Hedgology
Banned
- Joined
- May 31, 2018
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And I'm talking about the stuff that pays for your house or car when you get a loan. You are again focused solely on your bank's profitability.
So when you get a car loan for $5000, the car dealer ultimately gets a $5000 deposit into his account. Where do those funds come from? Nobody is interested in the grainy details that you are offering up.
But I'm talking about how you would get the stuff that pays for your house or car. Bank profitability is why a loan will be created, which is determined by loans and Treasury contributions, which is determined by the optimal volume of loans and deposits. This doesn't happen simply because society wants it to happen. Banks
Not at all. We just cut through all of the BS to get down to the basics of money creation. So all of the details you have been going on about, we cover with the simple phrase, "creditworthy borrower." That is plenty to get across that of course banks won't make unprofitable loans.
Money doesn't get created unless you understand this concept. There are constrains on this, like everything else. Banks are constrained by profitability; they're contained by capital, whether it's regulatory or self-imposed; and they're also constrained by the optimal volume of deposits. Everything you are citing is based on a theory; which is fine. However, your theory forgot to acquire a grasp of how banks operate..
Deposits are only important for being a cheap source of reserves. If you are saying something fundamentally different than this, then explain yourself in more detail.
Correct, thing is that deposits aren't the only sources of funds for a bank. If the bank wishes to increase it's loan portfolio, the expected income from an additional dollar of loan will go down because the bank needs to reduce the interest rate to attract the additional dollar of the loans, or because the bank accepts a loan of lower quality. A bank wouldn't do this because the funding cost of the loan would exceed the product price profitability of the loan.
I'm not crafting anything myself. The fact that banks create M1 money (loans create deposits) is widely accepted now, and no less an authority than the Bank of England has demonstrated this. https://www.bankofengland.co.uk/-/m...2014/money-creation-in-the-modern-economy.pdf
Your source is talking about expansion as a result, not the cause. I am referring to the cause, which is determined by a banks Treasury.
But just determining that banks don't necessarily need deposits to make loans is a very important step in getting to the correct answer and making people understand what is and isn't really key. Joe Schmo still believes in the loanable funds theory of banking. He also believes that the government is in trillions of dollars of actual debt. So these are important things to nail down.
But they do need deposits. That is how they are able to expand their loan portfolio. Commercial banks that operate with so little demand deposits run the risk of having a very small loan portfolio.
Now that we have established that deposits aren't necessary (because banks don't lend )...
Irrelevant. You've established on your own that deposits aren't necessary. I say that deposits are necessary, so I don't see the point in addressing this premise.
Not in any way similar to inventory that stacks up in warehouses, though.
Also irrelevant. Inventory can be used for the purposes of sales or the creation of services, which is the
[/QUOTE]I believe that this whole thing started based on the claim by Conservative that savings helped GDP. And I still hold the position that savings out of income - any savings - is a demand leakage, according to the circular flow of income model.
https://en.wikipedia.org/wiki/Circular_flow_of_income
Leakages only occur if they are greater than injections. This was already pointed out, and your source even points that out. Leakages, similar to injections describe a disequilibrium. You keep talking about leakages, but you don't want to talk about equilibrium. At some point, you're going to have to recognize that they're both related in this model.