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mvassilev
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posted November 19, 2009 10:36 PM |
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In reality, though, this doesn't happen, because banks still lend out their deposits.
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TheDeath
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posted November 19, 2009 10:41 PM |
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In reality, though, this doesn't happen, because banks still lend out their deposits.
Yes because that model is flawed, or it goes into government's account (or rather, to someone's account where the gov buys from).
Also I thought Treasury Bonds are temporary as well. If that's true, then the increase in reserves is also temporary.
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mvassilev
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posted November 19, 2009 10:42 PM |
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The government eventually pays off T-bonds, so they are indeed temporary - but they money they use isn't. 
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TheDeath
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posted November 19, 2009 10:45 PM |
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The government eventually pays off T-bonds
With taxes, aka people's money, so it's like it increases money then decreases, same effect. Temporary.
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baklava
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posted November 19, 2009 11:15 PM |
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You two haven't considered an MSN conversation or something, have you?
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Binabik
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posted November 19, 2009 11:19 PM |
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It's not really temporary. This goes back to what I was trying to say about taking a concept from one model and applying it to another. It can break down when you do that.
If a bank lends money to a single INDIVIDUAL (person A), that person eventually pays it back. So HIS debt is temporary. But the money is re-loaned and the money remains in circulation.
It's not like the specific money from person A was re-loaned. There are thousands of people making deposits and thousands taking out loans. The loans are paid back a little at a time. The NET AFFECT of the money constantly going into and out of the bank is money that stays in circulation. The individual transactions are temporary, but the loaned money stays in circulation.
Consider if there is a group of 5 people and I lend them a ball. They take the ball and pass it from one person to another. Each person only has the ball temporarily, but the ball itself stays in circulation and keeps getting passed around the circle.
Now expand that a little. We are all talented jugglers and have 100 little balls. The five people are in a circle and I'm in the middle (the bank). I take 80 of the balls and throw them into the circle, with each juggler getting some of them. The jugglers keep passing the balls from one person to another. They also pass some back to me every now and then.
So balls are flying everywhere, with most of them being passed around between the jugglers. When they pass the balls to me, I have more than I really need, so I toss them back into the circle. The individual balls don't really matter. But ON AVERAGE, at any given time, I have approximately 20 balls and the jugglers have 80.
I know you want to know where the balls came from, but keep that as a separate issue. Suffice it to say I just happened to have some.
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DagothGares
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posted November 19, 2009 11:20 PM |
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but then I wouldn't be able to read it 
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TheDeath
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posted November 20, 2009 12:10 AM |
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@Binabik: but that's only a constant increase. No matter how many people deposit that guy's loan, it's still the same money, and that is compensated with the fact that the guy will need to repay his loan -- possibly by selling stuff (i.e "taking" other people's money).
Not to mention that further on the line, banks will be able to loan fewer and fewer money (since they keep reserves), so there's a maximum that can be reached quickly (exponentially quickly).
The money, of course, has to increase constantly... how?
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baklava
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posted November 20, 2009 12:11 AM |
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I know you want to know where the balls came from, but keep that as a separate issue. Suffice it to say I just happened to have some.
I'll just quote this out of context to add a bit of productive shock to this discussion.
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Binabik
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posted November 20, 2009 01:26 AM |
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Wow, in that context, I was right in the middle of a bunch of guys playing with their balls. If being a banker means being the central target of a circle jerk I don't think I want the job....
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mvassilev
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posted November 20, 2009 01:26 AM |
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We are all talented jugglers and have 100 little balls.
dot dot dot
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With taxes, aka people's money, so it's like it increases money then decreases, same effect.
Well, yeah. (Unless it issues new treasury bonds, which it inevitably does.) That's why government debt is bad. But if the government issues T-bonds and then the Federal Reserve buys them, then the government does not have to pay them off, so the money supply increase remains.
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posted November 20, 2009 01:34 AM |
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That still doesn't work because it would mean that most of people's money doesn't belong to anyone's account -- either that or loans become bigger and bigger (without the deposits increasing). I don't think it's how it works at all, mvass, because then the reserves which do not belong to any deposit would constitute 99% of all the loans.
If there's only $1000 in deposits, but then let's say after 10 years we get to 1 million $, that $999,000 must be a loan (since the deposit is $1000 and doesn't increase in your model).
Yes, paying the loan back is problematic. The reason is because the money has to come from other people -- so even though they deposit the loan further, they also lose their others' deposits (i.e the lender sells something) which then goes to the bank to pay off the loan...
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mvassilev
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posted November 20, 2009 01:41 AM |
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then the reserves which do not belong to any deposit would constitute 99% of all the loans.
You're still thinking in terms of reserves "belonging to a deposit". They don't. Reserves are a homogeneous pile from which anyone can withdraw up to the amount that they have deposited. If the two of us each deposit $1000 and the bank then lends out $1800, then either one of us can withdraw up to $200, even though there's only $100 left from each of ours' individual deposits. Selling treasury bonds adds to that reserve pile, so if the bank sells $100 worth of treasury bonds, $100 is added to the pile, so now one of us can withdraw up to $300.
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posted November 20, 2009 02:24 AM |
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I'm talking about the total deposits. If the bank has $1000 in deposits by x people (means: if ALL people withdrew all of their deposits, the amount would be $1000), and $1100 in reserves, doesn't it sound strange to you?
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mvassilev
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posted November 20, 2009 03:18 AM |
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Right, but because the bank wants to maximise its profits, it'll lend out as much money as possible while minimising the risk of a bank run - so that'd never happen.
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TheDeath
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posted November 20, 2009 03:29 AM |
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Ok this is getting nowhere, you clearly don't see that all the increased money is not part of deposits and why it doesn't work that way. With the above logic, banks could lend $100 with absolutely 0 risk of bank runs, since they would keep all the deposits intact. (look again at the reserves vs deposits). The fact is that reserves can never be greater than the deposits (total), regardless of lending.
If you went through several stages with the above logic you could arrive at the scenario where the deposits are $1000 but the reserves are $10,000! Clearly invalid.
Not unless the reserves are taken after some time by the government (taxes) for the Treasury Bonds it issued.
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mvassilev
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posted November 20, 2009 03:33 AM |
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Obanks could lend $100 with absolutely 0 risk of bank runs
Or they could lend $101 (and make even more money) and have an almost 0 risk of bank runs. After all, what are the chances that all of their depositors will come to withdraw all of their deposits at the same time? Or lend $102... Eventually, this process balances out somewhere.
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TheDeath
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posted November 20, 2009 03:46 AM |
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Or they could lend $101 (and make even more money) and have an almost 0 risk of bank runs. After all, what are the chances that all of their depositors will come to withdraw all of their deposits at the same time? Or lend $102... Eventually, this process balances out somewhere.
/facepalm
that wasn't the point. When it becomes that they can lend $99,000 without risk, don't you see a blatant problem, since the money possessed by people isn't increased at all? That's not how it is in real life, people's deposits are not the ones from 50 years ago. Why are you insisting on that wrong model you know it's fake?
Here's my take:
The government is the sole entity who can add to the economy, for itself. Government issues Treasury Bonds to the Fed, say $100, and buys something with it. So that's where money gets injected (into that person's pocket).
Now there's $1100 in circulation, loans and such don't really matter. Of course the government got the stuff it bought for free (heh), which it has to pay back after the T-Bond expires.
The Treasury Bond has to be paid back, of course, it has a certain term or lifetime. So over the years taxes can be used to get it, in this case from the $1100, suppose the gov gets $100 and pays the T-Bond.
So basically taxes don't increase the government's economy but rather pay off its debts.
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mvassilev
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posted November 20, 2009 03:55 AM |
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When it becomes that they can lend $99,000 without risk
Remember, as the bank is lending, people are depositing the proceeds of the loans, so the deposits are growing as well.
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The Treasury Bond has to be paid back, of course, it has a certain term or lifetime.
The government does not have to pay the Fed anything - if the Fed ends up with Treasury bonds, there is no net exchange of money between it and the government. If a bank or private individual owns a Treasury bond, then the government has to pay them. But it doesn't have to pay the Fed.
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TheDeath
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posted November 22, 2009 03:03 AM |
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Remember, as the bank is lending, people are depositing the proceeds of the loans, so the deposits are growing as well.
...and others are LOSING their money by giving it to the guy who took the loan (he sells something) so he can REPAY his debt. So the net effect is 0 deposit increase.
For example: Guy takes a $100 loan ($1000 deposits), spends it on Bob, Bob deposits $100. There are now $1100 in deposits. Earl takes $100 from his deposit, and gives it to Guy. Guy then repays his debt. There are $1000 deposits, back to starting point, because Earl lost his deposit so Guy can repay his debt. Which was the whole point of the loan, it's not free money.
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The government does not have to pay the Fed anything - if the Fed ends up with Treasury bonds, there is no net exchange of money between it and the government. If a bank or private individual owns a Treasury bond, then the government has to pay them. But it doesn't have to pay the Fed.
I thought the Fed was holding the T-Bonds. 
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