> Basically he compares two kinds of growth rates : the growth rate of the 'real' economy and the growth rate of wealth itself. You need the wealth rate to be low enough that rich people want to invest some of it in the real world, not leave it in the bank.
I think your second sentence, and thus your explanation of Piketty's thesis, is wrong. Piketty's point was that if wealth grows faster than the economy, the total share of all assets held by the wealthy will grow and grow. I don't think he was concerned about the choice to invest 'in the real world'. In any case it's not clear what 'not investing in the real world' means or if it's meaningful. Any return on capital either comes from direct investment or from lending to someone else who will invest directly. There is a fundamental accounting equation which proves that all net saving is net investment.
> Any return on capital either comes from direct investment or from lending to someone else who will invest directly.
Is this true? I'm not saying it's a huge portion of all saving, but holding wealth in things like precious metals or greater fool investments like Bitcoin doesn't seem like "investing" in anything productive.
If you bury gold bars that you mined yourself in your backyard, or you bury your salary in cash there straight from your paycheck, then you remove money from the system and thus not invest it. And effectively damage the economy, mainly via lack of liquidity.
It's hard making your capital inaccessible to the economy, but it's easy to not get the benefits of that working capital.
For instance, any time you park your money in a regular bank account or lend it at a suboptimal rate, you don't get some of the benefits.
No it isn't true. Holding money as money in a bank account is also not investing unless you think that providing liquidity to a bank is a useful investment (liquidity they can trivially access from the central bank, albeit at a slightly less desirable rate). A bank deposit is a liability to the bank, not something that can be invested.
No, the deposit is a liability with a matching asset that comes with it. The asset is needed to balance the asset. They certainly don't lend it out to other customers, which always happens through new money creation. They do buy short duration government bonds with it because they're not stupid and can get a better return than on reserves, and bonds are acceptably liquid. Nothing they do can be construed as investment. Savings really are savings and are effectively removed from the economy.
You seem very confused about several different points here.
1. Deposits often fund loans. If deposits were never used to fund loans as you describe, most banks would have at least as many cash or HQLAs as they do deposit liabilities. Check any deposit-taking bank's balance sheet to see that this is not the case.
2. If banks do buy government bonds with deposits, that still does not negate the funds being invested. The government now has the money and will spend it. Again, you can quickly check the governments do not hold piles of cash and the vast majority of the money that they borrow is spent on their activities.
3. It is axiomatically untrue that 'savings are removed from the economy'. Savings means that someone consumes less than they produce. That production must either be consumed by someone else, or add to the stock of capital. It cannot disappear.
It’s been a while since I took a monetary theory class, but if people are interested in your first point they should look into fractional-reserve banking.
Essentially banks are only required to have a fraction of their deposit liabilities as liquid assets and can loan out the rest. If I remember correctly, this is actually how a substantial amount of money is created in the US and likely most of the world. If you deposit $100, a bank could make a $1000 loan assuming the reserve rate is 10%, which leads to an increase in the money supply of $900.
Money supply is definitely not the same as the size of the economy, but it is incorrect to say that bank deposits are just sitting stagnant. Banks are quite active with those deposits - how else would bankers make all that money!
Bankers make money by creating loans, which are subject to regulatory requirements imposed largely through the adoption of Basel III. The reason they take deposits is because they are the cheapest form of liquidity. The certainly don't make money lending out deposits, whatever that means. Many countries don't even have reserve requirements, which rather highlights the flaw in the fractional reserve model.
I don't think you know what 'liquidity' means, but if you do you are incorrect about it here. Deposits provide funding, not liquidity. Banks certainly do use deposits to fund loans.
It is not true that most countries do not have reserve requirements.
I think before commenting further you need to take a deep dive into actual banking operations, because you really are wide of the mark. I posted a few links in the other post local to this one that might help. I also suggest reading the Basel III accords (or at least a summary) to understand the role of liquidity in banking.
There's not much point me discussing this further with your since you're so wrong. Take care and good luck with your enquiries.
I do think that your original argument that bank deposits don’t contribute to economic growth is wrong though. As you point out, they are a cheap form of liquidity for lenders. I think you’d agree that loans play a key role in economic growth.
The ability of banks to lend is limited by the availability of credit worthy borrowers, not liquidity. Banks will always get the necessary liquidity from the central bank (assuming the system is working as intended), but prefer deposits because they are cheaper than whatever is offered by the CB. Inter-bank lending is an alternative preferred option if insufficient deposits are available.
These deposits can move between banks along with an associated asset.
Balance sheets always balance. Most of the balancing asset against a deposit is a loan. This is how banks make money and arguably their purpose. You can see the balance sheet of HSBC here (page 12):
https://www.hsbc.com/-/files/hsbc/investors/hsbc-results/202...
It's clear that the majority of their assets are loans as expected. Then a fair chunk of reserves which reflects transfers from other banks (which hold a corresponding loan asset) or payments from the government. Finally there's a smallish quantity of financial investments that includes government bonds.
Bonds are just a floating price asset swap for reserves so the reserves must exist (have been spent) before the bond sale can happen. That is, governments don't borrow money until after the spend. In the case of the UK, this is shown in the following paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
You seem to be of the understanding that there's a one to one correspondence between stuff and money, which a moments consideration of the endogenous nature of money (as described into BoE paper) would highlight as flawed. If you're suggesting something else by your point that savings imply a drop in consumption, please do clarify.
It feels like your understanding comes from an economics course, which generally bears no relation to actual monetary operations and understanding, rather reflecting the particular philosophical bent of the economic school.
Thanks, I know and agree that loans create deposits. Sadly this underrated fact seems to have thrown you a bit, to the point where a lot of what you say is just nonsense.
What does this mean? "Bonds are just a floating price asset swap for reserves so the reserves must exist (have been spent) before the bond sale can happen."
Are you able to explain what your understanding of liquidity is?
Do you know what it means for loans to be funded by deposits?
Do you know the origin of the equation between investments and savings and how it is justified?
You are giving the exact impression of someone who used to believe a flawed theory of money creation, watched the Netflix documentary about bank money and has lost it a little bit.
> No, the deposit is a liability with a matching asset that comes with it. The asset is needed to balance the asset. They certainly don't lend it out to other customers
When a customer (customer A) deposits $10 of cash at a bank, the bank has a new $10 asset (the cash), and a new $10 liability (the deposit it owes to the customer).
If another customer (customer B) then comes in and asks for some cash in the form of a loan, the bank can loan that customer the $10 cash, at which point the bank goes from having a $10 asset in the form of cash, to a $10 asset in the form of an outstanding loan.
This new asset is less liquid than the cash, but the bank's balance sheet still balances.
> which always happens through new money creation
You are correct here - bank lending is the process through which the vast majority of money is created. Before the loan, customer A thinks they have $10. After the loan, customer A and customer B both think they have $10. In this sense, $10 of new money is created.
Interest rates moderate the rate at which banks lend and the rate at which money is created, and the Central Bank acts as one of the most important price-setters in the economy.
> They do buy short duration government bonds with it because they're not stupid and can get a better return than on reserves, and bonds are acceptably liquid. Nothing they do can be construed as investment. Savings really are savings and are effectively removed from the economy.
Even if you believe that banks only buy short duration government bonds (which is provably not the case[1]), this is still a form of lending, as it effectively finances government borrowing, and the Government can spend their borrowed money as they see fit (such as for building infrastructure).
