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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'r

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."
    - keeganpoppen 4y ago
      good luck using that one next time you're at the bar...
      - JumpCrisscross 4y ago
        > good luck using that one next time you're at the bar I have? Card didn’t run at a bar I’m a regular at. So they said I could settle up later. Bar tabs are an old form of credit.
  - TekMol 4y ago
    Yet B has to pay taxes for it. The government will say "Oh, there is $100 more on your books! You have to pay us $25.". If that $100 in the books is not money, what is it?
    - whatshisface 4y ago
      It is something taxable on the books.
jljljl 4y ago
Any bank could loan out an infinite amount of money. If you come to a bank and ask for a loan (and they approve), the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. Generally banks will have some reserves (currency, accounts they can draw on, etc) to pay out people when they withdraw from their deposits, at their discretion The problem comes if people try to withdraw or move their deposits, and the bank does not have reserves to cover the withdrawal. In these cases, the bank would need to sell some of it's assets -or- borrow money from somewhere else. If they can't liquidate assets fast enough, they have a liquidity crunch and will need to borrow or sell the company. If the value of the assets is below the amount being withdrawn, they're insolvent. The Fed can act as a lender of last resort in liquidity times, but if a bank is insolvent they likely won't be able to post collateral to get loans from the Fed.
- whatshisface 4y ago
  >the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. What you're describing is a matter of accounting, I could do it too but it wouldn't create any money. The person who gets the loan usually intends to spend it in the near future, and if that was all it took for there to be a run on the banks then the system would always be in a run. The bank's ability to make good on deposits is limited by the amount of money it has in the accounts it has with other banks and the Fed, and if you trace it back, the federal reserve is the only player who is not limited by that fact.
  - jljljl 4y ago
    Well, obviously if you were starting a bank, you'd want a pile of reserves and cash so that this doesn't happen to you on day one. Alternately, you'd offer to hold deposits for some people in exchange for interest, and then lend it out. Your reserve ratio might be close to 100% in this case But over time, as your reputation got better and you gathered more deposits, you would lend out far more than your reserves. You could do this as much as your risk tolerance allowed. Historically, the Fed had a minimum reserve requirement of around 10%, meaning banks needed to have only 10% of the value of their deposits in safe, liquid assets. As of 2020, that requirement was dropped to... 0%
billfruit 4y ago
If Bob had 100 dollars, he can go about loaning 110$ to other people, making a bet that all of the other persons aren't going to turn up at the same instant and ask for withdrawals. Then 10$ has been created by Bob without central bank involvement.
- whatshisface 4y ago
  That wouldn't have any effect on the money supply unless the other persons actually spend the money they borrowed, so most people wouldn't call that money creation. P.S. usually borrowers spend the money they borrow as quickly as possible because they don't want to make interest payments just so it can sit in an account. That's not where the slack in bank deposits come from. Instead, it comes from people who are saving money.
  - JumpCrisscross 4y ago
    > wouldn't have any effect on the money supply unless the other persons actually spend the money they borrowed It can be spent. That's money.

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."
  - keeganpoppen 4y ago
    good luck using that one next time you're at the bar...
    - JumpCrisscross 4y ago
      > good luck using that one next time you're at the bar I have? Card didn’t run at a bar I’m a regular at. So they said I could settle up later. Bar tabs are an old form of credit.
- TekMol 4y ago
  Yet B has to pay taxes for it. The government will say "Oh, there is $100 more on your books! You have to pay us $25.". If that $100 in the books is not money, what is it?
  - whatshisface 4y ago
    It is something taxable on the books.

jljljl 4y ago

Any bank could loan out an infinite amount of money. If you come to a bank and ask for a loan (and they approve), the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. Generally banks will have some reserves (currency, accounts they can draw on, etc) to pay out people when they withdraw from their deposits, at their discretion The problem comes if people try to withdraw or move their deposits, and the bank does not have reserves to cover the withdrawal. In these cases, the bank would need to sell some of it's assets -or- borrow money from somewhere else. If they can't liquidate assets fast enough, they have a liquidity crunch and will need to borrow or sell the company. If the value of the assets is below the amount being withdrawn, they're insolvent. The Fed can act as a lender of last resort in liquidity times, but if a bank is insolvent they likely won't be able to post collateral to get loans from the Fed.

whatshisface 4y ago
>the bank will create the loan (an asset on their balance sheet) and a matching deposit (a liability on their balance sheet). They could do this an unlimited number of times, as long as the deposits they create are recognized and accepted by the economy. What you're describing is a matter of accounting, I could do it too but it wouldn't create any money. The person who gets the loan usually intends to spend it in the near future, and if that was all it took for there to be a run on the banks then the system would always be in a run. The bank's ability to make good on deposits is limited by the amount of money it has in the accounts it has with other banks and the Fed, and if you trace it back, the federal reserve is the only player who is not limited by that fact.
- jljljl 4y ago
  Well, obviously if you were starting a bank, you'd want a pile of reserves and cash so that this doesn't happen to you on day one. Alternately, you'd offer to hold deposits for some people in exchange for interest, and then lend it out. Your reserve ratio might be close to 100% in this case But over time, as your reputation got better and you gathered more deposits, you would lend out far more than your reserves. You could do this as much as your risk tolerance allowed. Historically, the Fed had a minimum reserve requirement of around 10%, meaning banks needed to have only 10% of the value of their deposits in safe, liquid assets. As of 2020, that requirement was dropped to... 0%

billfruit 4y ago

If Bob had 100 dollars, he can go about loaning 110$ to other people, making a bet that all of the other persons aren't going to turn up at the same instant and ask for withdrawals. Then 10$ has been created by Bob without central bank involvement.

whatshisface 4y ago
That wouldn't have any effect on the money supply unless the other persons actually spend the money they borrowed, so most people wouldn't call that money creation. P.S. usually borrowers spend the money they borrow as quickly as possible because they don't want to make interest payments just so it can sit in an account. That's not where the slack in bank deposits come from. Instead, it comes from people who are saving money.
- JumpCrisscross 4y ago
  > wouldn't have any effect on the money supply unless the other persons actually spend the money they borrowed It can be spent. That's money.