Henry, . "My point is that the textbook view, in which banks mainly take deposits from households and create credit upon them, is no longer valid." . The author is referring to the "recycled money" model you present. . "I do not argue that these wholesale deposits, or repo transactions, are money proper. However, the key is here to notice that in the contemporary economies there are many money-like assets (and distinct forms of money for different economic agents). I agree that short-term liabilities issued by shadow banks may not be immediately used as means of payment, but they may be converted on demand at par to money proper, hence they are a close substitute (Michell, 2016)." . Shadow banks create credit that circulates at par with state currencies, unregulated by the relevant states. . "The current definition of money supply is too narrow and not sufficient to understand the contemporary economy (Pozsar, 2014). According to Pozsar (2014), the monetary aggregates do not include the instruments that asset managers use as money, particularly repos. As far back as 1935, Hayek (1935, pp. 411–412) doubted whether is it possible to draw a sharp line between what is money and what is not, and noted that all sorts of ‘near-money’ had already existed in his time. Hence, economists should, perhaps, also include in their monetary analysis ‘shadow’ money and re-use of collateral (Singh, 2012, p. 14–16)." . Shadow banks create money. --- Money, as today's reality defines it. Financiers make a Nobel Prize every year in bonus money that is shadow-bank originated. Your definition of money is the idiosyncratic, fantastical, theoretical, unconnected-to-reality one ... --- Inflation does not matter. The Fed can use open market operations to buy and sell inflation swaps, and Treasury Inflation Protected Securities, so as to manipulate inflation expectations (i.e. inflation swap breakeven rates) to whatever they wish. Cost Of Living Adjustments guarantee real income purchasing power stability no matter how high or how fast inflation rises. TIPS protect savings. Inflation is a solved problem and is no constraint on public policy. --- Blissex should look up "externality". GDP is a political figure reflecting political values. Intellectually honest statisticians would include error bars for GDP; they don't, because the margins are so wide as to make them useless for public policy. GDP is over half made up. Donations are imputed; how can you know donations come from wages and not money created out of thin air by private banks in financial markets? My TSLA stock went up 14k%, that's not measured by GDP. GDP should be abandoned as a measurement of anything other than economic la-la-land imputations bearing no relation to out-the-window reality. --- r/wallstreetbets is not like institutional collusion because the collaboration is out in the open for all to see. Individuals are merely exercising free speech. . If there is a resulting liquidity problem, the Fed should supply liquidity as needed. . The point is to disconnect financial markets entirely from the real economy. People seek profits in financial markets and produce real things at lower prices because they want to. (Musk wants to drop the prices on Tesla cars because stock market profits pay salaries.) . Economics and Finance professors are way too quick to call for regulation but we've seen regulation backfire time and time again. The current restrictions on trading are due to unreasonable margin requirements at clearinghouses. The answer is for the Fed to guarantee liquidity supply, not to prohibit private individuals from freely expressing views in financial markets. . In September 2019 repo rates spiked due to Fed tightening and regulatory capital surcharges on big banks. Excessive regulation created a market crisis and the Fed responded by supplying liquidity as needed to bring down repo prices. The repo price spike crisis was completely unforeseen by those calling for the macroprudential regulation that caused it. . We should not reflexively regulate, because regulators have very little idea what is really going on and what unintended consequences their regulations will cause. --- For many of us, financial markets are the last place we can play. Keynesians however want no play. Every human effort must be directed towards increasing the sacred Output. If financial markets become disconnected from the Holy Output, that means people are idling and everyone knows that is the Devil's Workshop. Thank the Great Scarcity Gods we have economists to tell us in no uncertain (!) terms that we must get back to increasing the Hallowed Output, because that is the sole legitimate purpose of existing. . Thou shalt not speculate! . Never mind that the Fed has already proven time and time again that they can fix panics by supplying liquidity, and that the Blessed Output is easily more than demand no matter how many speculators have fun. Recall that FDR's problem was overproduction (see https://www.presidency.ucsb.edu/documents/second-fireside-chat ): . > The Farm Relief Bill seeks by the use of several methods, alone or together, to bring about an increased return to farmers for their major farm products, seeking at the same time to prevent in the days to come disastrous overproduction which so often in the past has kept farm commodity prices far below a reasonable return. . The obvious solution is a basic income funded by money-printing. Pay inflation as interest on Fed basic income accounts, to encourage savings if inflation spikes. But inflation is being exported harmlessly to financial markets, anyway. Rather than recognize and encourage this trend, Keynesians just want to tax away the harmless fun others are having, because they don't understand it ... ---