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Comment by arawde | Hacker News Reader

At last year's World Economic Forum, there was a panel titled "The Next Financial Crisis", and while many different potential causes were considered, the most prominent one is definitely corporate debt, especially emerging market debt that is dollar-denominated. [0]

Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit, both through raising interest rates and through unwinding its previous QE programs, there will be a significant impact on companies that have borrowed at lower interest rates. Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default.

If you're a country which borrowed in dollars, the tightening of US monetary policy will often lead to a change in exchange rates that makes it more expensive to pay back debt. Coupled with a global economic slowdown resulting from a trade war, and things start to look nasty wherever you look.

[0]: https://www.youtube.com/watch?v=1WOs6S0VrlA

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Risk has already come off - I am seeing it in private equity. If you run a startup and burn cash, have your plan B ready to go when the shit hits the fan.

https://www.slideshare.net/eldon/sequoia-capital-on-startups...

I remember when this was originally posted 10 years ago.

I've got mixed feelings about this. It's not 2008, and there's no reason to expect another 75-year economic event again. On the other hand, tech and VC investment has more than tripped since 2008.

What is the "75-year economic event" timeframe based on?

We now have "1000-year floods" five times in a year [1], is there good reason to think the economic predictions are more accurate than the climate ones?

[1] https://www.edf.org/blog/2016/09/01/we-just-had-five-1000-ye...

If there are at least 1000/5=200 floodplanes in the country it's not that surprising; and there are a lot more than 200 floodable areas.

I think you mean 5000 floodplains.

You're right, that was a silly mistake.

Houston had 500-year floods consecutively in 2015, 2016, and 2017. Oh and one in 2001. Must be a terrifically unlucky place.

That or the context in which such events were considered 500-year events has radically shifted in the last 100 and especially the last 50 years.

Which is kind of the point

"500 year flood" just means that in any given year there's a 1/500 chance of it happening. In theory history has nothing to do with it.

In practice it's calculated with models that are tuned with historical data (among other things), so if you fail to notice some important changes and update your models you might be wildly off.

He's saying that they were 1/500 events previously, when the frequency was determined to be 1/500, but conditions have changed (climate, development, etc.) and they are no longer 1/500 events.

Normally caused by non maintenance of flood channels and excessive building - that's what caused two 250 year floods in my village.

There are reasons to expect another such event again. First, those kind of shocks are not necessarily isolated, can happen in clusters. Second, the fundamental problems of 2008 were never fully solved, just transferred to govt/Fed balance sheets and pushed forward in time. It’s worth stress testing your current endeavors against a repeat.

The 1987 market crash (October 19, 1987, single-day loss of 23% in the S&P 500 index) was a 25 standard-deviation event. Mind you, an 8 standard-deviation event is an event that should occur once every 3 trillion years. And 25 standard-deviation events are unfathomable given the age of the Universe.

> The 1987 market crash (October 19, 1987, single-day loss of 23% in the S&P 500 index) was a 25 standard-deviation event.

Adding to this, the Swiss Franc revaluation in 2015 was called a 20 standard deviation event [0].

[0] https://www.ft.com/content/5a06ef16-b5e4-11e4-a577-00144feab...

I'd assume that statement presupposes a normal distribution. Is the stock market return normally distributed?

It's a power law distribution (Mandelbrot's work). That's why these numbers are outlandish.

Stock returns are modeled based on the assumption that they are lognormal.

Whether they really are is a different story.

Describing market moves in "standard-deviation events" does not really make sense. It is something for normal distributions and "random walks".

It has been known for a long time that his is not the case: https://www.amazon.com/Fractals-Scaling-Finance-1st-First/dp...

The conclusion is: due to faulty mathematics, far out of the money options are underpriced. Or, who Mandelbrot concluded, "investing on the stock market may be riskier than you think".

Not disagreeing with you, but would buying far out of the money options be a viable strategy if you wait long enough for the black swan event?

Generally not, because the price of the option is going to rise commensurate with the uncertainty of it being in the money.

It gets more and more difficult to accurately forecast that as uncertainty increases, which is why they're not priced as efficiently farther in the future. But since this is somewhat well known, you need to have some kind of edge to make it work - buying options haphazardly won't.

Nassim Taleb famously thought so, and made a killing in 2008 on this theory. But his fund does lose money in most years.

No, because timing.

But if you have a few bucks to spare and want to gamble you could buy far out of the money options for a downturn. VIX gets priced in, don't know how it looks currently.

Or you can gamble with "paper money" at Thinkorswim.

If you see a 25 standard deviation you are either

1. Incredibly lucky

2. Incredibly unlucky

3. Or don't have a standard distribution (but a fat tail distribution or Levi flight or whatever)

4. miscalculating

The trouble with this is that you need to have enough of a black swan to trigger the options but not enough that it prevents them paying out, e.g. due to counterparty risk or some kind of systemic collapse.

And "the market can stay irrational longer than you can stay solvent" - by definition this produces few, rare payouts.

Far better to employ the LTCM strategy and write a lot of out of the money options: https://en.wikipedia.org/wiki/Long-Term_Capital_Management

The trick is to do that with other people's money, on which you initially get huge returns. You can then collect large managment fees. The collapse takes out the fund, but it's an LLC so the staff get to keep their bonuses from previous years.

In principle yes. If far out of the money options are systemically underpriced then just buying a bunch and holding them should make money on average, by definition.

In practice there are a bunch of concerns. You have the gambler's ruin problem: even if your bets are positive expected value, it's very easy to go bankrupt. Since your fund makes all of its money from crises you have a bunch of counterparty risk along a risk of regulatory intervention etc.. Your fund will lose money in most years and it's very difficult for potential investors to know whether you're actually positioned to make money from a crisis or just wasting all their investment. See Keynes' line about sound bankers.

Taleb endorses and advises a fund that tries to bet on "black swans"; it's explicitly advertised as a fund that will lose 5% of its value every year in "normal years", but hopefully pay off in exceptional years. You can invest in it if you want. In theory it should work, but no-one will really know until after we have one of those exceptional years.

Standard deviation only has meaning for a normal distribution.

In this context yes, especially since it assumes distributions are normal.

The strict statistical meaning of a standard deviation applies to any statistical distribution

Your choices are “it will happen again”, or “it’s different this time”. Choose wisely!

Haven't banks also consolidated and gotten bigger?

Yes, but balance sheets of US banks have also improved fairly dramatically.

While I think a downturn may be in the cards, I don’t think another financial crisis is for the US.

China however...

I read The Road to Ruin last year. I don't know if it's viewed very credibly or not but the guy purports to have had a ringside seat to the 2008 GFC. That book reckons it's all about complexity theory and it's just becoming more and more complex and the next time it happens the complexity will be unparalleled and hence it is going to get hectic.

Now maybe that is just a way to sell books and it was a fun read, but I don't know.

I get the feeling we all know something is coming because it always has and it always will. Some suspect it's going to be catastrophic like never before. It's at least assumed it's going to hurt. We don't know when but it seems people are in agreement it's edging closer and closer and things are about to get really unfun for a while.

I just hope all the pain and misery happens to other people and I get through it unscathed. Totally going to take my share of the hurt most likely and that's OK I suppose. It's sort of fingers crossed at this point.

Financialization follows a cycle much like the hype cycle: something gets securitized, immense profits are made, people overextend and there's a crash, then it's reined in and becomes boring, and the next crash happens in something further out. If you read Liar's Poker, even in the '80s corporate equities were boring and all the action was in bonds. After the S&L crash, bonds were made boring (at least in the US for established companies) and the action moved to "emerging markets" and hot new IPOs. Asian crash of '97, dotcom crash of '99, these things get made boring and the action moves to mortgage securitization.

2008 crisis, mortgages get made boring, and the action now is in... well, if you can figure that out then there's a lot of money to be made. Car loans? Corporate loans? Foreign exchange? Commodities? I've seen all of those bandied about.

"another 75-year economic event again"

How do we know it's a 75 year event? Because it happened once 75 years before? How often should it happen?

We can't honestly answer how often it's going to or should happen. We can't honestly assess these sort of risk patterns because we don't have models that take enough of the variables into account (or even could?)

Check out Taleb's Black Swan. His big thing is understanding what risks are measurable (very few), which have a bounded/estimable impact (still very few), and which are both unbounded and immeasurable or most of them.

>How do we know it's a 75 year event? Because it happened once 75 years before? How often should it happen? We can't honestly answer...

We do have models that take it into account.

Taleb's argument isn't that you can't model the market, it's that most people aren't using the appropriate models [0].

[0] https://en.wikipedia.org/wiki/Fat-tailed_distribution#Fat_ta...

Interesting. The gist seems to be that we model market events with normal distributions, which is consistent with what I've seen in other "natural" and/or emergent processes, and this underestimates risk, because the true distribution is fat tailed.

This came out in the same year as Taleb's Black Swan:

https://www.springer.com/us/book/9781846284199

Enjoy!

You can have a 75 year event in successive years - the UK village I live in once had two 250 year floods inside of 5 years.

>>You can have a 75 year event in successive years - the UK village I live in once had two 250 year floods inside of 5 years.

Yeah but at some point the "250 year flood" might need a new name, like every other year flood or something.

The post-08 tech boom is almost perfectly correlated to the rise of smartphones, which built a market for products like Facebook ads, Uber rides and the like. That too is a one-off event; we're at smartphone saturation these days.

>there's no reason to expect another 75-year economic event again

Because that so called 75-year economic event never really happened, or at least its full consequences, has been delayed by doctors injecting lots of adrenaline keeping it alive.

Japan, China, EU, and US has since printed unprecedented amount of money. A lot of people think there wont be another 2008, I would be happy if it was only 2008 recessions. I am worry it will end up like 1930 with Great Depression.

> Risk has already come off

Are you able to elaborate on the derisking you've been seeing?

Many companies are laying off right now...

Respectfully, that's not the sort of color I was hoping for. Instead, consider evidence of derisking as exhibited by recent moves in HY OAS [0].

[0] https://fred.stlouisfed.org/series/BAMLH0A0HYM2

Perhaps, but when it's industry-wide it's often a good leading indicator. My previous employer's only layoffs ever were in 2008, when one of their investors (I believe A16Z?) sat down the founders of their portfolio companies and told them to cut down, because the crunch was coming. These are companies whose management is in very close personal contact with the capital markets, and so often make decisions very quickly in response to what's going on there.

> Perhaps, but when it's industry-wide it's often a good leading indicator.

As far as I'm aware, employment data is considered a lagging indicator [0], as labor tends to be reasonably sticky.

> These are companies whose management is in very close personal contact with the capital markets, and so often make decisions very quickly in response to what's going on there.

I was fishing for other data, in part, because current data does not support the assertion that layoffs have accelerated [1][2]. In fact, initial claims data appears to be at -- or close to -- historical lows.

[0] https://www.thebalance.com/lagging-economic-indicators-list-...

[1] https://fred.stlouisfed.org/series/ICSA

[2] https://fred.stlouisfed.org/series/IC4WSA

Many companies are hiring right now. Some companies are hiring and laying off simultaneously.

Layoff, cost cutting.

> Are you able to elaborate on the derisking you've been seeing?

The giant amount of credit that was raised for LBOs during last 5 years of stocks rally.

A lot of those LBOs went sour.

LBO?

Leveraged Buy Out. You use the value of the company you are acquiring to guarantee junk bonds that you sell to raise the money to buy the company.

Barbarians at the Gate is a popular book that goes into the details while telling the story of a large LBO.

One indicator is the number of large venture IPOs. I see Dell going public again, for instance, as an indicator of Michael Dell not wanting to carry the private concentration of assets as a risk any further.

Angels pulling out last minute because they are worried about their stock portfolio. Investors withdrawing from a levered strategy because of the same concern.

Thinking about this reminded me of the line from the movie "The Big Short" where Michael Burry says one of the indicators of the coming crisis was an increase in the rate of fraud. Juxtapose that with what feels like an uptick in white collar fraud these past couple years. ie: Theranos, Fyre, 1MDB, numerous crypto token related scams.

That's interesting though i'm not sure that's the right kind of fraud. The fraud Bury was referring to was related to mortgage lending, both on the part of the borrowers (fraudulent documents supporting income, etc.) and on the part of the immediate lenders (the banks / lead generators for mortgages). The comparable type of fraud here would be businesses inflating their assets or income streams to acquire bank loans that they couldn't otherwise qualify for. It may be that that kind of fraud is on the rise, but I don't think the examples you cited (with the notable exception of 1MDB) are instances of it.

It's not causal, it's symptomatic. People tend take bigger risks, even criminal ones, when they have less to lose or less to gain. It's an interesting proxy for economic desperation.

That's an interesting perspective that I hadn't considered. I'm not sure if it's right though. You think it's symptomatic of desperation? I don't think of the lead-up to the 2007 financial crisis as a particularly desperate time for most people.

One interpretation is that for many who took on debt they couldn't support, it was a desperate attempt to continue a lifestyle that wasn't possible for them any more due to changes in both the global and local economies, aided by technology, which resulted in the reduced value of their labor.

Is it possible there is greater scrutiny during times of economic downturn leading to greatest discovery of fraud?

>>The fraud Bury was referring to was related to mortgage lending

To be frank, I guess the parent was talking about general fraud trends. It will be a little disingenuous to suggest the same set of events have to repeat for it be classified as fraud.

For eg, these days start ups with no way of turning in profits, but raising billions in debt could be suggested as a fraud eventually.

Burry refers to hard numbers - the rate of fraud was increasing. "What feels like an uptick" does not mean the rate has actually increased (I don't know if it has or not, but an uptick on reporting about fraud is not an actual uptick).

wasn't theranos fraud committed for much longer than a couple years?

You lost me at “feels”. Need more than 4-5 anecdotes to determine if fraud is really upticking.

Fraud and scams are the second oldest profession. Nothing about theranos or fyre or crypto is unique to this time other than the social media-as-fuel component.

If you’re trying to say that corporate bonds are going to tank the economy, you’d need to find an increase in fraudulent issues. This is not the case—-the corporate bond market is highly regulated.

That is, if you trust the ratings agencies.

You don't have to trust the ratings agencies. You can look at the corporate balance sheets yourself.

Find me a recent issue that isn't properly priced considering the riskiness of the firm.

Accredited investors getting burned is not same as a national policy of grey zero loan restrictions, and the crypto was mostly retail investors using their Vegas money. You have to remember that it wasn't loan fraud that broke Wall Street's back in 2008, it was the the unregulated derivatives market of uncalculated risk... and that risk still exists today.

https://www.investopedia.com/ask/answers/052715/how-big-deri...

Theranos, from reading Bad Blood, seems to be fraudulent science with financial fraud as an inevitable effect. Also, it seems to be drawn out from 2011.

Plus bad corporate paper is a highly-correlated procyclical problem, which will be extremely not-fun when the economy starts seriously slowing (especially since the government shot their fiscal stimulus arrow with the tax cuts and the Fed is still trying to get enough headroom to not have to worry about the “pushing on a string” problem they encountered in the ‘08 crash). Not going to be a fun year or two ahead.

Only about 15% of the deficit is from the tax cuts, the rest is over-spending.

100% of the deficit is from over-spending or from under-taxing depending on how you look at it...

two months into fiscal FY2019, medicare had taken in $34B and spent $129B

fiscal FY2019 CMMS spent $270B - a 24% increase YOY

therefore, it seems disingenuous to equate taxation with spending, there's just no way to arithmetically catch up.

edit: accidentally put medicaid instead of CMMS

What do you mean arithmetically? Simply increasing taxes to without attempting to reduce spending growth might not be a good long term strategy, but it not like the laws of arithmetic prevent it. Whether we could raise tax revenue 24% is different question than whether we should.

If you taxed at 100% and still had a deficit, then yes, it’s arithmetically inpossible. With higher taxes past a certain point revenue decreases, per the Laffler Curve.

Well sure, but we are nowhere near there. The 2018 deficit was less than 4% of gdp. https://www.usgovernmentdebt.us/federal_deficit_percent_gdp

The Laffer curve is not interesting when you are way on the left side of it.

That 4% is very deceptive. It gives the impression, that there is some room to stretch it. But is there? I mean, you're talking 4% of a situation where 100% is total heat death of all the participants in the economy. Where any amount gained in the system goes towards the deficit. This is bonkers.

Our ancestors would probably think that an economy that spends 97% of GDP on things unrelated to food production is bonkers, but here we are.

If high government debt was decreasing economic participation that would be cause for concern. But is there any reason to believe it is? Japan is running a much higher debt-to-GDP ratio and while people are (probably rightly) worried, the fact that nothing catastrophic has happened there yet suggests that there's at least that much slack available.

It's confusing to use the hypothetical of 100% in one sentence and in the next acknowledge that the optimal rate of taxation for maximising revenues is not at 100%.

The question is whether tax revenues could be raised by raising tax rates to the point that revenues exceeded current expenditure. Whether or not that is possible is uncertain.

I mean it's still $150 billion a year? Hell, even if the only work is corporate debt that could have gone into reducing the deficit directly?

If you're worried about overspending it seems weird to try and reduce the spending by.... reducing receipts. Just reduce spending!

I think you mean commercial paper.

This episode of Odd Lots entitled "Why the Eurodollar Might Be Ground Zero for De-Globalization" is a great listen:

https://itunes.apple.com/us/podcast/odd-lots/id1056200096?mt...

I see that the podcast features Jeffrey Snider. You might be interested in his extensive series on Macro Voices [1] called Eurodollar University.

[1] https://www.macrovoices.com/edu (scroll to bottom)

> If you're a country which borrowed in dollars

All of Latin America, pretty much

> Much of the concern in markets right now seems to stem from the idea that as the Federal Reserve tightens credit

This became much less of a concern in late December, when Fed Chair Powell acquiesced to plummeting equities markets and declared a pause on rate hikes, emphasizing the data dependence and lack of a preset course for Fed policy. These statements signaled a shift in tone from the 'dots' published after FOMC, which indicated further hiking and a median expected neutral rate around 3% [0].

> both through raising interest rates

After Powell's comments, expectations for rate hikes have diminished. Looking at 30-Day Fed Funds Futures, you can see that the market is pricing in ~1 more rate hike before the Fed reverses course [1 - chart][2 - source data].

> unwinding its previous QE programs

It remains to be seen how aggressively the Fed will continue unwinding, but I'm curious how much balance sheet the Fed will actually be able to unwind. They've been rolling off ~50B in UST per month [3], starting from ~4.5T. For perspective, the Fed's balance sheet was ~800-900B prior to the GFC. There's reasonable concern that the Fed may not be able to reach pre-QE levels. The money stock appears to exhibit response to the Fed's balance shit reduction [4], which will not help foreign borrowers.

> Debt that is going to come due in the next few years is going to have to be refinanced, or is going to default.

It looks like loans have been refinanced such that the bulk of them mature in 2021 or later [5], giving issuers some breathing room for the time being.

[0] https://www.cnbc.com/2018/12/19/fed-dot-plot-december-2018.h...

[1] https://imgur.com/a/43Gt8si

[2] https://www.barchart.com/futures/quotes/ZQ*0/all-futures

[3] https://www.cnbc.com/2018/11/29/the-fed-is-still-tweaking-it...

[4] https://imgur.com/a/RA62s4e

[5] http://www.leveragedloan.com/us-leveraged-loan-maturity-wall...

This is true that many/most loans have already been refinanced. 2015-2017 europe was the hot bed for refinancing and anyone credit worthy has already done so. It's a good time for the fed to pull liquidity out of the system. If they do not then CLO hotbed would eventually just move to South America which is mainly risky energy companies.

Excessive debt has damaged Debenhams and killed some retailers in the UK.

Also changes in the deductibility of interest expense under the new tax law.

There isn't going to be any more tightening, sorry to say. The yield curve is flat out to 30 years. 5-year breakeven inflation has come down to 1.67%, way below the Fed target. Unless the Democrats rev up government spending again, which they can't until at least 2020, 2.5% is where this cycle peaks. So much for the secular bond bear market: the pattern of ever looser credit cycles remains.

I don't have econonic background but I understood why banks are allowed to print the money and give it to businesses. If amount of money is fixed, then this problem will go away on its own. Human nature is not relible and if allowed humans will overspend and subsequent default.

As Taleb puts it, executives at these companies don't have "skin in the game". Increasing shareholder value short-term is lucrative especially when their own compensations are tied to short-term stock value gain.

Another part is lack of progress in executive education. While engineering as a discipline have constantly improved by introspection. No such thing have happenned in business management area. It's all about maintaining the status quo and appearing in controls even when they are nowhere near it.

Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money.

> If amount of money is fixed, then this problem will go away on its own.

There was a time when this in was in fact the case. It was known as The Gold Standard and it basically required governments to back up their currency with an equivalent amount of gold.

The Gold Standard ended when it was abandoned by the USA.

Basically the USA did start to print money and they didn't have the gold to backup that printing press.

Banks don't literally print money but they do create it when they issue loans.

they do not create money, they are lending you someone else savings or money created by the federal reserve.

That is incorrect, they only are required to own a fraction of the loans they give in assets. When a bank lends someone money, they create that money https://en.m.wikipedia.org/wiki/Money_creation.

The Central bank in your link is the Federal Bank.

Basically when retail banks need money they get it from the Central Bank through the Open Market Operation.

What happens is the retail banks offering up theirs bonds (which are assets), and the Central bank effectively buys (or sell) these bonds using a swap or repurchase agreement.

The retail banks then use that money to offer up loans to the public.

So the Central bank has the ability to print money by being prepared to buy up these bonds (using money that is effectively printed), but retail banks don't have that ability.

Retail banks and companies can do something similar by offering up their own bonds and selling them to investors, however should that organisation go broke the bonds take on junk status which basically means any investor that paid good money for them has lost the money.

For these transaction the money being used is real money.

That isn’t how fractional reserve lending works. An example will probably help.

You walk into Friendly Neighborhood Bank and ask for a loan, and since they’re friendly they make the loan. Now, what does that mean? From your perspective you now have a liability (the loan) and an asset (money in a bank account). From the bank’s perspective, they now have an asset (the loan), a liability (your bank account), and an income stream (the interest payments).

The bank didn’t have to move any money around from the Fed or other people’s savings accounts to make this happen. They just entered the debits and credits into their system and boom the money appears in your account, just as good as any other money. They literally created it out of thin air.

For every debit there has to be a matching credit so nothing comes out of thin air.

If you go to your Friendly Neighbourhood Bank for a loan they are giving you their money, so you can then give that money on to someone else.

Now the bank is not so friendly that it gives you their money, instead they offer to lend you their money, on the proviso you pay it back in full and with interest.

For example lets say you want to buy a new car, so you go to the bank to get the loan.

The bank transfers the money to pay for the new car to the car dealership and you end up with a new car and a whole lot of debt.

> they are giving you their money

They create that money by crediting your checking account (their liability) and debiting your loan account (their asset).

But you missing one step where they credit your loan account by debiting their loan book account.

Also your loan account is not a bank asset, it is a bank liability.

It is money the bank might not get back.

> That isn’t how fractional reserve lending works.

I'm not sure which part of the GP you're disagreeing with.

Fractional reserve is exactly that banks lend out a fraction of the deposits that they take in (the rest is kept in reserve).

The only reason it looks like money is created is because people (and economists) think of 'money in their account' as real money, when in fact it's just a IOU from the bank to you (possibly guaranteed by the government).

If you think of money-in-your-account as actually a debt the bank owes you, then it becomes quite clear that banks don't create money any more than lending money to a friend creates money. And there is a sense in which it does - lending money to a friend results in your friend having money and you having an asset (an IOU from your friend) that you expect to be able to use at some point in the future, so there is a sense in which the sum total of wealth has increased by the value of the IOU.

> Fractional reserve is exactly that banks lend out a fraction of the money that they take in

Isn't it a multiple instead of a fraction? Banks are required to keep in reserve a small percentage of the actual amount being lent, which means that they can lend a multiple of the money they take in.

Correct. In the US the required capital reserve is expressed in terms of daily net transaction amount. Wikipedia has a good breakdown[1], but for large banks the Fed requires 10% of NTA to be swept into the bank's Fed account overnight. There are also capitalization requirements for all banks, which are more stringent for nationally important "too big to fail" banks and bank-like entities.

What is “real money” in our current system?

According to wikipedia, Standard and Poors, and the Bank of England the view I give above is considered outdated and wrong. Oh well.

https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...

http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_...

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

When a bank lends you money the money lands in your bank account which means the bank can lend it out again. Even if you spend it, the money is going to land in someone else's bank account again. If we assume that 100% of the money is in the banking system without any potential for a bank run then in theory the bank could lend out an infinite amount of money.

This is not how the banking system works.

Banks, just like all institutions have to account for their money, hence the reason they employ accountants.

Those accountants all use the same accounting rules, rules that were in fact invented many centuries earlier by the monk, Luca Pacioli.

Those rules form the basis of double entry book keeping, which boils done to a very simple rule that for every credit there must be an equal debit.

What you are describing does not follow that rule because you are saying one credit can result in many other many other credits.

What you describe reads more like a pyramid scheme than a banking system.

Banks don’t print physical money, that’s correct. But they do create new money when they lend money and I believe that’s what parent was referring to.

https://en.wikipedia.org/wiki/Fractional-reserve_banking - yes banks print money (figuratively). They make loans and the money people receive on their accounts is money just created out of thin air.

> Banks don't print money. Federal Banks print the money, which basically means it's the government printing the money.

You are confusing two things about money creation: which entity decides to create the money, and which one carries the book-keeping entry that creates it.

In the US system, it is member banks that decide to create a loan. The money that is loaned is some combination of their own deposits, and money lent them by the Federal Reserve. The details of how much money they need to keep on deposit, how much is "their own", and how much the Fed provides are governed by FR rules.

So, it is indeed banks that make the individual decision to create money by giving a loan. The FR is merely the book-keeper for that decision and the rule-maker for how the system at large works.

Oh, and last, it is the US Treasury that actually prints currency. But we're all talking about the more abstract concept "money".

Here's the best layman explanation by Bank of England of what is actually meant by "money" in the current economy[0]. Think it can be helpful for the discourse.

[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Well I must have hit some nerves. Getting up and down voted constantly.

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