tag:blogger.com,1999:blog-2277215496195926573.post5046004518519364705..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Private banks do not charge interest on the money they create.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-2277215496195926573.post-8115379883946234442015-03-02T15:43:02.736-08:002015-03-02T15:43:02.736-08:00This is a fairly complicated argument, so it has t...This is a fairly complicated argument, so it has taken me a while to think it through.<br /><br />What you seem to be saying is that, although Alice is borrowing from Bank 1, and paying interest so long as she does (which in some fundamental sense means banks *do* charge interest), in an economy with many Alices borrowing from various banks, the money supply would expand (because bank loans create money so long as they exist). Given enough of this expansion, it *may* cause inflation (if the economy is at capacity). Inflation tends to be countered by the Central Bank by (say) increasing interest rates. This is intended to discourage future Alices from borrowing and the indebted ones pay back faster, so that the money supply stabilises. Or if no inflation, then no tweaking necessary, the Alice sector continues as it was. (I don't see why there needs to be a Charlie in this argument, so I left him out).<br /><br />The suggestion being, I think, that all the later abstention cancels out the interest charged in the former borrowing bonanza. Is that correct? If so I don't see how, can you reference this argument anywhere?<br /><br />I just see banks charging interest at varying rates, and no way for any Alice to offset her payments. Even if she pays back her loans in full, the interest payments are a done deal and unreclaimable. The only potential reverse flows I can think of is if a) Alice is a beneficiary of the banking sector, or b) interest goes negative, or perhaps c) if some sort of asymmetric inflation renders the banks' assets worthless faster than Alice's.<br /><br />None of those seem to be generally applicable to our economy, even with QE creating inflation in the bond market more than elsewhere I don't believe this results in a loss for banks, quite the reverse.<br /><br />What I do find credible would be if Alice makes up for her interest payments by passing the cost on to her customers. Or perhaps she loans her loan out, and charges more interest. Assuming she has the means - if not the buck stops there. Then the hidden interest costs would transfer wealth up the commercial food-chain from Alice and her customers to the banks who created the original loan. But this is another topic.<br />Nickhttps://www.blogger.com/profile/03176842013097143590noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-41838885477639726512015-02-26T02:35:59.855-08:002015-02-26T02:35:59.855-08:00Nick,
I think I’ve spotted the flaw in your argum...Nick,<br /><br />I think I’ve spotted the flaw in your argument (after much head scratching). It’s as follows.<br /><br />Let’s assume, first, that the economy is at capacity. (I’ll deal with the economy NOT BEING at capacity below). So, say the economy is at capacity, and Alice borrows £X from Bank 1 and Charlie deposits the money in Bank 2 and puts it into a current account (which means Charlie intends spending the money fairly quickly). The result is an increase in aggregate demand because Alice spends her £X and so does Charlie. And an increase in AD just aint possible when the economy is at capacity: excess inflation will ensue.<br /><br />Of course it’s absurd to suggest that the latter scenario (which involves just two individuals) increases inflation to any measurable extent in an economy the size of the UK’s. But the important point here is the MACROECONOMICS, not the MICRO. That is, if there are lots of Alices and Charlies doing the above, then the central bank would need to raise interest rates or do something else to curb AD. And that will result in less spending by Alices, and/or more saving by Charlies.<br /><br />Put another way, looking at the economy AS A WHOLE, i.e. as far as macro is concerned, where a collection of people borrow money and spend it (which increases AD), another lot have to abstain from spending, i.e. they have to deposit money in banks and just leave it there.<br /><br />As to where the economy is NOT AT capacity, then obviously an increase in AD is permissible. So the Alices and Charlies can go on a wild spending spree. Unfortunately, that’s not a very realistic scenario in that private banks just don’t get us out of recessions very well. That is, far from increasing loans in a recession and curbing them in a boom, they do the opposite, e.g. lend too much in booms and fail to increase lending in recessions. I.e. they tend to act “pro –cyclically”.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-61572828488025446642015-02-25T12:55:02.267-08:002015-02-25T12:55:02.267-08:00Even so - when Alice takes a loan from Bank1, it i...Even so - when Alice takes a loan from Bank1, it imposes an interest rate which I believe is independent of whatever Alice does with it next, such as spend it or put it into a current account. The latter is entirely not a concern of the bank. This is certainly true of my mortgage - I definitely pay interest! Therefore I can't see any other conclusion except that banks *are* charging interest on the money created when loaning.Nickhttps://www.blogger.com/profile/03176842013097143590noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-39038764286862402522015-02-24T07:16:17.877-08:002015-02-24T07:16:17.877-08:00Nick,
I think you (with the assistance of Charlie...Nick,<br /><br />I think you (with the assistance of Charlie and Alice) have spotted a weakness in my argument. I’ve actually been uneasy about the above post for some time, and started re-writing it before getting your comment. So watch out for the improved version.<br /><br />For the moment, I’ll just reiterate what I’m trying to say, which is this.<br /><br />In that the private bank system is simply into supplying money, holders of that money will have the money in current / checking accounts, thus they’ll get little or no interest. Ergo banks don’t charge interest on the money they create and supply.<br /><br />In contrast, in that banks intermediate between long term lenders and long term borrowers, the lenders will tend to have their money in term accounts, and thus WILL GET interest, which banks will pass on to long term borrowers (e.g. mortgagors). <br /><br />Obviously the latter point of mine is made more complicated by maturity transformation, but I think my basic point holds, more or less.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-9039237782094812132015-02-23T16:07:59.651-08:002015-02-23T16:07:59.651-08:00Ralph, can you clarify this point from your blog:
...Ralph, can you clarify this point from your blog:<br /><br />> if a bank grants a loan for £X, and after the borrower has spent the money, the recipient/s of that new money put the £X into a term account where the term is more than about two months, then arguably no money is created. Plus the depositor will expect interest on the “money”, which the bank will pass on to the borrower. In short, interest is involved where a bank intermediates between lender and borrower. <br /><br />To restate the above: Alice borrows £X from Bank1, pays it all to Charlie, who deposits it in a term account at Bank2. What's puzzling me is your assertion that Charlie "expects interest", but the bank (Bank2) passes this on to "the borrower", which is Alice. Surely Bank2 pays interest to Charlie, whereas Alice pays interest to Bank1? Bank2 does not have any dealings with Alice, but even even if it did, the interest rates from the two banks aren't likely to coincide.<br /><br />You continue:<br />> In contrast, if after granting the £X loan, the money ends up in a current account (or “checking account” to use US parlance), and the account holder intends spending the money fairly quickly, then money IS CREATED. But in that case the depositor will get little or no interest, so the borrower won’t have to pay interest.<br /><br />Restating again: Alice borrows £X from Bank1, pays it all to Charlie except now he deposits it in a current account, and then spends it. Charlie gets no interest to speak of. But Alice is still paying exactly the same amount of interest to Bank1 as before, no? Just because Charlie isn't getting interest from Bank2, I can't see how you can conclude "the borrower won't have to pay interest".<br /> <br />Thanks,<br />- NickNickhttps://www.blogger.com/profile/03176842013097143590noreply@blogger.com