Money creation in the modern economy (2014 PDF by Bank of England)
A very interesting PDF from Bank of England tries to bring clarity about how FIAT money is created (and destroyed).
(source)
Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves
I think this is true for pounds but also for dollars and euros.
This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.
Oh, I see. The reverse. The f*ckin' reverse!!
Loan = new money created:
When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.
There's also a short explanation how Quantitative Easing works.
Another misconception (from The Guardian article):
the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all).
So...
Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.
But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realized the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
Now I'm going to read that paper again... I don't think I can understand everything, especially this late in the nig... morning. Hopefully you can.
nice
If you are interested in this sort of thing, check out pragcap.com. I have nothing to do with the website, but there is some good stuff on there. It's the first place I ever heard of the idea of banks creating money by giving loans.
Thank you! I will check it out.