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I was about to write a really snarky response here, because it seems intuitive to me that if the government prints more currency that means it's increasing the
by nickelcitymario 8y ago
I was about to write a really snarky response here, because it seems intuitive to me that if the government prints more currency that means it's increasing the supply of money, until I realized you might be right. So long as the issued currency is being used specifically the represent money that already exists on a ledger, it's perfectly fine.
My bad?
My one question though is... what's the mechanism for this to happen? My understanding is that when a government issues currency, they are in effect lending it out. They don't just print it out and say "This $1 is the same as the $1 in your account." The Central Bank of whatever country we're talking about has to lend that money out, either to the government itself or to the other banks.
And if THAT's the case, then doesn't every $1 of currency issued increase the total supply of money by $1?
What am I missing? (Not being argumentative, I'm honestly asking.)
- 781 8y agoIn 2008 the German government guaranteed ALL bank accounts, WITHOUT a limit. > As German leaders and bankers worked feverishly to rescue a lender considered too big to fail, the government announced Sunday that it would guarantee all private savings accounts in Germany - worth about €500 billion - in an effort to reinforce increasingly shaky confidence in the financial system. https://www.nytimes.com/2008/10/05/business/worldbusiness/05iht-hypo.4.16708030.html https://www.nytimes.com/2008/10/05/business/worldbusiness/05...
- nickelcitymario 8y agoHow does this address the question of whether printing more currency increases the supply of money?
- notahacker 8y agoThe mechanism is supply and demand. People and companies borrow money at the current interest rate (because both they and the banks believe they will be productive enough in future to pay it back) in excess of the current money supply, so the money supply rises to match it. As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest. Obviously over time, the amount of money being loaned into the system grows with the number of creditworthy people wanting to borrow. This system obviously isn't perfect in practice, but it's a lot better than the "however much we can get away with" approach to money creation used by Bitfinex and the government of Venezuela because the newly created money goes directly into their own pockets.
- nickelcitymario 8y ago> As the money from an individual loan gets repaid, the loan disappears from the banks' balance sheet, and the bank earns only from the interest. It disappears? How does that work? When the bank credits my account with, say, a $500,000 mortgage, they consider that an asset. Because now I owe them $500k+interest, even though they didn't actually take that $500k out of any account. They created it when they loaned it to me. You're saying the bank "destroys" the money as it gets paid back, and only keeps the interest? I apologize if I'm misconstruing your explanation.
- notahacker 8y agoYes. A mortgage ceases to be an asset when it is repaid, on account of not actually existing any more, with the bank only keeping the interest as profit (and similarly, loans the bank might have to take out to cover its reserve shortfall in the event of lending beyond its current deposits cease to become liabilities when the bank repays them). The result, for better and for worse, is that the quantity of money in an economy is linked to the supply of and demand for credit.
- nickelcitymario 8y agoWow, I have truly been schooled today. Thank you, notahacker :-)