Economic myths and fallacies

[Hellestal]

@LinusK

I’m not quite sure what you mean by this, particularly “crediting liabilities.” I would have said the bank creates a new liability on itself (for example, by increasing the amount in the borrower’s account) while simultaneously adding an asset to its own balance sheet (the discounted value of the loan).

I’m using the vocabulary of rudimentary double-entry accounting.

It’s called double-entry because there are always two entries done together. One entry is the debit. The other entry is the credit. Those are the names. Liabilities are entered as credits, a fact so basic it’s listed in the dictionary (definition 2 d (1)). Naturally, there must also be a corresponding debit entered simultaneously somewhere else. Two entries, debit and credit.

This is the core concept of double-entry bookkeeping. What you’re telling us here is that you don’t even know the names of the two entries.

@LinusK

No, I’m saying of the Fed wants the amount of Reserves to be $X, then that’s the amount it will be. It manipulates the amount by buying selling its assets - Treasuries, or other securities. It can do that despite the fact that people hold some Fed liabilities as currency, and despite the fact the amount they hold as currency changes from week to week and month to month.

What you said was, and I quote: “That number is totally under the control of the Fed.”

As a practical matter, there is no possible way for the Fed to keep reserves at precisely X dollars at all times. It is not “totally” under their control, just as they can’t keep interest rates at precisely the rate they want. There are broad market forces at work, and there will always be volatility around any chosen target. Even if they targeted bank reserves (and they don’t), they wouldn’t have total control.

In more extreme cases, for example if their assets dropped to essentially no value, they would have essentially no control.

@LinusK

I appreciate the gratuitous insult,

There was no insult anywhere, gratuitous or otherwise.

You’d know that if you read more carefully.

@LinusK

but if you think dollar liabilities and assets are not evenly matched, I’d be pleased to hear the explanation.

Why don’t you open a book?

I don’t make any demands on people that they must be credentialed experts for me to listen to them. I don’t demand that they have any special degree. I just want them to have done at least a little bit of research before they shoot their damn mouths off. That means that if you’re going to talk about bank ledgers, then yes, I expect you to know how a ledger works. Anyone who opines on the subject of accounting should know what a debit is and what a credit is, since those are the two entries referred to in the double-entry system. There are even free texts, like the online Principles of Accounting.

Banks create monetary liabilities without creating any loans all the time, literally every single working day. They will also decrease their deposit liabilities, thus destroying private-bank-money, again without touching any loan balance. Happens all the time. It’s as common as dirt. The size of the loan asset also often changes without any connection to the amount of deposit liabilities. This is all part of the normal operation of being a bank.

But I can’t teach you freshman financial accounting, let alone the peculiarities of banking. I’m always happy to explain things to anyone who asks honest questions, but I’m not here to remedy your nonexistent accounting education. Put some effort in. Learn the basic words. I can fill in the blanks but I can’t remedy a blank slate.