Economic Reform Australia Blog

Paul Krugman doesn’t understand banking

The influential U.S. economist Paul Krugman may think that he understands banking, however his comments in two very recent articles — in response to Steve Keen’s criticism of him — reveals that he does not.


For example Paul writes:  ” If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. ”

The simple fact is than none of a bank’s retail deposits are ever loaned out, nor are the associated reserves ever loaned out to retail customers. Banks create new credit money when they advance retail loans. It amazes me that Paul does not understand this.

John Hermann