for Bitcoin would again be 1, as the compromise of China (in the sense of a Chinese government crackdown on mining) would result in >51% of mining being compromised.
hidenotslide 9y ago
Here is a simple way to demonstrate the point of the article. If I deposit $100 in a bank, the bank can lend out around $90 to someone else (fractional reserve banking). That person now deposits the money at another bank, and the "money supply" is $190 instead of $100. On the other hand when a central bank "prints money", they use it to buy assets with an equivalent value, so there is no net transfer of wealth done by the central bank. That assumes they don't affect asset prices, which not a great assumption. The way central banks affect the money supply is through interest rates to change the supply and demand of private loans that banks make, which indirectly affects the money supply.
- millstone 9y ago
  > If I deposit $100 in a bank, the bank can lend out around $90 to someone else (fractional reserve banking) This is the textbook explanation which the article strongly rejects. In practice the bank will lend out as much as possible - it is not effectively constrained by reserve requirements since it can and will simply borrow the difference. What constrains it is market forces (the demand for loans, and their profitability), and financial regulations, and finally the interest rates set by the central bank. If a retail bank believes it can turn a profit by lending money borrowed from the central bank, in compliance with the law, it will do so until it exhausts the opportunity. Consumer deposits are irrelevant.
  - quantumofmalice 9y ago
    Exactly. There is no reserve limit: any pretense of that was washed away once sweep accounts became standard. Banks lend as much as they possibly can, and then a bit more, and then expect the taxpayers to pick up the pieces when it all falls apart. The irony is that there need not be a reserve ratio: if we just adopted duration-matched banking, where a bank had to demonstrate it had ownership of a given dollar it was lending for the duration it loaned that dollar (e.g. via a CD) it would be fine. This is the fundamental problem with banking, and I don't understand why no one talks about it. Banks are lying about having money they don't have (i.e. they are promising the same dollar to more than one person at the same time). If we forced them to just stop lying it would all work out, and there wouldn't be any need for a reserve ratio.
dwd 9y ago
Highly recommend this article for a dose of reality (he also covers the theory of money creation) http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/ http://www.debtdeflation.com/blogs/2009/01/31/therovingcaval...
manjushri 9y ago
It seems like leverage has shifted from the central banks to commercial banks over recent decades, and indeed there has been massive consolidation of power in the commercial sector. The central bank seems more like an insurance proxy for the tax payer to the commercial bank, as evidenced by the 2008 rescue packages.
stephen_g 9y ago
Yes, learning how banks create money for me was a huge turning point in realising most of what people think they know (and what I thought) about money, debt and economics is actually wrong. That the money supply grows when banks lend and contracts when people pay the debt down is a big point to get your head around. The other big one is the national accounts and sectoral balances - see [1] for a much more detailed run-down. To summarise, take the definition of GDP: (1) GDP ≡ C + I + G + (X – M) where C is household final consumption, I is private investment including inventory, G is Government spending, and (X-M) are net exports. Add net external income flows (FNI) to (1) and you get GNP: (2) GNP = C + I + G + (X – M) + FNI Subtract total transfers and taxes from each side: (3) GNP – T = C + I + G + (X – M) + FNI – T Collect terms by sector (private, Government and External) (4) (GNP – C – T) – I = (G – T) + (X – M + FNI) Then we can simplify - (GNP - consumption - taxes) is equilivalent to private saving (we’ll call that S), and (X - M - FNI) is called the Current Account Balance (CAD): (5) (S – I) – (G – T) – CAD = 0 or (6) (S – I) = (G – T) + CAD What this means is that by definition, if your external sector is balanced, a Government budget surplus must reduce the net assets of the private sector by exactly the same amount as it is in surplus. With a trade deficit and a Government surplus, the private sector’s net assets are reduced by the sum of those. This is quite clear graphically too [2]. So the end result is that you can only have economic growth when the Government is running a surplus and the private sector is in balance or deficit through money creation from banks. Is relies on people borrowing more and more money - but because equal amounts of debt are also created (no higher net wealth), eventually the sector in aggregate can’t borrow any more, and the system falls apart (the second derivative of credit growth dropped a little while before the GFC, which is how some non-mainstream economists predicted that it was coming). But at the end of the day, this means a balanced or surplus Government budget is actually bad for the economy by definition unless you have a big trade surplus (like Germany for instance), because it’s sapping the private sector of wealth. Do you have to start taking a more nuanced view of Government debt, when Government debt actually represents the net actual savings of the private sector! 1. http://bilbo.economicoutlook.net/blog/?p=32396 http://bilbo.economicoutlook.net/blog/?p=32396 2. https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg
- nopriorarrests 9y ago
known 9y ago
https://en.m.wikipedia.org/wiki/Chiemgauer https://en.m.wikipedia.org/wiki/Chiemgauer is a good experiment on local currency
codeulike 9y ago
An aspect of this I wonder about is that many years ago a bank account is what you opened when you explicitly wanted to lend money to the bank to earn interest. But these days a bank account is pretty much mandatory for any sort of normal existence.
mendelsd 9y ago
Most people are unaware of the true mechanism of money creation, therefore don't understand how the current mechanism and its (lack of) constraints affect society, therefore don't see the potential for societal improvement through systemic change around money creation and allocation. Prof Richard Werner is worth listening to on this topic. [1] I'd also recommend Steve Baker's heroic speech in UK parliament. [2] [1] https://youtu.be/9bQkfN_pe44 https://youtu.be/9bQkfN_pe44 [2] https://youtu.be/bXOkmD8Eozs https://youtu.be/bXOkmD8Eozs
- razakel 9y ago
  >I'd also recommend Steve Baker's heroic speech in UK parliament. What's astonishing is that 85% of MPs do not know how money is created. 70% believe that only the government can create money! That's like the CEO of GM not knowing what powers a car...
wazoox 9y ago
One thing that is astonishingly glossed over again and again is energy. There is no activity, no economy of any sort without energy. Energy availability therefore is absolutely central to any economic activity. Energy availability is not infinite, or infinitely elastic to demand. You cannot either infinitely yield more output from a given amount of energy. In last resort, we could say that all money is an energy debt (every dollar amounts to some energy quantity that varies). Making untenable promises by printing large amounts of money doesn't change this (promising that in 20 years, we'll have x% more energy than today doesn't help making this actually happen). In a finite world, you can't grow economy infinitely, period. Frigging laws of physics. See for instance https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/ https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/ Or start here for more https://dothemath.ucsd.edu/post-index/ https://dothemath.ucsd.edu/post-index/
- dsr_ 9y ago
  Energy availability is effectively infinite if you can plan for what you need and invest in the necessary infrastructure. Total insolation for the Earth is around 170 petawatts. If you need more than 1% of that, space-based solar will be cost-effective. The long-term problem with energy is getting rid of your waste.
  - wazoox 9y ago
    Apparently you didn't make the effort to read the article I linked to. You're talking the usual, wishful-thinking nonsense that'll bring us into the entropy wall full speed, real soon now.
  - jamoes 9y ago
    Yep, this is exactly the point economist Julian Simon made in his essay, "Can the Supply of Natural Resources - Especially Energy - Really Be Infinite? Yes!" [1] This exert from the conclusion sums up his argument well: > Incredible as it may seem at first, the term "finite" is not only inappropriate but is downright misleading when applied to natural resources, from both the practical and philosophical points of view. As with many important arguments, the finiteness issue is "just semantic." Yet the semantics of resource scarcity muddle public discussion and bring about wrongheaded policy decisions. [1] http://www.juliansimon.com/writings/Ultimate_Resource/TCHAR03A.txt http://www.juliansimon.com/writings/Ultimate_Resource/TCHAR0...
simo7 9y ago
This should not come at a surprise as money really is debt. Say you get a loan of 100$: now you have 100$ more to spend...but your creditor can still factor his/her credit (sell it at a discount) and spend that sum. That initial 100$ can be spent twice (minus discounting factor). Of course that loan needs to be repaid at one point. But what if you keep on making new debt to repay the previous debt? And what if the credits you generate have a particular utility for your creditors (eg. government-bonds for banks) so that you get 0 or even negative interest rate? You got really close to creating money. The difference between different types of debts and money is rather quantitative (interest rate) than qualitative: https://en.wikipedia.org/wiki/Near_money https://en.wikipedia.org/wiki/Near_money.
dunk010 9y ago
While informative I think that this article is somewhat misleading as it omits any discussion that the reserves described are, in fact, fractional reserves.
- spiralx 9y ago
  Well no, because the whole point of the article is that fractional reserve banking doesn't actually exist and that there is no money multiplier.
84Winston 9y ago
if a) "Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy"... and... b) money is destroyed by repaying loans then... c) Where does the extra money to pay interests come from?
HugoMoore 9y ago
indeed the debt-backed money is the best we know so far!! check out this article: https://medium.com/@sennerrichard/the-holy-grail-of-crypto-currencies-why-fiat-money-is-not-a-house-of-cards-and-why-crypto-could-eacb5acf3828 https://medium.com/@sennerrichard/the-holy-grail-of-crypto-c... We could indeed use blockchain to help generate price stability, but in a different way: we need a centralized decentralized autonomous bargaining system for the economy, together with a Keynes-Bancor-type rule between countries. In a next step, we can talk about replacing USD/Euro...
deleted 9y ago
[deleted]

227 points by adamnemecek 9y ago

Can't recommend "The end of alchemy" by Mervyn King former CEO of Bank of England enough.

You can't miss the accompanying videos that they recorded down in the basement: 1) https://www.youtube.com/watch?v=ziTE32hiWdk https://www.youtube.com/watch?v=ziTE32hiWdk (beginner) 2) https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw (advanced)

freejulian 9y ago

“QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier. This will raise the value of those assets and lower the cost to companies of raising funds in these markets.” The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). They buys whichever bonds they decide which then enables the holders of those bonds to collect free money. All the new money slowly works it’s way into the rest of the economy, inflating away the value of our savings. Crap like this is precisely why bitcoin will succeed. Eventually people will realize what the Central Banks are doing and will decide they’ve had enough.

skybrian 9y ago
It's not "free money". Investors get the money by selling assets. But it might be at a better price than they could have gotten elsewhere. One lesson is not to use a savings account as the only place to keep your money. Anyone who has looked at interest rates in the last few decades already knows this. Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people. This gets talked about as "helicopter drops" but never happens. (It probably requires an act of Congress.)
- freejulian 9y ago
  It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! Without conflating savings with investment, how would you propose an individual save money?
  - fwdpropaganda 9y ago
    > It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! If you had to put it away and couldn't use it for 30 years, it's not really free, is it? It cost you 30 years of not being able to use it. Plus you're taking inflation risk, default risk, depending on the bond you might also be taking liquidity risk, etc. You're talking out of your ass dude.
    - freejulian 9y ago
      Ummmmm, you’ve got it around the wrong way friend. The central banks are buying the bonds. You had already taken on the risk of buying the bond. The fed then came and said, “I’d like to buy your bond and give you 20 years of interest payments on top of your principal.”
      - fwdpropaganda 9y ago
fwdpropaganda 9y ago
> The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). If you believe this, isn't the rational thing to use your dollars to buy assets? I think you're betraying a deep mis-understading of how money works. QE has been raging for 10 years, but inflation is incredibly low (2.5% US, 1.5% EU). In other words, even though you claim that the FED "gives asset holders free money", when you hold cash you're not really losing purchasing power. How do you square the two things?
- freejulian 9y ago
  Absolutely, had I realized what the fed was doing when QE was happening I would have definitely done that. And a lot of people smarter than myself did do precisely that! Inflation is only “incredibly low” if you cherry pick the basket of goods used to measure it.
  - fwdpropaganda 9y ago
    So. No need for bitcoin. You're just running away from a complex thing you don't understand but has a lot of traction, to a simple thing which you understand but has no traction. My strategy is stick with the former and educate myself more. Different strategies.
    - whytaka 9y ago
      I think an alternate money system that works alongside government issued currencies would be a huge boon to society.
      - _jal 9y ago
        Long term, you will either have government as we know it now, or an alternate currency, but not both. The monopoly on currency is closely related to the monopoly on force. I generally think a lot of anarcho-capitalist theory to be obvious nonsense, but on that, they have a point.
ethbro 9y ago
> Crap like this is precisely why bitcoin will succeed "Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time" I'll believe you when the entire world economy has run on non-Keynesian cryptocurrency economics through a couple of recessions...
- freejulian 9y ago
  Well, I mean, the greatest economic booms in American history happened when our money was backed by gold. When the dollar came off the gold standard in the 70s, we saw wages decouple from productivity. This is not a coincidence.
  - skookumchuck 9y ago
    Most people who claim that fiat money is essential for a growing economy are unable to explain the US economy from 1800-1914. The real purpose of fiat money systems is so the government can spend more than it takes in by printing the difference (or the more modern variation of just creating it with accounting gimmicks).
    - ethbro 9y ago
      The real point of fiat money is that it affords a government the option to increase the money supply at will. Whether they do that for good (e.g. to attempt to combat a recession) or for evil (e.g. to invalidate government debt / inflate their way out of deficits) is a political exercise. And knowing that, I actually think the US Fed is a pretty decent system. I shudder to think what would happen if Congress controlled monetary supply.
      - skookumchuck 9y ago
        An 1800 dollar is worth the same as a 1914 dollar. A 2018 dollar is worth about 4 cents.
squaresmile 9y ago
Right after the part you quoted: "That, in turn, should lead to higher spending in the economy.(1) The way in which QE works therefore differs from two common misconceptions about central bank asset purchases: that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system, as might be described by the money multiplier theory. This section explains the relationship between money and QE and dispels these misconceptions. ... Two misconceptions about how QE works Why the extra reserves are not ‘free money’ for banks While the central bank’s asset purchases involve — and affect — commercial banks’ balance sheets, the primary role of those banks is as an intermediary to facilitate the transaction between the central bank and the pension fund. The additional reserves shown in Figure 3 are simply a by-product of this transaction. It is sometimes argued that, because they are assets held by commercial banks that earn interest, these reserves represent ‘free money’ for banks. While banks do earn interest on the newly created reserves, QE also creates an accompanying liability for the bank in the form of the pension fund’s deposit, which the bank will itself typically have to pay interest on. In other words, QE leaves banks with both a new IOU from the central bank but also a new, equally sized IOU to consumers (in this case, the pension fund), and the interest rates on both of these depend on Bank Rate"
- mac01021 9y ago
  I think maybe that is beside the point. If new money is created, and the new money is not distributed evenly among all citizens, all those citizens who receive less than an equal share are harmed while those who receive more than an equal share benfit. It seems like the central bank, in this way, harms most people on a regular basis. I am not prepared, however, to argue that Bitcoin is any better in this respect.

nosuchthing 9y ago

It seems quiet ironic that Bitcoin/Cryptocoin advocates claim the minting and production using algorithms like Satoshi's BTC will be better than fiat when it just creates a new oligarchy... easier to co-opt due to the consolidation of control within the cryptocoin ecosystems. Banks and the finance sector took note of BTC prior to 2014, and with the way BTC is produced anyone with enough capital entering into BTC - especially during the first few years would be in a position to take vast amounts of BTC at low cost and simply wait and attempt to convince other people to exchange their wealth for BTC which due to how the supply begins to be cut off, serves to enrich the minority of oligarchial squatter-speculators. Bitcoin is often misunderstood as "deflationary" yet checking the math under the hood and we see that's a half truth. The supply inflates every 10 minutes, and for the first few years Bitcoin was hyperinflationary, granting a small group of users the majority of the supply. Satoshi Nakamoto Thu Jan 8 14:27:40 EST 2009 I made the proof-of-work difficulty ridiculously easy to start with, so for a little while in the beginning a typical PC will be able to generate coins in just a few hours. It'll get a lot harder when competition makes the automatic adjustment drive up the difficulty. first 4 years: 10,500,000 coins next 4 years: 5,250,000 coins next 4 years: 2,625,000 coins next 4 years: 1,312,500 coins ____________________________________________________ ____________________________________________________ https://medium.com/@balajis/quantifying-decentralization-e39db233c28e https://medium.com/@balajis/quantifying-decentralization-e39... : One important point: if we actually include all 7 billion people on the earth, most of whom have zero BTC or Ethereum, the Gini coefficient is essentially 0.99+. And if we just include all balances, we include many dust balances which would again put the Gini coefficient at 0.99+. Thus, we need some kind of threshold here. The imperfect threshold we picked was the Gini coefficient among accounts with ≥185 BTC per address, and ≥2477 ETH per address. So this is the distribution of ownership among the Bitcoin and Ethereum rich with $500k as of July 2017. In what kind of situation would a thresholded metric like this be interesting? Perhaps in a scenario similar to the ongoing IRS Coinbase issue, where the IRS is seeking information on all holders with balances >$20,000. Conceptualized in terms of an attack, a high Gini coefficient would mean that a government would only need to round up a few large holders in order to acquire a large percentage of outstanding cryptocurrency — and with it the ability to tank the price. With that said, two points. First, while one would not want a Gini coefficient of exactly 1.0 for BTC or ETH (as then only one person would have all of the digital currency, and no one would have an incentive to help boost the network), in practice it appears that a very high level of wealth centralization is still compatible with the operation of a decentralized protocol. Second, as we show below, we think the Nakamoto coefficient is a better metric than the Gini coefficient for measuring holder concentration in particular as it obviates the issue of arbitrarily choosing a threshold. ...However, the maximum Gini coefficient has one obvious issue: while a high value tracks with our intuitive notion of a “more centralized” system, the fact that each Gini coefficient is restricted to a 0–1 scale means that it does not directly measure the number of individuals or entities required to compromise a system. Specifically, for a given blockchain suppose you have a subsystem of exchanges with 1000 actors with a Gini coefficient of 0.8, and another subsystem of 10 miners with a Gini coefficient of 0.7. It may turn out that compromising only 3 miners rather than 57 exchanges may be sufficient to compromise this system, which would mean the maximum Gini coefficient would have pointed to exchanges rather than miners as the decentralization bottleneck. Conversely, if one considers “number of distinct countries with substantial mining capacity” an essential subsystem, then the minimum Nakamoto coefficient for Bitcoin would again be 1, as the compromise of China (in the sense of a Chinese government crackdown on mining) would result in >51% of mining being compromised.

hidenotslide 9y ago

Here is a simple way to demonstrate the point of the article. If I deposit $100 in a bank, the bank can lend out around $90 to someone else (fractional reserve banking). That person now deposits the money at another bank, and the "money supply" is $190 instead of $100. On the other hand when a central bank "prints money", they use it to buy assets with an equivalent value, so there is no net transfer of wealth done by the central bank. That assumes they don't affect asset prices, which not a great assumption. The way central banks affect the money supply is through interest rates to change the supply and demand of private loans that banks make, which indirectly affects the money supply.

millstone 9y ago
> If I deposit $100 in a bank, the bank can lend out around $90 to someone else (fractional reserve banking) This is the textbook explanation which the article strongly rejects. In practice the bank will lend out as much as possible - it is not effectively constrained by reserve requirements since it can and will simply borrow the difference. What constrains it is market forces (the demand for loans, and their profitability), and financial regulations, and finally the interest rates set by the central bank. If a retail bank believes it can turn a profit by lending money borrowed from the central bank, in compliance with the law, it will do so until it exhausts the opportunity. Consumer deposits are irrelevant.
- quantumofmalice 9y ago
  Exactly. There is no reserve limit: any pretense of that was washed away once sweep accounts became standard. Banks lend as much as they possibly can, and then a bit more, and then expect the taxpayers to pick up the pieces when it all falls apart. The irony is that there need not be a reserve ratio: if we just adopted duration-matched banking, where a bank had to demonstrate it had ownership of a given dollar it was lending for the duration it loaned that dollar (e.g. via a CD) it would be fine. This is the fundamental problem with banking, and I don't understand why no one talks about it. Banks are lying about having money they don't have (i.e. they are promising the same dollar to more than one person at the same time). If we forced them to just stop lying it would all work out, and there wouldn't be any need for a reserve ratio.

dwd 9y ago

Highly recommend this article for a dose of reality (he also covers the theory of money creation) http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/ http://www.debtdeflation.com/blogs/2009/01/31/therovingcaval...

manjushri 9y ago

It seems like leverage has shifted from the central banks to commercial banks over recent decades, and indeed there has been massive consolidation of power in the commercial sector. The central bank seems more like an insurance proxy for the tax payer to the commercial bank, as evidenced by the 2008 rescue packages.

stephen_g 9y ago

Yes, learning how banks create money for me was a huge turning point in realising most of what people think they know (and what I thought) about money, debt and economics is actually wrong. That the money supply grows when banks lend and contracts when people pay the debt down is a big point to get your head around. The other big one is the national accounts and sectoral balances - see [1] for a much more detailed run-down. To summarise, take the definition of GDP: (1) GDP ≡ C + I + G + (X – M) where C is household final consumption, I is private investment including inventory, G is Government spending, and (X-M) are net exports. Add net external income flows (FNI) to (1) and you get GNP: (2) GNP = C + I + G + (X – M) + FNI Subtract total transfers and taxes from each side: (3) GNP – T = C + I + G + (X – M) + FNI – T Collect terms by sector (private, Government and External) (4) (GNP – C – T) – I = (G – T) + (X – M + FNI) Then we can simplify - (GNP - consumption - taxes) is equilivalent to private saving (we’ll call that S), and (X - M - FNI) is called the Current Account Balance (CAD): (5) (S – I) – (G – T) – CAD = 0 or (6) (S – I) = (G – T) + CAD What this means is that by definition, if your external sector is balanced, a Government budget surplus must reduce the net assets of the private sector by exactly the same amount as it is in surplus. With a trade deficit and a Government surplus, the private sector’s net assets are reduced by the sum of those. This is quite clear graphically too [2]. So the end result is that you can only have economic growth when the Government is running a surplus and the private sector is in balance or deficit through money creation from banks. Is relies on people borrowing more and more money - but because equal amounts of debt are also created (no higher net wealth), eventually the sector in aggregate can’t borrow any more, and the system falls apart (the second derivative of credit growth dropped a little while before the GFC, which is how some non-mainstream economists predicted that it was coming). But at the end of the day, this means a balanced or surplus Government budget is actually bad for the economy by definition unless you have a big trade surplus (like Germany for instance), because it’s sapping the private sector of wealth. Do you have to start taking a more nuanced view of Government debt, when Government debt actually represents the net actual savings of the private sector! 1. http://bilbo.economicoutlook.net/blog/?p=32396 http://bilbo.economicoutlook.net/blog/?p=32396 2. https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg

nopriorarrests 9y ago

known 9y ago

https://en.m.wikipedia.org/wiki/Chiemgauer https://en.m.wikipedia.org/wiki/Chiemgauer is a good experiment on local currency

codeulike 9y ago

An aspect of this I wonder about is that many years ago a bank account is what you opened when you explicitly wanted to lend money to the bank to earn interest. But these days a bank account is pretty much mandatory for any sort of normal existence.

mendelsd 9y ago

Most people are unaware of the true mechanism of money creation, therefore don't understand how the current mechanism and its (lack of) constraints affect society, therefore don't see the potential for societal improvement through systemic change around money creation and allocation. Prof Richard Werner is worth listening to on this topic. [1] I'd also recommend Steve Baker's heroic speech in UK parliament. [2] [1] https://youtu.be/9bQkfN_pe44 https://youtu.be/9bQkfN_pe44 [2] https://youtu.be/bXOkmD8Eozs https://youtu.be/bXOkmD8Eozs

razakel 9y ago
>I'd also recommend Steve Baker's heroic speech in UK parliament. What's astonishing is that 85% of MPs do not know how money is created. 70% believe that only the government can create money! That's like the CEO of GM not knowing what powers a car...

wazoox 9y ago

One thing that is astonishingly glossed over again and again is energy. There is no activity, no economy of any sort without energy. Energy availability therefore is absolutely central to any economic activity. Energy availability is not infinite, or infinitely elastic to demand. You cannot either infinitely yield more output from a given amount of energy. In last resort, we could say that all money is an energy debt (every dollar amounts to some energy quantity that varies). Making untenable promises by printing large amounts of money doesn't change this (promising that in 20 years, we'll have x% more energy than today doesn't help making this actually happen). In a finite world, you can't grow economy infinitely, period. Frigging laws of physics. See for instance https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/ https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/ Or start here for more https://dothemath.ucsd.edu/post-index/ https://dothemath.ucsd.edu/post-index/

dsr_ 9y ago
Energy availability is effectively infinite if you can plan for what you need and invest in the necessary infrastructure. Total insolation for the Earth is around 170 petawatts. If you need more than 1% of that, space-based solar will be cost-effective. The long-term problem with energy is getting rid of your waste.
- wazoox 9y ago
  Apparently you didn't make the effort to read the article I linked to. You're talking the usual, wishful-thinking nonsense that'll bring us into the entropy wall full speed, real soon now.
- jamoes 9y ago
  Yep, this is exactly the point economist Julian Simon made in his essay, "Can the Supply of Natural Resources - Especially Energy - Really Be Infinite? Yes!" [1] This exert from the conclusion sums up his argument well: > Incredible as it may seem at first, the term "finite" is not only inappropriate but is downright misleading when applied to natural resources, from both the practical and philosophical points of view. As with many important arguments, the finiteness issue is "just semantic." Yet the semantics of resource scarcity muddle public discussion and bring about wrongheaded policy decisions. [1] http://www.juliansimon.com/writings/Ultimate_Resource/TCHAR03A.txt http://www.juliansimon.com/writings/Ultimate_Resource/TCHAR0...

simo7 9y ago

This should not come at a surprise as money really is debt. Say you get a loan of 100$: now you have 100$ more to spend...but your creditor can still factor his/her credit (sell it at a discount) and spend that sum. That initial 100$ can be spent twice (minus discounting factor). Of course that loan needs to be repaid at one point. But what if you keep on making new debt to repay the previous debt? And what if the credits you generate have a particular utility for your creditors (eg. government-bonds for banks) so that you get 0 or even negative interest rate? You got really close to creating money. The difference between different types of debts and money is rather quantitative (interest rate) than qualitative: https://en.wikipedia.org/wiki/Near_money https://en.wikipedia.org/wiki/Near_money.

dunk010 9y ago

While informative I think that this article is somewhat misleading as it omits any discussion that the reserves described are, in fact, fractional reserves.

spiralx 9y ago
Well no, because the whole point of the article is that fractional reserve banking doesn't actually exist and that there is no money multiplier.

84Winston 9y ago

if a) "Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy"... and... b) money is destroyed by repaying loans then... c) Where does the extra money to pay interests come from?

HugoMoore 9y ago

indeed the debt-backed money is the best we know so far!! check out this article: https://medium.com/@sennerrichard/the-holy-grail-of-crypto-currencies-why-fiat-money-is-not-a-house-of-cards-and-why-crypto-could-eacb5acf3828 https://medium.com/@sennerrichard/the-holy-grail-of-crypto-c... We could indeed use blockchain to help generate price stability, but in a different way: we need a centralized decentralized autonomous bargaining system for the economy, together with a Keynes-Bancor-type rule between countries. In a next step, we can talk about replacing USD/Euro...

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