A few days ago I made a post about banking stating that bank loans create deposits, not the other way around. In other words, the long held view of banking that savers deposit money in a bank and then the bank loans that money out is not the way modern banking works.

Here is my original statement

And the follow up reference of a paper by employees of the Bank of England explaning in easy to understand terms that new money is created at the time a loan is made, creating the deposit. Previous money is not loaned out, new money is created by a ledger entry. This is the way the vast majority of our money supply expands, as debt by way of a bank loan. The money did not exist till the loan was made.

While it is true that there are other ways to loan out existing money supply (for example by selling bonds and using these bond funds as the source of funding), but the reality is that collateralized debt obligations the money is created first via a loan THEN the debt is bundled and sold. So the money supply increased BEFORE the debt was then sold. But it is also true when one debt pays off another, it cancels the new money created. As debts are paid off, the money goes back from where it came.............. nothing.

Anyway, the point of this post is to supply some more backup material to support what I was saying. The information is hard for most people to wrap their heads around. Most find it unbelievable that the vast majority of what we call money actually starts out from nothing and is created by the stroke of a pen.

The previous reference I gave was the paper from the Bank of England. The reason I used it is it is one of the very few official documents put out by a central bank that actually explains how most money is created in clear, layman's terms. I believe there is good reason to keep us confused about where our money comes from. Most people think it is ridiculous once they learn how money is created............out of nothing by private banks and a shadow banking industry.

So here are the additional references. The first is just an article that explains it. But it will not carry much weight with some because it is not from an "official" source. The guy (David Rosenberg) could just be all wet. So the link that follows is from the Federal Reserve. Much harder and more technical to follow, but with Rosenbergs explanation it is easier.

That couldn't possibly be true  By David Rosenberg

Modern money mechanics (PDF download from Federal Reserve bank of Chicago) A workbook on bank reserves and deposit expansion.

So in case someone just could not accept the Bank of England explanation, or thought that they operate differently than we do, hopefully the Fed will set the record straight.

Money creation in the modern economy  The original article referenced about how our money is created - by Bank of England

Once we understand how our money is created, and how it has an interest charge attached to it that not enough money is created at the same time to service the interest payment, it is not hard to understand why debt both public and private are always expanding and in fact why they HAVE to expand or the system implodes in a deflationary spiral. And why the rich get richer.

John