[Steve_American]

Money in bank accounts disappear when those loans go bad. When it becomes obvious that the entity that borrowed the money is not going to pay it back and the current worth of the collateral the bank has a hold on is worth less than the amount of money they are owed.

FDIC only covers a certain amount of losses, and even if the FDIC pays for it, that money still has to come from somewhere and it is ultimately going to remove "money" from the economy as a whole.

As I said, this usually only becomes a problem during a large bubble in the economy, such as the 2007 Housing Crisis.
People thought that houses were going to continue selling for higher prices, when in reality that was unsustainable.

The highlighted sentence is confusing. The money that was loaned was spent and is in many other banks after a few days. If the borrower can't pay, the money that was lent doesn't disappear. It must be some other money that you, PF, think disappears. It seems like the money that the bank has in the collateral may partially disappear. So what? On Wall Street billions can 'disappear' on any given day.

House prices are higher now than in 2007 or 2008. Does this mean that in 2007 house prices were sustainable? It seems like it.

[late]

The highlighted sentence is confusing. The money that was loaned was spent and is in many other banks after a few days. If the borrower can't pay, the money that was lent doesn't disappear. It must be some other money that you, PF, think disappears. It seems like the money that the bank has in the collateral may partially disappear. So what? On Wall Street billions can 'disappear' on any given day.

House prices are higher now than in 2007 or 2008. Does this mean that in 2007 house prices were sustainable? It seems like it.

It disappears if you're the one left holding the bag. Think musical chairs..

[Steve_American]

It disappears if you're the one left holding the bag. Think musical chairs..

Bad analogy. It proves nothing. And doesn't even illustrate anything.

Who is left holding the bag? Does it all disappear at once? Or, does it happen spread out over the term of the loan?

Generally, money doesn't disappear, it gets transferred to someone. In this case the person who can't pay, now has more money to spend somewhere else. Right?
.
.

[late]

Generally, money doesn't disappear, it gets transferred to someone. In this case the person who can't pay, now has more money to spend somewhere else. Right?

He's using the idea that a loan creates money. I don't know enough to explain it. If you look at the Great Depression, something like 1/3 of the money in the country disappeared. You could say it never really existed. And that's with the gold standard in effect.

Messes with your head.

[Steve_American]

He's using the idea that a loan creates money. I don't know enough to explain it. If you look at the Great Depression, something like 1/3 of the money in the country disappeared. You could say it never really existed. And that's with the gold standard in effect.

Messes with your head.

That was then, this is now. In the 30's there was no FDIC. When banks failed, the money in their accounts disappeared. Now is different. Banks rarely fail, they are sold. When they do fail, the FDIC covers all deposits up to $!60K or $299K, I'm not sure which.

And yes, banks create dollars with every loan. I'm not sure about "loans" made with credit cards, but why not? What is the difference?

Yes, we had the gold standard then, but we also had the Fed. Res. Bank since 1913. So, banks were already creating dollars with every loan they made. And, banks made many dumb loans in the late 20's, creating a lot of new dollars.
.

[late]

That was then, this is now. In the 30's there was no FDIC. When banks failed, the money in their accounts disappeared. Now is different. Banks rarely fail, they are sold. When they do fail, the FDIC covers all deposits up to $!60K or $299K, I'm not sure which.

And yes, banks create dollars with every loan. I'm not sure about "loans" made with credit cards, but why not? What is the difference?

Yes, we had the gold standard then, but we also had the Fed. Res. Bank since 1913. So, banks were already creating dollars with every loan they made. And, banks made many dumb loans in the late 20's, creating a lot of new dollars.

That is a tough nut to crack. I'm content with where I'm at, since you are clearly not, you might want to look into it.

[Puffer Fish]

He's using the idea that a loan creates money. I don't know enough to explain it. If you look at the Great Depression, something like 1/3 of the money in the country disappeared. You could say it never really existed. And that's with the gold standard in effect.

Yes.
It was much worse than just "money" disappearing though. People thought that wealth existed when that wealth actually did not exist.

If it had only been an issue of "money" disappearing, then the problem would have been a deflationary effect, and it would cause a problem with loan obligations. This is also a big problem but is a much smaller one than wealth disappearing in the economy.

As I said before, the confusion comes about because the concept of "money" can refer to several different precise things.

[Puffer Fish]

The highlighted sentence is confusing. The money that was loaned was spent and is in many other banks after a few days. If the borrower can't pay, the money that was lent doesn't disappear. It must be some other money that you, PF, think disappears.

That is correct. The issue is that the amount of money that the borrower owes to the bank becomes like "money" in the bank account.
People in the economy think it exists because they assume it will be repaid.
Most of the time these days when large amounts of money change hands it is not "real money" (notes directly issued by the government Central Bank) but is rather "money" in bank accounts, which ultimately represent loan obligations.

It seems like the money that the bank has in the collateral may partially disappear. So what? On Wall Street billions can 'disappear' on any given day.

There are some similarities and differences.
If wealth on Wall Street disappears, it can have a similar effect on the economy to money in banks disappearing.
Saying "So what?" discounts the effect that can have on the economy.

I will not bother to discuss the differences in this thread.

House prices are higher now than in 2007 or 2008. Does this mean that in 2007 house prices were sustainable? It seems like it.

Saying that "prices are higher" can lead to confusion because it could refer to two different things. Do you mean house prices adjusted for inflation?
To understand what "unsustainable" means, you need to know over what time period it refers to. Surely this is not a difficult concept to understand if you think about it.

House prices were not sustainable in 2007 because they later fell for several years. They had to fall.
Just because many years later they might be higher than they were before does not make those prices sustainable back at that time.
Some economists suspect that current home prices might not be sustainable (adjusted for inflation over time) either.

Obviously the word "sustainable" can have several different meanings and, in the strictest logical sense, is ultimately a bit relative.

[Puffer Fish]

Who is left holding the bag? Does it all disappear at once? Or, does it happen spread out over the term of the loan?

That is a little bit of a complicated question to answer.
The money might be said to disappear gradually as the bank does not receive the money they originally expected to be owed to it, or suddenly if the bank is no longer able to fulfill its obligations to those with money in its accounts, or sometimes more suddenly if the bank realises the loan will not be repaid and officially "writes the money off".

Generally, money doesn't disappear, it gets transferred to someone.

It depends what type of "money" you are talking about. "Money" can refer to different things.

I think we are referring to "money in bank accounts" rather than notes directly issued by the government run Central Bank.
Once a bank makes a loan, there now both exists money in the bank account (backed by the debt obligation of the borrower to the bank) and the money that bank has loaned out.
The money could be said to have been "multiplied".

[Steve_American]

That is a tough nut to crack. I'm content with where I'm at, since you are clearly not, you might want to look into it.

I respect you, late.
Here you made the mistake of starting your reply with "That". The rest of what you wrote gives me no clue what that "that" meant in your mind.
.

[Steve_American]

1] That is correct. The issue is that the amount of money that the borrower owes to the bank becomes like "money" in the bank [he means the bank's] account [somewhere].
People in the economy think it exists because they assume it will be repaid.
Most of the time these days when large amounts of money change hands it is not "real money" (notes directly issued by the government Central Bank) but is rather "money" in bank accounts, which ultimately represent loan obligations.


There are some similarities and differences.
If wealth on Wall Street disappears, it can have a similar effect on the economy to money in banks disappearing.
Saying "So what?" discounts the effect that can have on the economy.

I will not bother to discuss the differences in this thread.

Steve_American wrote:
House prices are higher now than in 2007 or 2008. Does this mean that in 2007 house prices were sustainable? It seems like it.

2] Saying that "prices are higher" can lead to confusion because it could refer to two different things. Do you mean house prices adjusted for inflation?
To understand what "unsustainable" means, you need to know over what time period it refers to. Surely this is not a difficult concept to understand if you think about it.

House prices were not sustainable in 2007 because they later fell for several years. They had to fall.
Just because many years later they might be higher than they were before does not make those prices sustainable back at that time.
Some economists suspect that current home prices might not be sustainable (adjusted for inflation over time) either.

Obviously the word "sustainable" can have several different meanings and, in the strictest logical sense, is ultimately a bit relative.

1] PF, you are trapped in a cult. Almost all of economics you believe is not true.

Here you think the people in the economy care a bit about the money that will exist in 10 years.
What matters is the transactions being made today. Only fools in your cult base their decision today on things they think will happen 10 years from now.
They assumed they knew what the future is (yes, is, as in certainly will happen), and now that future no longer will be what they thought, and they don't question the teachings of the cult. They also, IMHO, don't really care that much about the solvency of the bank in 10 years. They care about the bank's solvency this week.

2] The GFC/2008 happened when borrowers could not make their loan payments.
IMHO, this is a totally separate thing from the sustainability of the prices of the homes, etc.
Evidence for this conclusion is the fact that home prices rebounded very fast.

BTW, AFAIK, in the end the big banks ended up making more money from the crisis. They did fine foreclosing on homes and selling them at a profit. If they lost money, it was what they deserved, since they made the stupid loans in the 1st place, and thought they were not exposed because they had sold the loans to suckers.

The rest of the replies are also drivel based on the cult's false thinking.
.

[Puffer Fish]

House prices are higher now than in 2007 or 2008. Does this mean that in 2007 house prices were sustainable? It seems like it.

If you think they were "sustainable", then would you care to advance a theory why the bubble crashed and did not go back to where it was before (in inflation adjusted prices) for several (around 14) years?

I think we are just arguing over semantics; you seem to have a different definition of what "sustainable" means in this discussion.

[Puffer Fish]

Only fools in your cult base their decision today on things they think will happen 10 years from now.

Are you familiar with the fallacy of composition? In some cases what is true for the parts is not true for the whole collection of those parts. Individual people might not care, but as a collective they do.

Much of the money in people's bank accounts are based on expected things that will happen 10 years from now.

It's true of the stock market and it's true of people's retirement accounts.

Suppose you are trying to sell something. The amount of money you will be able to sell it for today is going to be based on people's expectations of how much it will be worth in the future.

They also, IMHO, don't really care that much about the solvency of the bank in 10 years. They care about the bank's solvency this week.

The bank's solvency this week is dependent on other people believing it will still be solvent next week.

Even with the national debt, if suddenly people are aware of a risk that the government may not be able to pay in 10 years, that could have a carry down risk to 5 years, and even create a risk within only 1 year.
If people know the government can't pay in 10 years, they're not going to want to lend money at the 5 year mark.

Imagine a pyramid scheme. Everyone thought it was a great investment but now suddenly everyone realises it is a pyramid scheme. Very quickly that pyramid is going to collapse, even if it could have gone on for years if the people did not know. Isn't that correct?

[Steve_American]

If you think they were "sustainable", then would you care to advance a theory why the bubble crashed and did not go back to where it was before (in inflation adjusted prices) for several (around 14) years?

I think we are just arguing over semantics; you seem to have a different definition of what "sustainable" means in this discussion.

I looked at some data on median home sale prices for the period.

As I expected, PF's assertion that it took 14 years for home prices to rebound was not true.

As I read the graph in the link, it took just 5 years for prices to reach the peak before 2008.
At the peak the median price was $257,400 in the 4th quarter of 2007 and in the 1st quarter of 2013 it was $258,400.

I thought 3 or 4, and it was 5. He claimed it was 14.

https://fred.stlouisfed.org/series/MSPUS

OOPS, I failed to correct for inflation.

If there had been 16% inflation then in Q4 it reached $302,500. So, this is 8 years.
This is close to 8 times 2%/yr., and we know it was less than that for a couple of years.
.

[Steve_American]

Are you familiar with the fallacy of composition? In some cases what is true for the parts is not true for the whole collection of those parts. Individual people might not care, but as a collective they do.

Much of the money in people's bank accounts are based on expected things that will happen 10 years from now.

It's true of the stock market and it's true of people's retirement accounts.

Suppose you are trying to sell something. The amount of money you will be able to sell it for today is going to be based on people's expectations of how much it will be worth in the future.



The bank's solvency this week is dependent on other people believing it will still be solvent next week.

Even with the national debt, if suddenly people are aware of a risk that the government may not be able to pay in 10 years, that could have a carry down risk to 5 years, and even create a risk within only 1 year.
If people know the government can't pay in 10 years, they're not going to want to lend money at the 5 year mark.

Imagine a pyramid scheme. Everyone thought it was a great investment but now suddenly everyone realises it is a pyramid scheme. Very quickly that pyramid is going to collapse, even if it could have gone on for years if the people did not know. Isn't that correct?

Really, how does that work? [That people as a group act as if they think X when as an individual, they don't think X.]

AFAIK, from wiki.
"Examples of Fallacy of Composition. Paradox of Saving (also known as paradox of thrift) - This is a classic example of the fallacy of composition. It is the belief that if one individual can save more money by spending less, then society or an entire economy can save more money by spending less."
. . . Here the people don't realize that if everyone saves, the certain result is that the total income will drop, because less is being spent, and so the economy as a whole is damaged. Therefore, there is an intervening step and the 1st is people's actions and the last is the result. Is there an intervening step in the case above? I don't see it.

[late]

I respect you, late.
Here you made the mistake of starting your reply with "That". The rest of what you wrote gives me no clue what that "that" meant in your mind.

"The more you think about money, the weirder it starts to feel. The government’s money used to be backed by real stuff like gold and silver. Now, as we know, paper money is backed by nothing more than fiat — a declaration by the government that it is (in the case of the United States) “legal tender for all debts public and private.” Surprisingly enough, everybody kind of goes along with that.

Moneyness is a measure of transactability, not value. In prisons and prisoner-of-war camps, mere scrip can serve as currency. Conversely, real estate is valuable, but it isn’t money.

Money is “a surprisingly slippery concept,” the economist Paul Sheard wrote in a new book. “There is no easy way to define and measure it, and it means different things to different people.”

Here’s one truism he challenges: Politicians warn us that the debt we incur today will impose a debt on our grandchildren. But Sheard points out that our grandchildren won’t be just taxpayers. They’ll also be bondholders. So they’ll both pay interest on the national debt and receive interest on it. For the generation as a whole, that will be a wash.

Sheard argues that governments should coordinate fiscal policy (taxing and spending) with monetary policy (the raising and lowering of interest rates). One idea would be to give the Treasury secretary a seat on the Federal Reserve’s rate-setting Federal Open Market Committee. But he said he’s not set on that: “We need to go back to the whiteboard and have a discussion about what is the best macroeconomic policy framework.”

https://www.nytimes.com/2023/07/19/opinion/money-paul-sheard-mmt.html

[Rich]

Raising interest rates to bring inflation back under control has worked in the United States, is working in Europe and is finally showing signs of starting to work in Britain.

[late]

Raising interest rates to bring inflation back under control has worked in the United States, is working in Europe and is finally showing signs of starting to work in Britain.

Nobody is arguing we ignore inflation...

The discussion is about the best way to handle it.

[Steve_American]

Raising interest rates to bring inflation back under control has worked in the United States, is working in Europe and is finally showing signs of starting to work in Britain.

Rich, the Fed. Res. Bk. of San Fransisco reported that 0.4 percentage points of the 6 or 7 percentage points of inflation were caused by the covid spending. The rest was caused by other factors, including supply shortages, OPEC raising oil prices, the war in Ukraine, and price gouging by corps.

Please explain why you think that it is the interest rates that brough down inflation and not the easing of the supply shortages that did it. Or, an end to oil price increases or corps stopping their ongoing price gouging.

My MMT economists always said that the inflation would end when the supply shortages ended, then came the war, etc. Now, they assert that it is not the interest rate increases because they didn't cause increased unemployment or reduce consumer spending. The MMTers say that interest rates work by reducing "demand" by reducing the incomes of the newly unemployed and by reducing consumer spending because they need to spend more on interest. Also. my MMTers assert that increasing interest rates itself can increase prices [=inflation] by increasing business expenses.

[Steve_American]

"The more you think about money, the weirder it starts to feel. The government’s money used to be backed by real stuff like gold and silver. Now, as we know, paper money is backed by nothing more than fiat — a declaration by the government that it is (in the case of the United States) “legal tender for all debts public and private.” Surprisingly enough, everybody kind of goes along with that.

Moneyness is a measure of transactability, not value. In prisons and prisoner-of-war camps, mere scrip can serve as currency. Conversely, real estate is valuable, but it isn’t money.

Money is “a surprisingly slippery concept,” the economist Paul Sheard wrote in a new book. “There is no easy way to define and measure it, and it means different things to different people.”

Here’s one truism he challenges: Politicians warn us that the debt we incur today will impose a debt on our grandchildren. But Sheard points out that our grandchildren won’t be just taxpayers. They’ll also be bondholders. So they’ll both pay interest on the national debt and receive interest on it. For the generation as a whole, that will be a wash.

Sheard argues that governments should coordinate fiscal policy (taxing and spending) with monetary policy (the raising and lowering of interest rates). One idea would be to give the Treasury secretary a seat on the Federal Reserve’s rate-setting Federal Open Market Committee. But he said he’s not set on that: “We need to go back to the whiteboard and have a discussion about what is the best macroeconomic policy framework.”

https://www.nytimes.com/2023/07/19/opinion/money-paul-sheard-mmt.html

Well, I'm terribly sorry.

However, nothing you said there told me what you meant by the original "That".

To reply to this post, look at MMT to understand money better.

Dollars are backed by your need for them to pay taxes. Everyone needs dollars, so everyone accepts them. The market sets their value.

MMT has its Job Guarantee Program that MMTers say will set the market price of everything. So, there will be little inflation. [I think they mean from the size of Gov. deficits. If OPRC adds $10/barrel every January for years, then I think they will say there will be inflation from that. Or, if a massive drought cuts the wheat and corn harvest in the US by 60% there will be inflation.]