Comment by trixn | Hacker News Reader

Comment by trixn | Hacker News Reader

> Money can’t be created out of nowhere

Well, in case of a bank it can. And it happens on a daily basis. In fact thats how most private bank money enters the system in the first place either when a bank makes a loan or when it buys any other asset like e.g. a corporate bond (you can conceptualize a loan as an asset purchase as well, the bank buys a promise to pay from the borrower which is recorded as an asset of the bank). Both are a balance sheet extension from a double-entry bookkeeping point of view.

The 4 operations double-entry bookkeeping allows are:

1. balance sheet extension (e.g. making a loan) 2. balance sheet reduction (e.g. loan repayment) 3. asset swap (e.g. a bank buying a government bond with central bank reserves) 4. liability swap (e.g. transferring money from one account to another)

So it may be more accurate to just say that every event that affects the balance sheet must be one of those 4 operations.

Also see "Money creation in the modern economy" - Bank of England Quarterly Bulletin 2014 Q1

> Well, in case of a bank it can. And it happens on a daily basis.

You mean it happens when a bank borrows money from a central bank, right?

Not every balance sheet expansion constitutes the creation of money, e.g. when you put money on your bank account, the bank's balance sheet grows, but the money is not newly created.

> You mean it happens when a bank borrows money from a central bank, right?

No I mean in the moment the bank grants a loan. The money the borrower receives is new money, its not taken from anywhere else. But at the same time the bank records the credit as an asset which makes it a balance sheet extension.

> when you put money on your bank account, the bank's balance sheet grows

That's true, you hand over cash to the bank which becomes its asset and your account balance is marked up for the same amount. Not all money in circulation is accounted on a bank balance sheet, but most of it is bank deposits. cash is an exception, it's public money, not private bank money. When you "put money in a bank account", i.e. you bring cash to the bank you are essentially selling your public government money to the bank and it pays you with its own private bank money (which it "creates" as well).

But this is only a micro-view of a single event. In the aggregate money is created when either the government runs a deficit or when banks make loans and money is destroyed when taxes are paid or loans are repaid.

Well, that's not money created out of nowhere. The balance sheet extension creates money and an equivalent liability. That's the point of the statement, not money supply and its regulation.

Fair enough, just wanted to point out that banks originate money as part of the lending process. You could maybe call that "money out of asset purchases" whatever that means and yes its a valid balance sheet operation. I guess you would agree that a bank needs no prior savings or deposits in order to make a loan, i.e. it doesn't need to have money that it "lends out"?

Or let me ask you this: What would in your opinion be a valid example of "money out of nowhere"?

some engineers and average person sees the entire fiat money as something that needs to be "earn" or get returns from investments only. they dont see how it's literally created as free and out of nothing.

Very true but also understandable because that's how most households perceive it from their micro-economic standpoint. But its very deceptive because it suffers from a fallacy of composition. If households want to earn more than they spend (i.e. save), some other entity must spend more than they earn. This can be somebody taking a mortgage or the government running a deficit. Debt and savings are mirror images of the same thing, two sides of the same coin and we use double-entry book keeping to track them.

It is very insightful to view money as a creature of accounting for debtor-creditor relations rather than thinking of it as some kind of commodity.

Reply on news.ycombinator.com