4 ms·

Shortest possible answer: debt is money. Or you could say it's dual to money - creating debt creates money, paying debt destroys money. There's literally less

Shortest possible answer: debt is money. Or you could say it's dual to money - creating debt creates money, paying debt destroys money. There's literally less money in the world when you make your mortgage payment (bank just sends much of your payment to /dev/null), and there's literally more money in the world when you take a mortgage (bank pulls it out of thin air). If all debt would be repaid then almost all of the money as we know it today would disappear.

Ir0nMan 8y ago
That's not how this works. That's not how any of this works.
- robertAngst 8y ago
  Don't just say No. You need to explain why. Also, I agree that the person you replied to was oversimplifying.
Joeri 8y ago
That’s not really how it works. The bank takes savings deposited and issues most of it as loans keeping enough on hand to issue to people withdrawing their savings (fractional reserve banking). The interest on the loans pays the interest on the savings (which is why one tracks the other). They also borrow money from the markets (or the central bank) at low interest rates to reissue as higher-interest loans. Nowhere in that system do they create money out of thin air or send money to /dev/null (although I get the impression they do some of that in derivatives markets).
- anonymouzz 8y ago
  This is how the system works. There's a limit to that practice (the money multiplier), which is one of the reasons why banks need to rotate money as you said (another being cross-bank transfers). See this link: https://en.wikipedia.org/wiki/Money_creation#Credit_theory_of_money https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o... It's a very counter intuitive concept that underpins the entire economic system. It was even a subject of a (failed) Swiss referendum recently: https://en.wikipedia.org/wiki/2018_Swiss_sovereign-money_initiative https://en.wikipedia.org/wiki/2018_Swiss_sovereign-money_ini...
- usefulcat 8y ago
  But they're able to loan far more than they have in deposits, no? In which case how are they not "creating money" by lending?
  - dragontamer 8y ago
    It's an issue of details. Mortgages make MBS, mortgaged backed securities, which are traded around. You can buy these, or SLABs, student loan backed securities. Neither are money. M0 money can only be made by the US Fed. M1 or M2 money can be made by banks out of savings accounts or checking accounts, due to the fractional reserve system. By lending money to a bank through the savings account mechanism, the bank owes YOU money, because the bank spends roughly 80% of it on other things. That's why there is a distinction from M0 pure cash, and the M1 or M2 virtual 'nearly money' in the system. I think credit cards are a higher order of money as well...
- pjmorris 8y ago
  Actually, the GP's explanation is closer to true than yours is. I was taught the same explanation you gave, but it doesn't fit the facts on the ground. Banks don't base the loans they issue on deposits (the closest to this they come are the capital requirements regulators impose on them), they base them on models of the borrower's ability to repay and on models of the ability to resell the loan (aka 'securitization', though less so since that practice helped drive the financial crisis). If the models fit, the loan amount is credited to the seller, and debited to the buyer, essentially creating money 'out of thin air.' The economist Steve Keen is perhaps one of the more vocal advocates of this view (http://www.debtdeflation.com/blogs/ http://www.debtdeflation.com/blogs/).
weberc2 8y ago
What is the relationship to money and wealth or money and productivity? Surely we wouldn’t say that incurring debt increases wealth and paying debt destroys it? Also, does “creating money” via incurring debt drive inflation (more money in the system)?
- anonymouzz 8y ago
  My view on this is that wealth is something real that actually impacts people's lives. At the same time money is not, it's the story told around wealth so that we can all agree on how one "wealth" compares to another. The goal is to not let this story go wild (e.g. into super-inflation) so that people don't lose trust in money. Keeping those two in check is the main goal of any central bank, ever since the gold standard was generally abandoned and money became entirely abstract. In my opinion no one really knows how to do it (although it's been okay-ish so far), the FED for example often uses national unemployment rate to decide how much dollars should be thrown at the system.

Ir0nMan 8y ago

That's not how this works. That's not how any of this works.

robertAngst 8y ago
Don't just say No. You need to explain why. Also, I agree that the person you replied to was oversimplifying.

Joeri 8y ago

That’s not really how it works. The bank takes savings deposited and issues most of it as loans keeping enough on hand to issue to people withdrawing their savings (fractional reserve banking). The interest on the loans pays the interest on the savings (which is why one tracks the other). They also borrow money from the markets (or the central bank) at low interest rates to reissue as higher-interest loans. Nowhere in that system do they create money out of thin air or send money to /dev/null (although I get the impression they do some of that in derivatives markets).

anonymouzz 8y ago
This is how the system works. There's a limit to that practice (the money multiplier), which is one of the reasons why banks need to rotate money as you said (another being cross-bank transfers). See this link: https://en.wikipedia.org/wiki/Money_creation#Credit_theory_of_money https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o... It's a very counter intuitive concept that underpins the entire economic system. It was even a subject of a (failed) Swiss referendum recently: https://en.wikipedia.org/wiki/2018_Swiss_sovereign-money_initiative https://en.wikipedia.org/wiki/2018_Swiss_sovereign-money_ini...
usefulcat 8y ago
But they're able to loan far more than they have in deposits, no? In which case how are they not "creating money" by lending?
- dragontamer 8y ago
  It's an issue of details. Mortgages make MBS, mortgaged backed securities, which are traded around. You can buy these, or SLABs, student loan backed securities. Neither are money. M0 money can only be made by the US Fed. M1 or M2 money can be made by banks out of savings accounts or checking accounts, due to the fractional reserve system. By lending money to a bank through the savings account mechanism, the bank owes YOU money, because the bank spends roughly 80% of it on other things. That's why there is a distinction from M0 pure cash, and the M1 or M2 virtual 'nearly money' in the system. I think credit cards are a higher order of money as well...
pjmorris 8y ago
Actually, the GP's explanation is closer to true than yours is. I was taught the same explanation you gave, but it doesn't fit the facts on the ground. Banks don't base the loans they issue on deposits (the closest to this they come are the capital requirements regulators impose on them), they base them on models of the borrower's ability to repay and on models of the ability to resell the loan (aka 'securitization', though less so since that practice helped drive the financial crisis). If the models fit, the loan amount is credited to the seller, and debited to the buyer, essentially creating money 'out of thin air.' The economist Steve Keen is perhaps one of the more vocal advocates of this view (http://www.debtdeflation.com/blogs/ http://www.debtdeflation.com/blogs/).

weberc2 8y ago

What is the relationship to money and wealth or money and productivity? Surely we wouldn’t say that incurring debt increases wealth and paying debt destroys it? Also, does “creating money” via incurring debt drive inflation (more money in the system)?

anonymouzz 8y ago
My view on this is that wealth is something real that actually impacts people's lives. At the same time money is not, it's the story told around wealth so that we can all agree on how one "wealth" compares to another. The goal is to not let this story go wild (e.g. into super-inflation) so that people don't lose trust in money. Keeping those two in check is the main goal of any central bank, ever since the gold standard was generally abandoned and money became entirely abstract. In my opinion no one really knows how to do it (although it's been okay-ish so far), the FED for example often uses national unemployment rate to decide how much dollars should be thrown at the system.