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Old 31-10-2017, 09:42 PM
cdm61 cdm61 is offline
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Straight from the horses mouth BoE on modern money creation

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This article, in the linked pdf, explains how the majority of money in the modern economy is created by commercial banks making loans.

• Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
• The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

What they mean in the last bullet point is the lower the interest rate the more demand for loans and vice-versa

And here is the main explanation - and within it the fact that your economics degree lied to you on money creation.

"The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. (when making loans)
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