Reconciling the economics of debt


Currently there is worldwide concern about debt. It is widely claimed that the mainstream economic community could not see the financial crisis coming because it ‘looked through’ money and debt to the real economy. And since debt, or in fact the dynamics of debt, seem to be important factors in the crisis, this was a failure of the theory.

It is easy to agree with this critique. But to really understand it we have to disentangle all parts of it, and as we will see, there is an obvious way to reconcile the mainstream with the critique as long as we are clear about what the mainstream view fundamentally entails.

To be clear, the mainstream view is that debt is a reallocation of resources. There is no legacy of debt to future generations, since both creditors and debtors will be part of every generation. However the mainstream itself is often very confused about debt, so it is worth clarifying this point in detail first.

Household example

To begin, a theory of resource allocation is right to treat debt as an internal allocation mechanism of real resources in the economy.

In a my household, for example, I can lend my wife money to treat herself a new dress today. If we were accurately keeping internal household accounts that would be a transfer from myself to her. In real terms, my consumption of resources decreases and hers increases.

Next week the debt is repaid according to our internal accounts when my wife gives me money to take the kids to the football.

When we look at our household as an aggregate entity, our total resource consumption is unchanged by the debt, which merely represents an internal reallocation.

There were no future resources brought forward for my wife to consume. The debt did not leave a cost to our children. Even if it was never repaid, I already paid for my household’s debt with the resources I didn’t consume when I transferred purchasing power to my wife.

It surprises me that on this crucial point the core mainstream concepts are consistent with the functional finance, or modern monetary theoryperspective, yet there remains animosity between these groups. I have come to believe that this is mostly a result of the mainstream’s inadequate understanding of their own conceptual apparatus (here’s an example of how the noisiest mainstream commentators remain confused about their own theories).

Much of the mainstream has equated ‘looking through’ debt to the real resources of the economic with ignoring the money creation aspect of debt altogether. This has lead to further confusion in the analysis of banking and economics generally, with the Bank of England recently having to explain the process to the economics community.

These core economic concepts are easily confused when one fails to properly understand the complete accounting of the system at all points in time. Specifically the use of overlapping generations (OLG) models can confuse more than inform, and many students come away from learning these models believing in the possibility of inter-temporal reallocations of resources – yes, that means time-travel.

OLG example

To labour the point, the errors made in understanding the concepts at play in debt are evident in the overlapping generations models (OLG), a tool commonly used in economics in order to understand various internal shifts in resource allocations. It can be easily misunderstood to show that debt enables resources to travel through time.

Abba Lerner made the argument I am just about to make back in 1961, when he was President of the American Economic Association. He was pulling into line economists Thomas Bowen and James Buchanan, amongst others, on their acceptance of the political propaganda that debt can distribute burdens across time. You’ve all heard a politician claim that debts are ‘leaving a burden for our children’.

The mistake of Bowen and Buchanan arises because of their incoherent application of the OLG model. In the model they merely redefine the current generation to mean those who lend the money (creditors), and the future generation as the one who repay the principle and interest (debtors).

Let me try and represent the model as simply as possible.

There are two generations (which are simplified into two people) alive in each time period, the ‘old’ and ‘young’. Each lives for two time periods, being young in their first time period, and old in their second. In the table below, which I will use to explain this, the coloured (and white) shaded cells are the same people, or cohort.

Screen Shot 2014-07-07 at 2.01.39 pm

Starting from a no debt baseline at period zero, the first period has the old borrow $100 from the young. It doesn’t real matter whether this a new money (in the form of bank lending), direct peer-to-peer transfers, or taxes and government spending, the net effect is that those who borrow are able to capture a share of resources in that period that they wouldn’t have otherwise.

In resource terms the young transfer $100 of resources to the old in period one. In period two the previous old generation has died, and the previous young generation is now the old generation (yellow cells), and there is a newly born young generation (white cells).

The new young cohort then repays the debts of the period one old generation, giving up $100 of resources to the current (period two) old generation (who were also the period one creditors).

As Lerner explains, if you label the newly born young generation in period two as the ‘future generation’, which lives from period two to three (shaded white) and the cohort who originally borrowed the money in period one, who lived from period zero to one (also shaded white), the ‘present generation’, you can see how a transfer through time seems to occur.

The ‘present generation’ sees a lifetime consumption from debt of +$100, while the ‘future generation’ sees a total lifetime consumption of -$100 from this debt repayment.

Labelled in this way it seems perfectly obvious that debt burdens are being passed along. But only if we artificially conflate creditors and debtors with ‘generations’, which can’t be done in general.

The reality is that the resource transfers occur at each point in time, not between times. As the final row shows, in each period there is an accounting balance in resource terms between borrows and lenders. It is only because of the artificial way lenders and borrows are identified by generations, and the necessity to eliminate the debt balance in the next period that provides the result.

Let’s have a look at an alternative, where the same debt is incurred, but repaid (if at all) only after all generations alive upon its creation have died (and the real interest rate is zero for simplicity).

Screen Shot 2014-07-07 at 10.01.42 pm

As you can see, this time it is clear that the generation born in the zero period is simply using debt to reallocate from the generation born in period one to themselves. Given the institutional power, they could of course have taxed that generation instead in order to redistribute resources. It is the same net effect.

The generational structure of the repayment of debt at some future point, however, is indeterminant. I have made this clear by labelling the period four repayment of debt with question marks, since who pays who in resource terms in that period for debt repayment is by its nature a result of all institutional resource allocations, including most importantly tax and transfer system.

A final illustration shows that when we consider continual debt-financed redistribution, that the redistribution problem goes away entirely, since all people receive the same redistributions at the same stages of their life. The table below show a continually debt funded reallocation from young to old, with ever increasing debt levels, but no identifiable winning or losing generation.

Screen Shot 2014-07-07 at 2.03.39 pm

If you are concerned about general welfare of all people living at any point in time, then you must consider debts as internal transfers at a point in time.

Before I conclude this section, I need to again be clear that identifying winners and losers from these internal debt transfers is not at as easy as bundling all debtors and creditors together and labelling them, which is exactly how the OLG model is typically, and incorrectly, applied. The complex interactions of the complete system of internal transfers means we simply cannot isolate these two groups. In fact, it may be very possible if an individual to be a borrower and lender at any point in time.

If I have just borrowed money to buy a house I am a borrower of purchasing power, which is paid for by the community at large via inflation and taxation. But of course I too am part of the community and give up resources via inflation and taxation. Understanding the balance even at an individual level is nigh impossible. At a community level, particularly in relation to public debt, there simple is no way to identify debtors and creditors in any meaningful sense.

For a policy maker the whole system of transfers in a given period is all that matters, whether this occurs via taxation and direct transfers, debt creation and repayment, or inflation. This is exactly what the core of macro economics says – debts are transfers in resource terms, and therefore balance out in aggregate. But somehow this is easily forgotten when it comes time to talk about policy.

Levels vs rates of change

The level of debt within an aggregate is not systematically important in terms of investment and macro economics. It is, however, important in terms of internal distribution, of which it forms a small component.

But the way in which debt levels change over time is vitally important to understanding the investment and business cycle. The reason being that debts in the private sector are typically incurred in order to finance new capital equipment and construction. By the nature of our banking and financial system, the rate of change in lending is a very good indicator of the aggregate investment occurring in the economy.

Steve Keen has repeatedly made the point that the rate of change in private debt and its derivative (which he calls acceleration of debt, being the second derivative of the debt level with respect to time), are far better indicators of the direction of the macro economy.

So while debt is an internal allocation, because our banking system generally produces debt in order to finance real new capital investment, the rate of change in the debt level can be used to understand the level of economic activity in aggregate. While Keen disagrees with me on the point that levels are not important, I stress that they are only important if their distribution hinders new investment, which again relates back to point that it is only the dynamics of debt that are useful indicators of investment behaviour.

This point is very subtle, but important. There is no conflict between the view that one can look through debt in terms of its role in static allocations of resources, while at the same time understand debt dynamics as important mechanisms for financing new investment and therefore determining aggregate demand and growth.

Sadly, some economics tribal leaders have failed to acknowledge these subtleties and merely prefer to fight each other over confusing interpretations of what can be consistent ideas about debt.

Foreign debt

Finally, the mainstream economics tribe usually has divergent opinions about different forms of debt. Foreign debt gets relabelled as foreign investment and miraculously becomes a great thing. But of course this is the only type of debt where a country in aggregate is borrowing externally.

It is the type of debt most loved by economists in general, but the only one in which countries as a whole, like Australia,  are generating future obligations to an external party, should these accumulated debts ever be repaid (which is ultimately a political question).

The same rationale as before applies to foreign debts – the distributive role of levels versus the investment role of debt dynamics. Foreign debts are a resource transfer at a point in time. We can only accumulate foreign debts by running a deficit in the current account, typically by importing more goods than we export. Hence, in resource terms, we get the transfer from our imported resources.

The investment role here is far more subtle, because unlike domestic lending, there is not necessarily a close relationship between the creation of debts and new capital investment. But I won’t unpick this point any further in this post.

The point I want to make is that unlike internal debts, international debt balances are much more politically interesting. The two (in fact many) parties to the relationship have different objectives, institutional constraints, and a complex web of non-monetary relationships such as military alliances, and resource interdependencies (such as reliance on either food or mineral imports).

Any questions about external debt are therefore inherently political.

One could construct a hypothetical baseline with which to compare and make judgements about external debts. This baseline would have a hypothetical market generate a relative currency value at a level that maintains a current account (and therefore capital account) balance. We only trade goods for goods in this scenario. In fact it is a ‘no foreign debt’ scenario.

What we then need to determine is what benefits a country gains by deviating from this baseline over an extended period. We know that depressing a currency increases foreign demand for tradable goods, and therefore enables more rapid large scale investments in these sectors if there is sufficient internal organisation.

This has been a recipe for development in East Asia for the past many decades, and the subject of much political discussion and intervention (eg. the Plaza and Louvre Accords).

On the other side of the baseline we have countries like Australia that have run trade deficits and current account deficits in general for half a century. The benefits to such countries are short term gifts of relatively cheap tradable goods, at the cost of long term investment in those sectors.

Over time foreign debts have the surprising effects of generating greater reliance on each party for continued stability. In Europe we can now see that ignorance of this fact is bringing down the area as a whole.

It should be obvious to any economist who understands their theoretical apparatus that the very existence of foreign debt is a sign of a political will on both sides to sustain an imbalance for their own national objectives. There is no need to continue looking at residual measures of productivity or technology or other magical explanations to understand what is ultimately a political construct. And if economists are to comment on the generational burden of foreign debt, we need a very good economic reason why it is in anyone’s interests to reverse the current patterns of international account balances.  Japan’s recent efforts to keep the Yen value down to encourage foreign demand is evidence that repaying foreign debt is costly to both parties.


Debt is a fundamental accounting feature of our monetary system. Economists used to know that they ‘looked through’ these accounts at real resources, and hence were able to see debts as merely the consequence of an internal reallocation. This lead most to believe that debt balances and their dynamics were of no interest at all.

Unfortunately, the discipline has seen a decline in the understanding of core concepts and theories, which I put down to a greater emphasis on a narrow set of mathematical techniques instead of their economic application and interpretation.

Yet there is a clear consistency between looking through debt levels as merely an account of past distributive choices, and paying very close attention to the dynamics of debt in relation to investment decisions, aggregate demand, asset prices and economic growth. Because private debts (and a portion of public debts) are, by the nature of lending processes, used for investment, their dynamics are both a signal of demand, and a driver of demand via feedbacks in the economy.


  1. It is a twisted path this tortured course.

    Norway went halves with the UK in the North Sea Oil.

    The UK blew its windfall on bloated house prices and such, while Norway saved its share to be invested in future generations.

    Australia has followed the UK course wasting the gifted blessing on bloated housing prices.

    I have ” ‘looked through’ money and debt to the real economy ” , and I clearly see that Norway has taken the intelligent/common sense path.

    Experience and History run expensive schools.

    • If people have learnt nothing from this balance sheet depression that started in October 2008, then it is pretty hard to feel sorry for them when the next stage shortly begins.

      The only difference between this situation and the one that began in 1929, is that the central banks have been foolish enough to try and stop a normal cleaning out of the dross by actually creating a humongous amount of extra debt to make the situation worse.

      The Bear has been very patient…he is happy to allow the central bankers to make complete fools of themselves… the bigger the better as far as he is concerned.

      But a lot of us common sense types just want to see the Bear throw out the trash and put some of the people that are supposed to know what they are doing
      … put them in the slammer… Yes, put them behind bars… In gaol.

      I’d feed the central bankers to the lions… but it’s been illegal since Tertullian was a boy.

  2. Nothing illustrated the blind belief is the current system as much as the ‘explanation’ of debt we were treated to on NZ TV1’s news last night (Nadine Chalmers-Ross – ex finance-slot host) ‘ If a depositor puts $100 in their account, the bank keeps $10 and lends out the remaining $90 to stimulate the economy ….” or some such words. Financial ‘experts’ must really believe this drivel if they keep reporting it with such certainty. It never crosses their minds that the bank might keep the whole $100 as the mandatory reserve, and lend out new accounting debt of an additional $900…….

  3. The opening assertion that there is not much concern about debt is crazy, everyone everywhere is concerned about the levels of debt, be it private or public

    • hatkins – I see no evidence of that. So-called ‘austerity’ as practised has not involved any reduction in debt. It has just been a slowing of debt creation in some areas that has been accompanied by accelerated debt creation in others. Even the slowdown in debt creation has been widely criticised. Even bloggers on MB run an anti-austerity agenda.

      • The Bank of International Settlements has calculated that debt has increased by 43% from US$70Trillion at October 2008 to US$100 in December 2013.

    • Are you serious? The left wants to spend infinitely and the right couldn’t care less about private debt.

      Most people wouldn’t even know how high private debt is.

      • migtronixMEMBER

        No sh!t they wouldn’t even know how high their own debt is when they earn 70kpa and have $3mil in mortgages… And call themselves millionaire investors of course.

  4. To me, the important statement is that when you borrow money you borrow purchasing power. What the borrower does with the purchasing power, is ultimately what determines if the loan has been a successful proposition. I noticed the phrase, The dash for trash, maybe it was here, it would seem to many that the loans taken out by many have been invested on items which have no long term value, and when the market eventually marks this junk back to market value, and the perceived value evaporates, is when the fun will begin.
    We wonder why the wealthy are becoming wealthier and the poor becoming poorer, the difference in the quality of their respective investments, physical, social and personal is mostly the reason.WW

  5. SweeperMEMBER

    I have never understood Keens argument about debt growth and aggregate demand. Why should debt growth have any effect on aggregate demand? Debt growth could just as easily be called saving growth – where existing creditors are saving and existing debtors are spending. That’s all it is, it doesn’t tell us anything about the level of aggregate demand. It does effect the composition of aggregate demand (which is important) but that is wasn’t Keen means.

    • Sweeper

      “I have never understood Keens argument about debt growth and aggregate demand. Why should debt growth have any effect on aggregate demand? Debt growth could just as easily be called saving growth – where existing creditors are saving and existing debtors are spending.”

      Perhaps Keen is saying that debt is created out if thin air and so as savings are the other side of that coin, savings are also created out of thin air.

      Therefore aggregate demand increases. I guess he’s saying that demand from “existing creditors” as you put it did not or could not exist without debt growth. Chicken /Egg?

      • It’s a dynamic self=reinforcing loop! However if you inject into that loop you heat the whole thing up and make it go faster. We run negative RAT interest rates (by injecting money) so we undervalue resources and we get an expansion in demand. Debt so created thus speeds up the over-use of the resources of the planet.
        Currently the belief is that you don’t require savings first. Rumples example of the household does not in fact apply. There is no saving required to give money to somebody else. We just create it. Sure some savings result and these just keep teh loop going at the increased speed…more correctly I guess the enthalpy is higher.

        If somebody had to save in order for someone else to borrow you have a totally different situation. Somebody has to go without resources for someone else to use them up. That is NOT the world we live in. We just go on consuming and consuming at a faster and faster rate by creating more and more debt!

      • Hi flawse.

        The BOE backs you up by saying that 97% of deposits are created via the process of creating money for loans.

        This can only end in tears and wailing.

      • SweeperMEMBER


        If that is his argument then that’s ridiculous.

        How does he model the interest rate to start off with?

        If more people want to borrow than want to save what happens to the interest rate. And what is the CB doing? Is it not their job to increase interest rates exactly when more people want to borrow than people want to save?

    • hubris_and_hyperbole

      Sweeper you appear to be trying to interpret Keens conclusions (also made before him I believe by Deutche bank) through a loanable funds lens.

      Using that lens it makes no sense. If you read the BOE stuff that is linked in this article it explains that loanable funds is nonsense.

      Money gets created out of thin air (subject to capital constraints etc). Therefore the expansion of debt creates expansion of purchasing power.

    • Rumplestatskin

      I agree. Keen’s model basically has money but no resources (though many implicit ideas about money-resource interactions, which we never get a good economic explanation of). While on the other side the mainstream has no money, just a rather intangible concept of real resources.

      I definitely agree with Keen about accounting for feedbacks in a dynamic model, but I still can get my head around the money-real resources link he makes.

      My view is that debt makes sense as an element of aggregate demand because the institutional setup we have basically ensures a good chunk of debt is directed towards capital investment (this has changed over time, and these days most debt is for existing homes).

      So Keen’s models are about representing Minsky. I actually like this paper (link below) that shows a basic model with and without ponzi-style speculation. But we still get cycles. And if I recall, in the model there is no much interpretation about capital or its utilisation, yet we get labour underutilisation because we don’t allow wages to adjust. And there is no capital value adjustment either.

      Some things are money, some are resources.

      I think there is a huge opportunity to use Keen’s modelling techniques and have a systematic economic interpretation of all the variables and relationships, that the mainstream may in fact embrace (okay, that’s rpetty optimistic).

      • SweeperMEMBER

        I think he must be thinking along the lines of what Escobar said above. If so, he raises more questions than answers. ie.

        – If debt growth drives aggregate demand. How can debt grow as the interest rate falls? That makes no sense
        – How can debt growth occur while CB base money growth is virtually static.

        Both of which occurred from the early 90’s to 2007, when household debt took off in all the advanced countries.

        And the reverse has happened from 2009 to today. Total debt has shrunk (except in Australia), interest rates haven’t moved, and base money growth has exploded.

      • interested party

        “money-resource interactions, which we never get a good economic explanation of”
        …and until you mob start to consider the economy along-side of and NOT separate to ENERGY and the ENVIRONMENT… will struggle to see the big picture. They are all components of the same system, but educated people fail on this simple observation. How can you be so close minded to miss the massive interactions that are all around us everyday…..yet all what is considered here is ‘how to reconcile economics of debt?

        Sorry fella’s………my view is a bit different to what you are looking at. Seems like a visit to the fairy down the garden.

      • Sweeper

        The CB is not the only source of debt! When you lower rates debt grows everywhere.

      • IP! Exactly!!!!! We had better get together for that beer.
        Economics has become totally vacuous thinking it operates in some sort of vacuum. If it continues there will be a vacuum where our civilisation once existed.

  6. “It surprises me that on this crucial point the core mainstream concepts are consistent with the functional finance or modern monetary theory perspective”

    I have NEVER seen any MMT proponent say that in order to create a debt somebody else has to save first! NEVER! In fact quite the opposite is the case. You can print money ad nauseum and if that creates over-use of undervalued resources it is all good and if it creates a CAD that is even better.

    • P.S. Not only MMT. I have not seen anywhere in any modern economic writing the concept that in order for somebody to have the use of resources somebody else has to set them aside!
      All we hear about is the ‘production gap’ etc where we are not using up our world fast enough so we need to create more debt to create more consumption.
      This seems to me to be the single great failing of ALL modern economic thinking. It is stupidity beyond imagining.

      The whole push across the whole damned world at the moment is towards confiscation and elimination of savings. We just simply cannot have anyone who sets aside resources for later use or for the use of others. We have to have everyone consuming at least to the extent of no savings and then we have to have most going into even more debt at an ever-accelerating rate, in the process accelerating the over-use of resources, just to maintain a so-called equilibrium.

    • Rumplestatskin

      Those in the mainstream who actually understand their own theory realise that debt is new money and hence doesn’t require saving. This is exactly what MMT says.

      Remember, there is no money in the mainstream theory – only resources. So the very fact that new money can utilise resource means that those resources are not being utilised elsewhere.

      MMT is not concerned with foreign account balances (as far as I can tell), since it is more a description of monetary processes, with some connection to real resources (via inflation constraints).

      • The rule is that any foreign sourced loans must be denominated in the local currency and the exchange rate must be floating.

        Otherwise the risk is an “Argentina scenario”

      • Rumplestatskin

        Thanks for the clarification Peter.

        Though what is happening in Argentina at the moment is quite interesting in regards to potential political outcomes of foreign currency denominated debts.

      • So the very fact that new money can utilise resource means that those resources are not being utilised elsewhere.

        Or the cost of those resources in fiat goes up….

      • Rumples you are completely ignoring the point……hell there is a lot of resources not being used. Does that mean we should place a value of zero on them and go out and use them up in one generation?

        MMT is just plain BS in this regard. Just keep pumping up econo mies to satisfy our present ge3neration to the absolute maximum with no regard for the real value of anything.

        IF resources have the same value as printed money i.e. zero FINE!!! If resources have value for ourselves and future generations then you need to think again and damned carefully at that!

    • MMT are simply explaining the process that already exists. We may or may not like it, but it is what it is and it isn’t going to change.

      • To be honest, I think very few theories or people actually understand what the process is. Hence the GFC etc comes as a big surprise to so many.

      • Hi FF
        MMT couldn’t have predicted the GFC. Those who did that understood the quality of the debt, or more correctly the lack of quality of a large percentage of the home loan debt in the USA.

        The mechanics of the system is that there can be no savings without debt. For every dollar someone holds in an account someone must owe a dollar. If you value savings you therefore must appreciate debt. One can’t exist without the other.

        Therefore the debt quality becomes important rather than the debt itself. By debt quality I mean the debtors capacity and willingness to repay.

      • @PF Yes I know. There are many more factors too conveniently ignored such as demographics etc.

        I don’t have an issue with MMT and MMT practitioners (well no such thing really) as long as they agree to the limitation of all such theories and models.

      • But doesn’t an economy based on the exponential increase in debt (in excess of real economic growth) necessarily lead to a decline in the quality of debt?

        ie as the best investments are completed, we move down the list to ones with lower and lower returns?

        As we know, debt was once predominantly tied to capital investment for businesses to produce real things, but once we had accumulated sufficient capital stock to meet demand business debt growth slowed and more and more has since found its way into speculating on asset prices.

        Isn’t more of this all we can expect?

  7. “Let’s have a look at an alternative, where … the real interest rate is zero for simplicity…”


    Just as with your own household example (“our total resource consumption is unchanged by the debt, which merely represents an internal reallocation”), your choosing to ignore the role of compounding usury owed along with the original debt principle amount, renders this entire analysis fundamentally flawed.

    Any economic analysis that ignores the critical role of compounding usury, is wrong.

    Our usury-based money system involves the creation of new debt principle (P), along with a legal obligation to repay “interest” (I) as well (P + I) — an additional, compounding sum of monies that have not been created along with the original loan of Principle, and therefore can not be paid without subtracting from the total sum of money already in circulation, or by the creation of even more debt (plus interest) obligations.

    • Op8

      ““interest” (I) as well (P + I) — an additional,compounding sum of monies that have not been created along with the original loan of Principle, and therefore can not be paid without subtracting from the total sum of money already in circulation”

      Yes of course. You need to create something of value to repay that interest (that recurring fee if you like) which represents the cost of bringing that money into existence plus a margin. … for as long as the loan exists.

      But crucially the interest does not exist on day 1. But merely accrues as long as the loan exists. And in order to pay the interest I have to earn or create something of value.

      How would it work without interest (or regular fee)…

      • “…in order to pay the interest I have to earn or create something of value.”

        Remembering that all “money” is in reality debt principle, it would be more correct to say that in order to pay the interest I have to acquire some of the debt principle (itself owing interest) currently in the possession of someone else. Thus, leaving someone else short of what they need to keep making payments to the usurer class.

        It should take very little contemplation to realise that the usury-based “money” system itself means there is always an artificial shortage of money (due uncreated, non-existent usury owed, and compounding), and that this artificial shortage of money forces everyone into lovely capital-ist competition with each other to acquire it. We are driven by the system to dog-eat-dog, rob-Peter-to-pay-Paul greed, and the worship of Mammon.

        Furthermore, what is the easiest way to acquire someone else’s debt principle?

        No, not by creating “something of value”, ie, real production, and selling it to someone.

        The easiest way to acquire “money” is by finding a way to insert yourself into the existing money flows, somewhere, and clip a ticket.

      • “interest (that recurring fee if you like) which represents the cost of bringing that money into existence plus a margin…”

        This is complete rubbish, btw. Another in the long line of economic axioms / articles of faith, perpetrated solely for the purpose of false and misleading rationalisation / justification for the practice of usury.

      • Op8

        It’s complete rubbish that in today’s world you can otherwise bring debt into existence without costs (people, systems, marketing, shareholders. …) and making a margin on those costs.

        Please propose an alternate process.

      • Escobar,

        If a bank can create new “money” out of thin air in the form of an interest-owing loan, then there is no logical reason why banking “services” could not be provided free, or for low fixed fees — no compound interest — with the actual costs associated with providing those “services” defrayed by “printing” new money (eg, to pay staff).

        Banking services should be, at worst, a public utility.

        They should not be a privatised, predatory, for profit / power system of mass rape.

      • Op8

        ” there is no logical reason why banking “services” could not be provided free, or for low fixed fees — no compound interest — with the actual costs associated with providing those “services” ”

        That’s an interesting paragraph.

        I don’t think the cost is low…. wages, systems, marketing and regulation… managing risk.

        Even if you change the system and halve the costs some will say it’s still high and need $100,000’s of dollars per average loan as a fee.

        Now what if some smart arse upstart says… well looky here; you can pay your large fee over the average life of the loan (each year)…

        Starts to look like interest.

      • “I don’t think the cost is low…. wages, systems, marketing and regulation… managing risk. “

        That’s because you are looking at the situation through the artificial lens of the prevailing paradigm … a lens that has been formed and polished over centuries (and especially the last 100 years) by the usurer class, solely in order to provide a multifaceted bogus rationalisation for the system by which they hugely benefit, to the detriment of everyone else.

        In a digital age, banking and “lending” “money” as we have known it, along with all its accoutrements such as “regulation” (LMAO) and “marketing”, is entirely unnecessary.

    • Rumplestatskin

      Interest payments are just transfers of resources in the reverse direction. It makes no difference to my analysis, though the rate of nominal interest may be a factor that determines the willingness to increase/decrease debt balances.

      • No. You are wrong. Fundamentally wrong.

        You are both failing to correctly understand, and, deliberately (and falsely) oversimplifying the mechanics of what actually occurs at the very root of the monetary system, in order to wave it away.

      • Rumplestatskin


        I actually agree with you

        “money system involves the creation of new debt principle (P), along with a legal obligation to repay “interest” (I) as well (P + I) — an additional, compounding sum of monies that have not been created along with the original loan of Principle, and therefore can not be paid without subtracting from the total sum of money already in circulation, or by the creation of even more debt (plus interest) obligations.”

        Yes, that’s true. But why is that important? So, we keep creating new money via new debts. What is inherently wrong with that? What alternative do you suggest?

        I mean, think about the system as a whole. Who is paying who? You say it is usury to lend money at interest. So who is the usury class? Can’t we just have a system that makes sure we are all part of the usury class? For example, if we all own the banks, or have other redistributive institutions in place?

      • Rumples,

        “But why is that important?”

        Can’t you see the problem? In fact, the problems are manifold. To cite just one, the inevitable consequence of a “money” system based on compounding usury is that, since debt growth is (therefore) a geometric function, whereas real economic growth is only an arithmetic function, growth in debt obligations must inevitably increase beyond the capacity of the real economy to “produce”. What we see all around us in the Western world today is a DIRECT consequence of usury: debt saturated households; debt saturated governments; inability for the real economy to “produce” (grow) at a rate that can support repayments (P + I) of the existing debt burden/s; official usury rates inevitably forced lower and lower in order to try and revive “growth”; nominal price increases (inflation) on everything, due to the ever increasing “money” (debt principle) that must continually be loaned into existence in order to service both real economic growth (where it exists) and also, more importantly, repayments of compounding usury on ALL the “money” (debt principle) already in the total system; increasing real wealth inequality as the “capital” owning (usury-earning/extracting) class “earn” money for doing nothing, while wage slaves devote their lives to repayment of P + I (remembering the vital fact just noted re the system itself demanding constant nominal price increases on everything); etc etc etc.

        “What is inherently wrong with that?”

        See above. The usury-based system is inherently rapacious. It is also terrible for the environment, since it drives the ever increasing consumption of natural resources, destruction of our natural world, in order to achieve ever more “growth” (ie, make “profits”).

        Plus, it is fundamentally unjust, and completely immoral. Which is why philosophers, sages, academics, and divines from every culture throughout all of recorded human history have denounced the practice of usury as being equivalent to theft and murder.

        “What alternative do you suggest? “.

        Ideally, I would like to see a maximally decentralised money system, whereby every adult citizen can act just like a central bank, creating digital tokens for themselves, interest-free, subject to uniform pre-programmed rules. These rules would include a preset rate of demurrage, reducing both “credit” and “debit” balances in their “account” towards zero, with the amount summed since last logon, and an automated Honour rating system that is determined by whichever is the greater of the account holder’s credit and debit balances.

        Failing my ideal system, one in which the private banking sector is eliminated, or forced to provide 100% usury-free services something like a public utility, and the “independent” central bank too is eliminated, with the elected government solely responsible for injecting usury-free credit into the economy via public works, would be an ok alternative to me.

        “So who is the usury class? Can’t we just have a system that makes sure we are all part of the usury class?”

        In a sense, that is precisely the logic behind my own alternate currency system idea.

        However, bear in mind that if we ALL become the usury class — on a 100% egalitarian footing, with no systemic bias enabling one group to gain control over others via legal obligation — then there is no “need” for usury.

      • since debt growth is (therefore) a geometric function, whereas real economic growth is only an arithmetic function, growth in debt obligations must inevitably increase beyond the capacity of the real economy to “produce”

        Where is b_b????

      • FF,

        This is worth a read —

        edit: a quote, for those who won’t bother clicking the link —

        (Henry) George’s major European follower, Michael Flürscheim, wrote one of the few books [A Clue to the Economic Labyrinth, 1902] focusing primary attention on the problems caused by interest-bearing debt.

        Flürscheim elaborated that “All exertions, all improvements in the methods and tools of labor, the strictest economy, the severest self-denial, are all powerless to compete with the rapidity of self-increase possessed by capital placed at compound interest, and they cannot keep up with its demands.”

        To illustrate this point he composed the following allegory to illustrate the dynamic at work.

        Many ages after man was driven from Paradise and told by the Lord “to earn his bread by the sweat of his brow, mercy began to prevail. A loving angel was sent down by the Great Master, charged with the task of lightening the burden. The angel’s name was Spirit of Invention. He began his work by teaching man to make useful tools,” to tame animals, mobilize water power, air and wind power, fire and steam power to drive machinery.

        “It seemed that at last the golden era had come of which men had dreamed for ages past, without ever hoping to attain it. Without trouble, with almost no exertion, except that of wealth for the satisfaction of wants which, in former times, even the richest did not know or dream of.”

        But “that envious spirit, that fallen angel, Satan, who once before, in the shape of the serpent, had driven man from Paradise by seducing him to sin,” was jealous and angry that his own empire would soon be over for ever.

        Among the follies of man, one little imp, called Interest, managed to attract Satan’s attention. “‘What is the matter with you, Interest?’ he asked the saucy imp. ‘You don’t seem to be so dejected as your comrades are?’”

        “‘Why should I be dejected, master?’ replied the spirit, ‘Am I not one of your favorite soldiers? Haven’t I always been victorious under your august guidance?’”

        But Satan answered sadly, “Alas, You are no match for the Spirit of Invention.” The imp, however, volunteered to demonstrate his prowess in a duel.

        “‘You little imp! Fight the powerful angel who is defeating all my army?’ laughed Satan.”

        “‘Yes, I alone; provided, of course, you allow my son, Compound Interest, to help me.’” He explained with regard to the goblins of technology, that “Instead of their being a source of blessing to mankind, I shall make them the producers of untold misery – worse than ever man suffered from thy hands.” So “Satan let him have his way. The battle of giants began.”

        In the beginning the angel laughed, for, though twenty squares were passed, no noticeable diminution of his forces was perceptible. Demon Interest said nothing, but attended to business, quietly doubling his army on every succeeding square. At the thirtieth square the angel ceased to laugh, and soon saw he was lost.

        ‘I despised you, little fellow,’ he sighed despairingly, ‘and I am punished for my vanity. I see there is no use fighting against you. Demon Interest is more powerful than the Spirit of Invention. I am your slave. Command your servant!’

        ‘I am the only servant of my great master,’ dryly replied the demon. ‘Here I see him coming. He will give you his orders.’

        And Satan gave his orders. He commanded that the angel was to continue in his work with all his troops, which were to be increased with all possible exertion, so that humanity – which did not know the nature of the antagonist it had to fight against – would always keep in fresh hope of final success when the new troops were forthcoming. But as fast as they appeared, Demon Interest was to send forth a larger army to capture the new forces, to enslave them, and – instead of their benefiting man – make them increase the slave-chains which weigh him down.

        To the surprise of the king, this series of doublings “produced an amount larger than the treasures of his whole kingdom could buy. It is this kind of chess-game which capital is continually playing with labor.” The remarkable growth of compound interest would “soon swallow products, capital, the earth and even the workers.”

      • Op8

        Compound interest?

        That only applies if you don’t pay the interest (yearly lease fee).

        So if you pay your interest bill, there won’t be compounding. ..

      • Op8

        Geez, I wish you wrote 5-10 simple dot points.

        Anyway… honour system?

        How do you deal with risk and default?

        Under your system why would an individual will lend?

      • Op 8 is fundamentally right. The problem lies in the exponential nature of interest paid to the usurers always being higher than the rate received. The gap always is higher and unrelated to the productive capacity of an economy. It must end in Ponzi finance and it unwinds. The low interest rate merely delays the reckoning.

      • Escobar,

        “How do you deal with risk …

        What risk? To whom? Under my system, every adult can create their own credit, for their own use, interest-free. If they are greedy (or stupid) and create too much (ie, more than they actually need at any moment in time), they are penalised with an automatic reduction in their publicly-visible Honour rating.

        “…and default?”

        If someone lends “money” (intrinsically worthless digital tokens) to someone else, and they “default”, tough titties. Next time they will be more careful who they lend to, won’t they.

        “Under your system why would an individual will lend?”

        Why would they need, or want to, when everyone else in society can create the credit they need for themselves?

      • Op8

        Thanks for persisting.

        I really needed simple dot points. So I create money for my self?

        If I die early… does it mean I’ve enjoyed a life beyond my means?

      • Rumplestatskin


        It sounds a lot like you are reinventing money. There was a time when small banks and businesses did issue their own credit, which was traded to a degree. But that was a cumbersome way to run things, and standardised national banking systems were a massive improvement.

        In fact, there is nothing stopping you creating your own credit now. Go for it. Try and get a builder to build you a house with it.

        Many businesses do issue credit to each other in just this way (you know accounts payable etc). It’s just a very risky way to do business. That’s why everyone likes centralised accounting of bank money with guarantees of 1:1 exchange with tax dollars and physical currency.

      • @Escobar

        1) All “money” that exists is an interest bearing debt.
        2) To pay of the interest of said debt, new money has to be created. Remember only principal in created at loan time.
        3) The above is a geometric series. For every dollar created at interest rates r, you need 1/1-r of total “money” to pay off the debt completely.
        4) Ofcourse parts of these flow back other people to pay for real resources (e.g labour) and go into savings etc.
        5) The only limit to 1) is that someone needs to take out debt, private or public. You don’t need savers.

      • Rumple

        I’m really confused now. I think I’ll have to bail from this thread.

        Op8 doesn’t seem to be talking about a builder lending money to get your house done. If he is then I need a break. .. too confused.

      • FF

        I understand maths very well. Got distinctions all the way through.

        A regular yearly lease fee with penalties for not paying on time including additional interest on the unpaid lease also compounds.

        If you pay your lease on time (or your interest on time) there is no compounding.

        Upshot of this is that you need to earn or create enough to pay your lease (pay your interest).

        We understand that debt is one source of new money…. interest only compounds when it’s not paid.

        Having said that. If you pay your interest on time then you’ll forgo other consumption. But same thing if you regularly pay for “what ever”

        Interest is just an expense. If you don’t pay it, it accumulates at a cost. You don’t have to agree with how much it costs. Of you don’t agree, don’t borrow.

        You and I have many expenses.. We better make sure we earn or create enough to pay for them.

        Yes. .. most new money comes from debt.

      • @Escobar

        The compounding has nothing to do with whether you pay your interest on time or not. It is inherent to the system.

        Please go over the points again.

        Edit: Also this has nothing to do with what you or I earn, it is fundamentally more intrinsic than that.

        We can have a society where government issue all new currency (without interest) to pay for itself and people can borrow from money that is already saved.

        This is what people think the current system is like. It is not.

      • Rumples,

        “…standardised national banking systems were a massive improvement.”

        How so? FOR whom? Did everyone in society benefit equally? What are the real world ramifications? Seriously, we need to think about these things.

        Note that I suggested two alternatives to modern bankstering / “money” creation. My personal preference (maximal decentralisation of “money” issuance, with pre-programmed rules that ALL must abide by, ie, standardisation), and, nationalisation of “money” issuance, interest-free. Importantly, in both cases the privatised “for-profit” banking industry is eliminated, and with it, the purported “need” for usury.

        A very important point to note is that “our” modern bankstering system is nothing more than a set of rules enforced by government legislation, for the primary benefit of private usury institutions.

        If you can have a massive and ever growing private usury industry — with all the associated problems, power, corruption, inequality et al — thanks to government legislation, then you can eliminate all that by government legislation too.


      • FF

        Yes more money is required at the rate of interest (at least).

        That’s a given.

        But a society (in my mind) can get new money from export / foreign earnings. .. but that’s easier said in theory. In practise money also flows out.

        The net of these flows and borrowings usually associated with and (called) growth.

        How else would you get growth. There’s only so many fish I can catch to pay for my haircuts and other services.

      • @Escobar

        But a society (in my mind) can get new money from export / foreign earnings. .. but that’s easier said in theory. In practise money also flows out.

        But it doesn’t. Welcome to the floating exchange rate. Why do you think the AUD is so high?

        Edit: Again you’re missing the point here. This is more fundamental than import/export, trade, barter etc.

        The net of these flows and borrowings usually associated with and (called) growth.How else would you get growth. There’s only so many fish I can catch to pay for my haircuts and other services.

        And deeper down the rabbit hole we go. Ask yourself, what is growth? Is it linked to actual things? Or just some number that appears because bankers lend too much?

        Why is it growth if I have to pay a million dollar for a house that someone paid 200K for ten years ago?

      • FF

        “Why do you think the AUD is so high?”

        Hmm? Is it supply and demand? Like anything else that’s traded….

        To your question of growth… look to gdp.

        When I write that growth is usually associated with increased debt, the extra demand is eventually met with supply (in regard to most consumables). This is growth.

        Why pay $1m for something once worth $200k? Sure it’s fuelled by debt. But because not all new debt is applied equally to assets then obviously some home owners and stock owners benefit from debt fuelled valuations. These people are then comparatively wealthier than those that do not have debt fuelled assets.

        If you borrow and build a stadium, a hospital, roads… is there no growth?

        How much further down the rabbit hole can you go.

      • @Escobar

        Hmm? Is it supply and demand? Like anything else that’s traded….

        Which means no money is created by exporting etc….

        look to gdp.

        I rest my case….

      • FF

        Who said anything about created money?

        If my grandmother who lives in the USA sends me $100usd…

        Guess what I have more money!

        I’ll make it easier. If my grandmother sends me gold… i have more money.

        I know exactly what your saying. You can’t fathom what I’m saying and why people / and economy exports/ has tourism.

        Good thing you’re not a lawyer. You’ll go broke.

        I work and invest in the real world.

        I rest my case.

      • @Escobar

        If my grandmother who lives in the USA sends me $100usd…

        You will have 100USD or you change it for AUD. The amount of AUD does not change just because you have 100 more.

        Good thing you’re not a lawyer. You’ll go broke.

        Funny you say that. Most people I know tell me I would make an excellent lawyer, including my wife who is a lawyer. Alas, I chose a different path.

        I work and invest in the real world. As do I. Doesn’t stop me from thinking more deeply about the way things are and how they ought to be.

        GDP has been shown repeatedly to be the worse measure of “growth”. In fact growth is a misnomer. What’s the point if it doesn’t improve anyone’s standard of living.

      • FF

        I understand precisely what you’re talking about wrt AUD.

        But I still have more money from export/ tourism and my grandmother.

        You’re arguing a different point which we all understand. For that, your case will be dismissed.

        I also mentioned that borrowings lead to growth (hospital, roads, schools etc) but you focus on inflation effects….

        On that score you will be entertained by the courts… but ultimately lose.

        On your inflation case especially with that $1m house, it’s well noted on this site that supply is the main issue. But I also agree with you that easy money is a massive issue (+ tax +immigratio

        n +middle class welfare).

        But I hate repeating myself. Debt leads to growth, leads to inflation if supply is constrained. But you know this.

        I reckon we could agree that rates are too low. If higher moderate growth ensues and no one would complain.

        Have a good day.

      • Rumplestatskin
        July 11, 2014 at 10:16 am

        Interest payments are just transfers of resources in the reverse direction”

        Resources?????? But you’ve been ranting. as per MMT, that money is just a creation and noithing whatsoever to do with real resources.
        This is all so illogical!!!!!!

      • Rumples

        “.. That’s why everyone likes centralised accounting of bank money with guarantees of 1:1 exchange with tax dollars and physical currency….”

        That is not correct.

        What people like is security.

        What private banks like is having their business model made secure with effective tax payer guarantees of the loans they create.

        Let the banks create as much endogenous private bank notes as they like and people desire.

        Let the govt create its own bank notes as it requires.

        Keep the two separate.

        If the banks wish to act as intermediaries in respect of govt notes – fine – but on 100% reserve basis.

        People can then choose whether to save in private bank notes or public bank notes.

        Exchange rates between them will allow people to alter the balance of each they hold.

        Don’t confuse mere history and ‘developments’ designed to address specific issues at points in time as having not only some inherent coherence but also informed consent by the public.

        The public can have security and consent without the risks and damage entailed in allowing private banks to control the fiat money supply.

  8. ” I stress that they are only important if their distribution hinders new investment, which again relates back solely to point that it is the dynamics only that are useful indicators.

    This point is very subtle, but important. There is no conflict between the view that one can look through debt in terms of its role in static allocations of resources, while at the same time understand debt dynamics as important mechanisms for financing new investment and therefore determining aggregate demand and growth.”

    Rumples you seem to be running some inconsistent logic. There is never a static level of debt and there is never a static economy from which to start. The whole body has momentum. If you undervalue money with negative RAT rates – again by just creating the damned stuff you get a major misallocation and over-use of resources. Perhaps your problem comes in presuming that debt is creates for investment. In fact in the western world a very large proportion of the debt is used not for investment but for consumption. If you inject debt into the Australian economy how much of it is spent on consumption that results in an increased CAD? I’ve asked over and over again if anyone had any number better than mine for the marginal propensity to import. Nobody has come up with one. Admittedly it varies just depending on where you inject your debt.

    Take the Aus economy. Because we have undervalued savings and therefore under-estimated the debt problem we now have an economic structure that is almost impossible to rescue. The economy is geared to consumption. We have giant retail malls everywhere and an abundance of cofeee shops, restaurants, car yards, Banks!!! etc. This is a giant rolling destructive ball that has resulted from the level of debt we have created and it soaks up everything in its path. The creation of more debt now just makes it bigger. In MB you see all the recommendations for the spending of new created debt and they almost all involve the enhancement of the lifestyles of urban consumers. Almost none is aimed at production. In addition if you now ai, the debt at production on the face of it it looks uneconomic. The time frames are now too long term. It has taken us 60 years or so to reach this point. How do you now invest to change that? If you just create more debt without first saving (the resources) how does the new investment get any resources?
    So yes the level of debt is important particularly in relation to your resultant productive capacity.

    • Interesting perspective. And if you compare that to attitudes to savings in in Asia, whether it be for commercial venture or private consumption, it is completely different with an emphasis on savings. And when unconstrained borrowing does occur in Asia, it usually ends in chaos, which leads to economic, political and social instability.

      In Australia, we simply don’t care….and head off the the footy, mall, or cafe.

      • “In Australia, we simply don’t care….and head off the the footy, mall, or cafe.”

        tan Have you ever read any Aldous Huxley? Google brave new World Revisited. It’s worth a read.

  9. my layman understanding is that the problem with debt is that it leads to mispricing of assets.

    This is what got us in to the current mess we are in: when the debt levels (or acceleration) fall, the assets are no longer “worth” what they once were.

    So it is misleading to say that borrowing transfers $100 “worth” of resources from one generation to the other. The level/acceleration of debt changes the “worth” of that resource

    • “Worth” equals “value”, not “price.” Worth or value only increases with scarcity and demand. So there you have an easy logical progression to justify expensive houses and convince people to “get on the ladder” as soon as possible cause ‘they’re not making any more of it.”

  10. “It should be obvious to any economist who understands their theoretical apparatus that the very existence of foreign debt is a sign of a political will on both sides to sustain an imbalance for their own national objectives.”

    Yeah right! You ignore the capital flows that result. If China has a long term strategic objective of control of resources and we have a short term aim of maximising our consumption without properly costing it then it is not ‘political will on both sides to maintain a balance’

    At leat on one side we have profound ignorance of the long term costs and outcomes of our mispricing of the debt and the resultant mispricing of our natural resources so that we sell them off without a thought because they have no value.

    Dictatorships and wars have always resulted from this sort of failure of long term understanding and, frankly, they are now in our future again.

    • Ronin8317MEMBER

      The ‘economist view’ is a government can simply declare that ‘all foreign debt is null and void’. You have 3 possible results : become a hermit kingdom like North Korea, have the People Liberation Army marching through the streets of Canberra, or you end up paying even more debt anyway after a few years of deferral (Argentina, Greece, etc).

      With the amount of resources being shipped to China, the Chinese should be owing us, not the other way around.

      • Yep Ronin
        We declare foreign debt null and confiscate all Chinese assets in Australia we will want to spend a lot of money on fighters and tanks!

  11. Ok, a couple of questions.

    1. In regard to foreign debt, if the lender resides in another country, how is there any consumption offset in the economy of the country the money is lent to? Is this not a net increase in debt, barring any trade between the two countries?

    2. What about the central banks’ role, especially in recent years with QE. They are operating as lenders but they don’t consume resources in the real economy, so no offset there either?

    • Rumplestatskin

      “if the lender resides in another country, how is there any consumption offset in the economy of the country the money is lent to?”

      It depends on how the purchasing power is distributed. Let’s take the example that a foreign entity has $AUD (from trading goods) and buys some Australian domestic asset, say Aus gov bonds.

      The seller of those bonds, whichever entity this is, now has some more purchasing power with which to consume. Those goods can’t be consumer by others, hence in resource terms they transfer those goods to themselves.

      I’m not clear about the second part of your first question, but without an historical trade imbalance then there is no foreign debts – goods are merely traded for goods each year.

      To your second question, you are right that the central bank doesn’t consume goods, but when they purchase assets from the private sectors (banks and other financial institutions), they certainly increase their purchasing power.

      But remember, when I say that dynamics are important, then it matters what happens with that purchasing power. It can be stored in accounts somewhere (and I mean to say that by not using fund to buy goods in the economy there is less inflation that would otherwise be the case).

      It could also be used to purchase goods to build new raillines, airports, whatever, in which case it would divert resources to those productive efforts.

      Also remember that inflation is one of the main ways resources are transferred. It used to be called an inflation tax to make the point that people who hold money are paying for others consumption (usually new debt funded investment) via a reduction in their purchasing power.

      Does that address you questions at all, or have I missed the point of them?

      • Yes thanks. I was confused about how the Fed is technically a “saver” , playing the role of lender without giving up consumption. But I guess they are similar to a bank in that they create new loans by buying bonds etc and then the function of savers and borrowers begins after that point once the money is dispersed throughout the economy.

  12. “A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at 5% per annum.”

    – J.W. Bennett, A Breed of Barren Metal (1895)

  13. “J.P. Morgan and John D. Rockefeller are reported to have called the principle of compound interest the Eight Wonder of The World. (Michael) Flürscheim described Napoleon as having voiced a similar idea upon being shown an interest table and remarking, “The deadly facts herein lead me to wonder that this monster Interest has not devoured the whole human race.”

    Flürscheim commented: “It would have done so long ago if bankruptcy and revolution had not been counter-poisons.” And that is just the point, of course. Something must give when the mathematics of interest-bearing debt overwhelms the economy’s ability to pay. For awhile the growing debt burden may be met by selling off or forfeiting property to creditors, but an active public policy response is needed to save the economy’s land and natural resources, mines and public monopolies, physical capital and other productive assets from being lost to creditors.

    Political responses to this problem are aggravated by the fact that the largest and most powerful creditors often are foreigners. Finance capital is much more cosmopolitan than land and industrial capital, and more mobile even than labor. The mathematics of savings/debt leads not only to domestic antagonism, but shapes global diplomacy by pitting international creditors against debtor economies. In this ultimate showdown global finance is arrayed against national government autonomy. This is the key to understanding international relations from the papal Italian bankers of the 14th century in debtor countries such as England through today’s IMF, World Bank and WTO maneuverings.”

    – Michael Hudson, The Bubble and Beyond

  14. “Money bearing compound interest increases at first slowly. But, the rate of increase being continually accelerated, it becomes in some time so rapid, as to mock all the powers of the imagination. One penny, put out at our Saviour’s birth at 5% compound interest, would, before this time, have increased to a greater sum than would be obtained in a 150 millions of Earths, all solid gold. But if put out to simple interest, it would, in the same time, have amounted to no more than 7 shillings 4½d.”

    – Richard Price, Appeal to the Public on the Subject of the National Debt, 1772

  15. “Reminiscent of Baudelaire’s quip, “The devil wins at the point where the world believes that he doesn’t exist,” finance capital prefers to drop the debt overhead from sight. Post-Ricardian analysis of how income was distributed among labor (wages), landowners (groundrent) and industrial or commercial capital (profits) did not take account of the payment of interest to bankers (Ricardo’s own class!). Interest is treated as “profit” earned by producing the bankers’ product: the debt taken on by borrowers. Treating the banks’ privilege of debt creation as tangible industrial investment conflates money and credit as a “factor of production”, so that interest, penalties and fees appear as part of the production process, not external to it. But if credit creation and its financial charges are a result of monopoly privilege extraneous to production (in contrast to the cost of industrial plant and equipment ultimately reducible to labor) then the National Income and Product Accounts (NIPA) are an exercise in double counting.

    The NIPA do not include asset-price gains, that is, “capital” gains, most of which reflect rising prices for land, stocks and bonds, and the capitalized value of monopoly privileges.”

    – Michael Hudson, The Bubble and Beyond

  16. “Ultimately, wealth has no object but itself. Created to satisfy the needs of life, as a mere means of subsistence, it becomes its own end, a universal, insatiable, boundless craving that nothing will ever be able to assuage. At the root of wealth one therefore discovers a corrupted disposition, a perverse will, a pleonexia — the desire to have more than others, more than one’s share, to have everything. In Greek eyes, ploutos (wealth) was bound up with a kind of disaster, above all with hubristic behavior whose defining characteristic was not just the egoism of wealth but the injury its holders did to their victims, most characteristically through usury.

    Self-enrichment through usury made money in an asocial way, one that was compulsive rather than warm, self-referential and metallic rather than interactive in an organic way. “Woe to you who add house to house and join field to field till no space is left and you live alone in the land,” declaimed the prophet Isaiah. Since Mesopotamian times the way to acquire property (and labor) most quickly was through usury and foreclosure, but creditors would live alone once they had cleared the land of everyone by foreclosing on their subsistence holdings. Usury became the economics of autism, a narcissistic social-personality defect that low surplus communities could not afford and indeed took pains to prevent from developing among their own members.”

    – Michael Hudson, The Bubble and Beyond

  17. Dumb question alert!

    The one thing I don’t get with MMT is this…

    So a bank creates $X with a couple of keystrokes, and lends $X to me. So the bank has an asset of $X. I have an asset of $X and a liability to the bank of $X.

    But surely, to create an asset $X, double entry book keeping requires the bank to create a liability of $X also.

    What liability is created and who is the counter-party for that liability?

    • Scott

      I’m not in banking, but before we go any further. .. the bank will offset it’s asset (loan receivable) with a liability to you – it credits your account so you can then draw down on those funds or direct the bank to pay whoever for what ever you want to buy.

      I don’t think that’s your question though…. and I’m sure you’ll tell me.

      But in case you then mean if the money is paid out to buy that “thing” you want, then the bank would credit either reserves or a loan from an external party.

      Ultimately they have to have the funds to lend. Initially they may not and so they’ll have to borrow overnight from the RBA (I believe) and clear that loan the next day… (again, as I understand it).

      It is more complex than that, but ultimately the overnight borrowing must be cleared and this is cleared by your bank either borrowing from another institution or from new deposits.

      Now here’s the bit that everyone talks of “creating” money from thin air. The funds you borrowed to buy the “thing” from that “bloke” will deposit his money in your bank and wella, the bank can use most (except the reserve amount) of those funds to settle with the RBA.

      I think that’s how it works. I’m sure someone can and will correct me.

      • Escobar…except on the way round about 30% of the money disappears paying for imports. So that 30% must come from overseas intersts either in the form of foreign debt or asset sales to foreigners. Aus has been ‘fortunate’ to have so many resource assets to sell.

      • Escobar,

        Just catching up on some reading here, and very late to the conversation… but this thread of comments is already a couple of days old, so what the heck.

        Since nobody else has corrected you here, I created an account to do so, because this topic is critical to understand correctly, imho. It’d be a shame to leave this misunderstanding hanging for future readers.

        You say “ultimately they (banks) have to have the funds to lend” – this is your fundamental misunderstanding here.

        Apart from the small amount of physical currency in circulation (amounts to < 3% of total money), the act of money creation occurs when a bank lends. They do not have the money already. They do not borrow the money or somehow get it from elsewhere. They create it at the moment they lend it.

        It is critical not to confuse the concepts of "adding value" and "creating money". Money is not magically created when value is produced. The process of creating money (aside from minting coin and notes – the < 3%) can happen in precisely only one way: through a bank issuing a loan.

        It is the very act of a bank lending that "creates money". The instant at which the money is created, is when the loan officer at the bank hits the submit button – at that point money is created "out of thin air" – double entry book keeping occurs, and new money enters the economy. The dollars of money did not exist before the loan, after the loan they do.

        The most accessible explanation of this process that I have yet found is from Positive Money in the UK (where the money creation system works effectively the same as here in Australia). Their Banking 101 course is really straightforward:

        As explained in the link provided above in the article, recently the Bank of England went to some lengths to explain all this as clearly and bluntly as they could.

        My experience has been, that once I understood how and where money is created in the economy (and globally, for that matter), I became quietly outraged at the preposterousness of this system, and its insidious, harmful effects.

        In the discussion I read above between you and Op8 (who has been fighting the good fight on MB to help folks understand the reality of money creation here), I think the disconnect relates to your misunderstanding about how money is actually created.

        Armed with a correct understanding of the process of money creation, and the realisation that this is done at interest, the rest (of the outrage) follows. But step #1 is to understand the process of money creation (as it occurs globally) first.


      • Shaggy

        Do you work in a bank?

        What I’ve written is in effect (kind of) the same thing as creating out of thin air, as the bank creates a deposit so it’s kinda out of thin air.

        I wrote it late because no one answered his question.

        Answer me this… the anz has declared (through ads) that it’s going to lend $2b.

        Why would they set an amount? Did they source the credit? Is it on tap ready to make loans?

        Why do banks bundle mortgages to sell them to gain funds for the purpose of relending?

        Ask peter fraser. He worked in a bank. A bank ultimately needs to have the funds and yes the funds can be the banks own created deposits.

        Tell me why does the rba even bother with overnight deposits and the new for banks to settle each day.

        How can a bank become insolvent if they don’t need money?

      • Escobar,

        I do not work in a bank, just have had an amateur interest in economics for many years that lead me over the last decade, through asking simple questions like “what is money and where does it comes from?” to the facts I presented. I have also been working in economic research for some years as a software engineer, and I have tested my understanding of money creation with the economists with which I work who have confirmed my understanding is correct.

        I don’t suggest you believe me necessarily, just investigate this for yourself – the facts are out there if you look into it.

        I know the information I have presented seems absurd at first gloss – it did to me too. The eminent economist John Kenneth Galbraith said of this: “The process by which banks create money is so simple that the mind is repelled.” ( Note that Galbraith is quite clear here – money is “created” by banks.

        There are limits to how much money banks can create through lending. In Australia there is a “capital adequacy ratio” requirement, APRA provides the details:

        DeepT has posted articles to MB several times in recent years, discussing the practical mechanics of this, and how it’s manipulated by banks – naturally they use these rules to their fullest advantage to them. One of your questions relates specifically to what is called mortgage rehypothecation – DeepT wrote a couple of detailed posts on this topic, IIRC.

        Did you look at the Positive Money links I sent you? They provide a better, clearer explanation of the process of money creation, that I ever could.

        Rather than directly address your questions point by point – because they are based on the fundamental misunderstanding that “a bank ultimately needs to have the funds” – I would prefer to turn the question around:

        Where do you think money comes from? Where and how is it created? (Aside from the small percentage of coin and notes in circulation).

        For every dollar in circulation, at some point that dollar must have been created by some technical mechanism. It cannot magically appear. What is the technical mechanism that creates each dollar? Who operates this mechanism and on what basis?

        I strongly encourage you to find the technical answer to this technical question.

        I an many others (I see there are plenty on MB too, including Op8, ff etc) have found understanding this mechanism highly illuminating – many fluffy issues in economics become much clearer matters of fact, directly derived from the actual, technical facts of the situation.


      • Shaggy

        I did look at the Positive Money links.

        It explains it as I have described it. The loan creates a deposit in the borrowers account.

        Once used by the borrower… those funds (now being a vendors funds) are then deposited in the banking system and on balance the original bank that made the loan gets its fair share of the original (borrowers) deposit. For simplicity I made it sound like the entire vendors received money’s went to the same bank that made the loan. If 100% went back (as a deposit) to the originating bank then there would be no need for the bank to borrow funds from anyone.

        However, the bank has a reserve requirement and a capital requirement meaning some funds are held back from deposits and when making loans.

        With respect you need to ask your friends why there is a settlement process and overnight loan with the rba. …

        I’m now more confident how it works.

        You haven’t explained or countered my question as to why rehypothecation.

        I’m afraid you lack a fundamental understanding (using your words) as you have not been able to close the loop.

        You’re half right. Banks create the loan and deposit in the name of the borrower. But once the borrower uses the money….. well there’s a little more that has to happen. The new deposit holder has to bank it (IF it ends up in the same bank, then hey presto created money).

      • Escobar,

        I return to my basic question here:

        When, where an how is money created?

        For every dollar in the system, where does it come from?

        Can you answer this question?

        If you can give me an answer to this question, we have some hope of connecting on this point.

        FWIW, I understand your position – I used to share your view, then I fully pursued the question of how and where money actually originates. Until we engage on this key point we will be talking at cross purposes.

        Also, inter-bank settling funds are not money in the usual sense – they are not legal tender, but rather an accounting entity used to ensure compliance with banking rules – this is a distraction to the fundamental question here, as to how and when money is actually created.

      • Shaggy

        There is no point of difference. You (again with respect) haven’t understood what I wrote.

        Money comes from loans.

        Loans create deposits.

        But you need to understand that the deposit must come in after the loan is actually “spent” otherwise the bank will have to seek new deposits (hence why they advertise for term deposits) or seek interbank loans.

      • Escobar,

        BTW, to be completely clear, I am not dodging your questions to be perverse, but simply because until it is clear to me we are on the same page with the facts as to how, where and when money originates, any attempt to answer these questions will most likely reinforce misunderstanding here.

        If we can come to a meeting of minds as to how money is created, we can have a constructive discussion about these other things.

        This is why I keep pressing you on this very simple, but very fundamental point.

        So with the greatest of respect, I am keen to hear your understanding of how each dollar of AUD is created.


      • Escobar,

        Looks like we are converging on an understanding here which is great.

        I agree loans create money.

        And that money largely finds it way into deposits once it is spent – rarely is money borrowed without being spent.

        So far so good.

        But what I take issue with is the assertion that “Ultimately they have to have the funds to lend” bit.

        But as you say, perhaps I misunderstood you here, and you meant something other than what I understood?

        To me this implies that banks must first source money (each dollar), before they can lend it (the same dollars). My understanding is that this is simply not the case. All they need to source is a small fraction of that money.

        What constrains the banks in lending is the capital adequacy rules. This means they must have sufficient capital on hand to equal 8% (iirc) of their risk weighted assets (loans). So in practice, given the risk weighting, significantly less than the equivalent of 8% of their loan book is required as capital, but this is why they seek deposits and or loans from elsewhere.

        Inter-bank settling processes are a separate consideration, using RBA created (non-legal tender) inter-bank settling funds, which are required after all loans and deposits, and transactions with other banks are squared away. The RBA automatically provides sufficient funds for this, as part of their charter. But this doesn’t directly affect the money supply.


      • Escobar,

        One additional clarification – do you agree that the *only* way money can be created (apart from minting coins and notes) is via domestic bank lending?

        Your comments above seem to suggest otherwise – that the money supply can increase/decrease via import/export?


      • Shaggy

        You’re killing me. 😉

        “My understanding is that this is simply not the case. All they need to source is a small fraction of that money.”

        That’s not my understanding.

        There a two ratios.

        1) Reserve ratio.
        Which means an amount of liquid deposits which must be on hand. So its still a deposit (from Me and you) but it’s highly liquid. That’s all.

        2) Capital adequacy
        Which means a bank must have an amount on hand which is a % of loans. Something like that.

        So the two combined represent liquid deposits that the bank must retain.

        So I think these things may not be 100% clear for you.

        It does not mean the bank has 20% reserve ratio and capital adequacy combined… and the rest is loans??? No.

        When I say ultimately. I mean that after the thin air loan and deposit is created… then the bank must get funds in to support the loan. It could be the same loan redeposited or a new loan from another bank.

        The settlement process ensures that where the original loan is spent and It doesn’t come back to the loan originating bank, then the rba will lend overnight. Each night there is always a loan Dr or credit to balance for an individual bank. Swings and round abouts.

        The overnight loan actually supports the new loans (new currency (deposits)) created by banks… so it kinda adds to money supply as it supports the money supply created by the bank.

      • Escobar,

        As far as I am aware, there is no reserve requirement for Australian banks – I’m happy to be proven wrong, but I believe your point (1) to be inapplicable to Australia. See for example:

        This clearly describes Australia as a country “without reserve requirement”.

        Regardless, it still seems we may be talking a cross purposes here.

        To really distil the point –

        Are you saying to me, that if the bank lends me $100, they need to get that $100 from somewhere?

        What I am saying, is that that $100 I borrow is new money, created ex nihilo. No interbank settling funds are required for this (these are only required for inter-bank transactions). However the bank must comply with banking regulations – there is no reserve requirement here, but they must have adequate capital (i.e. < $8 depending on the type of loan and risk weighting).

        Maybe we are getting to the core of our difference of understanding here?


      • @Shaggy and Escobar

        Spambot eating my replies but basically we have no reserve ratio and it does not matter where the loan gets deposited. It will get deposited somewhere and the money in the system grows. The bank only needs to hunt for deposits to maintain CAR.

      • ff,

        Yup, completely agree, this is what I am trying to say.

        The $100 I borrow in the example expands the money supply by $100.


      • Shaggy

        If that website is right then I’m more than happy to be corrected.

        I think most of what I read is American, but I did go to Uni in the early 90’s so yeah anything is possible things change….

        My humble apologies on that one.

        If you get $100 loan it sits in your account. Dr loan, Cr Your Deposit.

        No money required there.

        When you deplete “your deposit” it will be Dr Your Deposit, Cr Overnight Loan with RBA. (So far all made up money).

        The RBA loan is then repaid by either

        1) Dr Overnight Loan RBA, Cr “New” Deposit eg savings account or T DEPOSIT.


        2) Dr Overnight Loan RBA, Cr Loan (other bank, other institution)

        Initially a deposit is created with each loan. This deposit increases money supply. All loans are deposits. If the deposit doesn’t come back to the originating bank, then it must obtain a loan or deposit.

        As for export sales … yes I believe it adds to M2. It’s a foreign currency… its money.
        It’s not aud. But it’s money

      • Escobar,

        You say “No money required there” – this is the error.

        Let’s try an even simpler example:

        I borrow $100 from the bank.

        I buy $100 of tomatoes from a greengrocer who banks at the same bank and transfer $100 to them by direct deposit.

        The net deposits and loans of the bank has not changed – no interbank transactions required.

        Do you still say “no money required there”?

        I have not defrauded the greengrocer, I have used 100% legal tender. It is in every sense of the word real money. As real as it gets – it bought me those tasty tomatoes.

        The greengrocer has also received $100 of real money. The ATO sure will think so – they will be taxed, and they can spend it on whatever they like, or, for the purposes of this example, leave it in the same bank as savings.

        $100 of new money was created.

        The money supply expanded by $100.

        Sure, the bank needed to source =< $8 of capital if they hadn't already, but they did not need to have $100 on hand to lend to me. The RBA didn't get involved at all.


      • FF & Shaggy

        From FF

        “The bank only needs to hunt for deposits to maintain CAR.”

        This statement is the problem were facing.

        Deposits equalling CAR is not enough.
        We need to be clearer and have the books balance.

        You need CAR what ever X % and normal deposits 100%-X%.

        You need deposits to equal loans (ignoring shareholder funds).

        Once a loan is spent… ie comes out of your account, it’s not enough to just look for CAR deposits. You need the original deposit back, or a loan from an external party.

      • @Escobar

        If you get $100 loan it sits in your account. Dr loan, Cr Your Deposit.

        No money required there.

        Uhhh you’re mixing up the accounting entries with what happens. Accounting wise, there is always zero net dr and cr. That is the way it should be, its double entry.

        As for export sales … yes I believe it adds to M2. It’s a foreign currency… its money.

        Any proof of this?

        Lets take the two scenarios. 100 people in the system.

        1) Everyone has $0.0 in their accounts.
        2) Everyone has a loan for $100.

        in 1) there is no money in the system. In 2) there is 10K in the system because that money can be spent.

      • Shaggy

        Yes. Agree with your tomato example.

        As said all along. Loans create deposits. Deposits are money.

        But as you can see the bank has the deposit – has effectively ultimately paid for the loan.

        It owes money to the depositor and has a receivable from you.

        All contractually legal.
        It’s credit. Hence credit terms.

      • @Escobar

        Why do you need full deposit? For starters, we have no such system.

        Secondly, this holds true as long as loans create deposits, even under full reserve.

        The bank can always, always get the deposit later.

      • FF

        When I said no money required there. I meant that when the loan is created and deposited to your account instantly. No money was required from RBA or from another depositor or loan.

        Sorry for the confusion.

      • FF

        “Why do you need full deposit? For starters, we have no such system.”

        This is confusing given your next statement.

        “Secondly, this holds true as long as loans create deposits, even under full reserve.

        The bank can always, always get the deposit later.”

        “Always always”?
        What do you mean by this.

        Are you an accountant?

        Anyway I’ve been in the inside where a bank has told it’s mortgage advisers to go out and secure loans as they’ve just received a line of credit from XYZ. ..

        Go figure.

      • @Escobar

        always, always

        As long as the bank is viable, they can raise their deposit rates to those above their competitors to get deposits.

      • Escobar,

        “Anyway I’ve been in the inside where a bank has told it’s mortgage advisers to go out and secure loans as they’ve just received a line of credit from XYZ. ..Go figure.”

        No surprise there.

        An increase in bank capital means they can expand their loan book… by a lot more than the line of credit they have received (because it only has to be =< 8% of the new loans they issue).

        Anyway, so I come back to the statement of yours that I first objected to:

        “Ultimately they have to have the funds to lend. Initially they may not and so they’ll have to borrow overnight from the RBA (I believe) and clear that loan the next day…”

        and in general the apparent assertion that banks have to have the funds they lend.

        You agree with my example that $100 is created when a loan is issued – that loan create money.

        Are you still trying to say somehow that each dollar lent by a bank they have to get from somewhere else?

        Or do you agree they create this money (new money, an increase in the money supply) at the moment they issue the loan?

        In my tomatoes example at no point does this mean the original bank receives $100.


        (Edit: fixed my final, initially broken example.)

      • Shaggy

        Fair enough. I suppose when ANZ advertise they’ll lend $2b. They actually have $200m and the other $1.8b comes from thin air (deposits being re-lent).


      • @Escobar

        They still need their original deposit created with the loan though

        You’re losing me here …


        Fair enough. I suppose when ANZ advertise they’ll lend $2b. They actually have $200m and the other $1.8b comes from thin air (deposits being re-lent).

        Argh! We’re just going around in circles. The other 1.8b are not deposits being relent. If they have 200M they don’t need anything more.

        Plus it is a closed system so the money is deposited somewhere. If one institution lends too much, they just need a higher share of deposits.

      • Shaggy

        Interbank loans and loans from RBA mean precisely that money has ($100) has come back to the original bank.

        And, again loans create deposits which is money.

      • Escobar,

        We’re getting close, you said:

        “Fair enough. I suppose when ANZ advertise they’ll lend $2b. They actually have $200m and the other $1.8b comes from thin air”

        which is all fine and correct – more or less exactly how it works – but then you say:

        “(deposits being re-lent).”

        That last bit is just not right.

        The money really does come from thin air. It is not loaning out the deposits of someone else. It is money *creation* ex nihilo (in compliance with reserve rules).

        This is *the* mechanism of money creation in Australia (and everywhere else too).

        There is no other mechanism that somehow creates deposits other than through loans (except for the small amount of minted coin and notes).

        If every loan were repaid in Australia, there would be < 3% of the money supply left.

        This is the magic of modern banking – it operates unlike any other business. It creates its product out of nothing (as long as it can comply with the APRA rules i.e. sufficient capital).


      • ugh –

        ” (in compliance with reserve rules)”

        my 2nd screw up in the last few minutes.

        I meant “capital adequacy rules” of course – we’ve covered this already.


      • Shaggy

        Thought I’d post here… A little easier.

        “This is the magic of modern banking – it operates unlike any other business. It creates its product out of nothing (as long as it can comply with the APRA rules i.e. sufficient capital).”

        Yes shaggy. So long as the loan they create (which is obviously spent on tomatoes) is offset by a deposit or other loan back into the loan-originating bank Plus CAR.


      • @Escobar

        So long as the loan they create (which is obviously spent on tomatoes) is offset by a deposit or other loan back into the loan-originating bank Plus CAR.

        Are you deluded man?

        Loan + CAR? Where is the CAR coming from? There is no other money in the system…

        We are not making this up. This is how it is!

      • FF

        You need to learn accounting.

        When you can balance books you’ll understand.

        But will concede written arguments are difficult to follow.

      • @Escobar

        I did my fair share of accounting in high school, was involved in my dad’s business for over 10 years since I was 7 and have a PhD in Physics/Eng/CS. I think I manage just fine.

      • FF

        Yes. Indeed. Manage.

        Did your qualifications make you arrogant? Or was it your dad?

        Have a look closely. You’re the one with the rabbit hole and deluded comments.

        Shame on you. You’ve embarrassed yourself and your family.

      • Escobar,

        I take your point that the double-entry book-keeping works out, right throughout the system – I see where you are coming from with this, and why it might lead to the (incorrect) impression that banks re-lend existing money.

        It is fallacious to use the example as you do (or as is implied by your reasoning) of a single bank where the deposit created by a loan leaves that bank. It is true, that the originating bank must source whatever funds leave it from the interbank market to settle up with the destination bank. But it is not re-lending existing money. For the discussion at this level to be valid, you need to consider the entire banking system, which I do below.

        I deliberately presented a simplified example of a banking system consisting of just one bank. In my $100 tomatoes example, you find that yes, the deposit does offset the loan, and ensures the books balance. But that $100 was most definitely created quite literally out of thin air – the bank created new money, but received none in return (the deposit is simply what they created).

        If on the other hand you consider an entire banking system, so as to make your reasoning involving inter-bank settlement valid, where the $100 created via a loan moves from one bank to another, then yes, there will be $100 settled between the banks. The bank which originated the loan will receive $100 via the interbank market, which in the simplified example of two banks, is just the original $100 created by the loan. And of course the double-entry book-keeping will square away for both banks. But at this level you must consider both banks, i.e. the complete system, you cannot consider any one bank in isolation. Sure, in some sense the bank which originates the loan thereby creating a deposit that leaves it for another bank, does indeed receive $100 from the interbank market. It appears your reasoning therefore concludes that because the originating bank lent $100 and received $100, they are just re-lending existing money.

        But considering the complete banking system (of two banks), this system as a whole created $100 of new money via a loan, and at no time did it receive $100 from elsewhere. I hope you can see how this example of a banking system involving just 2 banks scales up to an arbitrary number of them.

        So I think it is quite incorrect to say or imply that banks lend existing money, as you did, or that banks source the funds they lend.

        It is much more correct to say that banks (collectively) create money, pure and simple, they don’t re-lend existing money. Sure, due to double-entry book-keeping, these funds will always tally up with the loans (considering the complete system), but the only way money enters the system is via the mechanism of issuing loans.

        Anyway, goodnight to you too.

        Thanks for the invigorating conversation!


      • Shaggy

        I think I’ve agreed with you all along…

        The problem I find is that non – accountants tend to speak of one side of the equation, and I tried to give the original questioner “scott” a basic overview. He wanted to know the entries of what took place.

        But totally agree loans create the deposit and in a large loan population each bank should get their deposits back and cover those loans from thin air (with those deposits from thin air).

        I agree with you but the mechanics elude most and they think it’s mystical.

        Loans from Thin air is one thing, but having a willing and eager borrower is another thing. Not quite making money as and when they want, they need a borrower. But you didn’t say that..

        Loans are contractual. I could make a loan payable to me for my services to whom ever. ..

        Made out of thin air? I gave services. ..

        A bank gives a tomato (effectively)… and creates a loan payable to it.