Fig. 3 is the interior plumbing of a chartered bank which shows
that the revenues banks collect through
the Interest(in) pipe from
loans and other services are used to meet
the bank's operating
expenses, to purchase assets to generate
future income, or are paid
to the shareholders as dividends through
the Bank Expenses pipe. And
it is true that these funds go back to
the economy free of debt though
I call it splashing in the pool.
* In Dr. Jaikaran's model, the only interaction
a bank has with the
*economy is to extend a loan and to collect
on it.
JCT: More precisely,
the plumbing shows that the only interaction
a bank has with the economy through the
tap of new money in the
pumphouse is to extend a loan and collect
the principal payments on
it. Yet:
*In the real world banks must pay their
employees, pay interest
*to their depositors, meet their other
expenses, and purchase
*equipment. When the banking system does
this, it spends into existence
*new "debt-free" money (debt-free in the
sense that no one outside the
*banking system is required to obtain
a new loan). In other words, the
*system creates a new demand deposit out
of nothing, adding to the
*money supply without the creation of
any additional bank credit (loans
*plus bank-held bonds) being necessary.
JCT: This says
that the Bank Expenses tube is connected to a tap.
Fig 3b
FRACTIONAL RESERVE BANK
*Summarizing the first counterpoint, the
banking system creates new
*"debt-free" money in the form of new
deposits whenever it pays its
*expenses or purchases fixed assets. These
deposits do not represent
*loan principal or interest which the
non-bank public must eventually
*repay. Contrary to the Debt Virus thesis,
new bank credit is not the
*only source of new money.
JCT: Your contention
that the Bank Expenses pipe is
connected to the tap is contradicted by
your statements that it's
connected to the reservoir of bank revenues.
I believe that only the
Loans(out) pipe is connected to tap of
new money and Bank Expenses are
as you yourself say: "banks spend money
back into the economy.." The
money spent back into the economy is the
money first taken out before
being put back.
*Counterpoint #4:
*Federal Reserve Earnings Go To the Treasury
*The Debt Virus explanation for how Federal
Reserve Notes enter the
*economy is correct, but it neglects two
very important points. First,
*like a commercial bank, the Federal Reserve
system has expenses which
*are met by spending the interest income
it collects from the Treasury.
JCT: Same contradiction.
The FED can't be paying for expenses
with already-existing revenues from the
reservoir and with newly-
created money in the pumphouse at the
same time.
So, Ed, before
I continue parsing your words for my Nov 12
presentation at Rensselaer Polytechnical
Institute, I'd like you to
indicate what the Bank Expenses Out pipe
is connected to, the
reservoir of revenues as in Fig 3 or the
tap of new money as in Fig
3b?