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Inflation, Hyperinflation, and M3


PeptoAbysmal

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6 minutes ago, SuperTramp said:

You misunderstand, I didn't say that loans are left unspent, I said a loan is created as a bank deposit, that more often than not is transferred to somebody else's account in the form of another bank deposit.

Example:-

Person A, borrows, £100,000, from Bank A, to buy, 10 Acacia Avenue.

Bank A, credits person A's account with £100,000.

Person A, transfers, £100,000 to bank account of owner of 10 Acacia Avenue.

Even small borrowing is mostly done through the banking system with credit cards.

And most of the money is existence is in the form of bank deposits.

Weird and scary.

Thanks for all your explanations.  This is probably my 10th attempt to understand fractional reserve banking and I may finally be getting there.  

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PeptoAbysmal
2 minutes ago, XswampyX said:

I get all that. Thanks. 

But a bad debt (unpaid) doesn't shrink the money supply (it's still out there, somewhere). Paying it back does.

If both bad debts and good debts shrink the money supply then how do we get any inflation?

 

Paying back a part of a loan, or all of a loan, merely puts money back in deposit if it's paid back with physical money, or transfers a deposit in one account to a deposit in another account.

A bad debt has to be written off on the bank's balance sheet, and if that happens the bank needs to credit its reserve account at the central bank with funds from elsewhere.

If that doesn't happen the bank cannot trade, reserve accounts have to balance at the close of business every day.

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No. That's not how it works.

I take a loan, the bank "creates" it, and when I pay it off the bank destroys it. They make their money off the interest.

Quote

HOW IS MONEY ‘DESTROYED’ WHEN LOANS ARE REPAID?
March 26, 2013 by

When banks make loans, they record a new asset (the loan) and a new liability (the deposits that appear in the borrower’s account) on their balance sheet. When loans are repaid, the deposits (liabilities) are cancelled out against the loan (asset) and both sides of the balance sheet ‘shrink’. The deposits disappear from the economy. See Banking 101 Part 6 for an explanation of how this works.

Here :- http://positivemoney.org/faqs/how-can-money-be-destroyed-when-loans-are-repaid/

 

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1 hour ago, XswampyX said:

Who would take out a loan and not spend it? Either with cash or some other bank transfer, what's the point?

And when you pay back your £1,000 loan then you really have shrunk the amount of money in circulation by £1,000

Now I agree that the £1,000 bad debt loan will have to be paid out of the banks profits, but it won't destroy that £1,000 just that somebody else (the bank) will have to pay it.

 Maybe I'm looking at it wrong?

 

 

I think that's right.  Paying off the loan destroys the money.  Bad debt keeps the money in circulation.  

I suppose, in a simple closed system, you'd need the bad debt and to keep that money in circulation in order to pay for the interest on the loans* -- technically there isn't enough money from the loans to actually pay the interest (as that money does hang around after the loan is paid off).

But actually, the banks can just create a whole new pile of debt, that'll make the new money that'll be used to pay off the interest on the original loans.  So long as the banks are creating new loans all the time then there'll be enough money to service the old debt.  I helps (IMO is essential) that asset values also increase in value during this time otherwise there's no collateral to hold against the debt (there's only so much unsecured lending you can do).

But once you've got this sort of money-system, the thing that absolutely, definitely must never be allowed to occur is to have all the debt that's been issued be paid down, with no new debt created.  Then you'd have a debt deflation because there's not enough money around to actually service the interest on the old loans.

If that started to happen then you'd need someone to shovel money into the economy to stop disaster** -- either the government directly (through fiscal stimulus) or force/encourage the banks to do it (monetary stimulus).

[* but this wouldn't actually work -- the banks would occasionally collapse if it was like this, destroying money in the process.  To create sustained inflation in money supply someone somewhere at some point has to create real money that hangs around and that doesn't get destroyed] 

[** the banks going bankrupt]

 

 

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3 hours ago, reformed nice guy said:

Thank you for the very interesting topic.

Here is a question:

Wonga look like they are going under. If they have already written off £220m in debt and they go under, will all that have shrunk the money supply?

https://www.bbc.co.uk/news/business-45322061

Wonga weren't a bank.  They will default on their debt; the people that lent money to them will have seen their money be transferred to feckless idiots that didn't/couldn't pay the interest or just disappeared, or sued Wonga for being heavy-handed or whatever.  Anyway, they won't have influenced the money supply.

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On 30/08/2018 at 10:26, reformed nice guy said:

Thank you for the very interesting topic.

Here is a question:

Wonga look like they are going under. If they have already written off £220m in debt and they go under, will all that have shrunk the money supply?

https://www.bbc.co.uk/news/business-45322061

Depends if they have a banking licence.

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On 30/08/2018 at 00:43, SuperTramp said:

Paying back a part of a loan, or all of a loan, merely puts money back in deposit if it's paid back with physical money, or transfers a deposit in one account to a deposit in another account.

A bad debt has to be written off on the bank's balance sheet, and if that happens the bank needs to credit its reserve account at the central bank with funds from elsewhere.

 

That's as I understand it.It's the strength of the balance sheet that allows the bank to extend new loans.Capital losses on the asset side will invoke reductions in liabilities on the other side.

On 30/08/2018 at 00:57, XswampyX said:

No. That's not how it works.

I take a loan, the bank "creates" it, and when I pay it off the bank destroys it. They make their money off the interest.

Here :- http://positivemoney.org/faqs/how-can-money-be-destroyed-when-loans-are-repaid/

 

The bank may destroy it but most likely,they'll lend it to someone else.

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On 04/09/2018 at 06:50, Barnsey said:

Great listen which ties into many of the ongoing topics we discuss, an hour long but flew past for me, will probably revisit

 

@SuperTramp this is super,starts taklking Velocity after about 20,both cause and effect.Well worth the time if you have it.

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  • 2 weeks later...

Thanks Sancho, I've listened to the video once, however, they do cover a lot of ground very quickly. This is something I'm going to need to listen two or three times over.

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