IS THIS HOW USD IS CREATED?

[bittraffic]

I have learned so much from this thread that I didn't got from economics and finance subject in school. If the government creates billions paper bills out of thin air, so its just the central bank that decides it value? 

I can find many theories how USD are created, some of them seem acceptable to me, and they believe new money is created whenever people like you and me take loan from the bank, and it is also how the shadow banking in China was so rampant in 2016, these shadow banking are creating credit at a speed of light and it is also unregulated, I’m not sure what will come next but some experts are screaming bubble is about to explode, I think it’s all the shadow banking who create USD too, but I don’t know who is their target “victim”.

There was a documentary I've seen years ago where it says China deliberately set its currency value to be lower and so they start to climb up to attract investors and open their country for investors, create certain places for trades like Hongkong.

[d5000]

Starts ups looking for business loans often have little in the way of collateral to provide. Sure, the bank could come after you for damages if you default, but that's not the same as them having assets to back up the loans they provide.

At least in the juristictions I know, it's not easy for a startup without collateral to get a loan by a full-fledged bank. Most of the time they have to reccur to angel investment, venture capital and other "non-banking" financing methods, where risks for the financing parties are higher but they also participate in the company (with voting rights) they support. And this kind of investors/financial entities does not have the right to "print money" like banks have.

After all, nobody should forget that money is only a means of communication between consumers and producers. If there was a party which "prints out" values that are not reflecting the "real" state of the production sector, that would lead very likely to high inflation. That's basically what happened in Venezuela, Simbabwe or late-eighties Argentina where the Central Bank policy failed completely, or what happens to every shitcoin that has nothing to offer for the "money" they print.

PS: There is however a criticism to "fiat money" creation I support, and that's the Cantillon Effect. Basically, it postulates that if there is inflation (even low), typically there will be a group who benefits first from a money supply increase, and those who benefit last will see their share of society's income and "prosperity" decreased.

[deisik]

No bank will give you anything on an empty promise

They will, though.

Sure, things like mortgages or car finance are collateralized against the value of your home or your car, but lots of loans aren't. I could get a brand new credit card today with a five figure spending limit, based solely on my past behavior, and without providing any collateral

This is definitely not an empty promise

But you wouldn't really expect a random dude from the streets to get a five figure credit on his word alone, would you? Also, a five figure amount can be anything from 10k to 100k and in what currency exactly? Regardless, how many people are willing to lend coins here to a fresh account? I don't think that many if any at all. So why should banks be different? Anyway, the loans you are talking about won't make a dent in the bank's balance if the borrower defaults on his debt, so my point still holds overall

Starts ups looking for business loans often have little in the way of collateral to provide. Sure, the bank could come after you for damages if you default, but that's not the same as them having assets to back up the loans they provide

Startups are typically looking for venture capital, not bank credits

The entire modern banking system is based on the fact banks can create money without having the assets to back it up

Okay, let's agree to disagree here

[o_e_l_e_o]

But you wouldn't really expect a random dude from the streets to get a five figure credit on his word alone, would you? Also, a five figure amount can be anything from 10k to 100k and in what currency exactly?

I don't know exactly how much, because I have no inclination to apply for a credit card and find out exactly. But everyone who opens a credit card gets given a credit limit. Some may get less than $1,000. Some may get as high as $100,000. For every single one of these credit cards, the person opening it does not have to provide a single piece of collateral. The credit given to them is based entirely on how likely or otherwise the bank they are to repay that credit - i.e. a promise. The bank does not increase its assets at any point; it simply creates new credit, and therefore new money, out of thin air.

Anyway, the loans you are talking about won't make a dent in the bank's balance if the borrower defaults on his debt, so my point still holds overall

That's not the point I'm making. Obviously the bank can absorb the loss of some loans; the point is that the money from these loans was created out of nothing without the bank increasing their assets or reserve at any time.

[deisik]

The credit given to them is based entirely on how likely or otherwise the bank they are to repay that credit - i.e. a promise

I guess what you describe has more to do with a credit history of a particular borrower, so if you defaulted on a loan before, you are unlikely to be approved at all. If you have no credit history, be ready to provide some form of collateral. Either way, you are risking your future loans. That's not a mere promise in my eyes

Anyway, the loans you are talking about won't make a dent in the bank's balance if the borrower defaults on his debt, so my point still holds overall

That's not the point I'm making. Obviously the bank can absorb the loss of some loans; the point is that the money from these loans was created out of nothing without the bank increasing their assets or reserve at any time

That's not necessarily so

A bank may in fact have real depositors who brought their hard-earned cash to the bank. Then the loans in question can be given out of these deposits or covered by them. In this case, you can't possibly say that the money for such loans was created out of nothing

[Nellayar]

Better to loan money from your own central bank then order them to print more USD for you. You are just devaluing your own money by that method. Just look at Venezuela or the classic story of Zimbabwe's hyperinflation and see where did it go from their. That's why you will always see them ask for loans with the lowest interest as this gives them enough room to pay them back on the certain period they have. Even if the debt is rising still they are able to pay back woth the projects, jobs, educations, and other developments they have given for their own country.

The reason behind Venezuela and Zimbabwe's hyperinflation is too much printing of money. As of now, the citizens of these two countries are suffering from poverty. Because of the inflation rate, the countries are dying. Maybe, a loan can be a solution for inflation yet it may also ruin the economy. Just like what happen in Greece and Germany. Greece loaned too much for Germany and as a result for collateral, Greece will pay their through their own land.

[el kaka22]

Honestly for anyone that is wondering how the money world is run and can't understand how world is in debt (considering we can't owe money to space, there is more debt existing than money that exists for some bad math calculation) you can read "I want the earth plus 5% more" and that will tell you how the system is crooked.

Normally, when someone gives you loan they should bring money for the interest as well but since interest wasn't printed not everyone can pay back their loans which creates a system where people are not paying their loans and there is this excess amount of money that is not being paid to anyone but banks still get their money somehow. I am not entirely sure how long this can continue but we all know its not sustainable and eventually will come to a full stop instead of a small slow down in 2008.

[o_e_l_e_o]

Either way, you are risking your future loans. That's not a mere promise in my eyes

Correct, but the risk of of not being able to take out any futures loans is a loss for the customer, not a gain for the bank. The bank does not receive any new assets or reserves from refusing to offer loans to customers who have previously defaulted.

A bank may in fact have real depositors who brought their hard-earned cash to the bank. Then the loans in question can be given out of these deposits or covered by them. In this case, you can't possibly say that the money for such loans was created out of nothing

Sure, but then the money in the depositors account is now no long backed up by reserves. Let's say I deposit $1000 at a bank, and then bank then loans that $1000 out to you. The next day, I decide I need to withdraw my $1000. Does the bank say "Sorry, you can't withdraw, it's out on loan"? Of course not. They give me my $1000. Now you have $1000 on loan and I have my $1000 back. Somewhere along the line, $1000 has been created out of nothing.

[Kakmakr]

It's called fractional reserve and has been happening for years since we ever departed from a gold standard. Welcome to the post Nixon era

Fractional reserve is also a thing of the past

It is a very common and widespread misconception to think that banks are somehow limited by the deposits that they have received (what fractional reserve is essentially about). In the modern day money is created via credit (it is called credit money for a reason). Banks don't need to look back at how much they have in their vaults as they can create as much money as required to meet the demand for that money. And if you think of it, it actually makes perfect sense since this is a very effective mechanism to provide liquidity for the economy in case the latter needs it. In other words, there is no reason to limit credit via a metric which doesn't in the least reflect the actual demand for new money

Agreed, but what difference is there between creating money from thin air by using Fractional reserve practices or by doing this by creating "fake" money via credit? Adding some numbers on an internal ledger to give more credit are exactly the same as adding additional money by lending money that you did not receive via deposits

It is a difference that makes the difference (and vice versa)

You seem to be looking at it from the wrong angle as you implicitly assume that credit money is inherently wrong or even evil. The money created via credit is not "thin" money, so to speak. It is still a collaterized form of money, i.e. money backed up by tangible assets (think of it as an extended and expanded variety of the gold standard). But with "classical" FRB you are limited by the deposits, while with purely credit money you are only limited by the demand for credit. So the second form of credit money is better for the economy because money gets created (and destroyed, for that matter) according to the needs of that economy. Simply put, it is a better device and more robust mechanism for providing liquidity to economic agents, i.e. those who need this money (businesses and individuals)

You will never convince me that credit is "good" money creation. If people were able to pay the debt, it would have been acceptable, because it stimulates the economy, but most people default on their debt, because they should not have qualified for that debt or their circumstances change and then they cannot pay that debt anymore.

The ridiculous interest on that debt also generate "new" money, which is also bad. The Bitcoin supply is fixed, so you cannot create tokens out of thin air.  

[deisik]

Either way, you are risking your future loans. That's not a mere promise in my eyes

Correct, but the risk of of not being able to take out any futures loans is a loss for the customer, not a gain for the bank. The bank does not receive any new assets or reserves from refusing to offer loans to customers who have previously defaulted

But it doesn't receive them even if it approves the loan

Remember you are talking about uncollateralized debt, right? In this way, if the bank refuses the loan to someone without a credit history, it doesn't run the risk of a future default but it (or some other bank in the system) has already incurred some losses from the past default of this borrower. As you can see, it involves a little more than just a promise of a random dude from the street. In short, empty promises don't work. You need something else, more solid

A bank may in fact have real depositors who brought their hard-earned cash to the bank. Then the loans in question can be given out of these deposits or covered by them. In this case, you can't possibly say that the money for such loans was created out of nothing

Sure, but then the money in the depositors account is now no long backed up by reserves

Um, I'm not sure what you mean by this. The money in the bank "depository" is the reserves which are used to back up a loan

Let's say I deposit $1000 at a bank, and then bank then loans that $1000 out to you. The next day, I decide I need to withdraw my $1000. Does the bank say "Sorry, you can't withdraw, it's out on loan"? Of course not

Are you sure you know how deposits actually work? It is in fact more like ""Sorry, you can't withdraw until date X"

You will never convince me that credit is "good" money creation

Okay then

[o_e_l_e_o]

In this way, if the bank refuses the loan to someone without a credit history, it doesn't run the risk of a future default but it (or some other bank in the system) has already incurred some losses from the past default of this borrower.

With every loan there is still a risk of default, even with previously trustworthy people with good credit histories.

As you can see, it involves a little more than just a promise of a random dude from the street. In short, empty promises don't work. You need something else, more solid

I'm not following. What is "solid"? When someone takes out a credit card, and gets a credit limit based on their previous behavior, what is solid? The bank receives no new assets. Their reserves do not grow. They get no collateral. They simply give credit based on how trustworthy they think the person is. What is "solid" about that?

The money in the bank "depository" is the reserves which are used to back up a loan

Yes, but the bank's reserves come from other people's deposits. A bank can't give this money out in loans and keep it in their reserves. At some point, new money has to enter the system, and banks do this by creating credit out of nothing.

[deisik]

In this way, if the bank refuses the loan to someone without a credit history, it doesn't run the risk of a future default but it (or some other bank in the system) has already incurred some losses from the past default of this borrower.

With every loan there is still a risk of default, even with previously trustworthy people with good credit histories

Basically, it is a one-off event. For a borrower. And technically, for a bank too, with that client. But with a world living on debt and in debt, this event would be pretty inconsequential

As you can see, it involves a little more than just a promise of a random dude from the street. In short, empty promises don't work. You need something else, more solid

I'm not following. What is "solid"?

Maybe, solid as in reputation? It is hard to build and easy to destroy. Once it is ruined, there's typically no way back (as even this forum clearly shows and knows)

The money in the bank "depository" is the reserves which are used to back up a loan

Yes, but the bank's reserves come from other people's deposits. A bank can't give this money out in loans and keep it in their reserves. At some point, new money has to enter the system, and banks do this by creating credit out of nothing

Okay, so you agree that presumably uncollateralized loans (like credit cards with a nice credit limit) may actually come from deposits, and in this manner you can't say that money for these loans appears out of nowhere. That seems to be a pretty solid conclusion (no pun intended)

[o_e_l_e_o]

Maybe, solid as in reputation?

Sure, but not solid as in there are any tangible assets transferred to the bank in order to obtain the loan or credit.

Okay, so you agree that presumably uncollateralized loans (like credit cards with a nice credit limit) may actually come from deposits, and in this manner you can't say that money for these loans appears out of nowhere. That seems to be a pretty solid conclusion (no pun intended).

I never said that loans come from deposits. I said the bank's reserves come from deposits. The bank can't simultaneously use this money as an asset to secure the credit in the depositors' accounts, whilst also giving it as credit to the loanees.

To go back to my previous example. Lets say I deposit $1000 to a bank. The bank now has $1000 in reserves, and I have $1000 of credit in my account. Lets say you now open a credit card, and they give you $1000 of credit. The bank still only has $1000 in its reserves, but now has $2000 of outstanding credit. New money has been created. If you were to physically withdraw cash, then yes, that cash might come from the cash I deposited to the bank, but the bottom line is still that the bank now has more outstanding credit than they have assets to cover it.

I'm not sure why you are arguing this? It is widely established and fairly common knowledge that banks create money out of nothing when providing loans to customers. Here is an article written by the Bank of England (one of the most important banks in the world, and which most other central banks are based on): https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.

When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

[deisik]

Maybe, solid as in reputation?

Sure, but not solid as in there are any tangible assets transferred to the bank in order to obtain the loan or credit

Reputation is everything these days

According to Robert Greene, reputation is "a treasure to be carefully collected and hoarded", which you should guard with your life. In fact, it has always been so, e.g. outlawing someone was considered a pretty severe punishment in the past. I feel certain that many people who defaulted on their loans would prefer to keep their reputation intact (represented by their credit history in today's world) and rather have bank taken their property

The bottom line is that it remains to be seen what is more solid here. And personally, I'm strongly inclined to think that reputation would win. That's basically why banks don't need to have the rights on any tangible assets transferred to them as losing reputation through a default will have more devastating consequences. It can be said that bank loans in the form of a credit card are already collateralized by the borrower's reputation

Here is an article written by the Bank of England (one of the most important banks in the world, and which most other central banks are based on)

You'd be surprised but I cited this article as early as 2016. But that doesn't deny or defy the facts that a) banks have deposits, b) loans are typically collateralized, and c) those which are not may come straight from these deposits

Either way, in fact, any of these three ways, banks don't create money completely out of thin air

[o_e_l_e_o]

It can be said that bank loans in the form of a credit card are already collateralized by the borrower's reputation

No, it can't. The borrower's reputation doesn't isn't a tangible asset. Collateral needs to be able to be sold to recuperate losses. A bank can't sell someone else's reputation. If someone launched a stable coin, and claimed it was backed up 1-to-1 with "reputation", they would be laughed off the forum.

You'd be surprised but I cited this article as early (https://bitcointalk.org/index.php?topic=1652815.msg17199620#msg17199620) as 2016.

So why have you changed your mind? You quote that article in 2016, and you seem to agree in that post that banks "don't need deposits" to create money. Yet now you seem to think that banks don't create money out of nothing, and all loans are collateralized, which is categorically not true.

[deisik]

It can be said that bank loans in the form of a credit card are already collateralized by the borrower's reputation

No, it can't. The borrower's reputation doesn't isn't a tangible asset. Collateral needs to be able to be sold to recuperate losses. A bank can't sell someone else's reputation. If someone launched a stable coin, and claimed it was backed up 1-to-1 with "reputation", they would be laughed off the forum

You say that reputation is not worth anything (in terms of creditability), I say that it is, so let's just agree to disagree. A bank can't sell someone's reputation but it can definitely ruin it

You'd be surprised but I cited this article as early (https://bitcointalk.org/index.php?topic=1652815.msg17199620#msg17199620) as 2016.

So why have you changed your mind? You quote that article in 2016, and you seem to agree in that post that banks "don't need deposits" to create money. Yet now you seem to think that banks don't create money out of nothing, and all loans are collateralized, which is categorically not true

I didn't in the least change my mind

And even in this very thread I repeat what I have been saying for years here, that banks don't need deposits to create new money. But that doesn't mean that banks create money as they see fit in a completely arbitrary fashion. They create money based on demand for money, i.e. through credit. But since most loans require collateral in one form or another, this newly created money is a collateralized form of money. I could even go as far as to say that reputation is also a form of collateral in this day and age (probably even a better one in certain respects)