Do loans and credit create new money?

[there4eyeM]

So, from your perspective, credit does not create new money?

See post 27; yes, checks, letters of credit and lines of credit are creation of money.

 

[Bootney Lee Farnsworth]

See post 27; yes, checks, letters of credit and lines of credit are creation of money.

But, that's not the creation of money. It's the creation of debt.

 

[there4eyeM]

But, that's not the creation of money. It's the creation of debt.

It is the creation of wealth, and usually results in goods and services.

 

[Bootney Lee Farnsworth]

It is the creation of wealth, and usually results in goods and services.

I would argue that it is the mere circulation of wealth. All new wealth comes from the land/earth.

 

[Stormy Daniels]

Credit does not create new money, but creates a need for more money to pay the debt.

It may create a need for the individual doing the borrowing, but it does not create a need within the overall economy in which the borrowing happens, right? In essence, the effect on GDP is nil, correct?

The premise often stated is that it is through the mechanisms of credit that money is created within an economy. That is to say, GDP increases when actors inside of the economy lend to other actors inside the economy. You, then, reject this premise?

 

[Dadoalex]

Liberals often talk about wealth disparity and wages as something akin to a zero sum game. CEOs make too much money, not leaving enough for others, that kind of stuff. Conservatives usually say that wealth has no limits and can be created if people just find a way. Credit is supposed to be one of the ways wealth is created, and government influence over credit allegedly affects creation of new wealth. When the fed cuts interests rates low, or even down to zero, it's allegedly no different than printing money out of thin air. But is it?

Does credit equate to creating new money? Why? How?

I put 100k in the bank...
Bank loans that money to a home builder who hires people to build houses
Those people put money in the bank
Which the bank in turn loans to people to buy cars
Which causes the car companies to build more cars using people to build them...

Now, let's give a guy 100M dollars.
Cool?
And lets give 1000 people 100k dollars

Pruducts 1 guy 1000 guys
TV 1 1000
Car 1 1000
House 1 1000

It is not "liberals" that treat the income disparities as "zero sum" it is people like you.
Liberals understand the multiplier effect
People like you only understand greed.


Thus explaining your limited understanding of the topics you're posting.

 

[Stormy Daniels]

See post 27; yes, checks, letters of credit and lines of credit are creation of money.

You're sending off mixed signals here. First you say that loaning 1 kilo of rice does not create new money in the island's economy, but now you say lines of credit are a creation of money.

 

[Dadoalex]

No:
- you buy something
- the credit card company pays the seller
- you pay the credit card company back.
How is that "new money"?

Here ya go...

What Is the Multiplier Effect? Formula and Example

The multiplier effect measures the impact that a change in investment will have on final economic output.

www.investopedia.com

Learn something today

 

[Dadoalex]

That's not quite how it works. But I understand your position, now.

Good.
That makes one of you.
His position is based on weird anti FED paranoia dating back nearly 90 years.
Betcha...
He wants to go back to the "gold standard"

Imagine this economy if you cut out 75% of the money.

Remember the economic collapse of 2008?
Bought about because the banks were selling mortgage securities that had no actual property value behind them.
When those collapsed, there was no money to pay for anything.
100B in the bank but couldn't get it because the bank had no money to pay deposits.

That's what this guy wants.

 

[Stormy Daniels]

It is not "liberals" that treat the income disparities as "zero sum" it is people like you.
Liberals understand the multiplier effect
People like you only understand greed.


Thus explaining your limited understanding of the topics you're posting.

Whoa now! I'm asking an honest, good faith question to stimulate discussion and gain better insight into other people's economic views. There is absolutely no reason to get a bad attitude. This has been a largely friendly conversation so far. If that's too much for you to handle...well that would say an awful lot about you.

 

[Dadoalex]

At one time, no the dollar was bound by the amount of gold in the reserve so the FED couldnt print any money other than with backing. It is the progressives who took the US off the gold standard allowing the debt and printing of oodles of money by the FED. Quantitative Easing, first by the brown turd Obammy was supposed to bring the US out of Progressive Andrew Cuomo's housing debacle, but all it did was delay the recovery while people like Steve Jobs , Elon Musk and Warren Buffet all took out loans at almost zero percent interest while investing in their company making 3 to 5 percent income per year. Now with the threat of higher interest rates, those debts are soon going to be higher than the income thus there will be a mad selloff of stock to cover, bringing a depression on the US. Who is the president again?

Your understanding of economics is exceeded by anything larger than a gnat's eyelash

 

[Dadoalex]

When a loan is made the Federal reserve prints it up or uses money already printed to loan out again. It is allowed to be laned out I believe 9 times each time worth 10% less from the previous loan. The fiat currency relies on constant credit expansion as it will implode with out it. However, in recent years it seems more likely and there can be just printing up money 24 hours a day to keep the system from collapsing from all the debt and promised payouts.

Try again...

What Is the Multiplier Effect? Formula and Example

The multiplier effect measures the impact that a change in investment will have on final economic output.

www.investopedia.com

 

[Dadoalex]

I'm curious. Back in the days of the gold standard, was new money not ever created? If it was, how was it created? Was there no inflation? If there was, what caused it?

There were massive regional and national
Depressions
Recessions
Inflation...

In this link check out the %decline in the "free banking" era and beyond.

List of recessions in the United States - Wikipedia

en.wikipedia.org

 

[Osiris-ODS]

Most people don't know what money actually is, Bootney.

All of the currency that is piling up is nothing more than a receipt for a claim check on an IOU bond.

Actual 'money' has to be a store of value and maintain its purchasing power over long periods of time, have a well defined unit of account to serve as a standard of value, and a medium of exchange.

Challenge any single one of our resident so-called 'experts' in the field to define the unit of account for one Federal Reserve Note and see what they tell you. Ask them to define their yardstick for measuring economic value. Heh heh. That'll be a hoot. They'll either look like a deer in headlights or pawn of some sensless troll remark or try to flip the script with some stupid, irrelevant counter-question to weasel away from it and re-steer the discussion. History is rife with example.

As you know, creating currency and credit out of thin air devalues the currency and inevitably leads to inflation.

Yep. My favorite illustration is the whiskey and water scenario.

 

[there4eyeM]

I would argue that it is the mere circulation of wealth. All new wealth comes from the land/earth.

Education is also 'wealth'. Good will is wealth. There are indeed intangibles involved.

 

[Stormy Daniels]

I had another poll/thread about printing money, and that seemed to get replies from a broad swath of people, with one of the responses a clear favorite. But this one about credit seems to be much more murky waters.

I'm not quite sure what to make if that. Perhaps people have stronger feelings about the effect of printing money on the economy. Maybe people are more knowledgeable (or at least believe they are). Perhaps many people aren't as well versed on the how credit influences the economy. Does this mean that many people here have only a cursory or superficial understanding of economics and therefore don't want to chime in on a more difficult topic?

 

[there4eyeM]

You're sending off mixed signals here. First you say that loaning 1 kilo of rice does not create new money in the island's economy, but now you say lines of credit are a creation of money.

Are you kidding or being obtuse?
You understand, we assume, that in the first, isolated case, all the parameters are fixed, known and limited.
In the second case, things are happening in a diverse and wide-spread world. When the merchant leaves Florence with his letter of credit to go to the fabric fair in Troyes, France, the gold stays in Florence, thus sparing the poor fellow the weight and danger of carrying it. The letter is accepted at the fair as exchange, money. Thus the value of the gold is in at least two places at once (and may have further been 'loaned' against in the meantime). This way, the same quantity of valued metal serves to create wealth in various places. It builds factories here, buys land there, purchases goods for transformation wherever. These things create jobs and the wealth continues to develop. The gold stays put.

 

[Stormy Daniels]

Are you kidding or being obtuse?
You understand, we assume, that in the first, isolated case, all the parameters are fixed, known and limited.
In the second case, things are happening in a diverse and wide-spread world. When the merchant leaves Florence with his letter of credit to go to the fabric fair in Troyes, France, the gold stays in Florence, thus sparing the poor fellow the weight and danger of carrying it. The letter is accepted at the fair as exchange, money. Thus the value of the gold is in at least two places at once (and may have further been 'loaned' against in the meantime). This way, the same quantity of valued metal serves to create wealth in various places. It builds factories here, buys land there, purchases goods for transformation wherever. These things create jobs and the wealth continues to develop. The gold stays put.

I'm simply trying to understand conflicting information you're stating, and to facilitate dialogue.

So, if I am to take your meaning, the issue with the rice example is basically that it's a closed system. A loan in such an instance would generate no new input, and therefore no mechanism of creation exists in the example. Is that about right?

That being said, the example of the Florentine banker seems to be a different matter entirely. In that instance you seem to be positing a mechanism that is highly dependent on space and time, and how much "work" (for lack of a better word) a given quantity of money can perform in a given span of time, and/or in various locations.

I have to acknowledge that your view seems to make a certain amount of sense on an intuitive level. But I don't think it reflects any well established economic theory. I would also point out that while the French and Italian economies might be separate and that exchanges between them might constitute open systems, the combined international economy would still be a closed system. That would bring us back to the issue of closed systems not being able to generate new money through the employment of credit. And that would necessitate that the only way the Florentine banker scenario could yield the creation of new money in one of the national economies would be to remove (and thereby destroy) money in the second. We're back at a zero sum scenario.

 

[bripat9643]

People speak of some metal "backing" a currency as if that metal had absolute value. Humans determine all value. Gold has as much value as people give to it. Paper money is no different.

ROFL! If given a choice between pieces of paper and a gold brick, which would you take?

On a desert island with two people on it, one has a hundred kilos of gold and one has a hundred kilos of rice. Who is rich?

We don't live on a desert island where exchange is pointless.

 

[Dadoalex]

Whoa now! I'm asking an honest, good faith question to stimulate discussion and gain better insight into other people's economic views. There is absolutely no reason to get a bad attitude. This has been a largely friendly conversation so far. If that's too much for you to handle...well that would say an awful lot about you.

"Liberals often talk about wealth disparity and wages as something akin to a zero sum game. "

"Good faith" questions are not preceded by insults.
Look in the mirror and try again.