JP Morgan's Coffee Machine | Hacker News Reader

JP Morgan's Coffee Machine

coppolacomment.com

38 pointssensiquest18 comments

I am far from a bank expert, so I could very well be wrong, but this article doesn't pass my smell test.

Banks as businesses have all kinds of expenses. Coffee machines, employee salaries, etc. I can't imagine the money for those expenses come from reserves (the money that customers deposited) or newly created money. The banks expenditures must come from their revenues, just like any other business, right?

The bank gives someone a loan, which is indeed new money. The person pays that loan back with interest. That interest goes into the bank's bank account, so to speak. Those are revenues. Similarly, a customer overdrafts their account has has to pay a fee. That fee is also revenues.

If the bank wants to buy a coffee machine, it is deducting the cost of that coffee machine from the account where it keeps its revenues. That's not new money, is it? And, like any other business, whatever money is left in that account after expenditures are the bank's profits.

I could very well be wrong on this one, but it just makes a lot more sense than what this blog post is saying.

I'm with you -- this makes no sense to me. Banks pay for their operating expenses using ... their operating cash! Most of it comes from return on reserves, fees, and the like.

JPM’s bank account at JPM is:

* an asset for the account holder, i.e JPM, and

* a liability for the bamk, i.e. JPM,

so one can cancel them out.

As a matter of fact banks have accounts for themselves, to facilitate administration and accounting for departments/branches/etc, but these accounts have, from an accounting point ov view, essentially no effect.

I think the example might be contrived but the point was that any bank operation eventually comes back to the settlement layer being reserves and since those get settled at a later time an opportunity for money creation mechanism presents itself and occurs. It’s not that the banks want to cheat it’s just a by product of the system.

As a fellow non bank expert, I feel like the problem with the article is more fundamental than that.

Suppose JP does indeed buys stuff with and only with its reserves. Now JP starts new initiative under the slogan 'Buy the US', with the intention of buying all the building in the US, one after the other.

The first building the one next to JP, and JP pays it from its reserves. According to the article, no change in JP sheets results from the deal. So JP goes on with its buying spree, and now JP owns every building in Manhattan, then NYC, NY, then comes Vermont and so fourth.

Well, there is a problem with that initiative. At some point JP have no more reserves, the accounting are not conforming to banking standards and requirement and it is no longer a bank. Therefore, I will argue, something must change in JP sheets with every building or coffee machine it purchases, and the article is missing it.

I'm no expert, but I think the missing bit is that the money 'created' is still backed by some asset, whether it's a coffee machine, a building, or a promise of future repayment (as with loans). I think that might be assumed for the audience of the blog, but it's not an obvious thing for us non-experts.

Compare with a loan. When loaning, the bank has a liability (balance in the receiver's account). That's the created money. It's balanced by the promise of payment later, plus interest.

It's not really that different to suggest that to buy a coffee machine, they're creating money as a liability (money in the coffee company's account) backed by the value of the coffee machine as a an asset.

So yes, something does change on the sheets[1] - JP now has another liability, and another asset. The limiting factor is that banks are required to have more assets than liabilities (capital) by proportion, because capital is what really gets used to pay for things like account withdrawals. The proportion JP actually has reduces as each purchase is made, which is why JP can't hold an unlimited number of coffee machines/buildings.[2]

[1] The article does actually mention this, buried in a sentence about a full analysis of JP's balance sheets.

[2] Without that requirement, if the accounts were all at JP, it could buy as many coffee machines/buildings as it wanted, but would collapse if/when the money created was withdrawn. Also see 2008.

If what the author is stipulating is true, wouldn't banks have just written themselves a check during the 2008/9 crisis and never involved the President or Congress? Basically a bank could avoid all crises by having enough global customers to offset risk they insert into each market. Yet, even global banks suffered during this crisis.

if they did their ratings would tank.

but why do that when congress will create a specific mechanism of infinite money creation for you?

Not even close.

>What exactly is this money, and how is it created?

It's not created. While banks do have the capacity to "create" money by lending they are also are an actual business. i.e. it's not their only source of money

They charge people a transaction fee and use said revenue to pay salaries and buy coffee machines. Just like any other biz.

There are also strict client money rules to keep the business side and the lending side separate.

I am not an expert or even hobbyist in paper finance, but the author did address your point, a few sentences later: "JP Morgan can't create reserves, it can only borrow or buy them."

I believe the implication is that investment banks can not perform certain actions with their own money due to 2008-2010 reforms: for instance the Volker rule https://www.investopedia.com/terms/v/volcker-rule.asp

Is this an insiders take on what is actually happening or just some bloggers fever dream? Its always hard to tell with finance.

“Whenever a bank buys something from a non-bank, new money is created.”

Definitely the latter.

Edit: Or maybe an insider’s fever dream: the writer/speaker/singer has an MBA, worked in banks and is currently writing "The Absolute Essentials of Banking". (!)

This is just outright wrong. Its fallacy is the type of problem you get when skipping math steps on a multi step problem. A bank can’t just credit accounts to get stuff for free. The coffee machine transaction has a missing intermediate deduction from cash reserves.

More like value was created in the system when the coffee machine was made. A better example is the queen of England sold a lock of her hair for 1 million, you can call this money creation if the value holds and someone is willing to buy it

Author ignores the fact that the bank has revenue from operations and it funds the majority of business expenses from those funds

Maybe she will say that when the bank has some revenue that money is destroyed as it becomes reserves. The piece on it’s own doesn’t make much sense but maybe it does in the context of a non-sensical framework…

of course in reality JP will lease the machine rather than buying it

hell my employer (also a bank) rents its expensive multi-function taps

I thought only central banks could create money.

This looks like value creation to me, rather than money creation.

Reply on news.ycombinator.com