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My understanding is that reserve banks create money out of thin air and then 'loan' it to governments. Then governments use the money to pay for public projects

My understanding is that reserve banks create money out of thin air and then 'loan' it to governments. Then governments use the money to pay for public projects. A lot of the money ends up going to large corporations through significant government contracts, grants and subsidies. When a government takes a loan from the reserve bank and puts it into circulation by giving the money to corporations to pay for public projects, the government is effectively diluting the value of everyone's money and giving it to corporations. This process creates public debt for which the government will need to take additional loans from the reserve bank to keep meeting the interest repayments; which will further dilute the value of everyone's wealth while increasing corporate wealth; and the cycle will keep repeating.

cecilpl2 8y ago
The idea is that the public projects increase everyone's wealth by a greater amount than the interest on the debt. If you take money out of the equation and just consider that we have a large pool of labor to make use of, government's purpose in spending on projects is to allocate some of that labor towards long-term goals that no company would involve itself in as the pure profit potential is too risky, distant, or difficult to capitalize on.
- spectrum1234 8y ago
  This might be true. However it's fact that poor people lose the most from inflation. Which is better?
  - slededit 8y ago
    The poor don’t have savings. If you spend as much or more than you make inflation benefits you by devaluing the debt you owe. If you have a large 401k on the other hand it deflates the value of your retirement savings. You may have to work in old age.
    - jondubois 8y ago
      But it also deflates the value of assets that generate monetary profits. If the value of cash goes down, then the value of cash-generating assets also goes down. When the value of today-money goes down, the value of tomorrow-money goes up relatively. That explains why tech companies and speculative investments do well during expansionary monetary policy. It aslo explains why advertising and brand become so important. Because if the value of money goes up in the future, then the value of each customer will also go up; even if you have to make a net loss today to pay for advertising to get those customers.
    - markvdb 8y ago
      Both your comment and the parent comment are right. How so? Two things: * Poor means less access to more expensive debt. Rich means more access to cheaper debt. * Rich means one can use debt leverage to grow one's assets. How does that influence the value of necessities for the less rich...?
    - Joeri 8y ago
      But the working poor don’t see their hourly wage rise automatically as a consequence of inflation, so unless the government mandates higher minimum wage, or unions negotiate it, or there’s a shortage of low-wage workers driving up wages, their income drops in real terms and they are worse off.
    - nradov 8y ago
      Inflation generally doesn't hurt the value of stocks in a 401(k). You still own the same percentage of the underlying public corporations. Inflation only hurts your bond holdings. This is one reason why it's best to keep at least some of your retirement fund assets in stocks even as you approach retirement age rather than shifting entirely too bonds. TIPS also provide a way to hedge against inflation in retirement funds.
      - slededit 8y ago
        Inflation does hurt the underlying companies, and thus stocks are not immune. Except in cases with extremely high inflation most contracts are not inflation adjusted. By the time a company is paid the merchandise sold is worth significantly more in fiat terms. In high inflation an entity is loathe to trade assets for dollars and so the economy will slow.
  - matt4077 8y ago
    Poor people with debt actually profit from inflation. Losers are people with cash savings and equivalent, plus those expecting pensions not indexed to inflation.
- jondubois 8y ago
  But it doesn't increase everyone's wealth equally... What's worse is that it doesn't even increase everyone's wealth in a fair way. It does not reward value creation. It rewards rent seeking (value capturing). It's not about who can create value in the most efficient way; it's about which corporation has the most friends in government and can get the biggest contracts.
  - novalis78 8y ago
    So then debt and IOUs as obligation for some future work that’s due re-introduces a feudal system with fancy language. Suddenly people have to work longer and harder to maintain the same living standards while their wealth gets expropriated and via crony government relationships of particularly well established lobbying industries runs into to pockets of a minority that’s not necessarily engaged in generating true value for the public. Sounds like ‘systemic’ Feudalism.
nonbel 8y ago
Yep, also keep in mind that the "new money" trickles down. Ie, prices rise faster than wages.
jazzyjackson 8y ago
Reserve banks create money out of debt. They give a loan to someone, which means someone owes them 10,000 dollars. Now they can trade that 10,000$ worth of debt to someone else. You could say "out of thin air", but its really "out of social expectations that you pay your debt eventually"
- robertAngst 8y ago
  >You could say "out of thin air", but its really "out of social expectations that you pay your debt eventually" You missed that- Since its 'out of thin air', the interest on this debt is artificially low. When interest rates around 0, things that would otherwise be a bad decision, become feasible. Or, things that are a good idea, are sold and the cronies who get the loans make even more money.
ThrowMeDown01 8y ago
> My understanding is that reserve banks create money out of thin air "Money creation in the modern economy" (Bank of England, PDF) https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Quote: In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. 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.
- arminiusreturns 8y ago
  This is semantics used to distract from the fractional reserve system in fiat currency, and is mostly false.
  - ThrowMeDown01 8y ago
    I don't understand your comment, especially the "distract" part. First, it isn't false at all, commercial banks create money, just as they say in the paper. Second, if you make the bold claim that the people of the Bank of England wrote a paper that is false you should provide more than a single sentence - especially when commenting here on HN.
    - matt4077 8y ago
      In my experience, the use of the terms “fractional reserve” and “fiat” are almost perfect indicators you are dealing with a conspiracy nut.
      - arminiusreturns 8y ago

cecilpl2 8y ago

The idea is that the public projects increase everyone's wealth by a greater amount than the interest on the debt. If you take money out of the equation and just consider that we have a large pool of labor to make use of, government's purpose in spending on projects is to allocate some of that labor towards long-term goals that no company would involve itself in as the pure profit potential is too risky, distant, or difficult to capitalize on.

spectrum1234 8y ago
This might be true. However it's fact that poor people lose the most from inflation. Which is better?
- slededit 8y ago
  The poor don’t have savings. If you spend as much or more than you make inflation benefits you by devaluing the debt you owe. If you have a large 401k on the other hand it deflates the value of your retirement savings. You may have to work in old age.
  - jondubois 8y ago
    But it also deflates the value of assets that generate monetary profits. If the value of cash goes down, then the value of cash-generating assets also goes down. When the value of today-money goes down, the value of tomorrow-money goes up relatively. That explains why tech companies and speculative investments do well during expansionary monetary policy. It aslo explains why advertising and brand become so important. Because if the value of money goes up in the future, then the value of each customer will also go up; even if you have to make a net loss today to pay for advertising to get those customers.
  - markvdb 8y ago
    Both your comment and the parent comment are right. How so? Two things: * Poor means less access to more expensive debt. Rich means more access to cheaper debt. * Rich means one can use debt leverage to grow one's assets. How does that influence the value of necessities for the less rich...?
  - Joeri 8y ago
    But the working poor don’t see their hourly wage rise automatically as a consequence of inflation, so unless the government mandates higher minimum wage, or unions negotiate it, or there’s a shortage of low-wage workers driving up wages, their income drops in real terms and they are worse off.
  - nradov 8y ago
    Inflation generally doesn't hurt the value of stocks in a 401(k). You still own the same percentage of the underlying public corporations. Inflation only hurts your bond holdings. This is one reason why it's best to keep at least some of your retirement fund assets in stocks even as you approach retirement age rather than shifting entirely too bonds. TIPS also provide a way to hedge against inflation in retirement funds.
    - slededit 8y ago
      Inflation does hurt the underlying companies, and thus stocks are not immune. Except in cases with extremely high inflation most contracts are not inflation adjusted. By the time a company is paid the merchandise sold is worth significantly more in fiat terms. In high inflation an entity is loathe to trade assets for dollars and so the economy will slow.
- matt4077 8y ago
  Poor people with debt actually profit from inflation. Losers are people with cash savings and equivalent, plus those expecting pensions not indexed to inflation.
jondubois 8y ago
But it doesn't increase everyone's wealth equally... What's worse is that it doesn't even increase everyone's wealth in a fair way. It does not reward value creation. It rewards rent seeking (value capturing). It's not about who can create value in the most efficient way; it's about which corporation has the most friends in government and can get the biggest contracts.
- novalis78 8y ago
  So then debt and IOUs as obligation for some future work that’s due re-introduces a feudal system with fancy language. Suddenly people have to work longer and harder to maintain the same living standards while their wealth gets expropriated and via crony government relationships of particularly well established lobbying industries runs into to pockets of a minority that’s not necessarily engaged in generating true value for the public. Sounds like ‘systemic’ Feudalism.

nonbel 8y ago

Yep, also keep in mind that the "new money" trickles down. Ie, prices rise faster than wages.

jazzyjackson 8y ago

Reserve banks create money out of debt. They give a loan to someone, which means someone owes them 10,000 dollars. Now they can trade that 10,000$ worth of debt to someone else. You could say "out of thin air", but its really "out of social expectations that you pay your debt eventually"

robertAngst 8y ago
>You could say "out of thin air", but its really "out of social expectations that you pay your debt eventually" You missed that- Since its 'out of thin air', the interest on this debt is artificially low. When interest rates around 0, things that would otherwise be a bad decision, become feasible. Or, things that are a good idea, are sold and the cronies who get the loans make even more money.

ThrowMeDown01 8y ago

> My understanding is that reserve banks create money out of thin air "Money creation in the modern economy" (Bank of England, PDF) https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Quote: In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. 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.

arminiusreturns 8y ago
This is semantics used to distract from the fractional reserve system in fiat currency, and is mostly false.
- ThrowMeDown01 8y ago
  I don't understand your comment, especially the "distract" part. First, it isn't false at all, commercial banks create money, just as they say in the paper. Second, if you make the bold claim that the people of the Bank of England wrote a paper that is false you should provide more than a single sentence - especially when commenting here on HN.
  - matt4077 8y ago
    In my experience, the use of the terms “fractional reserve” and “fiat” are almost perfect indicators you are dealing with a conspiracy nut.
    - arminiusreturns 8y ago