Monday, September 30, 2013

Reponse to Odie

Odie, you wrote:

"Instead it will be income for the bank which it will use to pay e. g. one of its employees by crediting its account. No money being created are destroyed there, simply shifting funds around. For those $1200 the bank's deposit liabilities stay the same. (More maybe later)"

I agree with everything in your comment up until that part!

There's two separate and completely independent IOUs at play here between you and the banking system in aggregate: Your IOU to them (the mortgage) and their IOU to you (your deposit). You are each others creditors and debtors. If you pay $2000 to them with your deposit, that is accomplished by them debiting your deposit account. Now it so happens that $800 of that payment is principal, so it also affects your IOU to them, so they mark that IOU down by $800 for that. Your mortgage though is not a medium of exchange and thus it is not "inside money." $2000 of inside money was destroyed in this example: $800 of your IOU was also destroyed for a net gain by the banks of $1200 of equity (the abstract dollar amount of the value of assets in excess of the value of liabilities). They have no obligation to turn around and create more inside money by crediting other people's or entities'  bank deposits with $2000 or $1200 or any other amount. There's no law of the preservation of bank deposits. You and I can't destroy bank deposits because to us bank deposits are "outside money." "Inside" and "outside" are relative terms. Relative to non-bank private entities, bank deposits are outside. Relative to the private sector (the usual vantage point from which to define "inside" and "outside") they are "inside." If we included the Fed in our vantage point, then Fed created money (reserve notes and Fed deposits) would also be "inside" and only coins and the extremely rare "US notes" would remain "outside." If you and I write out our own IOUs and use them as money, then we CAN destroy those and that "money" would be "inside" us.

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