Interesting. Where did these $472B go? My understanding is that this didn't go into another bank, that $472B is a net across all banks. Did people start investing more? Did this money go into the economy?
Fed policy for the last year has been to disappear money, which should eventually fix our inflation problem.
Cash is dwindling for the first time in a generation. The economy will act differently than most of us have seen in our lifetimes.
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M2, a measurement of how much money is in our economy, has been shrinking for months.
Then again, M2 expanded too much during the COVID-19 era policies (we overreacted to the problem. But I don't blame policy makers for taking bold action). So this is a somewhat natural backlash that the Fed needs to manage.
We are, and have been, undoing QE and raising interest rates simultaneously. This causes lending to be more expensive and savings to be better.
Alas, we all have debts to pay (lots and lots of individual debt, record high mortgage rates and car loan rates). We all have a bit less money as a people compared to last year.
So in practice, we are seeing personal savings dwindle and credit card debt (and other debt) balloon due to these interest rates.
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EDIT: Downvotes? Lemme explain further.
Since the peak in M2 of April 2022 at $22 Trillion, we're down to $20.9 Trillion, or roughly a loss of $1.1 Trillion in M2 (a measurement of how much money is in existence). The easiest place for cash to disappear is from liquid-savings accounts. Its very indirect: Fed raises interest rates, indirectly raising mortgages and car loan costs, raising what people are paying each money, eventually lowering savings accounts. But the "buck stops" somewhere, and its probably going to be in a liquid savings account.
It causes M2 to drop, and M2 includes savings account balances and MMFs (so it cannot be explained with "Oh, people just moved money to MMFs", because Savings+MMFs is dropping in general)
This excludes pension fund, mutual fund company, bank, insurance company, or any other large institution.
https://fred.stlouisfed.org/series/WRMFNS
Retail component of money market funds remains part of M2. Meaning that if depositors switched their money to VMFXX (or other retail money market funds), then it'd still be part of M2.
Raising interest rates has this explicit effect. There is a lag for this affect to be noticed in the system.
Total deposits is the money individuals placed in banks, (e.g. cash in a checking account). If a bank gives you a mortgage, it does create money due to the fractional reserve, but it doesnt change the underlying deposits (The deposits are the reserve)
The titular loss is simply people moving cash savings to money markets.
The amount of money in the system made up of currency deposited into a bank is less than 10% of overall money in the system (I think it was 7% in the UK last I checked). The rest is money (deposits) created from thin air at the moment that a loan is granted. The Bank of England website actually has some very good articles on these subjects. Loans literally create money. Paying off a loan destroys it, minus the interest paid to the lender, that stays in the system.
Banks do have a minimum reserve amount that they have to hold with the central bank, in the US and the UK this reserve percentage is currently 0 (zero).
I have a few downvotes it seems. I'd be very interested in where the gaps are in my knowledge as it's something I've been learning a lot about recently.
>The rest is money (deposits) created from thin air at the moment that a loan is granted.
You are conflaiting deposits and money in cirulation but they are not interchangable. Deposits refer specifically to cash held with a bank, not debt. As such, deposits do not change when loans are granted or repayed.
>Money is destroyed when these loans are repaid.
Similarly, Money is not destroyed when loans are repaid. Loans are repaid with real money, which remains in circulation.
> money is not destroyed
My understanding from my research is that this is exactly how it does work: https://www.bankofengland.co.uk/explainers/how-is-money-crea...
Think about what you're saying for a second. If you take $100 loan from a bank to go to the pub and repaid $200 for the principal and interest, do you think they delete the full $200? Of course not. Do you think they delete the $100 you spent at the pub? Of course not. The bank keeps $100 profit on the loan and the barkeeper keeps $100. You now have $200 in circulation, the total loan repayment amount.
Your research on how Banks calculate their total deposits is incorrect and your research is insufficient. Take a look at this link and scroll down to the real world example[1]. Deposits are the some total of money people have deposited in the bank. It is not marked down by the loans a bank has made. The total deposits held by a bank minus the total loans the bank has made is called the net worth of the bank.[2]
https://courses.lumenlearning.com/wm-macroeconomics/chapter/...
https://www.investopedia.com/terms/l/loan-to-deposit-ratio.a....
Do you mind explaining this? The linked article has an example very similar to yours, explaining how bank loans create money. Does this not apply to your scenario? Or is it talking about a completely unrelated concept on the banking system? Or is it that you simply think the article is wrong.
I’m asking in an attempt to better my understanding of the subject. Please don’t turn this into an unnecessarily heated discussion.
Loans create money - nobody is disputing that. Deposits do not create or destroy money. Repaying a loan is not making a deposit.
Total deposits in banks, for example in the title "US banks lost $472 in deposits" is not calculated as the total deposits minus loans outstanding.
This sentence makes no sense and is incorrect: >Money (deposits) are created at the point that loans are made.
Maybe this article articulates better what I'm trying to say, as I think I was saying the same thing as it unless I've worded something badly.
https://www.investopedia.com/articles/investing/022416/why-b...
Specifically the section: "How Banks Make Loans in the Real World"
> Contrary to the story described above, loans actually create deposits