The End of Money and the Liberation of Exchange - Page 3

Careyp74 · 13th July 2012, 05:57 AM

Originally Posted by Sceptic-PK

But your answers are inaccurate, confusing or disingenuous. Carey wasn’t asking to create Carey dollar IOUs or whatever. His query related to the real world and real currency (at least, that’s how it appears, carey could confirm). And in that real world a bank can’t “create” money without first having money to lend.

I was asking what you assumed, based on the point being made in the video.

Originally Posted by stilicho

Here's an opportunity though and that's employing discounting on the notes as they circulate. The risk is assumed by the discounter. You will always get paid.

Well that sounds like more banking to me. Isn't that what they are trying to do away with in these videos?

Francesca R · 13th July 2012, 06:11 AM

Originally Posted by psionl0

When a borrower makes a principal repayment, it reduces the borrower's debt and the amount of money in circulation by the same amount. (I assume this fact is not in dispute). OTOH an interest payment does not reduce a borrower's debt - it becomes part of the bank's capital or equity.

It becomes part of its revenue (income)

Quote:

It is this equity that banks use to pay staff wages etc (transferring money from the bank's capital account to the employee's bank account).

It's income, not capital.

Quote:

However, bank capital/equity is NOT money in circulation.

But its income is.

Quote:

So even if the interest payment hasn't "destroyed" money in the same way as a principal repayment, it has just as effectively removed money from circulation.

I think it hasn't.

Quote:

Bank spending transfers money from the banks' equity account to demand deposit accounts thereby increasing money in circulation.

By the same reasoning, I don't think so, as it was never in an "equity"/"capital" account.

lomiller · 13th July 2012, 08:10 AM

Originally Posted by Careyp74

Your post gives me the idea that it really isn't new money at all that is being created. Is this a fair assessment?

Money does get created but not when it’s loaned out when money is deposited because bank deposits are treated like cash and counted as part of the money supply. The confusion comes about because loans are almost always deposited either immediately on being issued or soon after they are issued.

When you are loaned cash and then deposit that cash the change in cash in the banking system is a wash but the bank now has an additional long term asset in the form of the loan repayment and an additional long term liability in the form of the bank deposit. While the loan has value it’s not a liquid asset so it’s not part of the money supply, the deposit on the other hand is a liquid asset that is counted as part of the money supply.

The deposit is the only new money created, but it’s not really money in the same way cash is. A bank deposit is simply a very liquid asset that people treat like cash, so it acts like cash in the economy so economists treat it as part of the money supply. What the bank has really done, however, is trade a static inflexible asset (loan payments) for a very liquid asset (bank deposits). This has a huge economic benefit because it’s much easier to make deals do business with liquid assets than it is to do them with inflexible assets.

psionl0 · 13th July 2012, 08:10 AM

Originally Posted by Francesca R

It becomes part of its revenue (income)

It's income, not capital.

But its income is.

I think it hasn't.

By the same reasoning, I don't think so, as it was never in an "equity"/"capital" account.

Fair go!

At the end of the day, income gets added to a business's capital account (or rather, it is transferred) and the expenses are subtracted. More usually, it is profit (the difference between income and expenses) that get added to the capital account. That's just basic bookkeeping.

ETA Just to simplify this, the banking system is essentially a source and a sink of money (as well as an "M0 converter"). No matter what label you attach to the money that goes into a bank, it won't circulate until the bank puts it out into the economy.

Francesca R · 13th July 2012, 08:22 AM

Well quite--after expenses (compensation and all other spending), tax and distributions, the retained earnings become part of the market capitalisation. Everything deducted before that remains in circulation (even the tax). And unless the retained earnings are put under the bank's mattress, the saving or investment they are used for is probably going to be in a higher measure of money too.

In short, most forms of value creation (which interest essentially is) ~~create more money~~ do not remove any money from circulation in the process of accounting for that value.

Since there is/was increased production "backing" the money created, most anti-credit folks don't mind it so much. Except those who believe loan interest is usury/economic rent/fraud etc . . . (ETA which, on second thought, is probably nearly all of them)

ETA: see strike/replace above as well. Of course interest accrual does not create extra money, any more than charging a bill to fix someone's plumbing does. The money to pay interest and plumbing invoices just comes from somewhere else.

Careyp74 · 13th July 2012, 08:34 AM

Originally Posted by lomiller

Money does get created but not when it’s loaned out when money is deposited because bank deposits are treated like cash and counted as part of the money supply. The confusion comes about because loans are almost always deposited either immediately on being issued or soon after they are issued.

When you are loaned cash and then deposit that cash the change in cash in the banking system is a wash but the bank now has an additional long term asset in the form of the loan repayment and an additional long term liability in the form of the bank deposit. While the loan has value it’s not a liquid asset so it’s not part of the money supply, the deposit on the other hand is a liquid asset that is counted as part of the money supply.

The deposit is the only new money created, but it’s not really money in the same way cash is. A bank deposit is simply a very liquid asset that people treat like cash, so it acts like cash in the economy so economists treat it as part of the money supply. What the bank has really done, however, is trade a static inflexible asset (loan payments) for a very liquid asset (bank deposits). This has a huge economic benefit because it’s much easier to make deals do business with liquid assets than it is to do them with inflexible assets.

I am getting the same feelings about this concept of new money as I did when first learning the double entry accounting system. As loans are paid off, does this new money start to disappear, until there is no more new money once the loan is paid off?

lomiller · 13th July 2012, 08:56 AM

Originally Posted by Careyp74

I am getting the same feelings about this concept of new money as I did when first learning the double entry accounting system. As loans are paid off, does this new money start to disappear, until there is no more new money once the loan is paid off?

If you just look at it in isolation than it could look like that, but remember this is a system so you can’t get a good understanding if you just look at things in isolation.

When you pay back a loan it diminishes the value of an asset on the banks books but gives them liquidity they can use to acquire more assets. IOW that cash gives them the freedom to make more loans; if they don’t have a new customer that wants to borrow it they will lend it to another bank that does have a customer. Any money they have over and above their reserve requirements and not needed for expenses or returned to shareholders is going to be used to buy assets because it’s these assets that make them their money.

Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking.

Careyp74 · 13th July 2012, 09:24 AM

Originally Posted by lomiller

If you just look at it in isolation than it could look like that, but remember this is a system so you can’t get a good understanding if you just look at things in isolation.

When you pay back a loan it diminishes the value of an asset on the banks books but gives them liquidity they can use to acquire more assets. IOW that cash gives them the freedom to make more loans; if they don’t have a new customer that wants to borrow it they will lend it to another bank that does have a customer. Any money they have over and above their reserve requirements and not needed for expenses or returned to shareholders is going to be used to buy assets because it’s these assets that make them their money.

Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking.

I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU. I don't see any new money being created here.

lomiller · 13th July 2012, 10:04 AM

Originally Posted by Careyp74

I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU.

The borrower has a new asset and a new liability. The asset being the money they borrowed and the liability being the money they owe to pay back the loan.

Originally Posted by Careyp74

I don't see any new money being created here.

The loan by itself does not increase the money supply, but if you deposit that loan in a bank the money supply will increase. Likewise if you buy a car, and the car dealership deposits the money in a bank the money supply will increase at that point. This is because the bank deposit itself is a form of money. A loan that does not end up being deposited in a bank doesn’t create money.

When you deposit cash in the bank, the bank is now free to use that cash as part of it’s normal operations, but you will also treat you deposit like very much like cash so it is money as well. (technically your deposit is part of a broader definition of money called M2)

Startz · 13th July 2012, 10:10 AM

Originally Posted by lomiller

Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking.

Originally Posted by Careyp74

I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU. I don't see any new money being created here.

The key, following along with Iomiller, is that "money" is just one kind of asset. When speaking colloquially, we all tend to use "money" to mean "wealth." When economists say "money," we mean a few particular assets such as cash and checking accounts. I suspect that a lot of confusion arises by different intentions when saying "money."

When a bank makes a loan by giving the borrower more money in the borrower's checking account, the amount of money in the economy certainly expands. But the bank has increased its assets (the loan) and its liabilities (the added deposit) by the same amount. Similarly, the borrower has increased her assets (the increased deposit) and her liabilities (the loan) by equal amounts. So while money has increased, their is no change in wealth for the bank, the borrower, or the economy.

lomiller · 13th July 2012, 10:26 AM

Originally Posted by Startz

The key, following along with Iomiller, is that "money" is just one kind of asset. When speaking colloquially, we all tend to use "money" to mean "wealth." When economists say "money," we mean a few particular assets such as cash and checking accounts. I suspect that a lot of confusion arises by different intentions when saying "money."

It’s also important o remember that for economists there are different types one money.
http://en.wikipedia.org/wiki/Money_supply
From Wikipedia

M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits
M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed. It is M2 - time deposits + money market funds
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.
M4-: M3 + Commercial Paper

psionl0 · 13th July 2012, 07:06 PM

Originally Posted by lomiller

A loan that does not end up being deposited in a bank doesn’t create money.

Why don't you review that particular belief?

It's the only flaw in an otherwise very good series of explanations.

psionl0 · 13th July 2012, 07:16 PM

Originally Posted by lomiller

It’s also important o remember that for economists there are different types one money.
http://en.wikipedia.org/wiki/Money_supply

That source takes an each way bet on the definition of M0.

Their "Type of Money" table show that Notes and coins (currency) in bank vaults are not M0 but in a footnote underneath the table it says, "M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money."

psionl0 · 13th July 2012, 07:24 PM

Originally Posted by Francesca R

Well quite--after expenses (compensation and all other spending), tax and distributions, the retained earnings become part of the market capitalisation.

I thought you knew something about bookkeeping.

If "the retained earnings become part of the market capitalisation" then they are not in customer bank accounts. ie They have not been returned to circulation.

Therefore, your assertion that bank income is money in circulation is incorrect.

Francesca R · 13th July 2012, 10:59 PM

I think you should read what I said. Since you seem to have immediately got it backwards (and therefore incorrectly inferred that it is wrong), I suggest that your attempts to explain these matters to others will also trip over, as seen above.

psionl0 · 14th July 2012, 01:46 AM

Originally Posted by Francesca R

I think you should read what I said. Since you seem to have immediately got it backwards (and therefore incorrectly inferred that it is wrong),

I don't know any other way to read what you said. Your entire argument rests on your assertion in post#82 that "income is money in circulation" (even though it isn't credited to any customer's account). So far, you have failed to demonstrate that this is the case.

Originally Posted by Francesca R

I suggest that your attempts to explain these matters to others will also trip over, as seen above.

Ahhh! The old "I don't understand you therefore you are talking nonsense" defence. I guess you won't be in a hurry to explain yourself.

Francesca R · 14th July 2012, 05:51 AM

Income (just about anybody's income) is money in circulation. It will mostly be used for spending (money in circulation), keeping in current accounts (money in circulation) or in cash (money in circulation) or to pay tax (where its approximate destination is a government collection account from which it will mostly be used for current public spending--again money in circulation)

The only part of income that is not in one of M0, M1, MZM is investment or in the case of companies including banks, retained earnings. Even then, capital spending typically puts it back in circulation under the definition of one of those aggregates.

That is what I said. In general your statement that interest payments on lending remove money from circulation is false.

I do understand what your statements are, and I am pointing out errors. It seems that you can't see those errors so maybe you don't understand yourself. If so, I recommend not attempting to inform others about the monetary system.

psionl0 · 14th July 2012, 07:12 PM

Originally Posted by Francesca R

Income (just about anybody's income) is money in circulation. It will mostly be used for spending (money in circulation), keeping in current accounts (money in circulation) or in cash (money in circulation) or to pay tax (where its approximate destination is a government collection account from which it will mostly be used for current public spending--again money in circulation)

The only part of income that is not in one of M0, M1, MZM is investment or in the case of companies including banks, retained earnings.

Thank you for that clarification Francesca. I see that you are doing what I suspected originally - treating bank income the same way as other business income. While they are similar in many ways, banks directly affect the M1 money supply so they should be treated as a special case.

You are right that business income is still money in circulation. In very basic terms, business income adds money to the business's bank account. (In the Balance Sheet you have to balance this out by increasing a capital or equity account but that is another matter).

One could reason (imperfectly) by analogy that bank income adds money to the bank's bank account. However, the bank's bank is the central bank and the central bank account is part of the bank's reserves. Therefore, bank income adds to bank reserves. (Actually, it increases excess reserves in the manner I described earlier).

But bank reserves are not part of any M_ money supply. This is why bank income is said to decrease the M1 money supply. Of course bank expenditure has the opposite effect. It decreases the amount of excess reserves a bank has and increases the M1 money supply. Not all of the bank income will be accounted for this way. There will still be some retained earnings. And how does the bank deal with that?

Originally Posted by Francesca R

Even then, capital spending typically puts it back in circulation under the definition of one of those aggregates.

That's right. New loans and securities (and it does increase one of "those aggregates").

But if a bank is making new loans to mop up the excess reserves created by retained earnings and these new loans are only replacing M1 money removed by the bank's retained earnings then guess how this affects the level of debt? (Note that I am not screaming "doomsday" here - only saying that the mechanism exists).

Originally Posted by Francesca R

That is what I said. In general your statement that interest payments on lending remove money from circulation is false.

I do understand what your statements are, and I am pointing out errors. It seems that you can't see those errors so maybe you don't understand yourself. If so, I recommend not attempting to inform others about the monetary system.

Now that it has been proven that the error is yours, I bet you wish you weren't so hasty.

Sceptic-PK · 14th July 2012, 07:47 PM

Yeah psi, stop leading me astray!

Francesca R · 15th July 2012, 01:14 AM

Originally Posted by psionl0

This is why bank income is said to decrease the M1 money supply. Of course bank expenditure has the opposite effect. It decreases the amount of excess reserves a bank has and increases the M1 money supply. Not all of the bank income will be accounted for this way. There will still be some retained earnings. And how does the bank deal with that?
That's right. New loans and securities (and it does increase one of "those aggregates").

You've just described the situation where none of the income is removed from circulation. So you have cancelled the statement you made that I challenged. Thanks.

psionl0 · 15th July 2012, 02:58 AM

Originally Posted by Francesca R

You've just described the situation where none of the income is removed from circulation.

You must have quoted the wrong bit.

Francesca R · 15th July 2012, 10:52 AM

psion10: (post 78) The interest payment [ . . . ] has just as effectively removed money from circulation.

FR: (82, 85): I don't think it has. Income is redistributed as all expenses and tax all of this stays in circulation. Only retained earnings becomes market cap (and typically re-enters circulation too)

psion10: (94): Retained earnings are not in circulation.

FR: (95, 97): I already said that and it does not support your original statement, it supports mine. And typically retained earnings will be put back into circulation as well.

psion10: (98) I agree retained earnings typically re-enter circulation. You are in error

FR: (100): You have now described exactly what I did.

---

Maybe if you cut down on the amount of text you'd be able to understand yourself, and then others. (By the way reserves and excess reserves are part of an M-money supply, namely monetary base, sometimes the same as M0.)

psionl0 · 15th July 2012, 04:04 PM

Originally Posted by Francesca R

FR: (82, 85): I don't think it has. Income is redistributed as all expenses and tax all of this stays in circulation. Only retained earnings becomes market cap (and typically re-enters circulation too)

Now where was that goal post again? Oh! That's right!:

Originally Posted by Francesca R in post#82

Quote:

However, bank capital/equity is NOT money in circulation.

But its income is.

If your argument is now that bank income removes money from circulation and the money gets returned via expenses and investment (of the retained earnings) then you are in complete agreement with post #78.

Originally Posted by Francesca R

(By the way reserves and excess reserves are part of an M-money supply, namely monetary base, sometimes the same as M0.)

Score! (Well done

)

13th July 2012, 08:10 AM	#83
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	Originally Posted by Careyp74 Your post gives me the idea that it really isn't new money at all that is being created. Is this a fair assessment? Money does get created but not when it’s loaned out when money is deposited because bank deposits are treated like cash and counted as part of the money supply. The confusion comes about because loans are almost always deposited either immediately on being issued or soon after they are issued. When you are loaned cash and then deposit that cash the change in cash in the banking system is a wash but the bank now has an additional long term asset in the form of the loan repayment and an additional long term liability in the form of the bank deposit. While the loan has value it’s not a liquid asset so it’s not part of the money supply, the deposit on the other hand is a liquid asset that is counted as part of the money supply. The deposit is the only new money created, but it’s not really money in the same way cash is. A bank deposit is simply a very liquid asset that people treat like cash, so it acts like cash in the economy so economists treat it as part of the money supply. What the bank has really done, however, is trade a static inflexible asset (loan payments) for a very liquid asset (bank deposits). This has a huge economic benefit because it’s much easier to make deals do business with liquid assets than it is to do them with inflexible assets.
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	__________________ "Anything's possible, but only a few things actually happen"

13th July 2012, 08:10 AM	#84
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R It becomes part of its revenue (income) It's income, not capital. But its income is. I think it hasn't. By the same reasoning, I don't think so, as it was never in an "equity"/"capital" account. Fair go! At the end of the day, income gets added to a business's capital account (or rather, it is transferred) and the expenses are subtracted. More usually, it is profit (the difference between income and expenses) that get added to the capital account. That's just basic bookkeeping. ETA Just to simplify this, the banking system is essentially a source and a sink of money (as well as an "M0 converter"). No matter what label you attach to the money that goes into a bank, it won't circulate until the bank puts it out into the economy.
	Last edited by psionl0; 13th July 2012 at 08:24 AM.

13th July 2012, 08:22 AM	#85
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	Well quite--after expenses (compensation and all other spending), tax and distributions, the retained earnings become part of the market capitalisation. Everything deducted before that remains in circulation (even the tax). And unless the retained earnings are put under the bank's mattress, the saving or investment they are used for is probably going to be in a higher measure of money too. In short, most forms of value creation (which interest essentially is) ~~create more money~~ do not remove any money from circulation in the process of accounting for that value. Since there is/was increased production "backing" the money created, most anti-credit folks don't mind it so much. Except those who believe loan interest is usury/economic rent/fraud etc . . . (ETA which, on second thought, is probably nearly all of them) ETA: see strike/replace above as well. Of course interest accrual does not create extra money, any more than charging a bill to fix someone's plumbing does. The money to pay interest and plumbing invoices just comes from somewhere else.
	Last edited by Francesca R; 13th July 2012 at 08:29 AM.

13th July 2012, 08:56 AM	#87
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	Originally Posted by Careyp74 I am getting the same feelings about this concept of new money as I did when first learning the double entry accounting system. As loans are paid off, does this new money start to disappear, until there is no more new money once the loan is paid off? If you just look at it in isolation than it could look like that, but remember this is a system so you can’t get a good understanding if you just look at things in isolation. When you pay back a loan it diminishes the value of an asset on the banks books but gives them liquidity they can use to acquire more assets. IOW that cash gives them the freedom to make more loans; if they don’t have a new customer that wants to borrow it they will lend it to another bank that does have a customer. Any money they have over and above their reserve requirements and not needed for expenses or returned to shareholders is going to be used to buy assets because it’s these assets that make them their money. Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking.
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	__________________ "Anything's possible, but only a few things actually happen"

13th July 2012, 10:04 AM	#89
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	Originally Posted by Careyp74 I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU. The borrower has a new asset and a new liability. The asset being the money they borrowed and the liability being the money they owe to pay back the loan. Originally Posted by Careyp74 I don't see any new money being created here. The loan by itself does not increase the money supply, but if you deposit that loan in a bank the money supply will increase. Likewise if you buy a car, and the car dealership deposits the money in a bank the money supply will increase at that point. This is because the bank deposit itself is a form of money. A loan that does not end up being deposited in a bank doesn’t create money. When you deposit cash in the bank, the bank is now free to use that cash as part of it’s normal operations, but you will also treat you deposit like very much like cash so it is money as well. (technically your deposit is part of a broader definition of money called M2)
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	__________________ "Anything's possible, but only a few things actually happen"

13th July 2012, 05:57 AM	#81
Careyp74 Illuminator Join Date: Feb 2008 Location: Trevose, PA Posts: 3,407	Originally Posted by Sceptic-PK But your answers are inaccurate, confusing or disingenuous. Carey wasn’t asking to create Carey dollar IOUs or whatever. His query related to the real world and real currency (at least, that’s how it appears, carey could confirm). And in that real world a bank can’t “create” money without first having money to lend. I was asking what you assumed, based on the point being made in the video. Originally Posted by stilicho Here's an opportunity though and that's employing discounting on the notes as they circulate. The risk is assumed by the discounter. You will always get paid. Well that sounds like more banking to me. Isn't that what they are trying to do away with in these videos?

13th July 2012, 06:11 AM	#82
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	Originally Posted by psionl0 When a borrower makes a principal repayment, it reduces the borrower's debt and the amount of money in circulation by the same amount. (I assume this fact is not in dispute). OTOH an interest payment does not reduce a borrower's debt - it becomes part of the bank's capital or equity. It becomes part of its revenue (income) Quote: It is this equity that banks use to pay staff wages etc (transferring money from the bank's capital account to the employee's bank account). It's income, not capital. Quote: However, bank capital/equity is NOT money in circulation. But its income is. Quote: So even if the interest payment hasn't "destroyed" money in the same way as a principal repayment, it has just as effectively removed money from circulation. I think it hasn't. Quote: Bank spending transfers money from the banks' equity account to demand deposit accounts thereby increasing money in circulation. By the same reasoning, I don't think so, as it was never in an "equity"/"capital" account.

13th July 2012, 08:34 AM	#86
Careyp74 Illuminator Join Date: Feb 2008 Location: Trevose, PA Posts: 3,407	Originally Posted by lomiller Money does get created but not when it’s loaned out when money is deposited because bank deposits are treated like cash and counted as part of the money supply. The confusion comes about because loans are almost always deposited either immediately on being issued or soon after they are issued. When you are loaned cash and then deposit that cash the change in cash in the banking system is a wash but the bank now has an additional long term asset in the form of the loan repayment and an additional long term liability in the form of the bank deposit. While the loan has value it’s not a liquid asset so it’s not part of the money supply, the deposit on the other hand is a liquid asset that is counted as part of the money supply. The deposit is the only new money created, but it’s not really money in the same way cash is. A bank deposit is simply a very liquid asset that people treat like cash, so it acts like cash in the economy so economists treat it as part of the money supply. What the bank has really done, however, is trade a static inflexible asset (loan payments) for a very liquid asset (bank deposits). This has a huge economic benefit because it’s much easier to make deals do business with liquid assets than it is to do them with inflexible assets. I am getting the same feelings about this concept of new money as I did when first learning the double entry accounting system. As loans are paid off, does this new money start to disappear, until there is no more new money once the loan is paid off?

13th July 2012, 09:24 AM	#88
Careyp74 Illuminator Join Date: Feb 2008 Location: Trevose, PA Posts: 3,407	Originally Posted by lomiller If you just look at it in isolation than it could look like that, but remember this is a system so you can’t get a good understanding if you just look at things in isolation. When you pay back a loan it diminishes the value of an asset on the banks books but gives them liquidity they can use to acquire more assets. IOW that cash gives them the freedom to make more loans; if they don’t have a new customer that wants to borrow it they will lend it to another bank that does have a customer. Any money they have over and above their reserve requirements and not needed for expenses or returned to shareholders is going to be used to buy assets because it’s these assets that make them their money. Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking. I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU. I don't see any new money being created here.

13th July 2012, 10:10 AM	#90
Startz Critical Thinker Join Date: Nov 2004 Location: Santa Barbara, CA Posts: 388	Originally Posted by lomiller Again, it would probably help if you keep in mind that all the bank is doing is exchanging un-liquid assets for liquid ones. “Money” is actually a red herring in this scenario as it’s just a subset of all asset types. It’s an important one for economists and for how the economy works but it’s misleading if that’s all you look at wrt to banking. Originally Posted by Careyp74 I think it is easier to understand when talking about assets instead of money. Yes money is an asset. When you loan out money, you get an IOU back, which is still an asset, with the same value as what you are loaning, and perhaps an interest. But the person borrowing doesn't have an asset, they have a debt the same size as the money they borrowed, because their name is on that IOU. I don't see any new money being created here. The key, following along with Iomiller, is that "money" is just one kind of asset. When speaking colloquially, we all tend to use "money" to mean "wealth." When economists say "money," we mean a few particular assets such as cash and checking accounts. I suspect that a lot of confusion arises by different intentions when saying "money." When a bank makes a loan by giving the borrower more money in the borrower's checking account, the amount of money in the economy certainly expands. But the bank has increased its assets (the loan) and its liabilities (the added deposit) by the same amount. Similarly, the borrower has increased her assets (the increased deposit) and her liabilities (the loan) by equal amounts. So while money has increased, their is no change in wealth for the bank, the borrower, or the economy.

13th July 2012, 10:26 AM	#91
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	Originally Posted by Startz The key, following along with Iomiller, is that "money" is just one kind of asset. When speaking colloquially, we all tend to use "money" to mean "wealth." When economists say "money," we mean a few particular assets such as cash and checking accounts. I suspect that a lot of confusion arises by different intentions when saying "money." It’s also important o remember that for economists there are different types one money. http://en.wikipedia.org/wiki/Money_supply From Wikipedia M0: The total of all physical currency including coinage. M0 = Federal Reserve Notes + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves. MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000). MZM: 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed. It is M2 - time deposits + money market funds M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. M4-: M3 + Commercial Paper
lomiller Philosopher Join Date: Jul 2007 Posts: 6,869	__________________ "Anything's possible, but only a few things actually happen"

13th July 2012, 07:06 PM	#92
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by lomiller A loan that does not end up being deposited in a bank doesn’t create money. Why don't you review that particular belief? It's the only flaw in an otherwise very good series of explanations.

13th July 2012, 07:16 PM	#93
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by lomiller It’s also important o remember that for economists there are different types one money. http://en.wikipedia.org/wiki/Money_supply That source takes an each way bet on the definition of M0. Their "Type of Money" table show that Notes and coins (currency) in bank vaults are not M0 but in a footnote underneath the table it says, "M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money."

13th July 2012, 07:24 PM	#94
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R Well quite--after expenses (compensation and all other spending), tax and distributions, the retained earnings become part of the market capitalisation. I thought you knew something about bookkeeping. If "the retained earnings become part of the market capitalisation" then they are not in customer bank accounts. ie They have not been returned to circulation. Therefore, your assertion that bank income is money in circulation is incorrect.

13th July 2012, 10:59 PM	#95
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	I think you should read what I said. Since you seem to have immediately got it backwards (and therefore incorrectly inferred that it is wrong), I suggest that your attempts to explain these matters to others will also trip over, as seen above.

14th July 2012, 01:46 AM	#96
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R I think you should read what I said. Since you seem to have immediately got it backwards (and therefore incorrectly inferred that it is wrong), I don't know any other way to read what you said. Your entire argument rests on your assertion in post#82 that "income is money in circulation" (even though it isn't credited to any customer's account). So far, you have failed to demonstrate that this is the case. Originally Posted by Francesca R I suggest that your attempts to explain these matters to others will also trip over, as seen above. Ahhh! The old "I don't understand you therefore you are talking nonsense" defence. I guess you won't be in a hurry to explain yourself.

14th July 2012, 05:51 AM	#97
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	Income (just about anybody's income) is money in circulation. It will mostly be used for spending (money in circulation), keeping in current accounts (money in circulation) or in cash (money in circulation) or to pay tax (where its approximate destination is a government collection account from which it will mostly be used for current public spending--again money in circulation) The only part of income that is not in one of M0, M1, MZM is investment or in the case of companies including banks, retained earnings. Even then, capital spending typically puts it back in circulation under the definition of one of those aggregates. That is what I said. In general your statement that interest payments on lending remove money from circulation is false. I do understand what your statements are, and I am pointing out errors. It seems that you can't see those errors so maybe you don't understand yourself. If so, I recommend not attempting to inform others about the monetary system.

14th July 2012, 07:12 PM	#98
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R Income (just about anybody's income) is money in circulation. It will mostly be used for spending (money in circulation), keeping in current accounts (money in circulation) or in cash (money in circulation) or to pay tax (where its approximate destination is a government collection account from which it will mostly be used for current public spending--again money in circulation) The only part of income that is not in one of M0, M1, MZM is investment or in the case of companies including banks, retained earnings. Thank you for that clarification Francesca. I see that you are doing what I suspected originally - treating bank income the same way as other business income. While they are similar in many ways, banks directly affect the M1 money supply so they should be treated as a special case. You are right that business income is still money in circulation. In very basic terms, business income adds money to the business's bank account. (In the Balance Sheet you have to balance this out by increasing a capital or equity account but that is another matter). One could reason (imperfectly) by analogy that bank income adds money to the bank's bank account. However, the bank's bank is the central bank and the central bank account is part of the bank's reserves. Therefore, bank income adds to bank reserves. (Actually, it increases excess reserves in the manner I described earlier). But bank reserves are not part of any M_ money supply. This is why bank income is said to decrease the M1 money supply. Of course bank expenditure has the opposite effect. It decreases the amount of excess reserves a bank has and increases the M1 money supply. Not all of the bank income will be accounted for this way. There will still be some retained earnings. And how does the bank deal with that? Originally Posted by Francesca R Even then, capital spending typically puts it back in circulation under the definition of one of those aggregates. That's right. New loans and securities (and it does increase one of "those aggregates"). But if a bank is making new loans to mop up the excess reserves created by retained earnings and these new loans are only replacing M1 money removed by the bank's retained earnings then guess how this affects the level of debt? (Note that I am not screaming "doomsday" here - only saying that the mechanism exists). Originally Posted by Francesca R That is what I said. In general your statement that interest payments on lending remove money from circulation is false. I do understand what your statements are, and I am pointing out errors. It seems that you can't see those errors so maybe you don't understand yourself. If so, I recommend not attempting to inform others about the monetary system. Now that it has been proven that the error is yours, I bet you wish you weren't so hasty.
	Last edited by psionl0; 14th July 2012 at 07:14 PM.

14th July 2012, 07:47 PM	#99
Sceptic-PK Master Poster Join Date: Jun 2010 Posts: 2,403	Yeah psi, stop leading me astray!

15th July 2012, 01:14 AM	#100
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	Originally Posted by psionl0 This is why bank income is said to decrease the M1 money supply. Of course bank expenditure has the opposite effect. It decreases the amount of excess reserves a bank has and increases the M1 money supply. Not all of the bank income will be accounted for this way. There will still be some retained earnings. And how does the bank deal with that? That's right. New loans and securities (and it does increase one of "those aggregates"). You've just described the situation where none of the income is removed from circulation. So you have cancelled the statement you made that I challenged. Thanks.

15th July 2012, 02:58 AM	#101
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R You've just described the situation where none of the income is removed from circulation. You must have quoted the wrong bit.

15th July 2012, 10:52 AM	#102
Francesca R Girl Join Date: Nov 2006 Location: London EC1 Posts: 11,826	psion10: (post 78) The interest payment [ . . . ] has just as effectively removed money from circulation. FR: (82, 85): I don't think it has. Income is redistributed as all expenses and tax all of this stays in circulation. Only retained earnings becomes market cap (and typically re-enters circulation too) psion10: (94): Retained earnings are not in circulation. FR: (95, 97): I already said that and it does not support your original statement, it supports mine. And typically retained earnings will be put back into circulation as well. psion10: (98) I agree retained earnings typically re-enter circulation. You are in error FR: (100): You have now described exactly what I did. --- Maybe if you cut down on the amount of text you'd be able to understand yourself, and then others. (By the way reserves and excess reserves are part of an M-money supply, namely monetary base, sometimes the same as M0.)

15th July 2012, 04:04 PM	#103
psionl0 Illuminator Join Date: Sep 2010 Location: 31°58'S 115°57'E Posts: 4,787	Originally Posted by Francesca R FR: (82, 85): I don't think it has. Income is redistributed as all expenses and tax all of this stays in circulation. Only retained earnings becomes market cap (and typically re-enters circulation too) Now where was that goal post again? Oh! That's right!: Originally Posted by Francesca R in post#82 Quote: However, bank capital/equity is NOT money in circulation. But its income is. If your argument is now that bank income removes money from circulation and the money gets returned via expenses and investment (of the retained earnings) then you are in complete agreement with post #78. Originally Posted by Francesca R (By the way reserves and excess reserves are part of an M-money supply, namely monetary base, sometimes the same as M0.) Score! (Well done )