Money Creation in the Modern Economy (2014) [pdf]
bankofengland.co.uk
bankofengland.co.uk
Forget theory, ideology, and politics for a moment. Let's focus on the mechanics of how things work.
When a bank lends money to a company, the bank and the company book corresponding accounting entries and money is created "out of thin air." (The bank is required to hold a minimum reserve balance, which they can borrow as needed from others in the financial system, or from a central bank).
When a central bank (like the Federal Reserve or the Bank of England) lends money to a bank, the central bank and the bank book corresponding accounting entries and money is created "out of thin air." Central banks literally click a button and create accounting entries.
When you borrow money from a bank, the bank books the corresponding accounting entries, and you probably won't record anything on an accounting program -- but your bank will keep track of all balances, to the cent.
When a borrower cannot pay back a loan from a bank, the bank writes off the loan balance, and reduces the borrower's liability by an equal amount.
The balance you have on your bank account is a liability on your bank's accounting books.
The balance on your credit card is an asset on your credit card company's accounting books.
When you buy something and pay with a check or a debit card, the financial system records all the necessary accounting transactions to update everyone's debit and credit balances.
The dollar bills you hold in your wallet are nothing less than 'certificates' indicating that the US government has a liability of the amount shown on those dollar bills, payable to the holder of those dollar bills.
In our modern economic system, the easiest way to understand money is as a global, mostly electronic network of accounting debits and credits, with balances varying as people conduct transactions.
For every debit there is an equal credit, and vice versa, so globally, total debit balances are always equal to total credit balances, and total debit transactions are always equal to total credit transactions.
Double-entry bookkeeping all the way down.
It is really quite something to behold.
Remember, if you deposit a 100$ bill the bank now has 100$ and marks you down with an IOU. That does not mean there is suddenly an extra 100$, you have an IOU and the bank has 100$.
Cash is money created directly by the government but, when the government pay their providers in their accounts they don't use cash;
they (or I should say 'we') just increment a number in a computer and that money is equally valid that cash because it's equally valid to pay taxes. It's money so real as any coin or bank note.
Re: automatically having the thing you need to pay taxes - this is exactly why you can go to the grocery store and buy stuff with US dollars.
Picture Bank A with 10 million$ on hand. Now, Bank A tells Bank B, I want to transfer 200 million to account XYZ.
What stops this from working? Well bank A and B are both talking to the Fed and the Fed says bank A does not have 200 million. The same thing stops Bank A from just ordering 20 million in cash.
PS: Don't forget there are still plenty of small banks. If owning a bank let you create unlimited cash from thin air people would do so.
Not all the "electronic cash" is created equal. Money is an IOU, so, the important thing is: who is backing that IOU?
If you ask a credit for 200 millions and the bank think that it's a good business they will credit your account with the money, but it's important to realize that this money comes from nowhere. The bank just created this money, not the government, and it's an IOU backed by the bank. So this IOU is not the same that the money the government use to pay providers (that is really a IOU from the government).
The bank is creating money and it has to meet legals requirements for doing this, for instance, getting, a posteriory, enough reserves (this is why is called a fractional system).
If you want to move your 200 millions to other bank, what would happen is the two banks would try to balance, at the end of the day, the movement of money in both directions. Maybe somebody is moving 200 millions from the other bank too.
In the case there is not a balance, the one in the negative has to borrow from the other banks. When banks lost trust in each other we have situations as we have seen in the last crisis.
Seriously, anyone interested in those things should check MMT.
Banks are only required to keep a percentage of there deposits on hand. So, if a bank has 10 million in deposits and the reserve is 10% then they can only send 9 million to another bank end of story.
The really important thing is that 9 million is not an IOU. It's deducted from the banks account at the FED. The IOU is to the banks depositors.
Now, Bank B, who got 9 million could then lend out 90% of that. But, with X money the entire banking system can only 'make' 10X assuming 10% reserve requirements.
It's a little more complex because the reserve requirements can change, and the FED does not require the entire reserve in cash. But, the important point is banks can only make a finite amount of IOU's.
PS: Now a sudden shock of failed banks can suddenly force the FED to make cash to cover FDIC. But, the FDIC has enough money to cover normal bank failures.
http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len...
http://www.forbes.com/sites/francescoppola/2014/01/21/banks-...
It's a fascinating subject when you start to dig in it.
"Rather a ratio of two loosely connected numbers has fallen dramatically"
In other words banks create a 'fixed' multiple of the money supply worth of debt. In the long term inflation comes from new money not normal bank loans.
"Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits."
I doubt I could be more clear than that.
About the 'link bait' thing: I'm not related to none of those sites so, if you are suggesting that I'm linking those because I get some kind of profit consider me offended.
So, the multiplier effect is real, it's just already baked into the current money supply.
Of note, it's the reverse that's important. When banks stop making loans or loans default the money supply shrinks.
PS: By link bait I mean the title is provocative and on tangentially related to the article. Like a title that said "future earnings irrelevant to stock price" and then saying future earnings don't alter stock price as there already baked in, its changes to future earnings projections that's important.
Actually that's exactly what it means. Because the bank (usually) is not going to make money sitting on that cash - it must immediately lend it out. So. You think that you have $100 in your account and someone else has borrowed $90 and they are holding that cash. If they spend it on shoes and default through bankruptcy, there are now $190 in the system. Alternatively, if you withdraw the cash before the borrower pays it back there's now $190 in the system.
Borrowing is inflationary, paying down debt is deflationary.
Remember M0, M1, MB, M2, M3, MZM are all different.
Isn't the whole point of the linked document to displace the myth that banks lend deposits?
(The interest disappears into the central bank.)
Paying down debt is deflationary in the short term, and inflationary in the long term. In the long term the interest paid on debt is reduced to zero, and gives the borrower room to borrow more again, or to accrue savings to earn interest. These events are inflationary.
This is related to the Fisher equation. [1]
nominal interest rate = real interest rate + inflation
The reason why they're talking about negative interest rates is, because in the past the governments and central banks have encouraged so much debt and lowered the interest to zero bound, causing a sharp inflationary spike (2009-2011), and are now experiencing the consequences of deflation due to excessive debt, which is postulated to happen "in the long term" by the Fisher equation. That nominal positive interest businesses and consumers pay is causing the deflation. That's why central banks are discussing whether negative interest rates could undo the consequences of their previous low interest rate policy, which causes inflation in the short term, and deflation in the long term.
Except for when the banks admit they've been extending credit against garbage to generate bonuses and then need the state to create money to bail them out, propping up assets underpinning these "balance" sheets and forcing young workers to pay more for land than the market can bear by underwriting even more risky behaviour with low rates.
The system of money as you described only works because of state power. It is a system that makes sure people work for the creditors.
If you want to know why bankers (the creditors) who caused hardship to the whole population of the world from the last economic crash, didn't go to jail, this is why.
It is a massive system but a fragile one.
This is also why market economies cannot exist outside a strong state. In fact, as described in Debt the first 5000 years, market economies were inventions to the problem of how to feed and maintain large armies in empires.
I don't think that's correct. The US Treasury can print dollar bills. How and where does that show up as a liability on the Treasury's balance sheet?
When the Fed prints currency (say a $100 bill), what happens? Does the Fed just suddenly have $100 more than it did? Or does the Fed owe the Treasury $100? Or something else?
I don't immediately see a way that somebody (anybody) can print a $100 bill and still have assets and liabilities net out to zero...
When the fed create money is a liability for them:
https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...
When you pay taxes, that liability is cancelled. The circle has to begin somewhere, and it begins and end with the government.
The government owe the liability to whoever come backs with that money to pay something (taxes normally). It will accept it as payment.
What is that something?
In particular, if you don't buy the whole premise (that dollar bills are US government liabilities), then RobertoG's statement (that "Money is an IOU. That is a promise of something.") is completely unconvincing by itself, without further support. And your "support" is not very helpful.
https://www.creditwritedowns.com/2011/10/currency-revulsion-...
This is a set of videos where Steve Keen is demoing his software tool Minsky that is aimed at simulating all this.
>Double-entry bookkeeping all the way down.
>It is really quite something to behold.
*Assuming all the books are being kept honestly. They aren't
Except dollars are no longer backed by anything. So the governments liability is nothing. What are they going to do trade you a dollar for a dollar? It is literally just paper. It is a stretch to still think of it as a 'certificate'.
https://www.creditwritedowns.com/2011/10/currency-revulsion-...
If productivity goes up, ratchet hours per week worked down.
I mean, if productivity goes up, waves keep the same, and people have to work more, where goes the difference?
Corporations and shareholders. That's what needs to be fixed.
But the economy provides ample opportunities to create wealth. Isn't that part of why people read this site?
For example, if there is one apple, either you can have it, or I can have it.
Where is the non-zero-sum game?
PG has a nice essay that explains this: http://paulgraham.com/wealth.html - in particular "the pie fallacy".
You might be referring to the 'rivalry' of goods: https://en.wikipedia.org/wiki/Rivalry_(economics) - but that's for one good at one time, not for the economy as a whole.
Even if you do get a brand new apple tree, it still takes some amount of time (at least a year, though likely much more) before you get any additional apples. So, the game 15 years from now may have more apples available, but the current game has a finite amount of apples available to the participants.
It is not "all the available goods in one precise instant of time". It's how people interact in the economy over time.
Compare and contrast the creation of an apple orchard with, say, going on a raid to the neighboring village's apple orchard, stealing all their apples, and cutting down all their trees. That's a negative-sum game. Looking at the entire economy, everyone is poorer, even if the raiders temporarily get some more apples. They haven't created any wealth, though; they've destroyed it.
Since labor is not instantaneous - planting a crop and waiting for it to grow takes time - writing code takes time - building a car takes time - economists talk about those interactions as non zero-sum. The total amount of goods at any one instant in time is some other measure.
How does this not violate several laws of conservation?
The very meaning of 'game' implies one or more moves by each player.
A photo of a chess board does not a chess game make, in other words.
> How does this not violate several laws of conservation?
That's physics, not economics. We're not talking about the total mass or energy or something in a system. Physics does not care if an apple tree produces apples for people to eat; people do.
Maybe you could supply a definition of what you are talking about?
You value the apple more then getting 1.5 apples later I value getting 1.5 apples later more than I value getting the apple now
You got something, I'll get something.
However, capitalism is still our most effective tool for accelerating innovation. This is why we willingly accept some of it's negative consequences.
The consequences of what money is in modern economies, are not well understood or accepted. I suspect that the possibilities that this open scare a lot of powerful people.
If somebody want to dig further in the rabbit hole, I recommend:
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf (this one is a pdf)
http://neweconomicperspectives.org/modern-monetary-theory-pr...
a) a "heterodox" theory that mainstream economists don't consider entirely legitimate, and
b) precisely how central banks in the US and UK describe their own routine monetary operations.
I still struggle to understand how and why these statements can both be true.
And MMT has another interesting property: when you take the time to learn a little, it makes a lot of sense.
They have been always saying how money is really created, now the Bank of England confirm it, but we should keep believing the text books from the gold standard era I suppose.
But it's possible to see some progress. There is now even a textbook for university-level macroeconomics students:
http://www.amazon.com/Modern-Monetary-Theory-Practice-Introd...
There is a central bank sitting in the middle of most modern economies, and it is a bank-for-banks: they either borrow from it or deposit into it. It sets an all-important interest rate: this rate is the rate-of-return that those other banks will compare possible loans to, when saying 'is it worth it to loan to this person, or should I just put my money in the central bank?' -- if you lower this rate, then presumably banks make more loans, stimulating the economy; if you raise this rate, then presumably banks make fewer, stifling the economy. The hope is not that different from storing up food in years of plenty in order to weather years of famine; during a recession you lower the interest rate, but afterwards in the upswing you raise it again.
When you deposit money in a bank, it is not required to hold onto all of it and keep it safe. Instead it usually takes a chunk of that money and promises it as a loan to someone else, who will hopefully in the end pay them more in interest than they're paying you, enough more that the difference is better than just shoving the money in the central bank.
When it makes this loan, that comes in the form of saying "I still owe you $x, and now I also owe this other person $y." So the true money stored by the bank is still only $x, but the money now in circulation in the economy -- in the sense that there's the illusion of people having it, which is the only sense that money exists anyway -- is $x + $y. If that other person needs to immediately cash out a quantity of dollar bills, then $y < $x, so the bank can comfortably do that. If you both try to cash out at the same time, there is an obvious problem (the bank has failed!), but remember that this is a sort of insurance scheme of "divide that risk among lots of people and trust that their decisions follow a binomial distribution" -- in reality there is some proportion p of a lot of individuals who collectively need to withdraw in order for the bank to fail. Furthermore when this happens the federal government may declare the bank "too big to fail" and funnel tax money into it, to keep it going.
This PDF is arguing that the above explanation is precise in ways that many economics textbooks are loose; notice that the extra value has nothing, for example, to do with your putting the money into the bank. Why? Because suppose you spent that on a new car: your car dealership that you're buying from has an account with this bank (or some other bank; the economy collectively includes all of them after all) and they take this amount of money and put it in the bank! So that $x is getting deposited somewhere, assuming that you do not take it out of circulation yourself (in which case, it doesn't help mediate your purchasing of goods and services, so is it really money?). Modern textbooks omit this and refer instead to the banks as a "money multiplier" where "there is $100 deposited at first, the bank saves 20% of its deposits, it loans out $80 which gets immediately spent hence re-deposited in some similar bank, so that bank saves $16 and loans out $64 which similarly gets re-deposited, saving $13 and loaning out $51, at this point the economy has nominally $100 + $80 + $64 + $51 = $295, so we've multiplied the amount of money deposited into the economy by a factor of ~3x, and if you continue the progression out to infinity you find that this multiplier approaches 1/(20%) = 1/0.2 = 5." The problem with this thinking is that there's nobody in the economy who comes into this system at that crucial step 0 -- you got your money from the bank account of your employer or from a loan from some other bank. So, from your perspective, there's kind of nothing to multiply.
If that makes you feel breathlessly like everything is an illusion resting on an insane Ponzi scheme, that's mostly correct and you should feel all of that. You can spend hours thinking about "what is money, I mean really?" and if you're a founder-mentality you might even spend years on this wondering if there's an opportunity for disruption at an epic scale somewhere therein.
Probably the best way to understand money is still the engineer's, "I do something that someone finds useful, so they give me points in this augmented-reality game where the rules force them to give those points out of their own personal stash. As long as we collectively agree that useful things are happening, those points have some form of meaning as a way to symbolically trade hypothetical goods and services. When we lose this collective confidence then the points will no longer matter to us."
I see that you correct this slightly later on, but in reality your deposit likely pads the bank's reserves so that it can lessen its draw at the Fed's overnight (zero interest loan) window.
Banks first create loans, then seek deposits to cover them.
It's kind of like the quote about democracy: it's the worst way to do things, except for all the others.
Nothing else has worked better: basing the expansion of the money supply on the amount of gold that people dig up did not prove to be a winning idea either. No serious economist regards it as being something we should return to, at least.
What alternatives would be worth investigating?
Right now we have private banks issuing credit against (state blessed) land ahead of wealth creation.
Obviously. A "serious economist" likely earns their living by their advice, so giving less-profitable advice is a good way to go out of business. And the easiest way to create profit is to simply print money!
Not that this refutes the commoners' belief that banks and government should be held to the same standard as everybody else, and not simply be able to arbitrarily conjure up money and take the first cut for themselves and their enablers.
I'll open my mind to the worthiness of debt-as-money when I personally can freely change IOUs into FRNs. Until then, it's just yet another rigged system of control that's been opaqued enough to not be blatantly obvious.
Money is essentially a distributed IOU. It enables people to trade goods and services for IOUs. The IOUs are then exchangeable for other good and services at a later time. Obviously there's more complications then that but that's the general thing.
Like if write code for a living and want a taco, the taco vendor doesn't want your code. Instead you sell your services (labor) to somebody who values that who gives you IOUs in return. Then you take those IOUs and you cash them for a taco or you can combine them with other IOUs you already have for bigger items like a car or a house.
Then you can do all sorts of abstract things with your IOUs such as hold onto them, or lend them out (to somebody who needs a bunch of IOUs at a time and will pay them back slowly) or convert them to other kinds of synthetic IOUs (stocks). Then later on these other kinds of IOUs get covered/replayed back as money IOUs that you go buy your other tacos with.
And lets not even get to IOU appreciation or deflation.
Isn't this completely circular? If money is IOU, what is it that is being Owned?
If you step back a bit to the meta IOU level. There's a fixed (but changing all the time) amount of IOUs in circulation... and since you can transfer IOUs you end up with ownership.
You can get more meta here, and say what is ownership? Ownership is really not a natural / physical law. Instead it's a series of laws and social conversion that we created and agreed upon. Why our brains made us do that is prob a good question of evolutionary biologist who study primates (since some can be thought to use money).
Not really debt. Money began as anything with wide-appeal and a long shelf life, like metals, spices, furs, tobacco, etc. Mostly it's whenever people get into the habit of pricing things in terms of those wide-appeal/long-shelf-life things that a kind of money is created. (Hey, BitCoin anyone?)
I mean, along the way there were places that issued certificates that would pay the bearer on demand whatever such certificates might tender, such as gold, silver, tobacco leaves, buckskins, etc. Almost as good as the actual thing. Actually, certificates might be better - easier to collect, store and transport. A lo now certificates can be money. The only trick is in getting people to generally have faith in them. (Hey, BitCoin anyone? Again?)
Fiat currency - something that's money by dint of hegemonic force - is something we've all grown accustomed to. The US Dollar become 100% fiat sometime 1971 (http://www.federalreservehistory.org/Events/DetailView/33). Now everything is faith.
Faith isn't worthless. It is right now what gives money its value. Money has real value for as long as it has such faith in reserve.
Faith is another word for trust. People need to establish trust with other people - that's what makes co-operation possible. Agreements made, promises kept. Strange as it sounds, your Government is in the trust business. It makes the currency after all. And in America anyway, there are the occasional establishments that may hang a sign like: In God we Trust, all others pay cash (https://img1.etsystatic.com/000/0/5441659/il_570xN.160397135...). Kind of ironic.
Anyway my two cents. :)
1) Steve Keen's blog - http://debtdeflation.com/blogs/
2) Debt: the first 5000 years - https://en.m.wikipedia.org/wiki/Debt:_The_First_5000_Years
Bank loans create money. Principal payments destroy money.
This paper argues that in reality, the relationship is exactly the reverse: most money (=debt) creation starts as loans between private commercial banks. Loans become deposits in other bank accounts. If a bank finds itself short on a reserve requirement, it can just borrow reserves from other banks to meet its reserves, or from the central bank.
In sum, at least in the United States and England, most money creation stems from loans within the private sector, as opposed to what the movie and textbooks typically suggest.
This is explained in the paper:
" For the [money multiplier] theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates. In reality, neither are reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England. The rest of this article discusses these practices in more detail."
I'm having trouble finding it at the moment but I remember reading a while back on the Federal Reserve's FAQ section about this. They were actually quite explicit about this, stating that if one of the big banks went under they would bail it out by printing what they needed, like they did in 2008. It is a bizarre design
Research bitcoin. Bitcoin is to money as bittorrent is to downloading files. It is a decentralized trustless system built on cryptology and it is absolutely beautiful.
With deflation, you have to work harder to expand your share of the economy. Just holding doesn't contribute to the economy and thus means an already large held share is less likely to grow in value relative to the desired goods.
Deflation literally increases the value of already-held cash (when prices go down, cash becomes more valuable). Deflation literally encourages hoarding, this is probably the one single tenet of economics that no one disputes.
> And inflation doesn't, when new money primarily goes to the few closest to the mint?
Inflation decreases the value of cash, so it encourages spending.
New money is issued when the central bank buys securities on the open market - usually from the government, sometimes from banks and businesses. Theoretically they can lend to whomever, but because of arbitrage (if the centra bank offers debt at 0.25%, interbank lending rate will fall/rise to that level, because if banks offered worse rates, lenders/borrowers would just go to the central bank) it winds up not mattering who they lend to.
They don't just wheel piles of cash to the nearest bank for them to hoard and pay CEOs with...
Anyhow, wiki article: https://en.wikipedia.org/wiki/Central_bank#Currency_issuance
And there's plenty of other material online.
There's an equilibrium here, one that's past the point of hoarding for large players. If you can move the economy all by yourself, you do not want the risk of letting the economy moving on without you. Money sitting still does no good by itself.
After all, what's the point of value you can't touch? There's no value in that...
With inflation, you can grow your share of the economy from your position alone (increasing both value and "rank"). Deflation point allows your value to passively increase, not your share of the economy.
And who is capable of performing arbitrage? Average Joe? Nope, inflation feeds people like on Wall Street since they get to spend the new money long before workers get their salary increases (after they feel effect of inflation on their expenses!).
Deflation almost always accompanies economic downturns. It's literally defined as a decrease in prices, which is caused by a lack of demand. A recession is literally a reduction in economic activity. They go together by definition.
https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
Of course, that's a fairy simply definition, you can have inflation in a downturn when your currency devaluates, and the price of imported goods go up, which is a problem if you import too much. But the value of domestic assets is still going down, so measuring inflation/deflation does depend somewhat on what exactly you're measuring.
> With inflation, you can grow your share of the economy from your position alone
If you own assets you benefit from inflation. If you have cash, you lose from inflation.
If you only have $1000, and the price of a business goes from $500-$1000 (inflation), you go from being able to buy 2, to only buying one. Cash loses.
If the price deflates from $500-$100, you go from being able to buy 2 to buying 10. In the deflationary scenario, cash wins.
If you already own a business, it's easier to guess which is better. You want the price to go up.
> Nope, inflation feeds people like on Wall Street since they get to spend the new money long before workers get their salary increases (after they feel effect of inflation on their expenses!).
You literally didn't read any information that I posted, did you? Central banks don't lend to banks to pay their bills or CEOs. They buy securities that are backed by real assets, and they generally prefer buying government bonds.
> And who is capable of performing arbitrage? Average Joe?
In this particular case, arbitrage is simply deciding who you're going to borrow from. If bank A offers a mortgage for 5%, and bank B for 6%, which loan are you going to take? This creates an incentive for both banks to lower their rate until a point where it's no longer profitable (ie. the rate that they're borrowing at). This is obviously a simplistic example, but should illustrate the point.
On a macro scale, if the central bank offers loans at a certain rate, then other banks will match that rate, otherwise they lose business.
Correlation ≠ causation.
In particular when practically every occurrence of deflation + a bad economy followed a crash in an economy built on debt. Have you considered that just like withdrawal symptoms, it isn't necessarily deflation that's the bad thing?
If you have government contracts and buy assets using effectively subsidized money, your assets and value both grow in absolute numbers. You're buying with fresh money before it has been matched by a price signal in the economy, only then raising the price.
With deflation only value grows, and only for as long as the economy stays alive.
How does printed money enter the economy if it isn't used to buy anything? And the printers don't buy from everybody equally. Value is shifted from the entire society to those closest to the printers.
And people not in a position to chose between loans or take any loans at all? I.e. below middle class?
A decrease in prices spurs demand so it can be a good thing.
However, in the context of currency, you don't want the currency itself to have deflationary mechanisms. In bitcoin's case, there's an ever-increasing cost to mining the bitcoins. This means the value will naturally increase. Which discourages any sort of spending.
The reason why a money supply that never increases is bad, is because human populations do increase. If more humans demand the same quantity of money, then those with money have the incentive to never spend. This negatively impacts the economy.
This is why in any downturn, the central bank response to deflation is to increase the money supply. By making money cheaper, they're encouraging people to take advantage of cheaper asset prices. This in turn, spurs demand.
> If you have government contracts and buy assets using effectively subsidized money, your assets and value both grow in absolute numbers.
You're forgetting that the borrower owes money.
> How does printed money enter the economy if it isn't used to buy anything?
Of course it's used to buy things. No one takes out loans to simply hoard money, because there's a cost to the loan (and the cost of the loan will always be more than the cost of a no-risk asset).
> Value is shifted from the entire society to those closest to the printers.
This is conspiracy thinking at it's finest. No one gets 'free' money. It all has to be paid back at some point.
Value goes to those who engage in constructive activities. Loans are a way to shift unused capital to constructive activities.
And no, no one has to take out a loan. You can accrue capital in other ways. However the lending system makes the whole economy more efficient.
This ignores the astronomical losses from our fractional banking system. Pretty much every 40 years we get a crash and print our way out of it, giving ever more money to the core of the system. (Trickle-down, or too-big-to-fail, both were rewards simply for being the entrenched players.) The USD has lost 95% of its value. Perhaps for the "economy" (... of bankers who defraud us) inflation is good, but for the common man fraud is worse and fiat is the enabler, not the solution.
Sure, there's a problem having a fiat system is good for but there's a huge gulf between "Fixes problem X" and "Performs better across all scenarios".
Take a look at some very long term (100 year) GDP charts. The economy is far less volatile today than ever before.
While there are culprits, the fractional banking system isn't necessarily one.
> Trickle-down, or too-big-to-fail, both were rewards simply for being the entrenched players.
These are the results of a corrupt system, not because of the existence of fiat currency or central banks.
> The USD has lost 95% of its value.
And you make 20 times more of it.
> Perhaps for the "economy" (... of bankers who defraud us) inflation is good, but for the common man fraud is worse and fiat is the enabler, not the solution.
Please, there was theft and fraud when we were trading piles of grain and goats.
Without the ability to print money we wouldn't have to wish for a unicorn - a non-corrupt system.
The banking/mortgage problem in 2008 only happened because everyone involved knew we'd bail them out, because we could. Whereas if we couldn't we'd have recovered the lost funds from the guilty parties.
The existence of an easy out practically guarantees that the government will take it.
> And you make 20 times more of it.
And what you had from before is nearly worthless. Yes, inflation keeps people on their toes because they need to work today to eat today, but I'd keep you on your toes if I stole your car too, you'd have to really be productive to break even!
That's a broken window fallacy with the twist of slightly breaking everyone's window.
As a currency, fiat is an absolutely stupid idea. So stupid that they had to make specie ownership illegal to force people to play along. Yes, I understand it gives the country great options. But so does conscription...
> Please, there was theft and fraud when we were trading piles of grain and goats.
Only fiat inflation lets a thief steal from everyone simultaneously. And thanks, but that's not really an answer anyways. I don't care that someone is always willing to steal from me, I care when the law says I can't attempt to avoid it.
And the money spent on computing power is proportional to the mining reward value, meaning that mining follows the price.
And yet people don't stop spending. Very few people hoard exclusively. And yet again, there's the equilibrium where not spending undoes the deflation and causes you to lose value again.
Incentivizing spending by messing with valuations and risk judgements isn't the greatest way of keeping the economy stable.
Inflation doesn't only come through loans...
By simple deflationist logic a share of a dividend-producing stock shouldn't be sold because its future value is unbounded but obviously this isn't how the market functions.