[bdmarti]

$this->bbcode_second_pass_quote('Peak_Plus', '
')1) Light Inflation is NOT bad. Money is there to be used, invested. Not to be put under a pillow or pay a bank to "hold" it.

[CrudeAwakening]

$this->bbcode_second_pass_quote('Peak_Plus', '')$this->bbcode_second_pass_quote('CrudeAwakening', '
')You do have use of your $10. You can write a cheque on it, and buy goods/services. The bank will honour your cheque because you have $10 in your deposit account. At the same time, it will honour a cheque written by whoever borrowed the $9 which was enabled by your deposit.

[MrBill]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('Peak_Plus', '')$this->bbcode_second_pass_quote('CrudeAwakening', '
')You do have use of your $10. You can write a cheque on it, and buy goods/services. The bank will honour your cheque because you have $10 in your deposit account. At the same time, it will honour a cheque written by whoever borrowed the $9 which was enabled by your deposit.

[DJ_Mittens]

Having a line of credit is meaningless.

Using a line of credit, however, does increase the money supply. We'll assume the person will pay back their loan, and not declare bankruptcy (which, in fact, would increase the money supply even more).

If that person pays back the loan, and the interest, there is a net decrease in money supply, because not only is the principle out of circulation when it once was, but now so is the interest paid. So to keep the supply increasing, either the government prints more, or the banks create even more credit availability or give out even more loans.

[MrBill]

$this->bbcode_second_pass_quote('DJ_Mittens', 'H')aving a line of credit is meaningless.

Using a line of credit, however, does increase the money supply. We'll assume the person will pay back their loan, and not declare bankruptcy (which, in fact, would increase the money supply even more).

If that person pays back the loan, and the interest, there is a net decrease in money supply, because not only is the principle out of circulation when it once was, but now so is the interest paid. So to keep the supply increasing, either the government prints more, or the banks create even more credit availability or give out even more loans.

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', 'S')o if Big Bank issues a credit card to Joe Consumption with a $10.000 credit limit has Big Bank increased either the money in circulation or money supply or just credit which is a fancy word for IOUs? If Joe buys a TV maybe the Big Bank can get back pennies on their dollars, but if Joe blows it on consumables, Big Bank and Big Bank's shareholders, plus any credit card receivables they flogged-off on Investor Jane are just plain out of luck, if Joe does not pay that IOU back. Credit is not money supply.

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', ' ')If I am a bank, I use liabilities that I have incurred, in the form of on demand site deposits from customers to make those payments.

[MrBill]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MrBill', 'S')o if Big Bank issues a credit card to Joe Consumption with a $10.000 credit limit has Big Bank increased either the money in circulation or money supply or just credit which is a fancy word for IOUs? If Joe buys a TV maybe the Big Bank can get back pennies on their dollars, but if Joe blows it on consumables, Big Bank and Big Bank's shareholders, plus any credit card receivables they flogged-off on Investor Jane are just plain out of luck, if Joe does not pay that IOU back. Credit is not money supply.

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', '
')Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .

[CrudeAwakening]

Interesting article, MrBill. Thanks for the link.

[MrBill]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MrBill', '
')Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .

[Peak_Plus]

$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MrBill', '
')Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .

[MrBill]

Well, I certainly see the fractional lending side of it. The original deposit gets lent out again. The money multiplier effect. Of course, the reverse happens when Depositer A takes his money out of the bank. Either the bank(s) have to find another source of primary funds or they have to borrow it from the central bank. If the central bank is running an expansionary policy, blowing up bubbles, then we all know what they are going to do? Keep printing and keep lending. Hence borrowing money you do not have to buy things you do not need which results in trade and current account deficits!

Fortunately for me, I type very fast. Unfortunately for you, sometimes I tend to write too much! ; - )

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', '
')
$1000 asset owed to CrudeAwakening
$1000 liability for Bank A

$900 asset for Bank A
$900 liability for Customer X

$900 asset for Vendor Y
$900 liability for Bank B

Bank A is paying interest on $1000, and receiving interest on $900
Bank B is paying interest on $900
Customer X is paying interest on $900
Vendor Y is earning interest on $900


All have been financed from CrudeAwakenings original $1000 in savings. I do not see any money being created?

[DJ_Mittens]

$this->bbcode_second_pass_quote('MrBill', '')$this->bbcode_second_pass_quote('CrudeAwakening', '')$this->bbcode_second_pass_quote('MrBill', '
')Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .

[MrBill]

CrudeAwakening wrote$this->bbcode_second_pass_quote('', 'T')o see the creation of money, simply compare total bank deposits before and after the loan transaction.

I deposit my money: Bank A owes me $1000.
Customer X borrows:Customer X owes bank A $900.
Vendor Y deposits: Bank B owes Vendor Y $900.
Before the loan, bank deposits were made up of my $1000 deposit.
After the loan, bank deposits amounted to $1900; therefore $900 of new deposits.

Demand deposit liabilities of the banks are considered part of the money supply, M1. These have increased by $900 as a result of the loan. Has anything occurred to offset this increase in M1? No. Customer X's liability to Bank A can't be considered a decrement in the money supply.

This process is quite different from a simple credit transaction, where I withdraw $900 from my account to lend to Person X (thus reducing my deposit balance by $900 and increasing his by $900), and he later repays me (with the opposite changes occurring, ignoring interest paid). In this situation total bank deposits remain unchanged, there is simply a transfer of deposits from me to X.

When X borrows from the bank, however, a new deposit is created, ending up in Vendor Y's account.

I feel like I'm belabouring the point a bit - it's a well recognised fact that FRBs create new bank deposits via the multiplier effect, and these deposits add to the money supply, M1. This is the essence of FR banking - an initial injection of reserves by the Fed is expanded into a greater amount of bank deposits (in parallel with debt) by the loan process. These additional deposits are only fractionally backed by bank reserves; depositor's withdrawals are met by use of these reserves, so not all depositors can withdraw their money at the same time.

Of course, to blame FRBs for increasing the money supply irresponsibly is missing the point - they are only doing what they are institutionally mandated to do. It is quite correct to point the finger at the central bank - but to claim that FRBs play no role in increasing the money supply is wrong.

[Doly]

$this->bbcode_second_pass_quote('MrBill', '
')This is a pretty good article by Steven Roach at Morgan Stanley explaining how central banks failed to address money supply growth, while concentrating only on inflation and therefore created these asset bubbles and contributed to global imbalances.

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', 'I') think the central bank has done a good job of targeting inflation, but a poor job of managing liquidity with the end result of many assets bubbles distorting the economy which were painless to inflate, but will not be so easy to deflate without causing problems for the real economy. Also, as others have pointed out, this has eroded the savings of those who chose not to partake in the asset bubble frenzy! ; - )

[MrBill]

$this->bbcode_second_pass_quote('Doly', '')$this->bbcode_second_pass_quote('MrBill', '
')This is a pretty good article by Steven Roach at Morgan Stanley explaining how central banks failed to address money supply growth, while concentrating only on inflation and therefore created these asset bubbles and contributed to global imbalances.

[CARVER]

If we look at the equation of exchange: M * V = P * Q , then does it matter whether we see what the banks are doing as (temporarily) creating additional (credit) money supply, or as increasing the velocity of (high powered) money?