A Black Hole In Economics: Money Creation And Its Consequences, Session Three
"Money From Nothing": a system of pure credit creation
Here’s a recording and manuscript of Session Three (of nine) from my course on money creation, now available to HardmoneyJim subscribers at no charge.
Session Three’s title, “Money From Nothing,” reflects that all the money we use today originates from a loan or asset purchase in a commercial bank. Here’s a fun fact: even the paper dollars circulating in the economy were born as bank deposits, which in turn were created when a commercial bank loaned money or purchased a financial asset.
Want to be the financial genius at your next holiday party? Listen to (or read) this post for the true but controversial details! :)
As usual, a manuscript with detailed notes and references is attached for those who would prefer to read the content or examine my sources, all of which are fully documented.
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HardmoneyJim
December 15, 2023
Jim -- first, thank you for taking the time to put down your research and thoughts on paper -- it is valuable.
Up until this part (Part III), I've had no issue with any of the material you have presented. I think you give a good sense of how 'historically' the system used to work (in a stylized bank under the gold system), and how money is created today (by being loaned into existence). This is valuable.
I have a couple of comments that I hope you consider. First, let me preface my comments saying that I am making them from a position of humility (I do not claim to have a comprehensive, yet alone definitive, understanding of money and banking, so under no circumstances am I screaming 'you are wrong' or that 'I could do better'. I very clearly could not). So take my comments, suggestions, and concerns (about what you have written) in that context.
My first observation is on the 'frame of reference' to your narrative. You appear to be writing 'the story of money and banking' from the perspective of 'Mr. Joe Average Citizen' -- explaining to them what their 'deposits' in the bank really mean, 'where' their loans come from, how 'fiat' currency is created, etc. This is great, needed, and useful for pretty much 'everybody'. However, this 'frame of reference' and 'starting point' is not necessarily a good 'frame of reference' for someone wanting to understand 'hot topics' in global macro and finance 'right now'. For example, someone trying to understand global macro issues (such as how bank's use 'wholesale money' or how 'collateral shortages' and 'constrained bank balance sheet capacity' affect lending) might not want to wade through the many pages of stylized discussion and simplified 'basics' to get to 'the answers' you might ultimately provide.
The 'so what' of this particular comment pertains to your proposed 9 part series. Is the 9 part series you are writing going to be 'useful enough' to readers with those kinds of questions? Do you need a different 9 part series telling 'your story' from different starting perspective? For example, when your son or daughter asks 'where do babies come from?", where do you begin your answer? When they are five years old, you might start the story one way, in a particular narrative direction and certain level of detail. However, when they are 15 (and studying for a genetics test), you might pick it up in a very different manner. I am supposing that you have useful insights to add in both of those scenarios (the beginner primer for the 'very young' and a more detailed examination for the moderately advanced or even 'expert') -- you just might need 'more' narratives than what you are currently envisioning (i.e. your 9 part story) to serve all of those different audiences. The fact that you think that 'many experts get QE wrong' is a good argument that both the 'young' and the 'advanced' need 'talking to'. It is unlikely that one narrative 'ring' is going to be 'good enough' to 'rule them all'.
My second comment relates to some of your 'advanced' comments regarding today's 'hot topics'.
In today's article, you state that you believed that QE was effective in (meaningfully) increasing the money supply (because the assets purchased by the Fed were from private individuals). I am no expert (and even if I was, I doubt you would accept 'correction' from me based on that self-claimed 'expertise'). Therefore, I am not saying that 'you are wrong' about this. Instead, what I am saying is that 'you may be wrong here' -- and that you need to do a much better job demonstrating that you are right.
For example, were most of the assets purchased by the Fed actually purchased from private hands (and not from Financial institutions that hold such assets on their own behalf)? Can you show this empirically? Or even if you can, do concepts such as 'the velocity of money' play a role (and perhaps make the practical effect of such QE de-minimus because the private individuals merely sink those funds into savings rather than consumption)?
Or what if you can show that these 'objections' are 'false' -- but the totally effect of such an increase in the domestic money supply is inconsequential in light of the total amount of debt (money supply) being unwound worldwide due to debt repayment (i.e. deleveraging)?
My point here is not to debate you on these points (I am not qualified to do so) - but I do listen to many people smarter than me on these topics and I am aware that some of those people might make those objections (or ones similar to those objections). Therefore, what I am suggesting is that you need to 'go more slowly', 'provide more data and evidence', and or entertain (and dismantle) other points of view more comprehensively than you do than in today's article. Merely claiming that 'experts' that disagree are 'wrong' is not enough. These topics are 'big fish' -- you need stronger rods and test lines if you want to successfully land such creatures.
Best regards
Hi Jim,
I'm not going to talk about deposits not being a means of payment today, but rather point out that the BoE should not be seen as the originator of the theory that banks create "money" when they lend. Because if you look at this letter from 2013, you will see that the FASB had already categorized "deposits" as "cash". Thus, they identify the bills and the deposits, from which it follows that when banks create deposits under a loan agreement, they are also creating cash.
http://www.iicpa.com/publications/Open%20letter%20accounting%20perversion.pdf
So the BoE has just copied this theory and wrapped it up a bit nicely, without referring to its source. She can do that, but shouldn't get caught out...
The source quoted in the letter is:
https://law.resource.org/pub/us/code/bean/fasb.html/fasb.305.2011.html
which can currently (for unauthorized persons) only be accessed via archive.org, saved on January 26, 2016.
A note: "currency in circulation" is a misleading term, because on the one hand it is the liability position originating from the issuance of banknotes at the central bank, on the other hand (in your case) the banknotes in circulation among the public. It seems appropriate to choose different expressions.
And, related: You do not explain (or maybe I overlooked it) how the banknotes are emerging at the central bank, or which processes are necessary for this. That is a big hole in the explanation.
Best regards