Loans Create Deposits: Inside vs Outside Money

YouTube has the video from 2016 Loans Create Deposits: Inside vs Outside Money.

Warren Mosler talking about the difference between bank-created money and government created money.

In our floating exchange rate system, the textbook explanation of the money multiplier does not apply. Instead, loans create deposits, and the Central Bank must supply any necessary reserves after the fact in order to be able to hit their interest rate target.

Warren Mosler’s explanation would be much more intuitive if he said that the bank creates a promise to give you high powered money when it makes you a loan. In exchange, you promise to pay it back. So far, no high powered money is involved. If the seller of the house uses the same bank where you got the loan, the bank just moves its promise of high powered money to the account of the seller when you pay for the house. No high powered money is involved., just the promise of that money is involved. If the seller of the house decides to take some of the money out of that bank, then, and only then does the bank have to fulfill its promise of high powered money. As long as the flows of high powered money into the bank and out of the bank are balanced, there is no need for the bank to get some high powered money to fulfill its promises. If there is an imbalance in those flows, and there are no real reserves at the bank because it already has an overdraft at the Fed, then it needs to get some high powered money from somewhere. Isn’t that part of what the repo market is all about. The Federal Reserve Bank also lends money to banks at very low interest rates, zero at the moment.

I have been told that MMT people don’t like the idea of promises of money. I have yet to hear an MMT authority address this terminology. Can someone point to an article or video where an MMT authority disparages the description of “promises of money”? It seems to me that when the financial system freezes up, it is often because the banks don’t trust each other over their promises of money.

March 29, 2020

I have corresponded with Warren Mosler. He is not too thrilled with my explanation to say the least. He has told me that my explanation is inaccurate, but I have not pressed him to tell me what is inaccurate about it. I can believe that my presentation could stand a lot of polish, but I don’t think corresponding with Warren Mosler will get me anywhere closer to a polished presentation.

Warren thinks his presentation is simpler than mine. Since he has owned a bank, I am sure his explanation is simpler for him. I don’t think he understands the minds of people who have not owned a bank. When he uses certain words, he has a deep understanding of what those words mean to him. Not everyone is privy to his deep thoughts.

As I wrote this comment on the video, I noticed a three year old comment from The Deficit Owls in response to another question.

Correct. Bank money is an asset of the holder (you) and a liability of the bank. You’re not actually using government money, you’re using the bank’s IOU for government money.

Many of the people responsible for The Deficit Owls web page and Facebook page are colleagues of Warren Mosler. The seem to be saying the same thing I am.

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