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Every time the banks grant a loan they’re effectively printing money
Too many people don’t understand this point. When we force the interest rate to be low that’s allowing more loans which creates more money. So when the Republicans come in and promise to stop printing money and lower interest rates for mortgages… Alarm bells should be going off. But we’re too busy teaching kids to repeat lists of names and places to teach them real stuff.
I never thought about it from this angle. But I did think about it from a different one: loans allow for an increase in demand and that increases prices. So either way, it will up the inflation
Could you explain this a bit further or share and article or video that goes into it further?
I’ve heard this before, but am struggling to wrap my head around it. Doesn’t the bank need to have the money to loan it out? I feel like I’m missing some piece of the equation.
It’s called “Fractional Reserve Banking”. The bank only needs to have about 10% of a loan on hand.
If a bank has $100, they can write a loan for $1,000; effectively putting $900 more into circulation. When that is spent, it gets deposited into a bank, which can then loan it out amplified again.
This could create infinite money, as I understand it. Since there is not infinite money, there must be a gap in my understanding somewhere.
Afaik some countries have dropped reserve requirements altogether.
Loans can be given out as long as the recipient is credit worthy.Money is free and infinite according to MMT
If a bank has $100, they can write a loan for $1,000; effectively putting $900 more into circulation. When that is spent, it gets deposited into a bank, which can then loan it out amplified again.
Since there is not infinite money, there must be a gap in my understanding somewhere.
While this is true, the only “new money” created in that loan is the interest becase the capital is paid back , albeit over decades.
I like Geoff Mann’s description: “When money is released into general circulation by a bank or a state, it is always issued via the process of debt creation. Which is to say, even though it is hard for many of us to believe, that much if not most of the money in circulation is produced when someone or some institution goes into debt. (Remember it need not be physical currency to circulate; currency represents a very small fraction of circulating money.) For example, when someone borrows money from a bank, it is not as if the bank has that money in bills and coins in a safe in the basement, nor does it have it in “digital” form. Instead, by lending money to the borrower (and thereby fulfilling its obligation to the debt contract), the bank basically “creates” that money. It simply creates a big hole in its own accounts, with a “minus” sign beside it. The debt contract stipulates that the borrower’s obligation is to fill the hole by a set date. The money loaned does not need to pre-exist the debt contract. Which means that the debt contract literally creates the money, because the big hole the bank placed in its own accounts is mirrored by an equally large “pile” in the borrower’s account. The borrower spends that money in the economy, and, in addition to the interest that is the price of using this money, slowly pays the bank back to fill the hole. The money produced via the loan is issued to the borrower who is then indebted, and the money represents the means of settling that debt.
The debt in this example is obviously private (be-tween a borrower and a private bank), but money produced by the creation of their credit-debt contract can circulate generally in the public realm-if you borrow to pay your tuition, the money you borrow is not special money only you can use. Your school can use it to pay instructors and buy office furniture, instructors can use it to buy groceries, and so on. The money is a product of your indebtedness, and you can transfer it to whomever you please- it is transferable debt. Now, in theory, a bank cannot go on creating money in this way without limit. Modern banking systems have regulated “capital requirements”; some portion of a banks money-loan portfolio must be covered by reserves of cash or cash-like assets. But the ratio in most capitalist nation-states is only around 10 percent, often even less.
Thus, at least in theory, unless all banks are simultaneously maxed out on their lending— unlikely, and even if it did happen, the banks merely have to go raise some more money to add to their reserves— the money supply can change size in response to demand for loans without direct state involvement.
Similarly, when the state creates money via spend-ing, “printing,” borrowing, etc., the money issued is a form of state debt. State-issued money is a claim on the state by the holder of the money, and it circulates among all the other private bank-issued debt-money: transferable debt. So, for example, when you come to settle your account with the state (pay your taxes, say), the state must accept its own credit-issue as legitimate means of redemption. The money is transferable debt that must be accepted as equivalent to the abstract unit of account.“
The money supply grows because banks are only forced to keep some of their deposits as reserves. Everything else can be lend away. The formula for the amount of money they create (money multiplier) is as follows:
a = physical currency/bank deposits w = reserves/deposit accounts MM = 1+a/w+a
You can interprete w as the rate of reserves. So if we simplify the equation by assuming theres no cash it becomes:
MM = 1/w
So if the reserve ratio is 0.1, the MM would be 10, meaning that the money supply will be 10 times bigger than the monetary base (cash + reserves).
The whole concept of “just printing money” is SUPER outdated anyway in a world where the vast majority of money is digital and the size of some of the largest hoards have no significant relation to the availability of physical currency.
I think this is lost on a lot of people. You used to have to physically store assets or money in order to have that money. You no longer need to. This breaking of money from physicality has second and third order effects that Keynes and Friedman just weren’t equipped to understand. Credit in large organizations or wealthy families approaches digitalization but it’s not actually the same thing as 90% of the country holding their money in digital accounts that can be fractionally leveraged by the banks.
At the end of the day we need new big theories on the behavior of digital economies. MMT is a step in the right direction but we need more. Especially work on systems of distribution. We’re effectively in a post scarcity world but we insist on a distribution of basic goods that creates scarcity.
My sister works for the wealth management software fintech company Addepar that Peter Thiel founded as a quality control engineer :| this is a sentiment she has echoed. Specifically that we live in a post scarcity world, but governments/society have not caught up to that.
We must have different definitions of “scarcity”.
Alright, think about this for a minute. We produce enough food to feed everyone on the planet. But even without war or closed borders there are countries where people go hungry. Purely for economic reasons.
There’s enough housing in the US to house all of the homeless. But we don’t want to support rural areas so people have to move away. And we treat housing as an investment activity so instead of building to need, developers build to market. That means there will never be enough in the large metro markets because if there was, they would lose money.
I can go on. The idea that capitalism is the most efficient system of distributing goods is fatally flawed.
“Printing money” is a metaphor, of course most money now is just virtual numbers.
Which makes it even easier for a government to create and spend it :)
Which makes it even easier for a government to create and spend it :)
Or a bank. Or a billionaire. Or a hedge fund. Or a stock market maximizing algorithm.
My point is that the amount of money in existence is no longer centralized or anywhere near as relevant as how it’s accumulated and ESPECIALLY how both it and tangible resources are distributed.
Gandhi figured out that “there is enough in this world to satisfy every man’s need, but not enough for every man’s greed” over half a century ago when ACTUAL scarcity was much more widespread and the rich were many times more constricted by laws and regulations than now.
Mentioning “Printing money”, even metaphorically, is nothing but a distraction from the things that actually matter and make a difference one way or the other.
Or a bank. Or a billionaire. Or a hedge fund. Or a stock market maximizing algorithm.
Only government has full control over its national currency via central bank and taxes. It’s not decentralized, as every commercial bank needs to get a loan from the central bank, and people have to pay taxes in national currency.
As other have mentioned, we operate with Fractional Reserve Lending, so most Money is not created by governments but by banks when the lend money.
Here is an article from the Bank Of England on it in case you think this is bullshit.
Government control over money creation is, nowadays, mostly indirect via reserve criteria which is a lot softer that the direct control over money printing in the old days.
Your idea of how money is created is at least 30 years out of date.
government has full control over its national currency
You can’t be serious 🤦
and the size of some of the largest hoards have no significant relation to the availability of physical currency
Also true. Only MB money aggregate is in active circulation.
isn’t mmt bullshit? Not saying conventional economics is good though
No it’s just more complicated than just print more.
Effectively the monetary supply is limited by the productive capacity/economic output of the country. If the nation or system doesn’t have enough output to cover new currency, it causes inflation as effectly 2 dollars are being used to represent the value of 1 dollar of work.
It’s basically what China does, right? I remember a while back someone calling China a “currency manipulator” with the force of a slur, so I assume it’s the kind of thing that really pisses off free market fetishists
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Have yet to hear a credible reason mmt is bullshit.
The most accurate macroeconomic model is only 55% accurate.
It relies on the idea that, since the government can ‘print money’ to pay the interest on debts, it can borrow freely. What do you expect the lenders to do in response?
What is supposed to be the argument for the “genius IQ” opinion? I’m not claiming inflation is this big bad monster some people make it out to be, but frankly, this meme seems like It’s advocating for relying on inflation as a way for the state to fund itself without any consequences.
If you just print money to fund a program that has a greater return on investment (ie: schools -> increased productivity, housing the homeless increasing their productivity, reducing waste to “crime” and paying police to harass people, etc), then the money per real asset can actually decrease from “just print money” and have the opposite effect in the long-term (and if these types of things are constantly being funded, then now is the “long term” from earlier investments anyways).
That can be a little tricky though. Are you creating money to pay for education, or are you creating money so consumers can buy bigger SUVs instead of paying the taxes that should be used to cover education?
Why choose inflation when you can just as easily raise other taxes?
I’m sure you agree with me that increasing taxes on inheritance, property, capital gains or really high income would be more efficient than printing money.
It’s not choosing inflation. As pointed out, it could actually be deflationary depending how how the money is printed. Funding services and taxing the wealthy are two separate issues. Taxes have nothing to do with funding services and are only used as an excuse to not have universal health care or to much on climate change, both of which could be deflationary if funded by just printing money and doing nothing is inflationary.
Of course I also don’t think billionaires should exist because they are separately harmful and only are possibly with exploitation. So I don’t particularly have a problem with using taxes as a weapon to combat that symptom of the exploitive system, but it’s like using paracetamol to treat an infection - its just treating the symptoms, which might be important to not die immediately and to be able to recover, but ideally you also treat the infection directly and then form antibodies to prevent future infections or have other external chances to reduce infectivity. So I’m not opposing taxes, but generally they are a distraction from other issues and meant to bore people by forcing advocates of such policies to waste time talking about boring specific tax policies rather than building a narrative about a better tomorrow.
Taxes don’t fund government expenses
Elaborate, please
Anyone who knows economics will see how much I butcher this but here it goes:
Basically modern monetary theory argues that the way we’ve set up our world, there’s really little to know consequence to the US and other large countries to just “print more money” to solve economic issues. Not in the sense of just handing people money, but that they can pay for government programs and stuff by dipping into an invisible pocketbook with no bottom by racking up debt with other countries. As long as we pay interest on it and keep other countries relatively happy everything goes fine.
Again, MMT is a modern economic theory with lots of papers written on it which is why it’s also being vouched for by the genius person in this meme.
In my opinion MMT seems like a sick economist brain way of admitting that we produce far more value and wealth than we use in this country, and instead of using that embarrassment of wealth to give humans free food, shelter, and medicine we invent a new way to keep up a class stratified society for long after it was economically necessary.
Yes
I’m not sure what OPs argument is, but maybe it’s something like, if we have very high inflation the rich will actually lose money as their savings have less value. While at the other hand wages go up.
This argument is flawed, as the rich usually don’t have savings, but investments. Those will actually just go up with inflation. Like if you invest in stocks, gold or houses, all of those will go up in times of high inflation.
So printing money is just going to screw the middle class with some savings in the bank. It’s also going to screw young people that don’t own a house.
No, it’s Modern Monetary Theory which is that all debt creation de facto creates (“prints”) money, so unless you cease all loan creation you’re always printing money, and thus it should be more accepted to use debt to invest in long term projects.
On Wikipedia it says
Mmt principals (nr 3) Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment
So you can’t really always print more money, unless you don’t care about inflation (that mostly screws the middle class).
But you can print more money while labour, capital, and natural resources are not fully utilised - which is a lot more than it is generally done at the moment.
Hyperinflation of the Weimarer Republik says „Guten Tag!“
Seriously, just printing money has the potential to go catastrophically wrong.
Hyperinflation is typically caused when you’re printing money to buy foreign currency as a means of servicing foreign debt as was the case in Weimar era Germany.
The increased supply lowers exchange rates, which in turn means you need to print more money.As long as you have free economic capacity domestically, spending money for it to be used won’t cause hyperinflation.
Sure, so can spending money, drinking water, or eating anything.
Just use a money system with expired date
