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Debt on Goods & Services

Cullen,

If I give new loan to any counterparty, definitively I create money. If I pay goods & services with debt, do I create money also in this context ?

Depends how you do it. A credit card is a short-term from of money creation. So, if you have a $10K line of credit with JPM then that basically allows you to create up to $10K on command. If you go to Walmart and put $1K on your credit card this expands the money supply by $1k. When you pay off your card the money supply contracts by $1K. It is basically a short-term loan by JPM.

If you buy a house with a $100K mortgage then JPM might finance that mortgage and expand the money supply by $100K. So yeah, any time you find a counterparty you are creating money. But the counterparty has to create viable "money" for it to be credible. For instance, if I write you an IOU on a piece of paper we've created money between the two of us, but no one else will consider that money. Ie, no one else will accept that note for payment of goods and services. So it kind of depends on the specifics. Banks are special in that they create a very specific credible type of money via credit extension.

I hope that helps!

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Cullen,

What I am asking is the relationship between two individuals who commit business transaction, not individual with financial institution. I saw in Ray Dalio's how economic works video, he gives example where somebody comes to bartender to purchase beer. Since he doesn't have money in hand, he purchases it with promise to pay it later (debt). And he considers this exchange as money creation, because he purchases with credit, and credit equals to money.

So, from your point of view, does this kind of transaction involve new money creation in the perspective of monetary realism ?

Hi Kevlar,

If I borrow money from a bartender for a beer I might write him an IOU on a napkin. The bartender will keep that IOU until I give him USD for the beer at which time he’ll extinguish the IOU. That IOU is money, but in the terms of Monetary Realism, it has a very low level of moneyness because the bartender can’t take that IOU to anyone else and buy things with it.

Banks are totally different. Banks don’t just agree to an IOU. They agree to an IOU that everyone else can also use as money because the loan, which creates a deposit, is accepted by anyone. So the loan the bank makes has a very high level of moneyness because their IOU is something that everyone accepts for the purchase of goods and services.

Make sense?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Yes. it totally makes sense !

Let say, I set up new company whose business is creating new electronic money. As the company grows, number of transactions keep soaring. From this situation, how can my company function like "private banks" where it can create new money ?

What cross in my mind is that my company should provide loan facility to my customers. However, in order to use that new loaned electronic money, they must within my electronic money ecosystems (all buyers and sellers must accept this), and also there should be mechanism to minimize the conversion from my electronic money into deposit banks. Because I know that my electronic money has still very low degree of moneyness.

What do you think Cullen ?

That's the whole trick! For money to be functional people need a reason to use it. If you create Kevlar Bucks why would people use them? You need credibility as a counterparty and to do that you need a network effect, a way to enforce the money as a contract, etc. These aren't hard things to create. They are INCREDIBLY hard things to create. That's why banks mostly rely on governments to help them establish credibility.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche