I don’t get it. I don’t get it. I don’t get it. I don’t get it.
When a bank makes a $1,000 loan, that creates $1,000 in the recipient’s account, but I don’t get how the loan, the absence of money, is an asset on the lending bank’s books. If it’s because the money will be paid back, then isn’t it’s value based on a corresponding debit of the recipients account thus nullifying the created money?
Edit: I am not asking how banks make a profit. I get that. I am asking how NEW DOLLARS are created. There are more dollars in existence now than there were say 100 years ago. I want to understand how they came to be. The answer I’ve found so far is that NEW DOLLARS are created when a commercial bank makes a loan.
Second Edit: For those saying commercial loans don’t create new dollars, apparently they do, but I don’t get it. For reference:
https://positivemoney.org/how-money-works/proof-that-banks-create-money/
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A guy at the federal reserve types some numbers on a screen and presses “enter”, and that adds more money to the “M1” money supply.
Banks borrow money from the fed at roughly 4% right now, and loan it out for people to buy houses at roughly 6% (or car loans at 8%-16%, whatever they can get away with). That 2% is part of their profit.
In order to borrow twenty million dollars from the fed (as an example), they have to have maybe two million in their bank. That’s why they want to provide checking accounts and savings accounts. You don’t have to ask why they want credit card accounts, many of the interest rates are 16%-19%…
Its a game for the patient. If you borrow $200K to buy a house, you will end up paying back around $600K over 30 years. The 6% interest doesn’t sound like much, but…it adds up…
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