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As a fellow non bank expert, I feel like the problem with the article is more fundamental than that. Suppose JP does indeed buys stuff with and only with its r

by zaat 5y ago

As a fellow non bank expert, I feel like the problem with the article is more fundamental than that. Suppose JP does indeed buys stuff with and only with its reserves. Now JP starts new initiative under the slogan 'Buy the US', with the intention of buying all the building in the US, one after the other. The first building the one next to JP, and JP pays it from its reserves. According to the article, no change in JP sheets results from the deal. So JP goes on with its buying spree, and now JP owns every building in Manhattan, then NYC, NY, then comes Vermont and so fourth. Well, there is a problem with that initiative. At some point JP have no more reserves, the accounting are not conforming to banking standards and requirement and it is no longer a bank. Therefore, I will argue, something must change in JP sheets with every building or coffee machine it purchases, and the article is missing it.

singingboyo 5y ago
I'm no expert, but I think the missing bit is that the money 'created' is still backed by some asset, whether it's a coffee machine, a building, or a promise of future repayment (as with loans). I think that might be assumed for the audience of the blog, but it's not an obvious thing for us non-experts. Compare with a loan. When loaning, the bank has a liability (balance in the receiver's account). That's the created money. It's balanced by the promise of payment later, plus interest. It's not really that different to suggest that to buy a coffee machine, they're creating money as a liability (money in the coffee company's account) backed by the value of the coffee machine as a an asset. So yes, something does change on the sheets[1] - JP now has another liability, and another asset. The limiting factor is that banks are required to have more assets than liabilities (capital) by proportion, because capital is what really gets used to pay for things like account withdrawals. The proportion JP actually has reduces as each purchase is made, which is why JP can't hold an unlimited number of coffee machines/buildings.[2] [1] The article does actually mention this, buried in a sentence about a full analysis of JP's balance sheets. [2] Without that requirement, if the accounts were all at JP, it could buy as many coffee machines/buildings as it wanted, but would collapse if/when the money created was withdrawn. Also see 2008.
- kodah 5y ago
  If what the author is stipulating is true, wouldn't banks have just written themselves a check during the 2008/9 crisis and never involved the President or Congress? Basically a bank could avoid all crises by having enough global customers to offset risk they insert into each market. Yet, even global banks suffered during this crisis.
  - elif 5y ago
    if they did their ratings would tank. but why do that when congress will create a specific mechanism of infinite money creation for you?

by zaat 5y ago

singingboyo 5y ago

I'm no expert, but I think the missing bit is that the money 'created' is still backed by some asset, whether it's a coffee machine, a building, or a promise of future repayment (as with loans). I think that might be assumed for the audience of the blog, but it's not an obvious thing for us non-experts. Compare with a loan. When loaning, the bank has a liability (balance in the receiver's account). That's the created money. It's balanced by the promise of payment later, plus interest. It's not really that different to suggest that to buy a coffee machine, they're creating money as a liability (money in the coffee company's account) backed by the value of the coffee machine as a an asset. So yes, something does change on the sheets[1] - JP now has another liability, and another asset. The limiting factor is that banks are required to have more assets than liabilities (capital) by proportion, because capital is what really gets used to pay for things like account withdrawals. The proportion JP actually has reduces as each purchase is made, which is why JP can't hold an unlimited number of coffee machines/buildings.[2] [1] The article does actually mention this, buried in a sentence about a full analysis of JP's balance sheets. [2] Without that requirement, if the accounts were all at JP, it could buy as many coffee machines/buildings as it wanted, but would collapse if/when the money created was withdrawn. Also see 2008.

kodah 5y ago
If what the author is stipulating is true, wouldn't banks have just written themselves a check during the 2008/9 crisis and never involved the President or Congress? Basically a bank could avoid all crises by having enough global customers to offset risk they insert into each market. Yet, even global banks suffered during this crisis.
- elif 5y ago
  if they did their ratings would tank. but why do that when congress will create a specific mechanism of infinite money creation for you?