3 ms·

>"Savings don't sit in a vault somewhere. They get reinvested into the economy, providing capital. " No they don't. Savings is only a number in a computer and

>"Savings don't sit in a vault somewhere. They get reinvested into the economy, providing capital. " No they don't. Savings is only a number in a computer and lending is not limited to the available savings because private banks create money when lending. So, the quantity of savings have not effect in how much financial capital can be invested in the economy. Private banks don't lend reserves (or savings), instead, they lend when makes business sense and then search for reserves in the system. Central banks will accommodate any need of reserves in the system in order to keep the interest rate in their choose range. Edit: I see I get some down-votes, maybe people is more willing to believe 'forbes' or the Bank of England that some random guy in the internet: https://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/ https://www.forbes.com/sites/francescoppola/2014/01/21/banks... 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-...

csomar 5y ago
> Central banks will accommodate any need of reserves in the system in order to keep the interest rate in their choose range. I think they are required to keep 10% reserve. Unless this changed very recently?
- RobertoG 5y ago
  It has not changed, the problem is that the normal narrative has the causality wrong. The explanation we get is this: private banks have a quantity of reserves and they can lend only what the money multiplier allows them. So, they are limited by the quantity of reserves they have. If that were true, they would be limited by the quantity of savings in the system. But in reality it works the other way around. Banks lend first (hopefully only when makes business sense to lend) and then they search for reserves. A bank lend (creating money in the process) and, after the fact, if it doesn't have enough reserves already, it tries to get the reserves from other banks (inter-bank market). This is a legal requirement, so, they have to get those reserves. This creates an offer-demand dynamic between banks that move the interest rate up or down. If the quantity of reserves was fixed, that would be the end of it, but, because Central Banks have a target interest rate that they want to keep (but not a money quantity target), they have to accommodate the quantity or reserves in the system reacting to the inter-bank market dynamics. Adding or retiring reserves as necessary to keep the interest rate that they want. The central banks control the interest rate, but that means they can't control the quantity of money in the system. The quantity of money is determined by the demand of credit from the economy (and not by the available savings). If we understand this, we see that private banks are not limited by savings in their lending capacity, they are limited by how many business or households are requesting credit (and if those request make business sense for the bank). This is a good reading about those subjects: 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-...
  - csomar 5y ago
    Thanks. This makes sense of what you said before. (I'd not focus on the downvotes too much, money issues are too emotional/political).
- lifty 5y ago
  There’s no reserve requirement anymore. It has been removed for a while. https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements https://www.eidebailly.com/insights/articles/2020/4/federal-...
imtringued 5y ago
>No they don't. Savings is only a number in a computer and lending is not limited to the available savings because private banks create money when lending. So, the quantity of savings have not effect in how much financial capital can be invested in the economy. If that were 100% true (there is a caveat) then the ideal savings rate would be 0% and that would be truly awful for every entity in the economy regardless of whether they are companies or private individuals. All savings would become excess savings and interest rates would need to be in the double digit negatives. In practice this would actually run into a contradiction, if the savings rate were 0% that would mean all income is immediately consumed or invested, meaning the economy runs at full capacity at all times, any increase of the monetary supply would immediately translate into inflation because all goods that are being produced are already being consumed, the additional money would result in additional consumption that causes a shortage of goods which then translates into increased prices aka inflation. At some point you would run into the physical limits of the economy. As your savings rate is 0%, the amount of money that can be created without inducing inflation is also $0. The potential for lending is "effectively" limited by available savings.
- RobertoG 5y ago
  I didn't say anything about the ideal savings rate being 0% The quantity of savings is divorce of the quantity of money available for investing or, in other words, lending money doesn't come from savings. That's an empirical fact. Of course, households and firms are going to choose to keep savings, and that's OK. If people choose to spend more and keep less savings then, Central Banks could accommodate the Interest Rate in order to make lending more expensive and avoid inflation, or the government could increase taxes or some other solution that retires money from the economy.

csomar 5y ago

> Central banks will accommodate any need of reserves in the system in order to keep the interest rate in their choose range. I think they are required to keep 10% reserve. Unless this changed very recently?

RobertoG 5y ago
It has not changed, the problem is that the normal narrative has the causality wrong. The explanation we get is this: private banks have a quantity of reserves and they can lend only what the money multiplier allows them. So, they are limited by the quantity of reserves they have. If that were true, they would be limited by the quantity of savings in the system. But in reality it works the other way around. Banks lend first (hopefully only when makes business sense to lend) and then they search for reserves. A bank lend (creating money in the process) and, after the fact, if it doesn't have enough reserves already, it tries to get the reserves from other banks (inter-bank market). This is a legal requirement, so, they have to get those reserves. This creates an offer-demand dynamic between banks that move the interest rate up or down. If the quantity of reserves was fixed, that would be the end of it, but, because Central Banks have a target interest rate that they want to keep (but not a money quantity target), they have to accommodate the quantity or reserves in the system reacting to the inter-bank market dynamics. Adding or retiring reserves as necessary to keep the interest rate that they want. The central banks control the interest rate, but that means they can't control the quantity of money in the system. The quantity of money is determined by the demand of credit from the economy (and not by the available savings). If we understand this, we see that private banks are not limited by savings in their lending capacity, they are limited by how many business or households are requesting credit (and if those request make business sense for the bank). This is a good reading about those subjects: 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-...
- csomar 5y ago
  Thanks. This makes sense of what you said before. (I'd not focus on the downvotes too much, money issues are too emotional/political).
lifty 5y ago
There’s no reserve requirement anymore. It has been removed for a while. https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements https://www.eidebailly.com/insights/articles/2020/4/federal-...

imtringued 5y ago

>No they don't. Savings is only a number in a computer and lending is not limited to the available savings because private banks create money when lending. So, the quantity of savings have not effect in how much financial capital can be invested in the economy. If that were 100% true (there is a caveat) then the ideal savings rate would be 0% and that would be truly awful for every entity in the economy regardless of whether they are companies or private individuals. All savings would become excess savings and interest rates would need to be in the double digit negatives. In practice this would actually run into a contradiction, if the savings rate were 0% that would mean all income is immediately consumed or invested, meaning the economy runs at full capacity at all times, any increase of the monetary supply would immediately translate into inflation because all goods that are being produced are already being consumed, the additional money would result in additional consumption that causes a shortage of goods which then translates into increased prices aka inflation. At some point you would run into the physical limits of the economy. As your savings rate is 0%, the amount of money that can be created without inducing inflation is also $0. The potential for lending is "effectively" limited by available savings.

RobertoG 5y ago
I didn't say anything about the ideal savings rate being 0% The quantity of savings is divorce of the quantity of money available for investing or, in other words, lending money doesn't come from savings. That's an empirical fact. Of course, households and firms are going to choose to keep savings, and that's OK. If people choose to spend more and keep less savings then, Central Banks could accommodate the Interest Rate in order to make lending more expensive and avoid inflation, or the government could increase taxes or some other solution that retires money from the economy.