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Every time your local bank issues a loan, it creates money out of thin air.

by vkou 4y ago

geoduck14 4y ago
The banks are only allowed to loan a certain amount. The department that prints mone6 is the same department that regulates how much can be lent by all banks (in the US), so it is the same type of "creating money" as printing money is. And is accounted for when calculating "how much money is in circulation"
- cjbgkagh 4y ago
  It's called a reserve requirement ratio (RRR), the bank must hold a certain percentage of loans as cash. It's mostly a closed loop due to rehypothecation so money supply is proportional to RRR. It keeps getting cut and it's one of those expansionary policies you tend not to hear much about. It's been a long time since I paid attention to it but I think there was talk of using cash equivalents instead of just cash at which point given the fraudulent incompetence of rating agencies you might as well not have a RRR.
  - JumpCrisscross 4y ago
    Australia hasn’t had a reserve requirement since the late 80s. They’re largely been phased out globally in favour of capital requirements and open-market operations.
    - cjbgkagh 4y ago
      Huh, indeed. I found this on the RBA website. "The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a percent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions." Is there any information on what those figures are because it's kind of important when calculating money supply? If not the RBA could 'print' large amounts of money and not tell anyone.
      - deleted 4y ago
        [deleted]
      - JumpCrisscross 4y ago
        This sounds like the discretionary component of all capital-requirement systems. > the RBA could 'print' large amounts of money and not tell anyone The RBA publishes accounts and money-supply estimates. Also, all banks can create money. Estimating money supply from capital requirements isn’t precise.
antihipocrat 4y ago
It actually creates debt out of thin air. The loan receiver has debt principal plus interest to be repaid. The bank's asset is the interest on that debt. Net money after the loan is repaid is negative - if we include fees and interest then a repaid loan from the bank in isolation actually removes money from the economy. What keeps it all going is the continued issuance of debt, which is often used to repay existing debt, as well as invest in capital that will ideally generate enough returns to repay interest.
anonuser123456 4y ago
It also creates debt. And debt is a commitment to destroy that money that was created.
- vkou 4y ago
  The solution to that problem is rolling it into even more debt. Zoom out to a multi-decade timeline, and that's pretty much what we have done in the real estate markets. Bigger mortgages and longer-termed mortgages have lead to an incredible expansion in the amount of money in circulation. Yes, at some point, this reaches a steady state (which it probably has, I don't expect mortgage terms to keep growing), but that expansion of the money supply will absolutely manifest itself as inflation. Which it did, in the asset markets. The only novel development last year is that it has finally trickled down to commodities.
WalterBright 4y ago
It's backed by collateral. And when the loan is paid back, the money is destroyed. Note that when the Fed borrows money, it is not backed by anything but the promise to borrow even more money to pay it back. Hence, inflation.

Every time your local bank issues a loan, it creates money out of thin air.

by vkou 4y ago

Every time your local bank issues a loan, it creates money out of thin air.

The banks are only allowed to loan a certain amount. The department that prints mone6 is the same department that regulates how much can be lent by all banks (in the US), so it is the same type of "creating money" as printing money is. And is accounted for when calculating "how much money is in circulation"

cjbgkagh 4y ago
It's called a reserve requirement ratio (RRR), the bank must hold a certain percentage of loans as cash. It's mostly a closed loop due to rehypothecation so money supply is proportional to RRR. It keeps getting cut and it's one of those expansionary policies you tend not to hear much about. It's been a long time since I paid attention to it but I think there was talk of using cash equivalents instead of just cash at which point given the fraudulent incompetence of rating agencies you might as well not have a RRR.
- JumpCrisscross 4y ago
  Australia hasn’t had a reserve requirement since the late 80s. They’re largely been phased out globally in favour of capital requirements and open-market operations.
  - cjbgkagh 4y ago
    Huh, indeed. I found this on the RBA website. "The Reserve Bank’s reserve requirements are not a Required Reserve Ratio (they are not set as a percent of the financial institution’s liabilities). The Reserve Bank’s reserve requirements are set annually as an AUD amount per financial institution with the aim of ensuring that each institution has sufficient funds to settle AUD transactions after business hours. The amount is set taking into account the historical pattern of each institution’s AUD transactions." Is there any information on what those figures are because it's kind of important when calculating money supply? If not the RBA could 'print' large amounts of money and not tell anyone.
    - deleted 4y ago
      [deleted]
    - JumpCrisscross 4y ago
      This sounds like the discretionary component of all capital-requirement systems. > the RBA could 'print' large amounts of money and not tell anyone The RBA publishes accounts and money-supply estimates. Also, all banks can create money. Estimating money supply from capital requirements isn’t precise.

antihipocrat 4y ago

It actually creates debt out of thin air. The loan receiver has debt principal plus interest to be repaid. The bank's asset is the interest on that debt. Net money after the loan is repaid is negative - if we include fees and interest then a repaid loan from the bank in isolation actually removes money from the economy. What keeps it all going is the continued issuance of debt, which is often used to repay existing debt, as well as invest in capital that will ideally generate enough returns to repay interest.

anonuser123456 4y ago

It also creates debt. And debt is a commitment to destroy that money that was created.

vkou 4y ago
The solution to that problem is rolling it into even more debt. Zoom out to a multi-decade timeline, and that's pretty much what we have done in the real estate markets. Bigger mortgages and longer-termed mortgages have lead to an incredible expansion in the amount of money in circulation. Yes, at some point, this reaches a steady state (which it probably has, I don't expect mortgage terms to keep growing), but that expansion of the money supply will absolutely manifest itself as inflation. Which it did, in the asset markets. The only novel development last year is that it has finally trickled down to commodities.

WalterBright 4y ago

It's backed by collateral. And when the loan is paid back, the money is destroyed. Note that when the Fed borrows money, it is not backed by anything but the promise to borrow even more money to pay it back. Hence, inflation.