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  1. It’s only the introduction but I must make one objection. Samuel used the phrase “Banks create money out of thin air . I always call people on using this phrase as it leads away from a proper understanding. A bank creates bank credit “money” as a liability against itself balanced by an asset. In the case of loans it is actually the BORROWER that creates money by promising to pay it back and extinguish it. With his/her signature, the typical borrower creates the new “money” as a demand upon themselves to produce value now and into the future (up to 30 years) that others will be willing to pay for. The lifeblood of mortgage borrowers is NOT “thin air”. That’s why the title of my movie trilogy is Money as Debt. There is no money. There is only our collective principal debt to banks – in circulation as money.

    A bank monetizes borrower debt (worthless to the general public but accepted by the bank) into bank credit “money” by making itself liable for extinguishing the borrowed principal from its own earnings if the borrower fails to do so. Most “money” in our system is created out of the expectation of productivity by the borrowers and requires that borrowers have the economic opportunity to deliver that productivity to avoid default. To make it into a similarly short phrase: “Banks create money from our ability to pay it back” or as I put it in Money as Debt 1 (2006) “Banks can create as much money as we can borrow”.

    In the case of a bank buying a stock or real estate by creating new liabilities against itself, the asset is what was bought. Thus the value of the new money is created by the market value of the asset purchased. The liabilities the bank spends to buy the asset will come back to the bank as a claim on the bank’s central bank reserves (real money to banks) . To avoid paying in reserves, the bank needs the equivalent liabilities it spent to return to it as deposits (deferred liabilities). Those deposits could have been used to offset liabilities created as interest bearing loans. Thus there was an opportunity cost to buying the asset.

    At no point in either of these cases ( the vast majority of money) is “thin air” involved.

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