No, banks don’t create money out of nothing, as far as I can tell from what I know. If you’re talking about interest, this doesn’t create anything but a debt. The debtor has to come up with the money, but the money doesn’t come from nowhere. If you’re not talking about interest, I don’t know what you’re talking about.
The Fed gets to pretty literally wave a magic wand and say “Poof, you have money that didn’t exist before.”
What does this have to do with what the Fed does? From the wiki, it appears to me they’re not saying “we owe the reserve bank X dollars,” rather, they’re saying “The reserve bank now has X dollars,” full stop. No IOU or IOU-like item seems to be involved.
You completely missed the point, which is hard to understand since the article was pretty explicit. The whole argument is a relative one. A central bank is said to monetize a country’s debt if it is providing a significant portion of the funding for that debt. 15% cannot be regarded as a significant portion.
I have already explained this and I would appreciate it if you would at least make SOME attempt to pay attention. The reason there is no inflation is that almost ALL of the money the fed has created in the process of purchasing securities during quantitative easing has gone to increasing the excess reserves of member banks - to the tune of nearly 2 trillion dollars. That money, as long as it is locked away in reserve accounts, is for all intents and purposes, invisible to the economy.
Actually, it would be a wash - as all loans are. However if there are any bookkeepers or accountants here I’d like to hear their take since this really just a bookkeeping issue. I’d imagine you increase your accounts receivable, an asset by $1 and decrease cash, also an asset by $1.
There is no wizardry in money creation with fractional reserve banking as there is with money creation by a central bank. Honestly, I had to look this up though since it’s been so long. The magic comes from the money multiplier which comes from the reserve ratio. I can explain this if anyone is interested but wikipedia does an ok job here - scroll down to the table. You can also find it here.
I’ve already tried to explain asset rotation to you. Why do you seem to have a problem understanding that there are a multitude of markets for a variety of asset classes? Do you even understand that? There are futures markets, options markets. There are markets for stocks, bonds, commodities. There is also cash not to mention less liquid markets such as real estate. Money is constantly flowing in and out of these.
They do, but it’s much more indirect via the money multiplier - see the reference in my previous response to Linus.
There are 2 versions of the multiplier though, observed and theoretical. The theoretical multiplier is the inverse of the reserve ratio. So if banks are required to keep 10% of deposits on reserve then the theoretical multiplier will be 1/.1 or 10.
Of course in real life you never see the money multiplied by that amount, what you see is the observed multiplier.
Terminology is weird. But as far as I’m concerned, it’s valid to say that private banks really do create “money” out of nothing, in a process that looks (from an accounting perspective) extremely similar to what a central bank does. You just have to be clear about which definition of money you’re using. There are many kinds. The central bank creates the monetary base (M0, high-powered money, or sometimes “outside money”), and private banks create private-bank-money (inside money/broad money/certain components of the M1, M2, M3, etc.)
Do you the basics of accounting? You need to have a handle on that to understand the process. Here’s a previous post from a previous thread where it gets a bit technical, and even a rudimentary familiarity with business accounting would help a lot.
In an accounting sense, the money that private banks have in their reserve accounts are a liability of the Federal Reserve. The green pieces of paper in your wallet are likewise accounting liabilities.
But deltasigma is precisely correct in post 168 that it’s gibberish to think of this as a genuine liability, or to believe that a central bank could go bankrupt. It’s an accounting fiction based on the historical development of central banking. That’s another long story, and again, I’m not sure how much detail you’d like.
But, as you went on to say, not in the lay sense of liability I was making use of when I typed the word “owe.” I took LinusK to be referring to actual, you-must-pay-this debts when he mentioned his “IOUs.” My understanding (which seems to be confirmed by what you said after the abovequoted) is that what the fed does to increase the amount of money in reserve accounts is not the drawing up of an IOU in this sense.
I’m not sure those distinctions are really going to help people understand what happens.
Money creation in the banking system relies on bank lending. But not just banks, all sorts of lending. This gets complicated very quickly though. Money and banking is one of the most difficult topics in business school so trying to cover this here probably isn’t going to go well, but we can give it a shot. As I said before, that link to the wiki entry for the money multiplier does a decent job.
It essentially occurs through re-lending the same money via different lenders. So if you look at the table I referenced earlier, an initial loan of $100 with a reserve requirement of 10% means that $10 has to be kept in reserve. So $90 can be used for loans. If the full $90 is lent, we assume that the people who get that will deposit in their banks. Those banks will also have the same reserve requirement and will keep $9 in reserve and have $81 to lend. Thus the process continues, theoretically ad infinitum.
Exactly right. The debt terminology for central bank money is completely misleading.
If you look at the Fed’s books, it will say that the bank reserves are all liabilities. But what sort? A fictional sort. These “liabilities” put them under no obligation whatever. They can’t be redeemed for precious metals, as in the past. They’re never rolled over. They don’t pay interest, unless the Fed willingly decides to do so in order to reduce bank lending by slowing monetary velocity.
This invites the question, what is a “liability” in the sense you’re describing? I take it it’s a technical accounting term conceptually divorced from the lay notion of debt. What’s its definition?
A Fed monetary liability is a number in their bank ledger that keeps the double-entries nicely balanced, one debit for one credit so the accountants don’t hyperventilate. That’s it. That’s all it is.
In a practical sense, it keeps track of who owns what. If the central bank has on record that it “owes” Bank A with a 100 dollar credit in the liability column, and it “owes” Bank B with a 200 dollar credit, well then, everything is nice and clear. No need to reinvent the wheel. People can’t demand gold, like they could in the past when these were real liabilities, but it still keeps things in order.
When were these ever “real” liabilities? These were always accounting entries, at least since the FOMC has been around. If they buy $1M in MBS’s from JPM, the bank gets a credit to it’s reserve account for that amount and the fed increases the assets it holds by the same amount.
I assume you’re talking about something like the discount window maybe? But even there, if the fed creates $1M to lend to a member bank, it still goes into the bank’s reserve acct I assume and still shows up as an asset of the fed. No?
I’m going way historical on this: the silver and gold standard eras.
When banknotes could be redeemed for precious metal at will, then that was a real liability, a real obligation. Modern private banks that possess central bank reserves… just have reserves, which is to say, they have their name attached to a ledger entry with a number on it, and the central bank has no additional obligation. But banks in history that possessed credits in reserve accounts, or even paper banknotes issued by the central bank, could demand the shiny whenever they felt like it. That’s a genuine liability, a genuine obligation on the part of the central bank.
Modern private banks essentially work in the same way, with genuine liabilities, except the “gold” that they have to give up is central bank money.
Yeah, I think that’s fundamentally right. If you’re talking about pebbles, or golden pebbles, or baseball cards or whatever, whatever the market says is what it’s worth. Those things don’t pay dividends or interest or anything, so there’s no way to apply a “fundamental” value to them. If there’s a return on an investment, or a prospective return, you can at least apply a value approach like Graham and Dodd. (Of course, the stock market is full of people who are not “value” investors - probably the majority of them.)
Anyway, my point was that whether you’re talking about pebbles or shares, increases in market value are financial wealth, not real wealth. Dollars are financial wealth, as well, despite what somebody up thread said.
Increases in financial wealth can affect real wealth - if people feel richer, because the market is up, or whatever, people may spend more because they feel richer. Spending creates employment, and employed people building and making things creates real wealth, making us actually better off.
What you’re missing here is when the Fed buys securities, those purchases have real-world effects on the private sector. It’s not just a matter of Federal reserve funds getting created or destroyed. Private sector assets disappear from the private sector, simultaneously. It’s important, because it makes a difference in terms of what’d you’d expect in terms of inflation when the Fed “creates” money.
I agree the idea of the Fed going bankrupt is absurd. Nevertheless, many people don’t, including influential members of Congress. For political purposes, if nothing else, the Fed needs to preserve the idea that its books.
Yes, the Fed’s expanded its balance sheet by about $2 trillion, precisely balanced by two trillion it’s removed from the private sector.
“Somebody” huh? LOL. The fact of the matter is that real wealth is measured in dollars unless you have alternate method like quatloos. And it it’s a good enough for every economist out there, I’m damn sure it’s good enough for LinusK.
No shit. What do think the purpose of the most recent round of asset purchases was? Jesus. It’s amazing how you walk right into this shit and don’t even realize it. I’m sorry to be so brutal, but anyone else would be pissing themselves at this point. The reason the fed was buying long term assets in Operation Twist was to put pressure on long term yields, which it did. Go ahead and google it if you want to find about 10 thousand news stories on the topic.
Most members of congress are chimps
and that money has gone into reserves which are essentially invisible to the economy - that is the critical point. And that is why that money can’t be allowed to remain there and why the fed has plans to use money market funds to drain liquidity from the system if it comes to that.
Sometimes it seems people don’t pay much attention to the words I use. Maybe they just skim, and jump to conclusions. That’s to be expected, i guess, on the Internet. Sometimes people just have things they want to say, so they just assume I was trying to controvert whatever they were planning on saying anyway.
Anyway, the original point was that there is no money in the market. It should be an obvious point, but so many people talk as if there is money in the market - money move in to the market, or moves out of the market, or moves from one market to another - I thought it was worth discussing.
Indeed, some people in this thread still seem to think there’s money “in” the market, despite what I thought was a pretty clear explanation of why that’s not and can’t be the case.
But no, it’s not meant to be a discussion of bubbles. If anything, it’s about the distinction between real wealth, and the financial kind. Real wealth requires work and effort. Financial wealth can be create out of nothing, and disappear into “thin air”.
Not to say financial wealth is irrelevant or unimportant. Indeed, it can have dramatic effects on the real economy. But it’s fundamentally different, and that’s important.
Financial assets ARE financial currency. Or rather, currency is a financial asset.
I’m not sure what you mean by “N-fold” but I think you’re arguing a little bit of increase in Federal reserves results in a several-fold increase in commercial bank money. That theory’s been disproved, or at least failed to find any support in recent financial events.
