Topic: Could take 5-8 years to shrink Fed portfolio: Yellen - page 2. (Read 10156 times)

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

It doesn't matter, anyways loans create deposits, that was my point.

When banks loan money to companies the company does not need to deposit the funds from the loan at the same bank, the funds end up in the banking system, not the lending bank.

There is a risk to saving, the only reason we might believe otherwise is government guarantees.     Everybody here accepts you can give (or lend) your money to someone and they fail to pay it back.    When you deposit cash at a bank, it feels alot safer.   They promise to always return the original amount no matter what.   They promise to give interest usually no matter what also.  
However a bank can fail, either totally or partially they can fail to return the original amount.     Everyone accepts this surely?    Some banks did lend to sub prime, a bank could just fail to keep good accounts, be corrupted or lose via theft.   It might not be their fault but a bank can lose your savings and maybe thats only a 1% risk but its real

When you put cash in a bank it is no longer pure cash.   As said, most banks are using fractional reserve.   There is risk in this and we are risking our cash to get interest.     Now to me this sounds mighty close to investment

Im not going to argue over a word like this, its pointless.  No doubt the FED backs the idea saving is antiquated, they certainly have done their best to make that true

http://www.youtube.com/watch?v=wM1DgihKHVI

You forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

Saving is very much investing. When you put cash in the bank, you are "investing" in a savings account, the same is true with a CD. The only difference between these investments and traditional investments (like stocks, bonds and index funds) is that bank deposits have much less risk.

Investment should not be classified as saving.

There is a reason why glass steagall act is there after the great depression. The 2008 meltdown should not be a surprise for scholars of great depression.

I can see why you are confused.  I'm responding to the idea that you need savings to capitalize the economy.  You define a saver as a person who saves.  But I define a saver as a person w a savings account so I can use the term savings & saver interchangeably.  I think I'm using banking language but you are using common language.

Savings = savings account (deposit account).  A saver is someone who has a deposit account.  Bank pays interest on deposit account
Stock = Investment account.  Investor is someone who has investment portfolio.  Investor take some risk

1 person can be both saver & investor at the same time.  But when your money is in savings account you are a saver.  When you money is in stocks you are an investor.  The guy can withdraw money from his savings account to buy stocks but its not "necessary".  He could be using money from selling his house, from his checking account, money gift, whatever.  Its not necessary to have savings in order to have capitalization.  

Capitalization happens when a company sells its stock to investors.  Neither the company, the investor, or the underwriter need to be savers in this scenario.  Its totally possible for an economy to exist without savings.  Savings are good when you are starting out and you need to accumulate funds.  Doesn't mean its necessary.  Did Zuckerburg need savings to start Facebook?  I don't think so.  He got an investment from his roommate, then other and bigger investors.

Shadow banking perform same function as a commercial bank (albeit in a different manner).  They function as credit intermediary.  The difference is that they are unregulated so they are not required to have any deposit accounts at all.  And most of them don't.  Once again no savings (deposit account) is needed to create money.  Deposit accounts are probably a very small portion of finance.  Saving is good for the individual but has minimal effect on the larger economy

I brought up Marx because someone made an example of labor to capital which was Marx contribution to economics.  But even when you equate labor to capital no savings are needed in that equation either

The savers are the people that bought the stock...

How do you not see this. Or do you only define "savings" as "holding cash reserves or other cash reserve denominated debt?" Because I'm pretty sure that's not how most people would define savings.

I also don't understand how its at all Marxist to say that money is the promise of labour, or something worth an equivalent amount of labour, in the future. AFAIK thats a pretty well accepted fact.

Furthermore I don't understand why you are quite so obsessed with "shadow banking." There's nothing special about a "shadow bank" rather than any other bank. It matches savers up with creditors just like any other bank. In some cases the savers might be the equity holders of the bank itself, but this changes the purpose of the bank not.

You're talking about commercial banking.  Shadow banking don't have deposit accounts.

BTW, Before the 2008 WFC, the size of shadow banking was BIGGER than commercial banking.

Read this article, it's interesting

http://www.stlouisfed.org/publications/re/articles/?id=2165

Banks use the money that depositors have in their accounts to lend to borrowers. Banks need to keep a little bit of their own money (capital) on hand to protect their depositors in the event that they lose money on some of their loans. If banks solely used their capital to lend money then the amount they would earn would be small and not worth it for banks to lend (they need to use leverage in order for the loan to make sense to them). Banks needs both capital and money from depositors in order to lend money.

Hmm, I'm not sure which country uses USD except the USA.  A lot of foreign investors do hold US Bonds.  But thats not really the same thing

I'm not saying savings is not important.  I'm saying its not necessary to create money (credit).  There are a lot of ways for companies to raise capital without going to commercial banks (that have deposit accounts).  For example investment banks, private equity, etc..

Even within commercial banks, they don't need deposit accounts.  They need reserves, which they can get from interbank lending, repo market, FED funds

Lumpy distribution of newly created money is it.  Thats whats happening, those closest to the FED are the ones who benefit most.   The people to suffer most arent even in USA, they use dollars as their national currency and they dont even receive them till its grubby and used ten times already.  By then the money they get is worth far less then the FED bought its bonds with.  
Hate to say it but its kinda similar to Mugabe paying out his war pensions, the new money worked fine but if you were far down the line in the economic chain the cash worth was far less then half in that case


Cash is a promissory note.   It is a promise to deliver in future some worth.   That is what we use for money now, we used to exchange metal and the coin itself could be melted right.  WE dont do that and maybe its clever but we do have to exchange something.
If I promise to pay you and I dont, its a failed contract.   I know people can get away with it but as an economy, this would not make sense.   A saver or some kind of capital is required behind the money exchanged.  A bill is produced and a payer is required or the note to describe the transaction is no use, so its just allowing transmission of work.
  One day I work hard till tired or ill even and I dont use up all my work in favours, I save my labour to spend another day when I need it.  I think thats roughly how it works,  I rely on the job contract to pay me and utilities who service me then rely on me to pay them,  theres a chain there and Im saving one day to spend another.  Maybe its a really tight chain, I work for the utility company!
 Or maybe its super long chain and the promise is going to Zimbabwe and they send us back diamonds or who knows but its about paying and saving really?

Commercial banks have deposit accounts but shadow banks don't even have deposit accounts.  How can you explain money creation from within shadow banking then?  You're right that capital comes from production (in a Marxist sense).  But even in the Marxist view savers aren't needed only labor

A company does an IPO and sell stock.  Voila! Instant capitalization.  There are no savers here either

This is a lie.

Savings are required for investment, because currency is a representation of labor an individual has expended without yet receiving a payout from this labor.

For example, if I grow apples in my back yard and sell you the apples, you give me currency, which represents the amount of work, capital, and risk I put into growing those apples.

You can print currency without anybody working, sure. But then somebody has to work to build the capital that you're basically borrowing from him in this scenario. (The currency you just printed representing your debt to him). If the person wanted consumption immediately upon receiving your currency (i.e, he wasn't a saver) he would give it back to you in return for some service of your own, destroying the currency in the process (the currency found its way back to the issuer). In this scenario, you are now the saver, because you now have put in labor to pay off your debt to the person you originally paid, without receiving any immediate consumption in return (you just get the thing you "invested" in). I suppose you could have refused to accept your own currency, in which case I suppose one can argue there was no saving, merely the unfulfilled promise of saving, i.e, theft.

Long story short, unless somebody somewhere is willing to take on the disutility of working without an immediate consumption payoff (i.e, saving) then there can never be any investment.

Now it might SEEM like there might be capital created without savings if the fed were to right now print $100M, lend it to a bank, who lends it to a company, who uses it to finance building a better oil rig for example, but indeed the savers are those that accepted the newly printed $100M as payment for their labour. If this currency never is repaid by the issuer, then that's equivalent of the theft explained in the prior example.

Inflation doesn't directly hurt or help the economy. Its basically just slowly shifting the accounting units. Just makes doing some math a bit harder lol.

When it starts hurting is if inflation isn't distributed evenly (i.e, only the fed gets to inflate the money supply, causing certain individuals to get disproportionate access to the newly printed funds), or if there are negative real interest rates. These two things tend to go hand in hand.

Debt is risk.  And if people want take on risk then let them.   Who am I to tell someone not to take a student loan or borrow money for startup that might fail.   If people use credit to buy cars or whatever.   Thats fine by me too.   I thought bitcoiners were libertarian??

But deposit accounts aren't necessary for bank to create credit.   Savers aren't required for capital