Fixed-rate Loans

Because it's not so simple.

Reply to
Padraig Breathnach
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"Padraig Breathnach" wrote

That's easy...

Firstly, note that your definition of "money" effectively ignores the position of the banks - it includes the position of individuals with regard to the banks (eg "John has a bank balance of

1000") but ignores the bank's position with regard to individuals (eg "Bank1 owes John 1000" or "Bank2 is owed 800 by Peter").

I'll assume that you also ignore any cash(coins+notes) held at banks - otherwise when someone pays 1000 into a bank, you'd start with 1000 "money" (all cash notes) and end with 2000 "money" (cash in bank + person's bank balance), which is non-sensical!

Now, looking back at your earlier example, we start with:-

John asset (cash): +1000. Retailer liability (overdraft to buy goods): -900. Retailer asset ("widescreen TV and stuff"): +900. TOTAL: +1000.

[Note that I've introduced the retailer's overdraft to show how they bought the goods in the first place.]

... and we end with:-

John asset (bank balance): +1000. Peter asset (cash): +800. Retailer (bank balance): 0. Bank1 asset (cash): +100. Bank2 asset (cash): +100. Mary asset ("widescreen TV and stuff"): +900. Peter liability (owes Bank2): -800. Mary liability (owes Bank1): -900. Bank1 liability (owes John): -1000. Bank1 asset (owed from Mary): +900. Bank2 liability (owes Retailer): -900. Bank2 asset (owed from Peter): +800. TOTAL: +1000.

In your definition of "money" you only count the first line in the starting position (total +1000) and the first two/three lines in the ending position (total +1800). Where does the extra 800 come from? Well, we need to look closer at the changing positions when Bank2 lends 800 to Peter:

Before: Bank2 asset (cash): +900.

After: Peter asset (cash): +800. Peter liability (owes Bank2): -800. Bank2 asset (owed from Peter): +800. Bank2 asset (cash): +100.

In the "before" situation here, the cash(coins+notes) in the bank are ignored in your definition of "money" (as above), so "money" is 0. In the "after" situation, you only count the first line and so "money" is

+800 (ie increased by 800 and you shout "we've created some money!").

But think about it - you didn't count the 800 cash notes before while the bank held them; but now you do, because Peter holds them. As far as your definition of "money" is concerned, Bank2 has just *printed* 800 cash notes itself, to hand to Peter! They didn't "exist" before, but now they do.

THAT is how the "money" has been "created" (it was effectively "printed") !

BUT - now here's an interesting question - what happened to the 900 money "created" when Bank1 lent it to Mary?!

Reply to
Tim

Hmm.

It's not "my" definition of money; it's a standard definition used by economists.

I don't see that I am ignoring the position of banks, particularly as I have identified their role in the mechanism.

Cash held in banks is counted as money. It's a small amount relative to the amount of credit balances. If I lodge ?1000, chances are that most of that will be out the door fairly fast in somebody else's pocket. If all the people with "money in the bank" went to take it out as cash, the bank wouldn't come within an asses roar of being able to pay them.

Why? To complicate things? Not to worry, it doesn't complicate things for me, as I am doing an economist's analysis rather than an accountant's one.

Have I met another accountant who is not an economist? Assets and liabilities must be equal under the rules of accounting: I have no problem with that. But Mary having the asset of the widescreen TV is now outside the money loop. She has spent the money. Sure, she has a liability of ?900, but that is outside the definition of money.

That is where I think you baulk, so I will stay on that point. The bank lends Mary ?900. Let's say it credits her current a/c with ?900 and debits her loan a/c with ?900. Nicely balanced from an accountant's point of view. But from the economist's perspective, the ?900 in her current a/c is money, and the ?900 owing in her loan a/c is not counted as negative money. Why? Because she can spend the ?900 in her current a/c but the sum owed on her loan a/c cannot be spent either by her or the bank. The bank sits and waits.

After Mary has spent the money with her retailer, somebody else has ?900 and it goes on its merry way,

Let's say that in six months' time Mary has accumulated ?900 in the jar in which she keeps the tips from her waitressing job. She takes it into the bank and clears the loan. What happens next? The bank has more cash, and there is Paul looking for a loan to finance a holiday. And the wheels go round...

You see, I do know that loans are supposed to be repaid, and we both know that most of them are. But the financial institutions don't want their loanbooks to shrink, so they keep pushing deals out to the punters, and they find enough takers. To a great extent, that is a good thing for the economy. It's not good if there is a bit too much, as it can cause inflation, and it's not necessarily good for the individual who might take on greater debts than he can really afford.

If everybody stopped borrowing and concentrated on repaying their loans, the money supply would collapse, eventually settling back to the value of notes and coins in circulation. And the sky will be dark with flying pigs the day that happens.

It might seem odd to you, but it's close enough to that. Banks no longer print their own notes (they used to, and you can see survivals of that with Northern Irish and Scottish banknotes). Now they print money by putting figures in certain ways in customers' accounts.

Yes. As balances on accounts, not printed banknotes.

You're playing with smoke and mirrors by using it to clear an overdraft. That's just a detour: when the retailer's overdraft was cleared, the bank found another borrower.

Reply to
Padraig Breathnach

It's as good as shit, because you know that by tomorrow it will be shit. Or compost, which amounts to the same thing.

Reply to
Ronald Raygun

"Padraig Breathnach" wrote

Then if you are an economist (you say below that you are "doing an economist's analysis"), then it is *your* definition!

"Padraig Breathnach" wrote

Yes you are. The "position" of the banks includes their assets (eg loans owed to them etc) and liabilities (balances which they owe to depositors). You *are* ignoring all those, aren't you?

"Padraig Breathnach" wrote

I don't think you have.

"Padraig Breathnach" wrote

Are you sure? You really consider the level of "money" to increase when someone just *deposits* coins+notes in a bank [then being counted twice, firstly as cash and then as bank balance], even *before* the bank has used it to lend to someone else?

OK, well let's try running with that for a while...

"Padraig Breathnach" wrote

"Padraig Breathnach" wrote

No, to more accurately describe the origins of some of the amounts.

"Padraig Breathnach" wrote

In light of your revelation about cash in bank being counted, we also need to count the next two lines of the ending position, so total is now +2000.

Of course, as you are counting cash at the bank we see that "money" remains at +900 in the before & after situations above. No "money" being created there...

So - where *does* the extra 1000 come from?

Well, the "money" increases by 1000 as soon as John deposits it in the bank. We start with:-

John asset (cash): +1000. TOTAL: +1000.

... and we then have:-

John asset (bank balance): +1000. Bank1 asset (cash): +1000. TOTAL: +2000.

We've just "created" 1000 "money", by simply depositing it in the bank?!

"Padraig Breathnach" wrote

No, you've met your match this time. I'm an actuary!

"Padraig Breathnach" wrote

It most certainly *can* be spent by the bank! You see, the bank can *sell* the debt on to someone else. They'll give the bank some "money" in return for the right to chase Mary for what she owes!

"Padraig Breathnach" wrote

Yes, but those banknotes don't multiply as they go. They remain the same number however many people they pass between!

"Padraig Breathnach" wrote

Ah, but where did *that* money come from? It wasn't "created" by Mary carrying a few meals in a restaurant - the diners already had it in their pockets when they entered the restaurant...

"Padraig Breathnach" wrote

We need to change the above now because you are counting cash in the bank...

"Padraig Breathnach" wrote

Well, you now say that someone depositing 1000 in their bank a/c creates 1000 more "money", even *before* the bank lends it to someone else - because you'll then count the

1000 banknotes in the bank *plus* the account holder's 1000 bank balance. That's quite a silly state of affairs, isn't it?

"Padraig Breathnach" wrote

Eh? I thought you weren't counting overdrafts in your definition of "money"? So, when the overdraft is cleared, the "money supply" is *not* affected. [Previously the -900 is not counted, and subsequently the 0 is not counted.]

The 900 banknotes which are used to pay off the overdraft are also not affected - being counted both before & after...

"Padraig Breathnach" wrote

Ah, but didn't the bank just give the new borrower the 900 banknotes which were *already* being counted within the "money supply", and so the "money supply" was not affected?

Reply to
Tim

"Fergus O'Rourke" wrote

Define "spend"...

If I give an IOU (which I write out myself) to a shop / trader for some goods, then is the IOU "money"? If so, then you are saying that *I* have just created the "money"... ?

"Fergus O'Rourke" wrote

...OK...

"Fergus O'Rourke" wrote

What do you class as "resources"? Banknotes+coins?

"Fergus O'Rourke" wrote

What are those "resources" again?

"Fergus O'Rourke" wrote

No, it equates to saying that someone buying a house financed by a 100% mortgage is no "wealthier" afterwards than s/he was before.

"Fergus O'Rourke" wrote

The 1million house bought with a 100% mortgage is quite "real", but does *not* mean that the owner is then "worth" 1million!

Reply to
Tim
[I'm going to snip hard for readability! Anybody who is really interested has probably read earlier posts.]

It's a definition with which I agree, but it's not mine in the sense that I did not make it.

No I am not! This is getting tiresome. What I have been saying is that certain figures in the books of banks constitute money, and others do not.

Read back through the thread. That's where we started.

Yes.

As I said, most of it goes out again almost immediately. Your double-counting argument is trivial, because it is but a small volume in a vast flow.

I'm not going to be drawn into a side issue.

Much of the foregoing is irrelevant, because only some of the things you list constitute money. Cash is money; bank credits are money. A widescreen TV is not money; a bank debit is not money.

No. You are presuming that cash lodged in a bank stays there. Very little of it does.

So you hold no qualification in either accounting or economics?

A book debt in a bank is not money. It cannot be spent. it can be sold, just as any other asset can.

Of course. But I never said banknotes. Most of my spending, and I presume most of your spending (by value, not number of transactions) does not involve banknotes, but various arrangements (credit card, debit card, direct debit, standing order, even the occasional cheque) for transferring balances between my account and other persons' accounts.

True. That's the way cash (a subset of money) works.

...

Cash in the bank is (on average) trivial, as it tends not to stay there.

What I said above.

As I said, smoke and mirrors. If cash is used to clear a bank loan, the money supply is unaffected; if a cheque drawn on an account in credit is used to clear it, then part of the money supply is extinguished. Most likely that is temporary, because the bank will be seeking to set up new loans with the resources released.

Most bank loans are not issued as cash. That's pretty well a red herring.

Let me clarify things: Cash is money; credit balances in banks and similar financial institutions are money. Nothing else is money.

The total of non-cash money vastly exceeds the amount of cash in the economy (in the order of 10:1). That arises because of the role of banks in credit creation.

Cash tends to flow through banks rather than stay there.

If I have a house and a car and a widescreen TV, they are assets, but they are not money.

If I have a mortgage loan on the house and a car loan from a finance company and a bank overdraft that I used to pay for the widescreen TV, they are liabilities for me and assets in the books of the lending agencies. They are not negative money for me or money for the lending agencies.

That's it. I'm going out now to spend some money.

Reply to
Padraig Breathnach

Ronald Raygun wrote: [snip]

So ?

I am saying that banks create money, not wealth.

Reply to
Fergus O'Rourke

Howard9 wrote: [snip]

ISTM the difficulty is for those who cannot distinguish money from wealth.

Reply to
Fergus O'Rourke

The point is that assets have been created. The liabilities that accompany them do not change that fact.

Reply to
Fergus O'Rourke

_________________QUOTE OF THE YEAR_________________

Reply to
Howard9

I didn't mention wealth, I mentioned spending power. That's money.

Reply to
Ronald Raygun

Why, thanks, Howard. Are you sure you're OK ?

I don't see why I deserve the award, but I'll take it anyway.

Reply to
Fergus O'Rourke

"Padraig Breathnach" wrote

Yes, but the "money supply" doesn't do a very good job of measuring "spending ability", does it? :-(

Firstly, let's ignore for the moment the situation where the local corner shop gives me interest-free credit for groceries, which increases my "spending ability" but has no effect on the "money supply".

Instead, let's concentrate on the banking system...

Suppose I have an overdraft limit of 1000. We can consider the following different scenarios: (1) Overdraft -100, Savings 500 : "Money supply" 500; (2) Overdraft 0, Savings 400 : "Money supply" 400; (3) Overdraft -500, Savings 900 : "Money supply" 900; (4) Overdraft -1000, Savings 1400 : "Money supply" 1400;

Of course, in all four scenarios above, the bank owes me

400 overall and is willing to lend me a further 1000. In all four scenarios, I am "worth" 400 and can "spend" 1400. It doesn't matter to me whether I "spend" it by withdrawing / transferring from savings or if I use a cheque on the current a/c. It's all the same - "spending power" either way.

The bank is in the same position in all scenarios, I am in the same position in all scenarios, I can "spend" the same amount in all scenarios, yet the "money supply" varies widely between 400 and 1400.

What use is that definition of "money"? :-(

Reply to
Tim

"Fergus O'Rourke" wrote

So, the difference between my current account balance and my overdraft limit is "money"?

The difference between my credit card balance and my credit limit is "money"?

I can spend either of those. But they don't seem to be included in the economist's definition of "money"...

Can you explain why not?

Reply to
Tim

Scríobh "Tim" :

Actually, it does. It may be difficult for the statisticians in the CSO to count, but it is still part of the money supply (M4)

Reply to
Féachadóir

Money supply is a macroeconomic variable, meaning that its impact on one person is not looked on as important; it's the impact on the economy that matters. For example, if money supply grows too rapidly, you can have too much money chasing too few goods and services, which is a cause of inflation. In normal situations, no one person's spending power is great enough to impact noticeably on an entire economy.

Okay, except to tell you that economists have noticed such things. You may recall I used a definition of M3, calling it the money supply. That is the version most often used, as it has been found most useful (by Governments and by Central Banks in trying to manage the economy). There are other definitions like M1, M2, M4, and so on.

The overdraft limit of 1000 is irrelevant. On your more substantive question: I don't know the answer. Economists conventionally seem to refer to bank loans that have a fixed term and repayment schedule. It may be that overdrafts are regarded differently. None of my near-at-hand references makes it clear for me.

Any definition of money is of little use to you or me. We just get on with living.

At the level of economic planning, however, such definitions are very important.

Reply to
Padraig Breathnach

"Padraig Breathnach" wrote

Of course, but such a large number of people have unused overdraft limits and credit card limits which they can spend that, taken together, that's an awful lot of spending power that's being ignored.

Surely that *does* have an impact on the economy?

"Padraig Breathnach" wrote

Anyone else care to elaborate?

Reply to
Tim

True. It's a Sword of Damocles hanging over the economy. Credit limits have no economic impact until they are used. If everybody went shopping next week and maxed out their credit cards there would be a huge jump in the money supply and inflation would also jump. In the short term interest rates would go up because the financial institutions would need to get funds to meet the demand, and the way for them to get more funds is to pay more interest. That would encourage borrowers to reduce their borrowing as fast as they are able, but it might take a lot of time.

No individual would be responsible, because individually our impact would be minuscule. It's not on the agenda of the financial institutions to control inflation: they simply want to maximise their profits. That's why governments and central banks interfere in the economy: nobody else has a motive.

It *can* have an impact on the economy. Happily, in normal circumstances things do not play out as severely as that. Borrowing drifts up (or down) and interest rates drift in response.

We have scared off most of the small number of participants in this group! I'm curious, too. If time permits, I'll dig through a few books and see if I can find the answer -- no promises, though, as I'm passing time here as a diversionary activity while real work and real life wait.

Reply to
Padraig Breathnach

I work with cash! I use the 3V disposable credit card for buying stuff off eBay but would never have an overdraft or credit card. I prefer to 'cut your coat according to your cloth - to only buy what you have enough money to pay for. I.E. "Of course we'd love a huge expensive house, but you have to cut your coat according to your cloth."

Reply to
DJ Spider

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