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mvassilev
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posted November 08, 2009 12:47 AM |
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+lend = increase
-lend = return (also remember that people rarely pay off their loans all at once, so the bank can lend out as the loan is paid back)
+lend = increase
etc.
So it stays at the increased level.
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posted November 08, 2009 12:53 AM |
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So it stays at the increased level.
Yes! But it is a constant, when it should be increasing, not stay at the increased level. Right?
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posted November 08, 2009 12:54 AM |
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No, it shouldn't be increasing. It should increase a certain amount after the Federal Reserve injects new money into the system, and eventually stop growing. At some point, it may be time for another injection.
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posted November 08, 2009 01:01 AM |
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No, it shouldn't be increasing. It should increase a certain amount after the Federal Reserve injects new money into the system, and eventually stop growing. At some point, it may be time for another injection.
Ok so now we get to one of my essential questions:
Where is money injected? What account?
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posted November 08, 2009 01:13 AM |
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Money is injected when the Federal Reserve lends to banks or buys Treasury bonds.
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posted November 08, 2009 01:24 AM |
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Isn't the latter the same as the bank getting money for free? And where does it go afterwards, to whoever borrows money from the bank?
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posted November 08, 2009 01:34 AM |
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Not for free - the bank sells Treasury bonds to get that money (but the Federal Reserve offers banks a better deal for them than they'd get otherwise).
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posted November 08, 2009 01:37 AM |
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I read someplace that Bonds are like "gold" (in gold-standard, which obviously it's no longer the case), right?
Then, money being injected is equivalent to mining more gold...
so the value (gold/bonds) ends up in the hands of the government?
otherwise I'm deeply confused. You see, all I'm asking is when money is injected, who possess it. Who gets "richer".
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posted November 08, 2009 01:40 AM |
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Not really. Money isn't backed by T-bonds, it's just what banks exchange to obtain money. (And it's how the government borrows money, as well.)
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Then, money being injected is equivalent to mining more gold...
In that sense, yes, although because gold has uses other than money, digging up more gold increases wealth, while printing money only increases the money supply. The government creates bonds and sells them, then the Federal Reserve may buy bonds from banks to expand the money supply.
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posted November 08, 2009 01:54 AM |
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Yeah but it buys bonds with money, which means money is "created" in the government's pockets?
T-Bonds confuse me. How do you buy them, with money? (if so, the Treasury gets money for nothing -- or rather for "mining" "bonds", which is almost free of charge)
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posted November 08, 2009 02:16 AM |
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The government creates the initial amount of money, and then lending, through the multiplier effect, creates the rest.
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posted November 08, 2009 02:22 AM |
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And where does it go? To whoever lends it (from the bank)? Nope, because he pays it back, so it's not really 'his' but only temporarily. So WHERE does it end up?
I mean you can't just inject $1000 (for example) and throw out in the air, where does it end up? In the bank's reserves? (so the bank gets free money -- after all people have to pay back their loans, so they don't get free money with loans)
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posted November 08, 2009 02:28 AM |
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It doesn't "end up" anywhere, because people borrow it from the bank, then they pay it back and the bank gradually lends it out again, etc.
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posted November 08, 2009 02:33 AM |
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It doesn't "end up" anywhere, because people borrow it from the bank, then they pay it back and the bank gradually lends it out again, etc.
You don't see that activity does not affect the money supply at all? Isn't it obvious? Since (excluding interest which is canceled because of deposits & the bank being paid for its services) the lent money is PAID BACK FULLY (principal), the fact that it was created spontaneously is canceled by being 'destroyed' spontaneously.
Ok since I don't know how to put this easier, let's get to a really simple example:
* there's no money at all in circulation (or deposits), it's just people having "stuff". Now of course trading "stuff" is tedious so... how do you start off distributing the money? 
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posted November 08, 2009 03:17 AM |
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Because it's being lent out as it's being paid back, it's not being destroyed, so the level is increased. The more money the government creates, the more money can be lent out, thus further increasing the money supply.
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posted November 08, 2009 03:35 AM |
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Because it's being lent out as it's being paid back, it's not being destroyed, so the level is increased. The more money the government creates, the more money can be lent out, thus further increasing the money supply.
But the government must pay it back as well since it's like it lends money from the Fed right?
So eventually it would drop to 0, it's a zero-sum game after all.
Something like this:
The government issues a Treasury Bond to the Fed and boosts the Bank Reserves (for banks to lend more money).
Then all the stuff we discussed (bank lends to people, people pay it back), so the reserve is the same as it was after the government injected.
Now what? Doesn't the government take the reserve back to pay off the Bond (after a certain amount of years), which destroys the reserve and thus it's a zero-sum game?
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posted November 08, 2009 03:42 AM |
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Now what? Doesn't the government take the reserve back to pay off the Bond
Pay off the bond to itself? It issues the bonds, and then it buys them back from the banks, thus increasing the money supply.
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posted November 08, 2009 03:52 AM |
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Pay off the bond to itself? It issues the bonds, and then it buys them back from the banks, thus increasing the money supply.
This doesn't increase the money supply, it cancels what they previously injected. Let's ignore interest for simplicity:
Gov gives $1000 Bond and receives $1000, which deposits it in a bank as reserve, right? Then someone comes and loans $9000 (reserve 10%), buys something with it (gives $9000 to some dude), then sells something to that dude in exchange for $9000, so he can pay off the $9000 back. He pays it back, then the Bond expired and the government takes the reserve away and gives it to the Fed (which destroys the money)?
This is zero-sum as, obviously, the person who borrowed wasn't in profit (he paid off to the bank exactly the investment, so profit was 0).
However let's note IF the person who borrowed money from the bank is in profit and sells off stuff worth more than $9000. Where would the customers get more money if there's only $9000 among them? By loaning more?
I don't know why you put it down but this is exactly what that long-time-ago video of debt-driven economy was saying.
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posted November 08, 2009 04:02 AM |
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Gov gives $1000 Bond and receives $1000, which deposits it in a bank as reserve, right?
No. The government doesn't use the money it receives from selling bonds to make bank reserves. Those are just for general funding. However, the Federal Reserve can buy Treasury bonds from banks who hold them, and thus increase the money supply. Suppose a bank buys a Treasury bond for $1000, and the Federal Reserve buys it from the bank for $1500. That's how it works.
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posted November 08, 2009 04:06 AM |
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I thought Treasury Bonds can ONLY be bought from the government's treasury, that's why they are called Treasury Bonds...
been browsing and found out this. Hope it explains it better what I mean.
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