How are you defining deficit here? If a bank creates a $1,000 deposit for Alice, and Alice promises to pay the bank $1,050 next year, would you say the bank has run a deficit?
I may need to edit my article to clarify this (to be clear I'm a student of this trying to explain it in plain language), but first I probably need to learn it better.
Allow me to think this through in this comment.
A deficit is when a stock of money gets smaller.
In the context of the commercial banks making a loan of $1,000, there is no stock of money that gets smaller, as prior to the bank funding the loan, the money does not exist.
But there is a surplus as a deposit account increased from $0 to $1,000.
And since for every surplus there is a corresponding deficit somewhere, the creation of the money must somehow represent a deficit to the bank.
Clear as mud.
With commercial banking the words commonly used are asset and liability.
The $1,000 deposit is a liability to the bank as the borrower can withdraw it at any time, and that same deposit is an asset to the borrower.
However, the debt obligation and the schedule of repayments is an asset to the bank and a liability to the borrower.
I suspect, but have not definitely looked into, that when the bank records the debt obligation and repayments as an asset to the bank and a liability to the borrower that they include interest, as the loan agreement (the legal basis for the money creation) includes interest.
So... If "liability" and "deficit" are the same, then yes, the bank created $1,000 is a deficit to the bank.
But... If they're different, then the terms liability and surplus do not apply to bank created credit money, but only to central bank created sovereign money.
Wow!
What a good question.
I recently joined a macro econ learning and master mind group and I'm going to put your question to them and see what they think.
Before you ask the group about whether liability and deficit are the same, notice that one is a stock (a value at a point in time) and the other a flow (a change in a stock over a period of time) - so they can't be the same.
I've also been through the process which you're going through now. Someone tells you that the common belief about how the monetary system works is wrong, and you have to try to work out what's really true. What I settled on is looking at assets, liabilities, and "raw" net worth (which is just assets minus liabilities) - and how these change over time. Your assets are what you own plus what you're owed, and your liabilities are what you owe.
Here are a couple of articles I wrote which you might find useful. First an introduction to the approach:
How are you defining deficit here? If a bank creates a $1,000 deposit for Alice, and Alice promises to pay the bank $1,050 next year, would you say the bank has run a deficit?
I may need to edit my article to clarify this (to be clear I'm a student of this trying to explain it in plain language), but first I probably need to learn it better.
Allow me to think this through in this comment.
A deficit is when a stock of money gets smaller.
In the context of the commercial banks making a loan of $1,000, there is no stock of money that gets smaller, as prior to the bank funding the loan, the money does not exist.
But there is a surplus as a deposit account increased from $0 to $1,000.
And since for every surplus there is a corresponding deficit somewhere, the creation of the money must somehow represent a deficit to the bank.
Clear as mud.
With commercial banking the words commonly used are asset and liability.
The $1,000 deposit is a liability to the bank as the borrower can withdraw it at any time, and that same deposit is an asset to the borrower.
However, the debt obligation and the schedule of repayments is an asset to the bank and a liability to the borrower.
I suspect, but have not definitely looked into, that when the bank records the debt obligation and repayments as an asset to the bank and a liability to the borrower that they include interest, as the loan agreement (the legal basis for the money creation) includes interest.
So... If "liability" and "deficit" are the same, then yes, the bank created $1,000 is a deficit to the bank.
But... If they're different, then the terms liability and surplus do not apply to bank created credit money, but only to central bank created sovereign money.
Wow!
What a good question.
I recently joined a macro econ learning and master mind group and I'm going to put your question to them and see what they think.
Before you ask the group about whether liability and deficit are the same, notice that one is a stock (a value at a point in time) and the other a flow (a change in a stock over a period of time) - so they can't be the same.
I've also been through the process which you're going through now. Someone tells you that the common belief about how the monetary system works is wrong, and you have to try to work out what's really true. What I settled on is looking at assets, liabilities, and "raw" net worth (which is just assets minus liabilities) - and how these change over time. Your assets are what you own plus what you're owed, and your liabilities are what you owe.
Here are a couple of articles I wrote which you might find useful. First an introduction to the approach:
economics21st.com/p/start-here
and a description of different possible solutions to the problem of how to trade when there isn't a double-coincidence of wants:
economics21st.com/p/money-and-banking-1
The key to understanding economics, in my opinion, is to look at how everyone's raw net worth changes.
FWIW, shortly after writing my prior comment I realized I made the mistake of...
If "liability" and "deficit" are the same
They're not. Deficits create liabilities, but are not liabilities, due to the flow and stock realities you mentioned.
But you commented before I fixed my post, so now I'll leave it.
I've read some of your posts. I like your approach. I'll be reading your posts going forward.