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July 08, 2014, 06:43:35 PM Last edit: July 08, 2014, 07:05:52 PM by STT |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
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twiifm
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July 08, 2014, 07:02:32 PM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer. A demo of that would be the closure of
That's only if you are an outside observer. If you are inside the economy inflation lifts everything. If you sell stuff you can inflate your prices so your income stays the same
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STT
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July 08, 2014, 07:09:33 PM Last edit: July 08, 2014, 07:19:36 PM by STT |
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All boats rise in a rising tide is how Ive read that in articles IVe read. I dont believe inflation is that perfect an effect and it benefits the rich far more then the poor. Owning a Ferrari F40 in the last decade has been a profitable endeavour but that is partly because classic car collecting is such an exclusive pursuit to begin with, its not really helped your average Chevy owner; 'lifts everything' is unfortunately not linear, its uneven, so tip over is more like its effects for many people. Microsoft, Intel, Apple and a few others can issue their debt at a 1% cost, gigantic benefit to them and their shareholders so thats about as close to mainstream it gets imo; I dont believe that is filtering through to the public more like the 1% argument comes in here Your average worker really doesnt have assets in many cases but he will notice the rising cost of everything. In that analogy I would say it creates turbulence, some boats break from their moorings unable to resist the increasing currents becoming rapids and some even sink :p http://en.wikipedia.org/wiki/A_rising_tide_lifts_all_boatsYou've definitely identified what Fed policy reflects, they really think they will make us better off but they are closer to fraud then benevolence
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RoadTrain
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July 08, 2014, 07:18:13 PM |
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Thanks. I'm going to try regurgitating my understanding with some new assumptions and hope I'm getting close to truth.
-So banks don't get to sell T-bonds at face value, just market price or sometimes even below for cash. The Fed allows this both to prevent problems with reserve requirements (and everything going along with banks not having enough) and I'd guess to also prevent large dumps on the T-bond market, which in turn makes T-bonds relatively stable, thus more attractive.
Many large banks are members of the Fed (paying both dues and fees), but the profit goes to the Treasury. The Treasury does create money, but it doesn't create wealth -- banks don't get free wealth from the Fed, while benefits are all fairly well-balanced to keep money-creation powers not fully divested to either the market or the government, permitting a semi-market-based approach to money creation. Since Fed profits go to the Treasury (less overhead, losses, etc), the Treasury is effectively allowed to issue T-bonds and not pay interest, but only for T-bonds sold to the Fed at or below market rates. Discounting debt devaluation (in real terms) from inflation, this scheme of doing things prevents the government from just printing any financial troubles away (if they tried, the uncertainty from breaking this unspoken contract risks complete USD and T-bond meltdown, which could bring a ruinous banking crisis). In times of banking turbulence, like now and in recent history, lots of money is created this way, but banks use this money generally to meet reserve requirements (either those set by gov't or those self-imposed) after taking losses or otherwise over-extending themselves, so it doesn't just go right back into the economy, at least not until the banks recover and a healthy (or dangerously over-permissive, maybe "predatory") state of lending resumes. Everything works in a very complex, somewhat balanced way that usually (except in cases of extreme political pressure?) prevents quick and extreme reactions to short-term or mid-term problems. This permits long-term health for the US dollar.
I'm still not sure why M2 increase doesn't eventually mean we'll feel inflation from it when lending fully un-thaws, especially if the effects are suppressed/delayed by low money velocity. It doesn't factor in debts written off by banks for things like mortgages or LoCs, so maybe that acts as a deflationary force, reducing money velocity (lower home prices, less money circulating, especially lent money) and reducing the money supply (houses aren't counted in M2, but banks do have to write off the debts occasionally and usually take large losses in trying to sell the mortgaged property - consumers and businesses taking LoC probably aren't buying CDs, T-bonds, or making demand deposits). -But the housing market's had a huge uptick over the last couple years, unemployment's stabilized, and real wages are on the way up, so if M2 had any impact at all, why hasn't it effectively turned the value of our dollars to ash? Conservative banks?
(side-question: is money for repos also created or even significant compared to Fed T-bond purchases?)
I think it's fair to assume that treasuries are quasi-money. They can be used as collateral in most market operations. And the money thing has been eroded to a degree by financialization of the economy. What about wealth. I tend to argue that Treasury is the govt entity that creates wealth, while the Fed doesn't. That's because when the govt does deficit spending, it adds net financial assets to the private sector, while the Fed only changes the assets composition. That's all about accounting basics and sectoral balances. On this topic I'd recommend reading Modern Monetary Theory ideas. Now about M2. I think this money measure doesn't work in this QE reality. Just because a large part of money counted just sits idle and doesn't participate in economic activity. I also think that money velocity didn't fall as much as calculations show, just because it consider this 'idle money' created by QE. It all looks like a big Théâtre de l'Absurde and does carry very little economical sense. But time will tell.
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twiifm
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![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
July 08, 2014, 09:03:29 PM |
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Thanks. I'm going to try regurgitating my understanding with some new assumptions and hope I'm getting close to truth.
-So banks don't get to sell T-bonds at face value, just market price or sometimes even below for cash. The Fed allows this both to prevent problems with reserve requirements (and everything going along with banks not having enough) and I'd guess to also prevent large dumps on the T-bond market, which in turn makes T-bonds relatively stable, thus more attractive.
Many large banks are members of the Fed (paying both dues and fees), but the profit goes to the Treasury. The Treasury does create money, but it doesn't create wealth -- banks don't get free wealth from the Fed, while benefits are all fairly well-balanced to keep money-creation powers not fully divested to either the market or the government, permitting a semi-market-based approach to money creation. Since Fed profits go to the Treasury (less overhead, losses, etc), the Treasury is effectively allowed to issue T-bonds and not pay interest, but only for T-bonds sold to the Fed at or below market rates. Discounting debt devaluation (in real terms) from inflation, this scheme of doing things prevents the government from just printing any financial troubles away (if they tried, the uncertainty from breaking this unspoken contract risks complete USD and T-bond meltdown, which could bring a ruinous banking crisis). In times of banking turbulence, like now and in recent history, lots of money is created this way, but banks use this money generally to meet reserve requirements (either those set by gov't or those self-imposed) after taking losses or otherwise over-extending themselves, so it doesn't just go right back into the economy, at least not until the banks recover and a healthy (or dangerously over-permissive, maybe "predatory") state of lending resumes. Everything works in a very complex, somewhat balanced way that usually (except in cases of extreme political pressure?) prevents quick and extreme reactions to short-term or mid-term problems. This permits long-term health for the US dollar.
I'm still not sure why M2 increase doesn't eventually mean we'll feel inflation from it when lending fully un-thaws, especially if the effects are suppressed/delayed by low money velocity. It doesn't factor in debts written off by banks for things like mortgages or LoCs, so maybe that acts as a deflationary force, reducing money velocity (lower home prices, less money circulating, especially lent money) and reducing the money supply (houses aren't counted in M2, but banks do have to write off the debts occasionally and usually take large losses in trying to sell the mortgaged property - consumers and businesses taking LoC probably aren't buying CDs, T-bonds, or making demand deposits). -But the housing market's had a huge uptick over the last couple years, unemployment's stabilized, and real wages are on the way up, so if M2 had any impact at all, why hasn't it effectively turned the value of our dollars to ash? Conservative banks?
(side-question: is money for repos also created or even significant compared to Fed T-bond purchases?)
I think it's fair to assume that treasuries are quasi-money. They can be used as collateral in most market operations. And the money thing has been eroded to a degree by financialization of the economy. What about wealth. I tend to argue that Treasury is the govt entity that creates wealth, while the Fed doesn't. That's because when the govt does deficit spending, it adds net financial assets to the private sector, while the Fed only changes the assets composition. That's all about accounting basics and sectoral balances. On this topic I'd recommend reading Modern Monetary Theory ideas. Now about M2. I think this money measure doesn't work in this QE reality. Just because a large part of money counted just sits idle and doesn't participate in economic activity. I also think that money velocity didn't fall as much as calculations show, just because it consider this 'idle money' created by QE. It all looks like a big Théâtre de l'Absurde and does carry very little economical sense. But time will tell. Very good post. I think it'll be difficult for folks here to understand MMT without understand double entry book keeping. But I agree with you. Wealth comes from the "real economy" rather than monetary policies. But even with QE & stimulus on a grand scale experiment like Abenomics have not shown to produce results. Time will tell indeed
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DannyElfman
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July 09, 2014, 02:11:57 AM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today.
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This spot for rent.
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twiifm
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![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
July 09, 2014, 02:22:29 AM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today. Majority make higher wages as they compete in the workplace for promotions. Then they invest in real estate or retirement accounts. Most people dont care about mild deflation, they care about employment. If you are talking about too much inflation or stagflation then thats a different discussion I don't buy the arguments here for deflation. Too much assumption about a static economy when in fact economies are dynamic
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DannyElfman
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![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
July 09, 2014, 04:25:36 AM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today. Majority make higher wages as they compete in the workplace for promotions. Then they invest in real estate or retirement accounts. Most people dont care about mild deflation, they care about employment. If you are talking about too much inflation or stagflation then thats a different discussion I don't buy the arguments here for deflation. Too much assumption about a static economy when in fact economies are dynamic This is exactly why that mild inflation is not necessarily a bad thing. Another point to make for savers/investors is that most asset prices increase faster then the rate of inflation (including dividends and similar payments).
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This spot for rent.
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scryptasicminer
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July 09, 2014, 06:14:52 PM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today. Majority make higher wages as they compete in the workplace for promotions. Then they invest in real estate or retirement accounts. Most people dont care about mild deflation, they care about employment. If you are talking about too much inflation or stagflation then thats a different discussion I don't buy the arguments here for deflation. Too much assumption about a static economy when in fact economies are dynamic This is exactly why that mild inflation is not necessarily a bad thing. Another point to make for savers/investors is that most asset prices increase faster then the rate of inflation (including dividends and similar payments). Why punish workers who save cash?
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twiifm
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![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
July 09, 2014, 07:12:10 PM |
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Its the individuals choice to save cash. Most people only save cash short term to buy something. Its not wise to save cash if you plan to hold for long term
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DannyElfman
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July 10, 2014, 11:10:02 PM |
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1.04 to the power of 40 or 4% interest over 40 years is alot of growth = 480% I think
I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.
Every time they give your gains, they exclude inflation usually. If you ever wondered why you arent getting any richer, thats probably it. Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.
Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today. Majority make higher wages as they compete in the workplace for promotions. Then they invest in real estate or retirement accounts. Most people dont care about mild deflation, they care about employment. If you are talking about too much inflation or stagflation then thats a different discussion I don't buy the arguments here for deflation. Too much assumption about a static economy when in fact economies are dynamic This is exactly why that mild inflation is not necessarily a bad thing. Another point to make for savers/investors is that most asset prices increase faster then the rate of inflation (including dividends and similar payments). Why punish workers who save cash? This would not punish people who save cash, as generally people can earn more with their bank account from interest then inflation would reduce the buying power.
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This spot for rent.
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STT
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July 11, 2014, 01:42:01 AM |
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Its the individuals choice to save cash. Most people only save cash short term to buy something. Its not wise to save cash if you plan to hold for long term
That might be true today but thats wrong in the grand scheme of things. Saving is not waste, pure cash kept in a biscuit jar sure I guess its not wise but savings deposited with a insurance or savings company is a good thing that supports a community. This is no longer cash then, it is investment A country needs capital for investment, it cant always be about debt because where does the money come from to enable that debt. At some point savings or unspent production must be directed towards investment, it cannot always be about spending every penny you've got. But hey dont worry, the asians are obsessed with saving, its their problem I agree about owning your own home and so on but that does require savings also, all debt is not a good idea or basis for an economy to operate on. Leverage adds risk and timing failure possible. In the end we see it ends up with government being forced to save consumers from themselves and because this is a democracy this has the country bending over backwards to serve people who failed to save, did not engage foresight in their actions or caution as to the consequences. In the end we are all poorer for not saving, for not being to access savings as a nation. Externally this gap is being covered by foreigners but this brings danger of imbalance and compromised sovereign integrity also
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twiifm
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July 11, 2014, 01:54:22 AM |
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Its the individuals choice to save cash. Most people only save cash short term to buy something. Its not wise to save cash if you plan to hold for long term
That might be true today but thats wrong in the grand scheme of things. Saving is not waste, pure cash kept in a biscuit jar sure I guess its not wise but savings deposited with a insurance or savings company is a good thing that supports a community. This is no longer cash then, it is investment A country needs capital for investment, it cant always be about debt because where does the money come from to enable that debt. At some point savings or unspent production must be directed towards investment, it cannot always be about spending every penny you've got. But hey dont worry, the asians are obsessed with saving, its their problem I agree about owning your own home and so on but that does require savings also, all debt is not a good idea or basis for an economy to operate on. Leverage adds risk and timing failure possible. In the end we see it ends up with government being forced to save consumers from themselves and because this is a democracy this has the country bending over backwards to serve people who failed to save, did not engage foresight in their actions or caution as to the consequences. In the end we are all poorer for not saving, for not being to access savings as a nation. Externally this gap is being covered by foreigners but this brings danger of imbalance and compromised sovereign integrity also Debt is risk. And if people want take on risk then let them. Who am I to tell someone not to take a student loan or borrow money for startup that might fail. If people use credit to buy cars or whatever. Thats fine by me too. I thought bitcoiners were libertarian?? But deposit accounts aren't necessary for bank to create credit. Savers aren't required for capital
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theonewhowaskazu
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July 11, 2014, 01:55:07 AM |
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Inflation doesn't directly hurt or help the economy. Its basically just slowly shifting the accounting units. Just makes doing some math a bit harder lol.
When it starts hurting is if inflation isn't distributed evenly (i.e, only the fed gets to inflate the money supply, causing certain individuals to get disproportionate access to the newly printed funds), or if there are negative real interest rates. These two things tend to go hand in hand.
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theonewhowaskazu
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July 11, 2014, 02:05:11 AM |
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But deposit accounts aren't necessary for bank to create credit. Savers aren't required for capital
This is a lie. Savings are required for investment, because currency is a representation of labor an individual has expended without yet receiving a payout from this labor. For example, if I grow apples in my back yard and sell you the apples, you give me currency, which represents the amount of work, capital, and risk I put into growing those apples. You can print currency without anybody working, sure. But then somebody has to work to build the capital that you're basically borrowing from him in this scenario. (The currency you just printed representing your debt to him). If the person wanted consumption immediately upon receiving your currency (i.e, he wasn't a saver) he would give it back to you in return for some service of your own, destroying the currency in the process (the currency found its way back to the issuer). In this scenario, you are now the saver, because you now have put in labor to pay off your debt to the person you originally paid, without receiving any immediate consumption in return (you just get the thing you "invested" in). I suppose you could have refused to accept your own currency, in which case I suppose one can argue there was no saving, merely the unfulfilled promise of saving, i.e, theft. Long story short, unless somebody somewhere is willing to take on the disutility of working without an immediate consumption payoff (i.e, saving) then there can never be any investment. Now it might SEEM like there might be capital created without savings if the fed were to right now print $100M, lend it to a bank, who lends it to a company, who uses it to finance building a better oil rig for example, but indeed the savers are those that accepted the newly printed $100M as payment for their labour. If this currency never is repaid by the issuer, then that's equivalent of the theft explained in the prior example.
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twiifm
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![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
July 11, 2014, 03:08:49 AM |
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But deposit accounts aren't necessary for bank to create credit. Savers aren't required for capital
This is a lie. Savings are required for investment, because currency is a representation of labor an individual has expended without yet receiving a payout from this labor. For example, if I grow apples in my back yard and sell you the apples, you give me currency, which represents the amount of work, capital, and risk I put into growing those apples. You can print currency without anybody working, sure. But then somebody has to work to build the capital that you're basically borrowing from him in this scenario. (The currency you just printed representing your debt to him). If the person wanted consumption immediately upon receiving your currency (i.e, he wasn't a saver) he would give it back to you in return for some service of your own, destroying the currency in the process (the currency found its way back to the issuer). In this scenario, you are now the saver, because you now have put in labor to pay off your debt to the person you originally paid, without receiving any immediate consumption in return (you just get the thing you "invested" in). I suppose you could have refused to accept your own currency, in which case I suppose one can argue there was no saving, merely the unfulfilled promise of saving, i.e, theft. Long story short, unless somebody somewhere is willing to take on the disutility of working without an immediate consumption payoff (i.e, saving) then there can never be any investment. Now it might SEEM like there might be capital created without savings if the fed were to right now print $100M, lend it to a bank, who lends it to a company, who uses it to finance building a better oil rig for example, but indeed the savers are those that accepted the newly printed $100M as payment for their labour. If this currency never is repaid by the issuer, then that's equivalent of the theft explained in the prior example. Commercial banks have deposit accounts but shadow banks don't even have deposit accounts. How can you explain money creation from within shadow banking then? You're right that capital comes from production (in a Marxist sense). But even in the Marxist view savers aren't needed only labor A company does an IPO and sell stock. Voila! Instant capitalization. There are no savers here either
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STT
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Exchange 250+ Coins With 0% Fees
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July 11, 2014, 03:10:09 AM |
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Lumpy distribution of newly created money is it. Thats whats happening, those closest to the FED are the ones who benefit most. The people to suffer most arent even in USA, they use dollars as their national currency and they dont even receive them till its grubby and used ten times already. By then the money they get is worth far less then the FED bought its bonds with. Hate to say it but its kinda similar to Mugabe paying out his war pensions, the new money worked fine but if you were far down the line in the economic chain the cash worth was far less then half in that case Savers aren't required for capital Cash is a promissory note. It is a promise to deliver in future some worth. That is what we use for money now, we used to exchange metal and the coin itself could be melted right. WE dont do that and maybe its clever but we do have to exchange something. If I promise to pay you and I dont, its a failed contract. I know people can get away with it but as an economy, this would not make sense. A saver or some kind of capital is required behind the money exchanged. A bill is produced and a payer is required or the note to describe the transaction is no use, so its just allowing transmission of work. One day I work hard till tired or ill even and I dont use up all my work in favours, I save my labour to spend another day when I need it. I think thats roughly how it works, I rely on the job contract to pay me and utilities who service me then rely on me to pay them, theres a chain there and Im saving one day to spend another. Maybe its a really tight chain, I work for the utility company! Or maybe its super long chain and the promise is going to Zimbabwe and they send us back diamonds or who knows but its about paying and saving really?
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twiifm
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July 11, 2014, 03:26:10 AM |
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Lumpy distribution of newly created money is it. Thats whats happening, those closest to the FED are the ones who benefit most. The people to suffer most arent even in USA, they use dollars as their national currency and they dont even receive them till its grubby and used ten times already. By then the money they get is worth far less then the FED bought its bonds with. Hate to say it but its kinda similar to Mugabe paying out his war pensions, the new money worked fine but if you were far down the line in the economic chain the cash worth was far less then half in that case Savers aren't required for capital Cash is a promissory note. It is a promise to deliver in future some worth. That is what we use for money now, we used to exchange metal and the coin itself could be melted right. WE dont do that and maybe its clever but we do have to exchange something. If I promise to pay you and I dont, its a failed contract. I know people can get away with it but as an economy, this would not make sense. A saver or some kind of capital is required behind the money exchanged. A bill is produced and a payer is required or the note to describe the transaction is no use, so its just allowing transmission of work. One day I work hard till tired or ill even and I dont use up all my work in favours, I save my labour to spend another day when I need it. I think thats roughly how it works, I rely on the job contract to pay me and utilities who service me then rely on me to pay them, theres a chain there and Im saving one day to spend another. Maybe its a really tight chain, I work for the utility company! Or maybe its super long chain and the promise is going to Zimbabwe and they send us back diamonds or who knows but its about paying and saving really? Hmm, I'm not sure which country uses USD except the USA. A lot of foreign investors do hold US Bonds. But thats not really the same thing I'm not saying savings is not important. I'm saying its not necessary to create money (credit). There are a lot of ways for companies to raise capital without going to commercial banks (that have deposit accounts). For example investment banks, private equity, etc.. Even within commercial banks, they don't need deposit accounts. They need reserves, which they can get from interbank lending, repo market, FED funds
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DannyElfman
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July 11, 2014, 03:38:50 AM |
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But deposit accounts aren't necessary for bank to create credit. Savers aren't required for capital
Banks use the money that depositors have in their accounts to lend to borrowers. Banks need to keep a little bit of their own money (capital) on hand to protect their depositors in the event that they lose money on some of their loans. If banks solely used their capital to lend money then the amount they would earn would be small and not worth it for banks to lend (they need to use leverage in order for the loan to make sense to them). Banks needs both capital and money from depositors in order to lend money.
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This spot for rent.
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twiifm
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July 11, 2014, 03:50:05 AM |
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But deposit accounts aren't necessary for bank to create credit. Savers aren't required for capital
Banks use the money that depositors have in their accounts to lend to borrowers. Banks need to keep a little bit of their own money (capital) on hand to protect their depositors in the event that they lose money on some of their loans. If banks solely used their capital to lend money then the amount they would earn would be small and not worth it for banks to lend (they need to use leverage in order for the loan to make sense to them). Banks needs both capital and money from depositors in order to lend money. You're talking about commercial banking. Shadow banking don't have deposit accounts. BTW, Before the 2008 WFC, the size of shadow banking was BIGGER than commercial banking. Read this article, it's interesting http://www.stlouisfed.org/publications/re/articles/?id=2165
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