A New Financial Myth

The idiocy of financial writers is exceeded only by that of those who read, believe and even regurgitate their writings. And economists, of course.

The latest idiocy is the idea that “central banks charge negative interest rates on reserves so that banks will lend out the money” – instead of keeping it on deposit at the central bank. This is idiotic because reserves are not lent except from one bank to another, moving from one central bank account to another. The liability side of the central bank’s balance sheet consists of cash, deposits by member banks and shareholders’ equity. Bank reserves are made up of cash and deposits which are interchangeable. The only way reserves decline or increase, in aggregate, is when the central bank increases or decreases the asset side of its balance sheet, usually by buying or selling securities at credit or debit to the reserve accounts.

This goes along with other financial myths, such as “money on the sidelines” and “banks lend savers’ money to borrowers.”

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