Those who say that our bank created money is debt have the polarity reversed: it is a claim over debt.
Hmmm. That money is neither debt or claim on debt. The relation to debt is only in origination: together with that created money (which is just a short term promise of bank) comes bank's claim on someone's debt (also a promise, a long term obligation). Then the money and the claim on debt go separate ways. If the borrower defaults, the money is still somewhere around. If he pays back everything with interest, he channeled a stream of anonymous money (in larger amount than created with his credit) back to a bank.
It is still not clear to me how the money is "destroyed". When a credit is paid back with interest, the initial credit amount is presumably canceled and the interest goes to bank's profit. But how does that happen technically? Is it first or last mortgage payments go to bank's profit and CEO bonuses? Or does the bank appropriates all payments, and the money gets really "destroyed" when a bank cannot pay out current cash or transaction requests?
Hmmm. That money is neither debt or claim on debt.
That is correct, I used sloppy language.
In fact it is a demand deposit which is an undated claim against the bank. On the other side of the bank's balance sheet is their assets, which mainly consists of interest-bearing loans.
das monde:
It is still not clear to me how the money is "destroyed".
This is the $64 billion dollar question.
I have come to think that a maverick thinker called Steve Consilvio is on the right track here by seeing it as a 'mathematical echo'. He also believes - as I do - that profit, by definition, causes inflation, but that is another story.
OpEdNews - Diary: Obama: Right and Wrong
Every transaction in the economy has a mathematical echo. The goods or services are consumed, but the mathematical value of what was created never expires. The Federal Debt of $13 trillion represents the cumulative value of every transaction for the last 230 years of American history. Other nations have their own numbers, in their own currency. It is all the same phenomenon.
He is on the right track because a deficit-based dollar is irredeemable for value, because there is nothing backing it.
When a debt is repaid, the debt is cancelled, but the original credit money creation (the mathematical echo) remains, as does the new credit created which was necessary to pay the interest.
If a loan defaults, then the way I see it the 'mathematical echo' of that debt becomes permanently immobilised to the extent of that default.
When a credit is paid back with interest, the initial credit amount is presumably canceled and the interest goes to bank's profit. But how does that happen technically? Is it first or last mortgage payments go to bank's profit and CEO bonuses? Or does the bank appropriates all payments, and the money gets really "destroyed" when a bank cannot pay out current cash or transaction requests?
What happens is that when there is a repayment:
(a) the capital element is credited to the borrower's account as a deduction from principal;
(b) the interest element is credited to the bank's Profit and Loss account.
The cool bit is that the bank is creating new credit when it debits its P& L and credits its staff or other costs, or credits the accounts of its shareholders with dividend payments. By doing this a private bank is spending new money into existence.
In neither case is credit - the mathematical echo, which is IMHO analogous to a redeemable share - destroyed.
The point of the latter is that private banks do not just create credit when they lend money, they also do so when they spend money. Quantitative Easing is what happens when a Central Bank spends money into existence.
I could do the same if I gave you my IOU against value received from you. If a third party then accepted my IOU from you in settlement of a debt owed by you then the result is a monetary system. The difference between me and the bank is that I have to provide real value to someone in settlement of my IOU. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
