Do Auto Loans increase the money supply, I cant seem to find a source for it. Its not a question on a test or anything, I was just curious, I’d always figured it was only business loans and mortgages that did so.
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Yes, virtually all auto loans are bank loans. When banks write loans, they create that money out of thin air. When you make a loan payment, the principal portion disappears from existence, and the bank pockets the interest portion. So that new money only exists for as long as and to the extent that the principal has not yet been paid.
Banks don’t really create it out of thin air. Banks are letting you borrow money they otherwise hold, meaning they can’t lend indefinitely. This is the exact same way say a library works, they can only lend you books they have, and while you are using that book they cannot lend it to others. Paying back the principal on your loan doesn’t make the money disappear, it’s you giving back the amount you borrowed, plus extra to compensate the bank for lending you the money. This all matters a bit more in non-fiat currencies since those are backed by something intrinsically valued (such as gold), but even in fiat currencies banks that lend more money than they have access too are over extended and generally need to borrow themselves from either other institutions or the Fed in the US. This is why the Fed interest rate impacts loan rates.
Banks don’t really create it out of thin air.
They really do.
- The Myth of the Money Multiplier - How Banking Really Works (3 mins)
- How Commercial Banks Really Create Money (the Money Multiplier is a Myth). (13 mins)
- The Myth of the Money Multiplier (29 mins)
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Paying back the principal on your loan doesn’t make the money disappear
It really does. You know what else makes money disappear? Paying federal taxes.
