11 ms·

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

76 points by porterde 5y ago

nabla9 5y ago
This is outdated. Maybe Bank of England still operates like this? Major central banks like US Fed, European ECB or Bank of Japan don't generate money using fractional reserve banking anymore. They use open market operations or quantitative easing instead. In other words, they buy debt, like treasuries with money.
- divbzero 5y ago
  I don’t think the article is outdated: US, Europe, and Japan all still use fractional reserve banking to create money. The central bank controls the base money supply using tools like open market operations or quantitative easing, but the broad money supply is some multiple of the base money supply. That multiple is determined by what fraction of deposits is lent out by commercial banks in the banking system.
  - mandelbrotwurst 5y ago
    The Fed actually completely eliminated the reserve requirement in March of last year (1). Unsurprisingly, this hasn't gotten a lot of attention from the corporate media. 1 - https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
    - stephen_g 5y ago
      Lots of countries have no reserve requirement. It actually doesn’t change much, just the asset mix banks hold. How much a bank can lend is basically entirely determined by the amount of paid-up capital, not reserves anyway. The maximum ratios are fairly strictly regulated (e.g. Basel rules).
      - mandelbrotwurst 5y ago
        So, I'd been interpreting this change as meaning that they're no longer required to carry some minimum amount of cash. I would be more confident in banks if they were required to carry some minimum fraction of their balances in cash in order to guarantee availability of funds. That said, I'm re-reading the page that I linked a bit more closely and realizing that it doesn't just say "reserve requirements must be satisfied by holding vault cash" , it says "reserve requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by maintaining a balance in an account at a Federal Reserve Bank". It's not clear to me whether that "balance" at a Fed bank must be in cash, but even if it is, I'm realizing that the requirement I was hoping existed may not have existed even prior to this change. TL;DR - Requirement for strong, local, cash reserves would be better than weaker requirements is better than no requirements. I'm not sure how close to the good end of that spectrum we've ever been, but where we are now certainly doesn't seem too good. Note: Please do explain if there is some nuance that I'm missing here
        NovemberWhiskey 5y ago
        This is the nuance you are missing: https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS The reserve requirement served no purpose because banks were holding trillions of dollars in excess of their reserve requirements meaning that the reserve ratio was an ineffective monetary policy tool.
      - zzzzzzzza 5y ago
        newb question what is paid up capital?
        stephen_g 5y ago
        It's a combination of capital paid from shareholders holding fully paid shares (i.e. shares that were paid in full when issued - for example, when shareholders buy new shares in capital raising rounds) and retained earnings.
    - NovemberWhiskey 5y ago
      I'd be interested to hear why you think this is newsworthy. It's not like reserve requirements were an effective monetary policy implement for the past several years - banks have been holding hugely in excess of the required reserves for a while now.
  - nabla9 5y ago
    Fed's reserve requirement is currently zero percent. Multiple of zero is zero.
  - dogma1138 5y ago
    Banks don’t lend out deposits to they create money that is then eliminated when the debt is paid back. To create money banks need a certain amount of capital this is governed by capital requirements most of which come from the capital invested into the bank through share purchases. Many countries have no reserve requirements at all, BOE specifically doesn’t even issue them any longer.
    - ChrisLomont 5y ago
      >Banks don’t lend out deposits Banks do lend out deposits, which is why when they fall below capital reserves as a result, they use the overnight lending facility of the Fed [1] (or similar processes in most countries) to maintain mandatory capital reserves. It leads to data like this [2] which shows the actual amount held by banks versus deposits. [1] https://www.newyorkfed.org/markets/reference-rates/obfr https://www.newyorkfed.org/markets/reference-rates/obfr [2] https://fred.stlouisfed.org/series/M14060USM156NNBR https://fred.stlouisfed.org/series/M14060USM156NNBR
- stephen_g 5y ago
  One implication of what the article is talking about, in fact, is that fractional reserve banking isn’t really a thing, and has only ever been an inaccurate model for how banks really work. A large proportion of money in modern economies is generated (along with private debt) in the private banking system. It is true that central banks can also create money (and in fact can do it without creating debt, unlike private banks), and can use this money for quantitive easing, but it’s not an either or - both are happening.
  - deleted 5y ago
    [deleted]
- kccqzy 5y ago
  The article doesn't talk about fractional reserve. It talks about commercial banks creating money by extending loans. It also talks about QE as another way of creating money by the central bank, when commercials banks aren't creating enough money.
  - nabla9 5y ago
    That's not what quantitative easing is. Central banks are passing private banks in their money creation.
rahimnathwani 5y ago
Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at the bank that move in opposite directions: - current account is credited by $X (bank owes you money) - loan account is debited by $X (you owe the bank) So the net effect is zero (the sum of all your balances with the bank is still the same as before the loan was made). But now there's more money in your current account, so there's more money available for you to spend. Money has been created. Even though this new money isn't central bank money: - it's denominated in the same units as central bank money (pounds) - it's almost as safe from default (it's protected by a deposit guarantee scheme) - you can use it to pay for things (bank transfers are widely accepted as a means of payment) In practice, there are capital adequacy requirements that limit how much banks can lend. They are required to keep a buffer between assets and liabilities (equity capital). As the bank's balance sheet gets bigger, more equity capital is required.
- andrepd 5y ago
  So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already questionable ethically, but the fact that they can do it but I can't, I have to pay the tithe to them... That's just wrong. Correct me if I'm missing something :)
  - whimsicalism 5y ago
    Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160. I disagree that it is intrinsically wrong that some people can do something that you cannot do.
SkyMarshal 5y ago
I think Richard Werner's empirical research on how banks create money is probably better than anything put out by the banking system itself, including the central banks. https://www.researchgate.net/publication/265909749_Can_Banks_Individually_Create_Money_Out_of_Nothing_-_The_Theories_and_the_Empirical_Evidence https://www.researchgate.net/publication/265909749_Can_Banks... https://www.researchgate.net/publication/283907413_Do_banks_really_create_money_out_of_nothing_Another_empirical_test_of_the_three_theories_of_banking https://www.researchgate.net/publication/283907413_Do_banks_... His work made realize that not even the banking system fully understands the banking system. (Werner is the economist that coined the term Quantitative Easing, originally created to describe Japanese post-WWII economic re-development monetary policy, research that later informed the US Fed's response to the GFC, among other things)
- whimsicalism 5y ago
  I think we give far too much credence to term coiners. I'm unsurprised to see him recommended here, as HN seems to veer heavily towards inflation trutherism, anti-central banking, and libertarianism, even if most commentators probably wouldn't share Werner's antivaxx beliefs.
  - SkyMarshal 5y ago
    It wasn't that he coined the term, but that he recognized an important phenomenon and published a description of it before anyone else, which later came to inform major decisions about the worst financial crisis since the Great Depression. Naming that phenomenon was just a byproduct of recognizing and writing about it, and I mention it only because it implies all of the above. And his vaxx beliefs aren't relevant to research he did prior to the COVID outbreak, but if you have a specific critique of that research I'd be interested to hear it.
dang 5y ago
Some past threads: Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=25885849 https://news.ycombinator.com/item?id=25885849 - Jan 2021 (1 comment) Money Creation in the modern economy [pdf] - https://news.ycombinator.com/item?id=22923785 https://news.ycombinator.com/item?id=22923785 - April 2020 (1 comment) Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=20875899 https://news.ycombinator.com/item?id=20875899 - Sept 2019 (1 comment) Money creation in the modern economy (2014) [pdf] - https://news.ycombinator.com/item?id=16604251 https://news.ycombinator.com/item?id=16604251 - March 2018 (123 comments) Money Creation in the Modern Economy (2014) [pdf] - https://news.ycombinator.com/item?id=11374907 https://news.ycombinator.com/item?id=11374907 - March 2016 (97 comments)
aazaa 5y ago
From the conclusion: > This article has discussed how money is created in the modern economy. 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 or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money. The discussion seems incomplete without mentioning government deficit spending. This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being. Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. The MMT perspective is gaining ground, especially as the world's governments find it increasingly difficult to avoid deficit spending. A leading proponent (Kelton) proposes ditching deficit targets altogether in favor of inflation targets.
- praxulus 5y ago
  The central bank is the part of the government that can issue money, and it's included in the explanation. With regard to its effect on the money supply, the rest of the government is no different than any other borrower since it can't (or at least doesn't) directly issue currency.
- bko 5y ago
  > Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in the US) From the Fed: > The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process. The Federal Reserve does not purchase new Treasury securities directly from the U.S. Treasury, and Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit. https://www.federalreserve.gov/faqs/how-does-the-federal-reserve-buying-and-selling-of-securities-relate-to-the-borrowing-decisions-of-the-federal-government.htm https://www.federalreserve.gov/faqs/how-does-the-federal-res...
andy_ppp 5y ago
I sometimes wonder how anything about economics can be tested when the world’s manufacturing has been outsourced to China. All of these theories rest on the fact inflation has been largely under control in the west, not because of a lack of gold standard but because almost all physical items have had zero or negative inflation for 30 years or so. All the things not “Made in China” I would say have been massively inflated. If we were to start having to produce say plumbing supplies locally (say due to Climate change) will these theoretical money creation mechanisms still work?
- dcolkitt 5y ago
  The US is a net exporter of food, and yet the price of food has significantly undershot headline inflation over 30 years.
  - andy_ppp 5y ago
    Interesting! I don't know enough about the US agricultural system but I suspect technology plays a big part in that reduction in cost... I found this amazing raspberry picker for example! https://www.youtube.com/watch?v=3iXJFDoKEvI&ab_channel=OxboInternational https://www.youtube.com/watch?v=3iXJFDoKEvI&ab_channel=OxboI... Maybe you're right and everything would just be made with machines in the West if China wasn't cheap to source things from. But then we come back round to what do you do with the bottom half of workers...
zja 5y ago
I remember David Graeber mentioned this report in “Against Economics”[1]. It’s a pretty interesting read if you like reading about MMT. [1] https://theanarchistlibrary.org/library/david-graeber-against-economics https://theanarchistlibrary.org/library/david-graeber-agains...
danielschonfeld 5y ago
The comments in this thread prove yet again that economics is a far cry from any science. Nobody really understands why this system of credit actually works as well as it does and even more troubling is what will be it's next iteration given that it's starting to crumble. Unfortunately for most of us though it appears as though the adage that 'cash is trash' is starting to become a very real problem even in the west and necessitates that all of us transition to holding yield producing assets with risk. In other words, even grandma is an investor (aka gambler) now by force.
1vuio0pswjnm7 5y ago
"Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay-that "someone else" is you. There is no such thing as public money; there is only taxpayers' money." https://web.archive.org/web/20110606031420/http://www.margaretthatcher.org/document/105454 https://web.archive.org/web/20110606031420/http://www.margar... In England, sometimes we need to explain to us where money comes from, just in case anyone forgets. :)
gandalfian 5y ago
Though todays big question is "How do you destroy money?" ie get it back?. You can tax and not spend but so much money has escaped abroad and hidden where you can't touch it. There is inflation but that is a dangerous pandoras box. Or you can say boost productivity and just create enough extra stuff to match all the extra money. Easier to say than to do though. You just have to live in hope that someone invents some wonderfully productivity enhancing something, fusion, robots or ai perhaps. Come to think of it perhaps Apple is really a government conspiracy to soak up consumers excess dollars? The Apple Tax suddenly fits hmmm.
mempko 5y ago
This is a MUST READ for any adult. Money literally runs our lives. We spend most of our waking time trying to get some. This explains where money comes from. And it's completely different than what you are taught in school or by media and economist pundits.

76 points by porterde 5y ago

This is outdated. Maybe Bank of England still operates like this? Major central banks like US Fed, European ECB or Bank of Japan don't generate money using fractional reserve banking anymore. They use open market operations or quantitative easing instead. In other words, they buy debt, like treasuries with money.

divbzero 5y ago
I don’t think the article is outdated: US, Europe, and Japan all still use fractional reserve banking to create money. The central bank controls the base money supply using tools like open market operations or quantitative easing, but the broad money supply is some multiple of the base money supply. That multiple is determined by what fraction of deposits is lent out by commercial banks in the banking system.
- mandelbrotwurst 5y ago
  The Fed actually completely eliminated the reserve requirement in March of last year (1). Unsurprisingly, this hasn't gotten a lot of attention from the corporate media. 1 - https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - stephen_g 5y ago
    Lots of countries have no reserve requirement. It actually doesn’t change much, just the asset mix banks hold. How much a bank can lend is basically entirely determined by the amount of paid-up capital, not reserves anyway. The maximum ratios are fairly strictly regulated (e.g. Basel rules).
    - mandelbrotwurst 5y ago
      So, I'd been interpreting this change as meaning that they're no longer required to carry some minimum amount of cash. I would be more confident in banks if they were required to carry some minimum fraction of their balances in cash in order to guarantee availability of funds. That said, I'm re-reading the page that I linked a bit more closely and realizing that it doesn't just say "reserve requirements must be satisfied by holding vault cash" , it says "reserve requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by maintaining a balance in an account at a Federal Reserve Bank". It's not clear to me whether that "balance" at a Fed bank must be in cash, but even if it is, I'm realizing that the requirement I was hoping existed may not have existed even prior to this change. TL;DR - Requirement for strong, local, cash reserves would be better than weaker requirements is better than no requirements. I'm not sure how close to the good end of that spectrum we've ever been, but where we are now certainly doesn't seem too good. Note: Please do explain if there is some nuance that I'm missing here
      - NovemberWhiskey 5y ago
        This is the nuance you are missing: https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS The reserve requirement served no purpose because banks were holding trillions of dollars in excess of their reserve requirements meaning that the reserve ratio was an ineffective monetary policy tool.
    - zzzzzzzza 5y ago
      newb question what is paid up capital?
      - stephen_g 5y ago
        It's a combination of capital paid from shareholders holding fully paid shares (i.e. shares that were paid in full when issued - for example, when shareholders buy new shares in capital raising rounds) and retained earnings.
  - NovemberWhiskey 5y ago
    I'd be interested to hear why you think this is newsworthy. It's not like reserve requirements were an effective monetary policy implement for the past several years - banks have been holding hugely in excess of the required reserves for a while now.
- nabla9 5y ago
  Fed's reserve requirement is currently zero percent. Multiple of zero is zero.
- dogma1138 5y ago
  Banks don’t lend out deposits to they create money that is then eliminated when the debt is paid back. To create money banks need a certain amount of capital this is governed by capital requirements most of which come from the capital invested into the bank through share purchases. Many countries have no reserve requirements at all, BOE specifically doesn’t even issue them any longer.
  - ChrisLomont 5y ago
    >Banks don’t lend out deposits Banks do lend out deposits, which is why when they fall below capital reserves as a result, they use the overnight lending facility of the Fed [1] (or similar processes in most countries) to maintain mandatory capital reserves. It leads to data like this [2] which shows the actual amount held by banks versus deposits. [1] https://www.newyorkfed.org/markets/reference-rates/obfr https://www.newyorkfed.org/markets/reference-rates/obfr [2] https://fred.stlouisfed.org/series/M14060USM156NNBR https://fred.stlouisfed.org/series/M14060USM156NNBR
stephen_g 5y ago
One implication of what the article is talking about, in fact, is that fractional reserve banking isn’t really a thing, and has only ever been an inaccurate model for how banks really work. A large proportion of money in modern economies is generated (along with private debt) in the private banking system. It is true that central banks can also create money (and in fact can do it without creating debt, unlike private banks), and can use this money for quantitive easing, but it’s not an either or - both are happening.
- deleted 5y ago
  [deleted]
kccqzy 5y ago
The article doesn't talk about fractional reserve. It talks about commercial banks creating money by extending loans. It also talks about QE as another way of creating money by the central bank, when commercials banks aren't creating enough money.
- nabla9 5y ago
  That's not what quantitative easing is. Central banks are passing private banks in their money creation.

rahimnathwani 5y ago

Some of the content is in this short video: https://www.youtube.com/watch?v=CvRAqR2pAgw https://www.youtube.com/watch?v=CvRAqR2pAgw Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at the bank that move in opposite directions: - current account is credited by $X (bank owes you money) - loan account is debited by $X (you owe the bank) So the net effect is zero (the sum of all your balances with the bank is still the same as before the loan was made). But now there's more money in your current account, so there's more money available for you to spend. Money has been created. Even though this new money isn't central bank money: - it's denominated in the same units as central bank money (pounds) - it's almost as safe from default (it's protected by a deposit guarantee scheme) - you can use it to pay for things (bank transfers are widely accepted as a means of payment) In practice, there are capital adequacy requirements that limit how much banks can lend. They are required to keep a buffer between assets and liabilities (equity capital). As the bank's balance sheet gets bigger, more equity capital is required.

andrepd 5y ago
So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already questionable ethically, but the fact that they can do it but I can't, I have to pay the tithe to them... That's just wrong. Correct me if I'm missing something :)
- whimsicalism 5y ago
  Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160. I disagree that it is intrinsically wrong that some people can do something that you cannot do.

SkyMarshal 5y ago

I think Richard Werner's empirical research on how banks create money is probably better than anything put out by the banking system itself, including the central banks. https://www.researchgate.net/publication/265909749_Can_Banks_Individually_Create_Money_Out_of_Nothing_-_The_Theories_and_the_Empirical_Evidence https://www.researchgate.net/publication/265909749_Can_Banks... https://www.researchgate.net/publication/283907413_Do_banks_really_create_money_out_of_nothing_Another_empirical_test_of_the_three_theories_of_banking https://www.researchgate.net/publication/283907413_Do_banks_... His work made realize that not even the banking system fully understands the banking system. (Werner is the economist that coined the term Quantitative Easing, originally created to describe Japanese post-WWII economic re-development monetary policy, research that later informed the US Fed's response to the GFC, among other things)

whimsicalism 5y ago
I think we give far too much credence to term coiners. I'm unsurprised to see him recommended here, as HN seems to veer heavily towards inflation trutherism, anti-central banking, and libertarianism, even if most commentators probably wouldn't share Werner's antivaxx beliefs.
- SkyMarshal 5y ago
  It wasn't that he coined the term, but that he recognized an important phenomenon and published a description of it before anyone else, which later came to inform major decisions about the worst financial crisis since the Great Depression. Naming that phenomenon was just a byproduct of recognizing and writing about it, and I mention it only because it implies all of the above. And his vaxx beliefs aren't relevant to research he did prior to the COVID outbreak, but if you have a specific critique of that research I'd be interested to hear it.

dang 5y ago

Some past threads: Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=25885849 https://news.ycombinator.com/item?id=25885849 - Jan 2021 (1 comment) Money Creation in the modern economy [pdf] - https://news.ycombinator.com/item?id=22923785 https://news.ycombinator.com/item?id=22923785 - April 2020 (1 comment) Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=20875899 https://news.ycombinator.com/item?id=20875899 - Sept 2019 (1 comment) Money creation in the modern economy (2014) [pdf] - https://news.ycombinator.com/item?id=16604251 https://news.ycombinator.com/item?id=16604251 - March 2018 (123 comments) Money Creation in the Modern Economy (2014) [pdf] - https://news.ycombinator.com/item?id=11374907 https://news.ycombinator.com/item?id=11374907 - March 2016 (97 comments)

aazaa 5y ago

From the conclusion: > This article has discussed how money is created in the modern economy. 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 or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money. The discussion seems incomplete without mentioning government deficit spending. This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being. Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. The MMT perspective is gaining ground, especially as the world's governments find it increasingly difficult to avoid deficit spending. A leading proponent (Kelton) proposes ditching deficit targets altogether in favor of inflation targets.

praxulus 5y ago
The central bank is the part of the government that can issue money, and it's included in the explanation. With regard to its effect on the money supply, the rest of the government is no different than any other borrower since it can't (or at least doesn't) directly issue currency.
bko 5y ago
> Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different. Actually, its worse than that. The treasuries are created, sold to bank and the bank immediately sells it to the Fed for cash for a nice little profit (at least in the US) From the Fed: > The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process. The Federal Reserve does not purchase new Treasury securities directly from the U.S. Treasury, and Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit. https://www.federalreserve.gov/faqs/how-does-the-federal-reserve-buying-and-selling-of-securities-relate-to-the-borrowing-decisions-of-the-federal-government.htm https://www.federalreserve.gov/faqs/how-does-the-federal-res...

andy_ppp 5y ago

I sometimes wonder how anything about economics can be tested when the world’s manufacturing has been outsourced to China. All of these theories rest on the fact inflation has been largely under control in the west, not because of a lack of gold standard but because almost all physical items have had zero or negative inflation for 30 years or so. All the things not “Made in China” I would say have been massively inflated. If we were to start having to produce say plumbing supplies locally (say due to Climate change) will these theoretical money creation mechanisms still work?

dcolkitt 5y ago
The US is a net exporter of food, and yet the price of food has significantly undershot headline inflation over 30 years.
- andy_ppp 5y ago
  Interesting! I don't know enough about the US agricultural system but I suspect technology plays a big part in that reduction in cost... I found this amazing raspberry picker for example! https://www.youtube.com/watch?v=3iXJFDoKEvI&ab_channel=OxboInternational https://www.youtube.com/watch?v=3iXJFDoKEvI&ab_channel=OxboI... Maybe you're right and everything would just be made with machines in the West if China wasn't cheap to source things from. But then we come back round to what do you do with the bottom half of workers...

zja 5y ago

I remember David Graeber mentioned this report in “Against Economics”[1]. It’s a pretty interesting read if you like reading about MMT. [1] https://theanarchistlibrary.org/library/david-graeber-against-economics https://theanarchistlibrary.org/library/david-graeber-agains...

danielschonfeld 5y ago

The comments in this thread prove yet again that economics is a far cry from any science. Nobody really understands why this system of credit actually works as well as it does and even more troubling is what will be it's next iteration given that it's starting to crumble. Unfortunately for most of us though it appears as though the adage that 'cash is trash' is starting to become a very real problem even in the west and necessitates that all of us transition to holding yield producing assets with risk. In other words, even grandma is an investor (aka gambler) now by force.

1vuio0pswjnm7 5y ago

"Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay-that "someone else" is you. There is no such thing as public money; there is only taxpayers' money." https://web.archive.org/web/20110606031420/http://www.margaretthatcher.org/document/105454 https://web.archive.org/web/20110606031420/http://www.margar... In England, sometimes we need to explain to us where money comes from, just in case anyone forgets. :)

gandalfian 5y ago

Though todays big question is "How do you destroy money?" ie get it back?. You can tax and not spend but so much money has escaped abroad and hidden where you can't touch it. There is inflation but that is a dangerous pandoras box. Or you can say boost productivity and just create enough extra stuff to match all the extra money. Easier to say than to do though. You just have to live in hope that someone invents some wonderfully productivity enhancing something, fusion, robots or ai perhaps. Come to think of it perhaps Apple is really a government conspiracy to soak up consumers excess dollars? The Apple Tax suddenly fits hmmm.

mempko 5y ago

This is a MUST READ for any adult. Money literally runs our lives. We spend most of our waking time trying to get some. This explains where money comes from. And it's completely different than what you are taught in school or by media and economist pundits.