Comment by manlymuppet
13 hours ago
Maybe a dumb question but how is NVIDIA increasing the total supply of money? Only the fed can actually order more money to be "created". Private companies can only work within the existing supply, that is, their reserves, no?
All debt is money. Anybody can create money, the trick is getting other people to accept it.
Nvidia is vendor financing its output.
An ai company order $100m of GPUs. Nvidia delivers and holds onto that debt as an asset - like a bank loan.
The production company uses AI to create better plant and purchases $100m of AI tokens to do so. The ai company hold that debt like a bank loan
Nvidia requests $100m of production based on its $100m of orders. The production company holds that debt like a bank loan.
You now have a monetary loop. Take a single $10 bank deposit and Nvidia pays the production company, who pays the ai company who pays Nvidia. Run that round the circle a few million times and everybody has been paid.
Rinse and repeat.
In principle you need a banking license in order to create money, so not "anybody" can create money. For example, I can't, and neither can you (unless you're a bank, which I suspect you're not_.
You should educate yourself about accounting.
First, under US GAAP rules (ASC 606), you cannot recognize revenue from a vendor-financed sale unless it meets certain criteria, the biggest one of which is: it has to be probable that the buyer will actually pay you. If a default is likely, revenue recognition is deferred until cash changes hands.
Nvidia's massive revenue is therefore not from a bunch of dubious vendor-financed sales to counterparties who don't have the money to pay and need a fraudulent scheme to make the arrangement work. Furthermore, Nvidia, by its own disclosure, indicates that when it extends financing to customers, they pay, on average, within 2 months (53 days to be exact). So these are not years-long extensions of credit.
"Create money" here doesn't mean literally fluffing the balance sheet like when the fed prints money (which would have accounting differences), it means spending the same money more rapidly than otherwise. This is NVidia's personal contribution to increasing the economy's Money Multiplier [https://en.wikipedia.org/wiki/Money_multiplier], which effectively increases the money supply from the broader economy's perspective.
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If the debt cancels out doesn't this mean that there was no debt ?
> If the debt cancels out doesn't this mean that there was no debt ?
No. For the same reason that oxygen being transported into and out of the body doesn't mean there was no oxygen.
I’m guessing it doesn’t “cancel out” due to interest.
> Only the fed can actually order more money to be "created"
No. Most money in modern economies is created by private parties [1].
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
> Only the fed can actually order more money to be "created".
If you go to a bank and get a loan, that is literally money that did not exist before you got a loan. People think that you are borrowing money that somebody else put in the bank, but that's not true. Banks can lend out a lot more money than people put into them.
Any time sometime makes a loan at a bank, that money is created. An accompanying debt is also created. It's like matter and antimatter. And when the debt is repaid, the matter and antimatter disappear again.
NV gives out a $100 to Party A, who puts it in their bank.
Bank takes $90 of that deposit (assuming 10% fractional reserve rule, no idea what the actual number is), and loans it out to party B, who pays it into either the same or another bank. Same rules apply -- except now it's down to $81 being loaned out, and so on and so forth, until that 100$ generated $1000 in total bank deposits.
edit: of course, it's never actually directly like this, a lot of other factors are involved, maybe the money is spent, maybe no one wants to borrow it, etc etc -- so it's more complicated but that's I think what they mean
0%. Zero percent is the actual reserve rule. https://www.stlouisfed.org/bank-supervision/reserve-administ...
Yup. Reserve requirements are functionally obsolete and never worked particularly well in the first place. Capital and liquidity requirements are far more robust and fine tuned.
That was my intuition at first too, but the original comment specified that they weren't borrowing all this money they're spending. The article also says how this is part of NVIDIA's strategy to enable demand, not create it, so supposedly these investments into their customers are actually going straight to paying for things.
Even if this money eventually gets loaned out eventually by one of NVIDIA's customers putting it into a bank, it isn't NVIDIA inflating the money supply, it's the borrowers, no? Or is this an ineffective way to look at things?
There is no such thing as fractional reserve banking. The multiplier is a myth.
Quite why this persists when the Bank of England debunked it in 2014 [0] is anybody’s guess.
Just another of those concepts that is neat, plausible and wrong.
[0]: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
> There is no such thing as fractional reserve banking
Yes, there is. We just changed how we measure the fraction from a crude one like a reserve requirement (which takes zero account of asset quality or funding source) to finer and more-robust ones like capital and liquidity reqirements.
Banks still have to hold reserves. And those required reserves constrain their lending and thus the amount of money they can create. The limits just aren't the old-school reserve requirement.
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I think at the top level between Govt and Industry and understanding has been reached that AI industry will be backstopped
If they’re effectively guaranteeing $500B in loans that adds close to $500B to M1, basically, that banks were not otherwise providing or loaning - at least that was my calculation.
Every form of lending that is specified via currency increases the supply.
If I give you GPUs worth $1bn, but take 100m payments for 11 years, then during that time you can use your other mony to buy other things that arent GPUs
If we stop after the 11 years and dont make new loans, the supply has shrunk back
Private banks increase money supply by lending. If 10 people deposit $1000 in a bank, it can loan $9000 to an 11th person. Now the economy has $19000 total.
> Private banks increase money supply by lending. If 10 people deposit $1000 in a bank, it can loan $9000 to an 11th person
It's the other way around. When a bank loans someone $1,000, they create a $1,000 deposit (their liability) and a $1,000 asset (their loan). Loans create deposits.
The Treasury can mint coin. But that's basically negligible in modern economies.
The $9000 has to be paid back, and then some. I sure hope you aren't an accountant.
But for the duration, there is more money. This isn’t some crank theory, it’s orthodox economics: https://en.wikipedia.org/wiki/Fractional-reserve_banking
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I learned about this concept in college macroeconomics. I asked this exact question and the TA said “yeah I guess repaying debt is like destroying money” as if they had never thought of that before. The idea of lending money increasing the money supply is definitionally true.
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It's a simplification to help people understand, but this is in the spirit of how things work because the value in the economy is not the money, but the goods and services that get created in the economy as a consequence of it. Most constructive uses of financial instruments in the markets (stocks, bonds, mutual funds, etc) are about efficient reallocation of money to enable value creation while balancing different risks, and people who provide this money indirectly benefit from this value creation via interest, dividends, selling stock at a higher price, etc.
Now to expand GP's example (still simplified):
- A borrows $100k money to pay B toward building a house. B puts $100k in their bank.
- C borrows $90k from B's bank toward building a house to pay D. D puts $90k in their bank.
- etc
So, houses were created (or other services were provided), and that's the real multiplicative factor. If banks loan out 90% of the cash stored (i.e. keep 10% in reserve [1]), the multiplicative factor of value creation in the economy is 10x the original amount of cash deposited in the first bank.
Now, if all of us withdrew our savings at once or sold all our stocks at once, we would have an economic shock analogous to that which resulted the Great Depression. That's why for banks, we have FDIC insurance - to mitigate such a panic so that money can serve its value-multiplicative role when it's not being actively used for anything else by the person owning the money. That's also why a positive (but low) inflation was originally considered economically healthy - so that people put their money in banks/market rather than under their mattresses gradually losing value. When interest rates are low, that encourages people to put their money into riskier (non-FDIC-insured) investments with higher growth potential, like a balanced portfolio of stocks/bonds/etc to avoid losing value to inflation, resulting in more economic growth.
[1]: https://en.wikipedia.org/wiki/Fractional-reserve_banking
And thus $9k of <something they got that $9k worth of value for> is injected into the economy, either assets sold or work performed.
Eventually
Which is, you know, the entire risk that people are worried about.
But at that point in time, there's 19k in money. And future repayments of that loan back to the bank are less valuable to it than that current value figure. Because a bank can do a lot more shenanigans with that loan figure than it can with just the deposits.
Ummm. No. I suggest you research how balance sheets work.
Unfortunately this kind of thinking is why so many people seem to think the big AI labs are totally killing it the second they make a “profit” on inference. Yes if you ignore the balance sheet all looks fine. Unfortunately companies go bankrupt because of their balance sheets, not operating profits and losses. You can make money on the direct COGS on every transaction and still be bankrupt.
You should research economics. That $9000 can build a house that wouldn’t have existed otherwise. Then it gets paid back. $10000 in the bank and a $9000 house.
Banks create money when issuing a loan. This is how fractional reserve banking works. They lend money they don't have (most of). This is institutionalized fraud, and it's been standard operating procedure for centuries.
But the fraction to be kept in reserve has been zero for 4-5 years.
Almost like the concept is complete bunkum.
It’s been zero in the UK for hundreds of years.
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They aren’t; the parent comment is incorrect. It’s safer to say Nvidia is encouraging the money that already exists to be deployed on AI buildouts.
But everyone is now chasing the same opportunity (AI and its dependencies like hardware and power) that will drive prices higher in those sectors until supply responds (or demand disappears).