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Comment by andrekandre | Hacker News Reader

  > If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money

im kind of ignorant so please forgive if this is not correct, but i've heard its not necessarily "creating" money since its (the 900 dollars) all on the balance sheets as liabilities?

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While it is not technically "creating" new money it is expanding the supply of money (credit) in the economy. In the above example you still have $1000 owed to you and the company/person receiving that loan now has $900. That's a total of $1900 of "real" money generated from your $1000 deposit. The balance sheets net out to zero but there is in effect an extra $900 now in the economy.

You’re splitting hairs that can’t be split. Increasing the money supply is creating new money.

Money is created and destroyed all the time.

Money supply is not a fixed constant, it never has been.

But under your argument, then the Fed doesn’t technically create money either. It lends money like any other bank. Now this money is created out of thin air, but in theory it’s eventually repaid.

A bank isn't creating money in the same way the Fed does. Yes they can increase the "money supply," which for whatever academic reason doesn't include the liabilities, but not the money in circulation. And they can only physically lend out the amount that's deposited, or legally more like 90%, and they're hosed if everyone wants their money back.

Only the Fed can create money out of nowhere. They can create endless dollars and owe nothing, diluting the currency permanently. Inflation and other metrics keep them in check. The common sense is actually right, not the overly technical explanation of lending that somehow concludes that the Fed isn't special.

> in theory it’s eventually repaid

It doesn't have to be, and it hasn't been. M2 has generally just gone up.

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