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Average household net worth declined 36% over 10 years.... (1 Viewer)
- Thread starter meatwad1
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IvanKaramazov
Footballguy
Banks absolutely do channel savings to borrowers. Your last sentence indicates as much. Banks accept deposits, and use those deposits as reserves to support a loan portfolio.JohnfrmCleveland said:
JohnfrmCleveland
Footballguy
But those dollars themselves are not loaned out, nor are they even necessary. As I pointed out earlier, Canada doesn't even have a reserve requirement. Banks can make loans with no deposits whatsoever.
IvanKaramazov
Footballguy
It doesn't matter whether those literal dollars are loaned out or whether they're reserved so that other dollars can be loaned. It's the same thing.
Neither does the UK, Sweden, Australia, or New Zealand. The reserve requirement in the US is functionally not relevant.
Politician Spock
Footballguy
Of course it does.
In basic monetary policy, when a bank makes a loan (creates money), it takes a risk. Because of this risk, the government regulates this process and market to protect the public from banks engaging too much risk.
In modern monetary policy, when a bank makes a loan (creates money), it passes the risk to an unregulated process and market by insuring the loan with a derivative bet. The banks meet said regulations, while risk to the public grows day after day after day as the risk created by the money creation process continues to inflate in unregulated derivatives.
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JohnfrmCleveland
Footballguy
It really isn't the same thing. The dollars that go to the borrower are created, on the spot, when the loan is made. It is not a pile of saved, accumulated dollars that are loaned out. It isn't Bill Gates' $30,000 deposit, or any part of it, that is being loaned out. New money is created at the time of the loan. Before the loan the world has X dollars, and after the loan the world has X + Y dollars.
And that is a crucial distinction, because it means that capital can be created on the spot, and the cost of capital is based on the interest rate charged by the Fed, and not on supply and demand (because there is not a limited amount of capital).
IvanKaramazov
Footballguy
This seems to be getting off track. When Bill Gates deposits $30,000 in a bank, what happens to those dollars? Is it your contention that the bank holds 100% of its deposits as reserves, or do they mostly get loaned?
Bottomfeeder Sports
Footballguy
This thread (and my schedule) has gone in a different direction since I asked the question so I'm leaving this for another day.
IvanKaramazov
Footballguy
JohnfrmCleveland
Footballguy
They absolutely do not get loaned. Everything, initially, goes into reserves. If he deposits cash (unlikely), it goes into the drawers or the vault, which count as reserves. If he deposits a check from Bank B into Bank A, Bank B will transfer that amount from their reserve acct. at the Fed to Bank A's reserve acct. at the Fed. If he deposits a check from somebody else's acct. at Bank A into his acct. at Bank A, no reserves get moved at all, and Bank A just makes the adjustment on its ledger.
The same thing happens whenever Bank A receives any kind of payment - it is either cash, or the net change is realized through their reserve account. A reserve account is just a bank's own bank account. When they pay an employee, which is probably written from an account in Bank A, their reserve account goes down by that amount. When you cash a check, they mark down your account, then hand you vault cash, and their reserves have gone down by that amount. Reserves aren't lost money or anything.
But when they make a loan for $30,000, they do it by expanding their balance sheet on paper. If the loan is to one of their own account holders, they just mark his account up and start billing him, and they shouldn't have to change their reserve position at all. If the loan is deposited at another bank, they transfer reserves to that bank's reserve account. But either way, the total amount of reserves does not go down by $30,000. (If anything, $3,000 has to be added to reserves.) The loan is brand new money, created by the bank expanding its balance sheet. But it works just the same as any other dollars.
It's really not that different that the old money multiplier story, in that banks created money in that scenario as well. Your $100 cash deposit somehow became $1000, right? Well, that's because banks loaned out money they didn't physically hold by creating it. They expanded their balance sheet, and their marks on a ledger worked just like real money - they paid bills with checks, etc. You could count how much money there was, you just couldn't cash it all in, because the physical dollars did not exist. But in the old story, your deposits were the determining factor in how much money existed - you deposit $100 in cash, and the world suddenly had $1000 - which was not true.
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We went down this road because people were insisting that everything they saved contributed to investment, their stock purchases contributed to investment, their savings were necessary for investment, the amount they saved affected investment, etc., and this just isn't true. Money takes a different path than we were taught.
IvanKaramazov
Footballguy
In June 2014, US commercial banks had $2.850 trillion in reserves. They had $10.161 trillion in deposits. So no, deposits are not all getting held as reserves. (Edit: I'm looking at pages 2 and 3, which are seasonally-adjusted).JohnfrmCleveland said:
You're getting too hung up on the nuts and bolts of the specific route that money takes through the vault, to the Fed, etc., none of which really matters. One way or another, deposits mostly pass through banks and don't just disappear into them.
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JohnfrmCleveland
Footballguy
The $2.850 trillion in reserves are govt.-made dollars, HPM, held in reserve accounts at the Fed (and in vault cash). The $10.161 trillion in deposits is bank-created credit, held in bank ledgers. That $10 trillion represents our bank accounts.
Understanding the nuts and bolts is vitally important to understanding what drives the economy. Most people here think that the money they deposit in banks helps the economy, but that's only because they misunderstand what happens to that money when they deposit it.
JohnfrmCleveland
Footballguy
Caught a mistake I made. If the Bank A pays an employee out of a Bank A account into another Bank A account of the employee, their reserves will not go down. Sorry, didn't want to cause any undue confusion.JohnfrmCleveland said:
urbanhack
Fight The Power!
Bottomfeeder Sports
Footballguy
Basically "profits" meaning in this context "paying the owners" (dividends, buybacks, etc.) is not "growth" (investing in the company). For the past 50+ years we have been facilitating removing capital from businesses with lower and lower tax rates rather than creating incentives to reinvest in that business. The cost of cashing out is too low.
We need a :brokenrecord: for these types of post.
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