Does inflation really help lower debt?

That may be the case, but I also strongly suspect the current mainstream economics understanding about money and banking is erroneous (on the whole of it, where some important concepts are concerned). They'll see a connection between A and B, and play that up, but they'll fail to put that into proper perspective with the bigger overall picture.

 

I'm not sure exactly what you mean, and I think you are drastically misunderstanding me again.
Banks can most certainly lend your money to someone else. You put paper money into your bank account. Your bank takes that money and lends it to someone else, and they take the paper money out of their account.

I'm not sure how we can avoid these type of misunderstandings, because it seems that you and me are not able to understand a lot of what the other is saying. Very bad communication.
We should both work to try to be more clear, and explain where we are trying to go with what what we are saying, and what the point is we are trying to make, in our posts.

And please, try to see the big concept, and the concept I am overall trying to explain, rather than getting lost in the details, and only looking at specific posts.
Because it's easy to only look at specific posts and then completely lose the point of what I have been trying to say.

 

Agree 100% Loanable funds theory, the notion that rising interest rates is a way to decrease economic activity, the idea that debt is unsustainable or that our taxes at the federal level are necessary for the government to have money to make purchases just to name a few.

 

Banks do not lend the money you deposit in your account (assuming you have a checking or savings account) to other people. Said another way, the availability of savings does not make it more or less possible for banks to lend. Said another way, a bank can make a loan without having a single dollar of savings (certainly it would be rare, but there is nothing technically that prevents it).

I apologize here. I jumped on long after this thread started. haven't been here in this forum for a while, can you point me back to a post in this thread that best makes the border point you are making.

Thanks

 

Somehow I highly doubt that. If any bank could just type some numbers into an account and make a loan, and I am talking about in a time of normal interest rates, which might hover at around 4 or 5%, then every single bank would lend as much money as possible, trying to get that interest, and it would drastically push interest down, barely above the amount necessary for the bank to cover their risks.

Somehow I think it may be you who do not actually understand how the banking system actually works.

I think every dollar held in bank accounts has to be balanced by loan repayment obligations. Every person who borrows money from the bank is theoretically on the hook to repay with cash (paper currency), if need be.

I would argue that the "money" in bank accounts is denominated in dollars, as a unit of measurement, rather than actually constituting dollars themselves.
The loan repayment obligations balance out the extra "money" that seems to be in the economy, when it comes to effects on inflation.

The "money" in bank accounts represents a dollar that will have to be repaid in the future.

But I think we're getting really off-topic here. This is a complicated contentious subject that belongs in another thread.

 

Remember that banks work on the asset/liability model. They use double-entry accounting. Every transaction must have (at least) two entries, a credit and a debit/ an asset and a liability.

So, from a double-entry accounting standpoint, a bank creating money for itself would create both a debt and a liability of the same amount. It would be like writing yourself a check.

Not to be redundant, but any time a bank lends money, the money it creates and lends is the bank's liability. That is, the bank must repay the money it lends out on a schedule. So if a bank lends $1 million dollars, the bank (and by extension it's investors) are liable for those $ 1 million dollars being repaid if the borrower does not repay (Something I can explain if you are interested).

Thus a bank that creates $1 million dollars and deposited it into an asset account has created a liability and asset worth $1 million dollars. Thus, it really hasn't created anything at all, has it? Of course, in the real world banks aren't allowed to lend to themselves.

To go a step further, when you and I take out a loan, we sign a promise to repay. For larger promises, they called "promissory notes" or just "notes".

When you sign a note and turn it over to a bank, the note has whatever the value is that you promise to repay. For instance, buy a car for $23,000 and promise to repay $25,000 ($23,000 principle + Interest). The bank in turn creates $23,000 and deposits it in your account. The bank is -$23,000, but has a note worth $25,000, so in terms of assets and liabilities, the note has $2,000 in value to the bank.

When you repay, the bank uses a portion of your payment to reduce the amount the bank is liable for (the $23k), and a small portion is taken as interest and that is the bank's profit. There are rules and schedules that are agreed upon, Basel III accords are an example that govern global banking and set some of the agreed-upon rules.

Visually (because I'm a slave to visuals) it looks like this....

Here is an example of the assets and liabilities between a buyer, a seller and a bank....



The buyer creates the promise out of thin air. The bank assures that the buyer has the capacity to repay and creates the currency out of thin air and the money is given to the seller.

The really interesting part is that once the loan is repaid, the economy does not gain or lose a dollar as a result of this transaction. Banks create "temporal" currency in the sense that the currency the bank created only circulates in the economy as long as the loan is outstanding. The currency repaid, reduces the amount of currency in circulation equal to the amount of each payment.

Note that under each entity, buyer, seller, and bank, there are two entries. This is how double-entry accounting works. Understand double-entry accounting (it's not hard) and you have taken your real first step to understanding how the economy works.

 

Econ4Every1 is correct.

Nope. Your money becomes part of their reserves. They do not lend out reserves.

No, they do not. The bank uses your paper money as vault cash and adds your deposit to its reserves, but it does not lend it out. When a bank lends, it just writes a higher number in the borrower's demand deposit account, which is a new liability of the bank (and asset of the borrower) that balances the new loan asset (and liability of the borrower). That bank demand deposit liability is generally accepted in exchange, and is therefore money that the bank has created.

No. The problem is not bad communication. The problem is your refusal to know facts that are identified for you repeatedly in clear, grammatical English.

 

The even more interesting thing with respect to what I just posted above is that we're told that saving "funds" lending when in fact it's 180 degrees the opposite. Banks don't lend savings, they create credit, this means it is lending that funds savings......

It was the borrower at step 2 above, that funded the savings of the seller.

Savings in this context is fiscal assets. This is to say that the seller has $500k because the borrower created an asset in the form of a promissory note of $500k and the bank facilitated the transaction by expanding its balance sheet.

 

In fairness to our mutual friend, it's understandable that people get these things wrong. We aren't taught this stuff and worse, whatever we learn through our own experience and intuition cannot be applied to banking or government though most people are unable to conceptualize why this is.

The important thing is that we understand that we are sharing knowledge, not for personal or political reasons. We're not advocating a system or making judgments about it, just explaining the reality of it which is really, really important when deciding what we can/ should do in society.

 

But you are incorrect. Econ4Every1 has explained the process accurately.

And that is exactly what happens. Except that a bank cannot just create a loan. It needs a borrower to sign on the dotted line, creating the loan asset that balances the demand deposit liability. No borrower --> no new money.

Please consult any good accounting textbook that describes banks' ledger entries.

Incorrect. There are also the net outstanding reserves.

Again, incorrect. They can repay with bank-issued, reserve-backed demand deposit liabilities.

Incorrect. The money in bank accounts is a liability of the bank payable in dollars, and which can circulate as dollars.

Incorrect. The borrower's loan liability does not reduce his purchasing power. The demand deposit asset (loan proceeds) does increase his purchasing power. That is why he borrowed the money.

Incorrect. Only the total outstanding bank loan principal does.

 

More accurately, we are taught -- and 99% of people believe with utter certainty -- completely inaccurate information, like the fairy tale of banks lending out fractions of customer deposits (which was, disgracefully, repeated as gospel in Greg Mankiw's introductory macro text). Then neoclassical economics comes along and insists that money, debt and banking are irrelevant to the "real" economy anyway.

 

Take this course, as I have (honestly I've watch the series 3 times). It's free and is a college accredited course. Of course, you will audit the course, but the lessons are the same. Then come back and we can discuss.

https://www.coursera.org/learn/money-banking

 

But it's not off-topic if you are discussing money and inflation. With all the respect I can muster, you don't understand fundamentals about the system we have. We can argue the merits of the system in another thread if you wish, I'm not judging the system, I'm merely trying to help you understand how it works and I've spent an inordinate amount of time learning it.

Lastly, there shouldn't be anything contentious about it. We all here to share and hopefully learn. I've been away for a long time so I don't have any history with most of the people here. No ax to grind and no one to "show up".

 

I don't think you get it. The problem is they teach it wrong.
The plain fact is many economists don't actually understand how it works. Yes, hard to believe the "experts" have it wrong, but that happens all the time in many different fields, not just economics, and the general public usually has trouble believing that could be true, simply because they don't know anything about the field that they assume somebody else must know about.

It's actually not such a simple task to organize countless details into simpler paradigm concepts that are both useful and truly functional. If I can draw an analogy, it would be like trying to get a computer to identify what is in a picture composed of thousands of pixels, and not understanding why that would be difficult because everyone knows pictures can easily be taken with electronics these days.

These type of things are inherently more complicated than many people may think.

People just want to assume things are simple. For example, automatically assuming that "experts must know". And it's hard to convince them of something that requires a something that is not a simple explanation, which their minds desire and prefer.

Not only do they have it wrong, but there are many experts who disagree. Which kind of demonstrates right there that's it's not so simple as just "facts".

 

I basically agree with you there. It is just a little more complicated, but basically I agree, that is how the concept works.

I think right now the Fed has practically reduced to reserve requirement to zero.

 

Too complicated to get into, but your various explanations here don't show that my statements were incorrect.

Maybe we are just viewing this from different perspectives.


I always hate these threads, because they start getting so complicated and diverge into so many discussions and topics, that eventually by page three, they become impossible to read, and the topic pretty much self-sabotages itself.

 

Then it becomes impossible to focus on any subject in one discussion, because it inevitably branches off into so many others.

That's why I don't like doing it. I prefer to have separate discussions for separate topics, and simply link to the other topic.

Does that makes sense?

This discussion is complicated enough.

Let's try to deal with one controversial question at a time.

 

I think you have to have different paradigms of understanding for different applications.

The reality itself is too complicated to intellectual do anything with. You have to be able to simplify it down into useful paradigms, and those paradigms have to be correctly functional.

However, to be able to create a good and "correct" paradigm (intellectual simplification) can be (paradoxically) harder than understanding the reality in its entirety.

Does that make sense? Do you understand how what I stated relates to economics?

 

Then I don't know what you thought you meant.

Well, you know what they say: if everyone you know seems to act like a jerk whenever you are around, they're not the jerk.

 

Or as JK Galbraith put it: "The process by which banks create money is so simple, the mind is repelled."

 

As other central banks have done, for the simple reason that they realized reserves are irrelevant.

 

Well, I wouldn't say totally irrelevant.

That would be another very complicated discussion.

These discussions can be complicated because we are using words to try to describe complex concepts, and the language may not be the most suited to that. So it's easy to fall into semantic arguments, unfortunately. You could be saying something, and it might be true in the sense you're talking about, but somebody else may take issue with it because it might not be true in another sense.
It can make it hard to have a discussion.

Does that make sense?

I mean, you could say one statement in one of these discussions about economics, and it could be interpreted by other people in three different ways.
And you can't get too specific and precise either, because then any statement is too inconvenient to read and much harder to understand.

I know that's all complicated, but that's why I feel these discussions never end up going anywhere. The language that we have available is simply not adequate to discuss the issue, or at least in a practical and easy way.
So somebody always starts an argument, which they do not realize is actually about a different issue from the one being argued about.

We have to say lots of things that may not be literally true, for the sake of pragmatics and simplicity. That's just the way things are.

 

I completely agree, but the problem is not that the concepts we're discussing aren't really all that complex, to the contrary, they are fairly simple. The problem is two-fold;

1) Most people don't start with a blank slate. Most people start with an understanding that is incorrect. This means that learning is clouded by ideas that are incorrect and require some people to "unlearn". Most people value the time it takes to learn and have a hard time tossing away the things they've learned, even if they are wrong and have a tendency to hold on to bad ideas as a result. To make matters worse their understanding is further made complicated by political bias.

2) To really have a "big picture" sort of understanding, you have to understand enough of the individual concepts to be able to see how each works with the other. In other words, understanding concepts like inflation and how a loan is made is really not that hard. But understanding how each relates to the border economy is more difficult because you have to have a sound foundation of understanding.

Think about it like this, is addition and subtraction hard? Now try to imagine learning algebra without understanding each. It's not that algebra is that difficult, it's that there is pre-requisite knowledge, that in itself isn't all the difficult, required before you can really understand it.

So with that, what is it that you believe is hard to understand? What concepts do you think aren't being understood in this thread?

 

If that's what you think, you either aren't reading my responses or you don't understand.

That said, to be clear when you say they are "teaching it wrong", do you mean the method of teaching is wrong, or the content of what is being taught? Or both? I'm going with both, but the biggest problem is the content followed a distant second by the method.

Basically? So what significant portion of the explanation is being left out?

As I said, the interest rate is ALWAYS zero. The Fed pushes rates up or allows them to fall. Why? Because the Fed guarantees that reserves will always be available. That means there is basically no "natural" scarcity of reserves.

 

I do not believe that is an accurate (or at least not very representative) explanation. The way I understand it, there is a "natural" going market interest rate, and the Fed usually seems to try to lower that; the way they do that is by lending out money at lower interest rates, but that carries an inherent inflationary cost, so they can only (only have the economic purchasing power to) keep rates down so low for so long.
(I mean they don't have the power to keep interest rates at 0 indefinitely, forever)

It is "supposed to be" used as a temporary economic tool, not a long-term economic policy.

Unlike what some people seem to believe (including many economists, it seems, who really should know better), the Fed can't just "magically" set or order what interest rates should be. They do not have that legal or economic power. If they want to "set" interest rates, they have to be the ones to subsidize it. Which can be expensive, when you're trying to mess with interest rates in an entire economy. Essentially the government is the one that ends up "paying" for it (in the form of reduced purchasing power).

Or to put it another way, you the taxpayer are paying the interest on someone else's loan. (because your taxes will have to be higher)
In the name of "economic policy".

Many people don't seem to understand that or be able to make that connection.

They imagine their magic government can do stuff in the economy, like a god.
There's no "free lunch" like that.

That's one of the reasons I believe neoliberals are really liberals at heart, despite the paradox of terminology. They're wacky and believe in magical things, despite claiming otherwise. Government is their god, whom they believe can make things happen in the economy. It's very comparable to a religion, in a way.
And their logic is uncomplete and unable to fully take in and understand the entire situation, because it's too complicated.