So, assuming 20% required for collateral, if you deposit $1,000 dollars into a checking account at Chase Bank they can go and lend out $800 of it to someone else while still claiming to hold your $1000.
Unquote
Fractional reserve banking was relaxed during COVID and not brought back
No reserve requirements now
Pump it up
A board monitors the banks assets and liabilities instead
One thing that didn’t quite sit correctly was your portrayal of bank and NBFI money creation. It’s less about fractional reserve money multiplying (yes this does matter) but more about a simple balance sheet trick that banks do to create matching deposit liabilities (new money) for every loan (asset). NBFIs undoubtedly do this but it’s technically illegal for them - only banks are regulated to do this and it’s why banks have licences / charters (part of an elite club).
The work of Prof Richard Werner is perhaps the best source for further detail, but the ECB and BoE surprisingly published explainers about this money creation about a decade ago.
This doesn’t change your article but it might introduce nuances, particularly about capital flows.
My gut feeling (I don’t have data to analyse) is that it’s more about commercial bank money creation - way more than central banks and NBFIs - that provides liquidity to NBFIs and other liquidity pools & holders, who then circulate it back round to each other and banks. It’s all totally opaque, but the point is, at the centre, the nub is capital flows are driven by bank balance sheet expansion and contraction driven exactly as you lay out. The nuanced risk here is a banking-centred crisis could be far more catastrophic than just a wider credit crisis.
The bottom line stays the same - newly created money flows around and has to find a home … hence hard to explain (using traditional taught school-economics) asset inflation and bubbles.
For what it’s worth, I expect the next home for the ever-increasing money supply will be (already starting to be) bitcoin ETFs. The whole bitcoin economic model (21m supply scarcity v demand) will be turned upside down with the Bitcoin price driven by its asset value, breaking away from risk-off narratives and correlations to equities. True coiners will be left scratching their heads (with some gloating about their foresight and brilliance). If this happens, the issuers of ETFs or bitcoin horders such as corporate treasuries and the likes of (Micro)Strategy will also flourish. But, as we’ve seen, the values of any investment in this space will be a rollercoaster - not the four year bitcoin halving cycle but the economic cycle (although the two do seem eerily similar) with ups and downs driven by global liquidity. This is why your article is so relevant.
Quote
So, assuming 20% required for collateral, if you deposit $1,000 dollars into a checking account at Chase Bank they can go and lend out $800 of it to someone else while still claiming to hold your $1000.
Unquote
Fractional reserve banking was relaxed during COVID and not brought back
No reserve requirements now
Pump it up
A board monitors the banks assets and liabilities instead
And sometimes not to well
Thank you David, I did not know that
Great article!
Whats the best indicator or chart to use on trading view or any other website to track global liquidity most accurately according to you?
Excellent article, thank you.
One thing that didn’t quite sit correctly was your portrayal of bank and NBFI money creation. It’s less about fractional reserve money multiplying (yes this does matter) but more about a simple balance sheet trick that banks do to create matching deposit liabilities (new money) for every loan (asset). NBFIs undoubtedly do this but it’s technically illegal for them - only banks are regulated to do this and it’s why banks have licences / charters (part of an elite club).
The work of Prof Richard Werner is perhaps the best source for further detail, but the ECB and BoE surprisingly published explainers about this money creation about a decade ago.
This doesn’t change your article but it might introduce nuances, particularly about capital flows.
My gut feeling (I don’t have data to analyse) is that it’s more about commercial bank money creation - way more than central banks and NBFIs - that provides liquidity to NBFIs and other liquidity pools & holders, who then circulate it back round to each other and banks. It’s all totally opaque, but the point is, at the centre, the nub is capital flows are driven by bank balance sheet expansion and contraction driven exactly as you lay out. The nuanced risk here is a banking-centred crisis could be far more catastrophic than just a wider credit crisis.
The bottom line stays the same - newly created money flows around and has to find a home … hence hard to explain (using traditional taught school-economics) asset inflation and bubbles.
For what it’s worth, I expect the next home for the ever-increasing money supply will be (already starting to be) bitcoin ETFs. The whole bitcoin economic model (21m supply scarcity v demand) will be turned upside down with the Bitcoin price driven by its asset value, breaking away from risk-off narratives and correlations to equities. True coiners will be left scratching their heads (with some gloating about their foresight and brilliance). If this happens, the issuers of ETFs or bitcoin horders such as corporate treasuries and the likes of (Micro)Strategy will also flourish. But, as we’ve seen, the values of any investment in this space will be a rollercoaster - not the four year bitcoin halving cycle but the economic cycle (although the two do seem eerily similar) with ups and downs driven by global liquidity. This is why your article is so relevant.
Thanks and looking forward to part 3!