Don't loans increase the money supply?

>If someone defaults the money created gets expenses off as bad debt.
ffs please stop posting...this is a finance board.
read the link posted above retard.

The money supply is infinite. You cannot increase or decrease it through consumer actions

you know nothing of what you're on about
mortgages (consumers) are the bread & butter of the banking industry

How old are you? Do you not understand how fiat currency works?

Older than you!
& NO ONE knows exactly
read the link retard, stop thinking you're smart. you're just being arrogant

Only if theyre defaulted on.

I'm getting tired of you guys shtting up this board, read the link. You fail to understand money creation.

Run me through it from the first step to the finish how money supply is reduced via a loan being defaulted on.

>Bank has $10, person a has $0, person B has a widget
>Fractional banking, bank loans person A $10, but also has $10 on its books
>Person A gives $10 to Person B and gets widget
>Bank has $10, Person A has widget, Person B has $10
> Person A defaults immediately, bank takes possession of widget.
>Bank has $10 and widget, Person A has $0, Person B has $10.
>Now overall money supply is $20

Where does that chain of events get things wrong?

My amateur opinion is you're correct and the idea that defaulting "decreases" money supply is only relative to the increased supply from the creation of the loan. The only other thing to consider for practicality is, money in the bank's possession can't be counted toward total supply unless they are spending it (theirs isn't in circulation). Because if the bank's $10 can create an infinite amount of loans, why count that $10 as $10 in the total supply? Why not count it as infinite money if it can be used like it is literally any amount? So...

>bank gives loan of $10
>bank and person b think they each have $10 = total supply of $10 because we count the bank's as $0
>person b spends $10 then defaults
>bank no longer thinks they have $10
money supply is now the $10 spent by person b, and the only "decrease" in the supply is the bank's $10 that was not previously in circulation

Checked but that is not how works much like >777777 1k eoy.
read the link in
let me know if you have any questions. I know its wordie (on purpose).
You also please read the link, it answers your question.

Money supply+ widget=20$ nigger

>bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
I read the link. It still doesn't make sense to me. In the example they site, if someone defaults on the loan the money supply still should increase.
Where does the chain of events in get it wrong?

Bank lends person A $10 of the $100 they have leaving $90 in their account. They loan it at 10% interest expecting $11 back. In scenario 1, person A returns the $10+$1 interest. In scenario 2 person A returns $6 but cannot repay the rest. Let's say the business they were running is now bust and everything is liquidated and the bank recovers another $3. That still leaves only $9 for the bank who is left with $99. That's why it causes deflation, the total available dollars is lesser than when we started. If all had gone according to plan the bank would have $101 and the money supply would have increased (inflation). Idk how youre making this so complicated.

According to that the money supply should remain static. You're ignoring that all the money the bank lent person A is now in the hands of person B. So the money supply is still $100 + widget.

>Bank lends person A $10 of the $100 they have
>Bank has $90, person A has $10
>Person A spends $10
>This involves giving the $10 to person B
>Now Bank has $90, person A has $0 + widget, Person B has $10
>When person A defaults and bank takes widget, money supply remains at $90 (bank) + widget + $10 (person B)

You're ignoring the existence of person B in your post. By your argument, the money supply remains static.

The most simple I can make it is double entry bookkeeping. A debt & a credit.
You create a debt (mortgage lets say), the CB (Central Bank) lodges your debt as a credit TO THEM, the fiat that is created is a DEBT to the CB.
The money supply (FRNs, GBP, EUR ect) expands via this way. It's the way it's designed.
This 'money' still exist.

If the debt is not paid, the bank will have to pay for it, from its own earnings. So the money created by the loan is now destroyed either way.

Unless, the bank made too many bad loans and went bankruptcy. In that case, the bank literally prints money and gives it away irresponsibly. That money is now floating in the wild.

If all banks are doing this, there is a credit bubble. Sooner or later, the collateral values will crash, and all banks are insolvent.

The Fed can lend to the banks (bail out) so that they can stay in business and pay off the bad loans with their future earnings.

So you're saying the chain of events is

>CB has infinite dollars, bank has $10, person A has $0, person B has widget (total money supply $10 and widget)
>bank loans $10 to person A but in doing so takes on a $10 debt to CB (total money supply $20 and a widget)
>person A gives person B $10 and gets widget
>person A then defaults on loan
>bank takes control of the widget, and liquidates it to get back as much of their investment as possible. lets say person B is savvy and buys it back for $5 (total money supply $20 and a widget)
>bank then pays back CB with the $5 they just got, and $5 from their reserves (total money supply $10 and a widget)

In this chain of events the overall supply stays static. All that's really happened is money transferring from the bank to person B. The bank's lending capacity in the future is reduced, but the actual supply of money in the system is the same no?

youtube.com/watch?v=iYZM58dulPE man just watch this.

Also, the widget is now worth less. Less loan can be issued by taking the widget as collateral.

>CB has infinite dollars
If you understood debt, you wouldn't say this. please read the link.

look up 'contraction of money supply'

I told you I read the link. It seems to me you're misinterpreting it. Again plz explain where the chain of events goes wrong.
Even if you limit the amount of money the CB has to $10, you end up with the same ending money supply.

That makes sense, but the money supply does remain static it's just that the amount of credit which can be easily lent out decreases.

Kill yourself schizo

Defaults have no direct relationship to the money supply. A default on a loan does directly cause the money supply to shrink. However, there’s certainly an indirect one. If defaults rise banks will have to increase interest rates leading to less loans, shrinking the overall money supply. The central bank rate is just one of the many factors that determine interest rates though. The Bank rate is for very short term lending IE Cheques clearing overnight between banks. The largest factor is probably risk premium on loans and the credit market.

Assuming the bank always issue loans as much as they can, in this economic situation the loans are cut in half, and the money supply is reduced.

But everything seems fine. person C can now apply for a $5 loan to buy the widget. The economic structure is the same, except everybody's $$ takes a 50% cut.

The supply of money which can be potentially loaned out in the future is reduced, but the actual money supply remained static and the value of the widget has maybe gone down... but it could also go up.
Seems like the real metric here on whether this will end up reducing or increasing the value of the remaining dollars on the system is how the widget holders end up feeling.
If they say 'well because the widget has been defaulted on i guess its only worth $5' then dollar purchasing power goes up. If they say 'Well now I have the $10 I needed originally, so now I don't need dollars as much any more. I won't sell the widget for less than $20' dollar purchasing power goes down.
If they say 'I think another $10 sale would be fine' dollar purchasing power stays the same.

Now what really interests me here is that the Fed is expanding its balance sheet, basically just buying the widget from the bank instead of making them pay back the liability from the failed loan to person A. And that actually does increase the money supply. Let's say the Fed just agrees to settle the loan by buying the widget for $5. Then what you end up with is;

>Bank has $15
>Person A has $0
>Person B has $10 and a widget
>Total money supply $25 and a widget

Alternatively if the Fed just accepts the widget as payment saying they'll sell it later and 'normalize their balance sheet' (yeah right) what you end up with is;

>Bank has $10
>Person A has $0
>Person B has $10 and a widget
>Total money supply $20 and a widget

In these scenarios not only does the money supply increase, but it does so while the lending capabilities of the bank remains static so that the cycle can just increase indefinitely.

In the pursuit of stabilizing economic cycles, the Fed creates a moral hazard in encouraging chasing bubbles, because in the end the Fed will the the last buyer.

We are going to see new All Time High soon in markets. Buy everything.

Yes. You are correct in the first line, the money supply increases by 100k when the bank lends the money out. It then decreases by up to that same amount (the difference of the sell value of the widget and the loan).
Person B may have that money, but the fact still remains that the bank still believes the loan will be paid back, ie they have a debt asset equal to 100k + interest up until the loan is defaulted on.

Yes, you are exactly right. This fact was well-understood by the ancients, hence the general prohibition of usury. See, for example, the Summa Theologica of St. Thomas Aquinas.
newadvent.org/summa/3078.htm

Attached: SummaTheologica.png (751x602, 178.64K)

I'm equally confused by your question, user, and no one has given a satisfactory answer yet. Also what you refer to as "fractional reserve banking" is technically credit creation of money. In FRB the bank would loan out a fraction of the deposited money, rather than creating a new balance of credit and debt.
For your further reading: researchgate.net/publication/283907413_Do_banks_really_create_money_out_of_nothing_Another_empirical_test_of_the_three_theories_of_banking

Maybe here's how to look at it:
>Bank lends $10 to A, creating a $10 debt on its books and $10 in credit towards A.
>A immediately defaults, so the bank's debt remains unpaid
>Bank must cover its debt by moving money from elsewhere in lieu of repayment from A
>So $10 was circulated into the economy via crediting A's account, but an equal amount of money had to be taken from some other source to cover the default, thus cancelling out the initial credit extension.

it seems retarded to me.
In circulation there are still 100k that B has spent to grown his bisness.

Forget about fractional. Loans should be granted if it's a good loan. Why would any economy deny a good loan because of some reserve requirement.

en.wikipedia.org/wiki/Money_creation#Credit_theory_of_money

As far as I can tell that St. Thomas is an idiot.
His definition of usury is that I can't both sell you something and then also charge for its use. But he agrees that as long as I don't sell you the thing, charging you for the use is ok, as when renting out a house. Well, when I lend you some money I'm not selling you the money either, I'm only charging you for using it. That's the whole point, you have to give the money back in the end, plus interest, just like you have to give back the house, plus the rent. Interest is the rent you pay for living in my money. Simple as.

>the Fed creates a moral hazard in encouraging chasing bubbles, because in the end the Fed will the the last buyer
does he buys before every crash?

Eggsample:

I ask the bank 100k

jews give them to me

I spend 100k on my business paying other people to do things for my business

I fail

I go on defult

I will never give back those 100k to the bank

but those 100k have not disappeared. They are still in the economy cause I paid some people for doing things in my business.
So where this retarded theory (lending leads to deflation) comes from?

Eggsample:

I ask the bank 100k

jews give them to me

I spend 100k on my business paying other people to do things for my business

I fail

I go on defult

I will never give back those 100k to the bank

but those 100k have not disappeared. They are still in the economy cause I paid some people for doing things in my business.
So where this retarded theory (lending leads to deflation) comes from?

THIS

They don't make more sense and I URGE you to rethink this statement. Shouldn't we think in terms of what money is actually in circulation, and not some failed risk assessment some bank put on it's balance sheet?

Eggsample:

I ask the bank 100k

jews give them to me

I spend 100k on my business paying other people to do things for my business

I fail

I go on defult

I will never give back those 100k to the bank

but those 100k have not disappeared. They are still in the economy cause I paid some people for doing things in my business.
So where this retarded theory (lending leads to deflation) comes from?

UNLESS the Fed just says 'Bank don't worry about it, we know the widget you seized from person A isnt worth $10 but we will buy it from you for $10. We will just normalize our balance sheet later.' in which case the money supply does increase in the event of default, but the supply of available collateral decreases.

No. You should think about collective psychology of the buyers and sellers. Money is a thought form.

Yes, that is correct. I believe where you are getting caught up is the timeline. A growing economy will have a lot of debt. Having debt is the norm. From point 0 to point 5, there is no change in money supply, but the second the loan is defaulted on money supply shrinks. So the graph of money supply would be an upside down V.