Let’s discuss how the fractional reserve banking policies affect these accounting principles.
How does an individual initially lend money into the economy as if he were a bank?
He lends a piece of the capacity to work reciprocally for others in the market of real value exchange.
How is the ability to sell a bond for money different than the ability to spend money in your possession?
How does an individual initially lend money? By selling a bond? Where did the money the buyer is using to pay for the bond come from? Where does “money in your possession” come from if nobody has any money in their possession at conception and they just keep trying to sell promises to pay money THAT DOESN’T EXIST to each other in future?
What makes the distinction is that…sometimes you don’t need money in your possession to lend to a borrower. You lend an amount of money the doesn’t exist but is somehow limited, (hopefully by a standard rule.) All that matters is that the accounting works out in the future so that you get all of that nothing back, plus some extra nothing to make it worthwhile.
So how does an individual initially lend money? He lends a piece of his future promise to work.
What is it that the individual is promising? To make an income by serving others in the market.
What does it mean to sell someone’s promise to repay him to another? That he forfeits his promise to work for others (by making income in the market.)
What is the measure of value used when an individual sell his security to another? The potential for humans to work for each other (to provide reciprocal real value.)
How does a bank differ from individual citizens in our democratic republic?
A bank lends a piece of the potential of humans’ capacity to work in the future by serving others in the market while forfeiting its promise to work for others reciprocally. (And to do some accounting.)
Whereas an individual in our democratic republic (in fractional reserve banking) may not lend money to others unless that money (1) [dishoard] has already been lent initially by a bank (the bank promises that they possess that money,) or (2) [borrow] it has been borrowed from a bank that initially created it, (and valued work must be done to create an income for the bank,) or (3) [liquidate(sell)] it has been borrowed from someone else’s promise to reciprocate valuable work in exchange for an income. (While forfeiting the income the sold bond guaranteed.)
To sum up, individuals in the this type of economy must forfeit the income from their security and borrow the bank’s promise to provide real value in the economy. While the bank requires that real valuable work must be done in the economy that guarantees the bank’s income because the individuals possess a borrowed piece of the potential of humans’ capacity to work in the future. This guarantees the need work for others non-reciprocally while making an income in the market unless he owns enough bonds, (then he’s free.)
> Let’s discuss how the fractional reserve banking policies affect these accounting principles.
The accounting principles stay the same.
In the money view, we tend to assume that so-called "fractional-reserve banking" is the normal/usual form of banking. Mehrling likes to say that "all banking is a swap of IOUs." The classic story is that a bank issues money liabilities (deposits) in exchange for the borrower-issued liability (loan).
> How does an individual initially lend money into the economy as if he were a bank?
Two points:
1. Banks lend money into the economy by allowing a borrower to swap his own liability (the loan) for liabilities of the bank (deposits).
Anyone can issue as many liabilities (IOUs) as they want. Banks' liabilities are special because everyone else uses them as money.
2. If my liabilities aren't usable as money, then I'll have to draw down my own cash balances when I lend.
> How is the ability to sell a bond for money different than the ability to spend money in your possession?
Selling an asset such as a bond requires a counterparty to sell to. When you're spending from your own money balances, you have access to money without requiring a counterparty.
> How does an individual initially lend money? By selling a bond?
I don't know what you mean by "initially lend money." Anyone can lend out from the assets they hold, lend out newly acquired assets, or lend out newly issued liabilities.
If an individual wants to lend money, and his own liabilities aren't themselves a form of money, he has to lend from his cash pile, or he has get the money from somewhere.
> Where did the money the buyer is using to pay for the bond come from?
The buyer might be spending down his existing cash balances. Or he can acquire money in all the usual ways.
> Where does “money in your possession” come from if nobody has any money in their possession at conception and they just keep trying to sell promises to pay money THAT DOESN’T EXIST to each other in future?
I'm not following this. What do you mean by "at conception"?
Who is it that keeps trying to sell promises to pay money?
What do you mean by "promises to pay money that doesn't exist"?
I feel like I'll be better equipped to address the rest of your comment once you've clarified some of my questions above.
A bank must have positive equity meaning that its assets exceed liabilities. It has reserves at the central bank. The bank uses the reserves to settle with other banks.
If a non-bank institution makes a loan it reduces its bank deposits and increases its loans. For the banks it’s just an asset swap.
If you have a banking license then a bank can create an asset, which is the loan, and add the same amount to its liabilities as deposits and therefore create money.
The bank affects both its assets (loans) and liabilities (deposits) when it makes a loan. Non-banks do not do this without breaking the law.
To be clear, a non-bank has assets (deposits) and converts them to assets (loans) causing the deposits to move to the borrower, but it has no effect on the non-bank’s liabilities.
The Treasury goes into negative equity to create an asset so that it can spend an increased quantity of money from its account at the central bank. This is fiat money creation.
The negative equity in the Treasury creates positive equity in both bank and non-bank lenders. When the Treasury spends a bank or non-bank receives the reserves as deposits.
The point is that banks create reserves assets and deposit liabilities when they lend or they receive reserves when they receive deposit liabilities from treasury spending.
The point is that the central bank and banks are able to increase their liabilities whereas non-banks are banned from doing so.
My question is, when a non-bank institution sells a loan to a bank does the bank increase its liabilities deposits AND INCREASE ITS ASSETS RESERVES? Or, does it not increase its assets reserves? No, they just get the loan as an asset.
> A bank must have positive equity meaning that its assets exceed liabilities.
That is indeed what positive equity means, but it is not true that a bank must have positive equity all the time. As long as the bank can meet its payment commitments as they come due, it can survive negative equity for a long time.
And whether a bank has positive and negative equity can depend on how you do your accounting.
As Perry Mehrling likes to say, “Solvency is accounting fiction. Liquidity is market fact.”
Solvency means positive equity.
Liquidity means being able to meet payment commitments.
> [A bank] has reserves at the central bank. The bank uses the reserves to settle with other banks.
Yes. Another way to put it is that banks, just like everyone else, ultimately settle using money. And officially chartered banks have deposit accounts at the Fed, which allows them to use those deposits as money for settlement.
> If a non-bank institution makes a loan it reduces its bank deposits and increases its loans. For the banks it's just an asset swap.
I think what you're doing is pointing out two different possible ways to lend money.
The lender gives up some money from the asset side of its balance sheet on exchange for a loan that pays interest.
The lender borrows new money and lends it out.
In the first instance, the lender’s balance sheet stays the same size. He's just replaced one asset (money) with another (the loan).
In the second instance, the lender's balance sheet expands on both sides. He has a new asset (the loan) and a new liability funding it.
But both banks and non-banks can lend either way. Most lending is of the second variety.
> If you have a banking license then a bank can create an asset, which is the loan, and add the same amount to its liabilities as deposits and therefore create money.
What's special about banks isn't that they can lend by expanding their balance sheet on both sides. What's special about banks is that people use certain types of their liabilities (demand deposits) as money.
Your liabilities and my liabilities are not money. But there are plenty of non-bank entities that do issue money or money-like liabilities. This is not exclusive to entities officially licensed as banks.
> The bank affects both its assets (loans) and liabilities (deposits) when it makes a loan. Non-banks do not do this without breaking the law.
This is just not true. It's perfectly fine for non-banks to do this.
> To be clear, a non-bank has assets (deposits) and converts them to assets (loans) causing the deposits move to the borrower, but it has no effect on the non-bank's liabilities.
No. Just like banks, non-bank financial institutions make a business out of expanding their balance sheets on both sides.
> The Treasury goes into negative equity to create an asset so that it can spend an increased quantity of money from its account at the central bank. This is fiat money creation.
Borrowing money and spending it is one way to drive down your equity. If you do it enough, you'll push your equity negative. This is not unique to the Treasury.
> The negative equity in the Treasury creates positive equity in both bank and non-bank lenders. When the Treasury spends a bank or non-bank receives the reserves as deposits.
This is half right. If I spend money on consumption, it pushes my equity down. But the equity of the non-me sector does not increase. I gave them money, but they had to give up something to get it.
Same is true of the Treasury. When the Treasury buys something, it doesn't increase the equity of the private sector. If the Treasury just hands money out, on the other hand, it would increase the equity of the private sector.
> The point is that banks create reserves assets and deposit liabilities when they lend or they receive reserves when they receive deposit liabilities from treasury spending.
What? Banks don't create reserves when they lend. The act of bank lending creates a loan asset and a deposit liability.
> The point is that the central bank and banks are able to increase their liabilities whereas non-banks are banned from doing so.
This is just false. Non-banks are allowed to borrow (increase their liabilities). If they weren't, then banks wouldn't be able to lend people any money.
If I borrow from a bank, my balance sheet expands on both sides just like the bank’s does.
> My question is, when a non-bank institution sells a loan to a bank does the bank increase its liabilities deposits AND INCREASE ITS ASSETS RESERVES?
No…. The bank adds a loan asset and a deposit liability. As usual, when the bank takes on a loan, it expands its balance sheet on both sides.
> Or, does it not increase its assets reserves? No, they just get the loan as an asset.
Right. Reserves do not increase. They get a loan asset in exchange for issuing a deposit liability.
Let’s discuss how the fractional reserve banking policies affect these accounting principles.
How does an individual initially lend money into the economy as if he were a bank?
He lends a piece of the capacity to work reciprocally for others in the market of real value exchange.
How is the ability to sell a bond for money different than the ability to spend money in your possession?
How does an individual initially lend money? By selling a bond? Where did the money the buyer is using to pay for the bond come from? Where does “money in your possession” come from if nobody has any money in their possession at conception and they just keep trying to sell promises to pay money THAT DOESN’T EXIST to each other in future?
What makes the distinction is that…sometimes you don’t need money in your possession to lend to a borrower. You lend an amount of money the doesn’t exist but is somehow limited, (hopefully by a standard rule.) All that matters is that the accounting works out in the future so that you get all of that nothing back, plus some extra nothing to make it worthwhile.
So how does an individual initially lend money? He lends a piece of his future promise to work.
What is it that the individual is promising? To make an income by serving others in the market.
What does it mean to sell someone’s promise to repay him to another? That he forfeits his promise to work for others (by making income in the market.)
What is the measure of value used when an individual sell his security to another? The potential for humans to work for each other (to provide reciprocal real value.)
How does a bank differ from individual citizens in our democratic republic?
A bank lends a piece of the potential of humans’ capacity to work in the future by serving others in the market while forfeiting its promise to work for others reciprocally. (And to do some accounting.)
Whereas an individual in our democratic republic (in fractional reserve banking) may not lend money to others unless that money (1) [dishoard] has already been lent initially by a bank (the bank promises that they possess that money,) or (2) [borrow] it has been borrowed from a bank that initially created it, (and valued work must be done to create an income for the bank,) or (3) [liquidate(sell)] it has been borrowed from someone else’s promise to reciprocate valuable work in exchange for an income. (While forfeiting the income the sold bond guaranteed.)
To sum up, individuals in the this type of economy must forfeit the income from their security and borrow the bank’s promise to provide real value in the economy. While the bank requires that real valuable work must be done in the economy that guarantees the bank’s income because the individuals possess a borrowed piece of the potential of humans’ capacity to work in the future. This guarantees the need work for others non-reciprocally while making an income in the market unless he owns enough bonds, (then he’s free.)
Hi Michael. Thanks for your thoughtful comment.
> Let’s discuss how the fractional reserve banking policies affect these accounting principles.
The accounting principles stay the same.
In the money view, we tend to assume that so-called "fractional-reserve banking" is the normal/usual form of banking. Mehrling likes to say that "all banking is a swap of IOUs." The classic story is that a bank issues money liabilities (deposits) in exchange for the borrower-issued liability (loan).
> How does an individual initially lend money into the economy as if he were a bank?
Two points:
1. Banks lend money into the economy by allowing a borrower to swap his own liability (the loan) for liabilities of the bank (deposits).
Anyone can issue as many liabilities (IOUs) as they want. Banks' liabilities are special because everyone else uses them as money.
2. If my liabilities aren't usable as money, then I'll have to draw down my own cash balances when I lend.
> How is the ability to sell a bond for money different than the ability to spend money in your possession?
Selling an asset such as a bond requires a counterparty to sell to. When you're spending from your own money balances, you have access to money without requiring a counterparty.
> How does an individual initially lend money? By selling a bond?
I don't know what you mean by "initially lend money." Anyone can lend out from the assets they hold, lend out newly acquired assets, or lend out newly issued liabilities.
If an individual wants to lend money, and his own liabilities aren't themselves a form of money, he has to lend from his cash pile, or he has get the money from somewhere.
> Where did the money the buyer is using to pay for the bond come from?
The buyer might be spending down his existing cash balances. Or he can acquire money in all the usual ways.
> Where does “money in your possession” come from if nobody has any money in their possession at conception and they just keep trying to sell promises to pay money THAT DOESN’T EXIST to each other in future?
I'm not following this. What do you mean by "at conception"?
Who is it that keeps trying to sell promises to pay money?
What do you mean by "promises to pay money that doesn't exist"?
I feel like I'll be better equipped to address the rest of your comment once you've clarified some of my questions above.
A bank must have positive equity meaning that its assets exceed liabilities. It has reserves at the central bank. The bank uses the reserves to settle with other banks.
If a non-bank institution makes a loan it reduces its bank deposits and increases its loans. For the banks it’s just an asset swap.
If you have a banking license then a bank can create an asset, which is the loan, and add the same amount to its liabilities as deposits and therefore create money.
The bank affects both its assets (loans) and liabilities (deposits) when it makes a loan. Non-banks do not do this without breaking the law.
To be clear, a non-bank has assets (deposits) and converts them to assets (loans) causing the deposits to move to the borrower, but it has no effect on the non-bank’s liabilities.
The Treasury goes into negative equity to create an asset so that it can spend an increased quantity of money from its account at the central bank. This is fiat money creation.
The negative equity in the Treasury creates positive equity in both bank and non-bank lenders. When the Treasury spends a bank or non-bank receives the reserves as deposits.
The point is that banks create reserves assets and deposit liabilities when they lend or they receive reserves when they receive deposit liabilities from treasury spending.
The point is that the central bank and banks are able to increase their liabilities whereas non-banks are banned from doing so.
My question is, when a non-bank institution sells a loan to a bank does the bank increase its liabilities deposits AND INCREASE ITS ASSETS RESERVES? Or, does it not increase its assets reserves? No, they just get the loan as an asset.
> A bank must have positive equity meaning that its assets exceed liabilities.
That is indeed what positive equity means, but it is not true that a bank must have positive equity all the time. As long as the bank can meet its payment commitments as they come due, it can survive negative equity for a long time.
And whether a bank has positive and negative equity can depend on how you do your accounting.
As Perry Mehrling likes to say, “Solvency is accounting fiction. Liquidity is market fact.”
Solvency means positive equity.
Liquidity means being able to meet payment commitments.
> [A bank] has reserves at the central bank. The bank uses the reserves to settle with other banks.
Yes. Another way to put it is that banks, just like everyone else, ultimately settle using money. And officially chartered banks have deposit accounts at the Fed, which allows them to use those deposits as money for settlement.
> If a non-bank institution makes a loan it reduces its bank deposits and increases its loans. For the banks it's just an asset swap.
I think what you're doing is pointing out two different possible ways to lend money.
The lender gives up some money from the asset side of its balance sheet on exchange for a loan that pays interest.
The lender borrows new money and lends it out.
In the first instance, the lender’s balance sheet stays the same size. He's just replaced one asset (money) with another (the loan).
In the second instance, the lender's balance sheet expands on both sides. He has a new asset (the loan) and a new liability funding it.
But both banks and non-banks can lend either way. Most lending is of the second variety.
> If you have a banking license then a bank can create an asset, which is the loan, and add the same amount to its liabilities as deposits and therefore create money.
What's special about banks isn't that they can lend by expanding their balance sheet on both sides. What's special about banks is that people use certain types of their liabilities (demand deposits) as money.
Your liabilities and my liabilities are not money. But there are plenty of non-bank entities that do issue money or money-like liabilities. This is not exclusive to entities officially licensed as banks.
> The bank affects both its assets (loans) and liabilities (deposits) when it makes a loan. Non-banks do not do this without breaking the law.
This is just not true. It's perfectly fine for non-banks to do this.
> To be clear, a non-bank has assets (deposits) and converts them to assets (loans) causing the deposits move to the borrower, but it has no effect on the non-bank's liabilities.
No. Just like banks, non-bank financial institutions make a business out of expanding their balance sheets on both sides.
> The Treasury goes into negative equity to create an asset so that it can spend an increased quantity of money from its account at the central bank. This is fiat money creation.
Borrowing money and spending it is one way to drive down your equity. If you do it enough, you'll push your equity negative. This is not unique to the Treasury.
> The negative equity in the Treasury creates positive equity in both bank and non-bank lenders. When the Treasury spends a bank or non-bank receives the reserves as deposits.
This is half right. If I spend money on consumption, it pushes my equity down. But the equity of the non-me sector does not increase. I gave them money, but they had to give up something to get it.
Same is true of the Treasury. When the Treasury buys something, it doesn't increase the equity of the private sector. If the Treasury just hands money out, on the other hand, it would increase the equity of the private sector.
> The point is that banks create reserves assets and deposit liabilities when they lend or they receive reserves when they receive deposit liabilities from treasury spending.
What? Banks don't create reserves when they lend. The act of bank lending creates a loan asset and a deposit liability.
> The point is that the central bank and banks are able to increase their liabilities whereas non-banks are banned from doing so.
This is just false. Non-banks are allowed to borrow (increase their liabilities). If they weren't, then banks wouldn't be able to lend people any money.
If I borrow from a bank, my balance sheet expands on both sides just like the bank’s does.
> My question is, when a non-bank institution sells a loan to a bank does the bank increase its liabilities deposits AND INCREASE ITS ASSETS RESERVES?
No…. The bank adds a loan asset and a deposit liability. As usual, when the bank takes on a loan, it expands its balance sheet on both sides.
> Or, does it not increase its assets reserves? No, they just get the loan as an asset.
Right. Reserves do not increase. They get a loan asset in exchange for issuing a deposit liability.