Truth To Power wrote:Can you provide a source for that second article? I suspect it is an exercise in deception in which true statements are recast to make it seem like they mean something they do not mean.
I didn't say "any textbook." I said any good ACCOUNTING textbook that describes banks' JOURNAL ENTRIES will set you straight. Many economics textbooks, including "Nobel" economics laureate Greg Mankiw's introductory macro text, continue to teach the fairy tale version (banks lend out customer deposits). But I have taught economics, and some macroeconomics textbooks -- including, rest assured, all the ones I have used -- do describe private commercial banks' debt money issuance process accurately. It's quite remarkable that there could be totally different textbook versions of what is a crucial economic phenomenon, but that's modern mainstream neoclassical economics for you.
This may be different in different countries. I have not taught economics in the USA, and maybe there they teach the fairy tale version where banks lend out depositors' money.
TtP, finally makes a post that is not riddled with false assertions. Just one false or maybe a few false assertions will make anyone's argument worthless. In logic we are NEVER allowed to prove things with even one false assertion.
OK, TtP did say "any good accounting textbook", however there are 2 KEY words there, 'good' and 'accounting'.
When he specifies 'good' textbooks only, he can always say he was right, while giving the impression that almost all textbooks contin the info being discussed.
Like TtP said might be true, in the US and Aust., etc., almost all econ. depts. are run by MS economists. They would not teach the correct facts in an accounting class as they teach the opposite facts in an introduction to macroeconomics class. It would make them look like the fools that they actually are.
Also, TtP reputation has been shredded in my opinion by his repeatedly confidently asserting things that are false. So, why should I or we believe him when he asserts that he has taught economics classes?
TtP, I could not find the paper I saw about 3 years ago. I looked at the 1st 5 pages of my search with "bank of england 2014 depositors money".
I did find this interesting paper on page 5 of my search on the subject written in 2015.https://www.weforum.org/agenda/2015/06/ ... come-from/Where do bank loans come from?
[Bold and size in original]
From it I quote the 1st page or so ---
Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, macroeconomic models were initially not ready to provide much support in thinking about the interaction of banks with the macro economy. This has now changed.
However, there remain many unresolved issues (Adrian et al. 2013) including:
The reasons for the extremely large changes to (and co-movements of) bank assets and bank debt;
The extent to which the banking sector triggers or amplifies financial and business cycles; and
The extent to which monetary and macro-prudential policies should lean against the wind in financial markets.
In our new work, we argue that many of these unresolved issues can be traced back to the fact that virtually all of the newly developed models are based on the highly misleading ‘intermediation of loanable funds’ theory of banking (Jakab and Kumhof 2015). We argue instead that the correct framework is ‘money creation’ theory.
In the intermediation of loanable funds model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers;
Lending starts with banks collecting deposits of real resources from savers and ends with the
lending of those resources to borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and intermediation of loanable funds-type institutions – which really amount to barter intermediaries in this approach – do not exist.
The key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.
Specifically, whenever a bank makes a new loan to a non-bank (‘customer X’), it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet.
The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources, and that acquires its economic significance through the fact that bank deposits are any modern economy’s generally accepted medium of exchange.
The real challenge
This money creation function of banks has been repeatedly described in publications of the world’s leading central banks (see McLeay et al. 2014a for an excellent summary). Our paper provides a comprehensive list of supporting citations and detailed explanations based on real-world balance sheet mechanics as to why intermediation of loanable funds-type institutions cannot possibly exist in the real world.What has been much more challenging, however, is the incorporation of these insights into macroeconomic models.
Our paper therefore builds examples of dynamic stochastic general equilibrium models with money creation banks, and then contrasts their predictions with those of otherwise identical money creation models. Figure 1 shows the simplest possible case of a money creation model, where banks interact with a single representative household. More elaborate money creation model setups with multiple agents are possible, and one of them is studied in the paper.
In the parts that I highlighted, they imply that the loanable funds assumption is false, and that it has been hard to get it out of the minds of many or most economists.
I assert that this is because this assumption was used (in the MS econ. theory being created with deductive logic and based only on assumptions) very early in the chain of reasoning. The key conclusion based on this assumption was that banks could be ignored for the rest of the theory. I've been told by 2 MMTers that MS econ. theory also removes money from the theory, which makes it be based on a purely barter system of economic exchanges.
. . . A analogy for this that most people can grok is Euclid's plane geometry. I want to show you the difference between an assumption being used early and one being used late.
1] So, the late case goes like this. Suppose that 2 parallel lines do meet if extended far enough, as they do on a sphere if we define 'parallel lines' in this way. [...snip... the way]
. . . This can easily be accommodated by creating "Solid Geometry". Where we are dealing with buildings we can still use Plane Geometry just fine. However, when surveying a state like Colorado, the grid of 1 sq. mile sections will not fit exactly because the surface is part of a sphere and is not a plane.
2] So, the early case goes like this. Suppose that there are no straight lines. That there are only curved lines and that their curve can change as you move along it [like they are drawn with a French Curve]. This may be actually true in General Relativity on grand scales.
. . . Now the entire structure of Euclid's proofs must be done over from scratch, because this was almost Euclid's very 1st starting point. For example, if we start with 3 points on the plane that will be used as the 3 corners of a triangle, and if we *can* use a straight rule to form the 3 sides, then Euclid's proofs will work.
. . . However, if we must use a French Curve to draw the 3 sides of the triangle, then the angles formed at the 3 corners will not total 180 deg. And worse, we really can't predict what they will be unless we can specify what part of the French Curve was used to draw each of the sides.
This analogy shows why it is hard to integrate the fact that banks create money with every loan into the MS econ. theory.
Got to go back in 1 hour. It is 9:40 pm in Chicago now. ***** I'm back now, and continue.
Lurkers, whenever you hear an economist or politician saying that Gov. deficit spending will increase interest rates for business investment and consumer spending loans, you will know that they are wrong because the "banks recycle the savers' money as loans for investment and consumer spending" assumption has been proven and accepted as being false
; and without that assumption the proof of the theory that predicts interest rate increases has been proven invalid or just wrong. The theory goes on from "that banks loan savers' money" to also say that Gov. bond sales must come out of savers' money to complete the link between deficits and bank loans.
. . . Actually, the Gov. checks that result from the deficit spending have already been sent out and cashed, before the bond sales occur. Therefore, bond sales don't suck up money that was already in the economy on the day the checks were cashed. The bond sales suck up the money added to the economy (banking system) when the Gov. checks were cashed.
. . . So, actually, Gov. deficit spending (if anything) increases the supply of money in the economy.
BTW --- AFAIK, consumer spending loans are mostly done with credit cards. And, the credit card transaction deposits the money into a bank automatically. And AFAIK, these money is also created out of thin air.
. . . If I'm wrong, I'd be glad to see how and why.