Could take 5-8 years to shrink Fed portfolio: Yellen

[theonewhowaskazu]

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

The savers are the people that bought the stock...

How do you not see this. Or do you only define "savings" as "holding cash reserves or other cash reserve denominated debt?" Because I'm pretty sure that's not how most people would define savings.

I also don't understand how its at all Marxist to say that money is the promise of labour, or something worth an equivalent amount of labour, in the future. AFAIK thats a pretty well accepted fact.

Furthermore I don't understand why you are quite so obsessed with "shadow banking." There's nothing special about a "shadow bank" rather than any other bank. It matches savers up with creditors just like any other bank. In some cases the savers might be the equity holders of the bank itself, but this changes the purpose of the bank not.

[twiifm]

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

The savers are the people that bought the stock...

How do you not see this. Or do you only define "savings" as "holding cash reserves or other cash reserve denominated debt?" Because I'm pretty sure that's not how most people would define savings.

I also don't understand how its at all Marxist to say that money is the promise of labour, or something worth an equivalent amount of labour, in the future. AFAIK thats a pretty well accepted fact.

Furthermore I don't understand why you are quite so obsessed with "shadow banking." There's nothing special about a "shadow bank" rather than any other bank. It matches savers up with creditors just like any other bank. In some cases the savers might be the equity holders of the bank itself, but this changes the purpose of the bank not.

I can see why you are confused.  I'm responding to the idea that you need savings to capitalize the economy.  You define a saver as a person who saves.  But I define a saver as a person w a savings account so I can use the term savings & saver interchangeably.  I think I'm using banking language but you are using common language.

Savings = savings account (deposit account).  A saver is someone who has a deposit account.  Bank pays interest on deposit account
Stock = Investment account.  Investor is someone who has investment portfolio.  Investor take some risk

1 person can be both saver & investor at the same time.  But when your money is in savings account you are a saver.  When you money is in stocks you are an investor.  The guy can withdraw money from his savings account to buy stocks but its not "necessary".  He could be using money from selling his house, from his checking account, money gift, whatever.  Its not necessary to have savings in order to have capitalization.  

Capitalization happens when a company sells its stock to investors.  Neither the company, the investor, or the underwriter need to be savers in this scenario.  Its totally possible for an economy to exist without savings.  Savings are good when you are starting out and you need to accumulate funds.  Doesn't mean its necessary.  Did Zuckerburg need savings to start Facebook?  I don't think so.  He got an investment from his roommate, then other and bigger investors.

Shadow banking perform same function as a commercial bank (albeit in a different manner).  They function as credit intermediary.  The difference is that they are unregulated so they are not required to have any deposit accounts at all.  And most of them don't.  Once again no savings (deposit account) is needed to create money.  Deposit accounts are probably a very small portion of finance.  Saving is good for the individual but has minimal effect on the larger economy

I brought up Marx because someone made an example of labor to capital which was Marx contribution to economics.  But even when you equate labor to capital no savings are needed in that equation either

[unpure]

Investment should not be classified as saving.

There is a reason why glass steagall act is there after the great depression. The 2008 meltdown should not be a surprise for scholars of great depression.

[InwardContour]

Investment should not be classified as saving.

There is a reason why glass steagall act is there after the great depression. The 2008 meltdown should not be a surprise for scholars of great depression.

Saving is very much investing. When you put cash in the bank, you are "investing" in a savings account, the same is true with a CD. The only difference between these investments and traditional investments (like stocks, bonds and index funds) is that bank deposits have much less risk.

[RoadTrain]

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 forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

[STT]

Investment should not be classified as saving.

There is a risk to saving, the only reason we might believe otherwise is government guarantees.     Everybody here accepts you can give (or lend) your money to someone and they fail to pay it back.    When you deposit cash at a bank, it feels alot safer.   They promise to always return the original amount no matter what.   They promise to give interest usually no matter what also.  
However a bank can fail, either totally or partially they can fail to return the original amount.     Everyone accepts this surely?    Some banks did lend to sub prime, a bank could just fail to keep good accounts, be corrupted or lose via theft.   It might not be their fault but a bank can lose your savings and maybe thats only a 1% risk but its real

When you put cash in a bank it is no longer pure cash.   As said, most banks are using fractional reserve.   There is risk in this and we are risking our cash to get interest.     Now to me this sounds mighty close to investment

Im not going to argue over a word like this, its pointless.  No doubt the FED backs the idea saving is antiquated, they certainly have done their best to make that true

http://www.youtube.com/watch?v=wM1DgihKHVI

[ShakyhandsBTCer]

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 forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

When banks loan money to companies the company does not need to deposit the funds from the loan at the same bank, the funds end up in the banking system, not the lending bank.

[RoadTrain]

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 forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

When banks loan money to companies the company does not need to deposit the funds from the loan at the same bank, the funds end up in the banking system, not the lending bank.

It doesn't matter, anyways loans create deposits, that was my point.

[ShakyhandsBTCer]

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 forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

When banks loan money to companies the company does not need to deposit the funds from the loan at the same bank, the funds end up in the banking system, not the lending bank.

It doesn't matter, anyways loans create deposits, that was my point.

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

[RoadTrain]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

[InwardContour]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

[twiifm]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

[hollowframe]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

[RoadTrain]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

[hollowframe]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

Not necessarily as now the borrower would have additional monthly cash flow (that they previously used to repay the loan every month) to use to invest in the economy. The bank would then also have additional capital to lend to others who need a loan.

[RoadTrain]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

Not necessarily as now the borrower would have additional monthly cash flow (that they previously used to repay the loan every month) to use to invest in the economy. The bank would then also have additional capital to lend to others who need a loan.

Do you know where does this additional cashflow come from? From borrowings as well. The money that banks issue is always backed by  the liability of equal size. This is called 'double-entry accounting principle'. The process of expanding credit can only continue until interest burden becomes too heavy, then credit starts to collapse, so does the economic activity and money aggregates. Unless the gov't starts to fix private sector's balances by deficit spending.

[hollowframe]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

Not necessarily as now the borrower would have additional monthly cash flow (that they previously used to repay the loan every month) to use to invest in the economy. The bank would then also have additional capital to lend to others who need a loan.

Do you know where does this additional cashflow come from? From borrowings as well. The money that banks issue is always backed by  the liability of equal size. This is called 'double-entry accounting principle'. The process of expanding credit can only continue until interest burden becomes too heavy, then credit starts to collapse, so does the economic activity and money aggregates. Unless the gov't starts to fix private sector's balances by deficit spending.

Once the borrower had paid off their loan with profits they would be able to spend an equal amount of money that they were using for debt repayment on other investments. Additional borrowing would not necessarily need to take place for this to happen, only higher asset prices.

[RoadTrain]

Once the borrower had paid off their loan with profits they would be able to spend an equal amount of money that they were using for debt repayment on other investments. Additional borrowing would not necessarily need to take place for this to happen, only higher asset prices.

Additional borrowing economy-wide.
Asset prices are in dollars, can you explain how they contribute to money supply?

[blumangroup]

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

If banks have any excess capital then this would not be the case. This is only true when all of a bank's money is deployed, which pretty much never happens.

[RoadTrain]

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

If banks have any excess capital then this would not be the case. This is only true when all of a bank's money is deployed, which pretty much never happens.

I don't get your point, care to elaborate?