7 ms·

Can everybody create money? If Alice and Bob agree that Alice owes Bob $100, Bob will have show this $100 in his books and pay taxes on it. Does this mean Alic

• jljljl 4y ago
  Correct. It doesn't have to be a bank or central bank: lot's of other entities create money through lending -- Insurance companies, pawn shops, hedge funds all do it. This it's what's known commonly referred to as shadow banking (https://en.wikipedia.org/wiki/Shadow_banking_system https://en.wikipedia.org/wiki/Shadow_banking_system)
  • brutusborn 4y ago
    Unless the pawn shop has an account at the Fed the result is zero sum: no money is ‘created’ because deposits balance credits. The other commenter explains it well - you need the privilege of a central bank account to create money.
    • simple-thoughts 4y ago
      That’s incorrect, as the original article explains. Absent QE (which the BOE explains in this article can result in both creation and destruction of money, depending on complex factors) money is usually created and destroyed without any influence from central authorities. You can read the article for a detailed explanation, but the simple version is that the financial sector as a whole can increase/decrease the entire balance sheet together. Yes assets and liabilities are balanced, but if the size of the balance sheet grows then there are more liabilities and this more money.
      • brutusborn 4y ago
        I’m not saying the central authorities create money, I’m saying they confer the privilege to do so. Minor players do not truly create money in this way because they are isolated from the financial sector as a whole. They don’t get to play at the big boys table, so their contribution is zero sum.
        • simple-thoughts 4y ago
          This starts to get outside the scope of the article, but it is not true that USD central authorities fully or even majority control the money supply through regulation. You can create a bank in UAE or many other jurisdictions with a local license that allows you to deal in USD completely outside the jurisdiction of US enforcement agencies. Even within the jurisdiction of US agencies, there is a shadow banking ecosystem that is poorly understood and highly illegible. Most USD are not created within the jurisdiction of US authorities because USD is an international trade and reserve currency.
        • jljljl 4y ago
          Banks are regulated and restricted, but any entity who lends money would technically create money. Individuals are rarely at a size where they can do this, but hedge funds and insurance companies are.
    • jljljl 4y ago
      I'm not sure this is correct -- a bank could create money by issuing loans without needing a central bank account. The central bank account provides banks with extra liquidity, but it isn't required to create deposits.
      • brutusborn 4y ago
        When a bank without a fed account gives a loan without a deposit, where does it the money come from? How would this even work?
        • billfruit 4y ago
          I this case the bank is making a bet that the loanees, and depositors won't all ask withdrawals at the same point of time. If they all did, it becomes a run on the bank and it will fail.
        • jljljl 4y ago
          When a bank creates a loan, it also creates a deposit. Say they make a loan to Bob: Loan -- an asset on the Bank's balance sheet. It's a promise that Bob will repay the bank a certain amount of money, plus interest Deposit -- a liability on the Bank's balance sheet. It's an account that Bob can draw from at any time, and the Bank will promise to honor or pay the deposit. These are created at the same time, and balance one another. The bank does not need the Fed to create the deposit at all, the create it out of thin air when issuing the loan. When Bob comes to withdraw from his account, the Bank will pay him from it's *reserves*. The banks reserves are a pool of assets, cash, and deposits from other customers that the bank holds in excess of it's loans. The bank can get these from a lot of places, not necessarily the Fed -- they could offer checking accounts to other customers, and hold some fraction of the assets in a customer's checking account in reserve. Banks offer all sorts of incentives to get people to deposit long term(CD, Savings Accounts, e.g.) for this reason, but they almost never have 100% of the money they are loaning out held in reserves. Their entire bet is that only a fraction of the deposits will be withdrawn at any time. The Fed doesn't need to be present for any of this, but they provide an important stabilizing function, ensure liquidity, and can adjust the money supply through open market operations or banking regulations.
• whatshisface 4y ago
  When you (you as a figure of speech, only vetted banks can do this) borrow money from the Fed, they do not have to take it out of their own bank account. They're the only participants who are allowed to loan out an unlimited amount of money, while Bob can't lend more than he has, and also can't loan $100 more to someone else until Alice pays him back. So that's money creation in the simple videogame sense. Banks can make loans that go more or less straight to the Fed's balance sheet without a lot of due diligence, so they have a delegated but slightly more limited money creation power (hypothetically the federal reserve can say no but that's not their policy). From then on every layer gets one additional creditor who is going to look at what's being done and who is on the hook for it being paid back, and it slowly starts working less like money creation and more like loans as most people experience them. Loaning out money that's deposited in banks, in contrast to loaning money borrowed from the Fed, can have effects that are a lot like money creation and which influence the money supply. Nested debts contribute to the velocity of money by allowing quantities of money to be spent over and over again in quick succession. That makes money more available and has an effect similar to increasing the total supply - and that's why some people call it money creation.
  • TekMol 4y ago
    They're the only participants who are allowed to loan out an unlimited amount of money I'm not talking about loaning. I'm talking about "A and B agree that A owes B $100".
    • whatshisface 4y ago
      That's not money creation because neither A or B can take anything about that to a checkout counter. :-)
      • JumpCrisscross 4y ago
        > neither A or B can take anything about that to a checkout counter Of course they can. "Can I get a beer, I'll settle up next week, A owes me."
• gamegoblin 4y ago
  “Everyone can create money; the problem is to get it accepted” - Hyman Minsky
  • dools 4y ago
    Jinx!
• brutusborn 4y ago
  The real question is: who gets to create an account with the central bank? The answer isn’t everybody, so everybody cannot create money. If Alice owes $100 to Bobs bank, they can use that to credit a central bank account, so $100 can be created (assuming they are within reserve limits). If Alice only owes Bob, the result is zero sum because neither party can directly interact with the central bank. The result in zero sum. The central-bank case is only zero sum when the loan is relayed and the $100 is removed from the reserve account. If the loan is never repayed, the economy just added $100 permanently.
  • TekMol 4y ago
    The economy wide sum might be zero. But still the $100 have been created, right? Imagine an economy where there is no money at all. Nobody can buy anything. Now Alice and Bob agree that Alice owes Bob $100. Now Bob has $100 in his books. Bob now can go to Charles and buy 50 apples from Charles. And in return give Charles 50% of the "Alice owes me $100" claim. Now Bob and Charles each have $50 in their books. And on an on it goes, the "created" $100 floating through the economy.
    • brutusborn 4y ago
      But Charles will say he can’t take a debt as payment unless it is done through a party his bank trusts, which will be other banks with fed accounts. Sure it’s possible to setup a parallel banking system, but who would use it?
      • JumpCrisscross 4y ago
        > it’s possible to setup a parallel banking system, but who would use it Invoice factoring rarely traverses the banking system, except at the endpoints.
        • brutusborn 4y ago
          And is zero-sum, thus not creating money. If a bank wants to pay everyone's invoices early they can, but unless that bank is using a fed account to pay the account, the result will be zero sum and no money will be created. The critical point is whether the final lender in the chain is lending $$ that previously existed, or whether they are lending $$ that popped up in a Fed Account 20 minutes ago. The first case is zero-sum, the second case is only zero sum _when(if?) the loan is repayed_.
• deleted 4y ago
  [deleted]
  • deleted 4y ago
    [deleted]
• abtinf 4y ago
  Whatever else dollars might be, they are not money. They are debt instruments. They say so right on themselves, in big all-caps letters, right at the top: "FEDERAL RESERVE NOTE". A "note" is a security that obligates repayment of debt. Money is the thing that would be used to repay the debt. Whether we like it or not, willing or not, regardless of our judgement of their ability to repay the debt, literally almost individual, institution, and nation in the world is a creditor to the fed.
  • JumpCrisscross 4y ago
    > whatever else dollars might be, they are not money. They are debt instruments This is a false dichotomy. Credit and money are two sides of the same coin.
• RC_ITR 4y ago
  Everybody can multiply money, but only the government (and it’s entities) can make it. Turns out, multiplying money is way more impactful than making it, much to the confusion of people who learned economics when M2 money supply was an economically relevant metric. (This phenomenon manifested as the Fed targeting interest rates rather than money supply, starting in the late 20th Century).
• JumpCrisscross 4y ago
  > Can everybody create money? Yes. All credit, e.g. a bar tab, is money.
  • eru 4y ago
    Well, it has some properties of money in some degree. Eg the brewery that supplies beer to your bar will typically not accept your a bar tab as payment. But they will accept USD. (However, 'factoring' of accounts receivables is a thing. And it's conceivable that under some circumstances third parties might start accepting bar tabs of reputable patrons. See shadow banking, too.)
• skybrian 4y ago
  Sorta, but the real question is would you want to? An IOU is an asset representing a future cash flow. From you. It’s an asset for someone else, but a liability for you. Similarly a bank can create money but it’s a liability for them. They won’t do it for free; you have to pay them to do it with something of value.
• neilwilson 4y ago
  Everybody creates money all the time. The trick is getting other people to accept it. If you have a trade account at a business, that's money creation.
  • eru 4y ago
    Yes. That's why it makes more sense to talk about money-ness as a gradual property. Eg Amazon store credit has some properties of money, but is not universally accepted. Similar for cigarettes in prison (or whatever is popular for that purpose at the moment).
• dools 4y ago
  “Anyone can create money, the trouble is getting it accepted” - Minsky
• OscarCunningham 4y ago
  No. The arbitrary definition of 'money' being used by the article is the UK's M4 (https://www.bankofengland.co.uk/statistics/details/further-details-about-m4-data https://www.bankofengland.co.uk/statistics/details/further-d...). This basically includes bank accounts along with any cash held outside banks. Since Alice isn't a bank, her IOUs don't count.
• stephen_g 4y ago
  I suppose Bob could become an illegal shadow bank. The two things that define a bank are 1) regulation and supervision by the Government and 2) access to exchange settlement accounts at the central bank, but you can ignore #1 if you want (it makes it a lot more likely for customers to lose their money either by collapse or fraud) and what banks do through #2 can be done to various extents through other channels. But they’re still not quite at the same level as money creating banks as you probably can’t, say, pay taxes or receive money from the Government directly with such an entity, and probably have to launder or at least convert assets to be able to credit a normal bank account.