I doubt that.
Generally I have a good idea of where people go off the rails in trying to discuss these issues. I have some small experience in the matter.
The rest of my post covers this.
They absolutely are creating “it” from nothing, when we’re referring to “it” as the M1.
To say that “the money isn’t there anymore” is not a helpful statement, regardless of what definition of “money” you’re using. If you’re referring to the M1, then they create the M1. If you’re referring to the base, well, the base doesn’t have to move. It genuinely does not have to go anywhere. (It probably will, but it’s not necessary. In many cases, the base will stay right there where it started.) You’re adding complications before you get the most basic scenario properly sorted out. You absolutely have to begin thinking about this by thinking about a single bank. One bank. Only after you get the single bank situation right can you start imagining the whole banking system.
To demonstrate that the monetary base does not have to move: If I buy a car with a loan, and the dealership uses the same bank that I use – a single bank – then the process looks like this: I get into debt 10,000 to the bank with the loan on my car. The bank gets into debt 10,000 with a new deposit entry for the dealership. The entire process for the bank can be summarized by a single ledger entry.
DEBIT New loan (asset)CREDIT New deposit (liability)The bank’s asset is the new loan that I owe to them. Their liability is their new deposit, their new “accounts payable”, their debt to the dealership, their promise to pay the dealership monetary base immediately when the dealership asks for it. But since in this example, we’re saying we bank at the same place, then the dealership isn’t going to do anything with it right away. They’ll just keep the money on deposit. The bank is the middleman in the process, both a borrower and a lender simultaneously.
The M1 includes demand deposits. This loan transaction increased the amount of deposit liabilities. Therefore this new loan created money, increased the M1. And yes, it was out of nothing. The monetary base did not have to move because we both use the same bank. In this case, they are NOT “lending money they actually have”. I discuss this at the end of the previous post. Once we get the single bank scenario sorted out, then we should quickly realize that the banking system as a whole works in an incredibly similar fashion.
Just as a deposit is a liability on a commercial bank’s books, the monetary base is a liability on the central bank’s books.
We can start by assuming that the bank has a bit over a trillion in assets, and a trillion in liabilities.
ASSETS - LIABILITIES = EQUITY
1.1 TR 1.0 TR 0.1 TR
Now they want to buy another trillion in assets, let’s say, oh, a mixture of Treasuries and MBS. So what they do is gobble up another trillion and then issue to the sellers another trillion of new monetary base.
DEBIT New MBS and Treasuries (assets)CREDIT New monetary base (“liability”)And the big categories on their new balance sheet now looks something like this:
ASSETS - LIABILITIES = EQUITY
2.1 TR 2.0 TR 0.1 TR
And that right there is a trillion more in monetary base in the world. The big difference between the base and broader forms of money is that the base does not act like a liability in any real sense. The accountants call it a liability, but is it really? No, not by any of the properties we normally think of liabilities having.
In the olden days, newly created central bank money was a liability in the sense that it could be exchanged for gold or silver on demand, depending on the era. But this new base? No, can’t be exchanged for anything. Or something can be a liability if it earns a yield for its holder. But this new base? No, there’s no yield unless they voluntarily give it away (as they’ve started to do with excess reserves). Or something can be a liability if it’s got zero yield, as long as it’s constantly being rolled over, like short term Treasury debt, in order to offer the possibility that the yield might be higher in the future. But is the base rolled over? No, it is what it is. It’s perpetual, never having to be rolled over.
As far as the accounting goes, what a central bank does and what a commercial bank does are nigh indistinguishable. But the monetary base is truly a different kind of “money” from anything else. All those broader forms of money are, in fact, promises to pay monetary base. All of the broader forms of money are built on a promise to pay the base, but the base isn’t a promise to pay anything. It just exists.
I disagree. I doubt anyone here misunderstands the idea that commercial banks can’t create their own monetary base.
But I think the language that has been developed to discuss these issues tends to be… unhelpful. It all looks like English, but there are dialects of different nuance here that muddy the discussion. That’s why in a lot of these threads, I spend 95% of my time trying to stress formal definitions. I hardly ever use the word “money” by itself, out of context. I’m always talking about the base, or about broader money. In discussions like these, it’s always, always necessary to specify.
Yes.
And that’s why the formal definitions are so important. There’s a difference between The World as it actually is, and The Language we use to describe it. There’s a difference between the genuine territory, and the printed map we use to navigate it. And the weird thing is, it’s completely possible for a person to completely understand the territory, without any error, and still get mixed up with the language. I don’t mean to pick on RickJay, but this was an interesting post in another thread:
Our internal understanding can be without error, but somehow the wrong word still comes out. Weird but human.
And this can work in the other direction. A statement from another poster might be completely 100% correct, but we believe we perceive error in their post because of our own linguistic baggage. Of course, the situation isn’t helped when the other person is still strutting around like he’s put on his big-boy britches for the first time. That precious attitude isn’t going to help communicate insight. But a puerile attitude is not equivalent to an error in our assertions. People can be precious, and yet still be strictly true in at least some of their statements.