by porterde on 9/9/21, 7:43 PM with 114 comments
by aazaa on 9/9/21, 8:43 PM
> This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.
The discussion seems incomplete without mentioning government deficit spending. This is, after all, the premise of Modern Monetary Theory: that unlike households, currency issuers like the US federal government aren't under the same balanced budget constraints as households. Currency issuers can create money by spending it into being.
Budget deficits can be financed through the issuance of bonds, which look a lot like loans. But they can also be financed by just printing the money. The end result is the same, money into the pockets of people, but the implications are very different.
The MMT perspective is gaining ground, especially as the world's governments find it increasingly difficult to avoid deficit spending. A leading proponent (Kelton) proposes ditching deficit targets altogether in favor of inflation targets.
by rahimnathwani on 9/9/21, 8:13 PM
Money is created by both the central bank and retail banks.
When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'.
When a commercial or retail bank gives you a loan, you have two accounts at the bank that move in opposite directions:
- current account is credited by $X (bank owes you money)
- loan account is debited by $X (you owe the bank)
So the net effect is zero (the sum of all your balances with the bank is still the same as before the loan was made). But now there's more money in your current account, so there's more money available for you to spend. Money has been created.
Even though this new money isn't central bank money:
- it's denominated in the same units as central bank money (pounds)
- it's almost as safe from default (it's protected by a deposit guarantee scheme)
- you can use it to pay for things (bank transfers are widely accepted as a means of payment)
In practice, there are capital adequacy requirements that limit how much banks can lend. They are required to keep a buffer between assets and liabilities (equity capital). As the bank's balance sheet gets bigger, more equity capital is required.
by dang on 9/9/21, 8:40 PM
Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=25885849 - Jan 2021 (1 comment)
Money Creation in the modern economy [pdf] - https://news.ycombinator.com/item?id=22923785 - April 2020 (1 comment)
Money Creation in the Modern Economy - https://news.ycombinator.com/item?id=20875899 - Sept 2019 (1 comment)
Money creation in the modern economy (2014) [pdf] - https://news.ycombinator.com/item?id=16604251 - March 2018 (123 comments)
Money Creation in the Modern Economy (2014) [pdf] - https://news.ycombinator.com/item?id=11374907 - March 2016 (97 comments)
by SkyMarshal on 9/9/21, 8:27 PM
https://www.researchgate.net/publication/265909749_Can_Banks...
https://www.researchgate.net/publication/283907413_Do_banks_...
His work made realize that not even the banking system fully understands the banking system.
(Werner is the economist that coined the term Quantitative Easing, originally created to describe Japanese post-WWII economic re-development monetary policy, research that later informed the US Fed's response to the GFC, among other things)
by zja on 9/9/21, 9:15 PM
by danielschonfeld on 9/9/21, 10:24 PM
Unfortunately for most of us though it appears as though the adage that 'cash is trash' is starting to become a very real problem even in the west and necessitates that all of us transition to holding yield producing assets with risk. In other words, even grandma is an investor (aka gambler) now by force.
by 1vuio0pswjnm7 on 9/9/21, 10:45 PM
https://web.archive.org/web/20110606031420/http://www.margar...
In England, sometimes we need to explain to us where money comes from, just in case anyone forgets. :)
by gandalfian on 9/9/21, 11:02 PM
You can tax and not spend but so much money has escaped abroad and hidden where you can't touch it.
There is inflation but that is a dangerous pandoras box.
Or you can say boost productivity and just create enough extra stuff to match all the extra money. Easier to say than to do though. You just have to live in hope that someone invents some wonderfully productivity enhancing something, fusion, robots or ai perhaps. Come to think of it perhaps Apple is really a government conspiracy to soak up consumers excess dollars? The Apple Tax suddenly fits hmmm.
by andy_ppp on 9/9/21, 8:52 PM
by mempko on 9/10/21, 12:43 AM
Money literally runs our lives. We spend most of our waking time trying to get some.
This explains where money comes from. And it's completely different than what you are taught in school or by media and economist pundits.
by nabla9 on 9/9/21, 7:48 PM
Major central banks like US Fed, European ECB or Bank of Japan don't generate money using fractional reserve banking anymore.
They use open market operations or quantitative easing instead. In other words, they buy debt, like treasuries with money.