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How Money is Created and Destroyed

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You got a lot wrong:br1) The Fed CAN create money, but rarely does Most government debt is monetized by bond dealers, aka "primary dealers" In other words, private banks create most of the money that the government borrowsbr2) Your model of banks creating money is based on the mythical "money multiplier effect" Reserves are NOT a limiting factor of loan creation by banks In fact, banks create new money out of thin air when they issue loans regardless of their current reserves Reserves are added LATER based on the previous 30 days of loan activity Reserves can be borrowed from other banks Reserves are held at the Fed for the check clearing system to operate, NOT as any part of the bank-debt money creation processbrYou were intentionally fooled "Modern Money Mechanics" is disinfo and propagandabrTHe simple truth is that ALL MONEY IS CREATED OUT OF THIN AIR WHEN PRIVATELY-OWNED BANKS ISSUE LOANS
Comment from : @widehotep9257

You wanna know why banks are allowed to “create” money it’s because it publishes real money when you go to the bank for a purported loan, the loan contract is really a promissory note
Comment from : @MrTrollBeast

The reason that many people want a gold standard, or any commodity based standard is for the very issues I put forth: Money when only considered in theoretical accounting terms makes many people think you can borrow your way out of a whole; while the whole time we are destroying our capacity of production; our reserve of real resources and inflation destroys savings (on purpose) The reason the FED, banks and government WANT money to be devalued is to create a 'Hot Potato' effect and make people want to spend quickly as opposed to save; the whole 'velocity' of circulation Think of any asset you have; if its value is going down you want to 'liquidate' it quickly so that you don't take a loss The only way to hold it is if you can somehow invest or save it with a rate of return equal or greater than the rate of devaluation Devaluation IS THE INTENDED purpose of all modern money, it creates an absolute necessity for its continual increase in creation/expansion and those closest to its creation obtain the benefit; effectively the government, bank and FED are 'SHORTING' the market in currency just like some investors do with securities
Comment from : @Nibarger

Last issue I'll toss out is 'stimulus' created by the FED and government This is accomplished in many ways Sometimes through the Reserve Rate (controls reserves and thus lending); Interest rates (affects the supply/demand of lending as a cost of money); and deficit spending (the governments attempt to take the place of market economic growth) The problem with these are 'Bubble Economics' Debt stimulus can never create more economic return than was spent (plus interest) In fact the economy becomes reliant upon that spending and thus the government must grow its spending proportion to the desired rate of 'economic growth' The government spends such a large percentage of the alleged 'GDP' that if government ever actually 'reduced spending' it would cause in modern economics 'recession' or even depression The US economy in real resources and actual productivity (per capita) has not grown in decades; and that fact is buried in debt, deficits, monetary inflation and imports
Comment from : @Nibarger

Second issue is foreign trade It is commonly believed that 'greedy corporations' send jobs overseas But in effect, monetary inflation demands it The US economy is more than 70 'Consumerism' which means we consume more than we produce Therefore, the supply/demand element necessitates foreign imports to make up the deficiency which has the byproduct effect of 'sending jobs overseas' BORROWED MONEY is Borrowed Resource (capital), not just paper antics and accounting
Comment from : @Nibarger

Couple of new points I did not address previously It has been suggested that debt can be repaid, including interest, through the 'recirculation' of money That is categorically false Money is the economic system of resouce allocation Just as a check is a demand on deposits; money is a demand on resources Recirculation still requires allocation of resources There is always a cost of sale; the seed planted to create the crop No activity has zero cost of overhead Available resources per capita in ratio to A) the amount of money circulating and B) supply/demand which is also relative to the cost of production
Comment from : @Nibarger

Your wrong about money created at the banks You in fact create the dollars when you take out a loan
Comment from : @CosmosPrivateer

Banks creating money has been going on for several decades It's also something that is supposed to be strictly regulated in just how much new money that banks can create as it relates to the actual deposits and reserves
Comment from : @InstTaxSolutionsLLC

How did this country operate prior to the illegal enactment of the Federal Reserve Act?? Aside from the revolutionary war, there was very little inflation, and there was gold at fort KnoxThe powers to be are always creating solutions without a problem, but only for the benefit of a few already wealthy families The Fed Reserve act turned the US into a debtor Nation According to the Supreme Court the 1913 13th amendment gave the Gov NO MORE taxing authority??????????????????????
Comment from : @GeNadi125

damn, money is equal or less than debt Are we doomed to become slave of liability?
Comment from : @dwigraha1197

The problem in modern economics and finance is that we call everything money We call credit money, we call currency money, we call ledger booked deposits (that are not real) as money Money has become fungible in definition as well as fungible in the function of commerce Money is supposed to carry out more than a single function: 1 Medium of Exchange; 2 Store of Value; and 3 Unit of Account Currently we only use #1 and issue it under debt or booked as an obligation on demand
Comment from : @Nibarger

No, I'm not incorrect Banks do not create money, the create debt and liability They "book" assets that don't exist This is why it was necessary for the FED to step in to provide "liquidity" A run on a bank means more withdrawls than reserves The problem is that people call this money, when it is not moneyonly an obligation to pay the money on demand If a run on a bank occursthe bank cannot create money to cover itthey need a bail out with new money (inflation) from FED
Comment from : @Nibarger

I'm sorry, but you are incorrect Money expansion does not expand the economy, unless you consider inflation to be the economy The economy expands through increased productivity Money is not created, credit/debt is created backed by money that does not actually exist The debits/credits on a bank balance sheet are liabilities, not real assets The lie sold for generations is that money is the thing of value, as opposed to real things Liabilities are not assets even though claimed to be
Comment from : @Nibarger

Not created out of thin air Nothing we know of is created ex nihilo It is created and backed by the obligation to repay It is financed by the borrower
Comment from : @courageousdose

The FED does not get paid 1000 In fact the benefits of monetary inflation is benefited by the member banks, not the FED itself
Comment from : @Nibarger

number of times created would be a maximum of 1/resrerve ratio
Comment from : @chavanyadav

Yes you are Money is a Ponzi scheme
Comment from : @jjovereats

This is wrong because you dont show how the Federal Reserve gets payed back 1000 plus from doing nothing and that the federal reserve is backed up by Investment Private Banks !!! So there is a bunch of guys who gets money from your efforts just buy creating bits into a bank account through a computer Thats Fraud
Comment from : @TheDaxindex

@PleaseReadSomething The problem is that you can't trust ANYONE to be competent and responsible in their management of credit or money creation The temptation to abuse the power is too great As a result, the 'money supply' is inflated much more than the supply of goods and services That's Inflation - and results in us paying more for less year after year after year Savvy people call Inflation "the hidden tax," because it eats away at the purchasing power of our savings
Comment from : @JELB1960

And what happens when the supply of money - or to be more precise cheap credit - increases faster than the amount of goods and services? Imagine being at a auction that's selling just one item, for CASH ONLY, that everyone desperately wants Imagine too that every bidder has exactly $10 with them Can you guess what the maximum bid will be? Now re-imagine this scenario such that everyone has $20 Do you think the bid will double? (Even though the item's usefulness is the same)
Comment from : @JELB1960

@bammbamm12 The video states (the sad fact) that the gov pays the interest with tax money I'm not sure, however, whether it said that, specifically, it's the Income Tax that is collected The Fed sets and varies the rate the gov pays Likewise, the 'Base Lending Rate,' is adjusted such that it has the effect of increasing or decreasing the 'money supply,' Increasing it is known as Inflation - and the rising prices we pay are the result of the increase
Comment from : @JELB1960

@ehertzog - I never used the term "90 effect" I referred to multiplier 90 was the "example" lendable amount of funds if a reserve were set at 10
Comment from : @Nibarger

@johnnibarger It is called a "multiplier effect" and not a "90 effect" for a reason
Comment from : @ehertzog

@johnnibarger One more issue that would be interesting is that it is IMPOSSIBLE for all debt to be paid in full Because all currency is issued through debt, and debt incurs interest charges, the initial $1000 lent requires more than $1000 to be repaid Therefore there is not enough money in existence to repay all debt with interest This creates the necessity for a continual increase in money otherwise the interest eventually over time would consume all money supply
Comment from : @Nibarger

@spectator59 I watched the video 3x and it does not provide adequate explanation to make this distinction It appears to say that a $1000 deposit creates an ability to loan 9x 9x may be the net effect, and this may actually be referred to as the "money multiplier" but it is important that you explain that a bank does not loan more money that it books, it can only loan it's deposits minus reserves and that the lent funds being redeposited creates the effect of new money, not leverage
Comment from : @Nibarger

@johnnibarger As I said in the video, to keep the model simple, I am using one bank to represent the entire banking system, and one transaction to represent many The *net result* is the same, as you said yourself -- reserves can be multiplied by up to 9x, given a 10 reserve requirement
Comment from : @spectator59

@GerhardSchroeder The Fed receives interest only on the bonds it holds The received interest is considered income for the Fed, and is first used to pay their expenses (salaries, equipment, etc) From the remaining profits, they pay 6 out as a dividend to all member banks At the end of the year, everything that's left over after that is rebated back to the US Treasury
Comment from : @spectator59

@spectator59 all profits minus 6 i believe
Comment from : @rvborgh

16 folks who watched this video work for bank or own bank
Comment from : @samann9

Sorry for asking so many questions but I am a finance major so this stuff intrigues me since it is really not taught in school as much (the whole Fed Reserve thing), so here is my next question: I am probably missing something basic here but here I go: So when the Fed receives that money from circulation it no longer shows up as a liability? So if the liability side is reduced what on the Asset side gets reduced? (I really thank you for answering my earlier question, you are a big help)
Comment from : @SonOfAbba

@SonOfAbba You can start with the H41 report Google "federal reserve h41" About $16T of the Fed's assets are US Treasury Securities There's another $1T in agency debt and mortgage backed securities, and the remaining $03T is misc odds-and-ends Currency in circulation is on the liability side, currently about $10T
Comment from : @spectator59

@lovepeacetrain You aren't paid interest by the bank for loaning to others; you are paid for making it possible for the bank to create money to loan, since your deposits form the bank's reserves You are also taking a risk, since the bank may fail Interest is not the only way for a bank to be paid for risk it takes when making a loan, but it is a convenient way for most in the Western world It seems to me that the Islamic banking approach of sharing profit and loss has the same net result
Comment from : @spectator59

it's the interest that kills us and creates bankruptcies
Comment from : @stevebyu

@makaveliguy The scenario in the video starts with no money in the economy After the government creates some money, the way it gets into circulation is for the government to spend it -- which it often does by buying things from companies / employers
Comment from : @spectator59

The "investment" in this scheme is "work" Sorry, left that out
Comment from : @miinyoo

@tkarmakid That's what most people think (since that's how it is outside of the banking system), but it doesn't work that way When the bank makes a loan, new money is created specifically for that purpose; the money that people have placed on deposit is not touched
Comment from : @spectator59

@wordpresswidget - I have no idea - it makes me dizzy just thinking about creating a monetary system
Comment from : @bammbamm12

@spectator59 person 1 sells an item to person 2 person 2 gets a loan from the bank to pay for it (the bank makes new money by issuing debt) unless person 1 takes that money and burns it in an open flame, the money is never destroyed Person 1 either spends it as a consumer (on some item or service), or puts it in an account (aka makes a loan to the bank to) and it becomes reserves in the banks balance sheet as loanable currency, which will be used to make loans at nearly 10 times its amount
Comment from : @lotzoskillz

@spectator59 The money isn't destroyed, the loan recipient's account is simply cleared out That money the bank receives from the loan is used just to create more debt It's a stacking procedure, which looks similar to an upside down triangle (small amount of assets in the bank, huge amount of assets recievable)
Comment from : @lotzoskillz

@spectator59 Quote: "I agree that there is a lot of fraud happening in the banking system, but not in this area" My point was how can you be sure of that?
Comment from : @099749

@099749 Credit money is destroyed when principal is repaid; that's a basic accounting requirement of the banking system When loans are sold, the new banks that eventually receive the principle from the borrower are responsible for destroying the associated credit money I agree that there is a lot of fraud happening in the banking system, but not in this area Oh, and the bailout money received by Goldman Sachs is a totally different thing The bailouts are designed to replace bank *capital*
Comment from : @spectator59

@swu880 Why do you think money is not destroyed when a loan is paid off? The process of money creation *and destruction* is very clearly documented For example, see "Modern Money Mechanics," printed by the Fed themselves Banks can create money for loans, but they can't create their own profits When the loans are paid off, the associated money must be destroyed; that's how the banking system works
Comment from : @spectator59

@099749 If you don't believe me, search the web for "Modern Money Mechanics," printed by the Fed themselves; it describes how money is also destroyed Banks can create money for loans, but they can't directly create their own profits, and only profits can be paid out as bonuses or dividends Even when loans are sold, they are still paid off, and when they are, the process of paying them off removes money from the economy
Comment from : @spectator59

Sorry this model is simplistic and rediculas, a bank that has it's loan payed of I doubt destroys the money paid back- I think you'll find they put that money in dividens to the shareholders of the bank, as the interest is paid along with the lone itself, some of that goes into profits Not forgetting that banks package loans and sell them on to others The loan money therefore still exists in the ecconomy after the loan is paid, and is given out in bonus' dividens and pay to workers etc
Comment from : @099749

@hwt2009 When the Fed prints money to buy Treasuries, although the result is that the government owes money to itself, which offsets interest payments/income, but that's not the same as paying down the debt -- that's monetizing the debt through inflation When the Fed buys Treasury debt, more money is put into circulation Truly paying down the debt would result in money being removed from circulation and destroyed
Comment from : @spectator59

Unfortunately a simple model is misleading The US Treasury auctions its bonds and the Federal Reserve has its own trade system and a group of primary dealers So if one wants a snapshot of bonds outstanding its not in one ledger Secondly if the Fed prints money and uses it to buy treasury bonds , in effect it is paying down the debt (assuming that the public debt reported and the Fed balance sheet are the only ledgers ) because both the Fed and the Treasury are parts of the same US government
Comment from : @hwt2009

The reason this is hard to understand is because every tutorial runs into the easy part (loans, fractional reserves, debt) and doesn't explain thoroughly the first few stages What does the Fed do with the bonds? How does the govt pay the interest on the notes? What interest rate does the govt pay? What are the factors in determining the interest rate? You guys must be amusing yourselves because you're not teaching anyone anything
Comment from : @bammbamm12

Right now loans are defaulting cash is used for trade without taxation assets are being discounted due to money supply is being reduced Each dollar has more buying power, thus deflation of all asset classes Reduction of parasite class living off hig debt interest costs That's what communist leaders do obamo! Just read up how well it works long term
Comment from : @bohemianh

@spectator59 MAkes senseThanks for the replyCan you please put in the import-export money/goods in to this scenario to explain the whole picture of the country's economy and the money cycle
Comment from : @djstud1987

You mentioned that the Treasury bonds are analogous to the total debt which I think is not trueThis is because the Bank also creates the loan money which isnt reflected as bonds on the Fed sideSo what is that one thing thats analogous to the Total National Debt?
Comment from : @djstud1987

@mrgerbeck yep, sucess of this model is based on; 0 interest rates from the central bank, 100 of the credit money going back into the economy (ie no bubbles or poor investments), and no compound interest Also easy credit (ie close to 0) encourages loans and discourages savings, credit contraction and mass debt defaults are inevitable - which is the point the US is at now If you put all that into your model it would probably be more accurate to show what has happened in the US economy
Comment from : @LuqmanNaq

i disagree federal reserve "loans" money to treasury in exchange to the treasury bonds the treasury bonds have to have some value i think essentially the treasury bonds are assets of the US public like schools public playgrounds etc so when treasury gives the bonds to fed, its actually putting US public property as collateral againsts the fed loan now US taxpayers not only have to pay the interests on the loan, which is impossible or loose its public properties to the owners of the bond
Comment from : @mintoo2cool

fed make bond for 1000$ he get money and how he give it back he print new money ?
Comment from : @roymakkaypl

@IntoTheHeartOfMusic I have addressed the issue of the interest money many times in the comments There is no shortage of money unless the interest is allowed to excessively compound Simple interest can be paid off with a fixed amount of money
Comment from : @spectator59

You forgot to talk about the interest money Interest money is never created, that's why there's always a shortage of money in the system Since you need a bigger amount of money to repay your debt than the amount that was originally lent to you, it follows that someone has to lose that extra amount of money so you can earn it and pay the interest on your loan Therefore not all loans can be repaid, which means that there necessarily have to be bankruptcies
Comment from : @BotNumber13

I agree that the Treasury borrows from banks (mostly primary bond dealers) and that the Fed rebates their profits to the Treasury (mentioned many times in my comments here) The video is a simplified version that starts with no money in the economy The net effect is the same, whether the Fed buys from a primary dealer or directly from the Treasury Either way, new money is created which ends up in the Treasury's account at the Fed
Comment from : @spectator59

The Fed's choices are: (1) to buy Treasuries, which will add money into circulation (as bank reserves) and thereby increase inflation and decrease the supply of Treasuries, which drives their rates up, or (2) sell Treasuries, which removes money from circulation, increases the supply of Treasuries, and thereby drives interest rates down At least that's the theory: it's not always quite so simple Demand from China and other foreign buyers is important, but it's a secondary consideration
Comment from : @spectator59

Yes The Fed can buy and sell government obligations (Treasury securities) in the open market, through the FOMC Their primary purpose in doing that is to manipulate interest rates
Comment from : @spectator59

Yes, either the Fed could spend the interest they receive back into the economy (as "expenses"), or it gets rebated back to the Treasury at the end of the year
Comment from : @spectator59

I don't favor debt-based money or a debt-based economy: I'm simply explaining how it works
Comment from : @spectator59

See my response to that comment above Principle (P) and Interest (I) don't have a simple mathematical relationship like that, because money circulates: it can be used more than once
Comment from : @spectator59

Money can only exist when it's backed by some corresponding debt When the debt is paid off, the associated money has to be destroyed It's just the reverse of the creation process: new money is created when a loan is created Banks don't loan their reserves; they create new money, and loan that Strange, I know, but true nonetheless
Comment from : @spectator59

I don't get why the money is destroyed Once the Employer sends the 9K back to the bank, why that doesn't became bank reserves? How is that "destroyed"? Same thing with the Fed Bond
Comment from : @sysFail81

Yes, that's right: the Fed doesn't have to give up anything in order to create new money: it's created from thin air The Treasury creates a new Bond from thin air, too They give the Bond to the Fed, and the Fed gives them money in return (actually, the public is the first source of funds; the Fed itself is secondary) However, all interest earned on the bonds, after expenses, is rebated back to the Treasury, so it's basically a zero-sum game
Comment from : @spectator59

I've simplified things somewhat in the video by using a single bank to represent the entire banking system and a single transaction to represent many Although a $1000 deposit only supports a $900 loan, the loaned money is created just for the loan; it doesn't come from the deposit If the loan proceeds are kept in the banking system (as opposed to being drawn out as cash), the process can be repeated until there is eventually $9000 in new money, with the original $1000 being 10 of the total
Comment from : @spectator59

One of the things that motivated me to make this video is that "Money as Debt" is so misleading As I've said in my earlier comments, the problem isn't that the debt can't be paid because the banks don't create the interest This video shows how money can be used more than once; it circulates The problem happens if you allow interest to excessively compound At some stage, the system is no longer supportable because new debt is being created faster than new wealth
Comment from : @spectator59