No, the deposit is a liability with a matching asset that comes with it. The asset is needed to balance the asset. They certainly don't lend it out to other customers, which always happens through new money creation. They do buy short duration government bonds with it because they're not stupid and can get a better return than on reserves, and bonds are acceptably liquid. Nothing they do can be construed as investment. Savings really are savings and are effectively removed from the economy.
You seem very confused about several different points here.
1. Deposits often fund loans. If deposits were never used to fund loans as you describe, most banks would have at least as many cash or HQLAs as they do deposit liabilities. Check any deposit-taking bank's balance sheet to see that this is not the case.
2. If banks do buy government bonds with deposits, that still does not negate the funds being invested. The government now has the money and will spend it. Again, you can quickly check the governments do not hold piles of cash and the vast majority of the money that they borrow is spent on their activities.
3. It is axiomatically untrue that 'savings are removed from the economy'. Savings means that someone consumes less than they produce. That production must either be consumed by someone else, or add to the stock of capital. It cannot disappear.
It’s been a while since I took a monetary theory class, but if people are interested in your first point they should look into fractional-reserve banking.
Essentially banks are only required to have a fraction of their deposit liabilities as liquid assets and can loan out the rest. If I remember correctly, this is actually how a substantial amount of money is created in the US and likely most of the world. If you deposit $100, a bank could make a $1000 loan assuming the reserve rate is 10%, which leads to an increase in the money supply of $900.
Money supply is definitely not the same as the size of the economy, but it is incorrect to say that bank deposits are just sitting stagnant. Banks are quite active with those deposits - how else would bankers make all that money!
Bankers make money by creating loans, which are subject to regulatory requirements imposed largely through the adoption of Basel III. The reason they take deposits is because they are the cheapest form of liquidity. The certainly don't make money lending out deposits, whatever that means. Many countries don't even have reserve requirements, which rather highlights the flaw in the fractional reserve model.
I don't think you know what 'liquidity' means, but if you do you are incorrect about it here. Deposits provide funding, not liquidity. Banks certainly do use deposits to fund loans.
It is not true that most countries do not have reserve requirements.
I think before commenting further you need to take a deep dive into actual banking operations, because you really are wide of the mark. I posted a few links in the other post local to this one that might help. I also suggest reading the Basel III accords (or at least a summary) to understand the role of liquidity in banking.
There's not much point me discussing this further with your since you're so wrong. Take care and good luck with your enquiries.
I do think that your original argument that bank deposits don’t contribute to economic growth is wrong though. As you point out, they are a cheap form of liquidity for lenders. I think you’d agree that loans play a key role in economic growth.
The ability of banks to lend is limited by the availability of credit worthy borrowers, not liquidity. Banks will always get the necessary liquidity from the central bank (assuming the system is working as intended), but prefer deposits because they are cheaper than whatever is offered by the CB. Inter-bank lending is an alternative preferred option if insufficient deposits are available.
These deposits can move between banks along with an associated asset.
Balance sheets always balance. Most of the balancing asset against a deposit is a loan. This is how banks make money and arguably their purpose. You can see the balance sheet of HSBC here (page 12):
https://www.hsbc.com/-/files/hsbc/investors/hsbc-results/202...
It's clear that the majority of their assets are loans as expected. Then a fair chunk of reserves which reflects transfers from other banks (which hold a corresponding loan asset) or payments from the government. Finally there's a smallish quantity of financial investments that includes government bonds.
Bonds are just a floating price asset swap for reserves so the reserves must exist (have been spent) before the bond sale can happen. That is, governments don't borrow money until after the spend. In the case of the UK, this is shown in the following paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
You seem to be of the understanding that there's a one to one correspondence between stuff and money, which a moments consideration of the endogenous nature of money (as described into BoE paper) would highlight as flawed. If you're suggesting something else by your point that savings imply a drop in consumption, please do clarify.
It feels like your understanding comes from an economics course, which generally bears no relation to actual monetary operations and understanding, rather reflecting the particular philosophical bent of the economic school.
Thanks, I know and agree that loans create deposits. Sadly this underrated fact seems to have thrown you a bit, to the point where a lot of what you say is just nonsense.
What does this mean? "Bonds are just a floating price asset swap for reserves so the reserves must exist (have been spent) before the bond sale can happen."
Are you able to explain what your understanding of liquidity is?
Do you know what it means for loans to be funded by deposits?
Do you know the origin of the equation between investments and savings and how it is justified?
You are giving the exact impression of someone who used to believe a flawed theory of money creation, watched the Netflix documentary about bank money and has lost it a little bit.
> No, the deposit is a liability with a matching asset that comes with it. The asset is needed to balance the asset. They certainly don't lend it out to other customers
When a customer (customer A) deposits $10 of cash at a bank, the bank has a new $10 asset (the cash), and a new $10 liability (the deposit it owes to the customer).
If another customer (customer B) then comes in and asks for some cash in the form of a loan, the bank can loan that customer the $10 cash, at which point the bank goes from having a $10 asset in the form of cash, to a $10 asset in the form of an outstanding loan.
This new asset is less liquid than the cash, but the bank's balance sheet still balances.
> which always happens through new money creation
You are correct here - bank lending is the process through which the vast majority of money is created. Before the loan, customer A thinks they have $10. After the loan, customer A and customer B both think they have $10. In this sense, $10 of new money is created.
Interest rates moderate the rate at which banks lend and the rate at which money is created, and the Central Bank acts as one of the most important price-setters in the economy.
> They do buy short duration government bonds with it because they're not stupid and can get a better return than on reserves, and bonds are acceptably liquid. Nothing they do can be construed as investment. Savings really are savings and are effectively removed from the economy.
Even if you believe that banks only buy short duration government bonds (which is provably not the case[1]), this is still a form of lending, as it effectively finances government borrowing, and the Government can spend their borrowed money as they see fit (such as for building infrastructure).
The Federal Reserve targeting "price stability" literally does mean that they target prices increasing exponentially by an average of 2% per year[1]. The mathematical form is P(t) = P₀(1.02)ᵗ, where P₀ is the initial price level and t is time in years.
> Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt.
The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt.
Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
1. Stock buybacks are always anti-dilutive regardless of the value of the stock, and so investors always benefit as future earnings are concentrated amongst fewer shares (all other things being equal). It's true that a lower price/value increases the magnitude of this effect, but the effect is always present.
2. Zero income stocks can still do buybacks when they're returning capital raised from shareholders to shareholders (this is essentially just partially reversing a funding round, which again undoes some of the dilution).
3. Companies can be deemed to be significantly valuable without paying any dividends. Companies that have a long history of paying dividends but then suddenly stop tend to be in distress, which is then reflected in their share price.
These statements might be logically true, but I feel the logic ignores the overall strategic factors involved in buying back stock and that management needs to consider whether the stock is over or under valued, whether earnings are strong enough for this to make logical sense and the supply and demand among investors for dividend stocks and the ultimate value of a single lump sum distributed to investors vs the value of increased future earnings to the investor from the anti-dilutive impact of buying back stock.
Discussing only the tax strategy as is happening in this thread is really stepping over some really important strategic operational factors.
You have to choose: they're either greedy or they cannot do anything about prices. If they are not driving prices to increase profits, then you can't say they're greedy. They're just doing whatever they can in a situation they don't have any control (they should also be fired and replaced by someone who can improve pricing).
I don't really get what you mean. They are always greedy, meaning they will always set prices at the level that is most profitable for them. Which simplistically means they will increase prices until the impact of higher prices on sales outweighs the impact on margins.
So their ability to set prices is constrained, principally by competition as well as the tendency of consumers to simply do without if the price is too high. When there is more money in the economy (eg, due to lower interest rates), consumers will tolerate higher prices for the same goods. Thus corporations have a greater ability to set prices, and they react, predictably, by increasing those prices.
> (University) Education sublely teaches us that the only important problems are those that are very difficult and preferably have never been solved before. Those same problems also make for better blogposts. In the real world the incentives are mostly opposite. Problems with no known solutions (or only really difficult solutions) are generally bad.
This is a great insight. One can add value to other people's lives by applying known solutions in relatively novel contexts (e.g. building a CRUD form at XYZ employer), whereas it's very hard to add value to other people's lives by trying to develop entirely novel solutions (because the probability of success is so low). Most of our training however, focuses on the methodology used to develop these novel solutions, rather than on the application of the solutions themselves.
This essay seems to rely explicitly on the idea that Government deficits are always monetised, and that the Central Bank is forced to do this and has no say in the matter, which causes inflation.
That seems empirically incorrect - debt monetisation is practically peformed using quantitative easing (where new money is issued to buy government debt) which is a policy instrument under the direct control of western Central Banks. If Central Banks cease quantitative easing, or engage in quantitative tightening (as all western Central Banks have done), then there's no reason for a fiscal deficit to be inherently inflationary, and therefore no reason for rising interest rates to cause inflation.
I think her argument is that while QE on its own is not necessarily inflationary, as it increases base money supply but not necessarily broad money supply, fiscal deficits are inflationary due to them ending up directly as broad money. And… This does seem to be the case, I can’t think of any government spending that wouldn’t directly become broad money.
Note also that she’s not implying that therefore not raising the rates would reduce inflation. In fact she states clearly that this would lead to even more problems and picks on Erdogan for doing this.
Her argument seems to be that inflation is going to be persistent for the foreseeable future until something changes. E.g. commodities becoming cheaper due to external factors and/or debt to GDP ratio slowly getting inflated away as inflation persists and rates stay just below it.
> If you want to transfer > X million ahead of time, you must give an N day notice.
We have those kind of fixed-term and notice accounts, but many businesses and consumers prefer to use more flexible demand-deposit accounts. You could theoretically regulate demand-deposit accounts out of existence and say everyone now has to use fixed-term and notice accounts, but that might have significant implications on the level of deposits that people choose to hold with banks (as opposed to just handling the cash themselves, where they have no such notice requirements), and this will have significant knock-on impacts to the availability of credit.
> Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings).
Under what circumstances could they choose to deny it? For how long can they choose to deny it? I wouldn't personally be too fond of lending my own hard earned money to an entity that can arbitrarily choose not to give it back for an indefinite period of time in a way that gives me no legal recourse... Again such a regulatory change could have significant knock-on implications to the quantity of deposits and the availability of credit.
The tricky things with bank runs are there aren't any easy solutions - the best one we've come up with so far is deposit insurance, although this has it's limits (both metaphorically and literally).
> the transfer should just be a decrement of a number in the first bank and an increment of it in the account on the second bank
The transfer actually decrements two numbers at the first bank and increments two numbers at the second bank, and typically also mutates two further numbers at another institution, as so:
If you transfer your deposit from a bank, then that bank needs to decrement it's liability to you. If it's decrementing it's liabilities, it also needs to decrement it's assets by an equal amount (otherwise it'd be making a profit with this transaction, which it's clearly not).
We therefore know from this that the first bank needs to transfer an asset of some kind from itself to the second bank.
The second bank then needs to increment their liabilities to record the fact they now owe you money, and they need to increment their assets to record the fact that they now own this new asset they've just received.
The asset that changes hands is typically Central Bank reserves, which is essentially money that is held in an account with the Federal Reserve. In order for the money to change hands, the Federal Reserve has to decrement the amount of reserves that are owned by/sit in the account of the first bank, and increment the amount of reservers that are owned by the second bank.
The other effect you need to think about is what happens if the first bank doesn't have a sufficiency of reserves to settle for this transaction? In this case, the sending bank would need to sell some of it's other assets so that it receives reserves from other institutions, before sending those reserves to the second bank, or alternatively it can go to the Federal Reserve and ask the Fed to create new reserves and lend those reserves to the bank, securing the loan against eligible collateral (such as US treasuries, as in the new Bank Term Funding Program), which it agrees to repay later (either with reserves that it receives in the future from other inbound transfers, or by ultimately selling the assets).
$56bn of deposits at point of sale to First Citizens. It had $119bn of deposits at the point the FDIC took over as receiver and then subsequently guaranteed all deposits [1].
Banks can and do then lend out deposited money to other customers, who can then spend it in the economy as they see fit.