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That's a misunderstanding - when a bank originates a loan: - the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the

That's a misunderstanding - when a bank originates a loan: - the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan) https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... At this point the money literally came out of thin air, there's more total currency in the system then there was before. It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works

HDThoreaun 4y ago
except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.
- nosianu 4y ago
  The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference. Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while. Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
  - HDThoreaun 4y ago
    I am responding to a post that said > Bank lending always creates new money. They don’t (and can’t) “lend deposits”. It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
    - dools 4y ago
      Well, even reserve balances are created out of thin air… it’s all just accounting
    - nosianu 4y ago
      > The cash in banks Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash". And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money. https://www.bankofengland.co.uk/explainers/what-is-money https://www.bankofengland.co.uk/explainers/what-is-money In the UK, as an example: > 96% is electronic > 4% is cash USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy. In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system. ABOUT THAT TERM "OUT OF THIN AIR" I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out... > commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason. For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-definitions https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
- fps 4y ago
  Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.
beowulfey 4y ago
But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources). So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
- elcomet 4y ago
  Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.
- alangibson 4y ago
  Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere. It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right" Currency is just a physical representation of that unit.
  - beowulfey 4y ago
    Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the insurance from central banks this problem is avoided.
    - alangibson 4y ago
      That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
      - 4y ago

HDThoreaun 4y ago

except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.

nosianu 4y ago
The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference. Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while. Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
- HDThoreaun 4y ago
  I am responding to a post that said > Bank lending always creates new money. They don’t (and can’t) “lend deposits”. It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
  - dools 4y ago
    Well, even reserve balances are created out of thin air… it’s all just accounting
  - nosianu 4y ago
    > The cash in banks Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash". And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money. https://www.bankofengland.co.uk/explainers/what-is-money https://www.bankofengland.co.uk/explainers/what-is-money In the UK, as an example: > 96% is electronic > 4% is cash USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy. In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system. ABOUT THAT TERM "OUT OF THIN AIR" I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air https://cepr.org/voxeu/columns/banks-do-not-create-money-out... > commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason. For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-definitions https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
fps 4y ago
Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.

beowulfey 4y ago

But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources). So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.

elcomet 4y ago
Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.
alangibson 4y ago
Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere. It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right" Currency is just a physical representation of that unit.
- beowulfey 4y ago
  Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it? Perhaps because of the insurance from central banks this problem is avoided.
  - alangibson 4y ago
    That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money. If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
    - 4y ago