Your Bank Makes Its Own Money

[@PEGSInstitute]

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[@TheKGBand]

Interestingly, all horizontal money, or bank credit, has to be paid back with interest. Each completed loan leaves a negative balance on the private sector balance sheet once settled. If all money was created this way the economy would fail because money created by private banks cannot fund profits, including interest. It can only create activity. Profit, therefore, must come from another source - Government spending into the economy, specifically deficit spending, which is the money left circulating in the economy after tax. Ipso facto Government deficits fund private sector profits.

[@carjaune6793]

Small criticisms: no 1: The dollar bill that appears on the left at 1:05 represents a private banking system "consumer" dollar; later at 1:33 that same dollar icon has morphed into a central banking dollar :( no 2: the interesting question posed at 0:50 is really the crux of the whole video... but that question segues onto another topic without being directly answered as part of a continuous narrative, kinda disappointing Bigger criticism: It would be nice to have more details on how private banks end up issuing many more "private banking dollars" than they actually have "high-powered dollars" in their accounts at the Fed. Like, what is the math here... because that's the counter-intuitive paradox: how do you manage to loan out more money than you own? (Or are able to service at your ATMs.)

[@PEGSInstitute]

1: that's not an error. It turns into cash, a physical note, which is considered high powered money. 2. That was actually exactly what we were trying to achieve with this video. The closing statements are intended as an answer to that question. As for how they have more "horizontal dollars than "vertical". That situation is only temporary. Everything gets balanced, but the horizontal money is less restricted so as to facilitate speedy exchange in the retail banking sector. The central bank does balance the books though.

[@carjaune6793]

@@PEGSInstitute Hi yeah I realized cash is high-powered money. And high-powered money can be owned by a private bank as part of its various assets, and is supplied by the central bank in return for marking down its balance at the Fed. Regardless the icon that meant to portray "horizontal" money ends up turning into a piece of "vertical" money, which is confusing IMO. For the "more horizontal dollars than vertical dollars" I don't think that situation is necessarily temporary. You can have more horizontal cash in existence over the long-term as long as the horizontal players all trust each other's long-term solvency, and as long as the users don't ask for high-powered cash, but trust instead the electronic equivalent held by their bank. In fact imagine a theoretical world without a Fed at all and only private bank money. In this theoretical model, banks all issue "dollars", and are run by some AI (for theoretical example's sake) that doesn't extend bad loans. In this world, in effect, the fact that you have to pay back your loan is the equivalent of anti-inflationary taxation. The fact that you have to pay back interest means that the system functions as a pyramid scheme of ever-more total debt, which is unpromising, but doesn't preclude the fact that it could work. (In fact, I think that some libertarian nutcases like Milton Friedman made the case for abolishing the Federal reserve along these lines. See the interview "Milton Friedman vs Bill Clinton" on this site.)

[@AFW007]

There's far more credit money than HPM as these are the dollars that are our savings, that remain in our bank accounts and have not been used/extinguished yet to pay taxes.

[@incikeleher8947]

Great background music.

[@SeanOCallaghan0106]

Great video/channel! I don’t understand tho why banks can fail in case of a bank-run? Wouldn’t they be able to create again more money in order not to fail?

[@Anonymous-md2qp]

How does a private bank benefit from paying a term deposit holder interest? If I give a bank $1 million and they pay me 3% interest after 12 months, what have they done with my $1 million if they don’t need it to create loans? Wouldn’t they see me as a liability if they have to give me $1,030,000 back after 12 months?

[@PEGSInstitute]

A private bank can invest your money elsewhere for their own profit. It is a liability, but only in that they have to pay you when it matures. We won't see anything like 3% interest at the moment, because interest rates are anchored off government securities/bonds.