> It's a zero sum because the persons and financial resources buying what you have to sell is a finite number.
Nope. It's obviously false by inspection - the GDP grows most years.
At the micro level, suppose I give Picasso $25 worth of art supplies. He then creates a painting with it worth $1,000,000. This painting becomes a valuable asset that he can then use as collateral for a loan. Banks loan money by creating it.
I.e. $999,975.00 magically appeared!
I wish the schools would teach this stuff. In my experience, very very few people understand this.
The Federal Reserve also has the ability to adjust banks' reserve requirements, which determines the level of reserves a bank must hold in comparison to specified deposit liabilities. Based on the required reserve ratio, the bank must hold a percentage of the specified deposits in vault cash or deposits with the Federal Reserve banks..."
"...By adjusting the reserve ratios applied to depository institutions, the Fed can effectively increase or decrease the amount these facilities can lend. For example, if the reserve requirement is 5% and the bank receives a deposit of $500, it can lend out $475 of the deposit as it is only required to hold $25, or 5%. If the reserve ratio is increased, the bank is left with less money to lend out on each dollar deposited..."
The monetary value of Picasso work, is tied to the competition between the ones who have a part of the current money supply, and how much they want a Picasso. If Picasso could produce 10,000 paintings per day, so that each person
in planet could have one, we would not be talking about millions of dollars per painting.
So no money is being created from nothing. It's leverage plus application of constrain theory. The main constraint being the amount of money printed and the leverage on the assets.
> That is called leverage and only exists because the government prints money.
This existed long before the government took over the banks and decoupled it from gold. It's called "fractional reserve banking".
> The bank did not create money
It absolutely did. It's how fractional reserve banking works. The "fetters" are the collateral backing up the loan. The money is destroyed when the loan gets paid back. I know it sounds like magic, but it isn't.
No bank in the world will loan you money without collateral. Now using your example of a loan based on a Picasso painting, the value of the painting is correlated to the money supply.
If Picasso decided to go live in Zimbabwe and decided never to sell his paintings to other than Zimbabwe nationals, paying on the local dollar, that would limit the loan the bank can collateralize with the asset, in other words the painting.
The bank does not create money.
"Fractional Reserve Banking: The Myth of Creation of Money" :
> No bank in the world will loan you money without collateral. Now using your example of a loan based on a Picasso painting, the value of the painting is correlated to the money supply.
That's what I wrote. The value of the painting was created by the painter, and money was created to back it. (And that money is destroyed when the loan is repaid, until the next time the painting is used as collateral.)
This is how the money supply (in free banking) naturally rises to match the asset wealth in the economy.
> The bank does not create money.
Of course it does. Your linked article is simply wrong. Trying to equate it to gold bars is a grossly wrong equivalence.
If Fractional Reserve Banking would create money, then it would not have a problem when all the depositors go at the same time to claim their money at the bank. :-)
As the previously mentioned article states, the bank does not create money, it increases the Velocity of Money.
> all the depositors go at the same time to claim their money at the bank.
If the bank did not create money, and simply loaned out the deposits, the depositors would still not find their money there when they run to get it.
Banks loan out a multiple of the deposits, meaning they create money.
Your theory that FRB doesn't create money is a fringe one, which should give some pause. What should also give pause is the gold example, which doesn't apply, and the false notion that bank collapses from runs only happen when they use FRB.
"...The phrase “banks create money” forms part of the popular discourse, but it conveys an erroneous representation of the banks’ role in the money creation process..."
"...Without the correct understanding, the misguided belief that banks create money out of nothing will continue to influence models of the financial sector and monetary policy interventions..."
"...The traditional view adopted in the money supply debate is that banks create bank money by granting loans. This explanation is then extended to suggest that banks thereby create money out of nothing. However, this is an inadequate caricature of the process of bank money creation..."
"...To an outsider, it appears as if by recording an asset account entry connected to the buyer and by recording a corresponding deposit entry, the bank has created money out of nothing; this is the illusion of the bank having created money..."
"...But this is only the prima facie appearance and not the truth of the matter because the outside observer has neglected to acknowledge that the deposit value records the value-for-value exchange conducted through an underlying transaction. In reality, the seller no longer has a house and the buyer now has a house..."
I feel you are getting into the definition of the role of the Bank as intermediary as stated in the latest link above, and to be fair the definition of what Money depends on what is role in the economic transactions.
Bankers themselves don't describe like that: "Economists frequently assert that banks can create money out of nothing. Bankers have a different opinion: for every loan they need to attract money. And, strangely, they are both correct. How can this be reconciled?"
Nope. It's obviously false by inspection - the GDP grows most years.
At the micro level, suppose I give Picasso $25 worth of art supplies. He then creates a painting with it worth $1,000,000. This painting becomes a valuable asset that he can then use as collateral for a loan. Banks loan money by creating it.
I.e. $999,975.00 magically appeared!
I wish the schools would teach this stuff. In my experience, very very few people understand this.