Money creation in the modern economy (2014) [pdf]
Banks create the money supply (~97% of it). A bank &quot;loan&quot; is not a legally a loan at all but a new security that is created and purchased by the bank. Furthermore, the money for that purchase does not come from any other account or &quot;fed reserves&quot; it is literally instantiated in the account. This &quot;credit creation&quot; theory of the money supply is what the article is about and was empirically proven by the work of Richard Werner.<p>This is a very important level of understanding, and one that is obfuscated by the central banks.<p>Once understood, it is self-evident that banks are wholly responsible for asset bubbles. Banks, especially large banks, create loans mostly for existing asset purchases, and not for new productive investment. Of course, they do this in part because those assets work as collateral.<p>What happens when this behavior is aggregated in the whole system is essentially wealthy people jumping over each other to secure an amount of loans approaching infinity to acquire FINITE real estate and SEMI-FINITE stock. You can see how that ratio will repeatedly create asset price inflation which inevitably implodes along with the banks who issued the loans.<p>The only solution is for the regulator, in this case the central banks, to issue guidance for the banks to create credit for only new productive investments, whether that be new housing, factories, machinery, or firms, because those are not inflationary and increase the size of the GDP pie. If done, the economy would grow at a high clip with low inflation. The current system of credit creation for leveraged buyouts ad infinitum of a slow growing economic pie, has only one logical outcome....