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Comment by radford-neal | Hacker News Reader

Maybe it's just a terminological matter. When counting how much money there is, you count the money that the seller now has in their account. You don't also count the amount of the mortgage, which is what I interpreted the statement to mean. Note that the person (or institution) that issued the mortgage now has less money in their account.

Counting the mortgage itself would make sense if the holder of the mortgage regarded it as "just as good as cash", but of course holding a mortgage is not at all equivalent to holding cash. Holding a mortgage is a long-term investment with uncertain return, and limited liquidity, not a money equivalent.

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Checking accounts are included in the money supply, without subtracting mortgages (what's considered 'as good as cash' are the balances of the buyer/seller, not the assets of the 'holder' of the mortgage, which would be the bank), and issuing a bank mortgage definitely increases the money supply (so the bank doesn't have less money, it's created new money):

https://www.federalreserve.gov/releases/h6/current/default.h... (Table 1 footnotes)

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

https://www.imf.org/en/Publications/WP/Issues/2019/12/20/Mon...

But yeah, we can agree that what's counted isn't the mortgage per se, but the balances of the buyer/seller (which came into existence when the mortgage was issued).

When banks issue mortgages, they don't decrease a number in their own accounts to balance it. The act of creating the mortgage itself creates new money out of thin air, the act of repaying it destroys the money again. This is fractional reserve banking and is how most money is created. It's also why there's a relationship between interest rates and inflation: raise interest rates and borrowing becomes more expensive, so it happens less, so less money is created.

Yes, when banks issue mortgages, they create money. When a non-bank (you, for instance) issues a mortgage, new money isn't created. When counting how much money there is, you count the bank balances, not the mortgages.

But non-banks by and large don't issue mortgages, or if they do they're pseudo-banks that make the loan and then turn around and immediately sell it to a bank.

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