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In your example, there is still $20 in the economy after Bob lends Charlie $20. Alice has $20. She loans it to Bob. Alice has $20 in assets (the loan), Bob has
by halpmeh 4y ago
In your example, there is still $20 in the economy after Bob lends Charlie $20. Alice has $20. She loans it to Bob. Alice has $20 in assets (the loan), Bob has $20 in assets (the money) and $20 in liabilities (the loan). The net amount is still $20. If Bob loans Charlie his $20, the net is still $20.
Banks do create money via lending, but the money creation comes from the interest charged. For example, if Bob lends Charlie $20 for a year and charges 10% interest to Charlie, he'll have $22 after one year. Where did the $2 come from?
- HWR_14 4y ago> Where did the $2 come from? Charlie
- halpmeh 4y agoYes, the money came from Charlie. But at the beginning, there was only $20 in circulation. After the loan is repaid, there is $22. Money was created from the loan.
- deleted 4y ago[deleted]
- tsukikage 4y agoThe bank didn't create anything, though. It got the money from Charlie. If it wasn't in circulation before, Charlie must have created it. Off to prison with him.
- halpmeh 4y agoThe bank did create the money. There is an element of cash flow to all of this. Charlie takes the loan, uses it to start a business, perhaps by buying something from Bob. Bob uses the money to pay back Alice. Alice then buys something from Charlie, allowing Charlie to repay his loan. The economy is basically a big flywheel.
- tsukikage 4y ago> the money creation comes from the interest charged This bit. This is the bit that's wrong. There is no money being created when interest is charged. The bank is certainly not creating it in this transaction: it is charging interest - that is, it is asking someone else to give it that money.
- halpmeh 4y agoOk, then where did the extra $2 come from in the example? Yes, ultimately Charlie pays Bob $22, but there is only $20 in circulation when Charlie takes out the loan. There are a bunch of moving pieces here that are all tied together. 1) There needs to be liquidity in the market place. Money needs to be flowing to and from Charlie for him to be able to service his loan. 2) Charlie needs to be engaged in an economically productive activity so that he can bring in cash flow to service the loan. There's definitely some other prerequisites to bootstrap the system as well. But the loan is what increased the money supply. The interest has to come from somewhere. Which is also why banks can't create a limitless supply of money. The interest has to come from somewhere. There is a certain amount of money that can be put to genuine economic use. If banks lend more than can be put to economic use, you have bubbles like we saw in 2008, or you have inflation like we have now.
- tsukikage 4y agoWhat you appear to be saying is that if I lend you $20 at 10% interest, the fact that you have to either eventually pay me back $22 or default on our agreement means that I have somehow created that $2. Can you please clarify either how that is different from what you are saying, or if that is what you are saying, how it makes any sense at all?