Message Font: Serif | Sans-Serif
No. of Recommendations: 4
Side note:

I tend to be a broken record regarding some of these issues related to sovereign debt,
money supply, loans creating deposits and the like. A lot of this tends to be counter-intuitive due
to framing problems. The nomenclature is just terrible - "deposits" (in aggregate nothing was
actually deposited anywhere), "bank loan" (the bank didn't give you temporary use of anything it
owned, or even intermediated between you and some other owner - it swapped promissory notes),
"reserves" (these are not buffer accounts to be dipped into on a rainy day*; "reserves" cannot be
"lent" out by a bank to a citizen), so on and so forth.

Most of these issues become crystal clear as soon as one starts looking at balance sheets (just
basic double entry accounting, nothing fancy) and changes in these. I think it was Minsky who said
something like, if you cannot put your reasoning in terms of a balance sheet there is a problem in
your logic.

The other difficulty that often arises is that people tend to think in terms of their own balance
sheets instead of aggregates (the private banking system as a whole). This is the same issue that
people encounter when thinking about financial markets in aggregate (active must underperform

It might be useful to keep these things in mind when encountering a statement about money and the
like that seems totally counter-intuitive.

* - insert rant on allowance for loan loss "accounts" in bank statements here.
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.