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The $9000 has to be paid back, and then some. I sure hope you aren't an accountant.

by esikich 22d ago

estearum 22d ago
Eventually Which is, you know, the entire risk that people are worried about.
mastax 22d ago
But for the duration, there is more money. This isn’t some crank theory, it’s orthodox economics: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- esikich 21d ago
  Yeah, we all know what fractional reserve banking is. But a debt exists at the same time and the idea is the money that was lent builds something, creating value. Let me borrow some gold so I can use my herbalism expertise to make some potions and sell them for a price that is greater than the sum of ingredients. That's how value is created. Saying loaning money inflates money de facto is disingenuous. Wealth is being created on the other side via goods and services.
  - chadgpt3 21d ago
    You seem to be saying that money is created and that's okay. You agree with GP.
    - esikich 21d ago
      wealth is created by loaning money.
      - chadgpt3 21d ago
        wealth is created by creating goods and providing services. money is created by loaning money.
theoreticalmal 22d ago
I learned about this concept in college macroeconomics. I asked this exact question and the TA said “yeah I guess repaying debt is like destroying money” as if they had never thought of that before. The idea of lending money increasing the money supply is definitionally true.
- hdgvhicv 22d ago
  And when debt is wiped out through bankruptcy that inflation remains.
  - JumpCrisscross 22d ago
    > when debt is wiped out through bankruptcy that inflation remains Bankruptcy is deflationary. The same way credit creation makes money bankruptcy (and any other reduction of debt, including through repayment) destroys it. It's why financial crises were often followed by deflation in gold-based economies.
- JumpCrisscross 22d ago
  > the TA said “yeah I guess repaying debt is like destroying money” as if they had never thought of that before They shouldn't have been a TA. Modern money is destroyed in three ways: through taxation, defaults and the extinguishing of debts.
  - lostlogin 21d ago
    Taxation destroys money?
    - mattclarkdotnet 21d ago
      Yes, the government doesn’t have a checking account. When it spends money, that money is created and its balance sheet grows. When it receives taxes the balance sheet shrinks as the money is destroyed. If there’s a gap it gets filled by issuing bonds. Thats the national debt. These are conventions, not absolute rules, so governments can go rogue but it doesn’t end well
tomrod 22d ago
And thus $9k of <something they got that $9k worth of value for> is injected into the economy, either assets sold or work performed.
fakedang 22d ago
But at that point in time, there's 19k in money. And future repayments of that loan back to the bank are less valuable to it than that current value figure. Because a bank can do a lot more shenanigans with that loan figure than it can with just the deposits.
marcianx 22d ago
It's a simplification to help people understand, but this is in the spirit of how things work because the value in the economy is not the money, but the goods and services that get created in the economy as a consequence of it. Most constructive uses of financial instruments in the markets (stocks, bonds, mutual funds, etc) are about efficient reallocation of money to enable value creation while balancing different risks, and people who provide this money indirectly benefit from this value creation via interest, dividends, selling stock at a higher price, etc. Now to expand GP's example (still simplified): - A borrows $100k money to pay B toward building a house. B puts $100k in their bank. - C borrows $90k from B's bank toward building a house to pay D. D puts $90k in their bank. - etc So, houses were created (or other services were provided), and that's the real multiplicative factor. If banks loan out 90% of the cash stored (i.e. keep 10% in reserve [1]), the multiplicative factor of value creation in the economy is 10x the original amount of cash deposited in the first bank. Now, if all of us withdrew our savings at once or sold all our stocks at once, we would have an economic shock analogous to that which resulted the Great Depression. That's why for banks, we have FDIC insurance - to mitigate such a panic so that money can serve its value-multiplicative role when it's not being actively used for anything else by the person owning the money. That's also why a positive (but low) inflation was originally considered economically healthy - so that people put their money in banks/market rather than under their mattresses gradually losing value. When interest rates are low, that encourages people to put their money into riskier (non-FDIC-insured) investments with higher growth potential, like a balanced portfolio of stocks/bonds/etc to avoid losing value to inflation, resulting in more economic growth. [1]: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

The $9000 has to be paid back, and then some. I sure hope you aren't an accountant.

by esikich 22d ago

The $9000 has to be paid back, and then some. I sure hope you aren't an accountant.

estearum 22d ago

Eventually Which is, you know, the entire risk that people are worried about.

mastax 22d ago

But for the duration, there is more money. This isn’t some crank theory, it’s orthodox economics: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

esikich 21d ago
Yeah, we all know what fractional reserve banking is. But a debt exists at the same time and the idea is the money that was lent builds something, creating value. Let me borrow some gold so I can use my herbalism expertise to make some potions and sell them for a price that is greater than the sum of ingredients. That's how value is created. Saying loaning money inflates money de facto is disingenuous. Wealth is being created on the other side via goods and services.
- chadgpt3 21d ago
  You seem to be saying that money is created and that's okay. You agree with GP.
  - esikich 21d ago
    wealth is created by loaning money.
    - chadgpt3 21d ago
      wealth is created by creating goods and providing services. money is created by loaning money.

theoreticalmal 22d ago

I learned about this concept in college macroeconomics. I asked this exact question and the TA said “yeah I guess repaying debt is like destroying money” as if they had never thought of that before. The idea of lending money increasing the money supply is definitionally true.

hdgvhicv 22d ago
And when debt is wiped out through bankruptcy that inflation remains.
- JumpCrisscross 22d ago
  > when debt is wiped out through bankruptcy that inflation remains Bankruptcy is deflationary. The same way credit creation makes money bankruptcy (and any other reduction of debt, including through repayment) destroys it. It's why financial crises were often followed by deflation in gold-based economies.
JumpCrisscross 22d ago
> the TA said “yeah I guess repaying debt is like destroying money” as if they had never thought of that before They shouldn't have been a TA. Modern money is destroyed in three ways: through taxation, defaults and the extinguishing of debts.
- lostlogin 21d ago
  Taxation destroys money?
  - mattclarkdotnet 21d ago
    Yes, the government doesn’t have a checking account. When it spends money, that money is created and its balance sheet grows. When it receives taxes the balance sheet shrinks as the money is destroyed. If there’s a gap it gets filled by issuing bonds. Thats the national debt. These are conventions, not absolute rules, so governments can go rogue but it doesn’t end well

tomrod 22d ago

And thus $9k of <something they got that $9k worth of value for> is injected into the economy, either assets sold or work performed.

fakedang 22d ago

But at that point in time, there's 19k in money. And future repayments of that loan back to the bank are less valuable to it than that current value figure. Because a bank can do a lot more shenanigans with that loan figure than it can with just the deposits.

marcianx 22d ago

It's a simplification to help people understand, but this is in the spirit of how things work because the value in the economy is not the money, but the goods and services that get created in the economy as a consequence of it. Most constructive uses of financial instruments in the markets (stocks, bonds, mutual funds, etc) are about efficient reallocation of money to enable value creation while balancing different risks, and people who provide this money indirectly benefit from this value creation via interest, dividends, selling stock at a higher price, etc. Now to expand GP's example (still simplified): - A borrows $100k money to pay B toward building a house. B puts $100k in their bank. - C borrows $90k from B's bank toward building a house to pay D. D puts $90k in their bank. - etc So, houses were created (or other services were provided), and that's the real multiplicative factor. If banks loan out 90% of the cash stored (i.e. keep 10% in reserve [1]), the multiplicative factor of value creation in the economy is 10x the original amount of cash deposited in the first bank. Now, if all of us withdrew our savings at once or sold all our stocks at once, we would have an economic shock analogous to that which resulted the Great Depression. That's why for banks, we have FDIC insurance - to mitigate such a panic so that money can serve its value-multiplicative role when it's not being actively used for anything else by the person owning the money. That's also why a positive (but low) inflation was originally considered economically healthy - so that people put their money in banks/market rather than under their mattresses gradually losing value. When interest rates are low, that encourages people to put their money into riskier (non-FDIC-insured) investments with higher growth potential, like a balanced portfolio of stocks/bonds/etc to avoid losing value to inflation, resulting in more economic growth. [1]: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking