Do bank expenses and bad loans offset the money creation process?

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JackH's picture
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Joined: Jul 30 2011
Posts: 1
Do bank expenses and bad loans offset the money creation process?

It appears to me there are 3 missing factors in the Chapter 8 discussion that counter an ability of $ to build up in a bank's accounts.  The interest income does not build up in the bank's accounts, but goes back out the bank's doors via bank expenses, the effect of bad loans, and the distribution of profits to stockholder via dividends. Those leaks in the banks accounts are where the $ comes from to repay loans.

1) Bank Expenses: The interest income is used by the bank to pay salaries and support it own infrastructure costs (e.g.., the cost of their office buildings). 
2) Banks do not get all loans repaid. The bank loans out $1M distributed over ten loans for $100K, at 10% for one year ($110K payback). If all are paid back, the bank has $1.1M after 1 year, if it has no expenses.If one person does not repay the loan, the bank only has only $990K and has lost money.
3) Bank Profits are distributed to stockholders.  If the bank does get more interest back than its expenses, these are the bank profits that are given to stockholders as dividends, who then spend it on their own lives, and the $ returns to the system.

How do these matters show up in the growth of money?

sceptical-h's picture
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Joined: Mar 22 2010
Posts: 3
Do bank expenses and bad loans offset the money creation process


You're quite right. Interest paid to banks is paid back out again. But not necessarily straight away, and not necessarily to people who will spend it back into the economy. Money can spend years circulating around the investment accounts of the financial markets before finally being spent on real goods and services so producers and consumers can service their debts from earnings, rather than new borrowings.

But that's a consequence of the existence of asset markets, and of the propensity to hoard. However, the adverse impact of logjams in the money circulation system is exacerbated by interest, since interest left unpaid proliferates. All other expenditures can be deferred to a greater or lesser extent until money becomes available. Interest cannot be deferred one second past its due date without becoming a monster.

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