How Commercial Banks Really Create Money (the Money Multiplier is a MYTH).

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Күн бұрын

Want to help me do more research? Consider supporting via: / moneymacro or ko-fi.com/moneymacro
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This video explains why fractional reserve banking and the money multiplier theory are myths and how banks do, in fact, create money.
△ Want to know more about money creation? Check out the playlist: • Money and banks
△ Want to know more about central banking? Check out the playlist: kzfaq.info?list...
△ Check out how I use these principles to study country economies: kzfaq.info?list...
Yes, banks create money (through credit creation) but they do not do so by getting cash from you and then lending over and over till they reach the reserve requirement limit, as the money multiplier theory suggests. The reserve requirement is not a hard limit on money creation because central banks create new reserves to support healthy but cash strained banks. This is evident since, even though banks can technically ‘create money’, they can still fail because they do have to pay back that money. There are three other important soft limits on bank money creation. These are the public’s demand for debt, capital requirements, and liquidity concerns.
For a more in depth blog on this topic check out: www.moneymacro.rocks/2020-02-2...
Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)
/ joerischasfoort
/ joeri-schasfoort
If you would like to go even more in depth. I suggest these excellent books:
- Where Does Money Come From?, excellent introduction on where money comes from by some of the leading forces behind the positive money movement.
- The end of alchemy, excellent book written by the former governor of the Bank of England: Mervyn King;
- Debt: The First 5,000 Years, historical account of debt as money;
- The New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, interesting account on how bank money creation powered the Japanese economic miracle;
- Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, introduction to the popular Modern Money Theory (MMT), a macroeconomic school of thought with bank money creation at the heart of it.
For some of the footage used in this video, I make the following attributions:
- Wallstreet cc Vedevo
- NYC Times Square cc Vedevo
- City at night cc Vedevo
- Dollar printing cc Panning Vedevo
- Hong Kong street level cc Vedevo
- Banks in the clouds cc Pexels
- ECB construction video cc ECB
- Deutsche Bundesbank video cc Deutsche Bundesbank

Пікірлер: 502

@malithdissanayake2032 2 жыл бұрын

wow. just found out the truth about money creation and it's crazy. I don't know why I took so long to watch your videos even after subscribing your channel long ago. thanks for the video..! looking forward to your other videos. also your reference about the CORE is fantastic. The

@lailaalfaddil7389 10 ай бұрын

How can this person, ROCHELLE DUNGCA-SCHREIBER be reached please..

@lailaalfaddil7389 10 ай бұрын

Wow! I just looked up this person out of curiosity and I'm super impressed with her qualifications. Thanks for sharing.

@FiikusMaximus 6 ай бұрын

@@lailaalfaddil7389guys, you're trying too hard. Bots.

@garryrowland 5 ай бұрын

Wow what an obvious made up comment.

@Artonox 2 жыл бұрын

i love how this incorporates the facts of accounting in regards of bank and customer creating "debt" to each other.

@AvnerSenderowicz 2 жыл бұрын

To complete the picture you should discuss how money gets destroyed. It's often left out that when loans are repaid the reverse happens - money/credit that was initially created is now destroyed/removed from the economy. What's left is the interest and whatever asset or enterprise the borrower purchased or created.

@musaran2 Жыл бұрын

I suspect destruction is sidestepped by artificially maintaining loans at all time.

@AvnerSenderowicz Жыл бұрын

@@musaran2 yes, but more importantly that money gets destroyed means there's something more nuanced than money-printing or even fiat going on.

@Rob-fx2dw Ай бұрын

Yes - That is something that is vital for people to understand and unfortunately missing from this presentation.

@MoneyMacro 2 жыл бұрын

Now you know how bank money creation works. But, is it dangerous? Check out my follow-up video here: kzfaq.info/get/bejne/b5ahjcaUss-7Zac.html Want to see more academic economic research on KZfaq? Consider supporting the channel via: www.patreon.com/moneymacro or ko-fi.com/moneymacro

@stevenanderson4383 2 жыл бұрын

Great video! It's taking too long for this explanation of money creation to become known. I was expecting, or maybe missed an additional constraint on banks creating money: Bank willingness to lend. It's rare, but after the GFC few banks were unwilling to lend , even at low interest rates, and it restricted the money supply. Keep up the great work! You just got a new subscriber!

@MoneyMacro 2 жыл бұрын

Welcome! Glad to have you as a subscriber.

@gallectee6032 10 ай бұрын

I think you mean even at high interest rates. Interest rates are the returns on loans that banks make. Higher interest rate = higher return for the bank.

@he1ar1 10 ай бұрын

@@gallectee6032 Higher interest rates from Central Bank means higher costs for retail banks which supposedly reduces the willingness of banks to provide loans to customers. Higher returns on the interest of assets means that the price of that assets has gone down. Typically this means that customers have reduced their demand for such financial products. This could be for several reasons, such as the company that pays the dividend is about to go bust; or a government is about to default on its debt. These returns look high, but they could come with significant risks that a bank would want to avoid.

@DeFlekkie 5 ай бұрын

Hey Joeri! Love your content, very happy it was recommended to me (1Dime brought me here initially). I have been learning a lot about banking, central banking and Macroeconomics in general. And I really really appreciate you using your specialised knowledge and make it so accessible! Thanks, keen to be watching more of your backlog and future videos 🙂

@ef7480 2 жыл бұрын

Basically, banks do not lend you 'money', they buy and sell securities/ IOUs created by the 'borrower' when they sign the agreement that allows the bank to create the funds/credit. Your signature creates a promissory note, an asset to the bank. Professor Richard Werner explains this also very well.

@user-mf3oc6mj5l 2 жыл бұрын

But they also have to give the borrower real cache. How can an IOU cost more than cache of equal nominal value? How do they make money? I can see that the economy as a whole gets more liquidity in this scheme, but I don't see how the bank does.

@IndexInvestingWithCole 2 жыл бұрын

Of course banks lend you money, what else would they give you? Corn dogs?

@yasinmehmed5600 Жыл бұрын

Who do they actually sell the securities to?

@mumbowilliams6191 Жыл бұрын

@@yasinmehmed5600 after the securitization process: long term: the Fed. In short, other investors. In America, you can find this information in The Federal Reserve Act, Specifically Section 16

@ef7480 Жыл бұрын

@@user-mf3oc6mj5l You have created the 'cash' on their balance sheet first as an asset when they purchase the loan agreement from you. The Interest applied on the 'loan' is how they make money. As you pay off the 'loan' the original amount is just wiped off the balance sheet and they keep the interest as profit that increases their total equity.. Remember that its all accounting figures on a computer, not physical cash that moves around....

@ethan_udovich 2 жыл бұрын

These videos are so level-headed and informative. You really know your stuff. How do you not have more followers??

@MoneyMacro 2 жыл бұрын

Thank you!!

@moneyRalf212 2 ай бұрын

He has no more followers becauze people are too busy spending their debt

@GoooObama08 2 жыл бұрын

Many thanks, that was the most logical explanation and well explained too.

@ichweissesnicht 2 жыл бұрын

I love you, man. Thank you soooo much for this video (and other videos on banking and central banking). It breaks my heart seing all of those videos on KZfaq with millions of views, just propagating the myth of the money multiplier and then the people in the comments thinking they learned how the world works, while they did the EXACT OPPOSITE of that. Sadly, this myth is still dominating economic textbooks, universities and class rooms. This video deserves a lot more views. God bless you.

@benweya 2 жыл бұрын

Is it really a myth or is it the way the Financial system used to work before?

@tekudiv 2 жыл бұрын

Thanks for explaining this! Much needed.

@willows2114 2 жыл бұрын

Yes! Thank you for uploading your video.... So many people don't know about how lending process and money creation....

@SuprBestFriends 2 жыл бұрын

loving these videos. Thank you!

@mislavgleich5978 3 ай бұрын

Thank you for pointing this out. Very informative video.

@meredfikireyohannes3528 2 жыл бұрын

Thank you, well explained.

@TobyUnravels 4 ай бұрын

Thanks. I made a video on the outdated story some time ago. This new way of looking things at is a breath of fresh air.

@henriquevalente3277 3 жыл бұрын

This is a great video. Thank you, Professor Joeri. May I ask you for good books about the history of the monetary system and central banks?

@MoneyMacro 3 жыл бұрын

Thanks Henrique. I really liked the book Money Changes everything by Goetzmann (although its from a different school of though than this video it still provides a valuable perspective). Also, I can recomment Debt: the first 5000 years by the late David Graeber.

@kindofunkind4826 2 жыл бұрын

A bit late, but there are a few videos with Graeber still on youtube, some of them about this book. Can recommend.

@Bob-fj7lr 2 жыл бұрын

@@MoneyMacro everyone should KZfaq David. I haven't had time to devour his book but he has a lot of media and his eyes are open af

@theosuellow651 8 ай бұрын

This videos title is a bit clickbatey to my taste and is grounded in a very pedantic interpretation of most introductory econ textbooks. From econ class I always viewed the multiplier as a function of banks propensity to to give out loans and the reserve requirements merely as a, rarely binding, hard ceiling on what banks will be able to lend out. Whether you call it a bank reserve requiremets, capital requirements or dis/incentivicing loan creation by playing with the interest rate, the effect will be the same as that which you would get from varying reserve requirements. From a pedagogical standpoint I find it perfectly justified to explain the multiplier assuming banks are eager lenders bound only by reserve requirements and add a bunch of caveats about the different forms these lending limitations can take after a simplified understanding of money creation has been established. While I agree completely with everything contained in this video it gave me the false expectation that my understanding of economics was about to be shattered XD. I guess you cant make a living on youtube with nuance XD. As an economics teacher I would actually stick to the way the multiplier is explained in most textbooks. Yes, its a simplification, but that is really all economics is. Then in a second step you can add nuance to students understanding, explaining there is more than one way to get banks to hold higher reserves and that by increasing interest rates or capital requirements you can also elicit reactions in the ratio of loans to reserve holdings, in fact banks might constrain the multiplier entirely on their own because they are to afraid to give out loans in an otherwise auspicious monetary environment. I think only few actual economist ever took reserve requirements to be more than an, admittedly misleading, synonym of banks propensity to loan money

@ProfAzimov 9 ай бұрын

Essentially, banks create money because they manipulate their ledger. When they give a loan, they change a few numbers on the bank account statements, and record on their spreadsheet that they owe bank account A $1M, and Bank Account A owes them $1M. When you want to spend your money, the bank debits a few digits off your end of the spreadsheet, and credits the account you pay. Since people accepts bank obligations at par to cash, the bank can create money by changing their spreadsheet to add points to someones account.

@ampion1 2 жыл бұрын

I have no idea about the other countries, but I do believe Swedish banks are required to keep a reserve. In theory it would be possible to limit the needed reserves to small amounts by asking the agency overseeing it to accept the banks own method. But realistically that will immediately set of red flags if you want to use a system that sets your assumed risk close to 0. All of this is governed in a swedish law "Lag (2006:1371) om kapitaltäckning och stora exponeringar".

@philipgardiner145 2 жыл бұрын

Great video! Just discovered your channel and the content is great. Pardon my ignorance but it’s one thing to have the reserve ratio of the bank at 0, but the central bank still creates the £1 out of nothing and lends that to the bank to dispense. Doesn’t that £1 have to be paid back to the central back (crucially) with interest?…where does that interest come from? From what I understand it’s an impossible equation. Many thanks for reading and your response.

@adamkral8110 6 ай бұрын

I wish Joeri had responded to your comment. My guess is that the interest paid on any loan is representative of the “value” added to the economy (capitalism assumes unlimited value create). For example, get loan, build house, sell house above loan value, repay loan with interest. The new house is value added to the economy and the money supply has increased. If my understanding is flawed, then hopefully Joeri will see this and make a detailed follow up video

@federicobindi9137 4 жыл бұрын

Great video! I'm member of Rethinking Economics at Università Bocconi in Milan, we'll share this on our social media!

@MoneyMacro 4 жыл бұрын

Thanks Federico!!!

@b.griffin317 Жыл бұрын

What is the difference between reserve requirements and capitol requirements/liquidity?

@Vikingrings Жыл бұрын

Reserve requirements are designed to protect banks against runs by depositors; capital requirements are designed to absorb losses on loans and other investments

@b.griffin317 Жыл бұрын

@@Vikingrings Thanks

@Vikingrings Жыл бұрын

in money multiplier banks get money from central banks, he says in reality banks can create money without centrak bank, do u kno wat how?

@b.griffin317 Жыл бұрын

@@Vikingrings When private banks lend out more money than they have in deposit then they increase the amount of money in circulation. Is this a controversial statement?

@jannetteberends8730 2 жыл бұрын

Strange, I studied econometrics, but I cannot remember ever heard about a money multiplier. Good video, by the way.

@kamilo4989 2 жыл бұрын

@MoneyMacro Brilliant video. Thank you so much for your hard work!

@andresrashti7138 5 ай бұрын

Great vid, reminds me of Prof. Richard Werner's vids

@kenethchua2507 7 ай бұрын

🎯 Key Takeaways for quick navigation: 00:00 💰 Understanding Money Creation 02:04 💵 How Banks Create Money 05:26 🕒 Timing and Money Creation 07:15 💳 Constraints on Money Creation 11:20 📚 Further Reading and Recap Made with HARPA AI

@SerifSansSerif 2 жыл бұрын

that's not really much different than double entry accounting. Debit your cash, credit your liability, money is created from nothing. (and gets destroyed when you remove cash to pay liabilities.)

@DOC884 6 ай бұрын

Thank you for this explanation can somebody explain why banks need people to deposit money and why they pay interest on customer savings?

@DistributistHound 4 ай бұрын

-we need banks for safekeeping our money and for their services such as money transfers. -also savers try to protect money from inflation (caused by the same arbitrary money creation) and sometimes some banks pay interests to savers above the inflation although they are not the only ones who offer investment services. For banks is cheaper to pay interests to customers than borrowing money from other banks or from the central bank which charge higher rates. Lastly having deposits gives them more stability and a wider margin to lend and earn more interests. Question is where do the interests money come from? From other loans. You can imagine this all breaks havoc in the economy

@BeeBrownUniversal Жыл бұрын

While I comprehend the information, there is a question which comes to mind after watching twice to examine carefully. With regards to the “other side” of the banking operation as a depository for customer savings, why does the bank not have the required reserves on hand to offset a bank run in the first place? If loans are solely “created by federal allowance” as you’ve demonstrated, that would suggest there would be an excess of reserves available for depositors, which we know for a fact is not the case. It seems default is inevitable and the system is wired to bust no matter what occurs.

@achilleasmanousakis4622 2 жыл бұрын

Great Video, thank you

@titusojar2461 7 ай бұрын

Thanks for this explanation

@MoneyMacro 7 ай бұрын

My pleasure

@MrDyhard 2 жыл бұрын

Great explanation !

@MoneyMacro 2 жыл бұрын

Thank you!

@hsensh7810 2 жыл бұрын

Do you have any book suggestions that explains the modern monetary theory in detail, I found many references that don't explain it in detail. So I wanted to see if you have an idea from a book I can start frlm to understand it.

@MoneyMacro 2 жыл бұрын

Sorry, I myself haven't found the time to read a book on MMT. I would myself start with Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems ... But, I haven't read it .. so no guarantee.

@hsensh7810 2 жыл бұрын

Okay, what theory, or set of theories, that you highlighted in this video? I thought it was MMT.

@LuxusHauserGroup Жыл бұрын

Good video title Joeri. 😮

@cameronjohnson5293 2 жыл бұрын

Hey cool video, thanks for making it! In this system what incentives do the banks have to get paid back if they’re creating the money, it seems like a default wouldn’t have any impact to the bank? Is it purely the risk that the CB will take a closer look at the loans?

@marcschramm6958 2 жыл бұрын

Because if you don’t pay back your loan, the bank makes a loss. If a lot of clients of the bank do not pay back their loans, the bank may go bankrupt.

@adaslesniak 2 жыл бұрын

When bank gives you a loan it creates two assets: 1-credit that bank owns to you, 2-credit that you own to bank which is slightly greater than 1. Then you use your credit to buy a house and everything is fine - bank now owns $$ to the guy who sold you property and you own bank $$+ - their balance sheet is positive (you own them more than they own to house seller). Now you destroy property and get broke. Bank has to write off debt you own them as unpayable and their balance sheet is negative.

@amitsondhi333 Жыл бұрын

"Is it purely the risk that the CB will take a closer look at the loans?" To a great extent, yes, because the CB doesn't want banks to issue loans with the 'created money' to individuals who will not correspondingly increase economic activity with their hard/smart work (as reflected in timely repayments). Too many such defaults would get reflected in the bank's assets turning dangerously low (close to negative balance sheet) and consequent inability to pay depositors, requiring the regulator to step in. Other than the CB, the shareholders would be unhappy because too many defaults mean that the bank is wasting its time and resources acquiring and servicing customers who would not lead to profits in the form of interest income.

@Basta11 10 ай бұрын

Well, in big loans usually there is collateral like a house or car. If you miss your payments, the bank will take that house or car or whatever sell it to cover some of the loan. This is why having a nice down payment helps because it makes it easier for the bank to get the money for the asset if they have to repossess it. Banks generally don’t want to foreclose or repossess properties since that’s not their main business and they could take loses.

@e7venjedi 2 жыл бұрын

It actually makes a lot of sense that you don't really need private banks to have a minimum reserve %/amount. Since it's just a ledger at the bank, people can 'pull out their money' as much as they want and the bank/central bank can just say 'there's more where that came from'. It made me think that Depression-causing bank runs aren't really a problem anymore per se. More so that as you said, if no one wants to borrow because they are afraid of interest rates rising or their ability to pay it back etc., that's when you are actually in trouble. eg. if everyone started avoiding getting mortgages at these insane prices, the demand for owning houses would fall which in theory should push prices down until people start to feel ok getting mortgages again Nice explanation Dr. Schasfoort!

@annoloki 2 жыл бұрын

Isn't it far simpler? There is a disparity between the deposit and withdrawal in the multiplier myth, because it ignores that when money is withdrawn, you are taking the bank's reserves back out of the bank... so if they were following a fractional reserve, the amount of credit they could issue would collapse at the same rate when cash is withdrawn as it expands when it is deposited. So, the money multiplier myth is erroneous even within a fractional reserve system.

@amitsondhi333 Жыл бұрын

I think the fractional reserve concept does take into account some degree of "withdrawals" of hard currency (e.g., from an ATM) by the depositor and therefore the depositor's bank doesn't actually loan out ALL of the amount allowed by fractional reserve banking to its borrowers, rather it serves as a hard limit. Then, it counts on all the loaned-out money coming back with interest (along with newer deposits by original and newer depositors) before the original depositor has a need for further withdrawals. Does that help address your question?

@coonhound_pharoah 4 ай бұрын

@amitsondhi333 This is incorrect. Banks do not loan out deposits, period. They create new money. Every bank loan is newly created money which is destroyed as the loan is repaid.

@bucketv5624 2 жыл бұрын

Fantastic content! What a weird concept.

@urieldaboamorte 2 жыл бұрын

as an undergrad studying to enroll on a master's, this video is most welcome (although it won't be used for ANPEC, but it's still cool to learn about it before getting into a program). what model describes this idea? would you have any studying recs for it? I ask this because I'm never fully comfortable with a theory before learning its formalization. I tried going to your in-depth discussion, but the blog link is broken 😭 edit: I know there are other recs (besides the blog post) on the description, but what I'm excited about is to learn about a formal model, not necessarily the (informal) ideas that surround this theory

@MoneyMacro 2 жыл бұрын

Hey, here is the blogpost. www.moneymacro.rocks/2020-03-28-banks-make-money/ As far as I know, there is not a formal banking model of this process specifically. There are some macro models with endogeneous money though: see e.g. the textbook: amzn.to/3NkzIEy

@urieldaboamorte 2 жыл бұрын

@@MoneyMacro thank you so much for the reply! I was wondering, though, how can we test this theory if it's not formalized? I mean, test it against data? if we can't do this, how can we be sure that's how money creation works? and I hope I don't sound cringe, but isn't this book a tad too heterodox? I mean, I know science is conservative by default, but I don't see how these models would work better than mainstream ones and simultaneously not be widely adopted. my undergrad program was housed by a heterodox school and these problems were always very present

@MoneyMacro 2 жыл бұрын

@@urieldaboamorte well, you don't need a formal model to test something empirically. The testable implications of bank money creation is that the money supply outside of CB money increases. That is what we see in the data. Then Money multiplier versus just creation ... how can we test that. Well, I think that people telling you how it actually works in the field are a scientific way of testing things. I would argue that making a formal model in itself is not scientific per sé. Testing theory predictions against empirical observations is.

@urieldaboamorte Жыл бұрын

@@MoneyMacro sure, of course not! I'm not claiming formal models are sufficient for scientific scrutinity. and also not entirely necessary, but it does help, right? I'm just saying it's easier to understand and generalize a theory if there's a formal model. and again, I'm just an undergrad. I don't know shit. but I understand what you're saying. I do hope though that a model will be developed because then we can more easily view this phenomenon in the broad context of decision theory, behavorial econ etc

@Johnjackjack Жыл бұрын

@@urieldaboamorte I don’t know about you but there was a number of red flags in his response to writing off the importance of testable data driven equations

@mnf1414 2 жыл бұрын

I would like to see you make videos about full reserve banking and currency boards.

@MoneyMacro 2 жыл бұрын

My next one will cover some of the full reserve banks that preceded modern central banks

@LearnWithMike 3 жыл бұрын

Great video. Thanks for sharing #financialeducation.

@MoneyMacro 3 жыл бұрын

Our pleasure!

@daniel.... Жыл бұрын

Aren't capital requirements just reserve requirements, but in reverse? So instead of people depositing money in the bank and the bank then using it to loan out a multiplier of that money, the bank loans out as much as it can, but has to then keep a percentage of that (7-8%) as capital.

@crawkn 5 ай бұрын

Thanks for this. It's annoying that the same myths are still taught in business courses. It's no wonder the public doesn't understand economics, when so many economists either also don't understand it, or are lying to them.

@crawkn 5 ай бұрын

@@19Borneo67 The way the story is usually told is that reserves are a percent of deposits received by the bank from customers. It's a very different situation when reserves are supplemented by the infinite credit limit credit card of the Federal Reserve. It means essentially there is no multiplier, other than whatever the number works out to be based on whatever the federal reserve happens to loan out, generally whatever they are asked for. It also puts in a very different light what's happening when the Fed tries to force banks to take loans from them, expecting the banks to then make loans to spur the economy. The reason they aren't already doing so is either that they don't trust that they will be repaid, or nobody wants to borrow because they are uncertain of their own ability to repay.

@calebtheragdoll9629 Жыл бұрын

A hard thank you! I am not an econ major so the original money multiplier theory has puzzled me for years -- it just doesn't make sense to me!

@MoneyMacro Жыл бұрын

Happy to hear that. Thanks for the support!

@nicolascorrea708 10 ай бұрын

Love a good throwback to see humble origins

@hafizhnugrahav0113 2 жыл бұрын

Hi joeri, i have some question . The money created through loans by commercial bank will be recorded in bank system. And those loans will be clustered by their risk to a portfolio loans and traded as financial instruments. If the customer default on their loans, the entity who bought or hold those portfolio will have their portfolio asset shrink and goes to balance sheet as loss. So unless the customer fully paid back the loans, is there no new created money? As there is someone who bear the loses. Or is the newly created money lost in the void when default happened?. How does it work? And the moment the customer lend money to bank, Does bank create 2 kinds of money: the monetary periphery that will be given to customer and a financial crust money that will be traded in financial market?

@MoneyMacro 2 жыл бұрын

Hey Hafizh. No the money created will typically remain in circulation since the person who borrowed has likely already spent it. What will happen is that the bank will record the loss on the asset side by deleting the loan there. Simultaneously the bank will take a hit on its 'equity' on the liability side. So what happens is that some stock value (that of the bank) is drained from the economy (not money).

@hafizhnugrahav0113 2 жыл бұрын

@@MoneyMacro based on my shallow knowledge, the loans will be grouped as a portfolio and will be traded in market, right?. So does those portfolio loans count as financial crust?

@MoneyMacro 2 жыл бұрын

@@hafizhnugrahav0113 they can be ... but that is up to the bank... If they are actively traded and used as money then they can belong to the financial crust

@armendibishi7985 2 жыл бұрын

@@MoneyMacro I have 3 simple questions mate 1) do private banks really add and create new money suply in economy like fed does , or private banks play for profit with the same money in circulation like other businesses do? 2)what are those MMT people are they like flat earth theorist that believe in somrhing diferent, why do they belive that goverment taxed money gets deleted from exsistence is this not Feds job ? Why 2 mechanisms for the same job. 3) why does fed have some private shareholders and why does fed share profits\dividents with them, it makes me think fed is private?

@inferno0020 2 жыл бұрын

Great video.

@ashishkarumbiah1365 7 ай бұрын

I have a question - Are banks in the United States under the control of the Gov or can it interveen!! as we know 567 banks have failed since 1974 its a disaster. Malpracticing banks: 1.Wells Fargo: In 2016, for opening millions of unauthorized accounts on behalf of customers without their consent. 2.Bank of America:Its role in the subprime mortgage crisis. 3.JPMorgan Chase: The London Whale trading scandal. 4.Goldman Sachs: Its role in the 208 financial crisis. 5.HSBC:2012 for money laundering and other financial crimes. Why havent the Gov not canceled their licences ?

@empalabolonya 2 жыл бұрын

Thanks bro

@AnyVideo999 2 жыл бұрын

Funny how they still teach money multiplier in Canada where the reserve ratio is 0%. I genuinely had no clue from what my university econ classes led me to believe, granted I only took a few.

@mionome501 7 ай бұрын

the link to the blog is broken!

@Dr.RiccoMastermind 3 ай бұрын

Hey Joeri, thanks for explaining so well. However, isnt there another dimension of multiplying? The koney banks lend to a company is paid out as wages or saleries or as income for suppliers which in turn spend the money on other companies goods or workers. So each Euro or Dollar can be used several times if not saved or taxed away too early. Shouldn't this determine how much or little circulating money we need to run all required transactions of our economy. Is this a multiplyer effect? Thanks for any response! 🙏

@TheRepublicOfUngeria Жыл бұрын

What is being obfuscated by our very language is: banks create credit, not currency. Credit is a claim on currency, not the currency itself. When a bank loans me $200k to buy a house, a real claim on real central bank currency must be transferred from me to the seller, either in the form of hard cash, or a claim on hard cash in a checking account. In exchange, I must retrieve $200k plus interest over the term of the loan by working for it, and giving the money I receive to the bank. In this way, banks don't really create money insofar as they create currency, banks create money insofar as they create future claims on currency: the central bank is still the one who creates the actual currency.

@juanmercado7706 10 ай бұрын

En Colombia las "leyes de encaje" son bastante rígidas respecto a las que tú mencionas allí. Resulta que acá hay unos requisitos de liquidez respecto a la cantidad de depósitos, pero la verdad es que ese fue el tema que más me ha costado entender en mi carrera profesional y este video me dejó peor. Igual gracias, tus videos la vacilan aunque tengamos posturas muy distintas a veces

@DistributistHound 8 ай бұрын

What is the difference with a full reserve or let's say 90% reserve system?

@wuchengli 2 ай бұрын

Thanks!

@aurenkleige 2 жыл бұрын

Unfortunately, AP Macroeconomics is still being taught with this Money Multiplier myth deeply involved in its curriculum, so the AP Test will include it on their exams. Hopefully that begins to change in the next few years. :/

@ysiabmworkinggroup3049 4 жыл бұрын

Fractional reserve banking actually sounds much more complicated than how it goes in real life. I guess it is just hard to wrap you head around the concept that banks and their customers issue debt at the same time.

@MoneyMacro 4 жыл бұрын

Yeah. Fractional reserve banking sounds compelling but.... Is actually an overcomplication.

@herbertspencer8293 3 жыл бұрын

kzfaq.info/get/bejne/n897pZCalZiWnY0.html The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest. This principle will force central banks to change monetary policy.

@widehotep9257 3 жыл бұрын

There hasn't been fractional reserve banking in the USA since 1933 when Roosevelt confiscated all the citizen's gold and forced them to deposit it with the privately-owned Federal Reserve Corporation. Since then, all American money has been created out of thin air when privately-owned banks issue loans. "FICTIONAL Reserve Banking" is a better description of the current scam.

@Achrononmaster 2 жыл бұрын

@@MoneyMacro Fractional reserve banking is IMPOSSIBLE if the actuaries/accountants get their banking software licenced (which they must do to get a bank licence), since it violates basic double-entry book-keeping rules. Although a bit geeky, see: kzfaq.info/get/bejne/gp-AlpVk18XRZp8.html

@Achrononmaster 2 жыл бұрын

@@herbertspencer8293 No it won't. The currency is a state monopoly (in the UK, USA, Canada, Australia, Japan,... most countries outside the eurozone) so the government chooses the interest rate. Natural rate of interest is ZERO. You are probably thinking of how a gold standard has to work (tightening of rates to protect the gold reserves) which is inapplicable for a fiat currency tax credit driven system. See, www.jstor.org/stable/pdfplus/4228167 or, www.pragcap.com/wp-content/uploads/2011/02/WP37-MoslerForstater.pdf

@harftimer4789 Жыл бұрын

What is the difference between the 7-8% loan/cash requirement, and the fractional reserve requirement? seems the same.

@daanishdan318 2 жыл бұрын

Dr Joeri great video! Quick Question: Does this apply to other currencies too? Think inter-country change in reserve currencies like dollars? How is this system managed? Ex. Say a Builder from Germany is helping a firm in India build a large dam. The whole deal is being done in dollars. Now can the Indian banks - even the state-run banks (on behalf of the Indian firm) create credit in dollars by just sort of telling the German firm's banks to increase the credit in their accounts? If so, why are foreign reserves so important/ what role do they play? Is there a Fractional Reserve Limit on central banks for issuing credit in other currencies?

@MoneyMacro 2 жыл бұрын

Private banks in another country can create credit in e.g. Dollars. In fact, it is very common. See e.g. the Eurodollar market: www.investopedia.com/terms/e/eurodollar.asp Why are reserves then still important.... well imagine your banking sector does this and faces a run... then the CB can only support it with foreign reserves.

@daanishdan318 2 жыл бұрын

Thanks for the reply Dr Joeri! Appreciate the article. I will go through the Euro Dollar (and forex) in more detail :).

@c.f3433 3 жыл бұрын

Hi Joeri I've just read "Where does money come from" and have a few more questions: Who/what kind of organisations can have central bank accounts (which hold CB reserves of a countries currency)? Some examples would be commercial banks (local and foreign) & CLS accounts but who else? Another thing I don't understand is why foreign reserves can't be used within a country. In the book they site Norway and their large sovereign wealth fund as an example. Surely foreign reserves can be converted to local currency. It seems I'm missing something. Thanks once more for content and good book recommendation. It's surprising how so many ppl assume banks still function in the traditional way (as financial intermediaries), this has been eye opening.

@MoneyMacro 3 жыл бұрын

Great to hear that you found it interesting. In most countries it are banks that hold CB reserves accounts. But, depending in the country, it can also be that other financial institutions hold these types of accounts. There is also a discussion ongoing in many countries that normal people or businesses should be able to hold a central bank account (and hence effectively hold a reserves account). This is the central bank digital currency debate. By the way, as I understand it, it is most often only local banks that hold a CB account (not foreign) unless these foreign banks have a local branch.

@MoneyMacro 3 жыл бұрын

You are right about foreign currency, while foreign currency reserves cannot be used locally, they can be converted into local currency. But this will put upward pressure on the exchange rate of that currency. This is what the Dutch government did, leading to a very strong Guilder which hurt the export industry, spawning the ' Dutch disease' phenomena. This is why Norway holds a lot of these foreign reserves and does not spend them locally.

@c.f3433 3 жыл бұрын

@@MoneyMacro What is the reason individual's would want a CB account. CB reserves can be thought of as a different type of money right? In the sense that I couldn't pay for groceries with CB reserves. What things can be paid for with CB reserves, besides interbank settlements?

@MoneyMacro 3 жыл бұрын

You are right. So now it would be pretty useless. But, if the central bank made it available to everyone (which more and more are considering), that could change.

@hemiedwards217 2 жыл бұрын

@@c.f3433 Because CB are essentially risk-free government securities and the value of these government securities are less volatile and more liquid than any other financial instruments.

@ITFA Жыл бұрын

I have been curious if the lack of lending post-2008 was driven by the supply or demand side of the lending market? It seems the idea "lower rates will spur lending" is a purely demand-side phenomenon, but what about the compensation for risk on the supply side? We could clearly see examples where banks undervalued expected inflation by offering extremely low rates even when a simple quantity of money theory predicts long periods of sustained inflation, which was what I called since I saw the spike in 2020. Did markets get such a simple concept wrong or is there some other market force that can explain why banks kept interest rates so low despite the largest creation of money in history? I can think of reasons why Moral Hazard might offer an explanation but I am curious to hear if anyone has any other bright ideas?

@kennethconnally4356 Жыл бұрын

I'm confused by the new story. When I deposit money at the bank, I get that I'm getting a lower interest rate on that loan than I could get elsewhere. But how does that mean that I'm actually borrowing the same amount of money from the bank? It doesn't seem like I borrow anything from them, because they're not giving me anything right away that I agree to give back later.

@amitsondhi333 Жыл бұрын

I think Joeri's *borrowing and lending at the same time* explanation only referred to the process of the bank issuing a loan to a borrower, not to a depositor depositing money in their account.

@Pradeepkumar-tv6sc 2 жыл бұрын

@9:52 how does one bank's increased lending tank its stock price ?

@fredsmith4134 2 жыл бұрын

ok you talked me into dropping a like, you owe us a new video like you promised !!!

@gx9254 3 жыл бұрын

If the money in circulation is created from loans, and banks charge interest on loans, then presumably the amount of debt owed to banks is higher than the amount of circulating currency? So where does the money to make up this difference come from? In other words, where does the money to pay the interest on the loans come from?

@MoneyMacro 3 жыл бұрын

Yeah, I struggled with this question when first learning about money & banking as well. Turns out the answer is pretty simple. Basically, the number of transactions (flow) can be much bigger than the quantity of money (stock) precisely because money circulates. Let me give you an example. You borrow 100k from the bank that is due next year. Around the half year mark you have to pay 5k in interests. If that is all that is happening in the economy, it is of course impossible. However, in reality you borrowed that money to be productive. E.g. open a Garage. In that case, the banker will likely use your service ... perhaps in the second half of the year. Paying you back that 5k so that you can repay the 100k at the end. Does that make sense?

@gx9254 3 жыл бұрын

@@MoneyMacro hi! Thank you for your reply. Yes that makes sense. I think I’d still need some convincing to fully accept that this is how the money to pay interest comes back into circulation in the real economy. I think it’s just difficult for me to picture this all functioning without a good proportion of the interest being paid with base money. Or that at the very least the base money supply acts as a necessary supply of money for interest payments.

@MoneyMacro 3 жыл бұрын

@@gx9254 Fair enough. Yeah the central bank still issues money. It's far less than what commercial banks do. But, still significant. Perhaps my video on the structure of the monetary financial system is of interest to you since it is about this issue. kzfaq.info/get/bejne/at6Xe8WIl6ede3k.html&ab_channel=Money%26Macro

@gx9254 3 жыл бұрын

@@MoneyMacro Hi, thanks again. That visualization was very helpful. I think I had all those ideas floating in my head but couldn't get them straight. So am I *roughly* correct in saying that the "monetary core" is equivalent to M0/MB, the "monetary periphery" is equivalent to M1 or M2 minus M0, and the financial crust is equivalent to M3 or M2 minus M1 (depending on how we decide to think of what qualifies as "peripheral" and what is in the "crust" of course)? Thank you for these videos and your quick responses by the way, they're extremely helpful and very high quality.

@MoneyMacro 3 жыл бұрын

@@gx9254 Glad to hear it. Almost but not quite. I think M0 does indeed feature purely CB money so is equivalent to what I call the monetary core. However, I also include bank reserves in there because they are bank money and they are not in M0. M1, M2 & M3 includes lots of bank money (=monetary periphery). However it also includes money market funds deposits , which I classify as financial crust because one cannot buy stuff with it other than financial instruments. Then, there are quite a lot of grey area instruments which I broadly classify under the financial crust. Look, I have to be honest with you here. Us economists haven't fully figures out money. Actually, for that reason, M0, M1, M2 etc are not that often being used anymore. Even though they are still in textbooks.... I realize that I'm making things more confusing now.. But yeah these frameworks help in getting a feel for this stuff but there are lots of grey areas here.

@AseasRoa 3 жыл бұрын

Well, at the end money is just purchasing power. Debt is the opposite, it's like anti-purchasing power. Money creation has to be creation of purchasing power that didn't existed before. So the question is, when the bank is giving purchasing power to the person, from where does that purchasing power comes from? From another person, from the bank's reserves or from the thin air? It's probably different for every loan, but I think we all agree that there is a constant influx of fresh new "thin air" in the mix. It's easier for me to think that the bank just gives as many loans as it wants. This is what we see in this video and also in the money multiplier explanation. I think the actual mechanism is the money multiplier, limited by the reasons explained in the video.

@MoneyMacro 3 жыл бұрын

If I can just add a little bit to your comment. How about debt is anti-future purchasing power? Personally, I still wouldn't frame it like that often but I think that is a better frame. Yeah I agree with the 'thin air' statement although I tend not to use it because this activity is not risk free for the bank. But, how useful is the money multiplier mechanism if reserve requirements are 0? I'm not sure if I interpret your last paragraph correctly. But, it looks to me as though you are saying: "I'm going with the money multiplier because that is easier for me to comprehend." While I do sympathize with that, I don't think that is a very good argument. I do admit that thinking about money creation as described in this video is quite counter-intuitive. It hurts the brain a little bit. I suspect that's why it is only now catching on in mainstream economics.

@MoneyMacro 3 жыл бұрын

I think about it like this. In most economies, there is a lot of slack. Meaning that people are not producing as much as they could. They could (and in small communities they do) work with each other in an informal debt-based system. I'll help you build a farm now given that you give me some of your crops later. This is a debt between us that can be created 'out of thin air.' Now you can think about banking in that it makes that relationship formal. The debt is created between the two people out of thin air. But, the banks formalizes it lending to the person who builds the farm. This way that person can now hire someone with whom he/she has no informal relationship. The bank of course runs a risk here (that the project fails) and also will be compensated for that risk in the form of interest. The kicker is that the 'out of thin air' creation happens between people. The bank just formalizes it. Search for "University of Groningen debt a great invention" on KZfaq for a more extended version of that argument.

@widehotep9257 3 жыл бұрын

Bank-created money has value because we are legally required to use it to pay taxes and settle debts (see LEGAL TENDER LAWS). But the only place to obtain this money is from private banks who create it out of thin air when they issue loans. Money Multiplier is a myth, and as far as I know it was first introduced by "Chicago School" economist Milton Friedman. He also pushed the lie that only governments create money on a printing press!

@MoneyMacro 3 жыл бұрын

@@widehotep9257 Totally agree with the legal tender bit. The fact that for example employers have to pay you into a bank account is of course a hidden subsidy of the government sector to the banking sector. Would be interesting to see if central bank digital currencies can change this situation.

@Achrononmaster 2 жыл бұрын

Any IOU is "purchasing power" --- if you can back your promise to redeem. Government can always back tax redemption since it runs the tax system, it issues tax credits (aka. "dollars") which you have to return if you do any taxable activity, that is, unless the government loses tax authority (which can happen, coup's war, etc.). Every debt is someone else's credit. They go together. What do you think Treasury securities are? They're safe money for people who already have money, but we call it "government debt" --- falsely thinking someone has to "pay it back." Wrong! The money was already issued, someone buys a T-security becasue they had cash reserves and they want the guaranteed interest, it's not to loan the currency-issuer government the currency only the government (or it's licenced banks) can originate.

@zedeyejoe 4 ай бұрын

Fractional reserve banking describes a system whereby banks loan out a certain amount of the deposits that they have on their balance sheets. Fractional reserve banking facilitates lending, thereby expanding the economy. In most countries, banks are required to keep a certain amount of their customer's deposits in reserve. Banks with a low fractional reserve are vulnerable to bank runs because there is always a risk that withdrawals may exceed their available reserves.

@whaha 2 жыл бұрын

Thank you for making this video! Have you done a video about (debt) deflation yet? In my opinion is deflation only a problem in the current system, because money is based on debt. What's your take on that? Is money as debt sustainable?

@aderounmubamgbose7005 7 ай бұрын

A quick question, Is this also how banks work in some developing countries, where people don't rely on credit and loans to make purchases. And mainly use bank accounts for deposits. Because I still think some countries do money multiplier and even have deposits of cash reserves in their central bank e.g. my country Nigeria

@anthonyyawtwumasimensah197 29 күн бұрын

Yes, in every country. You can even look up the fractional reserve requirement for Nigeria online.

@oliverchandler2013 2 жыл бұрын

If the reserve requirement in a country such as the UK is 0%, what is the purpose of banks allowing customers to hold regular accounts? Do every day current accounts that people get their wages paid into benefit banks in any way beyond transaction fees? Would banks be financially better off just issuing loans?

@raimonestanol8234 2 жыл бұрын

They want your data, that's why

@maypriy2834 Жыл бұрын

@@raimonestanol8234 is it just for data?

@Apeirox 2 жыл бұрын

Great video! Given this information, could you help me clarify these two questions? 1) What motivates banks to attract deposits? I think I understand that when a client moves deposits from bank A to bank B, it corresponds to an increase of B's reserves at the expense of A's reserves, which makes B overall less likely to need to borrow reserves from the central bank (or B can repay some of its current reserve loans). Is there anything else that makes it advantageous to attract deposits? 2) I read elsewhere that banks also create money when they buy bonds (in a similar way as when they make loans). Is that correct? Could you roughly characterize the types of money operations when banks actually create new money, and when they only transfer money?

@tedarcher9120 2 жыл бұрын

Yes, banks attract deposits because they are way cheaper than borrowing from central bank or other banks

@DavidEVogel 2 жыл бұрын

What motivates banks to attract deposits? Deposits can be used to purchased fixed-income securities. Remember that bank accounting is ass-backwards. Deposits are liabilities. Loans are assets. Fixed income securities are also assets. banks also create money when they buy bonds Banks buy bonds with cash. Its a trade-off. No money is created.

@jeanf6295 11 ай бұрын

Deposits are a liability for the bank, so when deposits flows are imbalanced, more goes from A to B than B to A, the bank A must give the bank B a compensation, in the form of central bank money, a special kind of currency used only by banks. Loans however are assets, they yield interests, and they can also sell them (through securitization). The point of getting deposits is to gain clients to sell loans or financial products to. It also allows the banks to sell payment terminals and take transaction fees each time their clients use their payment card.

@sdp5368 Жыл бұрын

Is that still the case here in the US & that’s super interesting?

@DistributistHound 8 ай бұрын

So the limit to bank money or financial credit creation is not customer demand only but also customer credit worthiness. And it is preferable (for the bank) if that money reminds as banking figures rather than turning it into cash by borrowers because if the loans become cash and it surpasses the reserves then the bank has to ask the central bank for more printed money. But this system should be called different to avoid the confusion with the historical fractional reserve system

@TheJayman213 2 жыл бұрын

thanks

@ourtinytale7520 2 жыл бұрын

Seems to me that reserve requirements and capital requirements are synonymous. Captial requirement ratio is a bit broader and includes other assets than just reserves, but wouldn't banks still overcome this stop by requesting more reserves from the central bank?

@MoneyMacro 2 жыл бұрын

Do you mean liquidity requirements and reserve requirements? If so... Yes liquidity requirements are just a bit broader and can theoretically be overcome like that.

@Pradeepkumar-tv6sc 2 жыл бұрын

@5:40 you say that the money created by the central bank land's in the economy, is it the similar way as Zimbabwe example where government issues bond to the central bank which creates the money which inturn the government pay's the people which then enters the banks to create the so called money multiplier effect ?

@milastran663 2 жыл бұрын

Thank you for the explanation. I learned about this through Jeff Snider. The majority of people still believe in the so called bank reserves.

@cameronsmith2928 Жыл бұрын

just so i have this right . so the bank creates money that is lent out then it gets it back in payments plus interest , does it have to pay the money back to the central bank and keep the interest as a profit , or can it just keep it all the money . i didnt here him say any thing about paying it back the the central bank must have missed that

@zwanzikahatzel9296 5 ай бұрын

Would it be possible in theory to prevent this from happening? For example by forcing banks to only lend out money they received from deposits and banning fractional reserve banking? Would this be desirable? Why have banks been granted this "privilege"? is there an economic advantage or is it just the banking "cartel"? Does the ability of banks to create new money distort markets and affect inflation?

@theprofessional1375 2 жыл бұрын

Its correct that the loan itself is made out of thin air, but when he is used to purchase a car, for instance, the car dealer must be paid. If the seller insists on cash payment, the borrower must withdraw the required amount from the bank (Bank A) that granted him the loan in bills and coins. This means the bank must either have that cash on hand or get it from the nearest central bank office. In the first case, it will have to debit its cash holdings. In the second case, it will have to debit its account at the central bank. If the car is purchased with a check drawn on Bank A, the seller will deposit the check with his bank (Bank B). Bank B will then present the check to Bank A for payment, and Bank A will debit its account at the central bank by the amount of the purchase and credit the same amount to Bank B’s account at the central bank. It is only after Bank B acknowledges that its account at the central bank has received the funds from Bank A that the transaction is considered complete

@theprofessional1375 2 жыл бұрын

What this means is that a bank must have sufficient cash or reserves at the central bank to make the loan. Otherwise, it cannot make any payments or grant any loans. The notion that a bank can create „money“ out of nothing is therefore I think disputable. Only banks that have plenty of cash or reserves can grant loans. In response to this, you argue in your video that reserves do not represent a constraint on bank lending because they are available from the central bank “on demand.” Although it is true that banks can borrow reserves from the central bank by posting high-quality collateral, both the availability of such collateral and the stigma attached to such borrowing (bigger banks can only use the FED‘s discount window three times a month if they dont want a visite from the FED‘s supervisors) discourage banks from relying on the central bank as a source of reserves except in emergencies. In the U.S., reserves borrowed from the Fed by commercial banks are called “borrowed reserves“ and represented just 0.86 percent of total reserves held by the banks even before the QE-programs. This means 99.14 percent of the reserves held by banks are obtained from private-sector sources who are willing to entrust their money with the bank, such as depositors, bond holders and shareholders. The notion that a bank can create money out of thin air because the central bank is always ready to provide reserves “on demand” is therefore wrong in my opinion. Banks do whatever they can to avoid borrowing from the central bank. Consequently, only banks with plenty of reserves grant loans and rely on the money they get from their customers.

@papasamblankson9378 2 жыл бұрын

What will the accounting record be for bank A when the deposit created from the loan is transferred out of the bank A to another bank B? Thanks.

@MoneyMacro 2 жыл бұрын

- deposit bank A (liability), + loan from interbank market (liability), In other words, banks typically borrow on the interbank market when clients move deposits between banks.

@Achrononmaster 2 жыл бұрын

@@MoneyMacro ... or they borrow as a last resort from the central bank discount window, still a lower i.r. than they're charging their customer, so they still make a profit.

@MoneyMacro 2 жыл бұрын

@@Achrononmaster in theory yes. Although, I've talked to banks about this and they told me there is a large stigma on borrowing from the central bank. So, I think in practice they prefer interbank.

@kdcruz75 2 жыл бұрын

@@MoneyMacro Is that becuase to recieve the central bank last resort loan they have to loan treasury securities.. So the market sees a bank running to the central bank as a sign if low credit rating in the market. Plus at the same time the bank has to reduce its treasury bill holdings..and have a reduced collateral to offer for interbank loans.. This again reduces their market credit rating...

@hemiedwards217 2 жыл бұрын

@@kdcruz75 yes

@hariomhari6181 Жыл бұрын

As per my understanding, reserve requirements are based on the capital or equity of a bank. If a bank is valued high, it needs to have more reserves. Deposits have no role in reserve requirements.

@didiermodica7336 7 ай бұрын

I have watched your video a few times, you do not discredit that banks create money. You just explain some extra steps involved in the money creation, but they do create money still

@MoneyMacro 7 ай бұрын

Absolutely

@c.f3433 3 жыл бұрын

Hi Joeri I have some questions: In order to fight inflation and decrease money supply, commercial banks will buy government securities from central banks (that is my understanding of how open market operations work), so if the government wanted to decrease the money supply how would they pressure commercial banks to do this? What if the banks didn't want to deplete their reserves? Another vaguely related question: when interest rates are higher in a country, foreigners will receive a higher interest rate on their deposits in that country (right?). Where exactly would these foreigners deposit this money? At a commercial bank? Where would the rates of return be advertised? Otherwise thank you, your videos are interesting

@MoneyMacro 3 жыл бұрын

Hey C.F, 1. Well, what do you mean by reducing the money supply. What you describe will definitely reduce the amount of reserves in circulation. But, what about deposits? The money in the hand of the public (deposits) will not change in your scenario. It is basically reverse QE,. One of the reasons this has not let to massive inflation is that banks did not want to expand their deposit supply after getting extra reserves. But that aside, what if banks do not want to swap their reserves for securities from the CB? In that case market forces will work their magic on open market operations. In other words, the central bank will have to reduce the price of the securities it is trying to sell to the banks. 2. Yes. They will typically deposit this money at a commercial bank or hold it in the form of government debt. For example, U.S. Treasuries are often seen as official reserves (money) when held by foreign central bank. This works for you as well, let's say that I want to earn a higher interest rate than I am currently earning on my European bank account, I could open a bank account in South Africa (in practice I would have to travel there to do that) or I could attempt to buy South African debt securities (these are generally higher as well because rates are higher). Does that make sense?

@c.f3433 3 жыл бұрын

@@MoneyMacro Ah okay, so the market part of Open Market Operations will lead banks to purchase Gov securities (price will reduce until attractive to bank). 1) To be clear: Purchasing Government securities refers to a commercial bank swapping its reserves for a bond from the government, right? 2) To check my understanding: With regard to money creation, in order for a bank to create money they need to identify a credit worthy customer (who the bank deems is capable of repaying the loan). The bank will issue debt to this customer because they believe he will repay the loan with interest, therefore the bank profits. So the money is created by: Bank placing debt obligation on customer - customer converts this debt into money which gets spent - customer then pays back loan as per agreement. 3) When you mentioned that CBs have a policy to facilitate reserve creation (a policy that allows the commercial banks to borrow reserves from the CB) is this money lent out at the repo rate to the commercial banks? Also, physically, do all commercial banks keep their reserves at the Central Bank? Thanks for the detailed response, your explanations are clear and I feel that it's starting to make sense.

@MoneyMacro 3 жыл бұрын

@@c.f3433 Yes. Although, open market operations can mean both buying and selling of securities on the part of the gov / central bank. 1) Yes 2) Yes that sounds about right. Although, I would not say that the customer converts this debt into money. Instead, I would say that the customer can spend the debt the bank has issued (and thus use it as money). 3) At which rate reserves are lent out to banks depends on the central bank. The South African central bank refers to its rate as the repo rate. But in other places the rate might be called differently. I know that for Europe, the ECB has 2 main rates. They are known as the rate on main refinancing operations, and the rate on the marginal lending facility (www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html). Different central banks have different specific facilities. The confusing thing about this is that in other countries the repo rate refers to purely a market rate, so keep that in mind.

@c.f3433 3 жыл бұрын

@@MoneyMacro OK, things are starting to make sense. I find it quite abstract understanding monetary policy and money creation, because "reserves" and central banks aren't things Ive seen in real life. I appreciate the help and will check out some of the books via link in the description 👍

@Achrononmaster 2 жыл бұрын

They are hedging against _anticipated_ inflation, not fighting it. In fact by buying T-bonds they are boosting inflation, because this adds net interest-income to the economy (basic income for people who already have money). However, since the central bank chooses the interest rate (which IS the inflation rate, as seen by buyers of goods today) there is no art to this, just buy a Treasury bond, or spend your cash already before prices rise.

@markociprijanovic7520 7 ай бұрын

I don't understand this part: if a customer takes a loan from the bank, bank borrows money from customer and customer borrows from a bank at the same time?

@grafh2732 Жыл бұрын

I have a question, what stops people of starting their own bank and doing dumb loans to their friends if the money doesn't exist at the beginning? Or simply starting your own bank to finance yourself?

@gallectee6032 10 ай бұрын

There's a ton of regulations. No country is going to allow you to just create as much of its cash as you want. And a ton of capital is required.

@detectiveofmoneypolitics 3 жыл бұрын

Many thanks you have been added to "My KZfaq channel Playlist" Frank Melbourne Australia

@widehotep9257 3 жыл бұрын

F yeah! Me too! Excellent channel! I hope you attack the MMT crowd. The foundation of their philosophy includes the belief that ONLY governments create new money, and that banks increase the money supply using the Money Multiplier Effect.

@YeTenuousUmbrae 2 жыл бұрын

How about no more fractional reserve banking altogether - which can be interpreted as banks stealing in a way. Instead, when you deposit money you agree to it being locked for a certain time, during that time the banks can lend out that money probably for a fairly high rate. Therefore no money is created and no more speculative bubbles and crashes. I'm there's a lot to be ironed out but introducing money at a constant rate would lead to a far more stable economy.

@MoneyMacro 2 жыл бұрын

Not sure if that is true though. Credit fuelling asset booms are also unstable if the liabilities of financial institutions do not trade as money. Look up shadow banking for example. These are not banks, they do not issue on demand deposits. Very unstable though and capable of inflating large asset bubbles.

@GameplayerCanal Жыл бұрын

Coming here to hear "Bank run still take place" right after the SVB falling due to a bank run is just incredible. 😂

@monkerud2108 2 жыл бұрын

But, one issue is that liquidity depends on the circumstances. Lets say a bank holds real estate for example as an asset, or debt linked to those assets and the floor falls out, then there really isn’t any liquidity is there? Almost all liquid assets only really function as such when they are not volatile, if everyone tries to sell their stonks the same day we all pretty much die.

@joecurran2811 2 жыл бұрын

One thing I'd like to clear up is if you have deposits at a bank but no loan, does this count as a loan to the bank or not? If not, what does the bank do with the 'money'? I understand that your deposits are technically the property of the bank, although you can call on it at any time.

@joecurran2811 Жыл бұрын

@@Vroomfondle1066 Right. So they're a liability on the bank's asset balance, used to cover demands when people call on their 'cash' which they have a right to do at any time. I can also claim my cash at any time. This explains the concept of a bank run then. Technically it's the bank's property but I can reclaim it as my property at any moment no questions asked (or transfer it to another bank). A slightly strange phenomenon. Thanks for replying.

@DankAudioStash24 Жыл бұрын

Can and/or does a bank create new money to pay their own employees?

@gonnaga9302 10 ай бұрын

I don't understand how there can be a myth, and needing "research" to disprove something like this? Either the banks loan money they don't have, or they don't. So all this time economists and bankers have thought banks loan money they don't have, but in reality they've had the money all the time? How can thousands of banks exist, who's main mission and expertise are loans, money, and ledger, been surviving without even knowing how much money they have and how mush they have lended out? If I Gonnaga Bank have 1 million, and I loan out 2 million, I've done the Money Multiplier trick. But I haven't? I've actually earned my money by loaning 1 million and getting 1,2 back over the course of 20 years. HOW has this NOT been common knowledge if that's the case? HOW can you run a company that only needs to know plus and minus, and not knowing basic plus and minus? HOW can tens of thousands of companies whos only criteria is knowing plus and minus not knowing plus and minus, at the same time??

@Basta11 10 ай бұрын

Isn’t the hard limit the credit worthiness of the customers themselves and the competition for them. If I’m a bank and I’m worried you’ll default on your loan, then I’m not going to do the a loan because there’s a good chance I’ll have to write it off and eat the bad debt expense.

@orangutanfan3179 7 ай бұрын

NB I am just a layman, but I believe the real limit is the repo market's appetite for mortgage backed securities.

@valentindanielbara548 Жыл бұрын

Really interesting to see this video in 2022 with this hyperinflationary environment. I don't get something, in Romania banks are now giving a better rate on your deposit, than they receive on a credit for housing purposes. This contradicts what this video states

@jaymills1720 7 ай бұрын

Hasn’t QE put enough money in the system ? So banks don’t look for funding after the loans most big banks have the reserves to meet payment obligations. How does Fed add more reserves ?