[Crantag]

I don't know how many times I need to say the same thing but in a different format @Steve_American. The US dollar is merely a national IOU from the government. A bank cannot create it as it is not an IOU from them. All a bank does is circulate existing deposits into assets via a method of risk and rules (fractional reserve). If it over steps the mark and these assets become toxic, they either go bankrupt or they need a government bailout - as they do not have the ability to print new Dollars. After all, why would the bank need to attract deposit customers (and pay interest) if they could just create money anyway? And that is the last I will say on the subject. You either understand that or you don't.

As for evidence as to why a nation cannot just print money to get out of debt...

https://en.m.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

Actually, mainstream economics defines money in terms of M1, M2, and M3, in descending numbers based on degree of liquidity (with M1 being the most liquid) M1 includes bank deposits. The same mainstream theory states that when a bank lends its fractional reserves, the money is generally deposited anew in the bank (thus providing basis for continued lending), and these deposits are classed as 'money'. So, I agree with Steve on this one particular point here.

[Steve_American]

So, B0ycey says he is done with the point about "when a bank makes a loan it is creating money out of air".
Good for him. He doesn't need to see how wrong he was. Too bad he didn't google it right off. He could have found the many, many places where the authors agree with me. I think since 2014 when the experiment was done, most every expert has changed their mind. But, the model still does not include the banking system IIRC. Until they correct the model the theory is still based on a false assumption because they used that assumption to exclude the banking system.

If I may use an analogy --- it is like --- after every expert had agreed that continents do in fact move about 1/2" to 1" per year, the geologists were still arguing about the land bridge across the Atlantic O. from Africa to S. America. Maybe not a good analogy but please give me a break here.

Anyway, anyone else want to talk about another of my examples of assumptions that are false.

[Crantag]

I don't agree with the allegation that mainstream economics doesn't regard banks as creating money. It is very much inline with mainstream/neoclassical thinking that banks do. The description I gave is drawn from neoclassical economics.

[B0ycey]

Hang on! If people want to believe the illusion of spreadsheet figures is creating money, that is up to them. Definitions of liquality is not creation either I might add. This is nothing more than the shit you read since 2008 to explain why everything went wrong with subprime morgages. In reality nothing is created - which is why everything went wrong duh!!! You can only spend the Dollars you have btw. After all, if I lend someone money but on my computer at home I have a spreadsheet with the figures as he said he is giving it me back, that doesn't mean I have created money. It is merely an illusion. And now someone is thinking of using the same practice to get out of national debt. Nice.

[Sivad]

"when a bank makes a loan it is creating money out of air".

The bank is creating money but not out of thin air. It's creating money based on an assessment of productive capacity. All money is faith and credit based on an underlying productive capacity. The capacity is always finite, it is possible to create too much money.

[Steve_American]

Hang on! If people want to believe the illusion of spreadsheet figures is creating money, that is up to them. Definitions of liquality is not creation either I might add. This is nothing more than the shit you read since 2008 to explain why everything went wrong with subprime morgages. In reality nothing is created - which is why everything went wrong duh!!! You can only spend the Dollars you have btw. After all, if I lend someone money but on my computer at home I have a spreadsheet with the figures as he said he is giving it me back, that doesn't mean I have created money. It is merely an illusion. And now someone is thinking of using the same practice to get out of national debt. Nice.

The difference between a bank with an account at the Fed. Res. Bk and you at home with a spread sheet on your computer is you don't have an account with the Fed. Res. I guess you didn't even read the bottom part od my last big reply.

It was explained somewhat there. The Fed. Res. Bk has a reserve requirement of 10%. This means that when the bank makes a loan of $100, its reserve requirement only goes up by $10. Most of the other $90 that is now on deposit in the bank (until it is spent by the borrower*) can be lent out to someone else. And if/when it does lend out $80 of it, then its reserve requirement only goes up another $8. Now $180 has been lent out and can be converted into actual cash dollar bills and spent. When this cash is spent even you would agree that it is real money/dollars, right? So, there you agree that there is $180 of real dollars at that instant.
. . Those $180 in the form of 9 $20 bills didn't come from any actual account that the bank had on its books before the loans were made. And yet there they are in the form of real IOUs actually printed by the Gov. and issued by the Fed.

.* . When the money is spent it goes 99% of the time to another US bank. At that bank it is a deposit and so increases the 2nd bank's reserve requirement by 10% of $180 = $18. This leaves the 2nd bank with $162 that it can hold and earn nothing for, or lend on the overnight interbank market at 0.0025%/yr. So, the 1st bank can borrow some of that $162 if it needs to, to meet its reserve requirement at the Fed. that night and every later night.
. . If you were not taught all this in your economics classes then it just goes to illustrate the fact that the standard model doesn't think you needed to learn about this because it isn't important.

[B0ycey]

All I read then was the FED issues the Dollars @Steve_American.

Which is what I have already said many times over.

[Crantag]

If anything Boycey didn't pay attention to or grasp that part in economics class, because this is all fundamental, mainstream, neoclassical economics.

Officially, the Fed manages reserve requirments as a means of managing the money in the economy (in theoretical discussion this is sometimes called managing the money supply, but in reality the Fed stopped attempting to monitor the 'money supply' decades ago. They just look at things like inflation and velocity of money).

Another major function of the Fed in this is the 'lender of last resort' function, which in effect guarantees the loans. Finally, controlling the discount rate (cost of borrowing from the Fed) also directly influences the Federal Fund Rate (interbank lending rate). Additionally, interest rates (managed through this same circuit) furthermore influence the amount of money lent.

[Crantag]

All I read then was the FED issues the Dollars @Steve_American.

Which is what I have already said many times over.

Even that isn't technically correct. The treasury does. But it's basically dependent on Fed actions, to at least a significant extent.

[Steve_American]

Hang on! If people want to believe the illusion of spreadsheet figures is creating money, that is up to them. Definitions of liquality is not creation either I might add. This is nothing more than the shit you read since 2008 to explain why everything went wrong with subprime morgages. In reality nothing is created - which is why everything went wrong duh!!! You can only spend the Dollars you have btw. After all, if I lend someone money but on my computer at home I have a spreadsheet with the figures as he said he is giving it me back, that doesn't mean I have created money. It is merely an illusion. And now someone is thinking of using the same practice to get out of national debt. Nice.

Earlier, in this thread you said that the US will have to pay off its debt someday.
Let me educate you.
In 1789, the US Gov. had a large national debt leftover from the Rev. War.
By 1835 it had paid it all off, by selling land that it stole from the Indians.
It had no debt until the Mexican War.
Then ir started borrowing. It has never stopped borrowing for long. In the Civil War it borrowed a lot. It rarely ran a surplus and so the debt went up in every decade from 1850 until 1930, then it went up more in the Depression. Then came WWII and more debt. And Vietnam.
By 1981 when Reagan was sworn in the national debt was just about exactly $1T.

Looking at all these facts. Why do you say the national debt needs to be paid off someday?
No real effort was made to pay it off from 1850 'til 2010 a period of 160 years.
Nobody made the US pay off its debt for over 160 years. That is 2 full life times or about 7 generations. Why in Hell's Name do you come off thinking that someone will make the US pay its debt now? What is different about NOW? And who made YOU boss?
. . And don't say, "Soon the dollar will not be the world's reserve currency." I reject the idea that the holders of dollars at that time will have any power to make the US pat off the national debt.
. . And even it they did, all the US has to do is create dollars and give them dollars. Then the debt is paid.
. . Yes, I agree that all those new dollars may be a bad thing.
But not as bad a thing as sucking $17T out of the US economy with new taxes. Think about that. $17T is about equal to the GDP. If the GOV. set taxes to collect it all in 1 year then the people would have zero dollars to spend and everyone would starve. [Just kidding, there. I know its more complicated than that.]
This is definitely my last effort to convince you. There is no way in Hell the the US can ever pay off the debt with tax revenue dollars and using printed dollars isn't a good idea either, unless it was done very slowly.

[B0ycey]

If anything Boycey didn't pay attention to or grasp that part in economics class, because this is all fundamental, mainstream, neoclassical economics.

All that is happening in this thread strawmen to justify things I have not actually said. Do banks create Dollars or not? Or is it the FED? All the bank does is circulate existing deposits to create assets in loans. If you think that is a creation of money, it isn't. It certainly isn't new Dollars nonetheless.

[B0ycey]

Earlier, in this thread you said that the US will have to pay off its debt someday.

If I said that, I am wrong. What I should have said is it needs to balance it's spending and create a surplus. To pay off its debt is to have no Dollars in circulation.

[Crantag]

All that is happening in this thread strawmen to justify things I have not actually said. Do banks create Dollars or not? Or is it the FED? All the bank does is circulate existing deposits to create assets in loans. If you think that is a creation of money, it isn't. It certainly isn't new Dollars nonetheless.

You have a flawed conception of what money is. Money is not merely green pieces of paper; neither in theory nor practice. The descriptions advanced in this thread are correct. And you aren't being persecuted. We are all merely discussing.

[B0ycey]

Is a loan money? Or is what is lent money? If it what is being lent then nothing has been created. It has been circulated. If you want to consider figures on a spreadsheet as money, then need to explain that depositors needn't worry if there is run on the bank. Liquidity terms are not creation. Otherwise liquidity has no meaning.

[Crantag]

Is a loan money? Or is what is lent money? If it what is being lent then nothing has been created. It has been circulated. If you want to consider figures on a spreadsheet as money, then need to explain that depositors needn't worry if there is run on the bank. Liquidity terms are not creation. Otherwise liquidity has no meaning.

The way that the relevant institutions are designed is such to facilitate the permeability of savings to investment, hence fostering the function of loans as money. The lending facilities of the Fed--as well as the regulated interbank market--facilitate these. In the US, the run on the banks hazzard is addressed with the Federal Deposit Insurance Commission. This is all explicitly designed to function accordingly.

[B0ycey]

So you are saying a loan is money and not an asset/liability. Then we disagree.

[Crantag]

So you are saying a loan is money and not an asset/liability. Then we disagree.

Actually I have said that bank deposits are money. Loans are the conduit through which banks create money through the mechanism of the multiplier effect, and this effects and implies an expansion in the number of bank accounts. This is all by design and is facilitated at the level of public institutions (and private institutions. The Fed is private of course. It's institutions are sort of quasi-public.)

[Steve_American]

Actually I have said that bank deposits are money. Loans are the conduit through which banks create money through the mechanism of the multiplier effect, and this effects and implies an expansion in the number of bank accounts. This is all by design and is facilitated at the level of public institutions (and private institutions. The Fed is private of course. It's institutions are sort of quasi-public.)

Actually I have said that bank deposits are money. Loans are the conduit through which banks create money through the mechanism of the multiplier effect, and this effects and implies an expansion in the number of bank accounts. This is all by design and is facilitated at the level of public institutions (and private institutions. The Fed is private of course. It's institutions are sort of quasi-public.)

So, what you are saying there is that a bank loan is money whether it is in the form of the original deposit at the lending bank, is moved to different account at another bank, or it is converted into actual cash. Either way the loan has added to the money supply.

B0ycey is right in a small sense. When someone buys a US Bond the transaction creates money that is perfectly safe. There is no hazard at all for either party. However, when a bank makes a loan there is also a repayment contract created. If the borrower defaults on this contract then money is destroyed.

It sees to me [a layman] that the bank loan actually creates 2 forms of "money". The cash or bank deposit will be spent and gone pretty fast. OTOH the repayment contract also has value and can be sold. If it is then money has changed hands. This transaction sort of also creates a new loan. The buyer of the loan gives the bank cash which it spends and it is gone, but the buyer thinks he has "money" in the form of the contract. When the original borrower defaults, that contract and its value disappears. I put the word money in quotes just above because one definition of money is "that it stores value". The contract stores value, right?

So, the economists who look at the amount of private debt in a nation's economy are on to something. Too much private debt can lead to a crash when a bubble bursts. MMT claims that public debt [i.e. US Gov. debt] never has or will have the same risk associated with it no matter how big it becomes, because the US Gov. can *always* pay its bills. It need never default.

[Crantag]

Governments have defaulted. Moreover, bank loans are secured. Also the bond market is itself a money management mechanism. The Fed sells bonds (not new issues--which are done by the treasury) to deflate the money 'supply' and buys bonds to inflate it. You also forgot about interbank lending which you yourself previously raised. Don't fall into the thought experiments trap. Better to understand the system as it is.

[Rugoz]

It really helps to look at banks' balance sheets, something beneath academic economists so they rather abstract it away

Here's an example. Say there are customers C1 and C2 and banks B1 and B2. Let's assume the balance sheet of the banks are empty at the beginning and let's ignore reserve requirements (some countries don't even have them) and capital requirements (more important). Now B1 provides a loan of $100 to C1. Hereby the loan is added on the asset side and a deposit of $100 is added to the liabilities. Then C1 withdraws say $20 from the deposit and transfers it to C2. If C2 has a deposit at B1 as well, $20 is subtracted from the deposit of C1 and added to the deposit of C2. No cash was needed, yet clearly a transaction was done. Now we assume C2 has a deposit at B2, then B1 must transfer the money to B2. For that purpose B1 needs cash. Let's say it borrows it from the central bank. The cash is added to the asset side, the central bank loan to the liabilities. The cash is then transferred to B2 and $20 subtracted from C1's deposit.

In reality there are tons of transactions between banks and only the net is transferred in cash at the end of the day. Also, to my knowledge banks are not obliged to settle in central bank money, they do it because it's safe.

Anyway, I'm not a bankster so feel free to add to the above