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In this case, I think it is best explained without any economics jargon.
If your thought experiment is taken to the extreme and no one knows about the money, it would literally imply that the money that was printed never went into circulation. In this scenario, nothing happens. However, usually someone doesn't print money just to store it in a vault or use ...
26
I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.
Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make ...
26
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 doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a "bank" has to allow deposits (at least by a naive ...
22
Yes and there is a real-world historical example.
Inflation is the term given to a natural phenomena where an overabundance of resources in human societies leads to the devaluation of such a resource and is applied especially to a resource used as a common medium of trade (money).
Long before the term inflation existed and long before (modern) economists ...
14
There is a long standing problem in most discussions of Fractional Reserve Banking (FRB), around the precise definition of money. Cash money (that is M0) is an asset on the banking system balance sheet, while deposit money (the liability) is the money that is created by lending.
Ever since the introduction of cheques specifically, and in general the ...
14
Normative questions require a standard of fairness in order to then be analyzed and answered with some degree of "objectiveness" so that the answer is not just a declaration of philosophical-ideological positions.
The OP starts by writing
"Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be ...
13
Stocks are not money.
The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.
The share price is the price people are willing to trade at right now. It does NOT mean all the shares have been traded at that price.
If a company issues 1 million shares, at a starting price of £10, the market cap is £10 ...
12
I recommend a careful read of the Wikipedia page for Fractional-reserve banking because it seems you are confused about how fractional reserve banking works.
Banks only lend out money they have under fractional reserve banking and, in fact, strictly less than they have. Those funds are a mix of deposits, funds from other debt issuance, and bank equity. They ...
12
Balance sheets always balance, so assets equal liabilities.
Imagine a commercial bank goes to the central bank and wants cash. The central bank provides the cash, but asks for some of the commercial bank's loans (or government bonds) in return.
The central bank now has the loans (or government bonds) as assets and the cash as liabilities.
The cash is a ...
12
Why doesn't the government create money, spend it for free without interest, and recollect it with taxes, you ask. Well, it does. That's exactly what public investment & spending, and the taxation system, do. The government creates money, puts it out into the economy, and collects it back through taxation and other payments.
If it does that while ...
9
The Fed introduces money in the economy through the banks via the mechanism of fractional-reserve banking, as you mentioned in your article.
This means the Fed is then allowing the banks to provide credit to anyone who they find adequate. The reason to do so is that banks will favor investment opportunities which lead to long term growth, such as build a ...
8
The problematic part of the statement, is the "because of other reasons not important here" part . In other words: "ignore general equilibrium" -which is an unacceptable statement to make when discussing government policy and actions.
Consider the naive quantity theory of money:
$$PQ = VM \tag{1}$$
$P$ is the price level, $Q$ is output produced (measured ...
8
The Fed controls the nominal money supply as they are the only ones who can add or remove money from the economy by printing it. Real money supply is only affected by increases or decreases in inflation and is fixed assuming inflation is 0. In the IS-LM model which is what I assume you are referring to it is assumed that inflation is fixed or that the fed ...
8
In 2013 researchers at the Federal Reserve Board published a paper {link} considering the costs and benefits of replacing \$1 bills with \$ coins.
Here are the takeaways from their executive summary: compared to notes, coins offer
Less payment system efficiency. Using \$1 coins instead of \$1 notes for transactions is inherently inefficient, requiring a ...
8
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 banks do need to take deposits or borrow money some other way:
By attracting new deposits, the bank can
increase its lending without running down its reserves [.....
7
What is value? Ultimately, value flows from the utility people get from consuming goods and services.
Now, suppose, in your example world, I am a farmer and it is Autumn so I have the product of a large harvest. Here are three things I could do with it:
Consume (and thereby enjoy the value of) my entire harvest immediately. But this would leave me hungry ...
7
When the USD is highly valued, it allows people from the home country, the United States in this case, to purchase goods relatively cheaply from abroad and put pressure on domestic firms to have low prices. From a consumption standpoint, this may be advantageous.
A high value USD may also make goods from the United States more expensive relative to goods ...
7
"Why I don't hear nobody speaking about such idea?"
Because historical experience says it won't work.
By printing money instead of collecting taxes, what increases is the nominal disposable income. The "value of work" is certainly not increased. And the important question is, does this increased nominal income lead to higher consumption?
Consider a ...
7
As mentioned in the other answer, the amount of money does not have to correspond to the total value of all assets in the economy. However, there is some correspondence that is not mentioned in the other answer so I will focus on that.
First, there should always be enough money in the economy so people can carry all the transactions they want. If that is not ...
7
This is because classical economic theory absolutely does not say that:
inflation occurs when the money supply is increased faster than the economic growth.
Even in most basic 101 models inflation depends on variety of factors. Inflation is determined by changes in price level which in turn depends on what the money market equilibrium is. This is given by ...
6
He's being glib. The only constraints on their capacity are political, not from technical constraints or inventory issues. They can make more Kroner by changing their own balances at Danish banks, something they can do at will. As the recent Swiss episode shows, political constraints can be very real and powerful, but they certainly didn't stop defending ...
6
This is meant to add to @BKay's answer. Here are some examples that might help to see what's happening when a bank makes a loan.
A bank's balance sheet
The image below is text taken from Greg Mankiw's textbook Macroeconomics (7th edition, p. 555). This is a simplified version of a typical bank's balance sheet. Notice that reserves, loans, and securities ...
6
Double entry book keeping.
If we take the example given here, of the Greek Central Bank (bank nerd trivia - interestingly the GCB is a commercial bank, listed on the Greek Stock Exchange), arbitrarily adding 000's to its deposit account.
This cannot be done as stated. The double entry book keeping accounting system on which all banking is based, requires ...
6
A bill with an expiration date does not become worthless suddenly. Clearly its value would decrease over time until, just before the expiration date, it was next to worthless. Think about it: how much would you pay for a $1 bill that expires in 5 minutes? Certainly a lot less than you would for one that expires in 6 months.
This constantly changing value ...
6
The Federal Reserve is a system, consisting of the reserve banks, which are "owned" (in a limited fashion) by their member banks (members select the leadership of the reserve banks), and the Federal Reserve Board of Governors, which oversees the member banks and is independent within the government (that is, the Governors are nominated by the President and ...
6
Here are three types of money:
Commodity money: goods of value are used as money (e.g. gold in your example, or cigarettes in a prison),
Representitive money: money is still based on a commodity but, instead of actually using that commodity in exchange, they use pieces of paper that can be exchanged for the commodity (e.g. the gold standard),
Fiat money: ...
6
No, because monetary policy is known to increase inequality.
In effect, evidence indicates that monetary policy has contributed toward higher inequality. Therefore, the Fed is not being very supportive of fairness, from this point of view.
Reasons are several. Some examples:
Booming Stock Markets: low interest rates generate booming stock markets. Because ...
6
A bank selling mortgages does not, by itself, increase the money supply.
To see this, work through the balance sheet implications step-by-step:
A bank makes a mortgage loan, swapping cash assets on its balance sheet for a mortgage asset. The customer receives cash. At this stage, the money supply has been increased.
2a. A bank sells a mortgage to another ...
6
First of all let's get our facts straight as it is not proper to argue based on incorrect premises.
The maximum ranking possible, used by conventional internationally respected debt ranking agencies, is AAA. I know of no rating agency that issues AAAA+ ratings.
The US debt rating is not AAAA+. The most recent ratings from Fitch, Moody's and S&P are AAA, ...
6
First, let me address some incorrect premises in your question
Usually economists say that in recession there is deflation, so increasing the money supply does not lead to high level of inflation.
This statement is not really correct. First, I dont know many economists who would say that usually recessions are deflationary. For example, according to Romer'...
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