The link I posted, at least when I click on it, leads to a chart, not the underlying article. You can skim down to the chart, if the link doesn’t work the same for you, as it does for me.
Let’s start with this: we both agree, right(?) that taxpayers can’t create money.
And we both agree (right?) that the government can, and does, create money.
So it follows - if taxpayers can’t create money, and the government can (and does) - that the government must first create the money, before the money can be taxed.
If you want an explanation of how the government distributes money to taxpayers, that’d be probably a longer post that what I feel like writing right now - and, given the limited patience you seem to have, based on what you wrote - longer than what you’d be willing to read.
Do you agree that creation of money by banks is a feature of fractional reserve banking? And that such creation of money is widely accepted and measured as common data on a country’s money supply?
Quantitative easing is a form of monetary policy. Central banks do that. They do that whether the country’s government has a budget surplus or deficit. The US had a budget surplus at the end of Bill Clinton’s presidency. This didn’t stop the Federal Reserve from conducting monetary policy.
QE has nothing to do with the budget deficit. Nothing.
It is true that central banks create money. But so do banking systems - when they loan money, they create new deposits. All of that is separate from budget deficits, which represent a shortfall of tax revenues relative to spending.
Banks are the source of all money. The Fed - which is a bank, and also part of the government - creates currency and federal reserve deposits. Commercial banks create commercial bank accounts.
Commercial banks do not, and cannot, transfer money directly to or from each other, or to the government.
The Fed is the bank of banks. It transfers money between banks, and between banks and government.
The money it transfers, however, is not the money it debited from your account. It is money debited from the bank’s Fed account. This is an important distinction, because if there is not enough money in the bank’s Fed account, it must get that money from somewhere. (There is no box at your bank or any bank, with a stack of cash in it, and your name on it. Your bank account is just a number.) One common source is the federal funds market. (It can also borrow the money from the Fed itself, but banks prefer avoid that, because it’s seen as a sign of weakness.)
If, for example, you pay your taxes, your bank debits your account for the amount of the taxes. It also notifies the Fed to debit money from its Fed account to and credit the government’s Fed account.
In other words, taxes can only be paid (as far as the government is concerned) by transferring money from one Fed account (the one owned by your bank) to another (to the one owned by the government.)
So to try to answer your questions:
1.) Banks create money.
2.) Fractional reserve banking is an unnecessary fiction. I realize it’s taught in first year economics courses, but it’s not a helpful or even accurate description of how banking actually works.
3.) “Money supply” is often divided into several categories: M0, M1, M2, MZM, etc. Not all countries use all of them, or define them the same way. The Fed eliminated one (M3) not long ago. I know what they are, but in own opinion is they’re not very helpful. I do agree, if this answers your question, that commercial bank deposits, currency, and federal reserve deposits are all forms of money.
I’m having a harder and harder time trying to understand what you’re saying. First you said governments create all money, then you seemed to say that banks don’t actually possess money because the Fed is the go-between for payments, then you agree that banks do create money. What happened between all those points is a bit of a mystery, but the fact That banks create money is, of course, the opposite of your assertion that the government is the source of all money.
I didn’t realize at first that this was the guy with the nutty ideas about economics. I think I’ll pass on further engagement on that subject. Also here.
I forgot about that one. He strikes me as someone who has heard of a few economic terms, infers his own definitions for them, then constructs these silly syllogisms that would be perfectly logical if only we accepted his kooky premises.
Sorry for being confusing. What I initially said was:
I simplified my answer by leaving out commercial banks. The reason I did that was that including commercial banks complicates the answer; but doesn’t change the result.
Under the system that we have, commercial banks need federal funds in order to exist. Federal funds, of course, are created by the Fed. Commercial banks need federal funds in order to meet legal requirements (they’re required to meet a certain level of federal funds) and to operate. Without federal funds they can’t transfer money to other banks (for example, when you get a payment from bank A, and deposit it in your account at bank B) or to the government (to pay taxes, for example).
Without currency - also issued by the government - they can’t cash checks, or operate ATMs or otherwise distribute cash to their customers. New banks can’t open, without a certain amount of money in their fed account, or in US currency.
In other words, in order for banks to open, or to do business, they must first obtain money from the government. In order to obtain money from the government, the government must provide it.
So, yes, banks do create money: specifically, all the money that’s in commercial bank deposits. But the money in commercial bank deposits is only useful to the extent it’s backed by government money.
More importantly, there’s an even more fundamental difference between commercial bank money and government money. Commercial banks’ power to make money is limited. The government’s ability to make money is unlimited.
I interpreted the OP to be an argument that taxpayers must pay down the debt. I countered the argument by observing that money comes from the government in the first place. So the government can use tax money to pay down the debt (so long as it provides the money in the first place), or it can “print” money to pay down the debt - which the US has been doing for years, now.
Either way, it’s a matter of policy, not a fiscal necessity. The government is not like a household, because it is the ultimate source of money, not just a user of money.
Please fight my ignorance on this one, but I have an elementary understanding of fractional reserve banking but I’ve never understood how actual money is created by it. If the amount of currency is fixed in a closed system, only “wealth” can be created by fractional reserve banking, not more currency, right? I mean, where would it come from?
If a closed society has $100 total, split between 10 members ($10/member), and the only bank in the society has all $100 deposited and is allowed to lend 90%, and then everyone borrows the maximum amount, $90 x 10 = $900… where does the extra $800 handed out in cash come from?
The extra money is not “cash”. In order to understand fractional reserve banking, you need to distinguish between different kinds of money.
The monetary base is the “cash” that you’re talking about. That doesn’t change in your hypothetical. In your closed society, the total amount of base cash is $100, for example, a historical society with 100 ounces of gold. The amount of base cash doesn’t have to change.
But the bank account balances are also a kind of money. This is broad money (and it goes by several other names). If the bank makes a loan, it doesn’t necessarily have to fork over the cash. If everybody agrees, the bank can “lend” money by increasing the size of the deposit balances. So although there is only $100 of cash in the vault, the total deposit balances of the bank might total to $500 or $800 or $1000 or whatever. The “reserve” of fractional reserve refers to the cash. The actual cash reserve (the cash in the bank vault) is only a fraction of their deposit balances owed to their customers. The bank has $100 of cash, but the bank’s customers have $1000 (or whatever) in their total deposit balances. The cash reserve is only a fraction of the bank’s liabilities.
In the past, the monetary base was gold or silver. Today the monetary base in the US is green government paper: either printed green paper, or the equivalent of “green paper” stored on computer disk drives on Fed computers.
QE reduces government debt when the Fed purchases Treasuries. It’s money, created “out of thin air” which reduces the amount of government debt owed to the public.
Anytime the Fed purchases anything - whether it’s Treasuries or mortgage backed securities - it increases the amount of money owned by people or companies in the private sector. In economic terms, it increases MB - or monetary base. To put it differently, it increases the money available to pay taxes.
My wife and mom both tell me I’m stubborn, so I guess I am, but i’m still not understanding how, when the bank increases these deposit balances, eventually they would have to be made whole, right? Where does the extra money come from to pay off the inflated account? I have a sneaking suspicion it comes, in a round-about way, from gov’t spending. I don’t see (so please correct me) how new currency’s original source to plug these holes can’t come from the ones that issue new currency… the gov’t.
The bank doesn’t have to “make everyone whole” unless everyone shows up to claim their deposits at once. When that happens, it’s called a run on the bank. In the old days, it happened more often. In the example above, the bank has $1000 in liabilities - money it owes its customers - but only $100 in cash.
So whoever shows up first, gets their cash. After that, the rest of the customers are out of luck. Given those circumstances, even a rumor that a bank might be in trouble could cause a run on the bank.
It happens less often now.
For one thing, FDIC insurance now covers up to $250,000 of depositors’ money. So there’s less of an incentive to rush to the bank. For another, the Fed regulates banks. It can lend money to banks, for example, if a bank gets in trouble, or arrange for a troubled bank to sell itself to another bank. In '08-‘09, if memory serves, the Fed lent billions (even to some banks who said they didn’t want it). TARP was also passed around the same time, which took “troubled assets” (bad loans) off banks’ hands, and exchanged them for cash.
Anyway, the point is that banks can go on indefinitely, with less cash than what they owe their customers, so long as customers have confidence in their banks.
Just a note to other posters: this is such pure nonsense that it isn’t even worth typing out a rebuttal. If the idea in this post confuses you, don’t worry about it, because it isn’t how anything works.
Just a note to other posters: this is such pure nonsense that it isn’t even worth typing out a rebuttal. If the idea in this post confuses you, don’t worry about it, because it isn’t how anything works.
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Correction for the benefit of other posters: while I won’t vouch for all that he’s posted in the thread, LinusK’s statement quoted here is perfectly correct. I don’t know why Ravenman found it confusing.
In the first quoted sentence LinusK writes “government debt” but in the second sentence clarifies that he refers to “government debt owed to the public.” Anyway the former term is quite acceptable as a substitute for the latter if one chooses to consolidate the financial statements of a sovereign-currency issuing government and its central bank.
Perhaps instead Ravenman objects to the notion that the Fed creates money “out of thin air” but this seems a fine clarifying term. I’ve used it myself.
LinusK is a defender of “Modern Money Theory”. Perhaps we need a thread to help us all understand MMT better. The article I linked admits that taxes seem necessary to maintain price stability. It might be useful to debate detailed policies advocated by MMT economists, but at its heart MMT is simply an intelligent way of understanding modern monetary systems. **Ravenman’**s criticism of LinusK’s comment is, well, nonsense.
Strictly speaking the term “government debt owed to the public” is defined to include debt owed to the FRB. However, the FRB is effectively a government agency; including its debt as “owed to the public” may be contrary to common-sense.
In any event, LinusK is viewing the government and its central bank as consolidated, a simplification adopted by Modern Money Theory.
I agree with you and not septimus. QE does not reduce debt owed to the public, it doesnt increase intragovernmental debt, and it has no impact on the national debt at all (unless you want to count the impact on interest rates, but that’s being overly generous).
No. Not unless the financial system as a whole is suffering.
How often in your life have you gone to your bank and said, “I want cash or a cashier’s check. I’m closing every account.” Personally, I’ve only done this when I moved and transferred my balances to new accounts at new banks. The vast majority of us prefer to keep our liquid wealth in the form of account balances (broad money) instead of cash (base money). This is a steady and reliable preference. It’s statistical and can be relied upon. There is no need for depositors “to be made whole” because depositors don’t want to be made whole. They’d rather have the deposit than the cash.
The exception is when the entire financial system goes to shit. We all remember 2008, I’m sure. Which leads to your next question.
Well, govt spending for the banks is certainly what happened during the financial crisis. The Powers That Be believe that government providers of money must provide more government money when the financial system is shaky.
It’s hard to argue against that specific case.
But then it gets very complicated very quickly. How does the government shore up the financial system without rewarding bad actors? That’s a big important question and there are no simple answers to it. Those bank bailouts might have been necessary but there’s no denying that a lot of good money went into the pockets of bad people. But we can’t just wave a magic wand and make everything right. Any policy to make this better has to go through the same political rigamarole described earlier in the thread. The system is a series of kludges, and it’s hard to believe it can become anything else.
Thank you for the clarification. I spent some time the other day trying to see if Treasuries owned by the Fed were part of “debt owed to the public” and couldn’t find a clear answer. My google-fu failed me, I guess.
However, I do believe they should be counted as inter-governmental debt, because the Fed is unequivocally part of the government. Considering Fed-owned debt as “debt owed to the public” seems nonsensical to me; especially since the Fed pays the interest it receives from Treasuries back to the Treasury.
Edit: IOW, it seems like perfectly straightforward example of the government lending money to itself, to me.
QE does not reduce debt owed to the public, it doesnt increase intragovernmental debt, and it has no impact on the national debt at all (unless you want to count the impact on interest rates, but that’s being overly generous).