Yes. The amazing thing about this topic is how confidently otherwise intelligent people routinely spout utter bullshit about it. It's particularly ironic (but completely unsurprising) to see people flaunting their misconceptioms in response to an extremely clear explanation of how it actually works from one of the most authoritative sources possible.
Please, if you think you know something on this topic and haven't read this pdf, just try and forget what you think you know and read it.
(Of course, now somebody will explain to me why the Bank of England doesn't actually know how money creation works, or is deliberately lying about it for some reason, and on it goes.)
> to an extremely clear explanation of how it actually works from one of the most authoritative sources possible.
If I'm not mistaken late into the 2000s authoritative sources like the Bank of England were still not completely on board with the idea that commercial banks themselves are in the process of actual money creation, a process explained described/explained by Schumpeter (I guess amongst many others) ever since back in the 1940s.
So a little bit of "not following the authoritative sources" on this one is understandable, as those authoritative sources themselves are pretty new to the idea.
There's even patterns to it. I've learned to avoid posting to (or even reading) comment sections touching certain topics, and to postpone submissions of certain stories until Monday, when the quality of discussion gets back to normal.
It also happens frequently on economic topics, especially regarding inflation and monetary policy, which seem to be fertile topics for conspiracy theories.
Interest rate and monetary policy articles on HN never produce productive discussion, for various reasons, which are quite obvious if you scan the comments of these types of articles so I won’t elaborate on what they are.
I quite often write and post a comment to correct a misconception and just end up deleting it because the person I am replying to is going to dismiss what I am posting anyways. Now I don’t waste my time.
Reading the source. It feels like it’s written for a specific audience, perhaps people who have taken a year of economics or more. So it’s difficult for an engineer to parse. One example is this paragraph:
> when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.
That could be taken to mean that savings accounts have only a second order contribution on the amount of money banks loan out, it could also mean that savings accounts reduce the amount of money banks can loan out.
I believe that passage is looking at banking from a systems level, and that savings may not directly impact loans a bank makes, but at a systemic level has an end result of reducing loans. It’s not clear at what level they’re taking about here.
A few days ago there was a post on here about how technical documentation only makes sense if you already have a working mental model of the system you’re working with. I feel like this may be an example of this.
My interpretation of that paragraph is the following:
The money that you don't deposit but you pay a company eventually also ends up in a bank account, of the company, of it's employees, of it's suppliers.
From the banking system point of view it's the same money amount, just split differently between accounts.
It would be interesting if somehow credible (including heterodox) experts could be tagged so you could differentiate them from people with no or limited knowledge larping as experts. Then, anyone could choose to filter by experts or not, to their preference.
I love the format of discussing articles/links, but the amount of people confidently pretending they know what they are talking about that you see when you visit a topic you're an expert on is wild. It must be the same for all topics, I just don't notice when I'm not an expert myself.
Deciding on "expert" seems completely intractable. What if one fellow has spent a decade studying the subject and agrees with 90% of his fellow decade-studiers on 90% of things but the remaining 10% of topics he has views shared by approximately no one. Is he a crank or an expert? What if he's fairly persuasive to layman/politicians and thus is the head of the Bank of England?
Additionally, if a subject matter does not lend itself to experimentation or feedback mechanisms then you can easily have all the experts be consistently wrong for decades due to group think or conformal pressures.
> It would be interesting if somehow credible (including heterodox) experts could be tagged so you could differentiate them from people with no or limited knowledge larping as experts.
These endorsements are highly sought by the larpers and confidently incorrect. Meanwhile the actual experts aren’t as interested in going through the process of getting the mark.
One pattern I’ve seen repeated across many forums over decades of internet use: The confidently incorrect have more time and energy to dedicate to online misinformation than the actual experts. I’ve watched many knowledgeable forum users eventually tire of participation and leave communities because they get overrun by younger, inexperienced people who are still in the phase of life where we think we know everything.
You can't frame rules to capture something like "expertise" which has an infinite scope. I don't know how to express it, but it feels wrong. If you could frame such rules then the subject under consideration might be so trivial, making the whole exercise of tagging pointless.
Or maybe you mean you want people to be able to share credentials like a degree and claim expertise without us having to do the extra work of judging the quality of those qualifications?
Alas, discussion of money and especially money creation online tends to be of uniformly low quality.
(To be fair, even many economists have a fairly nebulous understanding.)
What's somewhat ironic is that the some of the actual 'Austrian' economists like George Selgin have a pretty good handle on the topic, but 'Internet Austrians' invariable are some of the worst misunderstanders.
Agreed, read the article. Economics is a bit like physics in (and only in) that much of it isn't something you can solve through intuition alone, and quite often you'll get the wrong answer.
My question for you is does your intuition think this trend will continue, or is it temporary?
Your naive hypothesis is true. The ratio of cash to non-cash has been decreasing over time, as more digital payments are used. As everyone also knows, cash is a nominal value, it doesn't inflate. Anyone trying to intuit cash demand would be thinking about inflation rates and nominal gdp growth.
I think digital payments would explain a lot of why the correlation sharply reverses in 2020.
The problem is if you want to go further and say; since digital payments will increase during the pandemic, all demand for cash will decrease. I disagree that's an intuitive idea.
Covid changed the money supply and peoples behavior rapidly, saying you can't use intuition under higher uncertainty is a tautology - no field is immune to this. Also going past intuition, the decline in cash as a percentage of total money accelerated, due to the M2 increase being much larger.
Just because covid shocked a few things doesn't mean that economics insn't intuitive or that peoples intuition is wrong. It's like trying to reason about terrorist attack danger using data just after 9/11.
“I have money and people told me I was smart while growing up” is the gateway to being an armchair expert on economics on the internet. I’m not even sure the latter is required, but I’m assuming it’s also a driver for folks here.
Or history, or logistics... Regardless so, the comment sectuons are still good enough to learn something new even in fields like supply chain, in which I consider myself to be rather knowledgeable.
Banks create the money supply (~97% of it). A bank "loan" is not a legally a loan at all but a new security that is created and purchased by the bank. Furthermore, the money for that purchase does not come from any other account or "fed reserves" it is literally instantiated in the account. This "credit creation" theory of the money supply is what the article is about and was empirically proven by the work of Richard Werner.
This is a very important level of understanding, and one that is obfuscated by the central banks.
Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.
What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity to acquire FINITE real estate and SEMI-FINITE stock. You can see how that ratio will repeatedly create asset price inflation which inevitably implodes along with the banks who issued the loans.
The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie. If done, the economy would grow at a high clip with low inflation. The current system of credit creation for leveraged buyouts ad infinitum of a slow growing economic pie, has only one logical outcome....
"Once understood, it is self-evident that banks are wholly responsible for asset bubbles. "
No, it's not remotely.
They are no more responsible than the counterparts to the loan.
Every loan a bank makes comes with risks to the bank.
This idea you have about what is a 'productive investment' or not is fairy interventionist.
Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive?
If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks.
The banks make the loan if the collateral and risk line up - that's what they do.
They are not in the business of deciding what is good for the economy overall, nor should they be.
Finally, that banks create the money is not 'obfuscated' moreover, the amount of leverage in the system is actually controlled by the central bank by setting reserve requirements.
I suggest there's a lot of misunderstanding in our comment.
"When someone buys a building to lease out flats, is that not productive?"
That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally.
"it's the fault of those speculators for the speculating, not the banks."
Both the speculators and banks respond to financial incentives and must work within the laws.
"This idea you have about what is a 'productive investment' or not is fairy interventionist."
Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600?
It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.
> When someone buys a building to lease out flats, is that not productive?
Why would that be productive? Would the previous owner have left the building empty? If so, why, and isn't that an issue that should be addressed first?
Maybe you have other scenarios in mind where a change of ownership isn't the only thing that happens, but then the productivity is, at least to the first order, due to that other thing, not due to the change of ownership.
> They are not in the business of deciding what is good for the economy overall, nor should they be.
> This idea you have about what is a 'productive investment' or not is fairy interventionist.
So, banks do not give a damn about what's good for the economy (while having enormous power to drive economies), but you believe interventionsim is bad anyway?
Also, if you don't know what a productive asset is, you just need to read a little bit: it's not hard to know.
> If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks.
It doesnt matter whose responsibility is it if it screws up the entire economy. Breaking everything for everyone is not something that should be allowed regardless of justification.
> Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive?
In theory there is a powerful argument here, but in practice I am suspicious because when people attempt to start settling trades in, say, gold the police will soon get involved.
If we're appealing to principles of freedom of opinion, there has to be a really good justification for why we all have to agree with the bank's opinions on who is creditworthy? I think somewhere in the mess I'm being robbed, and everyone being forced to participate in the system is not allaying my suspicions.
It is the old argument against socialism - while there is often not a good argument against the individual parts; it is the communists building the wall to keep people in. Looks kinda suspicious and the people controlling the monetary system see little reason to compromise or allow people to choose the best personal options.
> bank "loan" is not a legally a loan at all but a new security that is created and purchased by the bank
No. Bank loans are legally loans in all competent jurisdictions and definitely not securities. (One can securitise loans, e.g. leveraged loans, but that's separate from lending.)
> a very important level of understanding, and one that is obfuscated by the central banks
What? Central banks somewhat consolidate credit creation. Credit has always been the basis of money, even in the commodity era.
Well, the obligation to pay back the loan itself may not be a security, but the receivership of the money that is paid back is usually packaged into a security, so that the entity that give out the loan may not be the one that is eventually paid back for it. Banks package and sell the rights to get the money back.
The bit I don't get is where there can be An accurate (?) measure of the productive capacity of ... anything. So under MMT as Inunderstand it the idea is it's feasible to create money to level of productive capacity - via government purchase of that capacity to build roads and buy policing services etc.
Wartime economies get more "productive" because the government is able to divert resources to its needs (ie stop being a hairdresser and work in the arms factory) - thus increasing the productive capacity.
So, if the government wanted to (peacetime) redirect resources it would have to bid for services at a level that encouraged hairdressers to become munitions workers - and then create money to pay for that.
And they create money through (ok lots of pieces I don't get but I think it's QE ala Richard Werner).
This is typified by a thought exercise: if the government simply replace fiat money with a crypto fiat (ie all money is in bank of englands blockchain ledger ) then suddenly private banks cannot make loans becaus they cannot create money on that blockchain. But the bank of england could ... and this is equivalent of QE except much cleaner and more obvious.
But ... and we eventually get to my point ... if money creation is taken away from banks (regulation, 2008 crash, crypto) and in theory banks are close to the real world and able to judge if loaning money for a factory is a good idea - then how does one judge how much money should be created ?
I am dubious of "we measure inflation" because not just lag but the fairly common view of "prices go up while RPI stays flat"
And since money creation is tied to collateral, and collateral is basically land, land absorbs all money creation in end - which is where we see our land price issues - and essentially means money creation is rich get richer.
If we could break the link between collateral and increasing productive capacity there might be a flowering of equality.
Just in the first half of your comment, it reminds me of Diane Coyle's long standing argument that the GDP, and many productivity indexes, are just very sexist and not for any real reason other than our patriarchal government, and economics specifically.
The problem with land is that you can't produce it. Producers arbitrage the interest rate and the profit rate of manufacturing until the difference is almost zero. But you can't produce land so the cost of land goes up instead.
This is like MMT inspired nonsense, lower interest rates from central banks aren't causing lower growth.
We have lower growth, so we have lower interest rates. Increasing rates would decrease the price of assets, as we've just seen from the past 12 months. The purpose of that was to handle the NGDP overshoot from covid.
> The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments
Just plain stupid. I don't even know what this means or what the policy would look like.
> new housing, factories, machinery, or firms, because those are not inflationary
Obviously wrong. What does inflation mean? An increase in the price level. If you increase demand all else being equal, what happens to the price of something?
By the way - that's the whole point of central banking affecting interest rates. To lower the cost of credit so aggregate demand increases (which is inflationary).
You need to give me a really good thesis on why increasing the cost of credit for """"semi-finite""" assets causes lower growth. The gall to end this with "only one logical outcome" smh.
Edit:
It's like you live in post 2008 fantasy land where aggregate demand is depressed forever. We do not live in this world.
Sorry, that's incorrect. Banks loan out money that is backed by collateral. This money is indeed created. But when the loan is paid back, the money is destroyed. The money tracks the value in the economy, so the inflation is zero.
What the fed does is create money that is backed solely by the fed promising to pay it back in the future. But the money is paid back by issuing more debt! Hence, inflation.
I do agree that the assertion holds true in most cases, but it break down during extreme environments - widespread bank collapses or when the productive ability of the economy is sharply reduced. Loans that cannot be repaid break the equation at some point.
As for government spending, it greatly depends on what it does with the money, and also on taxation. The government promises to pay back money based on future taxation, and if the taxation grow faster than the debt then there won't be any inflation.
Theoretically, yes. Technically, however, these people are getting bailed out. That makes inflation. The government still have to pay for the debt, but it seems like it’s not happening anytime soon (the debt ceiling just keep getting higher and higher).
US government debt is around 31.5 Trillion $$ at the moment. If the US government were to pay its debt today, all that liquidity will be removed from the market and this will have enormous deflationary pressures.
In the same way for private individuals, if you can always keep renewing your debt and pricing your assets higher (a bubble would help), you’d create inflation.
> The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie.
I struggle to see exactly what you are advocating for. If a family wants to buy a house, they will generally have to take out a loan to cover the upfront cost and pay off the loan over a long period of time. However, the loan is not a "productive investment" (no new assets are being created, only traded) and as such the central bank should regulate normal banks to not be allowed to issue loans for existing houses.
Without the ability to take out a loan for a house, I think we can all see how no normal family without 20-40 years of combined salary payments would be able to afford a house. Is this in line with what you are suggesting, or is it something else?
I'm not trying to be asinine, this is just my interpretation of your suggestion and I am trying to understand what you are suggesting.
They create all of it. God knows where the 97% comes from. We don't have silver coins any more, and even they were tokens for a promise.
It was empirically proven by Keynes by in the 1930s. Werner was way behind the curve.
It's not new knowledge. Reginald McKenna published a book on it in the 1920s.[0]
"What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity "
Wrong. The entire system is a liquidity provision for existing stuff. It is systemically limited by physical collateral and risk limits within banks. If a bank takes on too much risk then it goes bust and the shareholder capital is wiped out.
There is no asset bubble. Artificially intervening in the market for money (which is what interest rate setting is) suppresses the price of assets, which means insufficient are produced.
We're seeing that now as the house builders go into hibernation - another round of stop start in the construction industry - which is one of the reasons why they tend to use subcontractors rather than hire and train employees.
Channelling the stability process via the banks, and thereby making them 'special' means we can't let the standard process of capitalism, bankruptcy and loss of capital, control the risk limits in banks.
Out of curiosity, can you wax lyrical a bit more on construction? I’m about to build a house but I’m considering holding off for 12 months to see what happens with materials prices. Particularly steel. Not too concerned about contractors as I am building myself.
> Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.
This is probably the best part of what you wrote. Loans are typically given to help purchase a finite resource, helping increase demand for limited supply, having the overall effect of inflation.
The person who gets screwed is the person who saved their money. Now, when they withdraw it to buy an asset, it costs more, because the bank allowed somebody else to buy it.
An IRL example I see is tonnes of young people driving around in brand new cars on finance. Not a single one of them can afford the car they apparently own. Now I, as somebody who saved to buy their car, will need to pay more because the bank increased the demand for these cars so much.
The problem really occurs when high numbers of people start defaulting on these loans, and the things they purchased were highly inflated at the time of purchase. Even if the bank goes to collect the asset, they will find it's not worth what was originally paid, but they are still missing a large amount of money not originally factored into their risk.
Needless to say, 2023/2024 is about to get really bad.
> The person who gets screwed is the person who saved their money. Now, when they withdraw it to buy an asset, it costs more, because the bank allowed somebody else to buy it.
I don’t know needs to hear this, but I should remind everyone that putting your long-term savings in cash is, and always has been, a guaranteed way to lose to inflation. Long-term savers should be using a mix of bonds, CDs, stocks, and money market accounts depending on time horizons and risk tolerance.
Loans create deposits. Balance sheets have to balance.
The loan creates the advance, and the advance is transferred to the credit of another person - which is either directly the payee, or the bank where the payee has the account.
They don’t which is why they have become hostile to customers in the last 10-20 years. Especially with negative interest rates, the customer is a net negative. Still, people with money are usually the people who generate most business for the bank (either via loans or by buying other products), but it helps to have your account there first.
The central bank only controls the nominal "time value of money". The money holders have a big impact on the real "time value of money". Why haven't you looked there?
Also, the system behaves erratically even when there is no central bank. In fact, the erratic behaviour becomes even more frequent. That would imply that private market participants are a bigger factor in erratic behaviour than central banks.
Except there isn't agreement on the definition of "money" (because it's more complex than it seems on the surface), and there isn't agreement on how it works.
Agreed, but the point of (good) education is not inject revealed truth but train people to think. The different "definitions" are in reality different social contracts so there is nothing to agree on (but one can question which types are more appropriate for what type of economy etc).
I would hazard a guess that it has been intentionally muddied, made confusing, opaque, and left til the last minute for a reason.....interest rates and credit scores.
I don't think its intentional (the overlords?) but it is an unjustifiable gap for any society that considers itself democratic.
Its not just the broad unwashed masses. Essentially outside a tiny number of central banking economists the rest of the world has still "flat Earth" level understanding of how monetary systems work, the role of private banks and, crucially, what alternatives there might be and pros/cons.
Efforts for financial literacy, to the extend they exist, are inadequate and incomplete, essentially manuals for smoothing financial product consumption, not background knowledge on how and why these systems are setup.
Its a fixable gap. Compared to the amount of complexity of material people are exposed to at different school levels, this stuff is really not that difficult.
I was literally reading this article just 4 hours before it was submitted to HN. It's a little concerning when my 'unique' search from 2014 isn't even unique.
Some questions I am trying to answer:
1. What are the minimal reserves held by BoE (as %) and what do they currently hold. The same question for all the banks they have a contract with.
2. What is breakdown of the reserves? I.e. Foreign currency, gold, etc.
Thanks, but that only answers part of my question. I also want to see what the ratio is for contracted banks, it's no good if they outsource poor reserve ratios.
That banks can create as much money as they want, without limit?
Or that, even if the bank has a hard limit to how much they can loan out to the amount they hold in reserves in the central bank, what counts as money being created into the wider economy is the act of making a new loan for a customer?
One is way more boring, technical and unsurprising than the other.
Banks can create deposits but creating deposits that aren't backed with reserves entails a risk of insolvency. Thus the amount of deposits banks can create is ultimately limited by the reserves that they hold. The demand for credit also affects the amount of deposits that are created in practice.
Money creation is limited by the productive investments that the banks can find and if it is overly pessimistic it will not lend even to productive investments.
Sound money advocates think that money for loans should be limited by the availability of "prudent savers".
This article is pretty bad. In theory, in aggregate, it's sort of right. But it doesn't track the flow of what happens after that loan is made, it doesn't discuss how credit spends just like money (ie, anyone can create "money" depending on how you define it), and it doesn't discuss capital requirements (either from a reg perspective or a practical risk management perspective) other than a passing note.
People/companies don't borrow money and then leave it in the bank which lent them the money. The money typically gets wired somewhere, and then the bank which "created money" has to actually have the money in their account with the central bank or have assets to give another bank so they'll give some of their central bank reserves. So, their description is true for a hot minute, then lacking. A bank can't just keep lending and lending.
As for limits on lending, both for a specific bank and in aggregate - they don't discuss capital requirements or anything about Basel III... It's mentioned in passing with a reference to another paper, as though it's a minor detail. It isn't. The limit on lending could be the limit they lay out... but in practice the capital requirements mean that the amount of lending is severely constrained, both in quantity and the types of loans and the types of customers. Just look at a balance sheet of an actual bank... (like https://www.sec.gov/ix?doc=/Archives/edgar/data/72971/000007... , page 62). Using the BOE paper you'd assume there are banks levered 1000-1. There are not.
Readit News
Please, if you think you know something on this topic and haven't read this pdf, just try and forget what you think you know and read it.
(Of course, now somebody will explain to me why the Bank of England doesn't actually know how money creation works, or is deliberately lying about it for some reason, and on it goes.)
If I'm not mistaken late into the 2000s authoritative sources like the Bank of England were still not completely on board with the idea that commercial banks themselves are in the process of actual money creation, a process explained described/explained by Schumpeter (I guess amongst many others) ever since back in the 1940s.
So a little bit of "not following the authoritative sources" on this one is understandable, as those authoritative sources themselves are pretty new to the idea.
Deleted Comment
The fact that numbers appear to be involved changes nothing.
It's perfectly reasonable to ask if banks are doing what they claim to be doing.
Especially given the banking sector's very poor record of creating widespread stable prosperity through straightforwardness and integrity.
This happens frequently on weekends.
There's even patterns to it. I've learned to avoid posting to (or even reading) comment sections touching certain topics, and to postpone submissions of certain stories until Monday, when the quality of discussion gets back to normal.
I quite often write and post a comment to correct a misconception and just end up deleting it because the person I am replying to is going to dismiss what I am posting anyways. Now I don’t waste my time.
> when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.
That could be taken to mean that savings accounts have only a second order contribution on the amount of money banks loan out, it could also mean that savings accounts reduce the amount of money banks can loan out.
I believe that passage is looking at banking from a systems level, and that savings may not directly impact loans a bank makes, but at a systemic level has an end result of reducing loans. It’s not clear at what level they’re taking about here.
A few days ago there was a post on here about how technical documentation only makes sense if you already have a working mental model of the system you’re working with. I feel like this may be an example of this.
The money that you don't deposit but you pay a company eventually also ends up in a bank account, of the company, of it's employees, of it's suppliers.
From the banking system point of view it's the same money amount, just split differently between accounts.
Deleted Comment
I love the format of discussing articles/links, but the amount of people confidently pretending they know what they are talking about that you see when you visit a topic you're an expert on is wild. It must be the same for all topics, I just don't notice when I'm not an expert myself.
Additionally, if a subject matter does not lend itself to experimentation or feedback mechanisms then you can easily have all the experts be consistently wrong for decades due to group think or conformal pressures.
These endorsements are highly sought by the larpers and confidently incorrect. Meanwhile the actual experts aren’t as interested in going through the process of getting the mark.
One pattern I’ve seen repeated across many forums over decades of internet use: The confidently incorrect have more time and energy to dedicate to online misinformation than the actual experts. I’ve watched many knowledgeable forum users eventually tire of participation and leave communities because they get overrun by younger, inexperienced people who are still in the phase of life where we think we know everything.
Or maybe you mean you want people to be able to share credentials like a degree and claim expertise without us having to do the extra work of judging the quality of those qualifications?
(To be fair, even many economists have a fairly nebulous understanding.)
What's somewhat ironic is that the some of the actual 'Austrian' economists like George Selgin have a pretty good handle on the topic, but 'Internet Austrians' invariable are some of the worst misunderstanders.
An example, nobody uses cash for payments anymore, demand for bank notes must be down. And yet: https://www.rba.gov.au/publications/bulletin/2021/mar/pdf/ca...
Your naive hypothesis is true. The ratio of cash to non-cash has been decreasing over time, as more digital payments are used. As everyone also knows, cash is a nominal value, it doesn't inflate. Anyone trying to intuit cash demand would be thinking about inflation rates and nominal gdp growth.
In fact this naive thinking is a pretty good explanation for the graph in your source: https://www.rba.gov.au/publications/bulletin/2021/mar/images...
I think digital payments would explain a lot of why the correlation sharply reverses in 2020.
The problem is if you want to go further and say; since digital payments will increase during the pandemic, all demand for cash will decrease. I disagree that's an intuitive idea.
Covid changed the money supply and peoples behavior rapidly, saying you can't use intuition under higher uncertainty is a tautology - no field is immune to this. Also going past intuition, the decline in cash as a percentage of total money accelerated, due to the M2 increase being much larger.
Just because covid shocked a few things doesn't mean that economics insn't intuitive or that peoples intuition is wrong. It's like trying to reason about terrorist attack danger using data just after 9/11.
Dead Comment
This is a very important level of understanding, and one that is obfuscated by the central banks.
Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.
What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity to acquire FINITE real estate and SEMI-FINITE stock. You can see how that ratio will repeatedly create asset price inflation which inevitably implodes along with the banks who issued the loans.
The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie. If done, the economy would grow at a high clip with low inflation. The current system of credit creation for leveraged buyouts ad infinitum of a slow growing economic pie, has only one logical outcome....
No, it's not remotely.
They are no more responsible than the counterparts to the loan.
Every loan a bank makes comes with risks to the bank.
This idea you have about what is a 'productive investment' or not is fairy interventionist.
Who are you to say what is productive, and what is not? When someone buys a building to lease out flats, is that not productive?
If you believe that there is clearly such a thing as 'non productive assets', for example, pure real estate speculation, then it's the fault of those speculators for the speculating, not the banks.
The banks make the loan if the collateral and risk line up - that's what they do.
They are not in the business of deciding what is good for the economy overall, nor should they be.
Finally, that banks create the money is not 'obfuscated' moreover, the amount of leverage in the system is actually controlled by the central bank by setting reserve requirements.
I suggest there's a lot of misunderstanding in our comment.
That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally.
"it's the fault of those speculators for the speculating, not the banks." Both the speculators and banks respond to financial incentives and must work within the laws.
"This idea you have about what is a 'productive investment' or not is fairy interventionist." Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600?
It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.
Why would that be productive? Would the previous owner have left the building empty? If so, why, and isn't that an issue that should be addressed first?
Maybe you have other scenarios in mind where a change of ownership isn't the only thing that happens, but then the productivity is, at least to the first order, due to that other thing, not due to the change of ownership.
> This idea you have about what is a 'productive investment' or not is fairy interventionist.
So, banks do not give a damn about what's good for the economy (while having enormous power to drive economies), but you believe interventionsim is bad anyway?
Also, if you don't know what a productive asset is, you just need to read a little bit: it's not hard to know.
It doesnt matter whose responsibility is it if it screws up the entire economy. Breaking everything for everyone is not something that should be allowed regardless of justification.
In theory there is a powerful argument here, but in practice I am suspicious because when people attempt to start settling trades in, say, gold the police will soon get involved.
If we're appealing to principles of freedom of opinion, there has to be a really good justification for why we all have to agree with the bank's opinions on who is creditworthy? I think somewhere in the mess I'm being robbed, and everyone being forced to participate in the system is not allaying my suspicions.
It is the old argument against socialism - while there is often not a good argument against the individual parts; it is the communists building the wall to keep people in. Looks kinda suspicious and the people controlling the monetary system see little reason to compromise or allow people to choose the best personal options.
No. Bank loans are legally loans in all competent jurisdictions and definitely not securities. (One can securitise loans, e.g. leveraged loans, but that's separate from lending.)
> a very important level of understanding, and one that is obfuscated by the central banks
What? Central banks somewhat consolidate credit creation. Credit has always been the basis of money, even in the commodity era.
Well, the obligation to pay back the loan itself may not be a security, but the receivership of the money that is paid back is usually packaged into a security, so that the entity that give out the loan may not be the one that is eventually paid back for it. Banks package and sell the rights to get the money back.
Wartime economies get more "productive" because the government is able to divert resources to its needs (ie stop being a hairdresser and work in the arms factory) - thus increasing the productive capacity.
So, if the government wanted to (peacetime) redirect resources it would have to bid for services at a level that encouraged hairdressers to become munitions workers - and then create money to pay for that.
And they create money through (ok lots of pieces I don't get but I think it's QE ala Richard Werner).
This is typified by a thought exercise: if the government simply replace fiat money with a crypto fiat (ie all money is in bank of englands blockchain ledger ) then suddenly private banks cannot make loans becaus they cannot create money on that blockchain. But the bank of england could ... and this is equivalent of QE except much cleaner and more obvious.
But ... and we eventually get to my point ... if money creation is taken away from banks (regulation, 2008 crash, crypto) and in theory banks are close to the real world and able to judge if loaning money for a factory is a good idea - then how does one judge how much money should be created ?
I am dubious of "we measure inflation" because not just lag but the fairly common view of "prices go up while RPI stays flat"
And since money creation is tied to collateral, and collateral is basically land, land absorbs all money creation in end - which is where we see our land price issues - and essentially means money creation is rich get richer.
If we could break the link between collateral and increasing productive capacity there might be a flowering of equality.
This is turning into a long ramble - apologies
Here's an interview podcast with her, but I am not sure if that is the one covering her book on the subject or if that came later: https://pitchforkeconomics.com/episode/how-should-we-measure...
We have lower growth, so we have lower interest rates. Increasing rates would decrease the price of assets, as we've just seen from the past 12 months. The purpose of that was to handle the NGDP overshoot from covid.
> The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments
Just plain stupid. I don't even know what this means or what the policy would look like.
> new housing, factories, machinery, or firms, because those are not inflationary
Obviously wrong. What does inflation mean? An increase in the price level. If you increase demand all else being equal, what happens to the price of something?
By the way - that's the whole point of central banking affecting interest rates. To lower the cost of credit so aggregate demand increases (which is inflationary).
You need to give me a really good thesis on why increasing the cost of credit for """"semi-finite""" assets causes lower growth. The gall to end this with "only one logical outcome" smh.
Edit:
It's like you live in post 2008 fantasy land where aggregate demand is depressed forever. We do not live in this world.
What the fed does is create money that is backed solely by the fed promising to pay it back in the future. But the money is paid back by issuing more debt! Hence, inflation.
> The money tracks the value in the economy,
Does not imply this
> so the inflation is zero.
I do agree that the assertion holds true in most cases, but it break down during extreme environments - widespread bank collapses or when the productive ability of the economy is sharply reduced. Loans that cannot be repaid break the equation at some point.
As for government spending, it greatly depends on what it does with the money, and also on taxation. The government promises to pay back money based on future taxation, and if the taxation grow faster than the debt then there won't be any inflation.
US government debt is around 31.5 Trillion $$ at the moment. If the US government were to pay its debt today, all that liquidity will be removed from the market and this will have enormous deflationary pressures.
In the same way for private individuals, if you can always keep renewing your debt and pricing your assets higher (a bubble would help), you’d create inflation.
I struggle to see exactly what you are advocating for. If a family wants to buy a house, they will generally have to take out a loan to cover the upfront cost and pay off the loan over a long period of time. However, the loan is not a "productive investment" (no new assets are being created, only traded) and as such the central bank should regulate normal banks to not be allowed to issue loans for existing houses.
Without the ability to take out a loan for a house, I think we can all see how no normal family without 20-40 years of combined salary payments would be able to afford a house. Is this in line with what you are suggesting, or is it something else?
I'm not trying to be asinine, this is just my interpretation of your suggestion and I am trying to understand what you are suggesting.
They create all of it. God knows where the 97% comes from. We don't have silver coins any more, and even they were tokens for a promise.
It was empirically proven by Keynes by in the 1930s. Werner was way behind the curve.
It's not new knowledge. Reginald McKenna published a book on it in the 1920s.[0]
"What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity "
Wrong. The entire system is a liquidity provision for existing stuff. It is systemically limited by physical collateral and risk limits within banks. If a bank takes on too much risk then it goes bust and the shareholder capital is wiped out.
There is no asset bubble. Artificially intervening in the market for money (which is what interest rate setting is) suppresses the price of assets, which means insufficient are produced.
We're seeing that now as the house builders go into hibernation - another round of stop start in the construction industry - which is one of the reasons why they tend to use subcontractors rather than hire and train employees.
Channelling the stability process via the banks, and thereby making them 'special' means we can't let the standard process of capitalism, bankruptcy and loss of capital, control the risk limits in banks.
[0]: https://new-wayland.com/blog/post-war-banking-policy/
This is probably the best part of what you wrote. Loans are typically given to help purchase a finite resource, helping increase demand for limited supply, having the overall effect of inflation.
The person who gets screwed is the person who saved their money. Now, when they withdraw it to buy an asset, it costs more, because the bank allowed somebody else to buy it.
An IRL example I see is tonnes of young people driving around in brand new cars on finance. Not a single one of them can afford the car they apparently own. Now I, as somebody who saved to buy their car, will need to pay more because the bank increased the demand for these cars so much.
The problem really occurs when high numbers of people start defaulting on these loans, and the things they purchased were highly inflated at the time of purchase. Even if the bank goes to collect the asset, they will find it's not worth what was originally paid, but they are still missing a large amount of money not originally factored into their risk.
Needless to say, 2023/2024 is about to get really bad.
I don’t know needs to hear this, but I should remind everyone that putting your long-term savings in cash is, and always has been, a guaranteed way to lose to inflation. Long-term savers should be using a mix of bonds, CDs, stocks, and money market accounts depending on time horizons and risk tolerance.
The loan creates the advance, and the advance is transferred to the credit of another person - which is either directly the payee, or the bank where the payee has the account.
Simple double entry accounting.
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What is a "security" ?
https://en.wikipedia.org/wiki/Security_(finance)
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This is the central issue causing the system to behave erratically.
The irony of it all: the only place for socialism in our economies is the monetary system. No surprise it doesn't work well.
Also, the system behaves erratically even when there is no central bank. In fact, the erratic behaviour becomes even more frequent. That would imply that private market participants are a bigger factor in erratic behaviour than central banks.
The fact that there is such widespread financial illiteracy is a key reason society is so dysfunctional.
Its not just the broad unwashed masses. Essentially outside a tiny number of central banking economists the rest of the world has still "flat Earth" level understanding of how monetary systems work, the role of private banks and, crucially, what alternatives there might be and pros/cons.
Efforts for financial literacy, to the extend they exist, are inadequate and incomplete, essentially manuals for smoothing financial product consumption, not background knowledge on how and why these systems are setup.
Its a fixable gap. Compared to the amount of complexity of material people are exposed to at different school levels, this stuff is really not that difficult.
Some questions I am trying to answer:
1. What are the minimal reserves held by BoE (as %) and what do they currently hold. The same question for all the banks they have a contract with.
2. What is breakdown of the reserves? I.e. Foreign currency, gold, etc.
3. How have these numbers changed over time.
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That banks can create as much money as they want, without limit?
Or that, even if the bank has a hard limit to how much they can loan out to the amount they hold in reserves in the central bank, what counts as money being created into the wider economy is the act of making a new loan for a customer?
One is way more boring, technical and unsurprising than the other.
Reserves haven't been a limit for a while:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
* https://rationalreminder.ca/podcast/132
Some countries haven't had reserve limits for decades:
* https://en.wikipedia.org/wiki/Reserve_requirement#Canada
Sound money advocates think that money for loans should be limited by the availability of "prudent savers".
People/companies don't borrow money and then leave it in the bank which lent them the money. The money typically gets wired somewhere, and then the bank which "created money" has to actually have the money in their account with the central bank or have assets to give another bank so they'll give some of their central bank reserves. So, their description is true for a hot minute, then lacking. A bank can't just keep lending and lending.
As for limits on lending, both for a specific bank and in aggregate - they don't discuss capital requirements or anything about Basel III... It's mentioned in passing with a reference to another paper, as though it's a minor detail. It isn't. The limit on lending could be the limit they lay out... but in practice the capital requirements mean that the amount of lending is severely constrained, both in quantity and the types of loans and the types of customers. Just look at a balance sheet of an actual bank... (like https://www.sec.gov/ix?doc=/Archives/edgar/data/72971/000007... , page 62). Using the BOE paper you'd assume there are banks levered 1000-1. There are not.