How is new money created you ask? It's the story of IOUs.

“Where does money come from? In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks.”

http://positivemoney.org/how-money-works/proof-that-banks-create-money/

We tend to think of "money" as currency. For most of us, little is known about the enormous complexity of the money system that has resulted from crafty people working to create more and more opportunity for great profitability for themselves.

 

Well theoretically it's possible to create money without IOUs. For example, if the central bank decided to expand the money supply by buying up physical assets directly.
But in reality you're right, it's virtually all debt, in one form or another.
It makes one wonder how people in our society can ever save up a comfortable net amount of money, when one person's money is just another person's debt.

By the way, I don't believe this type of money creation necessarily creates inflation (at least fundamentally). As much as there is more "money" put out there, people are equally constrained by their debts (or taxes they will have to pay to help pay down the national debt).

Just to emphasize so there's no confusion, we are not talking about printing actual money here, that can indeed create inflation. We're talking about money in bank accounts that the bank has actually lent out to someone else.

 

The bank creates it. There is no "someone else" the money is from.

 

Shall we be thorough? Money is, in effect, created by the Fed whose raison detre is to instruct other banks how much money to add to or subtract from the money supply in order to keep inflation at 0% and thus maintain the efficiency of the economy.

 

I just think a lot of economists out there are completely brain dead. Changing the money supply doesn't fundamentally lead to changes in inflation. You can double the money supply, but that doesn't change the value of each dollar. There's just more debt out there. Not saying that's good for society, no not at all, but fundamentally it doesn't lead to inflation.

Inflation is caused by changes in the actual money, that is when the ratio of the total value of reserve assets held by the central bank changes relative to the amount of bank notes outstanding. Or when the ratio of taxes paid relative to the size of the economy changes (because part of the value of money comes from taxation too).

 

Let me clarify that in reality, there is probably some significant inflationary effect. If people can borrow more money, they can bid up prices higher. Even if that's not entirely an individually rational decision.
That's the reason the Fed stepped in after the housing bubble burst, it was an intentional attempt to try to prop up prices and prevent mortgage debt levels from deflating too much, because economic policy makers were afraid that would cause a rapid contraction in the money supply and lead to deflation, which they believed would be dangerous to the economy.

Now whether that was a good decision is another matter.

Basically, in the process, they converted mortgage debt that had gone bad into monetary inflation. The net effect was no change in the market valuation of the dollar. That's something that was observed and there's no arguing with it. It sounds paradoxical, but to provide an explanation, during the bubble people believed there was a lot more wealth than was actually there. So in reality, if you want to view it from this perspective, there was a massive undervaluation of the dollar in the market. Now when reality set in, that would have caused massive deflation. So instead the Fed stepped in and created inflation to counteract this market correction. The Fed used real U.S. dollars as a crutch to prop up the money supply, which was disappearing as the bubble burst and bad debt was being cleared off the accounts.

So printing trillions of dollars caused inflation but we never saw it because the housing bubble that preceded it had already gradually led to high inflation. We just swapped one form of inflation for another, basically. The Fed "stabilized" the economy, but at what cost?

But if the market had been completely rational, none of this would be required. An expanding money supply only caused inflation because the market was irrational. If investors had known that the debt they held wasn't any good and that the so-called wealth they held didn't actually exist, they wouldn't have spent the money. Yes, even money that doesn't exist can cause inflation, but eventually the party has to come to an end. It would have been no different if these banks had dumped massive amounts of counterfeit money into the economy.

 

wrong according to Milton Friedman
but what did he know. Too bad he never learned from you.

 

no, we literally just print more money.

its that simple.

 

and more money which causes inflation which makes the economy inefficient. Now do you understand?

 

total BS of course reserve assets take many forms, have many velocities, maturities, final dispositions, and exist relative to many changing macro economic conditions at any given time so cant be related to inflation in any meaningful way. Inflation of 5% means prices have inflated 5%. The ultimate solution is to limit money supply to make inflation impossible.

 

wrong of course either private citizens spend the money or the govt taxes it and spends it but total spending stays the same and so does economy. Do you understand?

 

I am talking about the very fundamentals. Despite what many people seem to believe, the dollar is not intrinsically simply a worthless piece of paper (i.e. pure fiat currency). It represents value because you can pay taxes with it, and theoretically because at some far off future point the Fed might liquidate assets and sell them off, contracting the money supply.

 

CPI was steady or slightly up so there was no inflation. Time to start over I'm afraid. Sorry

 

Yes, but at any instant in time the government has basically taken those out of circulation.

The value of the dollar arising out of taxation is proportional to the value of the part of the economy under taxation.

Quick basic example to illustrate: If there are 100 houses (all exactly the same), 10000 units of currency in circulation, and the government demands 5% of the market price of each house in annual taxation, then the tax each house will have to pay will end up being 5 units, and one house will be valued at 100 units. This is a closed system hypothetical example just to attempt to illustrate a point of how the money in the economy functions. (and the units in this example are purely fiat currency)

I simply meant there wasn't massive inflation.

It's too hard to try to qualify everything I write. And in economics, if you had to qualify everything to be absolutely accurate, you couldn't write anything. Or at least it wouldn't be readable because it would be so long and complicated.

 

you mean we print enough money to avoid deflation and inflation and thus keep the economy as efficient as monetary policy can

 

we care more about long run than instant in time. Besides if anything govt will spend tax dollars faster than tax payer or tax payers savings bank

 

I don't see many people burning or giving away their dollars so many people don't think they are worthless

 

actually your subject was "many people" and many people think it represents value because they can buy food clothing and shelter with it in order to stay alive, not because they can pay taxes with it. Do you understand??

 

so why is inflation soo low?

 

james M, you are misunderstanding what I am trying to say. I can't qualify everything I write to be absolutely completely accurate in economic terms.
So you will always be able to find fault with the details, but you're missing the main point of what I'm trying to communicate.

 

because the Fed's job is to maintain low or no inflation.

 

Well yes, that is basically how it ends up working out, essentially.
But the details and actual process inside that are more complicated.
Theoretically, every owner of a dollar is like a part share owner of the reserve assets held by the Federal Reserve Bank, in some sense. That's how they "expand" the dollar supply, they buy up assets on the market to add to their reserve assets. They might buy up your mortgage and hand your local bank some freshly printed dollars.

 

so why not communicate it clearly the way Milton Friedman did?? He created the common economic language. We are not looking to you to reinvent the wheel. Learn to say things in the context of an educated economist.

 

james M, I think Friedman was a good economist, he was better than most. But some of the specific things you are claiming Friedman believed I am not sure about. These things can be a little complicated and it might be possible you are misunderstanding exactly what Friedman believed (I'm not sure). In any case, I don't automatically accept everything he said without a little bit of critical analysis. There are a lot of things accepted as pillars of truth in the community of academic economists that are fundamentally wrong. That's part of what made Friedman an outstanding economist, he made arguments against the prevailing status quo.

If you go back and read my earlier posts, I gave you the reason:

Here's a word I recently learned on another forum: curmudgeon
You might want to look it up.

 

if you don't practice you will never learn. Give me an economic issue and I'll show you how to say in a simple Friedman like way that even liberals can understand.