For fractional reserve, the 10X money is what's circulated in the system. The liability on the book is just accounting. The bank doesn't have 10X money to start with. It has 1X but it's allowed to lend out upto 10X. The extra 9X is created out of thin air. Of course the 10X is the theoretical max; ultimately what controls the nX (where 1 <= n < 10) is interest rate.
Lending out loan creates money circulated in the system. Paying off debt destroys money from the system. By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply.
That's why the Fed went into the QE programs. The increasing bad loans at the banks was choking off the money circulating. By buying non-performing loans from the banks, the Fed removed the liability off the banks' books so they had more room in their fractional requirement and be able to lend again, thus restoring the money supply.
No, a bank cannot lend out 10X of it's deposits. That's simply wrong.
Say a person deposits $1. The bank owes the person $1. If the bank thinks this $1 is unlikely to be withdrawn soon, it can lend out $0.90 (assuming a 10% reserve rate). End of story. This bank having received $1 cannot turn around and lend $10. Note that this point the bank has $0.10 of the original persons assets, owes that person $1, and is owed $0.90 by the borrower. The net position of all this is zero for the bank.
Now, the borrower can deposit the borrowed 0.90 (assuming it's not spent somewhere else) into that bank, or some other bank. The process repeats.
The net value to society is zero. Liquidity is added, debts are added, they balance to zero.
If a bank lending money is creation of money, so is all lending. I lend Bob $10, he lends $10 to Fred, he lends $10 to Joe, and since we don't have fractional reserves, this is an infinite multiplier. However the chain of debts and assets still is zero sum. There is no difference between this and banks, except banks are required to hold some cash on hand to handle normal business transactions.
>By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply.
Not quite - a bank will loan any money it has at the highest rate it thinks is profitable (as would any actor in the economy). No bank loans are at the target rate the Fed sets.
The Fed does not control the interest rate, they set the Federal Funds Target Rate, which is a target. They do not lend money at this rate [1]. Nor do banks, except to each other, and only overnight.
Banks lend money to each other overnight to meet reserves, and each pair of banks sets a rate it thinks is worthwhile, like any open market transaction. The weighted average of these loans is the "federal funds effective rate". The Fed wants this number to be the Federal Funds Target Rate, and they use FOMC to buy/sell assets to try and get banks to lend to each other at the target rate. This has almost no effect on the multiplier, since it does not change the reserve requirements, and the usual fluctuations are tiny.
Nowhere does the Fed set a rate and lend at that rate, or even force others to lend at that rate. It's a target.
And no where does this force banks to lend or not lend to others. Banks decide to do this at whatever rate borrowers will pay.
Fractional reserve plus debt do create money. The accounting cancels out on the book but there are money circulating in the system. If accounting balanced to 0 means no money is created, then FOMC buying and selling treasury creates no money at all since it's net zero on the book at the end. Yet FOMC has the stated purpose to create/destroy money for the Fed.
The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It would work if you hand $10 to Bob for safe keeping and he gives you a deposit slip while lends $10 to Carl. Now you have the deposit slip valued at $10 and Carl has $10 in his pocket. The deposit slip is very liquid since you can get back the money at any time.
> If accounting balanced to 0 means no money is created
Accounting does balance to zero. Debt and money are added, and they sum to zero. Proof:
Let bank start at 0 (or pick any value).
Bank receives X dollars from entity A. Now bank has X dollars in reserves and owes entity A exactly X dollars, so net position of bank is zero (X dollars in reserves - X dollars owed = 0). A started with X, gave it to the bank, and the bank owes A X. So A has the same starting position.
Bank lends 0.9X = Y to B. Now B has Y, but owes Y, so B net position is 0. Bank lent Y, but is owed Y, so net change here is 0.
This happens every step. It's most certainly every single time a net 0 transaction.
If you care to continue to claim it's not net 0, please clearly demonstrate as I just did how it is not net 0.
>Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X.
No, in the limit it is exactly 10X. Proof:
Let S = 1+0.9 + 0.9^2 + 0.9^3 + ....
Then 0.9S = 0.9 + 0.9^2 + 0.9^3 + ....,
Subtract (S-0.9S) and all terms cancel except the first 1, so (S-0.9S) = S/10 = 1, so S = 10.
>The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid.
It's exactly the same thing. The bank lending is no different from any entity lending. The bank does not print up new money each time - it's the same money as you put it.
Bank IOUs are completely liquid either. All 10X money cannot be withdrawn at the same time - one is lent from someone else's assets, and this is only possible as long as everybody does not try to withdraw their assets at once. This is why there is a certain reserve needed - it allows normal withdrawals and deposits, which are around that fraction (10%) of needed assets.
If everybody in the 10X wanted to withdraw their money, there would not be enough money. All the banks would need to call in all loans, and that is chaos. It simply is money that sits in zero sum on balance sheets.
Ever wonder why there is a reserve? This is why. It's the expected amount of cash needed to let people with savings in the bank do day to day transactions. Bank runs used to happen (and still could) when reserves get too low, because all that 10X is not money that can be pulled out at once. The Fed provides a buffer against bank runs because it can provide liquidity as needed.
But the money multiplier is not some magic source of money any more than lending money from friend to friend is. It's exactly the same process.
Accounting does balance to zero. That doesn't negate the fact that money has been created in the system.
Let me pose the question again. Your statement is since accounting balanced to 0, no money has been created. In that case, FOMC's account balance is also net zero when buying treasury or selling treasury. Therefore FOMC doesn't create or destroy money. So what is the purpose of FOMC again?
>Your statement is since accounting balanced to 0, no money has been created
No. Nowhere have I written "no money". You have written it a few times. I have stated that the money is balanced by a matching debt. You also keep mixing fractional reserve and central bank purchases. These are entirely different things.
And FOMC is also zero sum - the dollars they inject are backed by debts they hold.
Yes, I am quite aware of this, even having been involved in many discussions and papers on exogenous vs endogenous money. If you want to really blow your mind search those terms and read academic papers on them.
What you seem to not understand is that the money is offset by matching debt. Your link states this in the first paragraph: "A central bank may introduce new money into the economy (termed "expansionary monetary policy", or "money printing" by detractors) by purchasing financial assets or lending money to financial institutions"
The Fed traditionally purchases debt to put more current into play. As more dollars are in the economy, the Fed carries more debt, the same as any bank when it loans out deposits. The difference is the Fed can purchase as much as it wants, but the sum is still zero.
Look: the fed has a balance sheet. Here are many snapshots of it [1]. It sums to zero. Take the last one from March, 2016 [2]. Look at page 6, Table 1. There is a line titled "Federal Reserve Notes in circulation". It is 1385B. There are other assets and debts. They are summed. The sum is zero.
Next - this has zero to do with fractional reserve, since you could have either without the other. We (and most of the world) had fractional reserve before we had a central bank.
So yes, there is more money. There is also matching debt. This is what I have stated since the beginning. You don't seem willing to note that the debt matches the money in every case, whether it's Joe loaning Bob, it's a bank and fractional reserve, or it's a central bank purchasing assets. The central bank has unlimited reserves, is the issuer of currency, and can take on unlimited debt.
If it helps you think clearly, assume the central bank has 20 quadrillion dollars. They decide to add X dollars to the economy, so they buy X in assets. Now they have 20Q - X in cash, X in assets, we have -X in assets, X in cash.
Where the economy increases is when the people buy goods (say Treasuries), and their value in dollars goes up through market pricing, then they get sold to the Fed. The Fed didn't add the value, market pricing did. The Fed simply traded some of it's (unlimited) reserves for assets.
This is also why the Fed traditionally purchases at open market prices - it helps them match inflation since the market, not the Fed, decides prices.
So - are you still claiming all these stages are not zero sum? If so, please detail which step is not zero sum.
>You were the one using the friend lending example to say there's no new money created when debt is created.
You keep saying I wrote no money is created. I did not. From every single post in this thread:
My first post in this thread: "new money is added through asset purchases, not giveaways,"
My second: "if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum"
Third: "Accounting does balance to zero. Debt and money are added, and they sum to zero"
Fourth: "I have stated that the money is balanced by a matching debt"
Literally every single post I wrote in this thread stated that money is added, and a matching debt is added.
Lending out loan creates money circulated in the system. Paying off debt destroys money from the system. By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply.
That's why the Fed went into the QE programs. The increasing bad loans at the banks was choking off the money circulating. By buying non-performing loans from the banks, the Fed removed the liability off the banks' books so they had more room in their fractional requirement and be able to lend again, thus restoring the money supply.