Council of Canadians

Doug Henwood dhenwood at
Thu Apr 6 16:13:55 PDT 2000

Doug Henwood wrote:

>kenneth.mackendrick at wrote:
>>Yes, it is my understand that this is exactly what a loan is - money created
>>out of thin air only to disappear again when it is paid back (this is exactly
>>what the banks do... they open an account an put money it it - from where -
>>from an 000-0001 account (or something like that - which isn't really an
>>account, it's just a number that, at the end of the day [term of
>>the loan], has
>>to be 0). Please, correct me.
>A loan is like that only in the very short term (though I should say
>this is a topic of theological dispute among economists). A bank
>makes a loan - then it needs to find the funds (either by taking
>deposits or selling short-term notes or bonds) to cover the loan. In
>a credit bubble, the process can get way ahead of itself, but you
>can't create money out of thin air forever without creating
>inflation or a credit bubble.

I should add that if the point of borrowing from a central bank is to increase investment, and thereby growth over the long term, then there has to be a diversion of current resources out of consumption. Someone's consumption - and the political fight is over whose. Funny money schemes aim to finesse that fight, but you just can't do it: resources for real investment have to come from somewhere. Money can be created out of thin air, but not machine tools or schools.


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