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27 votes

Why do banks take deposits if they do not need them to make loans?

I think there are a few separate issues here. First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a "bank". This really ...
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20 votes
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What benefits do governments receive from not eliminating debt?

Most of the same considerations apply to countries as apply to businesses and people, plus a couple of extra cons Pros of Being Debt Free No interest payments Not beholden to someone else (financial ...
  • 1,438
20 votes
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If I don't pay a debt, then the creditor takes my goods. Why, then, do Greek creditors not take Greece?

In general, there are three kinds of debt: Secured debt, like a mortgage or a repurchase agreement. With a mortgage, for example, the debt is secured by a lien on the home, and if the debtor does not ...
19 votes

Why do lenders dislike early loan repayments?

The reason that lenders dislike early repayments (known as "prepayments" or "voluntary prepayments") is that most lenders match their assets— the loans they've made to others— with liabilities of ...
17 votes
Accepted

Has the world become poorer?

The short answer is No. Every single year, except 2009, for the past 55 years of continuously recorded economic history, the world has been getting richer. The -2.1% global recession in 2009 was ...
13 votes
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What Level of Government Debt to GDP Ratio is Sustainable?

As you have pointed out: where it comes from is very important. As to the Japanese situation it is quiet different from the US position from example. In fact most of the Japanese debt is owned by ...
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13 votes
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What would happen if China called in its debt?

You have to understand how international debt works. These are not loans, but bonds. China buys a US bond for, e.g., 98 USD. This bond is a promise by the US Treasury to pay 100 USD one year from now. ...
  • 970
12 votes

When a country adopts the Euro, what happens to its debt?

Yes, upon the introduction of the euro on January 1, 1999, all debt (indeed, all nominal contracts) in participating countries was converted from national currency to euros at a legally defined ...
11 votes
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Are there any states that don't have debt?

The classic answer here would be Libya and Brunei, but I think Libya now has debt. Brunei is a strange case in that it uses a joint currency with Singapore dollar, controlled by the monetary ...
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10 votes

What benefits do governments receive from not eliminating debt?

There is an interesting report that circulated during the Clinton administration, when we predicted we'd pay off all the debt, that I think answers your question. (here's a public radio article about ...
10 votes

Is it possible to eliminate the U.S. national debt?

Yes, I imagine there's reason to contest that claim. Consider the GDP to debt ratio. While it has risen over time and with the recent recession, it was not too far away from Germany which is ...
10 votes
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Is investment in real estate a real investment?

Purchasing new homes would count as an investment. According to Blanchard et al. Macroeconomics: a European Perspective pp 568 in glossary investment is defined: Investment (I): Purchases of new ...
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9 votes

What Level of Government Debt to GDP Ratio is Sustainable?

I don't think you can sensibly discuss this without including two additional factors: what is the prevailing interest rate? is the debt in local or foreign currency? The first affects the cost of ...
  • 368
8 votes

Why do banks take deposits if they do not need them to make loans?

This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite. In order to make loans ...
7 votes
Accepted

Consequences to lending and value of national currency from a negative interest rate and 140-year mortgages in Sweden

There is some concern about the interest rates (currently at -0.5%) fueling a housing bubble in Sweden. This article at Fidelity states: In a bid to track the ECB, Sweden has cut its interest rate ...
7 votes
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In the eyes of a normal citizen, what difference does it make if my country has debt or no debt?

1) Debt matters because it smoothes (or unsmoothes) taxes over time, which matters because the deadweight loss from taxation is (roughly) proportional not to the tax rate, but to the square of the ...
7 votes

Will major economies be able to repay their debt?

Whether a country's debt is sustainable is a difficult question to answer. Bohn developped a framework for answering this question and the cited paper is a summary of much of its findings. Henning ...
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6 votes

What benefits do governments receive from not eliminating debt?

Suppose your country holds debt equal to thirty percent of GDP and that the government is obliged to pay interest of five percent per year on that debt. This implies that each year the cost of ...
  • 16.7k
6 votes
Accepted

Could debt cause inflation instead of deflation?

Yes it can. If debt originates from the banking system, then it potentially has a side effect of money creation. Whether or not money is actually created when a bank loan is made depends on the ...
  • 2,749
6 votes

Why do lenders dislike early loan repayments?

The fundamental reason, beyond any details about shifting interest rates, is that lenders are in the business of lending money. If you pay off the loan early, then they're doing less business. If you ...
6 votes
Accepted

Why aren't perpetual bonds more common?

The most famous perpetual bonds are UK Government Bonds known as consols. They weren't issued to avoid the rollover risk you highlight. Rather, their key benefit was liquidity. They could sell new ...
  • 16.1k
6 votes
Accepted

Is the loan principal ever delivered in pieces over time?

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation. The rationale is clear : the corporation wants to ...
6 votes

Why do banks take deposits if they do not need them to make loans?

I think this perhaps seems/reads like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing. Rather ...
6 votes

Can this transactions log become "money"?

There are some huge problems with your idea. There is no surplus value in your scheme. If you trade Alice a couple of cups of coffee for fixing a broken window, then you and Alice are square. But now ...
5 votes
Accepted

What is the justification for it being a problem if loans are not paid back?

It appears that the OP confuses money with property rights A) It writes "deposits owned by the bank" which is simply wrong, since deposits are liquid assets belonging to the persons that deposited ...
5 votes
Accepted

How much of Greece's public debt is created by its trade deficit?

As an accounting identity, it is required that the current account surplus (deficit) + capital account surplus (deficit) = 0. This is known as the balance of payments (BOP) identity . So if Greeks ...
  • 16.1k
5 votes

What is the need for a special purpose entity/vehicle in mortgage backed securities

Here are a few reasons that build on @Dismalscience's answer. Capital requirements: Banks don't typically need to hold capital against loans they originated but subsequently moved into an SPV. This ...
  • 16.1k
5 votes

Will major economies be able to repay their debt?

For any country that issues its own currency, having a sovereign debt in its own currency is a choice. It can always be monetised. This will cause a one-off inflation episode, but it does lessen, or ...
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5 votes

Why do banks take deposits if they do not need them to make loans?

Banking is confusing, and a lot of explanations apparently make things worse. In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. ...
5 votes

Can this transactions log become "money"?

This is not money because there is no unit of account Referring to the definition of money that people gave you in the comments, the biggest element lacking in this scheme is that there is no unit of ...
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