Thoughts on money creation

I don't know much about finance but I think money is a representation of trust. If you have something of value you could barter it to get something else but in a functioning society with institutions you trade something of value for what would essentially be valueless without trust. When this circulates through an economy quickly it allows for resources to be exchanged rapidly and for development to take place.
 
@Nilotic theres also something called seignorage which is the real value that US government extracts from the world by printing dollars, estimated to be 20 billion usd pr year according to Krugman. Basically means the US government steals 20 billion from the world by just printing money.

I heard about seignorage a couple of years ago and I think you're referring to this quote:

What is true is that the large holdings of US currency outside the United States — largely in the form of $100 bills, held for obvious reasons — represent, in effect, a roughly $500 billion zero-interest loan to America. That’s nice, but even in normal times it’s only worth around $20 billion a year, or roughly 0.15 percent of GDP.

It's certainly not insignificant, however, you should definitely read Michael Hudson's 'Super Imperialism: The Origin and Fundamentals of U.S. World Dominance' if you want an in-depth view of U.S. economic hegemony and the mechanics behind it.

There's a 3rd edition of the book that I haven't read just yet, but look into it.
 
I don't know much about the financial world..

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Neither do I, mate. I just thought I would share what I learned from Richard Werner and Michael Hudson.

I studied Marketing, so I'm certainly not well versed in economics and finance; I want to return to studying at uni and take up economics from people like Bill Mitchell and Steve Keen, so that I can get a real handle on all of this.
 
I heard about seignorage a couple of years ago and I think you're referring to this quote:



It's certainly not insignificant, however, you should definitely read Michael Hudson's 'Super Imperialism: The Origin and Fundamentals of U.S. World Dominance' if you want an in-depth view of U.S. economic hegemony and the mechanics behind it.

There's a 3rd edition of the book that I haven't read just yet, but look into it.
there is something called 'weaponization of finance' which is the power to exclude people and crountries from financial markets.
 
there is something called 'weaponization of finance' which is the power to exclude people and crountries from financial markets.

The United States regularly throws its economic and financial weight around and the term 'weaponization of finance' is certainly an apt description of its global conduct.

I came across two great articles on this imperial practice.


 
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Neither do I, mate. I just thought I would share what I learned from Richard Werner and Michael Hudson.

I studied Marketing, so I'm certainly not well versed in economics and finance; I want to return to studying at uni and take up economics from people like Bill Mitchell and Steve Keen, so that I can get a real handle on all of this.
you now the theories in economics is not a natural law that always works, sometimes when economists test those theories in reality they dont hold up completely, its really a social science that studies human behavior and its changing, same with finance, the field of econometrics tests the theories with real world data
 
Bank of England source on money (credit) creation:


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This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.


Source:

 
Thanks for sharing this. I always thought it was predominantly central banks that created money.

You're welcome, mate.

Very few people know that commercial banks create 97% of the money supply through double-entry bookkeeping via credit creation.
 
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You're welcome, mate.

Very few people know that commercial banks create 97% of the money supply through double-entry bookkeeping via credit creation.
I imagine there's regulations that restrict how much money a bank can create, right? Probably linked to how much capital they have?

But surely money these regulations differ from country to country?

I guess it's in the bank's own good that they don't lend too much money, so they don't fail.

It is an interesting topic. I'll read into it tonight hopefully.
 
I imagine there's regulations that restrict how much money a bank can create, right? Probably linked to how much capital they have?

But surely money these regulations differ from country to country?

I guess it's in the bank's own good that they don't lend too much money, so they don't fail.

It is an interesting topic. I'll read into it tonight hopefully.

Yes, there are regulatory and market restraints on credit creation by the commercial banks.

From the same Bank of England source:

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I imagine there's regulations that restrict how much money a bank can create, right? Probably linked to how much capital they have?

But surely money these regulations differ from country to country?

I guess it's in the bank's own good that they don't lend too much money, so they don't fail.

It is an interesting topic. I'll read into it tonight hopefully.
banks are really greedy, if they happen to be so important that no one can allow them to fail then they could act reclessly since they wont suffer the consequences because they will get bailed.
 
The central banks have an inflation target typically of 2%. it exists because its an insurance against recessions. Economists believe in a neautral rate of interest that brings the economy to full employment, which could potentially become a negative interest rate in a recession.

Today interest rates are very low and some inflation is needed to create a negative neautral rate. So inflation is good, according to economists.
 
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banks are really greedy, if they happen to be so important that no one can allow them to fail then they could act reclessly since they wont suffer the consequences because they will get bailed.

That's precisely why they should be turned into public utilities instead of private, for profit enterprises; their singular purpose should be to help the economy grow.
 
That's precisely why they should be turned into public utilities instead of private, for profit enterprises; their singular purpose should be to help the economy grow.
Thats not a bad idea, but they still have to be profit driven otherwise a bank collapsing hurts everyone. Either way, stateowned banks dont necessarily operate differently, the difference is the gambling US banks do would be much less because the government as investor wouldnt allow that, since the government is not a risky investor.

But investment banks should be private.
 
Thats not a bad idea, but they still have to be profit driven otherwise a bank collapsing hurts everyone. Either way, stateowned banks dont necessarily operate differently, the difference is the gambling US banks do would be much less because the government as investor wouldnt allow that, since the government is not a risky investor.

But investment banks should be private.

Strict credit guidance is precisely what's needed for the banking sector; credit should not be used for profligate, unsustainable consumption or asset bubbles.

I'll have to do more research on investment banks before I can say anything on it.
 
Strict credit guidance is precisely what's needed for the banking sector; credit should not be used for profligate, unsustainable consumption or asset bubbles.

I'll have to do more research on investment banks before I say anything on it.
Money goes where the highest return is. Asset bubbles are created because bonds have low returns, so people buy stocks to get higher returns. And thats important because insurance funds and pension funds need high returns for people to retire or pay out insurance money. And right now bonds give low returns so risky investments get more money and that creates bubble.

This is actually what created the financial crisis (part of it). The federal reserve lowered insterest rates and bonds returns got low, so investors started looking for riskier investments and that created a bubble. Right now we also have a bubble because interest rates are low.
 

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