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Think I found an explanation:


First is the accounting logic of real-world transactions. Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable.  A typical example used by MMT'ers is the loanable funds market, which posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy.  This model is simply inapplicable to our current monetary system in which bank loans are created "out of thin air" without the requirement of prior reserve balances or deposits to "fund" the loan's creation.  Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.  Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector's net saving of financial assets is by definition equal to the government sector's deficit and the current account balance.

So has deposits nothing to do with the amount that can be borrowed out? What about the reserve requirement?

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by A swedish kind of death on Thu May 12th, 2011 at 04:45:55 PM EST
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