[Pops]

I never get tired of this argument.

Banks don't create money, they create debt when they make loans. Most deposits are liabilities to someone somewhere in the inside money system. In fact your deposits aren't even yours, your receipt is just an IOU. Loans and deposits aren't money, just chips, temporary private arrangements, like a car rental.

Bank deposits are called inside money because they are "inside" the private sector. Those deposits are created and controlled as a business by private individuals competing (theoretically) in a free market. The supply of money then increases and declines in response to demand. Increased demand for money means more loans.

I don't know about elsewhere but Americans in particular are not hep to government controlling money creation. Being a market economy from the git go we opted for private banks and only after 150 years was the Fed created as kinda-sorta quasi-governmental facilitator to assure liquidity between banks. At the time the Fed was created othewise solvent banks were getting caught short because other banks would not honor their claims. After 50 years of deregulation of banking it is obvious that the wolves have taken over the henhouse again.

Cash (physical greenbacks in the US) and fed reserve deposits are called "outside" money and they don't represent a liability to anyone in the economy. They are actual money. The big downfall of outside, government money is it is issued by government. Government isn't for profit so supply and demand isn't a consideration. Government's job is politics, which is why currency manipulation by governments was once common and the market system has prevailed.


Way back in olden times when I was a kid, before mag-strips, there were checks and there was cash. Checks (inside money) were kind of a little world of their own between you and your bank and whoever elected to accept your script. Banks were less convenient than cash but made some things easier, like paying bills by mail, and of course cashing checks. But checks were not always accepted so everyone carried some cash. Back then the line between inside and outside money was pretty clear.

Then came debit cards and instant electronic banking and all that changed.

Now most people never touch cash. It is dirty and inconvenient when you can just swipe a card and be off. Everything is private, "inside" money now.

--
The thing about banks is they create debt but they do it against the value of an asset. Big loans are against property but there are a heck of a lot of "unsecured" loans made against "credit scores" to individuals and against the hope of future profits in the case of business. But in all cases there is the expectation of future profit/income to pay back the loan.

The issue of PO and FF depletion in general is and always has been that energy too cheap to meter has provided surpluses too great to measure. It is those surpluses the bank loans are actually based on, the idea that energy flows will continue increasing indefinitely.

The "what we do" is simple, we deleverage. No amount of regulatory fiddle faddle is gonna help.

Here is one chart of doom but even it only tells the part of the fantasy that imagines GDP is sustainable with less and less cheap energy. When energy declines so will GDP and the debt ratio will skyrocket, for a while.


Private debt in this chart includes corporate bonds.


http://www.federalreserve.gov/pubs/feds ... 638pap.pdf
http://www.pragcap.com/understanding-in ... ide-money/
http://www.pragcap.com/hoisington-inves ... rter-2014/

[davep]

Banks don't create money, they create debt when they make loans. Most deposits are liabilities to someone somewhere in the inside money system. In fact your deposits aren't even yours, your receipt is just an IOU. Loans and deposits aren't money, just chips, temporary private arrangements, like a car rental.

Banks create money as debt. 90% of money in circulation is created this way. That's why booms coincide with increasing real estate prices (and loans, and therefore available broad money). Once the loan is paid off, the money disappears (leaving the interest to be paid from further debt-created money). That's why we live in a debt-based as opposed to equity-based economy, because money is created as debt by banks. The BoE isn't just making it up.

[radon1]

Banks do create money. However, "equity-based" monetary system is nothing new. It is something known as "Islamic banking", for example.

Capitalism at a non-growth stage is capitalism in crisis.

SO WHAT DO WE DO

Don't know. Nurture some parallel structures, gradually driving out the existing ones. Just like linux drives out you-know-whom in some corners.

[davep]

Banks do create money. However, "equity-based" monetary system is nothing new. It is something known as "Islamic banking", for example.

Capitalism at a non-growth stage is capitalism in crisis.

SO WHAT DO WE DO

Don't know. Nurture some parallel structures, gradually driving out the existing ones. Just like linux drives out you-know-whom in some corners.

Capitalism doesn't depend on debt-based money creation. It's an invention of bankers for their own benefit.

Systems like the Chicago plan offer alternative equity-based monetary systems too.

[Pops]

You guys simply repeat your mantra rather than consider the argument.

Banks make land asset value liquid.

Remove the ability to borrow against that value and the economy goes to zip PDQ

[Subjectivist]

You guys simply repeat your mantra rather than consider the argument.

Banks make land asset value liquid.

Remove the ability to borrow against that value and the economy goes to zip PDQ

But in the old days, money leant was money already on deposit, today money leant does not exist until it is loaned into being.

[davep]

OK, here's some quotes from the BoE's article "Money creation in the modern economy" http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Money creation in reality
Lending creates deposits — broad money determination at the aggregate level As explained in ‘Money in the modern economy: an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. (4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. (6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates.

In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England. The rest of this article discusses these practices in more detail.

Money creation in reality

Lending creates deposits — broad money determination at the aggregate level
As explained in ‘Money in the modern economy: an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. (4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation. (6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

[davep]

So, in essence, individuals or corporations need to get in debt for money to be created. Yes, there's a balance sheet involved with assets, but the problem is that banks can turn the spigot on and off depending on the point of the business cycle. They control both creation and attribution, with a need for growth due to the vestigial debt from interest. In an equity-based scenario, existing money stays in circulation rather than being destroyed when loans are paid back, meaning the economy is far more stable.

[Pops]

But in the old days, money leant was money already on deposit, today money leant does not exist until it is loaned into being.

In the old days not much money was lent. Wealth was held in productive farmland. Productivity was measured in food. And since land was mostly inherited there was not much need for money.

Today wealth is held in non-productive private homes and real estate. Since houses aren't productive there needs to be money to invest in the industrial means, capitalism and all that.

The value exists whether the representation of it (loans/deposits) do or not. Modern banking goes hand in hand with modern industrial capitalism.

[davep]

The value exists whether the representation of it (loans/deposits) do or not.

Sure, but that isn't in the form of money. You stated above that banks don't create money. They do, but on loans. And as I said, it represents 97% of all broad money in the UK. It's an inherently unstable money creation process that now sees a large number of people in the UK unable to buy a home, and overall debt increasing as there just isn't enough growth for the interest element to be absorbed easily.

You also said "I don't know about elsewhere but Americans in particular are not hep to government controlling money creation". The point is that money creation in an equity-based money system is a tiny proportion of existing equity-based money (e.g. 2%), where people can choose to invest existing money in lending institutions as they see fit. We currently let practically all our money be created, attributed and destroyed by banks, whose interests align even less with ours than the Government's interests do.

[Pops]

but the problem is that banks can turn the spigot on and off depending on the point of the business cycle. They control both creation and attribution, with a need for growth due to the vestigial debt from interest. In an equity-based scenario, existing money stays in circulation rather than being destroyed when loans are paid back, meaning the economy is far more stable.

Banks don't just turn on the spigot. They compete to make loans, it is a market. (When regulatory systems are working anyway)

Like any market, when demand is high or the banks feel risk is high (risk being like supply), the price of money goes up. When demand or risk is low interest rates fall. It is just a market, and like any market it needs regulation. When banks are not sufficiently regulated the effects of risk are eliminated, which is like reducing any supply constraint. That was banks hiding crappy mortgages in synthetic whatevers in the oughts, it was the very same in the S&L crisis back in the '80s when lenders were able to pawn the risk off on to someone else they made stupid loans.

Not sure what Trump is about or where the populist right leaning folks are, but definitely Bernie and Lizzy are pointing to a general idea that the regulators have abdicated and Wall Street and K St. are in control of the regulators. Pretty sure that doesn't argue the regulators should be handed the keys to the kingdom, just the opposite.

Says me!

[davep]

It is not like any other market, money is essential for a functioning economy (which is why we bail banks out). Therefore they make vast profits but take on little or no risk. That isn't a functioning market.

The spigot reference was merely a simplification of the business cycle inherent in the current money creation system, whereby banks increase money supply as confidence grows and then suddenly get spooked and nearly stop all new loans (thereby massively decreasing available capital). This has happened regularly over the years and is a natural by-product of such a system.

[Pops]

The value exists whether the representation of it (loans/deposits) do or not.

Sure, but that isn't in the form of money. You stated above that banks don't create money. They do, but on loans.

We're saying the same thing:

Banks don't create money, they create debt when they make loans. Most deposits are liabilities to someone somewhere in the inside money system.

I took the lesson that banks create deposits but as we've both said, deposits are just IOUs, not money. The 97% of "inside money are just IOUs. As such they can simply go poof!

If you were to replace all that debt with "money" backed by nothing except government promises the sytem would be basically flooded with value, all the value of existing money (which is just a representation of housing value, right?) plus all the new government money...

The size of the paper economy would double, and be fixed! I think the value of all that money would need to fall by half would it not? insta-deflation, big time... Or is that not right?


(I gotta go do a littl money creation of my own, LOL)

[radon1]

Thought it could be useful to summarize various versions of the answer to the OP question, found in this and other threads:

AD: promote free markets and globalization in order to subsequently facilitate transformation to socialism
davep: introduce equity-based monetary system
Ibon: let the Overshoot Predator do his job
Cog: praise and glorify Cog
...: kill evil overpopulators
...: kill evil overconsumers
...: do nothing, everything is OK

Above are my interpretations, and as such can be completely wrong. Feel free to add or amend.

[davep]

The value exists whether the representation of it (loans/deposits) do or not.

Sure, but that isn't in the form of money. You stated above that banks don't create money. They do, but on loans.

We're saying the same thing:

Banks don't create money, they create debt when they make loans. Most deposits are liabilities to someone somewhere in the inside money system.

I took the lesson that banks create deposits but as we've both said, deposits are just IOUs, not money. The 97% of "inside money are just IOUs. As such they can simply go poof!

If you were to replace all that debt with "money" backed by nothing except government promises the sytem would be basically flooded with value, all the value of existing money (which is just a representation of housing value, right?) plus all the new government money...

The size of the paper economy would double, and be fixed! I think the value of all that money would need to fall by half would it not? insta-deflation, big time... Or is that not right?


(I gotta go do a littl money creation of my own, LOL)

The transition to an equity-based system creates the baseline money supply based on existing national debt. Which is why it's important that any new money be created by a formula rather than politicians. A very small increase per annum is then attributed by the Government, but the vast majority is already in the system. The Icelandic sovereign money proposal goes into this sort of question quite well, as does the Money Masters "Monetary Reform Act". The point is that any increase in money supply can be tiny because the existing money is not being destroyed as loans are paid off.

[ennui2]

I'm with Ibon, in the sense that no matter what we'd like to see happen, the majority of humanity will go its own way, which is brown-tech with a few glimmers of bright-green peppered on top. So why come in here and advocate for something when the rubber will never meet the road?

[Pops]

The point is that any increase in money supply can be tiny because the existing money is not being destroyed as loans are paid off.

I guess my problem is I don't see where that is bad. If the economy expands the money supply automatically expands as people try to take advantage of the expansion. When the economy contracts the money supply contracts as well, not just through amortization but through default. Thats how it used to work anyway, before trickle-up and deregulation and QE/TARP/ZIRP.

Lending is a leading indicator. Money is just another commodity, if supply is too high the value falls, if supply is too low the value escalates. With a relatively fixed money supply it seems like an expansion would be hobbled, or worse, demand for money would quickly raise it's value leading to textbook deflation.

On the downside of economic growth, where we're mostly concerned, debt retirement through amortization or default that shrinks the money supply is going to be important. It seems to me the fact that .gov absorbed so much bad debt (adding to it with QE and such) but left it on the books is the reason the economy is taking so long to right itself. A system too slow to react leaves too much money hanging around and that is of course textbook inflation.

[radon1]

A system too slow to react leaves too much money hanging around and that is of course textbook inflation.

And where is it?

[Tanada]

In the old days not much money was lent. Wealth was held in productive farmland. Productivity was measured in food. And since land was mostly inherited there was not much need for money.

Today wealth is held in non-productive private homes and real estate. Since houses aren't productive there needs to be money to invest in the industrial means, capitalism and all that.

The value exists whether the representation of it (loans/deposits) do or not. Modern banking goes hand in hand with modern industrial capitalism.

You say that as if modern industrial capitalism could exist without fossil fuel energy driving the whole cycle.



You also seem to be implying modern industrial capitalism is a good thing and the subsistence capitalism of the past was a bad thing. I don't find myself much in agreement with that, modern capitalism does far more damage to the planet than the old subsistence level capitalism ever did.

[davep]

Pops, lending is a function of the banks' willingness to lend. They lead the business cycles. These business cycles are not natural supply/demand cycles but merely boom-bust indications of banks' willingness to lend. And the whole economy is affected when they decide they're reducing money supply. Their decisions are not in any way based on the common good, but merely because they have been lending too much previously. It is inherent in the process that the growth can't go on forever and there is a bust, then the cycle restarts.

Look at the IMF Chicago Plan research document for how an Equity-based monetary system gets rid of these needless cycles https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf. There are four major claimed advantages:

Fisher (1936) claimed four major advantages for this plan.

First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations.

Second, 100% reserve backing would completely eliminate bank runs.

Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt.

Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.

And their research backs them all up.