The base money confusion

By Izabella Kaminska

Peter Stella, Fromer head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:

Naturally, this stunningly incorrect conceptualization of the lending process and how it interacts with bank reserves leads people to think how to entice banks to “get this money out the door” including to thoughts of “negative” deposit rates as an incentive.

My frustration lies in my inability to explain to “sophisticated” people why in a modern monetary system–fiat money, floating exchange rate world–there is absolutely no correlation between bank reserves and lending. And, more fundamentally, that banks do not lend “reserves”.

9 Responses

  1. Warren, have you seen this recent article co-authored by him? It totally botches up commercial bank lending, which is a bit surprising given this article.

    http://www.voxeu.org/article/other-deleveraging-what-economists-need-know-about-modern-money-creation-process

    Has their been any communication with Peter? This paragraph sounds remarkably like you:

    “My frustration lies in my inability to explain to “sophisticated” people why in a modern monetary system–fiat money, floating exchange rate world–there is absolutely no correlation between bank reserves and lending. And, more fundamentally, that banks do not lend “reserves”.”

  2. Scientists discover the Higgs Boson.

    Central Banking Cartel still believes the earth is the center of the universe with economists building complex models of concentric circles.

    Religious people in America watching NFL football 40 hours per week.

  3. “one man’s loan is another man’s asset”

    That’s got my synapses twisted for some reason

    1. @Andrew,

      Creditor’s loan is creditor’s asset (receivable) and liability (advance to borrower), i.e., the loan is a bank asset and the deposit is bank liability. The loan is is the borrower’s asset (deposit account mark up) and liability (payable).

      So the above statement is true, even if inelegantly stated.

    2. you go to the dentist and charge 100 which he gets and, for this example, keeps in your bank.

      you owe your bank 100, the dentist has 100 in his bank account.

      the 100 is the dentist’s asset and your loan is 100 as well

      1. @WARREN MOSLER, According to my accounting professor friend, double entry book-keeping was developed on the theory that counting everything twice would give assurance of accurate sums. It also, likely, resonated with our general attraction to binary patterns that mimic the duality of some of our sensory organs. If we had eight eyes, things would look different.
        Unless we let it, double counting makes no more difference than measuring everything in inches and centimeters, ounces and grams. Dollars are different in that they are twice removed from reality in accounting for what we like, rather than what we weigh — an objectification of a figment of a figment of the imagination.

      2. US dollars are demanded for payment of US taxes causing us to offer real goods and services to the govt that desires to provision itself as we try to obtain that which is demanded for payment of taxes.

        Dollars don’t account. We account. For example, we account for transactions that we call GDP.
        We maintain a social security trust fund to account for the difference between debits and credits made in the name of social security.
        etc.

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