How Money is created

Monetary & Quantitative Easing

So I just finished creating this diagram showing what Quantitative Easing and Monetary Easing is and more generally how new money is created and put into circulation, thus increasing the money supply.

@freemo AFAICS, this is completely ignoring fractional reserve banking, and that the vast majority of actual currency being created is printed into existence by private banks loaning out dollars they don't have to their customers.

@raucao It does not and is not an attempt at illustrating the fractional reserve part of the system, so you are correct it does not illustrate the "money multiplier" effect

However it isnt entierly accurate to say that they are loaning out money they dont have. They have the money in their vault, the agreement you make with a bank when you deposit the money is that you are loaning them the money and they are free to do with it whatever they want, including loan it to others. So it is absolutely their money to loan, you gave it to them for that purpose.

The deal you made with the bank is basically that they are allowed to loan out your money for as long as you keep it deposited and in return they will pay you a percentage of interest on your money as a sort of profit sharing on the money they make off being able to loan your money. In addition to that they will offer you the service of protecting your money.

So while you arent wrong your wording seems a bit disingenuous to me.They have the money, they took the loan from you and in exchange use the money they loaned and loan it to others.

@freemo That's not how it works, sorry. In fractional reserve banking, the bank actually does not lend out deposited money (for the most part). It lends out money that wasn't ever deposited, beyond the reserve requirement, which is as low or lower than 5% in most countries at the moment.

What you describe is the romantic version of banking, which is being taught in school, and which we all wish would be the case. But it has no connection to today's actual banking and money creation reality.


@raucao Thsi is one of my areas of expertise, so I can say quite confidently yo uhave the finer details wrong but you do seem to have read up on this because you are using many of the words 90% correctly. So I do appreciate youve tried to put time into learning this stuff and not trying to knock that,.

That’s not how it works, sorry. In fractional reserve banking, the bank actually does not lend out deposited money (for the most part). It lends out money that wasn’t ever deposited, beyond the reserve requirement

This isnt true, when you “beyond the reserve limit” the technical term for that is “Excess reserve”. It is money they have, it is cash sitting in their account at first, that cash can be obtained either from the fed throught he resale of bonds or from deposits.

The excess reserves are money they actually have on their balance shit either being held from a depositor or their own cash obtained from the feds. They can then loan out that excess reserve at which point they dont have the cash themselves anymore on their personal bank balance sheet but you, as the depositor keep it on your balance sheet.

So its actually the other way around, the bank is loaning out money they have (they got it from you or the feds).. it is you who claims to have money you dont have… the balance on your checking sheet is 90% higher than the actual funds you have waiting in reserve int he bank (and you agreed to that being the case when you gave it to them).

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@freemo Now you describe it a bit more correctly, but if you think about what you just said, it is not you who is certifying that you have that money, it is the bank. As you most likely do not have that money yet (according to pretty much all statistics about money supply), it is therefore the bank creating that money on paper when you borrow it from them.

@freemo Your explanation also does not take into account interest, by the way.

If you want to talk down to me, thinking your knowledge and point of view are superior, then I won't correct you anymore. But it is your chart that was misleading about how these things actually work when considering the most important "detail" that you simply left out.

@raucao thats sort of true.. for starters we have to be clear what "money" means.. money is not phsyical notes, if you are talking about physical notes then it has a different term "Monetary Base".. but up until the intention is that we are talking about total money supply, if i have misunderstood what you are saying in this regard please stop me now.

with that said, what the bank is really doing is keeping a reserve on hand that statistically should be enough to cover all expected with draws by all clients... while the money ont he balance sheets is quite a bit less than the total balance of all their clients, it is more than enough to handle any withdraws they make.

What is special about the situation, and why the bank can pretend it has more money than it has by putting on your balance sheet when you dont have it, is because they personally guarantee the difference, and this is backed up by the feds who DO have as much money as they need to back that up.

So in the unlikely event that a bank experiences a much higher than expected number of withdraws they are still more than capable of giving you your money and they will simply take a loan out from the central bank to cover it temporarily,a nd the bank will take the interest penalty themselves as it was their mistake...

So in all reality it isnt really just infinite money out of nowhere, it is backed, and backed with collateral, so it is secured.

@freemo Someone's a bit high on central bank fairy tales I see. No further questions.

@raucao Next your going to tell me the central bank makes money off you ::rolls eyes:: never mind the fact they cant legally hold a profit by definition and any profit it makes must be forfit...

Gotta love the central bank conspiracy theorists.

@freemo That's nonsense. Almost as much as what you just described being anywhere close to realistic in practice.

@raucao haha Q.E.D. then.

The degree of anti-fed conspiracy is always proportional to the ignorance of the person it seems.

Not only is it federal law they cant keep profits, not only have they in the past had to give those profits back to the US treasury, but it doesnt even have owners in the typical sense. The people running the fed are selected each election by the elected president. Those in charge do not get payouts from profits as an owner would either, they get paid and the amount they are paid is not related to the amount of money the fed itself deals in.

Literally nothing about the fed is in line with the usual conspiracy nonsense you hear but it seems the less people know about the process the more prevalent that thinking is.

I really dont mind if you wish to hate the fed or anything else. But please try to understand the things you hate at a minimum, because otherwise you just waste everyone's time.

@freemo I never said anything about the Fed profiting off of this. You're putting up a conspiracy strawman here. Just because you believe in the wacky MMT-style "the system cannot fail, because the Fed never runs out of money" theories, that doesn't mean you understand the fundamentals of this better than people you apparently have to put in a conspiracy drawer to avoid your own cognitive dissonance.

@freemo I didn't even talk about the Fed. You really need to check your prejudice dude.

@raucao Central Bank is another term for the Fed... You told me it was "nonsense" that they arent allowed to hold profit... ergo, yes, you make a remark about the fed.

@freemo You said something about me saying they're profiting, then I told you that what these people say is nonsense.

@freemo I never proposed that direct profit is a motive for central banks at all. You started that nonsense, so I said it's nonsense.

@freemo I said "central bank fairy tales" to your wacky MMT theory, which has been disproven many times in history.

@raucao I said absolutely nothing in support of MMT and the views I proposed were not the least bit in line with MMT. Nice try though.

@freemo You literally argued banks can print infinite money, because the Fed never runs out.

@freemo You probably don't even realize how your own explanation is literally the foundation of MMT?

@raucao Seeing as your quoting me as saying things I did not say at any point in the conversation and paraphrasing my stance in a way that in no way reflects my stance, it is no surprise you are similarly confgused about any similarity between my stance and MMT. Clearly you dont even know what my stance is, let alone how it may or may not be similar to MMT.


> when you dont have it, is because they personally guarantee the difference, and this is backed up by the feds who DO have as much money as they need to back that up.

> So in the unlikely event that a bank experiences a much higher than expected number of withdraws they are still more than capable of giving you your money and they will simply take a loan out from the central bank to cover it temporarily

@raucao yes neither of those statements come even close to the paraphrasing or psudo-quotes you attributed to me... Notice I never say anything about the fed not being able to fail by printing money.

I am also clearly talking about singular bank and not a mass run on **all** banks (notice the word bank is singular there). What I am describing is not just accepted fact, it is the norm and happens daily.. When a banks reserve dips below the required minimum this is exactly what they do, they just get a garunteed short term loan from the Fed to cover it which they correct through one of several means then return it.

So yea, nothing I said is even remotely MMT, it is, in fact, simply the cold hard fact of what takes place consistently in the banking system.

@freemo Running low is normal, but banks run never just happen to a single bank. The mere fact that you acknowledge that a bank run would create problems means that your original counter argument is now null and void. My original point is thus proven, which was that private banks print money into existence, which they do not have in the first place.

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@raucao Nope I never said anything of the sort. Again nice try, but trying to tell me what I said when I didnt say it isnt going to progress this conversation in the least.

@raucao you do realize that when you quote someone it has to actually be something the person said... I said nothing of the sort, dont put words into my mouth.

@freemo Please go read the conversation. You came at me with a complete nonsequitur about how I will probably say next that the Fed profits off of me. To which I directly replied that that's nonsense.

@raucao It seems perhaps I misunderstoof you then..

When you said "That is complete nonsense" I took that to mean you thought it was nonsense that the fed didnt profit.

Sounds like what you are saying is that it is nonsense you would think such a think and that you do, in fact, agree that the fed does not and can not make a profit.

If that is the case then I apologize for misreading what you said (though by that point you had already acted somewhat rudely, so you have some blame in that interactions yourself I'd say).

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