> Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates.
One way to understand how this works is by visualizing the circulation of the monetary base, aka physical coins and central bank reserves, or bitcoins/lunas in the crypto case.
Without lending, you have people and companies entering transactions, accumulating money and saving them for a later investment, for example putting a penny in the mattress or a bitcoin in cold storage. The penny might physically change hands once or twice a year. So in agregate you have:
V = PQ/M
with V, velocity of money ( = 1 transaction per year), PQ is the gross product (price level * quantity of goods), and M is the money supply (say, 21 milion bitcoins).
So one way to generate inflation is to increase M (print more money), since the ability of the economy to produce goods changes slowly, so P will need to increase to maintain equilibrium.
But another way to do that is to promote lending: instead of placing the penny in the mattress, is is deposited to a bank who immediately places it in the hands of a lender who buys a house or a TV, giving it to another entity that deposits into a bank etc. So you have a physical penny on steroids that can travel with a much higher velocity in the economic system, say 8 transactions per year as it was typical for the dollar last time I estimated this.
Banks can effectively print unlimited money substitutes (deposits denominated in bitcoins, luna, pennies etc) and as long as depositors trust them to be solvent this entire virtual monetary base will participate in the MV=PQ equation.
This is true in a fiat world as well as in a Bitcoin world, unregulated banks can greatly amplify the velocity of bitcoins without any technical support from the currency itself, in effect putting significantly more bitcoins on the market available for transactions, so overall reducing their market value, or "creating inflation" without printing a single bitcoin.
One way to understand how this works is by visualizing the circulation of the monetary base, aka physical coins and central bank reserves, or bitcoins/lunas in the crypto case.
Without lending, you have people and companies entering transactions, accumulating money and saving them for a later investment, for example putting a penny in the mattress or a bitcoin in cold storage. The penny might physically change hands once or twice a year. So in agregate you have:
V = PQ/M
with V, velocity of money ( = 1 transaction per year), PQ is the gross product (price level * quantity of goods), and M is the money supply (say, 21 milion bitcoins).
So one way to generate inflation is to increase M (print more money), since the ability of the economy to produce goods changes slowly, so P will need to increase to maintain equilibrium.
But another way to do that is to promote lending: instead of placing the penny in the mattress, is is deposited to a bank who immediately places it in the hands of a lender who buys a house or a TV, giving it to another entity that deposits into a bank etc. So you have a physical penny on steroids that can travel with a much higher velocity in the economic system, say 8 transactions per year as it was typical for the dollar last time I estimated this.
Banks can effectively print unlimited money substitutes (deposits denominated in bitcoins, luna, pennies etc) and as long as depositors trust them to be solvent this entire virtual monetary base will participate in the MV=PQ equation.
This is true in a fiat world as well as in a Bitcoin world, unregulated banks can greatly amplify the velocity of bitcoins without any technical support from the currency itself, in effect putting significantly more bitcoins on the market available for transactions, so overall reducing their market value, or "creating inflation" without printing a single bitcoin.