# News & Current Events > Economy & Markets >  Is Credit Card Debt an expansion of the Money Supply?

## jt8025

I have been in the habit lately of using my credit card for my gas since I get 5% cash back on my gas purchases.  I pay it off every month but I was wondering if this was a distortion of the money supply because I have the $400 in my bank, $400 on the credit card and the people who sell me gas have $400.  Instead of me having $0 in gas money reserves at the end of the month and the gas seller having $400.

I'm not trying to argue about whether I should use a credit card or not in general.  I was just wondering if the $20 benefit I get every month is causing inflation no matter how small it is.

Does it matter if the card is with a bank such as a Bank of America Visa versus a non-bank Visa.  Is the card with BOA expanding the money supply because they are not loaning me money they have on deposit but getting it from the FED to loan me.  Does a non-bank Visa have the power to do the same or do they have to loan me money they have (and not get the FED to print them money).

I'm wondering if I should keep earning my $20 or switch to using my debit card or Federal Reserve Notes in order to not inflate the currency.  

Thoughts?

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## misterx

It is until you pay it off. You're not causing inflation. Keep doing what you're doing.

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## MRoCkEd

Think about what you're implying. Can you imagine the impact on global commerce if no credit orders could be made, and cash had to be paid up front?

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## brandon

No. The bank that issued you the credit card pays the people you bought the gas from immediately. Then you pay them back.

If you and your buddy were out at the gun store and he bought you a case of ammo because you told him you would pay him back later, would that be an expansion of the money supply?

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## jt8025

> Think about what you're implying. Can you imagine the impact on global commerce if no credit orders could be made, and cash had to be paid up front?


I was suggesting should I use my debit card.




> No. The bank that issued you the credit card pays the people you bought the gas from immediately. Then you pay them back.


Are they using "their" money or borrowing money from the FED at 0% and paying the gas merchant then paying the FED back when I pay them.  I know this seems silly on a small scale.




> If you and your buddy were out at the gun store and he bought you a case of ammo because you told him you would pay him back later, would that be an expansion of the money supply?


Going with your analogy I was asking if what was happening was I ask my buddy to buy me ammo until we get home but he doesn't use "his" money he cranks up his magic printing machine and we use that money (inflation) until I pay him back and he destroys the money (deflation).  He was never out of any of money he has earned.

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## Liberty74

Using credit cards does not increase the money supply.

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## Danke



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## Gumba of Liberty

> *No. The bank that issued you the credit card pays the people you bought the gas from immediately. Then you pay them back.*
> 
> If you and your buddy were out at the gun store and he bought you a case of ammo because you told him you would pay him back later, would that be an expansion of the money supply?


Whenever a bank makes a loan whether it is a mortgage, student loan or credit card the bank is creating money out of thin air based on fractional reserves of another account. The only way money is creating in the current system is through these loans. So the OP is correct. Using a credit card expands the money supply until you pay your loan back.

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## youngbuck

> Whenever a bank makes a loan whether it is a mortgage, student loan or credit card the bank is creating money out of thin air based on fractional reserves of another account. The only way money is creating in the current system is through these loans. So the OP is correct. Using a credit card expands the money supply until you pay your loan back.


So if somebody racks up massive unsecured debt and then declares bankruptcy, the money supply increases.

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## heavenlyboy34

> No. The bank that issued you the credit card pays the people you bought the gas from immediately. Then you pay them back.
> 
> If you and your buddy were out at the gun store and he bought you a case of ammo because you told him you would pay him back later, would that be an expansion of the money supply?


This^^  The economy would be $#@! if there were no consumer credit.

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## Blueskies

> Using credit cards does not increase the money supply.


Yeah it does. Credit is part of the money supply. That's why credit contractions lead to deflation.

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## cubical

> Whenever a bank makes a loan whether it is a mortgage, student loan or credit card the bank is creating money out of thin air based on fractional reserves of another account. The only way money is creating in the current system is through these loans. So the OP is correct. Using a credit card expands the money supply until you pay your loan back.


Not really. The bank can loan out 90% of it's deposits. Not 900%.

If there are savings behind the credit, then there is no inflation, which I would believe is almost always the case. Unless the fed is creating money to be lent out, there is no inflation.

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## airborne373

I am no economist. But I have read that in Keynesian economics the issuance of credit is the very definition of expanding the money supply and without it and a lot of it Keynesian's fail.

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## heavenlyboy34

> Not really. The bank can loan out 90% of it's deposits. Not 900%.
> 
> If there are savings behind the credit, then there is no inflation, which I would believe is almost always the case. Unless the fed is creating money to be lent out, there is no inflation.


This^^  Even if one spends beyond current savings, one could carry the remaining balance till it's paid off.  Some credit counselors actually recommend carrying a balance, but I don't.  It's not my idea of a fun way to improve a credit rating.

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## musicmax

> Can you imagine the impact on global commerce if no credit orders could be made, and cash had to be paid up front?


Yes, it would mean global commerce being conducted as it was for 99.99% of civilized history.  The horror, the horror.

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## brandon

Credit has been around since the beginning of civilization, even though we may have not had fancy words to describe it. Irwin Schiff's classic, easy to read, comic book does a great job explaining how and why credit spontaneously emerges in any free market almost immediately.

freedom-school.com/money/how-an-economy-grows.pdf

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## Gumba of Liberty

> Not really. *The bank can loan out 90% of it's deposits*. Not 900%.
> 
> If there are savings behind the credit, then there is no inflation, which I would believe is almost always the case. *Unless the fed is creating money to be lent out, there is no inflation.*


Banks do not lend out their deposits. Bank deposits are redeemable on demand. Have you ever gone to the bank and not been able to get your money out? Neither have I. The way it works is that banks create lines of credit based on 90% of the savings of their customers and then deposit this "digital money" into the borrowers account. This is newly created money and is by definition an expansion of the money supply, whether it is a student loan or credit card. By the way, both the Fed and commercial banks create money.

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## Gumba of Liberty

> So if somebody racks up massive unsecured debt and then declares bankruptcy, the money supply increases.


The debt disappears and therefore the money disappears. We have a debt-based economy. Without debt their is no money. If the entire country was debt free, no money would exist at all.

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## cubical

> Banks do not lend out their deposits. Bank deposits are redeemable on demand. Have you ever gone to the bank and not been able to get your money out? Neither have I. The way it works is that banks create lines of credit based on 90% of the savings of their customers and then deposit this "digital money" into the borrowers account. This is newly created money and is by definition an expansion of the money supply, whether it is a student loan or credit card. By the way, both the Fed and commercial banks create money.


They the physical money because most of their deposits are not demanded on the same day. They money they lend out won't be at the bank unless they get a loan from the fed, which causes inflation.

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## Steven Douglas

Here's a pretty decent treatment of it. 




> ...the extension of credit by a bank does not in itself constitute an increase in the money supply until the moment when that credit is used to pay for a purchase. The money supply then increases by an amount equal to the purchase price. The credit limit on a credit card is not money but every time you use that credit card to make a purchase the money supply increases by the purchase amount.
> 
> Conversely, when bank loans are repaid the money supply decreases. History shows that bank loans (in the US at least) have been growing, meaning that new debts are created faster than old debts are paid off and that, in short, is the inflation we all know exists but were not able to quantify.


There's an inflation/deflation curve with every credit card debt.  Each purchase transaction using that credit card causes you to incur a debt with the bank.  That debt affects and is counted as part of the fiduciary media governed by that bank's reserve requirements, like any other loan.  And as that purchase becomes a deposit in (ostensibly) another commercial bank, it is also subject to that bank's fractional reserve multiplier. 

For those who like to split hairs, fiduciary media by commercial banks are not increases the "base money supply" - which really can only be increased by the Fed (and other actual counterfeiters).  But that really is splitting hairs, because banks increase the circulation speed of the same base money money through fiduciary media, as it creates multiple claims on that same base money. And the faster the same money circulates, the more money the economy APPEARS to have, even though the actually base money supply may not have increased.  And since we trade MOSTLY in fiduciary media, or "money derivatives", rather than actual paper notes and coins, net the effect is an inflation and deflation (increase/decrease in supply) of that particular media -- which in turn affects the value of what MOST consider money -- and therefore the value of the base money supply. 

Again, it's not credit itself that is inflationary -- it's fractional reserve lending, to which credit cards most definitely play a part. When you make a purchase on a credit card (not debit -- _credit_) the "fiduciary media supply" (or money supply as most know it, not as purists slice and dice it) increases (inflation).  As that credit card debt is paid off, the fiduciary media supply decreases (deflationary), even as interest (which was NOT part of that fiduciary media, and is a claim on the base money supply) is siphoned into the bank, and banking system (more deflationary).  The reason it is not deflationary on the whole:  Our debt-based economy really is a Ponzi scheme - with an ever widening circle of credit required to keep flow of fiduciary media alive.  

In a non-fractional reserve economy with sound money, paying off all debts in the aggregate would not dry up the money supply, and privately accumulated capital would always exists...for use and for lending.  In OUR CURRENT economy, paying off all debts in the aggregate would be absolutely catastrophic as a deflationary depression -- not to mention impossible, given that there are orders of magnitude claims on the same BASE MONEY than there is base money to satisfy those claims.

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## heavenlyboy34

> They the physical money because most of their deposits are not demanded on the same day. They money they lend out won't be at the bank unless they get a loan from the fed, which causes inflation.


Truth.  There is also a limit to how much can be withdrawn at one time, IIRC-to (theoretically) prevent bank runs.

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## heavenlyboy34

> Here's a pretty decent treatment of it. 
> 
> 
> 
> There's an inflation/deflation curve with every credit card debt.  Each purchase transaction using that credit card causes you to incur a debt with the bank.  That debt affects and is counted as part of the fiduciary media governed by that bank's reserve requirements, like any other loan.  And as that purchase becomes a deposit in (ostensibly) another commercial bank, it is also subject to that bank's fractional reserve multiplier. 
> 
> For those who like to split hairs, fiduciary media by commercial banks are not increases the "base money supply" - which really can only be increased by the Fed (and other actual counterfeiters).  But that really is splitting hairs, because banks increase the circulation speed of the same base money money through fiduciary media, as it creates multiple claims on that same base money. And the faster the same money circulates, the more money the economy APPEARS to have, even though the actually base money supply may not have increased.  And since we trade MOSTLY in fiduciary media, or "money derivatives", rather than actual paper notes and coins, net the effect is an inflation and deflation (increase/decrease in supply) of that particular media -- which in turn affects the value of what MOST consider money -- and therefore the value of the base money supply. 
> 
> Again, it's not credit itself that is inflationary -- it's fractional reserve lending, to which credit cards most definitely play a part. When you make a purchase on a credit card (not debit -- _credit_) the "fiduciary media supply" (or money supply as most know it, not as purists slice and dice it) increases (inflation).  As that credit card debt is paid off, the fiduciary media supply decreases (deflationary), even as interest (which was NOT part of that fiduciary media, and is a claim on the base money supply) is siphoned into the bank, and banking system (more deflationary).  The reason it is not deflationary on the whole:  Our debt-based economy really is a Ponzi scheme - with an ever widening circle of credit required to keep flow of fiduciary media alive.  
> ...


Excellent summary!  Thanks for taking the time to write that.

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## Paul Or Nothing II

> I'm wondering if I should keep earning my $20 or switch to using my debit card or Federal Reserve Notes in order to not inflate the currency.  
> 
> Thoughts?


Yes, every time money is borrowed through banks & spent, it creates monetary inflation but it vanishes to that extent when you pay it back

Umm don't worry so much about this though.......




> Whenever a bank makes a loan whether it is a mortgage, student loan or credit card the bank is creating money out of thin air based on fractional reserves of another account. The only way money is creating in the current system is through these loans. So the OP is correct. Using a credit card expands the money supply until you pay your loan back.


+1




> Not really. The bank can loan out 90% of it's deposits. Not 900%.
> 
> If there are savings behind the credit, then there is no inflation, which I would believe is almost always the case. Unless the fed is creating money to be lent out, there is no inflation.


Ever heard of "money-multiplier"?




> Banks do not lend out their deposits. Bank deposits are redeemable on demand. Have you ever gone to the bank and not been able to get your money out? Neither have I. The way it works is that banks create lines of credit based on 90% of the savings of their customers and then deposit this "digital money" into the borrowers account. This is newly created money and is by definition an expansion of the money supply, whether it is a student loan or credit card. By the way, *both the Fed and commercial banks create money*.


+1

Something a lot of people, even here, don't seem to comprehend very well! Well said!




> The debt disappears and therefore the money disappears. We have a debt-based economy. Without debt their is no money. *If the entire country was debt free, no money would exist at all*.


I disagree, this is just conspiratorial tripe peddled by idiots like Bill Shill & Zeitgeisters & such who don't understand things that well & have ulterior motives to misguide people

All debt can be paid & there would still be money! How? Fed doesn't "need" to buy Treasuries to create money, it can do so by buying ANYTHING; because when they buy something, they credit the seller's account with "new money" that didn't exist before!

What happened when Fed bought up all the bad assets of companies? It increased central-bank-money within the economy! So they can even buy stocks or gold or whatever & even that would "create money", hell, they can just issue it directly for no reason so NO, debt isn't "necessary" as such for money to exist, even under current monetary paradigm, it's just a misguided notion

May be it stems from the fallacious premise that _"interest can't be paid back with existing money"_ myth, of course, it can't be paid back all at once but money isn't a static phenomenon, it's a dynamic phenomenon so yes, it CAN be paid over time - http://mises.org/daily/4569

A lot of sources out there are trying to make people think that borrowers are "victims", which is typical OWS type of mentality, this is preying on people's ignorance & desire for entitlement & an unwillingness to accept responsibility, while blaming others for EVERYTHING that's wrong with them!
It's simple, the way to remain debt-free is NOT TO BORROW & live within your own means rather than selling your future for the present; borrowers turning around & blaming the lenders is height of ridiculousness & irresponsibility
The true victims in this whole thing are the savers, certainly NOT the borrowers! 
If borrowers don't borrow then commercial-banks can't inflate, period! (of course, here I'm talking about consumer-borrowers & not producer-borrowers as such)

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## Domalais

> Yes, it would mean global commerce being conducted as it was for 99.99% of civilized history.  The horror, the horror.


Yes, the part where we lived in huts and died at the age of 30.

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## UK4Paul

> Yes, the part where we lived in huts and died at the age of 30.


And no t'Internet! :O

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## jt8025

Does any of this conversation matter since the bank can borrow what it wants from the FED at or near 0% interest rates.  Is there a limit to this borrowing?  

In a fractional reserve system with no FED maybe I should worry about the inflation caused by borrowing.  But if the banks can inflate the money supply by borrowing from the FED does the fact that I quit borrowing money affect anything in terms of inflation.  I know it could in terms of bank profits but in terms of inflation.


Another issue I've been wrestling with lately is if it is somehow morally wrong to pull out my credit card to earn 1% on a average transaction of $5 when I know that business is being charged well over my $0.05 earnings.

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## Paul Or Nothing II

> Does any of this conversation matter since the bank can borrow what it wants from the FED at or near 0% interest rates.  Is there a limit to this borrowing?  
> 
> In a fractional reserve system with no FED maybe I should worry about the inflation caused by borrowing.  But if the banks can inflate the money supply by borrowing from the FED does the fact that I quit borrowing money affect anything in terms of inflation.  I know it could in terms of bank profits but in terms of inflation.
> 
> 
> Another issue I've been wrestling with lately is if it is somehow morally wrong to pull out my credit card to earn 1% on a average transaction of $5 when I know that business is being charged well over my $0.05 earnings.


The _"banks borrowing at 0%"_ thing is often taken out of context these days, because banks are usually pretty reluctant to borrow from Fed, they may at times in order to meet any shortages on their reserve-requirements but that's usually on an extremely short-term basis & is paid back very quickly but mostly they prefer borrowing on the inter-bank market rather than from Fed because you don't want your patrons to think that you're an unsound bank that doesn't have enough "credit" in the market to borrow from fellow banks.
It's usually used a lot during crises like the recent one but not necessarily on a regular basis.

So the usual path for Fed-money to enter the market is when they buy Treasuries, banks usually buy Treasuries at the auctions (not the Fed) & then when Fed needs to increase moneysupply enough to hit the "Target Rate" (which in turn tries to guide the interbank "Effective Rate"), they credit the respective banks, which is what creates "new money" to enter the market, then banks can lend it & the pyramidding begins!

So yes, borrowing by people matters, especially longer-term borrowing because borrowing increases moneysupply while paying it back decreases it.

I guess not re-paying the loan can be said to be "immoral" because it increases the moneysupply when it is borrowed & spent but it remains there if it isn't repaid & extinguished from existence. When one borrows & spends, they're essentially taking purchasing-power away from all the existing holders of money so they should produce goods/services to that extent & repay it

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## Gumba of Liberty

> Yes, every time money is borrowed through banks & spent, it creates monetary inflation but it vanishes to that extent when you pay it back
> 
> Umm don't worry so much about this though.......
> 
> 
> 
> +1
> 
> 
> ...


You are correct, in today's climate the Fed can purchase any financial instrument in chooses, behind closed doors I might add, but in the past it has not been this way. The Fed has traditionally only bought treasures and extended credit to commercial banks. Both of those actions involve extending credit which = creating debt.  Granted, if all debt was paid off their would still be money. Gold and silver would be in circulation and black-market currencies would fill the gaps. I should have been more specific and less "conspiratorial", if all T-Bills and personal debts were fully paid you would be hard pressed to find a Federal Reserve note in circulation. Debt is the critical, and criminal, piece of the Federal Reserve System. Without debt, inflation would be a much more rapid and uncontrollable phenomenon for the bankers. The money supply would increase and the bankers would lose their ability to contract the money supply by raising interest rates. Debt also serves as a way to subdue and distract the people. People in debt are insecure, preoccupied with their own affairs, more desperate for employment, and easier to subjugate.

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## cubical

> Ever heard of "money-multiplier"?


Unless the fed is printing money, there is no inflation. All "new" money is matched by credit/savings. If I loaned you $100, there isn't an extra $100 now in the economy. You have MY money, MY purchasing power, MY resources and I can't spend it or use it. A bank without the fed is just that, but the pool is much larger, allowing for plenty of liquidity though less reward.

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## Paul Or Nothing II

> You are correct, in today's climate the Fed can purchase any financial instrument in chooses, behind closed doors I might add, but in the past it has not been this way. The Fed has traditionally only bought treasures and extended credit to commercial banks. Both of those actions involve extending credit which = creating debt.  Granted, if all debt was paid off their would still be money. Gold and silver would be in circulation and black-market currencies would fill the gaps. I should have been more specific and less "conspiratorial", if all T-Bills and personal debts were fully paid you would be hard pressed to find a Federal Reserve note in circulation. Debt is the critical, and criminal, piece of the Federal Reserve System. Without debt, inflation would be a much more rapid and uncontrollable phenomenon for the bankers. The money supply would increase and the bankers would lose their ability to contract the money supply by raising interest rates. Debt also serves as a way to subdue and distract the people. People in debt are insecure, preoccupied with their own affairs, more desperate for employment, and easier to subjugate.


Again, even if T-bills & personal debt was paid off, there can STILL be fiat paper-money, it's existence isn't dependent on debt at all, it's just a misguided notion spread by some who just want to enrage people one way or another through misinformation, & misdirect them towards their own misguided causes.

Another thing, NO, debt is NOT essential to raising interest & curtailing moneysupply, the central-bank-money can just be withdrawn from circulation, plus, reserve-requirements can be raised to shrink the pyramid. For a long time, reserve-requirements were considered to be one of the tools in central-banks' repertoire to raise interest & to reduce moneysupply, many central-banks around the world STILL use this tool, most people just don't know about it because Fed hasn't been using it as they believe open-market-operations are a more faster & smoother way of adjusting moneysupply & interest but just because they aren't using it doesn't mean it doesn't exist, they can use that in absence of debt.

Neither is anyone forcing PEOPLE into debt, they go into debt because they want to. As I've said before, this "victim" mentality by the borrowers is the height of irresponsibility, *if one wants to remain debt-free then JUST DON'T BORROW & LIVE WITHIN ONE'S MEANS, it's that simple*; people borrowing & then blaming others for it is a sign of an unwillingness to take responsibility for one's own actions! 
If borrowers don't borrow then that puts a significant restriction on banks' ability to lend & inflate anyway so borrowers shouldn't escape criticism, any more than bankers!

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## heavenlyboy34

> The _"banks borrowing at 0%"_ thing is often taken out of context these days, because banks are usually pretty reluctant to borrow from Fed, they may at times in order to meet any shortages on their reserve-requirements but that's usually on an extremely short-term basis & is paid back very quickly but mostly they prefer borrowing on the inter-bank market rather than from Fed because you don't want your patrons to think that you're an unsound bank that doesn't have enough "credit" in the market to borrow from fellow banks.
> It's usually used a lot during crises like the recent one but not necessarily on a regular basis.
> 
> So the usual path for Fed-money to enter the market is when they buy Treasuries, banks usually buy Treasuries at the auctions (not the Fed) & then when Fed needs to increase moneysupply enough to hit the "Target Rate" (which in turn tries to guide the interbank "Effective Rate"), they credit the respective banks, which is what creates "new money" to enter the market, then banks can lend it & the pyramidding begins!
> 
> So yes, borrowing by people matters, especially longer-term borrowing because borrowing increases moneysupply while paying it back decreases it.
> *
> I guess not re-paying the loan can be said to be "immoral" because it increases the moneysupply when it is borrowed & spent but it remains there if it isn't repaid & extinguished from existence. When one borrows & spends, they're essentially taking purchasing-power away from all the existing holders of money so they should produce goods/services to that extent & repay it*


That's an interesting point.  Note that currently the high unemployment rate lends itself to high welfare spending (people spending unemployment on food, durable goods, services, etc).  So, we're burning the candle at both ends-inflating and spending/throwing good money after bad at the same time.  It's a horribly designed system, obviously.  It's destined to crash...it's more a question of "when?".

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## Gumba of Liberty

> *Again, even if T-bills & personal debt was paid off, there can STILL be fiat paper-money, it's existence isn't dependent on debt at all*, it's just a misguided notion spread by some who just want to enrage people one way or another through misinformation, & misdirect them towards their own misguided causes.
> 
> Another thing, NO, debt is NOT essential to raising interest & curtailing moneysupply, *the central-bank-money can just be withdrawn from circulation, plus, reserve-requirements can be raised to shrink the pyramid.* For a long time, reserve-requirements were considered to be one of the tools in central-banks' repertoire to raise interest & to reduce moneysupply, many central-banks around the world STILL use this tool, most people just don't know about it because Fed hasn't been using it as they believe open-market-operations are a more faster & smoother way of adjusting moneysupply & interest but just because they aren't using it doesn't mean it doesn't exist, they can use that in absence of debt.
> 
> Neither is anyone forcing PEOPLE into debt, they go into debt because they want to. As I've said before, this "victim" mentality by the borrowers is the height of irresponsibility, *if one wants to remain debt-free then JUST DON'T BORROW & LIVE WITHIN ONE'S MEANS, it's that simple*; people borrowing & then blaming others for it is a sign of an unwillingness to take responsibility for one's own actions! 
> If borrowers don't borrow then that puts a significant restriction on banks' ability to lend & inflate anyway so borrowers shouldn't escape criticism, any more than bankers!


The Fed has multiple ways to get money into the economy but all of them include the creation of credit (also known as debt). Maybe you know something I don't but other than QE1, QE2, and Op. Twist, I do not see evidence that the Fed is in the business of circulating debt free currency.

Onto your other point, how does the central bank "just" withdraw currency from circulation? Reserve requirements are a powerful tool, but they only apply to the ability of banks to make new loans. it would not pull money that was debt free from the economy. Please, explain to me how reserve requirements effect debt-free fiat currency?

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## Black Flag

> The Fed has multiple ways to get money into the economy but all of them include the creation of credit (also known as debt). Maybe you know something I don't but other than QE1, QE2, and Op. Twist, I do not see evidence that the Fed is in the business of circulating debt free currency.


Money is not debt.

The FED buys debt with money. This does not make money debt, no more than  you buying a car with money makes a car money, nor money a car.

FED buys T-bills with money. They manufacture the money to buy the T-bill. The money is not debt, the T-bill is debt.




> Onto your other point, how does the central bank "just" withdraw currency from circulation?


It sells the T-bills it holds in the open market for money.




> Reserve requirements are a powerful tool, but they only apply to the ability of banks to make new loans. it would not pull money that was debt free from the economy. Please, explain to me how reserve requirements effect debt-free fiat currency?


Reserve requirements merely establishes the amount outstanding loans per dollar-money a bank can hold. It has nothing to do with currency or the amount of money in the economy.

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## Jordan

If you want to stop inflating prices, just stop buying gas.

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## Black Flag

> If you want to stop inflating prices, just stop buying gas.


...which will not stop inflating prices.

Price inflation is a consequence of an oversupply of money to demand for money.

Like any economic good, money obeys the laws of supply and demand.

Oversupply, the price of money goes down -- means it takes more money to trade for goods; since goods are priced in money, we see this effect as "a rise in prices"

Deflation is the other way - a rising demand for money, means it takes less money to trade for goods, and the effect of "a fall in prices".

Oil is not money.

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## Jordan

> ...which will not stop inflating prices.
> 
> Price inflation is a consequence of an oversupply of money to demand for money.
> 
> Like any economic good, money obeys the laws of supply and demand.
> 
> Oversupply, the price of money goes down -- means it takes more money to trade for goods; since goods are priced in money, we see this effect as "a rise in prices"
> 
> Deflation is the other way - a rising demand for money, means it takes less money to trade for goods, and the effect of "a fall in prices".
> ...


Whatever you say, man.  There's absolutely no relationship between spending and inflation - not at all!  That's why the FED printed up money like it was going out of style in the past couple years and inflation has kept pace with the expansion in money supply.

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## Black Flag

> Whatever you say, man.  There's absolutely no relationship between spending and inflation - not at all!


Not at all.

Do not confuse "inflation" - whose effect is a *systemic rise* in prices across all goods and services with merely the rise and fall of specific supply and demand within a single good or service.

Oil going up or down is not inflation - it is price adjustments due to changes in supply and demand of oil.

Food/oil/car/wage/toothbrushes...etc. all going up is due to the increase in supply of *money* - and since all goods and services are priced in money, the effect is that *all prices across all sectors* reflect that change in supply/demand.

If we priced our goods/services in barrels of oil, then the rise and fall in demand of oil would change that price for those goods/services too.





> That's why the FED printed up money like it was going out of style in the past couple years and inflation has kept pace with the expansion in money supply.


Since you do not hold a coherent theory of money, you made serious cause/effect mistakes.

The FED printing money has been given to the banks who - like never before in history of the US banking - stuffed into "Excess Reserves".

"Reserves" are the legal requirement of money a bank needs to hold at the FED so to support the loans the bank has issued.
"Excess" reserves are the over the legal requirement stored at the FED by these banks - it is money that is not lent to borrowers - instead held back.

Here is the graph:


For nearly all of banking history, excepting small blips, the banks have loaned out the money to the maximum capacity available, thus held nearly zero "excess" reserves.

Now -unprecedented in modern banking history- nearly $1.5 trillion of money held at the FED and not made into loans that has been held out of the economy.
Thus, no oversupply of money.
Thus, no inflation.

The day the FED stops paying interest (0.25%) and charges a fee for storing said money - you better be in gold....

----------


## heavenlyboy34

> Money is not debt.
> 
> The FED buys debt with money. This does not make money debt, no more than  you buying a car with money makes a car money, nor money a car.
> 
> FED buys T-bills with money. They manufacture the money to buy the T-bill. The money is not debt, the T-bill is debt.
> 
> 
> 
> It sells the T-bills it holds in the open market for money.
> ...


Depends on how you define "money".  An FRN is "currency", but not "money".  It is just legal tender (it even says so on the bills)-loaned into existence.

----------


## Black Flag

> Depends on how you define "money".  An FRN is "currency", but not "money".  It is just legal tender (it even says so on the bills)-loaned into existence.



It is money.

It is manufactured by the FED.

*One* of the mechanics of introducing newly manufactured money into the economy is for the FED to buy a debt obligation of the Treasury, known as a T-bill. The government creates the IOU, sells to the FED for money, which the government then spends.

But the FRBN is money.

----------


## Black Flag

Another mechanism to introduce newly manufactured money is for the FED to buy *assets* such as property, like foreclosed property of the banks or their mortgages, or bullion. This is uncommon, but recently, exercised.

----------


## heavenlyboy34

> It is money.
> 
> It is manufactured by the FED.
> 
> *One* of the mechanics of introducing newly manufactured money into the economy is for the FED to buy a debt obligation of the Treasury, known as a T-bill. The government creates the IOU, sells to the FED for money, which the government then spends.
> 
> But the FRBN is money.


It can be used as a medium of exchange ("money"), but it isn't "money"-it represents debt.  If it were backed by something, it would be "money".  Calling FRNs "money" is playing rather loosely with definitions.

Rothbard goes into it in detail (what has government done to our money?) *Money in a Free Society*

----------


## Black Flag

> It can be used as a medium of exchange ("money"), but it isn't "money"-it represents debt.  If it were backed by something, it would be "money".  Calling FRNs "money" is playing rather loosely with definitions.


What backs gold?



> Rothbard goes into it in detail (what has government done to our money?) *Money in a Free Society*


You misunderstand Rothbard.

He argues that _in place of your money_ you have accepted a deposit receipt - sold to you _as if it was a warehousing receipt_. 
He argues that the bank lied to you - your money is not stored as a "bailment" - but in fact, you sold your money in trade for a promise from the bank.

He is very clear here.

Because *you are confused into thinking your deposit is "money" does not make it money* - it merely the system that has you totally confused - it is not your fault - as you are hammered in all directions reinforcing this confusion - at your peril.

Rothbard "Fraction Reserve System"

_In particular, the investment bankers acted as a ginger group to work for the cartelization
of commercial banks. To some extent, commercial bankers lend out their own capital and
money acquired by CDs. But most commercial banking is "deposit banking" based on a
gigantic scam: the idea, which most depositors believe, that their money is down at the
bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000
at a local bank, Jim knows that this is a "demand deposit," that is, that the bank pledges to
pay him $1,000 in cash, on demand, anytime he wishes to "get his money out." 

Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them
to take out at any time. Hence, they think of their checking account as equivalent to a
warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect
to get the chair back whenever they present the receipt. Unfortunately, while banks
depend on the warehouse analogy, the depositors are systematically deluded. Their
money ain't there._

----------


## Steven Douglas

> What backs gold?


That almost sounds like it's supposed to be a "gotcha" question, but it's really kind of silly, isn't it?  Like asking what backs a new pair of shoes, a coil of copper tubing, a bag of apples, or an iPad.  Whatever is valued *directly* needs no backing, as it is not a substitute representation of anything, and is therefore "backed" by itself.  I don't value FRBN's *directly* -- I only value what I can exchange them for, and _only to that extent_.  However, in and of themselves, they have no *direct* value to me. 

*It's not the money I'll miss. It's all of the stuff!*
-Bernadette Peters in "The Jerk"

----------


## enoch150

> 


I've seen that graph dozens of times, but for some reason this time I got to wondering - just what is the actual reserve ratio? Couldn't find it by googling. Tried using the Fed stats. But...

$1.56 Trillion in excess reserves from the graph above.



$99.8 Billion in required reserves. Add those together.



$1.658 Trillion in total reserves. M'kay. 

And a 10% reserve requirement figures to... eh... am I missing something or is the actual reserve ratio in excess of 100%?

----------


## cubical

The ratio between excess reserves and required reserves does not have to be 10%. Excess reserves are not being lent out. Required reserves are a great way to track how much money is "out there". As you can see prices should be moving much higher. They are certainly on their way.

----------


## Paul Or Nothing II

> The Fed has multiple ways to get money into the economy but all of them include the creation of credit (also known as debt). Maybe you know something I don't but other than QE1, QE2, and Op. Twist, I do not see evidence that the Fed is in the business of circulating debt free currency.


Well, my contention was that even if all the government-bonds & private-debt is paid off, the money could STILL exist, contrary, to your claim that it couldn't (an erroneous claim many seem to make)




> Onto your other point, how does the central bank "just" withdraw currency from circulation? Reserve requirements are a powerful tool, but they only apply to the ability of banks to make new loans. it would not pull money that was debt free from the economy. Please, explain to me how reserve requirements effect debt-free fiat currency?


Well, if they raise reserve-requirements then that would shrink the moneysupply; google "money-multiplier"

I'm not really sure what you mean by "debt-free money" because the way it seems to be used these days is the way Bill Still ("Money Masters", "Secret of Oz") tends to use it, that is to mean an unbacked paper-money, which isn't really "debt-free" as such because it's really a "claim-check" of sorts, an obligation for the issuer & a claim for the bearer.
For example, under gold-standard, you could get gold for the your "claim-check" (paper-money) but under an UNBACKED paper-standard, it's "backed" by "faith & credit of government" (which approximately means........NOTHING) So even though some people tout it as "debt-free", it really isn't; the only truly "debt-free" currency would be one where the paper is actually backed by something that goes on its market-value (it could be gold, silver, iron or any other commodity that markets prefer)




> It can be used as a medium of exchange ("money"), but it isn't "money"-it represents debt.  If it were backed by something, it would be "money".  Calling FRNs "money" is playing rather loosely with definitions.
> 
> Rothbard goes into it in detail (what has government done to our money?) *Money in a Free Society*


If I may, I'd advise you to not debate "money" with BF unless you want to end up in a useless, endless loop of semantics because like Roy L, whatever BF says is the "self-evident objective truth" so there's no point in us mere mortals arguing with him 
Here's something I've gathered so far:
1) According to BF, "money" only means central-bank-money, not commercial-bank-money (even though both are equally fictional, commercial-bank-money isn't money )
2) Only central-bank-money causes inflation/deflation, not commercial-bank-money (oh, those bubbles, they were figments of our imaginations )
3) Paying off debt doesn't diminish moneysupply 
May be there's more but I can't recall right now.........



Anyways, for those of us who have a "twisted" view of things, may be able to see why it's sort of a "claim-check", an obligation, it says something on the left-hand side of the note, something about "debt"........

When one gets something from someone, one is "indebted" & it is dissovled by handing a "claim-check" to the seller, which was previously received by the buyer from someone else, & so on the chain goes back to the original issuer, whose obligation it is........but here's the thing, it doesn't specify what it is that the bearer will have a claim on....pretty smart heh!

----------


## Gumba of Liberty

> *Well, my contention was that even if all the government-bonds & private-debt is paid off, the money could STILL exist, contrary, to your claim that it couldn't (an erroneous claim many seem to make)*
> 
> 
> 
> Well, if they raise reserve-requirements then that would shrink the moneysupply; google "money-multiplier"
> 
> I'm not really sure what you mean by "debt-free money" because the way it seems to be used these days is the way Bill Still ("Money Masters", "Secret of Oz") tends to use it, that is to mean an unbacked paper-money, which isn't really "debt-free" as such because it's really a "claim-check" of sorts, an obligation for the issuer & a claim for the bearer.
> For example, under gold-standard, you could get gold for the your "claim-check" (paper-money) but under an UNBACKED paper-standard, it's "backed" by "faith & credit of government" (which approximately means........NOTHING) So even though some people tout it as "debt-free", it really isn't; the only truly "debt-free" currency would be one where the paper is actually backed by something that goes on its market-value (it could be gold, silver, iron or any other commodity that markets prefer)
> 
> ...


I do not believe it to be an erroneous claim. The Fed "could" do anything it wants. As a agency above the law working in total secrecy, it can issue currency by purchasing assets rather than purchasing T-Bills or extending credit to banks but 99.99999% of the time it does not. In the United States today our system is debt-based and the Fed is the reason for this. If the Fed stayed with its current policy and all debt was paid off it would be extremely hard to find any FRN in circulation. 

To a point you made on your last post, I disagree with the fact that the people are the only ones to blame for the debt crisis we are now in. It is easy to say, *"Just don't get into debt and it is all your own fault if you do."* That mentality is harmful because it will divide (and could possibly derail) the Revolution. Granted, in a free-market economy it would be your own fault if you went into debt, but that is not the case today. Inflation does not hit all industries equally. Inflation hits industries that are closes to the government first (healthcare, education, real-estate, energy) and then spreads to other sectors (agriculture, transportation, entertainment) while only allowing a few extremely efficient sectors to resemble a free-market (electronics, social media). This manipulation of the system allows the banks to get people into debt even when they do not want to. A few examples:

1. A single mother, who has low-quality health insurance, gets sick, she cannot work and she racks up $15,000 in hospital bills for the surgery she needed to save her life.  She makes about $25,000 dollars a year. In this situation she would have a large amount of debt and it would not solely be her fault. If it wasn't for government regulations and the Fed, those hospital bills would be closer to $3,000 and she could pay them off rather quickly.

2. A student, who has been told his entire life that going to college is the only path to prosperity, takes out student loans to attend an in-state school. His parents can barely make ends meet so he pays for his room and board with the student loans as well. He works two part-time jobs but still graduates with over $50,000 dollars in debt. Is it his fault he is in debt? Yes. Is it his fault he is $50,000 in debt? No. If not for the Federal Student Loan Program, the Fed and fractional-reserve banking, his debts would be closer to $10,000 and with a good job he would have no trouble paying them off.

3. A 35 year-old head of household, who is debt-free, lives paycheck to paycheck to make ends meet. His car that he has owned for 10 years breaks down and now he has no way to get to work. He scrounges up any money he can and puts down a $1000 down payment on a used car. He is now $7000 dollars in debt. Without the ability of the Fed to lower interest rates and the government propping up the price of cars through regulations, in a free-market the man could probably get a vehicle of similar quality purchased in the 3 figure range. (Read about the $4000 GM Car in China)

4. A family of five have saved up $50,000 to put down on a $125,000 home. The family must finance $75,000. Their fault? Of course. Their fault a house that would fit them comfortably costs $125,000? Not at all.

The entire country is in debt. The United States is the most indebted country in the history of the world. This is not the fault of individual consumers but of the system itself. Attack the system and you defeat it. Blame the ignorant, desperate, or the lazy and you will have nothing but animosity for your fellow countryman. This is the elites plan. Keep us fighting with each other while they bleed us dry.


George Carlin for the Rest...

----------


## Danke

> When one gets something from someone, one is "indebted" & it is dissovled by handing a "claim-check" to the seller, which was previously received by the buyer from someone else, & so on the chain goes back to the original issuer, whose obligation it is........but here's the thing, it doesn't specify what it is that the bearer will have a claim on....pretty smart heh!


"They shall be redeemed in *lawful money* on demand at the
Treasury Department of the United States, in the city of
Washington, District of Columbia, or at any Federal Reserve bank."

http://codes.lp.findlaw.com/uscode/12/3/XII/411

----------


## Black Flag

> That almost sounds like it's supposed to be a "gotcha" question, but it's really kind of silly, isn't it?


No, it is germane.

The same thing that backs gold, backs FRBN - the value imputed by the individual.




> I don't value FRBN's *directly* -- I only value what I can exchange them for, and _only to that extent_.  However, in and of themselves, they have no *direct* value to me.


Bull.

If I held up briefcase and said "This briefcase is worth $1 million" you laugh ... until I said, it had a million bucks in it. Then you would stop laughing.

You aren't "calculating" oooo..look at all the goodies I can buy with a million --- you are looking at it *exactly like you would look at a 500oz of gold*

----------


## rpwi

> Unless the fed is printing money, there is no inflation. All "new" money is matched by credit/savings. If I loaned you $100, there isn't an extra $100 now in the economy. You have MY money, MY purchasing power, MY resources and I can't spend it or use it. A bank without the fed is just that, but the pool is much larger, allowing for plenty of liquidity though less reward.


This is quite incorrect.  A bank regularly creates inflation though it's creation of deposits.  An analogy to illustrate.

Say the money supply was 1000 pounds of gold in a local economy.  Instead of the people trading gold between each other...they decide to deposit it with a gold smith who lets them trade claim slips as well.  Goldsmith notices that these claim slips are not being redeemed regularly...so with a sneaky move goes out and loans some it.  Because he has created more gold slips than there is gold he has created inflation.  Even though he has create a corresponding amount of debt.  

Couple different ways to conceptional this.  When you deposit money at a bank and get a checking account, you are in reality getting an interest bearing investment that has an infinitely small interest rate and an infinitely quick maturity.  So one can say anytime you backup long term assets with short term debt you are creating money.

----------


## forsmant

Going bankrupt on your debt is destruction of money. If it weren't then why did all the foreclosed homes cause price deflation in 2008?

----------


## Black Flag

> I've seen that graph dozens of times, but for some reason this time I got to wondering - just what is the actual reserve ratio? Couldn't find it by googling. Tried using the Fed stats. But...


Because it is actually more complex then merely a "percentage"
See this formula:
*
Capital requirements = Core Capital / Assets*

Core Capital is weighted due to risk – with cash at 0%, no risk and government bonds at say 5%, mortgage loans, at say, 50%, and other loans and assets, such as credit card loans, perhaps at 100%. (which operates in reverse for the calculation - that is, 100% of cash on hand applies, 95% of the value of gov. bonds, 50% of the mortgage value and credit cards .... simply do not count at all as an asset)

The Asset divisor is *Total capital minus deposits – as deposits are a banking liability.*
(This is where the "debt-money" guys get destroyed - deposits are a liability, not an asset, and cannot be money)

*As Federal Reserve-placed funds represents cash* as far as calculating the Core Capital – an increase in the excess reserves significantly improves the capital ratio of said bank.


Ed:
The next question you should ask is:
"Why are the banks piling up so much cash?"

Ans:
"Improves their capital ratio massively"

Question:
"Why do they need such a massive capital ratio, while forgoing earning obscene profit lending it?"

Ans:
"They see a massive, great default coming ... and it is default in loans *(and not completely bizarre belief that paying back loans*) that destroys the capital base of the bank, and with it *shrinks the money supply*"

----------


## Black Flag

> Going bankrupt on your debt is destruction of money. If it weren't then why did all the foreclosed homes cause price deflation in 2008?


Completely false.

My failing to pay back your IOU does not change the money supply one iota.

You lent me $100, and I gave you an IOU.
I spent $100, so now it is in the hand of the car dealer (as an example).
I renege on your IOU

The $100 is still in the hand of the car dealer, I have a car, and you have zippo.

YOU suffer the loss of your capital (100-100=0), but I have an increase in asset (Car) (0+car=car) but no money (100-100=0) and the car dealer has the money (0+$100=$100) but no car (Car-car=0)

There is no "destruction" of money here.

----------


## rpwi

> The _"banks borrowing at 0%"_ thing is often taken out of context these days, because banks are usually pretty reluctant to borrow from Fed, they may at times in order to meet any shortages on their reserve-requirements but that's usually on an extremely short-term basis & is paid back very quickly but mostly they prefer borrowing on the inter-bank market rather than from Fed because you don't want your patrons to think that you're an unsound bank that doesn't have enough "credit" in the market to borrow from fellow banks.


You probably know this but a further clarification for others reading...  Banks can only really borrow directly from the Federal Reserve through the Discount Window...which is basically overnight lending from the Fed to troubled banks to help them meet reserve requirements.  It is quite dishonest as you and I don't have access to these same below-market rate loans.

Other then special bailouts there aren't really mechanisms for banks to borrow from the Fed...however there is a major way in which they can borrow indirecetly from the Fed and that is through primary dealer banks.  Only the 21 banks lucky enough to be classified as 'primary dealers' get to buy and sell t-bills on the 'open market' with the Fed.  So say the banking system wants 10 billion more in reserves to expand lending the money supply.  They will drive up the over-night interest rates between banks (called the Fed Funds Rate)...say from x% to (x+1)%.  The Fed sees the Fed Funds rate is above the target rate and attempts to knock it back down fabricating money.  They fabricate a liability on their balance sheet and use to to acquire t-bills from one of the 21 primary dealers.  The primary dealers then resell this Federal Reserve liability (the monetary base) to the banks in need...and this results in the banks getting the money they wanted.  Very dishonest.  If the banking system wants more money, they can get through indirect pressure from the Fed.  The worst part is the open market mechanism, as the primary dealers game, churn and skim the system so that substantial amounts of what should be t-bill interest that would otherwise be rebated to the treasury department, instead goes to fatten the primary dealers.

----------


## Black Flag

> If I may, I'd advise you to not debate "money" with BF unless you want to end up in a useless, endless loop of semantics because like Roy L, whatever BF says is the "self-evident objective truth" so there's no point in us mere mortals arguing with him


That's not fair.

One merely needs to follow the money - put a radioactive "tag" on it, and see where it goes.

Now, I do understand you've been thoroughly brainwashed into believing a debt instrument (depository receipt) is the same as a FRBN, so you believe the two are equal.

But a quick review of the bank's balance sheet proves that they are not.

If they were equal, they would carry the same "weighting" in the capital calculation ... but they don't! Not even government bonds equals "cash".

And further, your depository funds *are a liability* ... explain to me that "money" is an liability??? Money *eliminates monetary liability*, it is NOT a liability!

In other words, your monetary theory (albeit popular) _is wrong_

And, until the illusion that deposits are "money", incredibly serious errors are made in determining: inflation/default consequences and other general monetary policies.




> Here's something I've gathered so far:
> 1) According to BF, "money" only means central-bank-money, not commercial-bank-money (even though both are equally fictional, commercial-bank-money isn't money )


Central bank money is not fictional - open your wallet, and you will probably see a bit of it.

PS: I dare to open your wallet and see "commercial-bank-money" in there....gee! Not one ...single..bit ...of it...

So, which one is an illusion, and which one is real?

Now unless you often do not believe what you see and can touch ... well, that would mean you have a mental problem ... but I do not believe you do as you are often, on other matters, incredibly lucid.

So, it must be an error on your part - an error of fundamental proportions.




> 2) Only central-bank-money causes inflation/deflation, not commercial-bank-money (oh, those bubbles, they were figments of our imaginations )


Bubbles have nothing at all to due with the illusion of "Commercial-bank-money" -- it has everything to do with the central bank's interest rate and lending *policies*




> 3) Paying off debt doesn't diminish moneysupply


To claim such is utterly bizarre.

What *does diminish the money supply* is the *default in paying off bank-issued debt* 

- but paying back loans?? Utter poppycock.

----------


## rpwi

> Completely false.
> 
> My failing to pay back your IOU does not change the money supply one iota.
> 
> You lent me $100, and I gave you an IOU.
> I spent $100, so now it is in the hand of the car dealer (as an example).
> I renege on your IOU
> 
> The $100 is still in the hand of the car dealer, I have a car, and you have zippo.
> ...


I would disagree and the home mortgage mess did indeed contribute to massive deflation (which was countered by massive inflation of the monetary base by the Fed).  Say an economy has 1 trillion in monetary base.    They have then 3 trillion in demand deposits (checking accounts).  So the aggregate balance sheet looks from the bankers perspective like:

Liabilities: 3 trillion in demand deposits
Assets: 1 trillion in reserves (monetary base)
Assets: 2 trillion in loans (like mortgages)

Say .5 trillion of the loans went bellyup.  Assets have to equal lliabilities plus equity, therefore the new balance sheet will be:

Liabilities: 2.5 trillion in demand deposits
Assets: 1 trillion in reserves (monetary base)
Assets: 1.5 trillion in loans (like mortgages)

.5 trillion in demand deposits were destroyed when the defaults happen...so they did cause deflation...just like when the banks did lend out and create the demand deposits that caused inflation.

----------


## rpwi

There was a mention of reserve requirements and the capital requirements and this requires a clarification.  The reserve requirements is basically how much cash + deposits at the fed (reserves) a bank must have as a ratio of their deposits.  It's a nice rule to minimize the amount of counterfeiting and inflating banks do...but it is somewhat circumvented in modern financial systems.

The reserve requirement is only really an issue for demand deposits...once a bank creates near-demand-deposits like small term deposits...they effectively get around the reserve requirement and can create as much money as they want.  In fact most small banks resell their loans to upstream banks who specialize in balancing these quasi-deposits against long term assets.  The issue is still the same though...whenever you finance long term credit, with short term debt...you have issues/inflation/bankruns/bailouts.

This is why most major countries in addition to using the reserve requirements also regulate 'Bank Capital
Requirements'.  Rules are complex in accordance with BIS regulations...but basically a banks equity has to be a certain percentage of their risk weight assets.  This helps put a clamp on inflation/speculation/gambling.  One can kind of argue that the reserve ratio is somewhat antiquated...(believe Canada doesn't even use it)...but I still think it is an important measure for minimizing how much banks can misbehave.

----------


## thedude

> Completely false.
> 
> My failing to pay back your IOU does not change the money supply one iota.
> 
> You lent me $100, and I gave you an IOU.
> I spent $100, so now it is in the hand of the car dealer (as an example).
> I renege on your IOU
> 
> The $100 is still in the hand of the car dealer, I have a car, and you have zippo.
> ...


The problem is that the $100 which was digitally entered into your possession that I gave you was only possible to give because I had $10 somebody gave me.  When you failed to pay the IOU, I had to destroy the IOU on my assets sheet and the liabilities that balanced it.  Now that person comes back for their $10... I don't have it to give.  This person's asset was destroyed.  Should I tell him to go to the car dealer to get it (who already gave it to his employee, who spent it at the store, which was given back to this guy in a paycheck)?

EDIT:  Actually, I do have it to give... because the government bailed me out via the FDIC.  Now they have less money...  Either way you look at it, somebody loses.

----------


## Letters

Ron Paul had said "Obama has used all the credit cards availble to USA"

----------


## Black Flag

> This is quite incorrect.  A bank regularly creates inflation though it's creation of deposits.  An analogy to illustrate.
> 
> Say the money supply was 1000 pounds of gold in a local economy.  Instead of the people trading gold between each other...they decide to deposit it with a gold smith who lets them trade claim slips as well.  Goldsmith notices that these claim slips are not being redeemed regularly...so with a sneaky move goes out and loans some it.  Because he has created more gold slips than there is gold he has created inflation.  Even though he has create a corresponding amount of debt.


But that is NOT the current banking system that exists today..

FRBN are not gold receipts - they are not receipts for anything..

People use FRBN in trade, and the mechanics _actually moves money_ between the transaction parties.. therefore, there is no way that the fractional reserve system can cause inflation - there is never more money in the system than actually exists..

----------


## Black Flag

> I would disagree and the home mortgage mess did indeed contribute to massive deflation (which was countered by massive inflation of the monetary base by the Fed).


*blink*

So you disagree with me that failure to pay loans causes deflation by pointing out that the collapse of the mortgage business - because of the inability of the owners to pay their loans ..... causes deflation *blink*




> Say an economy has 1 trillion in monetary base.    They have then 3 trillion in demand deposits (checking accounts).  So the aggregate balance sheet looks from the bankers perspective like:
> 
> Liabilities: 3 trillion in demand deposits
> Assets: 1 trillion in reserves (monetary base)
> Assets: 2 trillion in loans (like mortgages)
> 
> 
> Say .5 trillion of the loans went bellyup.  Assets have to equal lliabilities plus equity, therefore the new balance sheet will be:
> 
> ...


No, sir your math is wrong.

Because you did not pay your debt does NOT take my deposit away - it takes the bank capital away.

So you are:
Liabilities: *3 trillion in demand deposits* this is unchanged
Assets: 1 trillion in reserves (monetary base)
Assets: 1.5 trillion in loans (like mortgages)

....with the .5 trillion to balance the accounting _must come from the capital reserves of the bank -its shares_

----------


## Black Flag

> There was a mention of reserve requirements and the capital requirements and this requires a clarification.  The reserve requirements is basically how much cash + deposits at the fed (reserves) a bank must have as a ratio of their deposits.  It's a nice rule to minimize the amount of counterfeiting and inflating banks do...but it is somewhat circumvented in modern financial systems.


No sir, they never do that at all.

It is always a calculation of the *capital requirements*, and here is why:

A bank can loan money that it has raised by selling shares.
A bank can loan money it has borrowed from the Central bank based on the financial assets (such as mortgages/bonds/t-bills) it holds
A bank can loan money that it has raised by selling CD's.
A bank can loan money based on the reserve monies on deposit with the FED.

So, the calculation is not merely how much is on "reserve" - that is but a component among others to calculate the Capital requirement of the bank.

----------


## Black Flag

> The problem is that the $100 which was digitally entered into your possession that I gave you was only possible to give because I had $10 somebody gave me.


No, you have not done the exercise and followed the money.

*Never, ever, never do you use anything but real money in a transaction* -- do not be hoodwinked by the digital "shortcut" - it is ALWAYS a withdrawal, trade, redeposit .... and the withdrawal _must be money_. If a bank is ever unable to satisfy your demand at withdrawal in money - well, bad things happen....

Because of mere convenience, you no longer need to take physical possession but do the withdraw/trade/deposit in a microsecond does not change the fundamental mechanics of the transaction process.




> When you failed to pay the IOU, I had to destroy the IOU on my assets sheet and the liabilities that balanced it.  Now that person comes back for their $10... I don't have it to give.  This person's asset was destroyed.  Should I tell him to go to the car dealer to get it (who already gave it to his employee, who spent it at the store, which was given back to this guy in a paycheck)?


Correct. You, as the bank, lied to the depositor in claiming his deposit was "as good as money in hand" - because, as you've shown, it wasn't. It was a promise ... which is never money ... and you, the bank, reneged on your promise. Tough luck for the depositor who was deluded by your (as the bank) lies about your deposit being "as good as money in hand" ... *because deposit receipts are not money*



> EDIT:  Actually, I do have it to give... because the government bailed me out via the FDIC.  Now they have less money...  Either way you look at it, somebody loses.


FDIC adds a dangerous wrinkle to the problem but really is independent to this particular dialogue.

----------


## rpwi

> But that is NOT the current banking system that exists today..


Little conceptional difference.  The gold is now the monetary base (either in paper form as a FRBN or in electronic form as a direct deposit at the Federal Reserve).  The claim slips are now demand deposits.




> FRBN are not gold receipts - they are not receipts for anything..


Well to continue the analogy...FRBN...or more broadly the monetary base would be the gold while the checking accounts would be gold slips.  FRBN are indeed not deposit slips...although they used to be...so back in the day we used to have national federal reserve banking...compounded by private banking fractional reserve banking.  Rothbard writes about this in several of his book.




> People use FRBN in trade, and the mechanics _actually moves money_ between the transaction parties.. therefore, there is no way that the fractional reserve system can cause inflation - there is never more money in the system than actually exists..


Well more accurately the private banks' deposits at the Federal Reserve is what changes hands for the most part...very rarely is it the paper component. 

Perhaps the point you are making is that only the monetary base is exchanged in a transaction...   This would only be true in cases in which both depositors did not share a bank...true...only the fed deposits would be sent between the banks but this would not be relevant.  Just like gold smiths surely shipped gold to other gold smiths to satisfy client transactions...the inflation they create is still present.  Perhaps for a small blip bank money at one point would be destroyed extremely quickly than recreated as it gets transfered from bank to bank...but in the end the bank money is still much more than the reserves.  In fact in modern economies, central banks allow each bank to keep their deposits on books during transfers which creates 'float' and even more bank money.  All in all...I think it is more helpful to think of money as a store of value rather than as a means of exchange.

----------


## rpwi

> *blink*
> No, sir your math is wrong.
> 
> Because you did not pay your debt does NOT take my deposit away - it takes the bank capital away.
> 
> So you are:
> Liabilities: *3 trillion in demand deposits* this is unchanged
> Assets: 1 trillion in reserves (monetary base)
> Assets: 1.5 trillion in loans (like mortgages)
> ...


In my example, the hypothetical bank had no equity.  Therefore the reduction in assets must come at the expense of liabilities.  You are correct that a defaulted loan could come at the expense of equity...it happens all the time.  However since the bulk of demand deposits are not backed with reserves, but rather a debt...the the destruction in debt for the most part will result in a destruction in deposits (normally...however with the credit crisis and shift to near-demand deposits the rules have changed a tiny bit).  This can happen in a rather round-about way.  For example, a bank wanting to repair the equity ratio from defaulted loans, will likely let maturing debt not roll over to boost their equity.  They'll also curb lending and seek more conventional short term loans as financing instead of demand deposits.  All of which reduces the money supply because of defaults to the banks.

----------


## The Free Hornet

> This^^  The economy would be $#@! if there were no consumer credit.


Where is the actual support for this opinion?

I understand that Easy Credit (EZ) Applicance may outperform Cash Only (CO) Appliance which is why most stores will accept both.  If very little could be bought on credit, there would be a lull in purchases but they would come back stronger once people stopped throwing money away on interest payments, fees, unnecessary purchases.  What is more likely to help the economy, buying a car we may have actually made or buying a bunch of cheap imported electronics on easy credit?

Unless you believe that the economy is so fragile a house of cards but I doubt that.  The monetary system is a house of cards, but aside from that people would be much better off if less use was made of payday loans, balance carrying, rent-a-whatever.  This is not about "the economy" but rather "which economy".  I prefer to see the economy of people who save for the stuff they need not the economy of the impulse shopper.

How many of us have either had credit card problems or have coworkers who do?

Government promotes easy credit and even gives that dreaded "qualified immunity" to ratings agencies so they are not liable for slandering your name or having your identity stolen - all in the name of easy credit!

It's fine to think credit is good, but I don't think Uncle Sam needs his thumb on the scale.  I want a level playing field.  Where the $#@! is my qualified immunity?

----------


## Black Flag

> Little conceptional difference.  The gold is now the monetary base (either in paper form as a FRBN or in electronic form as a direct deposit at the Federal Reserve).  The claim slips are now demand deposits.


No, sir, massive conceptual difference.

Gold is NOT the monetary base today. 

Today it is FRBN.

The claim slips ARE demand deposits, but that is not money. Those are _liabilities_ - they are an IOU - and money is never a liability to hold nor an IOU - *money resolves IOU and is always an asset no matter who holds it*

The challenge: people have been indoctrinated by a poor definition of money.
They have accepted this poor definition, and then, allocated all the power and effect "real" money retains and placed it on something that is NOT money.

They then exercise certain economic laws and theories regarding money upon this thing that is not money - and end up with utterly bizarre proclamations - such as a man paying off his debt destroys the monetary base.




> Well to continue the analogy...FRBN...or more broadly the monetary base would be the gold while the checking accounts would be gold slips.  FRBN are indeed not deposit slips...although they used to be...so back in the day we used to have national federal reserve banking...compounded by private banking fractional reserve banking.  Rothbard writes about this in several of his book.


No, sir. 
FRBN (Federal Reserve BANK notes) have never, ever, ever, never been deposit slips or redeemable for gold.
They were born in 1932 and used to buy the gold and gold certificates during the FDR demonetization of gold. (Note the term: DEMONETIZATION)

FRN - Federal Reserve Notes - were, indeed, certificates of gold/silver, and were removed from circulation a hundred years ago or so.




> Well more accurately the private banks' deposits at the Federal Reserve is what changes hands for the most part...very rarely is it the paper component.


Whether represented by paper or a digit in a computer does not change FRBN.

----------


## Black Flag

> In my example, the hypothetical bank had no equity.  Therefore the reduction in assets must come at the expense of liabilities.


Ah, I see.

Ok, you must remember that demand deposits is an *accounting record* and not anything in reality. It is merely a record of how much and to whom the bank owes money *which is why it is a liability to the bank - it is an obligation against the bank*

So no, the demand deposits *which merely an accounting record* are not debited. There is no offsetting reason for debiting - it can only be debited by a *withdrawal*

It remains on the accounting as 
3 trillion in demand deposits (liability)

The .5 trillion sits, thus, on the books as negative equity:

Liabilities: 3 trillion (deposits)
Assets: 1 trillion (cash)
Assets: 1.5 trillion (loans)
Bank equity: -.5 trillion

----------


## rpwi

> No sir, they never do that at all.
> 
> It is always a calculation of the *capital requirements*, and here is why:
> 
> A bank can loan money that it has raised by selling shares.
> A bank can loan money it has borrowed from the Central bank based on the financial assets (such as mortgages/bonds/t-bills) it holds
> A bank can loan money that it has raised by selling CD's.
> A bank can loan money based on the reserve monies on deposit with the FED.
> 
> So, the calculation is not merely how much is on "reserve" - that is but a component among others to calculate the Capital requirement of the bank.


Hopefully we're not talking about two different things here...  There are two primary regulations a bank faces with lending.  The first is the reserve ratio that determines how much reserves a bank must keep on hand as a percentage of their checking accounts.  Roughly 10% in the US.  

Capital requirements are a completely different regulation that determines how much equity a bank must have as a ratio of their 'risky' liabilities.  This is set by international agreement.  Given how popular near-demand deposits are now...this is probably a good idea (until we return the banking system to proper free market accountability).

You listed the ways in which a bank can finance a loan.  You left off demand deposits.  There is little conceptual difference between a CD financing that mortgage the bank setup or the demand deposit financing that mortgage.

The demand deposit is merely a CD with an infinitely small interest rate and infinitely small maturity period.  In this fashion the bank creates money (and inflation).

Say Bob wants to sell his house for 100k.
Sam wants to buy the house for 100k.

The bank is willing to setup the deal for say 5% interest.

So the bank 'borrows' from Bob either a CD or a demand deposit of 100k.

Bob receives a 100k credit or put another way the bank receives a 100k liability.

Sam receives the house, but incurs a 100k debt to the bank...which the bank lists as a 100k asset.  In this fashion...the bank create demand deposits to finance the purchase of the house.

----------


## Black Flag

Rpwi,

So, now of course, your bank is under threat. It is technically bankrupt - that is, its debts are greater than its assets.

As such, the "authorities" who ever they be would step in and dissolve such a bank - collect as much of the outstanding loans as possible, and distribute the remaining funds to the depositors - who would suffer the losses and ed: cause a deflation of the money supply.

As such, *once again* demonstrates that demand deposits are NOT money - because if they were money, the depositors would never need to worry about their money, no matter what the bank did.

That is, if the demand deposits were actually a *bailment*, the failure of the loans would make no difference to them!

Liabilities: 0 trillion
Bailment: 3 trillion
Assets: **whatever**
Bank equity: -.5 trillion.

The bank would still go bankrupt, but all the depositors would be paid out at face value - *since their money was never promised away*

In all cases, demand deposits are never money. They are *always a promise to satisfy an obligation on demand - and that promise always risks being broken.*

----------


## Black Flag

> Hopefully we're not talking about two different things here...  There are two primary regulations a bank faces with lending.  The first is the reserve ratio that determines how much reserves a bank must keep on hand as a percentage of their checking accounts.  Roughly 10% in the US.  
> 
> Capital requirements are a completely different regulation that determines how much equity a bank must have as a ratio of their 'risky' liabilities.  This is set by international agreement.  Given how popular near-demand deposits are now...this is probably a good idea (until we return the banking system to proper free market accountability).


The former merely creates a ratio of cash-to-loan and is utterly irrelevant.

The cash in such a reserve is applied and used to calculate the Capital base of the bank. 
It is THIS that is utterly important for it determines the existence or the dissolution of a bank.

It is the loss of capital, due to failure of repayment of a loan, the risks the existence of the bank because of the reverse-leverage that the capital provides to the ability of the bank to make loans and take deposits.




> You listed the ways in which a bank can finance a loan.  You left off demand deposits.  There is little conceptual difference between a CD financing that mortgage the bank setup or the demand deposit financing that mortgage.


Completely total difference.
A CD cannot be withdrawn by the depositor. There is no threat to undermining the capital reserve of the bank in making a loan against a CD.

This absolutely cannot be said about demand deposits - which is why a CD and bonds have a capital base modifier of around 5% and demand deposits have a capital base modifier of around 50%.

The modifier recognizes that demand deposits place an significant risk upon the capital base of a bank, and thus are treated more cautiously then a bond or CD.




> Say Bob wants to sell his house for 100k.
> Sam wants to buy the house for 100k.
> 
> The bank is willing to setup the deal for say 5% interest.
> 
> So the bank 'borrows' from Bob either a CD or a demand deposit of 100k.
> 
> Bob receives a 100k credit or put another way the bank receives a 100k liability.
> 
> Sam receives the house, but incurs a 100k debt to the bank...which the bank lists as a 100k asset.  In this fashion...the bank create demand deposits to finance the purchase of the house.


Agreed *except* the bank cannot apply 0% modifier to the 100K demand deposit - thus, requires 200k in demand deposits to make the 100k loan. (and to be complete, the bank would need to receive 105,263 CD to loan 100k)

----------


## matt0611

Black Flag, fractional reserve banking creates inflation by expansion of the supply of M1. In FRB M1 is almost always larger than M0 (base) because the banks create these deposits when they make loans and only a fraction of those demand deposits are "backed by" actual base money. 

People use M1 as money, through writing checks or using debit cards as if they were all 100% backed. This action causes prices to rise higher than they would if we were not on a fractional reserve system.

----------


## rpwi

> No, sir, massive conceptual difference.
> 
> Gold is NOT the monetary base today. 
> 
> Today it is FRBN.


Minor semantic confusion.  The monetary base is basically all dollars bills + all electronic bank deposits at the Federal Reserve.  Both are liabilities of the Fed...and there is little conceptual difference between the two as the Fed will convert the paper form of MB into electonic form or vice versa as banks require.  Since federal reserve notes are just a component of the monetary base...is it more accurate to use the monetary base itself in these examples.  Just like gold used to be the reserve back in the day...dollars (whether in electronic or paper form) are that reserve now.  Little has changed...issuing more claims than what banks/goldsmiths have is fraud and results in either inflation is the fraud isn't caught or bankruns and bailouts if it is caught.




> The claim slips ARE demand deposits, but that is not money. Those are _liabilities_ - they are an IOU - and money is never a liability to hold nor an IOU - *money resolves IOU and is always an asset no matter who holds it*


Yes...demand deposits are the modern equivalent of gold claim slips.  But they are money.  Technically they are a liability to the bank...but quite a minor one.  One that is never really redeemed in the aggregate and doesn't cost really much in interest.  On the consumer end, the demand deposit is an asset but a very flimsy one as it does not have proper backing.  Certainly debt can be a means of exchange.   If somebody buys a car from you for a 10k corporate bond...didn't they buy your car with debt?  




> The challenge: you have been indoctrinated by a poor definition of money.
> You have accepted this poor definition, and then, allocated all the power and effect "real" money retains and placed it on something that is NOT money.
> 
> You then exercise certain economic laws and theories regarding money upon this thing that is not money - and end up with utterly bizarre proclamations - such as a man paying off his debt destroys the monetary base.


Let's return to the goldsmith example.  Don't you agree that a goldsmith that issues more gold slips than he has gold is dishonest and creates inflation?  If he uses these gold slips to loan out money...isn't it logical, that if this money were to be repaid the amount of gold slips and therefore inflation would be reduced?  What's the difference between what the goldsmiths did and what banks do now?




> No, sir. 
> FRBN (Federal Reserve BANK notes) have never, ever, ever, never been deposit slips or redeemable for gold.
> They were born in 1932 and used to buy the gold and gold certificates during the FDR demonetization of gold. (Note the term: DEMONETIZATION)
> 
> FRN - Federal Reserve Notes - were, indeed, certificates of gold/silver, and were removed from circulation a hundred years ago or so.


Yeah...I did use incorrect terminology as FRBN's are different than FRN's.  FRBN's were only redeemable with treasury debt.

Should be noted while FDR ended the public gold standard, the international gold standard actually stuck around until Nixon...so a country like France could (and did) demand gold for their dollars...which because the dollar was fractionally backed by gold the entire system crashed and Nixon really didn't have a choice but to take us off the standard.

----------


## rpwi

> Ah, I see.
> 
> Ok, you must remember that demand deposits is an *accounting record* and not anything in reality. It is merely a record of how much and to whom the bank owes money *which is why it is a liability to the bank - it is an obligation against the bank*


It is an accounting entry...but so is a federal reserve note to the federal reserve.  The peice of paper is just a handy reminder of who has what on the Fed's (or subordinate banks') balance sheets.




> So no, the demand deposits *which merely an accounting record* are not debited. There is no offsetting reason for debiting - it can only be debited by a *withdrawal*


Or by a default from the bank.  This would happen all the time if it weren't for the government constantly bailing out the banks.




> It remains on the accounting as 
> 3 trillion in demand deposits (liability)
> 
> The .5 trillion sits, thus, on the books as negative equity:
> 
> Liabilities: 3 trillion (deposits)
> Assets: 1 trillion (cash)
> Assets: 1.5 trillion (loans)
> Bank equity: -.5 trillion


Negative equity in accounting is impossible.  The bank would instantly become insolvent.  Say there was equity to pad this loss though...sure a small default might not change the money supply...but in general defaults would because the banks would have to bolster their reserves to maintain capital and reserve requirements.  The actual loss in the money supply would probably take place from the bank NOT re-lending a different loan that had just been repaid.

----------


## Black Flag

> Black Flag, fractional reserve banking creates inflation by expansion of the supply of M1. In FRB M1 is almost always larger than M0 (base) because the banks create these deposits when they make loans and only a fraction of those demand deposits are "backed by" actual base money.


Sir,
You make a basic (but fallacious) assumption that demand deposits are money - thus, you add them to money (M0) to create your M1 - but this is like adding the bark of a dog to a dog, and claiming the dog barking outside of your door is actually two dogs.

As I pointed out above, because you apply the attributes of money to something that is NOT money, but a debt/obligation, you end up creating bizarre cause/consequence calculations that end with such stories that paying off debt causes deflation.




> This action causes prices to rise higher than they would if we were not on a fractional reserve system.


This is completely untrue.

If you, in fact, measured inflation vs. the increase in demand deposits, there exists no such correlation ---*it does not appear at all* - but your theory, as you have just stated, says it must.

The reason it does not is because every transaction in the market place uses real, M0, money. The mechanics in every transaction is that the money is withdrawn by the buyer, spent, and then redeposited by the seller. In all cases, it is real M0 money changing hands.

Therefore, the only amount of money in the market place is what can possibly be withdrawn as M0 money, and never more than that - therefore, the money supply, measured in M0,_ is the sole determiner of inflation or deflation_*, and never demand deposits.

Demand deposits may account for an increase in the number of transactions an economy can undertake - that is, they move faster (no time lost in getting currency, spending, and redeposit - it happens in a microsecond) - but that does not create inflation.

*well, not quite. Inflation/deflation actually created by changes in supply and demand of money. So, if M0 goes up, the supply changes, thus, the price (inflation). But demand can change too - such as in Rpwi post were the banks stop lending and horde cash.

In his example, 
$100 reserve/$900 deposits/$900 loans.

If, for whatever reason, there is a bank run - people exercise their demand deposit but there is only $1 per $100 in obligation.
The M0 has not changed - it is still $100 - but the demand side of the supply and demand law has radically increased, making money more valuable, thus increasing its price relative to other goods, which means less of it is needed to buy other goods, which means the market sees systemic price collapse - deflation.

----------


## rpwi

> Rpwi,
> 
> So, now of course, your bank is under threat. It is technically bankrupt - that is, its debts are greater than its assets.
> 
> As such, the "authorities" who ever they be would step in and dissolve such a bank - collect as much of the outstanding loans as possible, and distribute the remaining funds to the depositors - who would suffer the losses and ed: cause a deflation of the money supply.


Exactly...  Now for the most part defaults don't take down banks because they have reserves, the ability to borrow from other banks and the ability to be bailed out indirectly and directly from the Fed.    As long as the bank is still standing...the defaulted loan will still cause deflation though as the bank will curb the amount of demand deposits the bank can make to rebalance their reserves and equity ratios.




> As such, *once again* demonstrates that demand deposits are NOT money - because if they were money, the depositors would never need to worry about their money, no matter what the bank did.


There is no question that demand deposits are a different type of money than base money...but claim slips are technically money as they are stores of values accepted as a means of exchange.  Certainly they can create inflation and deflation just like base money can.




> In all cases, demand deposits are never money. They are *always a promise to satisfy an obligation on demand - and that promise always risks being broken.*


Indeed it always can and always will (without government bailouts be broken).  Part of the problem is the consumer.  We're dumb enough to accept demand deposits as payment...so we MAKE it money.  Most have no idea that demand deposits are fractionally backed so to the public's credit part of this horrible bank money mistake we find ourselves in is not entirely due to our ignorance but partly to the fraud of private banks and the federal reserve.

----------


## Black Flag

> It is an accounting entry...but so is a federal reserve note to the federal reserve.  The peice of paper is just a handy reminder of who has what on the Fed's (or subordinate banks') balance sheets.


No, sir, it is not.
Open your wallet and touch them. They are not an accounting record. It is money.

If, as you claim, they are merely an accounting, pray tell, what are they accounting for?




> Or by a default from the bank.  This would happen all the time if it weren't for the government constantly bailing out the banks.


Agreed. FDIC adds a very disturbing wrinkle - but that is whole other dialogue.




> Negative equity in accounting is impossible.  The bank would instantly become insolvent.


No, actually *bankrupt* - that is, more liabilities then assets.

Insolvent is more assets then liabilities, but no cash to pay current obligations.

But, Bingo. The bank dissolves.




> The actual loss in the money supply would probably take place from the bank NOT re-lending a different loan that had just been repaid.


Bingo!

Exact-a-mundo, sir! 

The banking system begins to stop re-lending and begins to horde cash .... circa 1932.

----------


## rpwi

> The former merely creates a ratio of cash-to-loan and is utterly irrelevant.


Well given that most of these loans are fairly short term in nature and the bank has very little in short term assets to back this up...it is relevant.  Otherwise a bank without a proper capital ratio is highly vulnerable to a bankrun (or as they call them now...a bailout).




> Completely total difference.
> A CD cannot be withdrawn by the depositor.


Well some CD's can be withdrawn at any time...you just lose the interest.  Let's pretend that isn't the case and say...all CD expired in a year.  Would it matter?  What is the difference between a 10k demand deposit and a 10k CD that expires in a year?  What about a 10k DD and CD that expires in a month?  Week? Day? Hour? Minute? Second?  Nano-second?  Where do you draw the line to say that clearly the CD is a separate conceptual entity from the DD?




> There is no threat to undermining the capital reserve of the bank in making a loan against a CD.


Actually there is.  Especially if your 30 year mortgage is backed by say a 5 year CD.  That's problematic in the aggregate...  




> This absolutely cannot be said about demand deposits - which is why a CD and bonds have a capital base modifier of around 5% and demand deposits have a capital base modifier of around 50%.


Arbitrarily chosen numbers.  Sure a CD will be more stable...but it still has the same conceptial problems a DD has.




> Agreed *except* the bank cannot apply 0% modifier to the 100K demand deposit


Semantics...  A bank can issue a loan with an infinitely low interest rate which is little different than a demand deposit with an infinitely low interest rate.  Banks do issue demand deposits to finance say mortgages all the times which reinforce my example.

----------


## Black Flag

> Well given that most of these loans are fairly short term in nature and the bank has very little in short term assets to back this up...it is relevant.  Otherwise a bank without a proper capital ratio is highly vulnerable to a bankrun (or as they call them now...a bailout).


I was a bit too flippant - yes, it does matter - the ratio measures cash-to-loans, which is a measure of risk of loan default as it reverse-leverages the fractional reserve system.

So, we are better aligned here.




> Well some CD's can be withdrawn at any time...you just lose the interest.


Some, you pay a penalty.
That is why there is a trade market for selling CD ... you sell the CD to another guy at a discount, but get your money out. The bank don't care.




> Where do you draw the line to say that clearly the CD is a separate conceptual entity from the DD?


Any CD of X (or more) time placed upon of loan of a term of X (or less) is never a problem.

Any other investment vehicle to loan where the term is longer then the investment is always a risk to the fractional reserve system.

----------


## rpwi

> No, sir, it is not.
> Open your wallet and touch them. They are not an accounting record. It is money.
> 
> If, as you claim, they are merely an accounting, pray tell, what are they accounting for?


It is merely the physical manifestation of a deposit at the Federal Reserve.  I mean let's go through the accounting entries when the Fed creates money on the open market.

The fed buys say 10m in t-bills from a primary dealer.  They in turn credit the primary dealer's account at the Fed with 10k.

So the fed balance sheet looks like:

liabilities: x + 10m in bank deposits
assets: x + 10m in tbills

The primary dealer...say Citigroup...balance sheet then looks like:

assets: x - 10m in tbills
assets: x + 10 in deposits at the federal reserve

Then say a bunch of citigroup's customers want 5 million in cash.  Citigroup goes to the Fed and asks for this.  The Fed (which will get the paper notes from the Treasury Department if needed) provides the notes and uses the deposits at the federal reserve as payment.

So the fed's balance sheet then looks like:

liabilities:
  Member bank depsoits: x - 5m
  Federal Reserve Notes: x + 5m

Citigroup's balance sheet then looks like:

Assets:
  Deposits at the Fed: -5m
  Cash Reserves: +5m

Citigroups customers are then able to cashout their deposits.

Those are the accounting entries for the monetary base...of which the fed notes are but a component.  It is somewhat semantics...but IMO it is accurate to call greenbacks mere reminders of what the Fed holds as a record on their balance sheet if that makes sense.

----------


## Black Flag

> It is merely the physical manifestation of a deposit at the Federal Reserve.  I mean let's go through the accounting entries when the Fed creates money on the open market.


Deposit of....what?

I do.

Treasury creates T-bill for $1 billion.
FED buys T-bill for $1 billion.

FED either prints or types on a computer $1 billion in digits for the Treasury.

The government spends it.

It is money.

Just because the FED manufactures money does not make it "not" money.

That would be like saying just because a miner mines gold does not make it gold.

----------


## matt0611

> Exactly...  Now for the most part defaults don't take down banks because they have reserves, the ability to borrow from other banks and the ability to be bailed out indirectly and directly from the Fed.    As long as the bank is still standing...the defaulted loan will still cause deflation though as the bank will curb the amount of demand deposits the bank can make to rebalance their reserves and equity ratios.
> 
> There is no question that demand deposits are a different type of money than base money...but claim slips are technically money as they are stores of values accepted as a means of exchange.  Certainly they can create inflation and deflation just like base money can.
> *
> Indeed it always can and always will (without government bailouts be broken).  Part of the problem is the consumer.  We're dumb enough to accept demand deposits as payment...so we MAKE it money.  Most have no idea that demand deposits are fractionally backed so to the public's credit part of this horrible bank money mistake we find ourselves in is not entirely due to our ignorance but partly to the fraud of private banks and the federal reserve*.


This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.

As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.

----------


## Black Flag

> Those are the accounting entries for the monetary base...of which the fed notes are but a component.  It is somewhat semantics...but IMO it is accurate to call greenbacks mere reminders of what the Fed holds as a record on their balance sheet if that makes sense.


Do not get hung up by the fact FRBN can be computer digits or little pieces of paper - they are both FRBN.

The measure of money is that it appears - always- as an asset on any book.

Your scenario, you have an error:
Follow the accounting:

The fed buys say 10m in t-bills from a primary dealer. They in turn credit the primary dealer's account at the Fed with 100k.

So the fed balance sheet looks like, *in fact, this*

*liabilities: 0*
assets: x + 10m in tbills

The Fed, never, never, never, has monetary liabilities. It has the power to *monetize anything*. It never, in its history, has had any monetary liabilities... not ... a single...one. It cannot, since it has the power to manufacture money.

----------


## Black Flag

> This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.


I agree, the People *believe* that is money. But believing an illusion does not make it real.

No matter what, they cannot withdraw their deposit greater then the M0. An attempt to do so creates a systemic bank run - *which would be impossible if, in fact, demand deposits was money*.




> As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.


There has been inflation, of course - as the M0 has steadily increased.

However, if the claim be true, that the fractional reserve system mechanics which creates a demand deposits up to 9x the M0, we should see a comparable inflation rate to that 9x the M0.

What we see is an inflation rate comparable only to the M0.

The reason I posit is that the economy transact with M0 - real money. Therefore, the maximum amount of actual transaction in play can never exceed M0 - and that is the measure of money in the economy - that is, how much concurrent transaction.

Now, because of demand deposit and computer digits - the rate of transactions is massively faster. Instead of say a day to carry cash between withdrawal, purchase and redeposit, it is now a microsecond.

Does this increase the economic capacity? Sure.

But does it decrease the demand for money? I say No.

Without a decrease in the demand for money (that is, -supply/demand law - either by an oversupply of money or reduced desire to hold money) inflation does not come to play.

----------


## rpwi

> Deposit of....what?


Yes...the terminology the Fed uses is confusing...but they do award deposits to banks.  It used to be these deposits were fractionally backed by gold but now they are mostly backed by t-bills.  




> Treasury creates T-bill for $1 billion.
> FED buys T-bill for $1 billion.
> 
> FED either prints or types on a computer $1 billion in digits for the Treasury.
> 
> The government spends it.


It should be noted that it would be quite rare for the Fed to directly purchase t-bills from the Fed.  If they did they would cut out the middleman in the primary dealers and they wouldn't get as many profits.  And since bank profits are paramount, the Fed will probably never deal directly with the treasury regarding t-bills because it is too efficient.  Now the treasury department is like a bank in that it has a large 'deposit' at the Fed...which is a 'liability' to the Fed.  But the primary way they get the account credited is through bond sales and tax receipts.




> It is money.
> 
> Just because the FED manufactures money does not make it "not" money.
> 
> That would be like saying just because a miner mines gold does not make it gold.


We agree...the monetary base created by government is money.  My point is just that M1 or bank money or checking accounts...is also money.  You seemed to disagree because you said this was merely accounting entrees...which in a sense was quite correct.  But then I countered that the MB can be just accounting entries as well.  We can quibble semantics I suppose...

----------


## rpwi

> This is the heart of the matter IMO. People's take actions as IF the demand deposits were base money. This is the cause of the rising prices. At least in theory as I understand it.


I think it is more than that.  Demand deposits are money through our perception.  They are a store of our value.   If all our demand deposits were to vanish and only the reserves backing them remained...we would have lost a 'lot of money'.




> As to studies of inflation vs demand deposits, I'm not familiar with any and haven't looked into that matter.


The creation of checking accounts absolutely and without a doubt causes inflation.  Some argue this is not the case because a bank only uses bank money to buy loans...and therefore they cancel each other.  Many also make the same argument that the Fed because it buys t-bills off of the open market when it creates MB...that it doesn't create inflation.  Both arguments are false.  Whenever you create short term debt to backup long term debt, you are creating money and inflation.  Be it at the Fed in the open market or at a private bank when they're financing a mortgage (or nowadays a private equity takeover which will be the new bubble). 

The other quirk to to think about is that M1 is somewhat antiquated.  You also have to consider 'near' demand deposits.  eg Demand deposits that bear interest and have short maturities.  If you view a checking account as merely a deposit that yields a microscopic amount of interest and has a microscopic maturity and that it constantly rolls over...you appreciate that there is little difference between demand deposits and their close cousins.  This is why the Feds and the financial markets keep track of higher aggregates like M2 and M3 besides just M1 and MB.  Because M1 is much more regulated by the Feds...banks have shifted a lot of money from M1 into M2 and M3 which explains why as M1 has recently crashed...we haven't had deflation (M2 and M3 have been still growing sharply).

----------


## rpwi

> Do not get hung up by the fact FRBN can be computer digits or little pieces of paper - they are both FRBN.


In all my reading I've never heard of the MB be referred to as FRBN.  Correct term should be 'monetary base' and not Federal Reserve Bank Notes...as they are different...but I won't push the issue after this.




> The fed buys say 10m in t-bills from a primary dealer. They in turn credit the primary dealer's account at the Fed with 100k.
> 
> So the fed balance sheet looks like, *in fact, this*
> 
> *liabilities: 0*
> assets: x + 10m in tbills


I did make an error with 100k...should have been 10k.  Was late and I was tired :P .  However, your accounting is incorrect.  The Fed absolutely increases their liability (specifically deposit liability from citigroup) when they purchase a t-bill.  This is also basic accounting.  You can not increase an asset without increasing either a corresponding liability or equity.




> The Fed, never, never, never, has monetary liabilities. It has the power to *monetize anything*. It never, in its history, has had any monetary liabilities... not ... a single...one. It cannot, since it has the power to manufacture money.


This is quite untrue.  In fact the Fed publishes their balance sheet and you can check this out for yourself.   Go to:

http://www.federalreserve.gov/releases/h41/current/

And scroll down to ''8. Consolidated Statement of Condition of All Federal Reserve Banks".  That's the Fed's balance sheet.  On here you can clearly see that federal reserve bank notes are about a trillion dollar liability and deposits at the Fed are about a 1.6 trillion dollar liability.  You can also see there is about a 11 billion in gold a holdover from when the dollar was backed by gold.  The gold was the asset to the fed (as well as t-bills).  Then the gold and the t-bills backed up their deposit liabilities.  Now since we are off of the gold standard...really it is mostly t-bills that backs deposits at the Fed.

----------


## rpwi

> There has been inflation, of course - as the M0 has steadily increased.
> 
> However, if the claim be true, that the fractional reserve system mechanics which creates a demand deposits up to 9x the M0, we should see a comparable inflation rate to that 9x the M0.
> 
> What we see is an inflation rate comparable only to the M0.


Couple of points to make.

M0 is not an accurate measure of money...it is a subset of MB or the monetary base.  It would have been more logical for the US government to equate M0 with MB but unfortunately this is not the case.

You can see the history of MB at shadow stats (along with other aggregates) here:

http://www.shadowstats.com/charts/mo...e-money-supply

And here is a nice measure of inflation historically:

http://www.shadowstats.com/alternate...flation-charts

If you're theory that bank money wasn't money...or more importantly it did not have the affect of the money (like inflation) then in 2008 when the MB spiked to unprecedented levels (bottom right graph of the first link) we should have seen more than a 10% spike in inflation.  Indeed if you compare the charts...the inflation graphs (using the pre-1980 measure which is more honest) much more closely corresponds with the Bank money aggregates (M1, M2, and M3) than it does with MB.

Certainly creating more of the monetary base will probably create more inflation.  But the biggest reason is because it further enables banks to create more money on their end.

Other thing to consider is...there are other causes of inflation. Crop failures, over-population, immigration, monopolies, redemptions of the dollar from being a reserve currency, competition with other currencies and more are all causes.  You can largely look at the supply of money but it is not the whole story.

----------


## matt0611

rpwi, what's the difference between MB and M0? I always thought they were both just the sum of all FRNs + coins + electronic deposits at the Fed that can be exchanged for FRNs or coins.

----------


## Black Flag

> Yes...the terminology the Fed uses is confusing...but they do award deposits to banks.  It used to be these deposits were fractionally backed by gold but now they are mostly backed by t-bills.


"Used to" is 80 years ago ... so its not relevant at all today.

They are not backed by T-bills.

A Treasury note is debt .... it is used for the government to GET money, not to BACK money.

You do not make an IOU, get money for it, then claim your IOU 'backs' the money you just got.




> It should be noted that it would be quite rare for the Fed to directly purchase t-bills from the Fed.  If they did they would cut out the middleman in the primary dealers and they wouldn't get as many profits.


Possible true.

The reason they do the charade is to mask the raw creation of money by using the middle man to give credibility to it.




> My point is just that M1 or bank money or checking accounts...is also money.


My argument is:
it is absolutely not money.

It is a debt and liability; money is never a debt nor a liability, no matter who holds it.

Demand deposits create an obligation on a party to the benefit of another; money never obligates anyone nor grants a benefit to someone other than the holder of money.

My point is:
- _if you assign the cause/effect of money to something that is not money, you will build crackpot theories and crackpot explanations for economic effects which will lead you to make bizarre claims (paying off debt shrinks money supply) and proclaim bizarre policies which, in the end, will undermine the marketplace._

----------


## Black Flag

> If you're theory that bank money wasn't money...or more importantly it did not have the affect of the money (like inflation) then in 2008 when the MB spiked to unprecedented levels (bottom right graph of the first link) we should have seen more than a 10% spike in inflation.


No.

This is the reason why:

ed; whoops, forgot the graph

The money has NOT been added to the economy, nor loaned.
It sits in FED.

Thus, printing a qazzilion dollars by the FED, but kept in the FED vault is exactly the same effect as the FED not printing a gazzilion dollars.




> Other thing to consider is...there are other causes of inflation. Crop failures, over-population, immigration, monopolies


Never.

Crop failures spike prices in CROPS, not systemic across the market.
Supply and demand changes in commodities *other than money* does not cause inflation. 

It creates supply and demand issues in that commodity and adjacent products - nothing more.

A shortage of Ferraris - with their subsequent rise in price - is not "inflation".




> redemptions of the dollar from being a reserve currency


Huh?

How does spending a dollar cause inflation?



> competition with other currencies


This is true.

Money is an economic good, and obeys all the laws of economics -no more and no less- as all other economic goods.

The Law of Supply and Demand effects money.
Competition affects demand.
Therefore, competitive currency will affect the demand curve of money.




> Huh  You can largely look at the supply of money but it is not the whole story.


All of your other "causation" are not relevant at all to inflation/deflation.

But as I pointed out above, in this post and previous posts, the supply/demand law commands money, like it does all economic goods.

Yes, supply changes impact money, thus inflation and deflation.

And, as we agree here, demand changes also impacts money, thus inflation and deflation.

----------


## Black Flag

> rpwi, what's the difference between MB and M0? I always thought they were both just the sum of all FRNs + coins + electronic deposits at the Fed that can be exchanged for FRNs or coins.


You are correct.

----------


## Steven Douglas

> I don't value FRBN's directly -- I only value what I can exchange them for, and only to that extent. However, in and of themselves, they have no direct value to me.
> 			
> 		
> 
> Bull.
> 
> If I held up briefcase and said "This briefcase is worth $1 million" you laugh ... until I said, it had a million bucks in it. Then you would stop laughing.
> 
> You aren't "calculating" oooo..look at all the goodies I can buy with a million --- you are looking at it *exactly like you would look at a 500oz of gold*


Yeah? How would you feel if I held up a briefcase full of Weimar Republic Deutschmarks?  All large denominations, too (they're not rare, you can get a briefcase full of them in Germany still).   

You missed the point completely (deliberately?). I didn't claim that I didn't value FRBN's. I said I didn't value them _directly_.  I value apples directly.  But if I'm an apple farmer or food merchant I could also value them indirectly - for what I could exchange them for (for things I actually do value directly).

If I was in Vegas and found an abandoned briefcase filled with black chips from Harrah's, I'd be screaming for joy. But that doesn't mean I have a black chip fetish.  It means I can go cash them OUT for FRBN's, which I can then go "cash out" for the things I actually do directly value. 

Gambling chips and FRBN's ONLY have _indirect_ exchange value -- which is temporal, fleeting, and constantly eroding. Without that RIGHT NOW exchange value (e.g., they eventually become like Continentals - worthless) _they are essentially valueless_. 

Gold, on the other hand, has DIRECT value, and has throughout most of human civilization throughout recorded history. I own (and directly value) some gold that isn't money.  I have right now three dental crowns made of white gold in my mouth that I value - for its utility. I use other gold I have in a semiconductor sputtering process, and I have a friend who uses gold to create leads from integrated circuit chip substrates in ceramic packages he creates.  

So unlike Harrah's black chips and the Fed's FRBN's, which ONLY have indirect exchange value, and only in the moment, gold has both direct value and indirect exchange value.

----------


## cubical

> This is quite incorrect.  A bank regularly creates inflation though it's creation of deposits.  An analogy to illustrate.
> 
> Say the money supply was 1000 pounds of gold in a local economy.  Instead of the people trading gold between each other...they decide to deposit it with a gold smith who lets them trade claim slips as well.  Goldsmith notices that these claim slips are not being redeemed regularly...so with a sneaky move goes out and loans some it.  Because he has created more gold slips than there is gold he has created inflation.  Even though he has create a corresponding amount of debt.  
> 
> Couple different ways to conceptional this.  When you deposit money at a bank and get a checking account, you are in reality getting an interest bearing investment that has an infinitely small interest rate and an infinitely quick maturity.  So one can say anytime you backup long term assets with short term debt you are creating money.


Yes, but banks can't do this unless they are getting loans from the fed or they are counterfeiting. In your example the gold smith is counterfeiting whatever the notes he is giving out. Do really believe the banks are doing the same?

----------


## Black Flag

> Yeah? How would you feel if I held up a briefcase full of Weimar Republic Deutschmarks?  All large denominations, too (they're not rare, you can get a briefcase full of them in Germany still).


Exactly.
You do not value them - and if you took a ton of gold to Fijians, they'd throw it in the garbage.

That's the point - value is imputed.




> . I said I didn't value them _directly_.


And you  missed my point.

I do not care about your reasons why you do or do not or how you value anything - that is all up to you.

But the way YOU do it has no merit on anyone else or how they do it.

Gold has only indirect exchange value - you can't eat a bar of gold, nor use it to fuel your car. You have to exchange it for the thing you do eat and gasoline.

Same as FRBN -no different.

----------


## matt0611

> Exactly.
> You do not value them - and if you took a ton of gold to Fijians, they'd throw it in the garbage.
> 
> That's the point - value is imputed.
> 
> 
> 
> And you  missed my point.
> 
> ...


I don't think I agree with this. Gold has some direct economic uses. Ornamental, dental, semiconductor etc. 
FRNs have no real direct uses.

----------


## wgadget

Toilet paper, wall paper, kindling...

----------


## rpwi

> rpwi, what's the difference between MB and M0? I always thought they were both just the sum of all FRNs + coins + electronic deposits at the Fed that can be exchanged for FRNs or coins.


Depends on the country...in England M0 and MB are the same (which is more logical).  In the US, the conventional wisdom is to refer to MB as merely being how much cash and coin circulates outside of the banking system.  Since obviously cash that is held by a bank...or fed deposits held by the bank...are part of the economy and base money supply...M0 is not a super important measure.  MB is the best measure of direct government money because it includes all cash, coin and deposits at the Fed.

----------


## rpwi

> They are not backed by T-bills.
> 
> A Treasury note is debt .... it is used for the government to GET money, not to BACK money.
> 
> You do not make an IOU, get money for it, then claim your IOU 'backs' the money you just got.


Well...t-bills 'back' the monetary base in more of an indirect way.  Certainly the Fed doesn't practice direct redemptions of dollars for t-bills...but in their accounting entries they absolutely back dollars with t-bills (most of the time).  Do they need to do this?  No.  Some of this is accounting orthodoxy.  They could just fabricate another asset and use that to balance the dollar liability (say the asset of 'Federal Reserve Brownie Points' or 'good will').  I personally think it is quite foolish of the Fed to almost exclusively purchase t-bills and not just because the yields are pathetic...  IMO direct rebates to the treasury would probably be the most efficient use of the money.  Now the Fed is somewhat constrained by these accounting rules...but they've been playing games with 'swaps' to get around them lately.  All very evil.




> The reason they do the charade is to mask the raw creation of money by using the middle man to give credibility to it.


The Fed does indeed do a lot of masking.  From 2008 to present, they've taken the MB from about 1 trillion to 2.6 trillion.  Does that mean the Fed merely created 1.6 trillion?  Noooo....  They created a LOT more...but then destroyed a lot more so only the net increase was 1.6 trillion.  Since each deal from the Fed incurs heavy transaction fees this means the public is getting fleeced out of t-bill interest that would normally go to reduce the deficit.   This is extremely evil and no politicians are talking about.  You can for example read about some of the churning the Fed and the horribly corrupt open market works at:

http://wps.pearsoncustom.com/pcp_mil...ent/index.html




> My argument is:
> it is absolutely not money.
> 
> It is a debt and liability;


It is both.  Why is this not possible?  Anything can be money... Baseball cards...sea-shells...  So could one say corporate bonds be used as money?  One could pay for their groceries with a corporate bond for IBM perhaps?  If this is possible why would it be impossible for checking accounts to be money?   




> My point is:
> - _if you assign the cause/effect of money to something that is not money, you will build crackpot theories and crackpot explanations for economic effects which will lead you to make bizarre claims (paying off debt shrinks money supply) and proclaim bizarre policies which, in the end, will undermine the marketplace._


It's not a crackpot theory.  Even orthodox economics agrees with anti-fractional bankers in regards to the fundamentals of how bank money works.  Both agree that the measure of money needs to include bank money (almost all econ texts discuss M1, M2 and M3.  Both agree that bank money can create inflation...and while not mentioned as much...most agree that repaying debts does wind down the money supply.  I'm sure if you asked any top Federal Reserve official or treasury official they would actually agree on all these points.

----------


## rpwi

> No.
> 
> This is the reason why:
> 
> ed; whoops, forgot the graph
> 
> The money has NOT been added to the economy, nor loaned.
> It sits in FED.
> 
> Thus, printing a qazzilion dollars by the FED, but kept in the FED vault is exactly the same effect as the FED not printing a gazzilion dollars.


Not true.  The measure of MB is all cash in circulation + all cash in private bank vaults + all coinage + all private bank deposits at the Federal Reserve.  Pretty much all of MB is in the economy.  If the Federal Reserve had been holding MB in their vaults...it would not have been counted as MB.  Logically it makes no sense that the Fed would create a lot of MB and then do nothing with it.  Are you saying they printed a trillion plus in dollar bills and just sat on it?  That's clearly not the case.  They mostly created liabilities (fed deposits) to purchase an assortment of assets from the private sector to bail it out.  Again the reason why inflation didn't spike (it did go up more than experts are willing to admit) is because bank aggregates crashed.  Once banks start relending at their normal money multipliers...we could see mega-inflation.




> Never.
> 
> Crop failures spike prices in CROPS, not systemic across the market.


Not true.  Money is only valuable for what it can buy...if there isn't that much stuff on the market to buy...then the value of money goes down.  If people can't spend their money on crops...they'll spend their money on other things like say...fish.  And the price of fish goes up.  So indeed a crop failure would cause systemic inflation in an economy.




> Supply and demand changes in commodities *other than money* does not cause inflation.


So if a blight wipes out 99% of the food supply in the world...you're saying their would be no inflation??




> How does spending a dollar cause inflation?


The dollar is a reserve currency.  It's a good deal.  We send worthless pieces of paper to countries like latin American and they send us ore, ag products and real wealth.  As long as these countries keep the dollars for internal transactions...we luck out.  But there will come a day...when these countries will get fed up with the dollar and no longer are willing to use it as a local intermediary of exchange.  They will send it back to the US.  But they will get real wealth in exchange.  We will send them say soybeans and machine parts...and they will send us worthless pieces of paper.  This absolutely will create inflation...and probably mega-inflation at that.




> But as I pointed out above, in this post and previous posts, the supply/demand law commands money, like it does all economic goods.


Yes and no.  Money is not natural.  Because it has the ability to satisfy legal tender laws it has a lot of artificial power and is somewhat exempt from the laws of supply and demand.  Also the central banks around the world are constantly meddling with the monetary bases and bank aggregates...so none of this is natural and competitive.

----------


## rpwi

> Yes, but banks can't do this unless they are getting loans from the fed or they are counterfeiting. In your example the gold smith is counterfeiting whatever the notes he is giving out. Do really believe the banks are doing the same?


Yes.  In the old days the issue was goldsmiths printing more claim-slips than there was gold.  Then banks did pretty much the same thing as the gold smiths.  Then in the US, dollars replaced gold as the reserve and checking accounts are the new gold claim slips.  Our checking accounts are fraudulent.  We can't all redeem our demand deposits for dollars because the banks are gambling our deposits away with side-investments.  Now a bank need not get a loan from the Fed to practice fractional banking (unless you consider FRBN's loans or FR Deposits loans in the more abstract sense).  All they need are dollar deposits...and they can promise more claims on dollars than they have dollars on hand.

----------


## Black Flag

> All they need are dollar deposits...and they can promise more claims on dollars than they have dollars on hand.


Correct. That is the fundamental fraud of the Fractional Reserve system

----------


## Steven Douglas

> You do not value them - and if you took a ton of gold to Fijians, they'd throw it in the garbage.


Hardly. 




> Gold has only indirect exchange value - you can't eat a bar of gold, nor use it to fuel your car. You have to exchange it for the thing you do eat and gasoline.


Pretty daft response - you can't eat an iPod, roll of copper tubing, a gallon of paint, a box of nails, or use any of them to fuel your car either, but they all have direct value in and of themselves. Like gold, which - as I said, but you apparently missed - I have as three crowns, and use in a sputtering process.   




> Same as FRBN -no different.


FRBN's, gambling chips, checks, etc., have indirect/exchange value _only_.  If you want to split hairs, gambling chips could have value as coasters for elves, and FRBN's could have direct value as kindling, or toilet paper - but that's about it.

----------


## Black Flag

> Not true.  The measure of MB is all cash in circulation + all cash in private bank vaults + all coinage + all private bank deposits at the Federal Reserve.  Pretty much all of MB is in the economy.  If the Federal Reserve had been holding MB in their vaults...it would not have been counted as MB.  Logically it makes no sense that the Fed would create a lot of MB and then do nothing with it.


Ok, you misunderstand the graph and the action of the FED, while being correct about the MB contents.

This is the DEPOSIT BANKS *excess* reserves.

So the FED created money in exchange for these banks unmarketable assets (bad mortgages and stuff).

These banks, instead of making loans, put the new money into the reserve of the FED, thus *excess* reserves.

Thus, this money has not entered the market. It sits unused and uncirculated.

It DOES count to the MB, but is has the _same effect as the FED not printing as far as inflation concerns (not used, no inflation)_ BUT it has the effect of protecting the banks capital requirements, which is a matter of solvency.

----------


## Black Flag

> Hardly.


In fact, yes.

They had no use for the stuff.

(They may now, being Westernized, but back then ... it was as utterly useless to them as the planet Pluto is to you)




> Pretty daft response - you can't eat an iPod, roll of copper tubing, a gallon of paint, a box of nails, or use any of them to fuel your car either, but they all have direct value in and of themselves.


Exactly and so does FRBN - about the same as gold




> Like gold, which - as I said, but you apparently missed - I have as three crowns, and use in a sputtering process.


And I have emergency fire starter, which gold -in fact of practice- is utterly useless to use.

Get the point?

Just because YOU are utterly unimaginative for some other uses for paper other than money does not diminish FRBN being money while backed by nothing - * absolutely no different a situation of gold being backed by nothing but once was money but not money now!*


ed:
Steven, you might argue gold would be a "better" money then FRBN, and likely -on some points at least- I may agree with you. 

But it is not money now.

FRBN is.

FRBN may be deficient as money for certain reasons, but that does not change the fact:
-that it is backed by nothing, like gold was backed by nothing.
-that it is money now.

----------


## Black Flag

Rpwi,

I showed above "where" the money went (excess reserves)

To show and confirm your point that indeed the MB had to increased as well.

----------


## Steven Douglas

> And I have emergency fire starter, which gold -in fact of practice- is utterly useless to use.


You keep going back to that same weak red herring - finding a specific use for one thing, and dismissing the value of another for not being suited to that particular purpose.  It's a completely daft argument because gold does not derive its value from being edible or for its use as a fuel.  Gold also doesn't compute by itself, isn't drinkable, can't be used as a hammock or underarm deodorant, and it won't keep your garden pest free. But that does not negate gold's intrinsic properties or the purposes to which gold is UNIQUELY suited, and therefore DIRECTLY valued.   

And note this:  it is precisely because gold is directly and valued for its many uses that it has gained market exchange value throughout most of humanity over the past several thousand years (ancient isolated primitive people notwithstanding).  It is for that reason that even long after gold has been demonetized, it can STILL be exchanged for many 88 times what the original dollar bill note that was once backed by it was worth.  

Get the point? Gold continues to have both direct utility value AND universal exchange value (irrelevant isolated exceptions noted and dismissed), even through wars, pestilence, famines, and fiat currency failures worldwide.  Meanwhile, the paper you believe in and are so in love with as somehow being on par with gold only loses value (relative to a wide basket of commodities) over time - and will eventually be worth less than the paper it is printed on - just like Continentals and Weimar Deutschmarks.   




> Just because YOU are utterly unimaginative for some other uses for paper other than money does not diminish FRBN being money while backed by nothing - * absolutely no different a situation of gold being backed by nothing but once was money but not money now!*


Nice straw man.  I never said FRBN was not money while backed by nothing, but it's a red herring to even state that gold is backed by nothing, as gold IS backing, and continues to have both direct and exchange value for that reason - _even when it is not officially monetized_.  The same cannot be said of FRBN's.  Repeal legal tender laws and allow PM's to compete freely as currency, without taxation and other barriers to entry, and watch the steadily eroding value of your precious FRBN's accelerate. 

[QUOTE]


> Steven, you might argue gold would be a "better" money then FRBN, and likely -on some points at least- I may agree with you. 
> 
> But it is not money now.
> 
> FRBN is.


I don't know how you are defining money, but it seems pretty narrowly constrained to me.  Gold is a penalized, taxed form of money, and not efficient for a number of reasons -- but it is still money.




> FRBN may be deficient as money for certain reasons, but that does not change the fact:
> -that it is backed by nothing, like gold was backed by nothing.
> -that it is money now.


Those points aren't even being argued, nor are they in dispute, excepting the point I made: that gold IS a form of backing. That's why it CONTINUES to have market value, even when it is not a widely accepted or officially recognized form of currency.

----------


## cubical

> Yes.  In the old days the issue was goldsmiths printing more claim-slips than there was gold.  Then banks did pretty much the same thing as the gold smiths.  Then in the US, dollars replaced gold as the reserve and checking accounts are the new gold claim slips.  Our checking accounts are fraudulent.  We can't all redeem our demand deposits for dollars because the banks are gambling our deposits away with side-investments.  Now a bank need not get a loan from the Fed to practice fractional banking (unless you consider FRBN's loans or FR Deposits loans in the more abstract sense).  All they need are dollar deposits...and they can promise more claims on dollars than they have dollars on hand.


We can all redeem our demand deposits because the fed exists(though it might take a day or so to get the physical money). But to do this the fed must loan the bank the money. They are not counterfeiting the money like the gold smith, the fed is the one counterfeiting and creating inflation.

With no fed, fractional reserve banking is no problem.

----------


## Black Flag

> You keep going back to that same weak red herring - finding a specific use for one thing, and dismissing the value of another for not being suited to that particular purpose.


Steven, 

It is you who created this red herring - you seem to believe that because you don't like paper, that it can't be used for money.

Yet, when other's don't like gold and say it can't be used for money, you go ballistic ....when they use your own argument against you!




> It's a completely daft argument because gold does not derive its value from being edible or for its use as a fuel.


Your argument is completely daft argument because FRBN does not derive its value from being jewelry or filling for your teeth.




> Gold also doesn't compute by itself, isn't drinkable, can't be used as a hammock or underarm deodorant, and it won't keep your garden pest free.


FRBN have great art and skill in its manufacture, made out of the finest linen paper in the world.




> But that does not negate gold's intrinsic properties


Paper doesn't have "intrinsic" properties? You jest!




> or the purposes to which gold is UNIQUELY suited, and therefore DIRECTLY valued.


FRBN purpose is UNIQUELY suited and therefore DIRECTLY valued...too!

Probably why we use it as money!




> And note this:  it is precisely because gold is directly and valued for its many uses that it has gained market exchange value throughout most of humanity over the past several thousand years


*So what?*

IT
AIN'T
MONEY
NOW.

So who gives a flying rat butt what the Egyptians used 5,000 years ago?

Do you think salt is money today because the Romans used salt as such???




> It is for that reason that even long after gold has been demonetized, it can STILL be exchanged for many 88 times what the original dollar bill note that was once backed by it was worth.


And if you bought it in 1977 and sold in 1982, you'd be in the poor house!!

Some store of value, huh?




> Get the point?


Do you?

Not one thing you raised about gold cannot be applied to FRBN.

Just, in your opinion, you like gold. *shrug*




> Gold continues to have both direct utility value AND universal exchange value (irrelevant isolated exceptions noted and dismissed), even through wars, pestilence, famines, and fiat currency failures worldwide.


FRBN continues to be money, direct utility value AND universal exchange value. It sits as the reserve currency for most of the world and most of the world uses FRBN adjacent to their own national currency, even through wars, pestilence, famine and currency failures worldwide. It is the currency everyone runs to when theirs collapses.

Which is FRBN is money.




> Meanwhile, the paper you believe in and are so in love with as somehow being on par with gold only loses value


So did gold in 1982, Spain 1600, California 1849, Yukon 1902....




> Repeal legal tender laws and allow PM's to compete freely as currency, without taxation and other barriers to entry, and watch the steadily eroding value of your precious FRBN's accelerate.


But we already know... FRBN are used in every country on earth ... and many have tied their own currency to it, and most countries you can buy goods directly at the retail with it...

You have your "competition" and the winner is perfectly clear ... except to those that have gold in place of their eyes.






> I don't know how you are defining money, but it seems pretty narrowly constrained to me.


Darn right.
A definition of something that encompasses 1/2 the world is useless.

I mean isn't:
_Buffalo buffalo Buffalo buffalo buffalo buffalo Buffalo buffalo._

...kinda hard to understand? (The longest, grammatically correct, 1 word sentence in the English language)




> Gold is a penalized, taxed form of money


Your argument is against tax, not for gold.



> but it is still money.


Nonsense.

Take a gold coin and try to buy your food, they will laugh at you - or you will have to suffer a huge discount to its commodity price.
Take a gold coin to France and try to buy your food, they will laugh at you - or you will have to suffer a huge discount to its commodity price.

Take it ... Brazil... same thing.

But I take the FRBN and they say "Thank you, sir!"

Gold is not money ... today.



> that gold IS a form of backing.


So is FRBN, which is why it is the *World's Reserve Currency* and sits in every Central bank on earth as such.




> That's why it CONTINUES to have market value, even when it is not a widely accepted or officially recognized form of currency.


It has market value, like copper, platinum, palladium, etc. Heck, you can buy coins in those metals too, just like gold.

But like those other metals, gold is NOT money unless it has a stamp of some national current as a coin... otherwise, today, it is just a valuable commodity.

----------


## Steven Douglas

> It is you who created this red herring - you seem to believe that because you don't like paper, that it can't be used for money.


Why continue? From a red herring you dive straight into a straw man. I never once claimed that paper couldn't be used for money.  Who are you talking to anyway?

----------


## Black Flag

> Why continue? From a red herring you dive straight into a straw man. I never once claimed that paper couldn't be used for money.  Who are you talking to anyway?


Ya, you're right - you drifted from this statement you made

"..I didn't claim that I didn't value FRBN's. I said I didn't value them directly..." 

...as if your opinion of value held some universal merit - which we have seen does not.

----------


## Steven Douglas

> Ya, you're right - you drifted from this statement you made
> 
> "..I didn't claim that I didn't value FRBN's. I said I didn't value them directly..." 
> 
> ...as if your opinion of value held some universal merit - which we have seen does not.


It wasn't an opinion -- just an observation, with an actual attendant logical train of thought - one you did not address at all, save with unrelated red herrings and finally with a strawman argument that made me realize you might be giving knee-jerk responses without actually reading any of my arguments. 

Direct and indirect value are salient to understanding a fundamental difference between paper currency (or electronic entries on a debit card) as money, which has indirect value only, and tangible goods, like gold, which can have both indirect value as a medium of exchange, and direct value as an actual good in itself.   

Unlike paper money, both the direct and indirect value of an ounce of gold are at all times EQUAL. If I am pricing that gold in FRBN, one ounce will get me $1,631 - and if I am pricing it in goods and services from a tailor I deal with, who does happen to accept gold and silver coin as payment, that same ounce of gold (which to you isn't even "money", whatever that means, but to him it is) will buy $1,631 FRBN equivalent worth of whatever I want from that tailor.  Indirect or direct, the value is the same.  NOT so with paper money, and that's the difference (as well as why Weimar Deutschmarks and Continentals were only worth something once upon a time).  The indirect (exchange) value of paper money is not equal to the direct value of the paper itself.   Likewise with base metal coins.  


Lastly, you obviously have a very narrow personal definition for what money is, or can be, the criteria of which you haven't really established at all, except loosely in context:




> Take a gold coin and try to buy your food, they will laugh at you - or you will have to suffer a huge discount to its commodity price.
> Take a gold coin to France and try to buy your food, they will laugh at you - or you will have to suffer a huge discount to its commodity price.
> 
> But I take the FRBN and they say "Thank you, sir!"
> 
> Gold is not money ... today.


In that context, using your logic, it would seem that the following is some kind of criteria for what is NOT money:

1- being laughed at - OR  
2- suffering a huge discount to a commodity price
3- not universally accepted

Am I missing something? If not, do you see how absolutely silly that is?  In point of fact, NOBODY laughs at gold except you, and I'm sure only in a forum to try to make a point, as if argument by ridicule could accomplish that.  Gold might not be EFFICIENT as a form of money (TODAY), but that does not mean that it cannot be used as money - or that gold is not being used as money today.  

I said much earlier that I trade in US minted silver coins all the time.  I like using these coins as money, and have made quite the habit of it, given that I don't like keeping money in FRBN any more than I would bitcoins.  The reason for this: FRBN's have this nasty habit of CONSTANTLY INEXORABLY LOSING VALUE.  So I convert them as quickly as I acquire them into a far more stable currency.  

So I do have a circle of people that I trade with for all kinds of basic needs -- merchants that I personally cultivated for the sole purpose of circulating and trading with using only US minted silver coins - with no laughter, as they are more than enthusiastically accepted, and no "discount to its commodity price".  They seem to think of it as money, just as I do.  

That leaves "not universally accepted", which seems to be another of your personal criterion (if not yours, source please) for what can or cannot be called money. The fact that I can trade in silver coin with a finite number of merchants does not take away from the fact that I DO, in fact, use US minted silver coin as money.  So what, exactly in your mind, makes it "not money", and what's the source of that reasoning?

----------


## rpwi

> Correct. That is the fundamental fraud of the Fractional Reserve system


Yet don't you see that if banks promise more checking accounts than they have in dollars...and customers don't bother to verify that the banks have their dollars...that this results in inflation?

----------


## Black Flag

> Yet don't you see that if banks promise more checking accounts than they have in dollars...and customers don't bother to verify that the banks have their dollars...that this results in inflation?


No.

The mechanics:
- Deposit withdrawn
- Spent for product
- Producer Deposits

The amount of money in the system can never exceed the amount of money. 

If "everyone" withdrew, the system would collapse, because there is not enough money.

Therefore, the system can never have, right now, more money then there is.

So the amount of money in the system can never be more then M0 at any one time, given the system has not collapsed.

Now, the _rate_ of transactions are faster as the withdrawal/spending/re-deposit happens in a microsecond. But that, too, does not change the amount of money in the system, but *the number of transactions the system can support per second* - and I know of few economic theories other than crack pot Keynes that attributes rate of transactions to be equal to be money to be a causation of inflation.

----------


## Black Flag

> It wasn't an opinion -- just an observation, with an actual attendant logical train of thought - one you did not address at all, save with unrelated red herrings and finally with a strawman argument that made me realize you might be giving knee-jerk responses without actually reading any of my arguments.


Steven, I did address and agreed that it was YOUR observation, and I gave mine which was *opposite* of yours.

Now you tried to use YOUR observation as a platform to create a theory - but my observation undermine your platform - therefore, you can only hold your position based on _opinion_ until you absorb further information.




> Direct and indirect value are salient to understanding a fundamental difference between paper currency (or electronic entries on a debit card) as money, which has indirect value only, and tangible goods, like gold, which can have both indirect value as a medium of exchange, and direct value as an actual good in itself.


Your opinion is in the measure.

Your opinion - you believe golds has MORE direct value, by being gold, then paper, being paper.

You tried to show this by example.

I showed paper is far more used as a commodity then gold

You get frustrated and point to gold in historical vaults.

I show paper *today* in current vaults.

You get frustrated.

----------


## Black Flag

> Unlike paper money, both the direct and indirect value of an ounce of gold are at all times EQUAL.


Not true.

Value for gold in raw form -natural gold nuggets- trades easily 3 to 8x per oz. value.

Gold in jewellery has massive price/value over bar, as does gold coin over bar.

Gold bar is less valuable then gold certificates as you need to pay storage and insurance for gold bar but not for -say- Mocatta Certs.... gee, paper more valuable the the gold... hmmm....

...and the same thing with paper.
Paper on your walls is a lot less valuable then paper in your wallet.

Just watch your face when I put a piece of old wallpaper of yours in the fire, followed by an old $100 bill - we'll see which one you think has "direct" value.

----------


## rpwi

> Ok, you misunderstand the graph and the action of the FED, while being correct about the MB contents.
> 
> This is the DEPOSIT BANKS *excess* reserves.


My mistake but it doesn't affect the argument at large.  I just glanced at your graph and assumed it was a MB graph.  In my initial post I referenced the spike in MB:

http://www.shadowstats.com/charts/mo...e-money-supply (bottom right)

And asked the question...if MB is the most proper determiner for inflation...then why in 2008 when we had an unprecedented spike in MB...did not inflation spike more than 10%?  You have yet to provide an answer to this question.




> So the FED created money in exchange for these banks unmarketable assets (bad mortgages and stuff).
> 
> These banks, instead of making loans, put the new money into the reserve of the FED, thus *excess* reserves.
> 
> Thus, this money has not entered the market. It sits unused and uncirculated.
> 
> It DOES count to the MB, but is has the _same effect as the FED not printing as far as inflation concerns (not used, no inflation)_ BUT it has the effect of protecting the banks capital requirements, which is a matter of solvency.


What you propose is impossible.  Let's first address the graph, you used: "Excess Reserves of Depository Institutions".  This is basically how much reserves banks have above their reserve ratio.  So basically this is telling us that the ratio between checking accounts and the dollars/MB they correspond with is shrinking (my point entirely).

Banks do not 'put the new money into the reserve of the FED'.  The money is already held as a liability of the Fed.  Either has a dollar bill...or has a 'electronic dollar bill'.  If ABC bank has the following balance sheet:

*Assets:*

Cash:10m
'Electronic Cash' or Deposit at their local Fed Branch: 10m
Investments: 25m

*Liabilities:* 

Demand Deposits: 30m
MISC Borrowing: 10M

*Equity:*

Retained Earnings: 5m

Then how do they 'hoard' dollars the fed?  I don't get the circulating argument as well.  Dollars (either paper or electronic) held as reserves at banks don't really circulate accept to meet withdrawals or to be transferred to another bank.  Indeed, legally only banks can hold electronic dollars which is very unfair of the Fed and create privilege for the banks.  In essence it's the demand deposits that do most of the circulating...what happened in 2008 to present was fractional banking took a HUGE hit and the money multiplier collapsed.  This merely means banks aren't gambling as much with our checking account reserves like they used to.  The collapse in M1 while MB exploded is why we didn't have runaway inflation.  M1 IS money.  Now the story with M1 is a little more complicated as M2 and M3...while dipping...bounced back much more sharply.  Near demand deposits are more of a worry now with fractional banking than just normal checking accounts.  The reason is we've had a huge transfer of wealth from the poor to the wealthy in this country and the wealthy prefer interest bearing bank accounts over the mundane checking accounts you and I have.  Banks also prefer to invest in M2 and M3 because the yields are so pathetic they are practically non-existant and M2 and M3 bank money is subject to less regulation (most notably with reserve requirements and FDIC rules).

----------


## Black Flag

> Lastly, you obviously have a very narrow personal definition for what money is, or can be, the criteria of which you haven't really established at all, except loosely in context:


Hmmm.....Steven....

It is the very definition of M0, which you accept. So it really isn't much of a criteria to accept what you and other call "money".

Our difference is you want to make a debt instrument - *which can only be created by an exchange of money* - which is an action; that is an exchange; to be the same as the object of the exchange.

Like I said to Roy, you want the dog's bark to be the same thing as a dog - so when a dog bark's you think there are two dogs outside your door! 
And equally, when you open the door, and see only one, you argue "Ha! All that has happened is the other dog evaporated...but he was really there up to that point!!"

----------


## Black Flag

> My mistake but it doesn't affect the argument at large.  I just glanced at your graph and assumed it was a MB graph.  In my initial post I referenced the spike in MB:
> 
> http://www.shadowstats.com/charts/mo...e-money-supply (bottom right)
> 
> And asked the question...if MB is the most proper determiner for inflation...then why in 2008 when we had an unprecedented spike in MB...did not inflation spike more than 10%?  You have yet to provide an answer to this question.


I did so, sir, which is why you look at the excess reserves graph.

If I print up a bunch of money, but you merely stash them under your pillow, does the creation of money create inflation. No.

I think we are orbiting around this issue, and that is you (and Steven and a lot of others) believe money is a _wholly different unique economic good_ with different economic laws operating upon it vs. every other economic good.

So you think apples and the law of supply and demand "does this", but when it comes to money, the law of supply and demand is completely different, you make up bizarre theories of thin-air money, debt-money, and massive other cause/consequence stories that never actually reflect anything of reality.

If I said to you that the a guy ordering a bushel of apples and pays in advance, and gets a receipt for delivery in 30 days, and then declared that receipt was *the same as physical apples in hand*, you'd look at me cross-eyed. _*Ed: If I further said the receipt for apples has increased the supply of apples, and thus caused the price of apples to fall...ie: inflation of apples... you'd laugh at me!_... and demand "what bizarre law of supply and demand are you applying, BF???"

Yet you want me to believe the same story after you substitute "money" for "apple".

So, inflation and monetary expansion *all operates under the laws of Supply and Demand*

If I produces a billion zillion diamonds, because diamonds are not rare, but I stuff the diamonds in a huge warehouse, and only take a handful out a month, what price do you believe the diamonds will demand? The a price based on the number in the warehouse, or the number brought out for sale?

----------


## Black Flag

...well since Debeer's makes a mint on diamonds, the price of diamonds is not reflected by the number of diamonds in their warehouse, but by the number they bring out for sale.

...and astonishingly, same with money.

The banks are not selling the money they have --- it sits unsold in  *their* warehouse, called the Excess Reserves at the FED. Banks selling money is called "loans" and they are not selling.

The day they do sell (and that day will come), you will then - and only then - see the spike in inflation you are looking for.

----------


## Black Flag

> What you propose is impossible.  Let's first address the graph, you used: "Excess Reserves of Depository Institutions".  This is basically how much reserves banks have above their reserve ratio.  So basically this is telling us that the ratio between checking accounts and the dollars/MB they correspond with is shrinking (my point entirely).


It is a ratio, but such a ratio is *meaningless* in determining inflation/deflation.

This ratio *only has meaning as a measure of risk* to the bank's capital requirements, solvency and continuity.

If I am *allowed* to loan $9 to 1$ in reserve, my risk of such loans defaulting must be less than 1 out 9, or my bank capital is exhausted.

If I am *allowed* to loan $9 to 1$ in reserve, and I only loan 2$ to 1$, my risk of my own capital is dramatically reduced - I can sustain less the 1 out 2 loans into default.

Measuring today's economic climate - the bank's piling up excess reserves is doing exactly that - they believe even more, substantial, defaults are coming down the time-pipe and are piling up reserves like crazy so they survive the fall-out.

The consequence of that, they are not selling the money as loans - no selling, no supply change, no inflation.

----------


## Black Flag

> In that context, using your logic, it would seem that the following is some kind of criteria for what is NOT money:
> 
> 1- being laughed at - OR  
> 2- suffering a huge discount to a commodity price
> 3- not universally accepted


No, what is "not" money is a commodity in a trade that needs to be discounted or converted before the trade happens.

If you go to your grocer with a gold coin to pay for your veggies .... current trade of 1oz. gold being, say, $1600 for easy number - and you say to him "here, is $1600 for this box of veggies", he will wrinkle up his eyebrow and probably discount your coin to ...maybe...$800. You will be "paying" twice as much with the coin vs. had you taken the coin to a dealer, got $1600 FRBN, and given the money to the grocer.

That is why gold is not money. Very few accepts it directly (except such dealers in business to do so) and the trade in coin is invisibly thin.

I do not have your problem with FRBN.

FRBN is money.
Gold is not money.

(PS: we are taking about "this" economy. Other economies can use different money, such as Rai stones... but that does not effect this economy and this money)

Further point, Steven.

This discount happens with other currencies .... which is the Japanese yen is not money in the US, though money in Japan.

If you go to the grocer with your yen, he will -like with gold- wrinkle up his nose and either send you away to a dealer to convert it, or massively discount the yen to his goods before he takes your yen.

Further, this is why FRBN has won your "currency" competition that you believe does not exist.

I can go to Venezuela today with a pocket of FRBN and _buy more goods with the $ directly from a local producer than I would be able to if I converted the FRBN to Bolivars, then used the Bolivars to buy the goods_ -- the locals discount their own currency!

FRBN is the world's money in the great global competition of money - so it is your answer to your question regarding competition.

----------


## rpwi

> No.
> 
> The mechanics:
> - Deposit withdrawn
> - Spent for product
> - Producer Deposits
> 
> The amount of money in the system can never exceed the amount of money.


What is your definition of money then?  I believe you feel that because in many transactions in which checks are written...only really MB is transferred between banks...therefore only MB and not M1 is money.  Well lets try a mental experiment...

Say all the banks in the US are combined to create one super bank.  So when I write a check to my grocer, the bank's balance sheet doesn't really change. We both deposit at the same institution.  In such a scenario...surely there would be no practical brake to curb the bank from creating many more deposits than they have in reserves, right?  Also in such a scenario...the bank would create inflation right?  If the bank has 1 trillion in dollars and creates 10 trillion in deposits...why wouldn't there be inflation?

If so...  Then say this super bank was broken up into two banks.  One west of the Mississippi and one east.  By and large most transactions would circulate internally.  But on occasion MB would have to be transferred to the other bank to meet checking account transactions.  By and large though...outgoing fund transfers would be roughly matched statically by incoming fund transfers.  Surely inflation would still exist under this scenario as well, right?  There would be little conceptual difference between a mega bank and two mega banks.

What if there were three banks...wouldn't we still have inflation as the banks created more deposits than they had in dollars?  What about 30 banks?  300 banks? 3000 banks? Where do you draw the line?  

What if we had a complicated system in which the banks largely specialized along either regional grounds or in the types of deposits and loans they handled.  Banks with insufficient reserves could borrow them from other specialty banks and if the interest rate got too high (signaling a shortage of reserves) the friendly central bank would fabricate lots of dollars and keep inserting them into the banking system until the 'shortages' were alleviated.  A national insurance system for deposits would be setup that would merge failed banks into bigger banks so customers would never have to worry about losing their deposits.  Surely that system would allow bank money to create inflation, right?




> If "everyone" withdrew, the system would collapse, because there is not enough money.
> 
> Therefore, the system can never have, right now, more money then there is.


What if our checking deposits were for dodo eggs (now extinct obviously).  We could have millions in dodo egg deposits and happily be trading with each other...oblivious to the fact that there aren't the dodo eggs to back up our deposits.  Dodo egg deposits are still money...even though there aren't enough reserves...because we accept it as money.  We accept bank deposits as money...so it too is money.




> So the amount of money in the system can never be more then M0 at any one time, given the system has not collapsed.


The system has not collapsed because there hasn't been a massive run on the banking system and because the Fed is CONSTANTLY bailing the banking system out through open market operations, the discount window and more.  No fed = mass bank crash (good thing as banks are parasites).

----------


## rpwi

> I did so, sir, which is why you look at the excess reserves graph.
> 
> If I print up a bunch of money, but you merely stash them under your pillow, does the creation of money create inflation. No.


Where has money been stashed under a pillow?  If I deposit 100 dollar bills at a bank...and they keep 100% on reserve for my checking account.  Does that mean they are stashing this cash under a pillow?  No. If they keep 90% on reserve and loan 10% out because they know statistically, I'll probably not withdraw my money...is that 'stashing money'?  No.




> So you think apples and the law of supply and demand "does this", but when it comes to money, the law of supply and demand is completely different, you make up bizarre theories of thin-air money, debt-money, and massive other cause/consequence stories that never actually reflect anything of reality.


Supply and demand doesn't apply to bank money for two reasons.  One is that the Fed is constantly bailing out by constantly creating more MB.  Look at history...MB is constantly on the rise.  This is because the banking system would choke on it's internal contradictions without the Fed constantly bailing it out.  The other reason, bank money is exempt from the laws of supply and demand is because it operates on belief which trumps supply and demand.  It's like believing snake oil will cure your ills.  Just because the body demands healthy cures...doesn't mean unhealthy cures will be erroneously applied because belief trumps supply and demand.  We think bank money is money (even though we shouldn't) so it is money. 




> If I said to you that the a guy ordering a bushel of apples and pays in advance, and gets a receipt for delivery in 30 days, and then declared that receipt was *the same as physical apples in hand*, you'd look at me cross-eyed. _*Ed: If I further said the receipt for apples has increased the supply of apples, and thus caused the price of apples to fall...ie: inflation of apples... you'd laugh at me!_... and demand "what bizarre law of supply and demand are you applying, BF???"
> 
> Yet you want me to believe the same story after you substitute "money" for "apple".


Let's continue with the analogy.  Nobody is really concerned about delayed delivery by 30 days.  The issue becomes...what happens when the apple dealer promises more apples than he has?  Now apples are consumed...so these mistake would be readily exposed.  But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver.  If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should!  Bank deposits get away with this because money is a store of value.  We don't eat our money.  Therefore bank money is money and it does create inflation.




> So, inflation and monetary expansion *all operates under the laws of Supply and Demand*


So if I counterfeit dollars bills...that's subject to the laws of supply and demand?  I create inflation because naive people think my dollar bills are the same as real dollar bills.  Counterfeiting is conceptually the same as fractional banking when it comes to inflation.




> If I produces a billion zillion diamonds, because diamonds are not rare, but I stuff the diamonds in a huge warehouse, and only take a handful out a month, what price do you believe the diamonds will demand? The a price based on the number in the warehouse, or the number brought out for sale?


That's not how a bank operates though.  They don't withhold from the market.  My cash deposit into the bank are the market.  When the banks create loans onto my deposits they are 'expanding' the market...but through a dishonest and inflationary way.

----------


## Black Flag

> Where has money been stashed under a pillow?  If I deposit 100 dollar bills at a bank...and they keep 100% on reserve for my checking account.  Does that mean they are stashing this cash under a pillow?  No.


Yes, because they *forgo lending the money out*.

If you produced 100 apples and gave it to a grocer to sell, but he merely places it his warehouse and does not put them on the shelf, what happens to the price of apples?

Answer: nothing. Supply has not changed to the consumer.

Same here, but using money instead of apples.




> If they keep 90% on reserve and loan 10% out because they know statistically, I'll probably not withdraw my money...is that 'stashing money'?  No.


That is NOT the purpose of the legal reserve requirement - a bunch of cash stored to pay back withdrawing depositors.

The legal reserve requirement sits as a measure of the amount of *loans* a bank can issue. _Important: it has NOTHING to do with depositor and being a fund to satisfy a withdrawal_

----------


## Black Flag

> Supply and demand doesn't apply to bank money for two reasons.


**Blink**

And that is why your theory is crackpottery. 

You deny fundamental laws of economics and make up new ones out of thin air ... just like the "debt" money.

Economic alchemy and witchcraft is your economic theory.

----------


## Black Flag

> One is that the Fed is constantly bailing out by constantly creating more MB.


And this does not change the money supply?

Well, you said it does.

Then you said the money doesn't obey supply/demand law.

But now you show it does.

Egads!

Return to some first principle, sir .... you are fragmenting like a spent grenade.

----------


## Black Flag

> The other reason, bank money is exempt from the laws of supply and demand is because it operates on belief which trumps supply and demand.



So, let me see here.

Because you "believe" you can trump the law of gravity, the law of gravity no longer applies _to you_

Because the banks (and you) believe they can trump the law of supply and demand, the law of supply and demand no longer applies to them.

No sir.

No matter how you believe you can fly after you jump off the cliff, your falling is not you flying and is not you "trumping" the law of gravity. The sudden stop at the end will enlighten you on such a folly of belief.

No matter how you believe bankers and their money trumps supply and demand, the consequences created by the law of supply and demand will impact them - and you - and hopefully, enlighten you and them on such a folly of belief.

----------


## Black Flag

> Let's continue with the analogy.  Nobody is really concerned about delayed delivery by 30 days.  The issue becomes...what happens when the apple dealer promises more apples than he has?  Now apples are consumed...so these mistake would be readily exposed.  But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver.  If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should!  Bank deposits get away with this because money is a store of value.  We don't eat our money.  Therefore bank money is money and it does create inflation.


You fail to apply your analogy to completion, jump from it half-way, claim some sort of enlightenment, and then misapply the lesson.

Do you really believe grocers buy apples and that they will "forget" to take delivery? Well, if they do, they won't be in business for very long!
At some point in time, delivery is demanded.

If it is not filled, huge problems occur for the supplier and the grocer.

Suddenly the supplier goes bankrupt, and what remains of his assets are dispersed to his creditors, at a loss to all or most of his creditors.

The grocer, now under constraint of apples, *raises the price of apples*.

Well, same with money.

The supplier defaults (the bank) and its assets are used to pay back its creditors (depositors), all probably at a loss.
Money is now under constraint - and its price rises....*it becomes more valuable*

The price of money goes up - means it takes less money to buy goods - which, as all goods are priced in money, the price *goes down*

Exactly 1932 scenario.

As banks renege, depositors lose, money becomes more valuable .... _deflation_...the fall of prices happens.

Again, *stand on the universal foundation of economic law - here, the law of supply and demand* and clarity of cause and effect will be yours.

----------


## rpwi

> Yes, because they *forgo lending the money out*.


I'm not sure what you're arguing then.  Initially you have stated that a bank creating deposits and lending them out did not create inflation.  Now it does?   




> That is NOT the purpose of the legal reserve requirement - a bunch of cash stored to pay back withdrawing depositors.
> 
> The legal reserve requirement sits as a measure of the amount of *loans* a bank can issue. _Important: it has NOTHING to do with depositor and being a fund to satisfy a withdrawal_


Well reserve requirements do serve a two-fold purpose.  One is to curb lending/inflation...the other is to help ensure solvency and the ability of the bank to meet withdrawal demands.

----------


## Black Flag

> Nobody is really concerned about delayed delivery by 30 days.  The issue becomes...what happens when the apple dealer promises more apples than he has?  Now apples are consumed...so these mistake would be readily exposed.  But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver.  If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should!  Bank deposits get away with this because money is a store of value.  We don't eat our money.  Therefore bank money is money and it does create inflation.


Continuing....

...so what if the supplier, giving out receipts for apples for a future delivery - far more than he can deliver at once.

As long as the supply of apples is forth coming to him, he can "manage" his customers saying "can we roll-over your demand for another 30-days?"...stuff like that.

Some one is getting delivery, others delayed -- but as long as the supply keeps up with the delivery promises, he can -indeed- over promise while managing the supply and customers ...as long as they all play along.

So, they are all playing along....

What does the promises of delivery do to the supply of apples? Well...nothing.

Only apples on the shelves, being sold, is applied to the law of supply and demand. What is bought and sold _today_ ... or the near future matters, right?

If you demand apples today, but there are few, and *you* is the market place ... then the demand goes up vs. real supply (not fictitious supply), so does the price.

But if the supply on the shelves meets demand - no matter how much is promised in the future for delivery, price is not affected.

----------


## wgadget

I read recently that because people are so scared of the future, they are not spending their cash..it's just sitting there...low velocity.  Which has a deflationary effect. 

BUT--When the world determines that the dollar is becoming even MORE WORTHLESS WHEN THEY START QE3, dollars will flood back to the US from foreigners who will want to GET something for their dollars, and the people here in the US will be spending them to buy things before the prices go up due to inflation.

----------


## Black Flag

> I'm not sure what you're arguing then.  Initially you have stated that a bank creating deposits and lending them out did not create inflation.  Now it does?


I said banks do NOT create money - you infer a deposit receipt is money.

----------


## rpwi

> **Blink**
> 
> And that is why your theory is crackpottery. 
> 
> You deny fundamental laws of economics and make up new ones out of thin air ... just like the "debt" money.
> 
> Economic alchemy and witchcraft is your economic theory.


I don't deny that higher prices encourage competition generally which can in turn drive down prices.  What I do say is that people frequently ignore supply and demand.  They buy incorrect products.  They pay too much for their products when cheaper alternatives are available.  Supply and demand works when people want to use it.  This is quite evident in the banking sector.  I mean what is the supply and demand when it comes to checking accounts?   Generally speaking Bank A offers free checking...then again so does Bank B.  Do I or the public compare balance sheets of the banks to see if they would have solvency issues to meet my withdrawals?  No.  My deposit is an investment in the bank (a lousy one in which I get 0% interest) yet I don't care because the government backs it up.  The banking system we have now is NOT a natural market but one propped up by government support.  If for example the government guaranteed to pay all auto-repair costs...would we have a supply and demand for quality autos?  No.  Same deal with banks.

----------


## rpwi

> And this does not change the money supply?


When the Fed creates more MB for the banking system...this results in an increase in the supply of MB as well as an increase in the supply of M1 and higher aggregates (although there can be a delay).




> Then you said the money doesn't obey supply/demand law.


Aspects do...but the core premise of bank money doesn't obey the laws of supply and demand for the same reason supply and demand doesn't work to prevent counterfeiting.  If I counterfeit dollar bills, I benefit because somebody else assumes they are dollars.  I'm taking advantage of their ignorance.  Counterfeiting = fractional banking.

----------


## Black Flag

> I read recently that because people are so scared of the future, they are not spending their cash..it's just sitting there...low velocity.  Which has a deflationary effect.


No.
Where is the cash?
Not under a pillow, but in a bank account.

When you buy a good it goes out of your account and then back into another account.
Both accounts are in the same banking system.
Deposits in the banking system has not changed
Your X out is an X in somewhere.

Whether it moves or not does not change X.

There is no deflation.

----------


## rpwi

> You fail to apply your analogy to completion, jump from it half-way, claim some sort of enlightenment, and then misapply the lesson.
> 
> Do you really believe grocers buy apples and that they will "forget" to take delivery? Well, if they do, they won't be in business for very long!


Quite true in the apple industry.  Not so true in the banking industry.  We has a nation have truly forgotten to take deliver of our dollars from our bank deposits...and banks have sneakily created more deposits than they should have.  Bank deposits are money (store of value) so they can get away with this, while an apple industry can't.




> At some point in time, delivery is demanded.
> 
> If it is not filled, huge problems occur for the supplier and the grocer.
> 
> Suddenly the supplier goes bankrupt, and what remains of his assets are dispersed to his creditors, at a loss to all or most of his creditors.
> 
> The grocer, now under constraint of apples, *raises the price of apples*.
> 
> Well, same with money.


Not the same with money.  People don't cash out their checking accounts.  Why?  Because they are content (erroneously) to accept checks as payment instead of dollars.

----------


## Steven Douglas

> No, what is "not" money is a commodity in a trade that needs to be discounted or converted before the trade happens.


By whose reckoning?  That criterion is personal to you, and not based on any universal monetary principle or law of economics (you never cited a source or argued why that criterion holds as true). Furthermore, by your own criteria can FRBN's even be considered money? Ubiquitous sales taxes discount those automatically before a trade happens, and income tax withholding discounts them in many cases before a trade in labor happens.  

Everything you are debating about this subject appears to be a semantics game - all of which hinges on your personal criteria, which is also why I believe you are having such a tough time selling your ideas to anyone.  Both you and Roy L. share that in common, as you argue from your own personal definitions and governing assumptions which are not agreed upon or established. 

I gave you a personal example, here in the US, wherein I use US minted silver coin as money.  That caused you to make an ad hoc repair to your theory of what is not money:  _"trade in coin is invisibly thin"_  - followed by _"we are taking about "this" economy. Other economies can use different money..."_

You didn't have a problem throwing up ancient Fijians rejecting gold when we were supposedly talking about "this economy".  And yet within "this" economy there is another economy, which uses "different money" - namely, US minted silver coins. My little micro-economy _is an economy_ within the wider economy which does use silver coin as money (even according to your narrow personal view).  And since you grant that "other economies can use different money", and my micro-economy is one that does just that, it also falsifies your theory that gold (and silver) aren't money. Today.

Understand two things before you respond: 

1 - You are NOT talking to someone with a counter-semantics problem. I am not one who insists that money can only take on a certain form in order to be called such, or in order to be "valid". There is no purist definition of money for me, because money is a term that has been bastardized through common usage. I accept that and use its broader meaning (i.e., money=currency=whatever can be used as exchange in trade).  So when you say that M0 is money I agree. There is no dispute because that fits the bill just fine.  

2 - I recognize "the economy" and "economy-wide" as meaningful terms only when they are qualified.  That's another bastardized term, given that all micro-economies are subsets of the wider economy.

----------


## matt0611

Steven, I really enjoy your posts on money (in this thread and in others) and find that your logic is very solid and consistent. 

What is your response to Black Flags assertion that fractional reserve banking is not inflationary and that demand deposits (M1) are not in themselves "money"? (putting the gold vs fiat debate to the side for the moment)

Would be curious to get your take on that...

----------


## Zippyjuan

Inflation (meaning a rise in prices for goods and services) can occur under any sort of mone system.  All that is required is that demand is greater than supply of a good. In this country we saw inflation under a gold standard and under fiat. 

Money has its own supply and demand and that too can effect prices. If there is a small supply of money relative to goods then it will take a small amount of money to exchange for those goods.  If the supply of money is increased, then there is more money available for the same amount of goods and the sellers or producers can get more money in exchange for what they are producing. 

But increasing the supply of money will not necessarily mean higher prices- if the economy is growing and has a higher demand for money and the amount of money is not increasing faster than the amount of goods then there may not be price increases. 

When the economic crisis hit in 2008, the demand for money dropped significantly because economic activity dropped significantly. The Federal Reserve tried to get things going again so they tried to increase the supply of money by purchasing securities- US Treasury notes and Mortgage Backed Securities.  This failed to increase the economy.  Why? No demand for that extra money.  So the banks (who sold the securities to the Fed) just kept that money.   Money has to be circulating in order to have any effect on prices.  Money in the bank or under your pillow is doing nothing.  Nearly all of that money ended up either with the banks themselves or they put it in storage at the Federal Rerseve in the form of excess reserves. 

Why didn't this extra money cause prices to go up?  Again, because there was no demand for it- the money didn't end up circulating.  End of story? No. The money is still there and as the economy picks up so will the demand for money.  If that money at the banks and the Fed starts to flow faster, then it will have more of an impact on prices and the price inflation will still happen.

----------


## Steven Douglas

> Steven, I really enjoy your posts on money (in this thread and in others) and find that your logic is very solid and consistent. 
> 
> What is your response to Black Flags assertion that fractional reserve banking is not inflationary and that demand deposits (M1) are not in themselves "money"? (putting the gold vs fiat debate to the side for the moment)
> 
> Would be curious to get your take on that...


I have a very different, MUCH broader definition of money than Black Flag does - his definition is highly semantic, very narrow, and deliberately ridiculing and exclusive of anything that doesn't fit what appears to be his beloved and currently enthroned paper regime. 

Before I continue, let me be clear on my definition of inflationary, which has NOTHING to do with the disingenuous, intellectually dishonest "general price increases" (an effect with multiple possible causes). When I use the terms inflationary or deflationary, I am referring to the actual supply of what most people count as money, including ALL fiduciary media, that is actively circulating, and therefore "felt" by the economy. 

Fractional reserve lending on a loan-by-loan basis is first inflationary (as money is spent into the economy), then deflationary, as the loan is paid off and the interest (which was not created as part of the loan) is siphoned back into the bank.  Because credit MUST expand _indefinitely_ for the entire Ponzi system to remain viable, _in the aggregate_ fractional reserve lending is highly and deliberately inflationary -- but also in the aggregate, assuming no infusion of "new money" (the only kind BF counts as money), deflation from all debts paid under our current fractional reserve lending regime would be catastrophic, as there are orders of magnitude more claims on the same base money extant.  To satisfy those claims you must a) create more base money (strictly inflationary to the money supply), and/or b) increase the velocity and number of new claims on existing base money (inflationary then deflationary on the whole).   And since money in either form cannot be created except as a form of debt, with attendant interest payment requirements, and since exponential expansion of credit is a physical impossibility, the end game is only a question of an equally exponential drop in the value of the money (hyperinflation), with a_ possible_ interim - but equally catastrophic - drop in the supply (deflationary depression).  

The only question in my mind, using the deaths of stars as a metaphor: Do we just progress into a Red Giant, like our own sun will one day, as an ordinary main sequence star, engulfing everything in its path with its perpetual expansion (hyperinflation), leaving behind a white dwarf? Or, is it larger than a main sequence star economy. Do we, with the help of the Fed and IMF, implode before going full supernova, leaving behind a neutron star, or even a black hole from which nothing escapes? 

Either way, the Death Fundamentals for our currency regimes are solidly in place, and they dictate the end game, and that's for a regime of unprecedented magnitude and velocity, the death of which will be positively catastrophic. 

Hope that helps.

----------


## Black Flag

> I have a very different, MUCH broader definition of money than Black Flag does - his definition is highly semantic, very narrow, and deliberately ridiculing and exclusive of anything that doesn't fit what appears to be his beloved and currently enthroned paper regime.


It is not semantic, it is narrow and exclusive *as that is the utility of defining things*

You want everything a bank does to be some form of money and end up so confused:

Steven's money definition labeled as a dog:

Dog=dog
Dog=leg
Dog=kicking
Dog=flower

Steven's conversation:
"I dogged the dog and he bit my dog causing me to fall into the dog"

Since this is nonsense, he tries to correct it by adding numbers:

Dog=dog=Dog0
Dog=kick=Dog1
Dog=leg=Dog2
Dog=flowers=Dog3

"I dogg1'ed the dog0 and he bit my dog2 causing me to fall into the dog3"

This incredibly complex of relabeling still misses the real definition of  a dog! 
And that is the problem - Steven (and others) start making up theories based on everything being a dog (with a number) based on how dogs do things.

----------


## Black Flag

> I am referring to the actual supply of what most people count as money, including ALL fiduciary media, that is actively circulating, and therefore "felt" by the economy.



But that's the problem -- all this dog(#) money created utterly does not match the increase in inflation. There is little correlation.

So, your calculation of all your money and non-money money and non-non-non money money doesn't do a thing to figure out anything like inflation risk.

----------


## Steven Douglas

See, Matt?  Most of what you and most people think of as money, BF will set you straight and get your mind right - "That's not money, it's a dog-leg-kick-flower, silly. Pfft. So much for your knowledge of banking, finance and economics."

----------


## Black Flag

> Quite true in the apple industry.  Not so true in the banking industry.  We has a nation have truly forgotten to take deliver of our dollars from our bank deposits...and banks have sneakily created more deposits than they should have.  Bank deposits are money (store of value) so they can get away with this, while an apple industry can't.


Sure they can, they make apple juice.




> Not the same with money.  People don't cash out their checking accounts.  Why?  Because they are content (erroneously) to accept checks as payment instead of dollars.


They are accepting dollars as payment when you cash your check ... that is the point of "clearing the check".

----------


## Black Flag

> See, Matt?  Most of what you and most people think of as money, BF will set you straight and get your mind right - "That's not money, it's a dog-leg-kick-flower, silly. Pfft. So much for your knowledge of banking, finance and economics."


Ah, it is a story to show how ridiculous your labeling and mis-labeling of money is.

You combine money plus *a consequence of a transaction using money* to be... Money! 

As before, you think the dog and the dog's bark makes two dogs.

----------


## Black Flag

> When the Fed creates more MB for the banking system...this results in an increase in the supply of MB as well as an increase in the supply of M1 and higher aggregates (although there can be a delay).
> 
> Aspects do...but the core premise of bank money doesn't obey the laws of supply and demand for the same reason supply and demand doesn't work to prevent counterfeiting.  If I counterfeit dollar bills, I benefit because somebody else assumes they are dollars.  I'm taking advantage of their ignorance.  Counterfeiting = fractional banking.


Counterfeiting is NOT what the fractional banking system is doing. 

Again, because you hold a bizarre theory of money like Steven, you fall into bizarro world where banks are making "money" out of thin air and selling it as if it was real stuff.

But they are not. They do not make 'thin-air' money. They are not counterfeiting - every dollar you use to buy a good or service _is real FRBN money_.

Again, as I repeat - while holding crackpot theory of money, you end up with crackpot conclusions.

----------


## Steven Douglas

> As before, you think the dog and the dog's bark makes two dogs.


Not "makes" two dogs. Is treated and viewed by the economy as ten or more dogs. World of difference, since all ten or more barks (or bites) can be heard/felt _simultaneously_.

----------


## Black Flag

Steven



> Fractional reserve lending on a loan-by-loan basis is first inflationary (as money is spent into the economy), then deflationary, as the loan is paid off and the interest (which was not created as part of the loan) is siphoned back into the bank.


Poppycock! Another crackpot conclusion based on crackpot theory of money.

Deposit $100, and the series of loans, redeposits and loans....

$100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. 
I think Steven agrees up to here....

I repay $10 of my loan.
To repay $10 of my loan means someone had to withdraw $10 from their demand deposit.

$90 FED, $900 Loan, $890 Demand deposit, $10 cash.

They pay me the cash, and I pay off my loan

$90 FED, $10 bank *excess reserve*, $890 loan, $890 Demand deposit.

Where is the deflation? 

What the bank does with the money is irrelevant - but usually they *Loan it out again to a new borrower*

To claim paying off "debt" is deflationary is utterly bizarre. There is never more money in the system then $100 - _NO DEMAND DEPOSIT ACCOUNT CAN WITHDRAW MORE THAN THAT._ though should many withdraw their demand deposit, serious issues arise.

----------


## Black Flag

> Not "makes" two dogs. Is treated and viewed by the economy as ten or more dogs. World of difference, since all ten or more barks (or bites) can be heard/felt _simultaneously_.


I was being generous, but you even show how much more bizarre the theory of money you articulate! Yep, one dog, and a bark ... and you believe there are 9 of them out side.

Of course, once you open the door and reconcile ... you see only one. 
But no problem for the crackpot theory - it is waved away with "thin money" evaporates!

Yep, the leprechaun theory of money! It is there at the rainbow, for sure! except when you get there, it will disappear before you get it!

(PS: the economy does not "treat" illusions as real nor "views" what does not exist - economics is a science not mysticism.)

----------


## rpwi

> They are accepting dollars as payment when you cash your check ... that is the point of "clearing the check".


Actually if both depositors have checking accounts there will be no MB cleared.  And even if MB is sent to another bank it doesn't matter as statistically another depositor will transfer money in to balance things out.

----------


## rpwi

> Counterfeiting is NOT what the fractional banking system is doing.


In a legal literal sense, no.  In a conceptual sense, yes.  Ask somebody how much money they have.  They will include everything in their checking account in their answer.  Using your logic, if everybody said their checking account was 3x and reserves were X...you would say they only had a third of the money they claimed.




> Again, because you hold a bizarre theory of money like Steven, you fall into bizarro world where banks are making "money" out of thin air and selling it as if it was real stuff.
> 
> But they are not. They do not make 'thin-air' money. They are not counterfeiting - every dollar you use to buy a good or service _is real FRBN money_.
> 
> Again, as I repeat - while holding crackpot theory of money, you end up with crackpot conclusions.


Why don't you go ahead and provide your own definition of money.  It should be clear, distinct and object and leave no room for doubt as to what is and what is not money.

----------


## Black Flag

> Actually if both depositors have checking accounts there will be no MB cleared.


It always is.

Do not be fooled by the verbal shortcut - ie: demand deposit to demand deposit.
It is always -demand deposit to withdrawal (cash) to demand deposit.





> And even if MB is sent to another bank it doesn't matter as statistically another depositor will transfer money in to balance things out.


This issue is not that 1+1-1=1

The issue is that there is a time between the adding and subtracting and _that creates the risk_ of the system.

----------


## Black Flag

> In a legal literal sense, no.


It is legal in a literal sense, absolutely. *Says so in the law.*




> In a conceptual sense, yes.  Ask somebody how much money they have.  They will include everything in their checking account in their answer.


Asking a scientifically illiterate person about how the sun creates heat and light and you equally will get some bizarre answer - so you would accept their answer as equal to the truth?

I do not measure the function and fact of our banking system based on what somebody says.

I actually work the process myself and see it for myself, which is why I urge you -too- do the same.

You will find no "debt" money, you will find real money moving in and out, and you will find a lot of accounting notes.




> Using your logic, if everybody said their checking account was 3x and reserves were X...you would say they only had a third of the money they claimed.


No!
*They absolutely have no money at all!*

They have a bank's IOU.

Until they demand the bank redeem their IOU, *they have no money*




> Why don't you go ahead and provide your own definition of money.  It should be clear, distinct and object and leave no room for doubt as to what is and what is not money.


M0

----------


## Black Flag

zippy posted this in another thread, but its truth is germane here.

_'Bank Deposits'
When someone opens a bank account and makes a deposit of $500 cash, the account holder surrenders legal title to the $500 cash.

This cash becomes an asset of the bank; the account becomes a liability. In the United States, the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance that guarantees the deposits of member banks up to $250,000 per depositor, per bank. Member banks are required to place signs visible to the public stating that "deposits are backed by the full faith and credit of the United States Government."

Read more: http://www.investopedia.com/terms/b/...#ixzz1rV747yyV_

----------


## matt0611

Black Flag, you're against FRB are you not?

----------


## Black Flag

> Black Flag, you're against FRB are you not?


Yes.

But my opposition to it does not turn FRBN into "not" money.

However, it is not the root problem.

The Fractional Reserve system is the root problem.

No matter what is money, as long as the fractional reserve system is in play, the same violent distortions to the economy will remain.

----------


## matt0611

> Yes.
> 
> But my opposition to it does not turn FRBN into "not" money.
> 
> However, it is not the root problem.
> 
> The Fractional Reserve system is the root problem.
> 
> No matter what is money, as long as the fractional reserve system is in play, the same violent distortions to the economy will remain.


Do you oppose it because you believe its fraudulent / immoral or economically unstable or both?

----------


## rpwi

> It always is.


No.  If there is a check written internally between clients of the same bank, this results in no transfer or conversion to MB.  Both these checks were against the bank's reserves and they remain unchanged when the check clears.




> Do not be fooled by the verbal shortcut - ie: demand deposit to demand deposit.
> It is always -demand deposit to withdrawal (cash) to demand deposit.


Well it is more complicated than that because of float...both banks get to receive credit for the amount between transactions which is quite fraudulent.  Yes, conversions from interbank transactions require a switch from M1 to MB but the time it takes for the regional branch of the Fed to debit one account and credit the other, you can practically state such a conversion almost doesn't exist because it is so quick.  Now a loss of reserves for a bank can be a big concern...but that's not the M1 to MB to M1 transaction you were referring to.




> This issue is not that 1+1-1=1
> 
> The issue is that there is a time between the adding and subtracting and _that creates the risk_ of the system.


The Fed doesn't like risk...so they created 'float' to largely fill in the cracks between bank transactions.  Just like they created 'Treasury Tax and Loan' to guarantee the banks deposits (below-market-rate loans) during tax time as the Feds are worried taxes would pull too much money out of the banking system.

Now by and large banks don't really worry about their supply of reserves nowadays like they used to.  If depositors shuffle reserves from Bank group A to Bank Group B, then there exist an sophisticated lending system by which big banks borrow and relend excess 'reserves' to to ensure that all banks have adequate amount.  The big banks in turn borrow from the primary dealers and the primary dealers are able to obtain 'reserves' directly from the open market through sale of t-bills to get brand new dollars (one of the reasons why t-bills are so over-priced).  Now banks DO worry about loans failing but not so much in losing out on reserves/deposits/MB because everything is manipulated to make it as easy as possible for banks to borrow the reserves they 'need'.

My point about about incoming deposits and outgoing deposits balancing out is quite relevent though.  If you transfer funds from one bank to another...you're still inside of the banking system.  You have to think of the banking system as a whole.  As long as the reserves stay in there...they can practice fractional banking EVEN THOUGH they appear to compete with each other.  It's best to think of our banking systems as a giant body.  Most banks specialize in their region...some banks are organs.  And the Fed life-support (that has to exist in perpetuity).

----------


## rpwi

> Why don't you go ahead and provide your own definition of money. It should be clear, distinct and object and leave no room for doubt as to what is and what is not money.
> 			
> 		
> 
> M0


Well...since we have some contention over what M0 refers to, your answer is circular.

I define M0 as all cash and coin outside of the banking system (private and federal).

I definite MB as call cash and coins (inside and outside of the private banking system) and private bank credit at the federal reserve (electronic dollars so to speak).

What is your definition of M0?

You do not seem to accept the standard explanations of money as a store of value nor as a intermediary of exchange...so it would be helpful for you to explain WHY M0 qualifies as a definition for money.

----------


## jt8025

I'll admit I haven't read all 159 post but have we come to an agreement on an answer for the question?  

I was thinking that if one persons payment date was on the 1st and another persons due date was on the 15th, even if both people paid off their credit cards at the end of their billing cycle there would always be a debt between the two people.

Do we think this is a inflation of the money supply?  

I trying to help answer the moral question for myself of does my using a credit card cause a decrease in purchasing power for another person?  Am I robbing someone of there personal savings indirectly so that I can earn reward points?

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## jt8025

---

----------


## Steven Douglas

> To claim paying off "debt" is deflationary is utterly bizarre. There is never more money in the system then $100 - _NO DEMAND DEPOSIT ACCOUNT CAN WITHDRAW MORE THAN THAT._ though should many withdraw their demand deposit, serious issues arise.


Yes, serious issues certainly do arise, because the entire system is inherently insolvent. 

You started with:  $100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. You traced a lowly $10 loan repayment, with no mention of how much of that was _interest_ - one of the all-important terms of any loan. Even if the interest was included in that $10 payment, the insolvency of the system is only revealed when you try to pay everything off in the aggregate - not just make a single payment, as people do every day. 

For simplicity's sake, to illustrate what is fundamentally wrong - a fatal flaw in the system that makes it a Ponzi scheme, let's look at this in terms of modest, but not implausible, extremes.  

Make all those for thirty years at a fixed rate of 7%, compounded annually, and further stipulate that all loans were made in a single month, and merely have to be repaid over time.  Since we're talking about the possible deflationary effects of paying off all loans repaid in the aggregate, and the ultimate ability for the entire system to reconcile, let's stipulate that no new loans can be made. Also, no runs on banks. Only money needed to service loans is withdrawn.  

You can only reconcile with what actually exists, or with what the Fed can create as M0 - so even if you need the Fed to create more M0 to reconcile the entire system show that in your steps.  Meanwhile, _no new loans to anyone_ - no expansion of credit, no robbing Peter's grandchildren to pay Paul's grandchildren.  We're just reconciling - closing the banks out to test the solvency of the entire system.  Now take your monopoly money out and pay off all those loans. You get thirty years to do it. 

We only have 100$ FED reserves. $900 in outstanding loans, $900 in demand deposits outstanding.  To reconcile we need $1,207.02 in interest - _over and above that $900 principle that must be repaid._ Now lets' ignore the fact that at some point nothing will be in circulation.  Like you said, to make a payment, a demand deposit has to be tapped somewhere.  

Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?

----------


## rpwi

> Steven


You directed this question to Steven, but I'm going sneak into here too.




> Deposit $100, and the series of loans, redeposits and loans....
> 
> $100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. 
> I think Steven agrees up to here....


Your example is confusing as it isn't clear whether the $100 comes from equity investment or from a depositor.  If from a depositor, I believe this should be 800 in loans...  [Assets]: 100 reserves + 900 loan credit != [liabilities/equity]: 900 demand deposits




> I repay $10 of my loan.
> To repay $10 of my loan means someone had to withdraw $10 from their demand deposit.
> 
> $90 FED, $900 Loan, $890 Demand deposit, $10 cash.
> 
> They pay me the cash, and I pay off my loan
> 
> $90 FED, $10 bank *excess reserve*, $890 loan, $890 Demand deposit.
> 
> ...


A couple of relevant points...  The first is yes...in some cases paying off a debt doesn't result in the destruction of M1 (and deflation).  This is because when a bank loans out money...they do not do so exclusively against demand deposits.  They also finance these loans with equity and other liabilities like corporate bonds.  So therefore when a bank sees a loss in reserves...it will always go against equity or non-deposit liabilities first.  However...  Banks are actively seeking to maintain constant reserve ratios and capital requirement ratios.  If their reserves drop, they either have to get reserves from another bank (and then the other bank will be the ones to create deflation) or they have to regain their ratio by curtailing new loans or not rolling over existing ones (or by getting new depositors or by selling assets).  So yes...repaying a loan doesn't result in an INSTANTANEOUS act of deflation...it does result in a rather a quick form of it through cause and effect.

----------


## rpwi

> I'll admit I haven't read all 159 post but have we come to an agreement on an answer for the question?  
> 
> I was thinking that if one persons payment date was on the 1st and another persons due date was on the 15th, even if both people paid off their credit cards at the end of their billing cycle there would always be a debt between the two people.
> 
> Do we think this is a inflation of the money supply?  
> 
> I trying to help answer the moral question for myself of does my using a credit card cause a decrease in purchasing power for another person?  Am I robbing someone of there personal savings indirectly so that I can earn reward points?


I'll take a stab at your question.

The first is that the credit card company itself doesn't practice fractional banking (isn't allowed to by law) so it doesn't create M1 nor inflation directly.  However...credit cards companies just really facilitate transactions and get most of their money off of transaction fees.  

The cards are issued from either private banks or credit unions.  Now rightaway...they do not create inflation.  If charge my CC for 1000 to buy some furniture and my bank is ABC Bank...then ABC bank transfers 1000 in reserves to the banker of the furniture dealer and gets a 1000 loan credit in my name.  Now a modern bank immediately will probably rebalance their funds by borrowing from an upstream bank to rebalance their reserves.  The upstream bank isn't probably a big player in the depositor market and probably will in turn borrow from another smaller community bank which had 'excess reserves'.  These reserves weren't 'excess' though...they were promises to repay depositors...so this was theft and inflation.

So basically...yeah.  When you borrow from a credit card (or from any bank for that matter) you contribute to fractional banking/inflation/instability/bailouts  Sorry.  That you may delay payment is not relevant.  For in that time, the money was created.  Sure it maybe a 0% loan for a little bit...but that debt was backing deposits erroneously (but in probably a complicated and indirect fashion).

Now some fractional-bank critics are actually as critical of the borrowers in this system as the bankers themselves and equate them as co-conspirators.  Image if you will, one can counterfeit.  But there is a caveat... you can only buy motorcycles with this fake money...even if you can create trillions of dollars.  Not the end of the world as you can resell the motorcycles...but this is a huge boon for anybody making a motorcycle.

In describing the above system, by which reserves are allocated and inflation created through use of a credit card, I neglected to bring up the Federal Reserve.  In reality...if your bank that gave you the credit card loan can't get the reserves from the private banking market...they can get it from the Fed.  Basically...once 'reserves' become scare thanks to all the CC borrowing...banks will auction up their inter-bank rates for reserves.  The fed sees these and supplies new reserves into the market to meet their target interbank lending rate (that famous rate we hear about in the news).  They do so through the open market.  They buy t-bills from huge banks (primary dealers) and give them brand new dollars.  Then the primary dealers relend these reserves to the rest of the market.  In this fashion, the fed makes sure that anybody that wants to make a stupid loan and a stupid CC purchase can.  With the injection of MB, the money multiplier wratchets up M1, M2 and M3 and we get inflation (thank in part to financial tools like credit cards).  So in all likelihood a credit card purchase will result in an increase in the monetary base AND a bigger increase in bank money (M1,M2,M3).

----------


## Black Flag

> Yes, serious issues certainly do arise, because the entire system is inherently insolvent.


We agree




> You started with:  $100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. You traced a lowly $10 loan repayment,


Oh come on, Steven - add zeros behind all the numbers and the story does not change. The process operates the same whether $1, $10 or $10 trillion.




> with no mention of how much of that was _interest_ - one of the all-important terms of any loan.


This is irrelevant in any discussion of fractional reserve banking.

All banking systems process - fractional or full reserved - operate by offering an interest earning loan.
The issue therefore is not their similarity but their difference.




> Even if the interest was included in that $10 payment, the insolvency of the system is only revealed when you try to pay everything off in the aggregate - not just make a single payment, as people do every day.


Nah!

To pay off a loan means either you have cash or a bank IOU.

You can trade your bank IOU for your IOU with the bank - this does not require you to withdraw a thing - it is merely an accounting reconciliation.

Obviously if you hold cash, the system was capable of managing your withdrawal, but in the end, faces receiving your money anyway, the money going (until loaned again) into excess reserves.

----------


## Agorism

> So if somebody racks up massive unsecured debt and then declares bankruptcy, the money supply increases.



First off it depends on who is loaning the money. Are they loaning with a 1:1 system or a fractional reserve system. A 1:1 system would not be an increase in the money supply.

But more obviously, if the person then declared bankruptcy...*this would SHRINK* the money supply back to whatever it was before he was lent the money if there was indeed an initial increase.

----------


## Black Flag

> Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?


The banks are businesses like any other.

They pay their employees out of their profits, their rent, buy computers, etc, out of their interest and fees earnings.

They loan out the money they get in interest back out into the economy.

They are no different then any one or company - if your money "never stands still" and goes out as loans, etc., well...that is exactly the same here - their money never stands still either (generally).

----------


## Black Flag

> We only have 100$ FED reserves. $900 in outstanding loans, $900 in demand deposits outstanding.  To reconcile we need $1,207.02 in interest - _over and above that $900 principle that must be repaid._ Now lets' ignore the fact that at some point nothing will be in circulation.  Like you said, to make a payment, a demand deposit has to be tapped somewhere.  
> 
> Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?


So, putting some monopoly money to this:

~900 dd/~900 loan/$100 FedRes, you are repaying your loan of $10+$1 interest.

To pay back your loan, you need to have earned from someone else, $11 - so "whoever" pays you $11 for your services which they withdraw from their account and pay you

~889 dd/~11 cash/$89 FEDRes/~900 loan

Then you pay your loan....
~889 dd/~0 cash/$89 FEDres/$11 ExcessReserve/$889 loan

...so where is the problem? None exists. 
Loans/Deposits .... still equals "1", as it did before you paid back your loan with interest.

----------


## Black Flag

> o reconcile we need $1,207.02 in interest - _over and above that $900 principle that must be repaid._


So, recap:

We have shown how interest gets paid - and nothing abnormal happens to the banking system
We have shown what the bank does with its earnings - it spends them or invests them or lend it.... just like you would.

Now, your specific issue of a repayment of $900 in loans.

The vital concept that we have to understand:
*All transactions use real money*

This is why "bank runs" are a threat - if the withdrawals of real money to engage in transactions is too great at once, it causes a bank run.
You agree with this effect.

But _a loan repayment IS a transaction_ - which means money needs to be withdrawn to engage in the transactions!
(withdraw money-pay for goods-seller deposits) ....

...remember a "loan" is really a deferred payment for the goods today .... and now the transaction is to the loan holder to move the goods and the payment to be equal in time...that is, today "the debt is cleared"... so:

(withdraw money -pay for goods used in the past "pay off debt" - creditor deposits)

If this withdraw money risks the same situation as a bank run ... if suddenly EVERYONE withdraws money (the reason does not matter, whether to hold cash or pay off loans), the banks default on their promise.

The key, Steven, is the reason for the bank run is irrelevant... you here thought that paying off a debt is different then paying for goods, or withdrawing cash to hold in hand... but it is not. 

It triggers the same default scenario.

----------


## Black Flag

> You directed this question to Steven, but I'm going sneak into here too.


Of course! Anytime!




> Your example is confusing as it isn't clear whether the $100 comes from equity investment or from a depositor.  If from a depositor, I believe this should be 800 in loans...  [Assets]: 100 reserves + 900 loan credit != [liabilities/equity]: 900 demand deposits


It doesn't matter - as far as the fractional reserve system exist, as well as legal capital reserve requirements - depository funds, CD, bonds, or share sales all count toward the lending limit of any bank.

A bank can sell its shares, take no deposits, and still lend money - it will not participate in the fractional reserve system since it has no depositors.

A bank that takes deposits and sells it shares can use both source of funds to make loans, and all the money ..share sales+deposits.. can be fractionally loaned away.

So, there is no such thing as a "loan credit" from the banks accounting.

How the bank is allowed to lend is based on the capital base and modifiers applied to the components that make up that capital base. I think I have already provided the calculation.

PS: remember the money to buy shares for a bank comes from the banking system.




> .they do not do so exclusively against demand deposits.


See my response to Steven re:"monopoly money example"

----------


## Steven Douglas

> So, recap:
> 
> We have shown how interest gets paid - and nothing abnormal happens to the banking system


Oh yeah, sure, as long as we count massive inevitable default as 'nothing abnormal'. 




> ..._a loan repayment IS a transaction_ - which means money needs to be withdrawn to engage in the transactions!


Yes, we agree there, so why the exclamation point? There's nothing new, interesting or surprising there.  We don't disagree on the nature of a loan payment - we're just playing out an end game scenario through to a conclusion, as we trace _all_ transactions, over time, no rush, that are required for the entire system to reconcile - not just a single payment in the moment. 




> If this withdraw money risks the same situation as a bank run ... if suddenly EVERYONE withdraws money (the reason does not matter, whether to hold cash or pay off loans), the banks default on their promise.


Aye, and there's the rub for the end game scenario that you completely avoided as to details - in the case where $900 (principle) plus $1,207.02 in interest ALL must be paid.  Over time, debtors go to pull money from banks to service loans. That all amounts to a bank run, as debtors are increasingly unable to withdraw.  Both creditors and banks default on their promises. Banks that default are no longer around to create loans (the primary way in which money is introduced into the economy, but they're not making new loans - only reconciling and winding down over time).  As the amount of fiduciary media dries up in the aggregate, so does the velocity of money - the number of transactions -- and therefore deflation (of the number and magnitude of transactions possible).  




> The key, Steven, is the reason for the bank run is irrelevant... you here thought that paying off a debt is different then paying for goods, or withdrawing cash to hold in hand... but it is not.


No, I pretty much had my eye on that little pea under the walnut shells the whole time. I just wanted to see how you moved them around.  You're so careful to show how monopoly money moves as principle only, step by step, and yet you completely glossed over, in a very sloppy, dismissive kind of way, with broken trains of thought, how all the debts - principle _plus interest_ - would be paid in the aggregate in the scenario I described. To wit:




> It triggers the same default scenario.


_Correctamundo._  In other words, although you didn't say it directly, and wouldn't play it out with your monopoly money, there is not enough M0 in existence to facilitate payment of all debts in the aggregate.  The _interest due is all M0_. No getting around that, and there's $1,207.02 of it due - with only $100 in existence to cover it.  Attempting to pay off all debts (while not Ponzi-ing any new debt into existence to cover the illusion of solvency) is the same thing as a massive, absolutely unavoidable, system-wide bank run.  Just to service debts on time.  Even pretending for a moment that everyone is surviving using another currency while this one winds down.  

Thus long before all the debts are paid, all banks, as well as many debtors, are forced to default.  And if an attempt was made to pay off all debts - without any new debts being created to service payments on the old ones - the money supply (and by "supply" I mean the actual amount of money in circulation, not existence) does indeed dry up completely.  

That $100 original FED reserve (and you're right, the number of zeros is irrelevant) represents the entire quantity of M0 in existence. There are INTEREST claims on that money over thirty years which are 1200% of the total amount of M0 in existence in our scenario.  The domino effect wipes out everyone, including the last creditor and bank standing, because that $100 is still in someone's possession, and insufficient to meet their own demands, meaning that, like London Bridges, "they all fall down".  

Catastrophic deflation, even internally.  No velocity, no circulation, no expansion of credit, no money.

----------


## Black Flag

> Oh yeah, sure, as long as we count massive inevitable default as 'nothing abnormal'.


Default of... what?

Government default of T-bills does not impact whatsoever the money supply.

A bank run -massive withdrawal of money - is highly unlikely in any scenario.

Systemic banking crisis and banking failures is possible, but the FDIC will monetize the deposits - this will be very inflationary, but not a "collapse".

What scenario are you imagining?




> Yes, we agree there, so why the exclamation point? There's nothing new, interesting or surprising there.  We don't disagree on the nature of a loan payment - we're just playing out an end game scenario through to a conclusion, as we trace _all_ transactions, over time, no rush, that are required for the entire system to reconcile - not just a single payment in the moment.


There is absolutely no problems.

Your first assumption is "Banks do not lend money they get returned from re-payment of loan".... but they do, as that is their business. If they do not lend, they do not earn.

Your next assumption is that "Interest cannot be paid" ... but that is the same strange conceptual twist of "how do companies create a profit? Where does the "money" come from to pay the profit over the costs to produce the goods?"

Yet, I doubt you suffer the economic misunderstanding here, if we talk about the source of wealth creation as it pertains to, say, automobile manufacturers - yet, I do not understand why it confuses you if the business is banking?

----------


## Black Flag

> Aye, and there's the rub for the end game scenario that you completely avoided as to details - in the case where $900 (principle) plus $1,207.02 in interest ALL must be paid.



If I said to you "So, where does the "money" to pay the profit of a company come from?"
If a wheel costs $100, the car company pays Wheel-guy $100. The car company sells the wheel for -say- $110.
Where does the extra $10 comes from to pay for the wheel?

...now you would pull out your economic text book and explain how wealth is created , etc. etc. and you would not be confused at all or worried about "oh my God! The capitalist system will collapse!"

Yet, replace Car maker with "Bank" and you go twisty.

Banking is a business, just like any other business.
They sell a service and make a profit.

The problem you have between Car maker and Banking is that *you believe banks make money out of thin air*, and because of this crack pot theory, you begin to assign wild and crazy circumstances to the business of banking - that, somehow, thin-air money earning interest will somehow collapse the economy.

But there is no such thing as "thin air" money.
Banks earn income selling loans.
Interest is paid by people earning money with their own services and making a profit.
They buy the services of a bank like they buy the services of an accountant.
Banks and accountants earn money with their services and make a profit.
Banks and accountants spend their money buying the services and goods of other producers, who sell their services and goods to the bank for a profit.

As long as you hold on to crack pot theories, the simple economic world of the free market - which to a man as intelligent as you - is perfectly clear _except_ when you apply this crack pot theory of money and banking - then, then this crack pot theory utterly muds the whole thing for you.

Drop the crack pot theory.
Clarity returns.

----------


## Steven Douglas

> If I said to you "So, where does the "money" to pay the profit of a company come from?"


_Future debt._ Future promises only.  That's my point. Without future debt the interest on existing loans in our global Ponzi scheme system cannot be paid in the aggregate.  

You compared it with any other business. Good.  An ordinary business owner, who is not in the red, decides to retire as he's aging and it's no longer profitable to remain in business, even though he breaks even.  It's a specialized business that requires him to run, so the business can't be sold, but only liquidated and wound down.  He takes on no new customers, winds down his affairs, sells all assets, collects all outstanding payments, satisfies and pays everything that is outstanding, and even has a dollar leftover after all is said and done (which only means there was no default, no bankruptcy, no insolvency).  

By your logic, you should be able to do the same with the banking system in our scenario.  Pay all the principle plus interest in the banking scenario I gave.  You have $100 in FED reserve, $900 in outstanding loans, $900 in demand deposits, plus $1,207.02 in interest that must be paid.  Assume for the sake of simplicity that a different currency is concurrently circulating, supporting both businesses and banks as you wind down this currency (over time, thirty years, the length of all loans).   

No new debts, just wind it all down until it all comes to zero.  And you can have your Fed print more money to do it if needed - just show how it was done.  I can't do it, because Ponzi schemes don't reconcile; they only maintain the illusion of solvency by expanding the circle of new marks that pay for the old ones, but I want to see if - and how - you can.

----------


## rpwi

> See my response to Steven re:"monopoly money example"


It's helpful to remember what we're initially arguing about.  You are arguing that paying down bank debt does not deflate the money supply.  I am arguing it does.

You have referred to an answer to Steven...but Steven is using a different tact (interest on principal) counter-argument which I'm not using.  Instead I'm arguing that deflation will result from the way reserves will be rebalanced.

Say I'm a depositor of ABC bank.  I'm also a lender of ABC bank.  I have 100k in debts, but 100k in checking.  If I repay my 100k debt, the bank merely removes their 100k checking liability to me and their 100k loan credit to me.  In the aggregate the banking system now has 100k less in deposits.  This is a destruction of money since M1 is money.  The bank has become less fractionally backed and more honestly backed (of course not sustainable as full loan repayments are impossible without government injections of reserves).  Now in the aggregate the economy still has the same amount of reserves or MB.  So this does not result in a destruction of base money.  Doesn't matter though as we accept checking accounts as money, so they are money and we do have deflation with loan repayments.  Now chances are the bank will relend my reserves and re-inflate M1...but this isn't necessarily always the case.

Now in a modern economy, repaying loans can and probably will shrink M0 as well because of how the open market works.  If I repay my loan, I provide the banking system with excess reserves.  What do the banks do with excess reserves?  Well, loaning out the money to an individual would be nice...but it is quite common for the bank to lend this to other banks nowadays.  What does this do the market for overnight loans?  Well with supply and demand...it drives their value down. The Fed of course monitors this and if they see the inter-bank lending be more active than they want (where interest rates between banks are below the fed funds rate), they remove reserves from the banking system by selling t-bills to primary dealers for reserves.  When the Fed does this, this results in a destruction of the monetary base and deflation.

So in summation...a simple fractional based banking economy absolutely experiences monetary loss and deflation when loans are repaid.

An economy backed by the Fed's open market will not only experience M1 deflation but MB deflation as well as the reserves are taken out of the system to rebalance supply and demand for loans.

----------


## Black Flag

> _Future debt._ Future promises only.  That's my point. Without future debt the interest on existing loans in our global Ponzi scheme system cannot be paid in the aggregate.


Not at all, Steven!

It is no ponzi scheme whatsoever.

Bank earns interest on its loans.
It spends these earnings on its wages, rent, computer, etc. just like any other business.

It invests its profits, just like any business.

If you think this is a ponzi scheme, you must also believe capitalism and the creation of wealth is merely a ponzi scheme!

----------


## Black Flag

> By your logic, you should be able to do the same with the banking system in our scenario.


Again, crack pot theory!

You are suggesting the entire economy - all at once - takes their ball glove and bat and goes home!

You are suggesting the banks never loan, thus do not earn, thus cannot pay their employees, their rent, their luxury condos.

By what logic to you prescribe this will ever happen????

Your crack pot theory requires a situation that has never and will never happen in modern human history - save global nuclear war. If that happens, banking is the least of your worries.

IF all the debts were unwound, there would the *same $100 in money that the system started with* (using my monopoly example) -*which is, has been, and the only money running around our little economy example from the beginning.*

It is your crackpot theory of fictitious thin-air money that has you so thoroughly confused to believe that without debt, there is no money - and YET! you utterly refuse to do the real touch and feel example with your monopoly set to see ... that your theory is WRONG.

----------


## Black Flag

> It's helpful to remember what we're initially arguing about.  You are arguing that paying down bank debt does not deflate the money supply.  I am arguing it does.


I know.

It the the old, tired, Keyensian mumbo-jumbo theory.




> Say I'm a depositor of ABC bank.  I'm also a lender of ABC bank.  I have 100k in debts, but 100k in checking.  If I repay my 100k debt, the bank merely removes their 100k checking liability to me and their 100k loan credit to me.


Correct - and the money supply does not change.

*It does not matter which bank or how many banks or if it is one bank, the mechanics remains the same, because you are in ONE banking system - the Federal Reserve System*




> In the aggregate the banking system now has 100k less in deposits.


So?
It has also has 100K of *Liabilities* removed from its books.




> This is a destruction of money since M1 is money.


Thus the crack pot theory!

You merely have made the same bizarre definition of money as Keynes - that an IOU - *consequence of LENDING money* because that which caused it --- money!

The dog and bark= two dogs theory at work again




> The bank has become less fractionally backed and more honestly backed


This is true - it has more cash to provide to its IOU's demands - it has become more solvent.

*But how does improving solvency come at destroying money???? - It can't*

"I am more solvent because money was destroyed!" === utter poppycock.

I have become more solvent because I have MORE money to IOU!





> (of course not sustainable as full loan repayments are impossible without government injections of reserves).


Poppy cock!

You therefore deny the existence of the free market and capitalism!

"Of course "profits" are impossible without the government injecting money into the system!" is your claim here!!

*Break out the monopoly set; take 100 1$monopoly money and move the paper money around; take accounting notes of who owes what*

...and you will find profits; you will find interest; you will accounting of deposits and of loans, and the system goes around and around and around forever without you having to pull one more monopoly dollar out to make it work

----------


## Black Flag

Steve,

Here, do this exercise:

Leave out the banks and fractional reserves and all of that.

You have $25, I have $25, rwpi has $25 and Roy has $25.

I teach, you make shoes, rwpi fixes computers and Roy sews dresses.

How does our economy work, where ALL of us make a profit selling our stuff, and yet ALL of us enjoy the fruits of each other's labor?

Do the exercise and explain your version of the free market system.

----------


## Steven Douglas

> Again, crack pot theory!
> 
> You are suggesting the entire economy - all at once - takes their ball glove and bat and goes home! .... Your crack pot theory requires a situation that has never and will never happen in modern human history - save global nuclear war. If that happens, banking is the least of your worries.


It's an hypothetical - a thought experiment, not a theory, and I already gave you a plausible out, so not so fast. I already said have a concurrent currency in circulation. That was to head you off at that dismissive pass.  Which you headed for anyway.

Currencies are replaced ALL THE TIME around the world. One winds down as another takes over. That's not crack pottery - that's HISTORY.    

So no, the entire economy continues to run in this hypothetical - which was only designed to illustrate what you refuse to entertain anyway:  Two currencies (pretend we adopted and are widely circulating Pesos, RMB, a new Uber-EURO, or whatever else makes you feel better).  All banks and all other commerce use _both_ currencies, so nobody's hurting in the process, and business continues as usual.  

Remember, we're just winding down one currency, and just to see how, or if, it can be done. Stop evading, and simplistically explaining away - and do what you love most: get out that handy monopoly set:  

$100 in FED reserves (and can print any new money, just show how it fits into the scenario)
$900 in demand deposits
$900 in outstanding loans (all 30 years, all at 7% fixed, compounded annually) which means
$1,207.02 in interest also payable over the next 30 years. 
The bank (single banking system) is phasing out this type of money, so it won't re-lend any of that currency. 
Everything proceeds normally in our scenario, nobody panics or makes any sudden moves. 

Now show me how all that can be paid down.   Wind down that wonderful, perfectly normal and working currency, to make room for one that's essentially the same, just more global, and not tied to this one.  




> IF all the debts were unwound, there would the *same $100 in money that the system started with* (using my monopoly example) -*which is, has been, and the only money running around our little economy example from the beginning.*


Don't tell me. _Show me._  

By my reckoning, with the bank as the only one doing any lending, all bucks stop with the bank/banking system (closed loop anyway, so call it one bank).  I'm trying to figure out a) Where does the $1,207.02 come from, and b) how does that transform back into the original $100? As I understand it, the bank - which as you said is just one more business - is fully expecting more than just its original $100 M0/$900 M1 in return.  It also has $1,207.02 (Can the bank fully expect and demand, like any other business, nothing but M0?) coming to it after 30 years of patiently waiting (while surviving on lending out another currency simultaneously).  




> Here, do this exercise:
> 
> Leave out the banks and fractional reserves and all of that.
> 
> You have $25, I have $25, rwpi has $25 and Roy has $25.


I have a better exercise, one that actually gives a meaningful workout, and doesn't go completely and evasively off point: 

You have $25, I have $25, rwpi has $25 and Roy has $25.  We each borrowed it from BANK, which has $100, the only $100 in existence, which loaned it out directly to each of us - no fractional reserve banking involved. The loan duration is irrelevant, make it whatever you want, but the interest on each loan amounts to $5 for each of us when all is said and done.  Each of us borrowed $25, each of us owes the bank $30 dollars, for a grand total of $120 owed to the bank.  

I know where we can each get the principle - in theory.  I can see that with your monopoly money just fine.  I even know where a couple of us might get the interest to satisfy our own debts to the bank - but not without shorting the money available for the principle one or more others of us owes, forget the interest.  But let's just say we make equal payments, all on time.

Where do we get the principle plus the interest in the aggregate? There's only $100 in existence. The entire system appears to be $20 short.

----------


## Black Flag

> It's an hypothetical - a thought experiment, not a theory, and I already gave you a plausible out, so not so fast. I already said have a concurrent currency in circulation. That was to head you off at that dismissive pass.  Which you headed for anyway.


So, thrown in a few fire breathing dragons while you are at it, along with leprechauns (oops, you got those already) and a fairy god mother just for kicks.

Making up ridiculous, impossible and irrelevant scenarios is simply absurd.

Economics is the science of human *action* - all action occurs in *reality* - so keep it there, and read the fairy tales to your kids at night.

You have to explain *why* your economy has -suddenly- slammed to an immediate halt - that no bank loans anymore, that no bank spends a dime on rent, labor, computers, luxury condo's, expensive cars, caviar and whatever they spend their profits on and why given this cataclysmic event, people even care about paying off their loan?

...because without this backdrop, nothing makes sense from you.




> Currencies ARE replaced ALL THE TIME around the world. One winds down as another takes over. That's not crack pottery - that's HISTORY.


We aren't talking about replace - if it being replaced then your scenario does not occur either.

FDR replaced gold with FRBN - there were still outstanding loans, an economy trade and banks profits. So?

----------


## Black Flag

> Where do we get the principle plus the interest in the aggregate? There's only $100 in existence.


Answer my question:

"Where do you get profit from in a free market capitalist system?"

See the question of the four of us in an economy with no bank - all profitable, all enjoying the fruit of each others labor, and all of this with only $100 between us.

Explain that, Steven - unless you are Marxist, you'll explain *exactly* how the bank earns a profit on its service, just like you, while participating in the free market.

----------


## Steven Douglas

> "Where do you get profit from in a free market capitalist system?"


Red herring, and a not-so-bright, not-so-artful dodge.  Profit in what form? Money? Certainly we're not talking about the mechanics of profit in a free market, are we? Isn't "profit", in the context you're using it, just another word for money?  We are not talking about profit, but the origin of money itself, and the mechanics of how it is introduced into the market to become available for profit -- _in this particular market_. 

And your reference to fire breathing dragons, leprechauns and a fairy god mother was nothing more than another dodge, another flagrant evasion, once again, this time with the fallacy of Argument by Ridicule.  Why? Because your position is indefensible.  You can't afford to exit your closed, and quite circular, loop of reasoning.  

Using a hard specie regime I can show you both how the entire system could wind down as well as why it never would. That's because hard specie comes from the ground (aka the "free market", as just another commodity).  To get the money to pay the principle plus interest on those loans, the debtors can trade anything that has some connection to a miner and an assayer, and those debts can be satisfied completely -- using stuff that continues to be produced by the free market to this day.   

But with M0, you would have to actually pull back the curtain and bare the wrinkled butt of the old man behind it to show how that gets introduced - which is always in the form of -- yet more loans. If you used some kind of M0 counterfeit creation to come up with the interest, you would still be left with the problem of showing how that newly created money got introduced into the economy - so that it could finally make its way to those who must repay their loans.  And then there's the problem of ... yet more loans, and no way to wind anything down without...yet more loans.

----------


## rpwi

> It has also has 100K of *Liabilities* removed from its books.


These weren't real liabilities since the banks never have a means to repay them in the aggregate.   




> This is true - it has more cash to provide to its IOU's demands - it has become more solvent.


Not possible in the aggregate though.  As long as deposits are more than MB, than MB can not be used to repay MB backed loans.  It would be circular logic.




> *But how does improving solvency come at destroying money???? - It can't*


Let's use an analogy.  Say a counterfeiter exchanges 1000 fake dollars for real dollars.  Inflationary and dishonest, yes?  Say he feels guilty...  So he exchanges the real 1000 dollars for the fake 1000 dollars.  Deflationary, yes?  Same deal in the banking system.   Put another way...ask everybody how much money they had before the debt was repaid and how much money they had after the debt was paid.  Since they will count M1, they will have said their money (in the aggregate) has decreased.




> "I am more solvent because money was destroyed!" === utter poppycock.


Fake money (M1+) was destroyed.  MB wasn't destroyed (although indirectly on the open market it is).




> Poppy cock!
> 
> You therefore deny the existence of the free market and capitalism!


Fractional banking is fraud...and fraud is not a proper component of the free market.  When an economy has trillion dollars in base money and three trillion in deposits...and the deposits are backed by two trillion in loans...how does the economy repay the two trillion?  Put another way...say the 3 trillion in deposits all wanted to be cashed out into reserves...what happens? 




> "Of course "profits" are impossible without the government injecting money into the system!" is your claim here!!


??  I don't know where you are getting this idea...  What I was explaining is how the Fed has to constantly inject reserves into the banking system to keep it afloat.  Fractional banking is inherently unstable and will always crash because people demand liquidity that is rightfully theirs.  Or they will decide they don't want to borrow as much.  Or they have the inability to repay bank loans (thanks in large part to how bank money plus interest squeezes the demand for reserves).

Let's try this...let's establish what we agree and disagree on.

MB is destroyed = deflation...MB created = inflation.  Correct?

You believe that M1 is not money.  Therefore when M1 is either created or destroyed it doesn't affect prices, right?

You believe repaying loans reduces M1, right?

But you don't believe a reduction in M1 results in deflation, right?

You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?

If so,  do you believe this affects the open market and the amount of t-bills bought and sold as well as the amount of Mb created and destroyed?

If so, do you then believe that paying off loans can result in a reduction in Mb in the economy due to the Fed Funds Rate and open Market operations, so that this would create deflation but in a round-about fashion?

----------


## Black Flag

> These weren't real liabilities since the banks never have a means to repay them in the aggregate.


OF course they are liabilities.

You cannot repay your house in aggregate either! But your mortgage is still a liability!

The problem, again, is the Fractional Reserve, not some fairy tale belief of "thin air" money.




> Not possible in the aggregate though.


So?

What fantasy do you imagine upon the economy that would make such a thing something to worry about?

----------


## Black Flag

> Red herring, and a not-so-bright, not-so-artful dodge.  Profit in what form? Money? Certainly we're not talking about the mechanics of profit in a free market, are we? Isn't "profit", in the context you're using it, just another word for money?  We are not talking about profit, but the origin of money itself, and the mechanics of how it is introduced into the market to become available for profit -- _in this particular market_.


It is not a red herring.

You sit there pretending the bank stuffs its earnings and loans repayments under a mattress - buying nothing, and selling no more loans.

Under this bizarre scenario, you believe you can make real world statements about banking.

----------


## Black Flag

> And your reference to fire breathing dragons, leprechauns and a fairy god mother was nothing more than another dodge, another flagrant evasion, once again, this time with the fallacy of Argument by Ridicule.  Why? Because your position is indefensible.  You can't afford to exit your closed, and quite circular, loop of reasoning.


Utter nonsense.

You make up fantastic stories and crack pot theories _in an attempt to understand the real world_!!

Such a thing Mises warned about ... where half-taught men pretend away at illusions - and such a thing is NOT economics.

----------


## Black Flag

> But with M0, you would have to actually pull back the curtain and bare the wrinkled butt of the old man behind it to show how that gets introduced - which is always in the form of -- yet more loans. If you used some kind of M0 counterfeit creation to come up with the interest, you would still be left with the problem of showing how that newly created money got introduced into the economy - so that it could finally make its way to those who must repay their loans.  And then there's the problem of ... yet more loans, and no way to wind anything down without...yet more loans.


I sit stunned at your bizarre assertion that a bank - who is in business to make loans - *makes more loans when the past loans and interest is repaid* - and this is a problem!!!

Shock on you!

You equally must be stunned to think car manufacturers make more cars after the previous ones have been sold!

You are stunned that a doctor services a new patient after he is cured another!

Man!

----------


## Black Flag

Steven

Why you need to understand the free market -which I am confident you do - is that it applies to banking too! (Shock, I know!...for you!)

You trade because you need to eat.
You provide a service or a good to trade.
You do this regularly since you need to eat regularly.

Your bizarre theory of banking - from the get-go - is based on a crack pot theory. As you apply it, you need equally to apply more cracked pots.

You now come to a point, in your utter confusion, that you do not know or understand what a bank does with the interest it earns.

Your crackpot theory says "It sits on them".

No, *it spends it back into the marketplace to pay rent, salaries, etc.* 

OR!!!

Invests them!!

JUST
LIKE
YOU
DO

You attribute some very strange behavior to banks that you do not attribute to other businesses.

So where does the interest come from to pay back to the bank?
*From providing services and goods into the economy*

*As the bank participates in this economy by buying such services with its profits, it returns the interest you paid back to you in trade for your services or provides capital to you to expand your business* for you to produce even more goods or services and earn even more money.

This is why you need to do the hands on exercises, Steven.

Without them, you get wildly confused about things you already know very well.

----------


## Black Flag

> As long as deposits are more than MB, than MB can not be used to repay MB backed loans.  It would be circular logic.


That is why it is fraudulent.

That does not mean they cannot maintain the banking system.

All that is required is timing. As long as people re-deposit what they withdraw, the system works fine.




> Let's use an analogy.


Let's not - it confuses you because you do not apply proper economic theory in your analogies.

Use a real example - use a monopoly set with money, notepads to record your transactions, and work it out.






> Say a counterfeiter exchanges


Exactly my point with your analogies.

There is NO counterfeiting going on with the Fractional Reserve banking system

Read carefully, sir.

*Every transaction is done using REAL, HONEST MONEY*

You withdraw REAL money from your deposit account as according to your IOU agreement with the bank.

You hand over REAL money to buy your goods.

The seller deposits REAL money into his bank deposit account based on an IOU agreement with the bank.

So quit with your bizarre counterfeiting nonsense - because it makes NO sense!




> Fractional banking is fraud...and fraud is not a proper component of the free market.


Agreed. 

It is, as Rothbard said, two simultaneous claims on the same asset. One of them cannot be right. The bank claims both are right. That is fraud.

But there is no counterfeiting, and no "thin air money"



> When an economy has trillion dollars in base money and three trillion in deposits...and the deposits are backed by two trillion in loans...how does the economy repay the two trillion?


By *earning!* - how do you pay off your loan? You get a job, work hard, save money and repay your loan?!?!?!?

Why is this such a bloody mystery to you?




> Put another way...say the 3 trillion in deposits all wanted to be cashed out into reserves...what happens?


1st, that will never happen. 

If you think it will, explain the circumstance that suddenly crashed Western Civilization - and I will point to that event being the cataclysmic event, and not a failure of the banking system.

2nd, it can happen to *banks* - happens all the time - hundreds have closed their doors.

When their depositors take their money out - and the bank no longer has capital to repay it, the bank is bankrupt and it closes it doors.

Those that did not get paid are stiffed.

*This creates a massive recession/depression if many banks suffer this fate and cause massive losses to its depositors* by being unable to repay their IOU.

Now, again, if you believe the IOU is money, this simply is impossible! How can you run out of the thing you have? 

But IOU is not money - it is REPAID WITH MONEY, and the money ran out.

There have been 100's of banks that have been bankrupted and dissolved since 1933.
There has not been 1 ... not one .... depositor who has lost their money.

Why?



> ??  I don't know where you are getting this idea...  What I was explaining is how the Fed has to constantly inject reserves into the banking system to keep it afloat.


Bull.

It injects money into the system *to keep large BANKS afloat, and to give money to government* but it does NOT inject money to keep the "system" afloat - it does not have to.

The capitalist free-market system is already a infinitely, self-sustaining feedback loop - the Federal Reserve couldn't stop the economy if they tried.




> Fractional banking is inherently unstable and will always crash because people demand liquidity that is rightfully theirs.


True.




> Or they will decide they don't want to borrow as much.


False (that such a thing will collapse the system) - (true, they may choose not to borrow)




> Or they have the inability to repay bank loans


True.




> (thanks in large part to how bank money plus interest squeezes the demand for reserves).


False.




> Let's try this...let's establish what we agree and disagree on.
> 
> MB is destroyed = deflation...MB created = inflation.  Correct?


No, not quite.

Inflation/deflation is a consequence of the *law of supply and demand* 

Increase in demand for money raises the price of money.
Decrease in demand for money lowers the price of money.

Increase in supply of money lowers the price of money.
Decrease in supply of money raises the price of money.

If the increase in demand of money is met with an increase in the supply, the price of money does not vary.

If there is an increase in the demand for apples, but the apple growers meet that demand, the price of apples does not vary.

This is basic economics 101 - the law of supply and demand.

It applies to apples, computers, labor ... and money.

Yes demand for money (or a lessening of it) will change the price of money and create inflation/deflation
Yes the manufacturing of money (or the lessening of it) will change the price of money and create inflation/deflation.

BOTH in action, one stronger than the other, will change the price of money.




> You believe that M1 is not money.  Therefore when M1 is either created or destroyed it doesn't affect prices, right?


True. 
You obtaining a loan means there is money to lend. 
You paying off a loan means there must have been money to earn.

*edited*

Well, not necessarily true either - 

and though not anything to do with the banking system, I can see where people losing their deposits - that is, they got stiffed, - will change their buying habits.

You take a bath in the stock market and lose your retirement fund, you may change your spending habits so to replenish those funds - thus, not buy things, thus cause a recession.

People losing their money due to unpaid deposits may cause the same thing - a reduction in spending so to rebuild excess capital.

BUT!
The amount of money neither increase or decreases in either circumstance.



> You believe repaying loans reduces M1, right?


No.

You have "Steven's" disease.

You believe when a loan is repaid, the bank sits on its hands and goes "Whew! Got the money now stuff it in a pillow case and hide it!"

No, it is a business.

It is in the business of making loans.

You repay your loan to the bank.

The bank takes your repayment and  loans the money out to the economy and someone else.

It does this because that is what a bank does to earn a living. 
It lends money. 
It pays its employees, it lightening bills, its electrical bills, its rent from the money earned in doing its business - that is, lending money. It's earnings are called "interest".

So it lends the money again.
To who?
A person who needs money that they don't have to buy something they want today. They want to *defer payment* for the goods they want today, and pay for that good in the future.
The bank charges a fee for giving you money today to be returned in the future. 

There is a fee for using this money for your wants because the bank cannot use that money for its wants. This fee is interest.
_
The person who borrows money uses it to buy something.
They spend the money.
The seller gets the money, and do you know what he does with it?

He ... deposits it!

A repayment of a loan requires money. True.
Money to repay loan comes from working. True.
The service you give by working trades for money. True.
That money to pay you for your work is withdrawn from a bank account, and lowers DD. True.
The money is repaid to bank, and that lowers loan liabilities. True.

...but you want to stop there. But it does not stop there.

The bank employees need to eat again tomorrow.
They need to earn money to buy food.
They earn money to buy food by lending money at a price.
They have money to lend.
They lend so to earn money.

There is a borrower who..... (repeat forever)._




> But you don't believe a reduction in M1 results in deflation, right?


Why would it? 
IF people are pulling out their money and NOT redepositing it, *there must be a reason for this*





> You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?


It effects individual BANKS and their capital requirements - but it does NOT affect the banking system. Money out of one bank in this banking system and into another bank in the same banking system is:
-1+1=0 ... no change.




> If so,  do you believe this affects the open market and the amount of t-bills bought and sold as well as the amount of Mb created and destroyed?


The reasons the FED may or may not buy a T-bill has nothing to do with whether a bank takes a deposit or makes a loan to you.




> If so, do you then believe that paying off loans can result in a reduction in Mb in the economy due to the Fed Funds Rate and open Market operations, so that this would create deflation but in a round-about fashion?


There are a lot of economic circumstances that change a person's demand for money relative to their demand for other goods. Maybe millions of circumstances, maybe billions.

Picking one that, through a chain of effect, may indeed do as you claim.

But, it might not either.

And equally, it might do the opposite next time.

----------


## Steven Douglas

Well, BF, I can't say that I blame you for completely turtling. Once again you've done nothing but duck, dodge and evade -- in three separate posts, no less, the last one yet another red herring about how the market works, rather than how the money is created and enters into a regime to pay off some simple loans plus interest, in the aggregate, in a simple thought experiment. 

To you our current monetary regime just goes on forever, as it always did. Exponentially even, like some kind of closed loop  Alpha-Omega type system, with no beginning or end (hence the circular reasoning, and the inability  to entertain its beginnings and possible endings). For all  intents and purposes it somehow always existed and always will.  Your inability to even humor my scenario is evidence of that, which has a decidedly dogmatic ring to it (like a religious tenet).  

*Anyone who believes that exponential growth can go on
forever in a finite world is either a madman or an economist.*
- Kenneth Boulding, Economist


As long as we're waxing dogmatic and axiomatic, let me state some things which I believe are axiomatic: Our currency is not immortal.  It has a  life cycle, and will one day die, only to be replaced by another. To you it's so Titanic that God Himself could not sink this ship - but if history has taught us anything it  is that all currencies are eventually debauched - and then they die, often horrible, tragic deaths.  The death of our particular currency was designed into the system itself, given that it is unsustainable without exponential growth, which really is only possible in the minds of madmen and economists. 

Our current regime (post Continentals) had a  hard specie beginning, a paper devolution in the middle, and now there  is a definite built-in end game to it all - one which you cannot fathom or even conceive as a possibility - even conceptually.  Now that to me is beyond  bizarre. 

Your normalcy bias is so overwhelming that you cannot (won't?) even conceive of another currency entering into an economy and taking over as the new money - even as the prior currency wanes and dies out. Perish that thought, it's so bizarre in your mind (even though it's happened in this very country, and hundreds of others throughout recorded history) that you cannot/will not even entertain the possibility - even as a thought experiment - to test the overall solvency of the system, or how its end game could play out in theory if done deliberately - with a concurrent currency ensuring that the economy continued to roll on despite its death. 

And since you have no answers, but prefer instead to engage in red herrings, argument by ridicule, and condescension that is completely unwarranted, labeling a  simple thought experiment so "bizarre" as not to be worth entertaining,  there's really not a whole lot to discuss with you.  

Steel trap minds  and all that. It would have been fun if you had played along, I think - but I'll take your evasiveness as a forfeit on your part, obvious enough to anyone else viewing, I think.

----------


## Black Flag

> Well, BF, I can't say that I blame you for completely turtling.


Now you are turning into Roy!

If I don't submit to your irrational plea to believe in fairy tales, you think I am turtling.

I asked you specifically - *and you refuse to comply*

_What event makes all banks stop lending_ because that is what your fairy tale requires.




> than how the money is created


Stop it, Roy.

Already presented:
Money is created by the Federal Reserve through monetizing T-bills, or purchase of assets.

It is NOT created by you getting a loan from your local bank.




> and enters into a regime to pay off some simple loans plus interest, in the aggregate, in a simple thought experiment.


That's the problem!

You have presented no experiment -*a microcosm of the real world* in an effort to understand the world.

*You want a fantasy where the entire economy has shut down, then you want to know what happens to the money and interest!!!*

Well, if the entire economy shuts down, Steve, the need for any money is zero. You are dead.

Your *base premise for your experiment invokes a condition where economics no longer applies*, there is no trade, there is no money, you are dead.




> To you our current monetary regime just goes on forever, as it always did.


You believe you stop earning? and buying? and consuming?

As long as men do so, yep, the economy runs along with it.

But you are a red herring - I've already presented _how this monetary system is unstable_ and ...

IT
HAS
NOTHING
TO
DO
WITH
YOUR
FANTASY
"THIN AIR"
MONEY

It has to do with dual claims and rights upon the same asset of money -one by the depositor and the other by the borrower.




> Exponentially even


Where did this come from?
The economy has grown -averaged- 2 to 3% a year for the last 350 years or so. Hardly exponential, but an order of magnitude better than it did for the previous 2,000 years.

Please show exponential growth.




> *Anyone who believes that exponential growth can go on
> forever in a finite world is either a madman or an economist.*
> - Kenneth Boulding, Economist


Any man who believes there is a limit to human growth has only demonstrated the limit to his education.




> Our currency is not immortal.


I do not disagree.

But that does not make your thin-air money real.




> Your normalcy bias is so overwhelming


I have no such thing.

I see reality and it tells me the truth.

You believe in an illusion because you want your fantasy to be truth. You want your thin-air money to be real so you can apply other crackpottery creating even more bizarre proclamations like:
"paying off your debt causes deflation"

----------


## Steven Douglas

> I asked you specifically - *and you refuse to comply*
> 
> _What event makes all banks stop lending_ because that is what your fairy tale requires.


I asked you something first, and you refused to answer with anything but a modified scenario that rephrased the question as a deflection, and so that the discussion could shift to the points you wanted to make.  Which I answered anyway.  

So two answers to your last question: 

Banks might stop lending when they are no longer able to meet their obligations, become bankrupt, and no longer exist.  
In the case of two currencies, however, with one being phased out and another in transition, the banks which are solvent stop lending out the dying currency, and start lending out only the prevailing currency.   




> Money is created by the Federal Reserve through monetizing T-bills, or purchase of assets.
> 
> It is NOT created by you getting a loan from your local bank.


I don't care.  I'm not on a kick to quibble over how you want to define money, and I'll go with your definitions for the sake of discussion. And I said that I didn't care how or if you created the money needed to satisfy all outstanding principle plus interest debts in the scenario, as long as you showed it in the process.  




> You have presented no experiment -*a microcosm of the real world* in an effort to understand the world.
> 
> *You want a fantasy where the entire economy has shut down, then you want to know what happens to the money and interest!!!*


And there you go again.  I already told you we're NOT shutting down the entire economy. We're merely phasing out one currency as another currency transitions in to take over.  In the real world this happens all the time. Member states of the Eurozone had to phase out their currencies, along with scenario decisions on how that would be done. To wit: 




> *Scenarios for adopting the euro*
> 
> *In the preparations for the introduction of the euro in 1999, Member States applied the ‘Madrid scenario’, so-called because it was agreed at the European Council meeting in Madrid in 1995.*
> 
> 
> 
> The Madrid scenario set the legal framework and the timetable for the adoption of the euro, which involved a gradual changeover during a three-year transitional period:
> 
> On 31 December 1998, the euro conversion rates for the national currencies of the Member States adopting the euro were irrevocably fixed.On 1 January 1999, the euro became the official currency of the participating countries. The national currency units became 'sub-units' of the euro, and national banknotes and coins remained in circulation. Consumers saw dual price displays in euro and the national currency units, e.g. in shops and on bank account statements, but euro cash was yet to be made available. Governments, financial institutions and companies began operating in euro, e.g. for wholesale transactions and for issuing debt. The euro was in widespread use as ‘book money’ and as a unit of account.Euro banknotes and coins were first introduced in the euro-area countries on 1 January 2002 (€-day), three years after the euro was launched. During a short period of dual circulation when both euro and national cash were legal tender, the latter was progressively withdrawn from circulation, mainly collected by shops and banks. The dual circulation period came to an end on 28 February – or even before in some countries – so that from 1 March 2002 only euro banknotes and coins were accepted for payment in the euro area.


There's a perfect example of a real world scenario not too very unlike the one I set up. And since now we can see that such a scenario is not as outlandish or bizarre as you once believed, would you mind very much going back and showing me with your monopoly money how to wind the old currency down -- even as you are safe in the knowledge that another currency is circulating around just fine, and in an economy that continues to function using that other currency. 




> The economy has grown -averaged- 2 to 3% a year for the last 350 years or so. Hardly exponential, but an order of magnitude better than it did for the previous 2,000 years.
> 
> Please show exponential growth.


_You just did._ You just didn't know it. What you called "hardly exponential" was PRECISELY EXPONENTIAL. And not "an order of magnitude" but ORDERS of magnitude larger. 

You need to watch this. This is not the usual blah blah to make a point. It's to educate you on what should be a simple concept for everyone to understand: 




I did not know that you did not even understand the meaning of exponential growth.  It has nothing to do with the size of the rate of growth, or the initial amount, but the fact that it is a steady rate of increase (percentage-wise) over time, which involves doubling rates over time.  Even 1% per year is still considered exponential. To get the doubling rate of the entire system (to approximate how long it takes for the original number to double), you divide the percentage over time into 70 (69.3 if you want to be closer to the actual logarithm).  So a 1% increase per year has a doubling rate of ~70 years. .5%/yr would be 140 years doubling time. 2%/yr - 35 years. 7% per year, 10 years, and so on.  That's how you determine how long it takes for an exponential system with a fixed rate of growth to double.  

A growth rate of 2% per year IS EXPONENTIAL, with a doubling rate of 35 years.  So while the Earth is big and the economy was relatively small, time passes and it looks to the uneducated as if the potential for exponential growth is boundless and infinite.  It's not. 

You see 2% per unit of time as a steady number, without realizing the actual numbers that are being accumulated, compounded and multiplied in the process.  

Start with 1000 (of anything) in the year 1660. It increases at 2% per year.  In 35 years, that number will double, and so on, every 35 years after that, doubling the previous number, until the entire system has been doubled 10 times. 

1660	1,000
1695	2,000
1730	4,000
1765	8,000
1800	16,000
1835	32,000
1870	64,000
1905	128,000
1940	256,000
1975	512,000
2010	1,024,000

So when you say that something grows at _a mere 2% per year_ for 350 years, you're really saying it's multiplied roughly a thousand (or four orders of magnitude) times the original number. 

Here is a generic exponential curve:



What percent of change is required to make such a curve?  ANY. Any steady rate of increase (percent over time) will produce an exponential curve, just like this one. 




> Any man who believes there is a limit to human growth has only demonstrated the limit to his education.


That very statement shows a distinct lack of education, and sounds more like a mantra for a motivational poster than an educated statement.  Human growth limits are factual, based on underlying fundamentals that can be measured. What cannot be measured, but only predicted or projected, is how humans will deal with these limits, because on an individual level humans are complex and adaptive, with infinite possibilities for adaptation.  But the fundamentals themselves used in those adaptations can be measured, and once the adaptations are made, those new fundamentals too can be quantified, as they are all finite. Even if we figured out a way to fill the known universe with our adaptations they would be finite, because both mass and energy (the real fundamentals) are finite. 




> But that does not make your thin-air money real.


Stop with the "thin-air money" strawman, as we're not talking about "thin air money". I don't care how you label money, fiduciary media, demand deposits or anything else.  I'll accept ALL your definitions and we'll label them any way you want for the sake of discussion.  The ONLY thing we are talking about here is the mechanics of how whatever-it-is-you-call-it actually flows* and reconciles* -- system-wide in the aggregate.  

Now humor me with my scenario -- which I have shown clearly is not so bizarre, not so "fantasy world" implausible after all.

----------


## rpwi

> OF course they are liabilities.
> 
> You cannot repay your house in aggregate either! But your mortgage is still a liability!


The difference is the home is a long term asset and it will be backed by a long term liability in a home loan.  When a bank mismatches short liabilities with long term loan assets that's when problems occur.   




> The problem, again, is the Fractional Reserve, not some fairy tale belief of "thin air" money.


If you are arguing that M1 doesn't create inflation and with FDIC insurance/open market operations meaning don't have that many bank runs these days...then what is YOUR arguement against the fractional banking system?  How does it hurt John Q. Public?

----------


## rpwi

Lot to go over :P... Well let's start with the core concepts first since derivative arguments are built upon these.


> No, not quite.
> 
> ...
> BOTH in action, one stronger than the other, will change the price of money.


Good...we are agreed that all else being equal a change in MB will either inflationary or deflationary.




> True. 
> You obtaining a loan means there is money to lend. 
> You paying off a loan means there must have been money to earn.
> ...
> The amount of money neither increase or decreases in either circumstance.


So here we agree to disagree.  You clearly believe M1 is not money.  You also believe repayment of M1 backed loans is not deflationary.  You seem to think that because a person had the money to repay the bank loan...no problem...things even out.  But the problem is the person who repaid their bank loan...undoubtedly did so with a bank deposit.  Therein lies the deflation.

In response to my statement that repaying a bank loan results in a reduction in M1, you state:




> No.
> 
> You believe when a loan is repaid, the bank sits on its hands and goes "Whew! Got the money now stuff it in a pillow case and hide it!"


If a bank relends a repaid loan the deflation is counteracted.  Now when you refer to a bank 'stuffing money into a pillow case'...this does not make sense.  Isn't this what a bank is supposed to do?  If I deposit 1k at a bank, I'm asking them to 'stuff money into a pillow case'.  In return I receive 1k in demand deposits. This idea that banks are 'hoarding' money if they don't lend out all my deposits (which are promised on demand) is absurd.




> The bank takes your repayment and  loans the money out to the economy and someone else.


Then yes, deflation is counteracted with quick inflation.  The issue is if the economy borrowing in the aggregate drops or raises.  The average from  new loans - old loans is where inflation/deflation comes about.




> It does this because that is what a bank does to earn a living. 
> It lends money. 
> It pays its employees, it lightening bills, its electrical bills, its rent from the money earned in doing its business - that is, lending money. It's earnings are called "interest".


An odd argument.  A bank's operational expenses (which are a pittance compared to their revenue) hardly matters.  It's like me arguing...I counterfeited dollars...but because I had to pay the electric bill...I'm ok!  No inflation was caused![/quote]

_...But you don't believe a reduction in M1 results in deflation, right? ..._




> Why would it? 
> IF people are pulling out their money and NOT redepositing it, *there must be a reason for this*


Indeed.  Perhaps they lost faith in the banking system and learned our fractional banking actually worked.  You appear to be arguing that a reduction in M1 would not result in deflation as this meant there was a corresponding decrease in the demand for M1.  This is not the case though as there is no 'market for M1'  There is a market however for the loans which in turn generate of deplete M1.

_You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?_




> It effects individual BANKS and their capital requirements - but it does NOT affect the banking system. Money out of one bank in this banking system and into another bank in the same banking system is:
> -1+1=0 ... no change.


So you are arguing a bank would not have excess reserves from a paid off loan?  So what happens if I use 100k in deposits to pay off 100k in loans...and they are both from the same bank?  The bank has canceled both a liability and an asset.  But since the demand deposit liability is less...than demand deposits / reserves was higher than it was before, right?  In fact their ratio of deposits to reserves changed...and assuming they want to return to their same ratio...they would have 'excess reserves', right?  You're a supply and demand guy...so if one bank has excess reserves...wouldn't it be logical for this bank to lend to banks that don't reserve shortfalls?  Wouldn't there be an average interest rate on these reserves?  Then if the Fed monitors this and injects MB accordingly...it is very safe to say that an economy that borrows less...will generate more demand for reserves inside of the banking system and this will mean the Fed will give it more because of targeted fed funds rate.




> The reasons the FED may or may not buy a T-bill has nothing to do with whether a bank takes a deposit or makes a loan to you.


Yes it does.  Deposits and loans affect reserve ratios, right?  A bank seeks to correct reserve ratios that vary from what they want, correct?  These corrections results in an inter-banking market for reserves, right?  This is what the fed monitors when it determines whether that banking system has too much or not enough reserves right?

----------


## rpwi

> That is why it is fraudulent.
> 
> That does not mean they cannot maintain the banking system.
> 
> All that is required is timing. As long as people re-deposit what they withdraw, the system works fine.


Well...if people are constantly re-depositing what they are withdrawing...then reserves hardly matter, right?  I mean a banking system could have 1 million reserves and a trillion dollars in deposits.  If nobody 'checks' under their mattress to see if the reserves are still there then for all practical purposes, they aren't, right?  If this is the case, then would the reserves (or MB) be considered an accurate gauge of money?  Would not M1 very clearly be a more accurate gauge and do a much better job of for example explaining inflation?




> There is NO counterfeiting going on with the Fractional Reserve banking system
> 
> Read carefully, sir.
> 
> *Every transaction is done using REAL, HONEST MONEY*


No.  When two customers of the same bank partake in a transaction, no 'real money' (mb) has been exchanged.  In fact internal banking operations (which are quite common in small towns) totally destroy your argument.  Interbank transactions are little different.  The bank with the surplus reserves lends back to the bank with a shortage of reserves (somewhat in a round-about fashion) so in essence you can say no 'real money' is exchanged.




> You withdraw REAL money from your deposit account as according to your IOU agreement with the bank.
> 
> You hand over REAL money to buy your goods.
> 
> The seller deposits REAL money into his bank deposit account based on an IOU agreement with the bank.


Say I bank at ABC bank.  I want to buy a home for 100k.  Frank owns a home...and also banks at ABC bank.  We agree to deal.  The bank gives Franks a 100k deposit and I get the home and in exchange the bank gets 100k loan asset.  Surely you must acknowledge this happened above and beyond reserves and therefore reserves can't be considered the sole source of money.




> So quit with your bizarre counterfeiting nonsense - because it makes NO sense!


It does if you think about it.  My fake green backs are pretending to be greenbacks.  Because they pretend to be greenbacks I can buy more than I should be able to.  A banks deposits are fake dollars.  Because they pretend to be dollars, the bank can buy more than they should be able to.




> Agreed. 
> 
> It is, as Rothbard said, two simultaneous claims on the same asset. One of them cannot be right. The bank claims both are right. That is fraud.


Rothbard is a wise man   Now say the depositors never check to see if their deposits are backed.  In such a case you would argue that such fraud would never become uncovered right?  Do you argue that fractional banking (unless there is a bank run or bailout) does 0 harm to the economy even though a bank issues more claims on reserves than it can do?




> By *earning!* - how do you pay off your loan? You get a job, work hard, save money and repay your loan?!?!?!?
> 
> Why is this such a bloody mystery to you?


It's all about time.  A bank works it's magic by mismatching short term liabilities against long term assets.  This means the short term assets have to be perpetually rolled over or refinanced to maintain liquidity.  Long term assets being long term assets  means they will not help a bank's liquidity situation.  The only other thing that can help would be money from outside of the banking system (which is scare relative to the scale of the banking system or is plentiful if it comes from the Fed).  

Put another way in order for fractionally backed loans to be paid off, the savings outside of the banking system has to grow at a faster rate than the debts to the banking system.  However a bank balances their deposits against long term assets which have the best savings rate.  I think we agree that sudden repayment is impossible...God could write in the sky 'pay off your debts' and the public could try as hard as they could...but they wouldn't be able to pay off the debt.  You seem to be arguing that the debts could be repaid...just over time.  In small cases, yes.  But not once a banking system has the majority of reserves and they are well invested in long term assets which have the best rates of return, I do not believe this to be possible.  




> 1st, that will never happen. 
> 
> If you think it will, explain the circumstance that suddenly crashed Western Civilization - and I will point to that event being the cataclysmic event, and not a failure of the banking system.


The great depression?  The bank system is constantly crashing and the governments are constantly bailing them out...nothing super special about the great depression...just that the system got exposed for a brief moment before it went back into hiding.




> 2nd, it can happen to *banks* - happens all the time - hundreds have closed their doors.


Nowdays it is not relevant.  The FDIC just feeds the broken bank to a bigger bank  Without the FDIC and more importantly the the open market, the true market would expose and destroy the banking system in short notice.




> When their depositors take their money out - and the bank no longer has capital to repay it, the bank is bankrupt and it closes it doors.
> 
> Those that did not get paid are stiffed.
> 
> *This creates a massive recession/depression if many banks suffer this fate and cause massive losses to its depositors* by being unable to repay their IOU.
> 
> Now, again, if you believe the IOU is money, this simply is impossible! How can you run out of the thing you have?


So if I counterfeit greenbacks and use them to buy dinners and vacations and the like...and I get sued...and I can't pay back the litigants...can I use your argument?   Just because M1 can be exposed as fraudulent doesn't mean it doesn't exist and function in our economy.




> But IOU is not money - it is REPAID WITH MONEY, and the money ran out.


Anything can be money.  It is whatever we accept as a store of value.  We accept deposits as a store of value for our labor, so it is money.




> There have been 100's of banks that have been bankrupted and dissolved since 1933.
> There has not been 1 ... not one .... depositor who has lost their money.
> 
> Why?


FDIC.




> It injects money into the system *to keep large BANKS afloat, and to give money to government* but it does NOT inject money to keep the "system" afloat - it does not have to.


If the Fed vanished but left MB in place...there would be a squeeze on reserves...this would result in shortfalls and this would result in depositors not getting their money.  Much more than the banking system.

----------


## Black Flag

> So if somebody racks up massive unsecured debt and then declares bankruptcy, the money supply increases.


No, why?

To borrow, you must get real money from someone that you spend.

You need $100, you borrow $100 from you friend.
You spend it with "this guy", now he has $100.

You renege and your friend is out $100.

But the other guy still has it.

There is only $100 in this economy at the beginning of your adventure, during your adventure and at the end of your adventure.

You merely lost a friend and that is not inflationary.

----------


## Black Flag

> Lot to go over :P...


No kidding.
Imagine me having to deal with you and Steven.




> Good...we are agreed that all else being equal a change in MB will either inflationary or deflationary.


I think we have to be careful about what *the reason*.

I sense you believe merely the “change” of amount of money creates inflation or deflation – that is, there is but one leaver. You do not mention demand, nor “price” in your statements around this – which leads me to believe you do not consider them.
I state unequivocally – it is the Law of Supply and Demand, where supply AND demand change the PRICE of money. 
I hold that a significant change in either supply or demand or *both* creates inflation or deflation.
There are reasons that may cause such a change – but it the supply and demand law that is the operative here.



> You clearly believe M1 is not money.


Correct. 
It is a liability created by an exchange of money for an IOU.



> You also believe repayment of M1 backed loans is not deflationary.


A deposit is created by money, and a loan is repaid by money. 
The money to make a deposit comes from somewhere, and the money to make a loan comes from somewhere. They are not made up in fantasy as Steven would have you believe.
It is real money being deposited, agreed?
So it is real money being loaned, agreed?
The money has to come from somewhere, and it comes from deposits.
A deposit is saving –the depositor is delayed his consumption into the future. 
This is deflationary.
A borrower is delaying his payment into the future for goods now.
This is inflationary.
These two guys cancel each other out – and if you break out the monopoly set and do the work you can see why. There is no increase or decrease in the money supply – and the *demand for money is balanced* – one wants it now (high demand) and one wants it in the future (low demand).
This unrolling of this (paying debt) simply reverses this, and since the roll up made no inflation/deflation, the roll back does not either.



> You seem to think that because a person had the money to repay the bank loan...no problem...things even out.  But the problem is the person who repaid their bank loan...undoubtedly did so with a bank deposit.  Therein lies the deflation.


Use the monopoly set and see that there is no less nor more money in supply at any time during your transaction.
To pay a loan, you have to earn.
Now, unless you believe earning money is somehow inflationary - … (god, I hope you have better economic sense then that…)
To consume and eat, etc. you need to spend money – now do you believe spending money is deflationary? 
All a loan is *is a deferment of payment of currents goods into the future*
But it is “spending” – except instead of earn-then-spend, you have a spend-then-earn. But the outcome is the same – you have traded money for goods, ending up with the goods and reduced money IN YOUR POCKET, but now in the pocket of someone else (who is out the goods, but in with money).
So unless you have even more of a home-grown economic theory where normal economic transactions now create inflation/deflation… I think you might see where you can apply it with “banking”.

Banking is just another economic service, like a doctor or the garbage man. Banks participate *in the marketplace* just as you do. They buy things, and the earn.
They obey all the same laws of economics you do. 
Do not attribute to them super-man powers that they do not have.



> An odd argument.  A bank's operational expenses (which are a pittance compared to their revenue)


You jest.



> hardly matters.


Of course it matters !
Read carefully:
You earn money.
You have a decision. You spend it on your wants or you save.
That which you do not spend, you save.
To save, you either lend it to the bank as a deposit - which the banks lends, or you invest it.
One day, you get back the money you saved (either by redeeming your deposit, or extracting your investment) so that you can spend it.

So far so good? Nothing bizarre, right?
Now, replace “you” with “bank”.
They do the same thing as you.
They earn.
They spend.
What they do not spend they invest, either in making loans or investing.
One day, they get the money back, so that they can spend – or make loans and invest again.




> It's like me arguing...I counterfeited dollars...but because I had to pay the electric bill...I'm ok!  No inflation was caused!


Drop the counterfeiting reference – it is irrational to equate trading real money with “counterfeiting” money.



> You appear to be arguing that a reduction in M1 would not result in deflation as this meant there was a corresponding decrease in the demand for M1.


There are two reasons people pull money out of a bank.
One, to spend it. 
As above, if you hold some bizarre economic theory that “spending” makes inflation … you have more economic confusion then I can fix on a blog – but I do not think you think this anyway, so it is moot.
Or two, they do not trust the bank.
Thus, with (1), the money moves out through one deposit and right back into another deposit …from buyer deposit to seller deposit. Nothing strange here, either.
With (2), the REAL money comes out, reducing the banks capital reserves and threatening the survival of the bank –*which has nothing to do with real money created or destroyed* – it merely has to do with the bank facing its fraud – too many calls on the same real money.



> This is not the case though as there is no 'market for M1'  There is a market however for the loans which in turn generate of deplete M1.


Again, only under scenario #2 does such a situation create a crisis – nothing to do with loans or M1, *but everything to do with the broken promise and fraudulent practice of the bank*
Now, unless you come up with another plausible reason for your scenario that is not covered by (1) and (2)…. that is, I  am not interested in fairy tales or an invasion of beings from Mars or any other such nonsense.



> So you are arguing a bank would not have excess reserves from a paid off loan?


I did not argue that at all.



> The bank has canceled both a liability and an asset.  But since the demand deposit liability is less...than demand deposits / reserves was higher than it was before, right?


No, less
Before 
$900 DD/$100 cash = 9/1 leverage, that is $1 of reserves backs $9 of deposits.
After repayment of, say, $50 – so $50 out of the bank thru a deposit, and back in to the bank reconcile the loan:
$850 DD/$100 is a 8.5/1 leverage … now $1 backs $8.5 of deposits … a far superior position, if you are a depositor.
Cash counts 100% …. $100 in cash=$100 capital reserve 



> In fact their ratio of deposits to reserves changed


Yes, it is better, less risk to depositors, towards a 1/1 ratio….



> ...and assuming they want to return to their same ratio...they would have 'excess reserves', right?


Yes.



> You're a supply and demand guy...so if one bank has excess reserves...wouldn't it be logical for this bank to lend to banks that don't reserve shortfalls?


As I said before banks participate in the market place, a bank is in the business of lending, for that it is how it earns.
The free market capitalist system does not change economic laws because you sell your services to Joe A and not to Joe B.
If a business needs a loan, a bank provides it.
A bank is a business.
No surprise that banks lend to banks, right?



> Wouldn't there be an average interest rate on these reserves?


I believe the FED sets the rate.



> Then if the Fed monitors this and injects MB accordingly


But it does not do this necessarily.



> ...it is very safe to say that an economy that borrows less...will generate more demand for reserves inside of the banking system


No, it will not generate more demand for reserves as pointed out above – the bank _improves its ratio_ as loans are paid off.
In other words, you are claiming that bank holding excess reserves is less solvent than a bank that has none!
Also remember, loans count as assets only after a modifier, typical 95% to 50% (or 0% in case of credit cards) as assets, whereas cash is 100% of face value – in other words, a bank converting a loan asset to a cash asset doubles the asset base ($100 loan =$50 to asset base; $100 cash = $100 to asset base).
Your  claim here is that there is more risk to a bank in NOT making loans than making them!
No, the only risk is that they do not earn as much profit.

----------


## Black Flag

> Well...if people are constantly re-depositing what they are withdrawing...then reserves hardly matter, right?


They matter muchly - the reserves determine the risk to the depositor.




> I mean a banking system could have 1 million reserves and a trillion dollars in deposits.  If nobody 'checks' under their mattress to see if the reserves are still there then for all practical purposes, they aren't, right?


But you check under the mattress every time you buy something - for that is real money that is transacted. And there is no more real money in the system then there really is in the system! Reality sorta works that way!

So, yes, it all "works" as long as there is not more concurrent transactions then the money supply.




> If this is the case, then would the reserves (or MB) be considered an accurate gauge of money?  Would not M1 very clearly be a more accurate gauge and do a much better job of for example explaining inflation?


No, and no.
Explaining inflation is easy as long as you are not a Keyensian.




> No.  When two customers of the same bank partake in a transaction, no 'real money' (mb) has been exchanged.


In fact, it has.
Do not be fooled by the short hand.

All transaction occur with money or it is a barter.

Because the speed of withdrawal to redeposit in now measured in microseconds does not change this.
All it means is the economy can produce more transactions in a given time period.
It does not change the money supply.
It does not "necessarily" change the demand for money or lessen it.



> In fact internal banking operations (which are quite common in small towns) totally destroy your argument.  Interbank transactions are little different.


This is merely simplified accounting.



> The bank with the surplus reserves lends back to the bank with a shortage of reserves (somewhat in a round-about fashion) so in essence you can say no 'real money' is exchanged.


If, in fact, the system worked as you say such lending would be unnecessary - debt is money, right? So why would a bank need to borrow money so to cover money?

But they do. Banks exchange real money to maintain their legal requirements because the deposits are not money, but liabilities called "IOU"




> Say I bank at ABC bank.  I want to buy a home for 100k.  Frank owns a home...and also banks at ABC bank.  We agree to deal.  The bank gives Franks a 100k deposit and I get the home and in exchange the bank gets 100k loan asset.  Surely you must acknowledge this happened above and beyond reserves and therefore reserves can't be considered the sole source of money.


Sorry, no. 
It does not happen greater than the reserves.
That is why small banks can only make small loans and big banks make big loans.

Your local bank cannot make a loan for $1 billion to a local who will buy a land from another local, even if that local deposited the loan .... because the new billionaire may want to not want to deposit it!

Your claim is that the bank forces the re-deposit to ensure its liquidity ... and forcing it cannot do.




> Rothbard is a wise man   Now say the depositors never check to see if their deposits are backed.


He is right.




> In such a case you would argue that such fraud would never become uncovered right?


It's worked for 100 years.




> Do you argue that fractional banking (unless there is a bank run or bailout) does 0 harm to the economy even though a bank issues more claims on reserves than it can do?


Correct.

As long as the demand of money is lower than the supply.




> It's all about time.  A bank works it's magic by mismatching short term liabilities against long term assets.


Agreed.




> This means the short term assets have to be perpetually rolled over or refinanced to maintain liquidity.


Every microsecond, since the short term is "anytime I get my money"




> Long term assets being long term assets  means they will not help a bank's liquidity situation.


Correct, unless the bank sells them




> The only other thing that can help would be money from outside of the banking system (which is scare relative to the scale of the banking system or is plentiful if it comes from the Fed).


Help...when?
During a banking crises?




> Put another way in order for fractionally backed loans to be paid off, the savings outside of the banking system has to grow at a faster rate than the debts to the banking system.


No.

In order for a *loan* to be paid off is for the borrower to earn.

It has nothing to do with "creating money", unless you believe you earning is 'creating money'.

Take the bank out of the loop.

Just you and I.

I have bread and you are hungry.

We make a deal.

I will give you bread, but you have to mow my lawn.

I takes me 1 hr to mow the lawn, but it takes you only 1/2 hr.

In 1 hour I make more than enough bread to feed me and feed you.

You work for 1/2 hour, and get bread.
I have bread and a mowed lawn. 

Where did your bread come from?

Replace me with "bank" and "mowed lawn" with repayment plus interest.

So, no, paying interest on borrowed money does not demand more creation of money.

Banks spend their money or invest their profits (savings, that which they do not spend) - *just like you do*

You argue the banks are outside of the economic system - they are not. They are equal participants, like you.

Bank of America:
Revenue net:  $120.9 billion
Expenses: $72 billion
Net Income: $48.4 billion

And what did they do with what was left of the $48 billion after they paid taxes and dividends etc.?
Loaned it out...again.




> You seem to be arguing that the debts could be repaid...just over time.


Could? 
Sure, and one day maybe we'll colonize Alpha Centurai too.

No, I am arguing that the banking system exists *because it is valuable to the market place*

It provides an avenue for savers to invest their money
It provides an avenue for entrepreneurs to get money to make a business.

Banks "borrow" money from savers and lends money to borrowers. It is in the business to *get repaid* because that it how it earns profit. But it earns a profit by lending.

Therefore, the business is a constant repay/lend/repay/lend ... forever.

There will always be borrowers in the market for there is always will be people who desire goods today but wish to defer payment until tomorrow.
There will always be depositors in the market for there is always will be people who desire goods in the future to consume and defer consuming them today.

Thus, there will always be a banking system that exists to satisfy the desires of both these people ... for a profit.




> The FDIC just feeds the broken bank to a bigger bank  Without the FDIC and more importantly the the open market, the true market would expose and destroy the banking system in short notice.


Perhaps, but the FDIC *is inflationary* by its operation.

This is where money is created to satisfy depositors. 

A bank goes bust. It cannot pay depositors due to its 9/1 leverage. 8 are out of luck.
The money supply has not changed, still "1" as it was before.

Now FDIC steps in and funds the other 8.
If it can do it out the fund it has created by charging a fee, it is not inflationary - it is merely another "Federal Reserve" fund to offset deposit demands, except aggregated.

But if this is all it was - the same could be done by the FED by lowering the fractional reserve from 9/1 to 5/1 or 3/1 or whatever.

The FDIC exists so it can also pull from the US Treasury.

The US Treasury has no money, but a lot of T-bills.

The FED buys these T-bills with newly manufactured money

...which goes to the Treasury, to the FDIC, to the depositors as real money.
There is your "inflation".

----------


## Black Flag

> I asked you something first, and you refused to answer with anything but a modified scenario that rephrased the question as a deflection, and so that the discussion could shift to the points you wanted to make.  Which I answered anyway.


You asked how many angels can dance on the head of a pin if a leprechaun sings a tune.

Explain why the banking system stops suddenly - and the reason is not because the banking system stops.




> Banks might stop lending when they are no longer able to meet their obligations, become bankrupt, and no longer exist.


A banks or a few, but not the banking system.

You attribute a massive systemic event but explain it by pointing to a few banks and say "see, like that".

Well, no.

A few banks going belly up is one thing - but the whole system going belly up is wholly something else, and you cannot explain it away with the same brush.





> In the case of two currencies, however, with one being phased out and another in transition, the banks which are solvent stop lending out the dying currency, and start lending out only the prevailing currency.


No, they lend in both and as the other is deposited, it is converted.

Or did I miss the utter collapse of the banking systems in Europe when they moved to the Euro?




> I don't care.  I'm not on a kick to quibble over how you want to define money, and I'll go with your definitions for the sake of discussion. And I said that I didn't care how or if you created the money needed to satisfy all outstanding principle plus interest debts in the scenario, as long as you showed it in the process.


I did.
You earn it.
Somebody pays you.
You take your pay and pay off your loan.

I take $100 out of my account, I lend it to you and said to you, pay me back $110, what would you do?
You take my $100 and buy a bike. The guy trades his bike for you money. He deposits the money in a bank.
You'd go and do a job with that bike, like deliver newspapers that earned you $110, 
You get that money from people who take money out of their account and give it to you in trade for you newspaper.
They take a buck out of their account and give it to you for your newspaper. 
You take that buck and give it to me and I deduct a buck from your debt.
I deposit that buck into my account.
You do this 110 times.
After you gave me $110, I declare you "repaid".

You have a bike, so you can earn more.
I have an IOU from the bank that says "pay $110 on demand".

Where are you lost in all of this?

The math:
$200 DD "A", $200 DD "B", $200 DD "C", $ 200 DD "D", $200 DD "BF", $0 DD Steven

$1000 in demand deposits
$100 in cash reserves

I withdraw $100 to give to you on promise you repay $110.

$200 DD "A", $200 DD "B", $200 DD "C", $ 200 DD "D", $100 DD "BF", $100 DD ($110 Loan) Steven

You buy a bike from  "A"

$300 DD "A", $200 DD "B", $200 DD "C", $ 200 DD "D", $100 DD "BF", $0 DD Steven ($110 loan)

You work 

Day 1:
$299 "A", $199 "B", $199 "C" , $199 "D"., $100 "BF", $4 Steven ($110 Loan)

Day 25
$275 "A", $175 "B", $175 "C", $175 "D", $100 "BF", $100 Steven ($110 Loan)

Day 28

$272, $172, $172, $172, $100 "BF", $112 Steven ($110 Loan)

You pay me back

$272, $172, $172, $172, $210 "BF", $2 Steven ($0 Loan)

Please note, the money supply has not changed - the $100 is still in the reserve, happy and just fine and so is the economy.

----------


## Steven Douglas

You moved the goalposts. In your modified scenario you increased DD by $100 and left out "outstanding loans" altogether.  You wrote:

$1000 in demand deposits
  $100 in cash reserves

Five parties listed, each with $200 DD, with absolutely no mention of any outstanding loans (which will not total $1,000).  

The entire economy in our scenario was:

$100 in FED reserves$900 in demand deposits$900 in outstanding loans, $2,107.02 in outstanding loans ($900 plus $1,207.02 interest).
 It's funny, I am not even arguing "thin air money", or trying to quibble with you over the definition of money.  I just want to explore and test the most fundamental mechanics of the aggregate system as you see it.  And, as it turns out, you are the one having the source of all that profit magically appear out of thin air to pay for the previous loans, given that you don't explicitly trace it all back to its source, except to identify all of it as DD. And yet all that DD was _from outstanding loans_, which you _incorrectly identified_ as principle only. The interest was never once mentioned, always conveniently omitted. Why is that, given that interest is an elementary fundamental, with a profound effect on what must happen (and indeed has happened) in the aggregate, as a requirement for the monetary regime we have now to continue to function. 

So, to recap: $100 in reserves, $900 in DD, _$2,107.02 in outstanding loans_.  To pay all that off: 

*a)* MB Reserves are going to have to increase, AND/OR reserve requirements are going to have to decrease, *AND*
*b)* More loans are going to have to be made to so that more M1/DD can enter the economy, *AND*
*c)* The physical economy itself MUST expand accordingly.

The _only_ way to get the $2,107.02 needed to pay off all those loans, credit/M1 MUST expand -- which in turn enlarges _the entire scenario:_ 
The amount of reserves must increase (and/or you can decrease the reserve requirements) - to increase theOutstanding loans_-including-interest_ - to increase theResultant (principle only) DD increase required for everyone in the aggregate. 

Exponentially, indefinitely, and due to one inescapable fact:  DD NEVER EQUALS OUTSTANDING LOANS, which are forever, perpetually and by design greater than DD. Whenever you create the principle required to satisfy the prior principle+interest demands, only that principle is created, along with newer, increased principle+interest demands for the future.  That's called kicking the can down the road, AKA perpetual expansion required to sustain, AKA PONZI SCHEME. Those are the fundamental requirements of the monetary regime we have, which in turn places a full expectation of growth on the economy, which must grow in proportion to accommodate these expectations. These are not requirements of the free market. These are _the requirements of the lending regime_ from whence all money enters the economy.
 For an economy to expand at a "modest" 2% per year it must double in size every 35 years. That's simple but inescapable arithmetic. And there is an end game to that -- unless you happen to be one who believes that a physical economy can double in size indefinitely, or that expansion is not required for our economy to function.   To me that's like someone on board the Titanic who can see clearly that we've hit an iceberg, but breathes a big sigh of relief because it's been a full half hour and the ship hasn't sunk. So obviously it's not going to. 

That's where I wanted to get to with you but couldn't, as you kept omitting interest. When questioned about it repeatedly, you fully exited the Economics and Monetary Mechanics discussion altogether, and shifted condescendingly to a Business 101 for Dummies explanation instead -- as if that somehow answered it.  When further pressed on the question of interest, you finally showed a single _private_ loan between you and I with a paltry 10% (total interest paid) tacked on, as if that could explain everything, showing how we could just shift DD around to satisfy that one loan without affecting future M1 or M0 reserve requirements.  Most M1 loans don't work that way and you know it, and your example didn't explore anything remotely resembling the most basic "real world" economy as it behaves in the aggregate.  In fact, you left out the expansion _requirement_ altogether. Why?

----------


## seraphson

> Now you are turning into Roy!
> 
> If I don't submit to your irrational plea to believe in fairy tales, you think I am turtling.
> 
> I asked you specifically - *and you refuse to comply*
> 
> _What event makes all banks stop lending_ because that is what your fairy tale requires.
> 
> 
> ...


Relativley speaking I have a new and probably flawed view on this but I'd like to _try_ to answer what's highlighted in green.

From what I understand aren't other nations already in the process of slowing lending to the US?  I believe I read somewhere that the Federal Reserve had to buy nearly 60% of our debt for the fiscal year 2011?

What happens when China and the other big players stop lending real production for our funny money?

----------


## Black Flag

> Relativley speaking I have a new and probably flawed view on this but I'd like to _try_ to answer what's highlighted in green.
> 
> From what I understand aren't other nations already in the process of slowing lending to the US?  I believe I read somewhere that the Federal Reserve had to buy nearly 60% of our debt for the fiscal year 2011?
> 
> What happens when China and the other big players stop lending real production for our funny money?


China will fall into a massive recession ... who is going to buy their goods? A Chinese farmer who earns $400 a year? Chinese are as much Keynesian as the US is, and will fall into the same stupid traps.

US will find few will want to sell to US and few to buy US goods - a big Depression in US.

US productivity will begin to recover, as US consumers look locally for their goods.
Manufacturing will rebound, jobs will be found, economic prosperity will return.

----------


## rpwi

> You earn money.
> You have a decision. You spend it on your wants or you save.
> That which you do not spend, you save.
> To save, you either lend it to the bank as a deposit - which the banks lends, or you invest it.


This is not accurate.  When I get paid from an employer, the money did not come from outside of the banking system.  It came from my employer's bank.  And the employer got the money from our clients' banks.  In many of your examples with both Steven and myself, you make the mistake of assuming your average transaction comes from M0 (the true definition of M0 in cash/coin outside of the banking system).  In reality it comes from the banking system, so you can't say I make the decision to 'lend' to the bank since that was what I already received in payment.  Furthermore the idea of investing in a bank by opening a demand deposit from an accounting standpoint is correct, but from a market standpoint not logical.  What type of 'investment' yields 0% (mostly), promises perfect liquidity and is only backed by a small percentage of liquid reserves?  From an accounting perspective, what Ponzi offered were investments as well.




> There are two reasons people pull money out of a bank.
> One, to spend it.


But spending the money does not result in a loss of reserves in the banking system in the aggregate so it is largely irrelevant.  If you are a bank...and a depositor pays 100k to another bank...why does it matter?   The banking system as a whole still has the same amount of reserves.  I know I can borrow all the reserves I need from 'Federal Funds' (the market for excess bank reserves).  The other bank has ER (excess reserves) so  he lends these as over-night loans to the banking system as a whole and I know they'll find their way back to my bank as BR (borrowed reserves).  I still have my reserves no problemo.  Yes...I now have to pay interest on these borrowed reserves (a pittance nowdays) which is not ideal...but given the ebb and flow of transactions it is not the big deal that you make it out to be.  It would be a big deal if the Fed stopped supporting the 'Federal Funds' by injecting MB to maintain their  'Federal Funds Rate'.  With no intervention from the Feds...the interest rate for excess reserves would keep climbing and climbing and climbing until it went so high the entire banking system collapsed (as it should).




> Or two, they do not trust the bank.


Sure...or three...they can't withdraw their money...because the bank made it up.




> Thus, with (1), the money moves out through one deposit and right back into another deposit from buyer deposit to seller deposit. Nothing strange here, either.


Indeed...so if there is no pressure on reserves escaping the banking system...what is to keep the bankers from pretending they don't have them...creating more deposits than they have reserves...then creating inflation?

The goldsmith analogy is most excellent.  If x = the supply of gold...and the goldsmiths promise 2x in gold deposits...and use 1x to buy loan assets...CLEARLY they have created inflation.  They can get away with this, because the public assumes the claim as a liability is matched by a short term asset (in actual gold).  But because the bank mismatched the short term assets for a long term asset...fraud was committed.  The banking system is no different than the goldsmiths of old.  Reserves are the new gold...checking accounts are the new gold claim slips.  You seem to feel that if there were multiple goldsmiths and their clients exchanged gold claims and therefore gold bars occasional...this prevents inflation...but clearly this is not the case.  Competition for deposits does not prevent them from creating deposit inflation.




> With (2), the REAL money comes out, reducing the banks capital reserves and threatening the survival of the bank *which has nothing to do with real money created or destroyed*  it merely has to do with the bank facing its fraud  too many calls on the same real money.


So what does the receiver bank do with their excess reserves?  If the other banks play hard-to-get with their excess reserves this will drive up the interest rate for reserves and the Fed will intervene and fabricate as much money it takes to achieve the Fed Funds Rate.  Bank doesn't have much to worry about...it will always have the short term liabilities (because of the Fed) to back it's much higher yielding long term assets.




> I believe the FED sets the rate.


Not directly.  The media and our education system perpetuates the myth that the Fed stipulates at what interest rate banks can lend to each other.  What happens is that the actual market for bank reserves is quite erratic and never perfectly matches the Fed Funds Rate.  The Open Market is a reactionary tool in which the Fed tries to rebalance the amount of reserves in the banking system after-the-fact to achieve the Fed Funds Rate.  




> Then if the Fed monitors this and injects MB accordingly
> 			
> 		
> 
> But it does not do this necessarily.


They mostly do.  If the banks are lending overnight excess reserves to each other at 5% and the Fed Funds Rate is 3%...the fed will create as much MB as possible and continue to buy t-bills until 3% is achieved.




> No, it will not generate more demand for reserves as pointed out above  the bank _improves its ratio_ as loans are paid off.


Typo on my part.

It is correct to say that the following will create more demand for reserves (and indirectly MB and MB inflation to occur):

* A transfer of reserves from the banking system out of the banking system
* An increase in bank loans
* Banks not playing nice with each other and not relending their excess reserves

The following will create less demand for reserves which will result indirectly in the destruction of MB and result in MB deflation:

* A transfer of reserves (well cash/coin) from out of the banking system to go into the banking system
* A decrease in bank loans (like repaying loans)
* A competitive and smooth Fed Funds market

----------


## rpwi

> Well...if people are constantly re-depositing what they are withdrawing...then reserves hardly matter, right?
> 			
> 		
> 
> They matter muchly - the reserves determine the risk to the depositor.


Your average depositor does not look up the credit rating of their bank.  So it does not matter to them.   The banks on the other hand do not worry about losing reserves...what they 'worry' so much is having to pay interest on the reserves.  The biggest worry for a bank is their loan portfolio.  Defaults horrify them.  Repaid loans that can't be reissued hurt profits. This is what scares a bank...not lost reserves so much (as long as the Fed is running the show).  




> But you check under the mattress every time you buy something - for that is real money that is transacted. And there is no more real money in the system then there really is in the system! Reality sorta works that way!


No I don't.  When I write a check, I don't verify that my bank has the reserves necessary to meet the transaction. For starters if the transaction was to a person who also deposited at my bank...reserves aren't touched.  You don't understand this.  Now if I sent a payment to another bank...the banking system as a whole still has the amount of deposits and reserves so nothing has changed.  I will get the reserves back virtually rightaway as a round-about deposit...or as an 'over-night' loan of reserves.  In the scheme of things...reserves aren't lost.  Just the banks that are able to acquire the most direct demand deposits get to pay the least amount of interest on them.  Given the small interest rate on reserves...this is not a big deal.




> I mean a banking system could have 1 million reserves and a trillion dollars in deposits. If nobody 'checks' under their mattress to see if the reserves are still there then for all practical purposes, they aren't, right?
> 			
> 		
> 
> So, yes, it all "works" as long as there is not more concurrent transactions then the money supply.


It's not concurrency so much...  A whistling economy means yeah...they will be a lot of outgoing reserves...but there will also be a lot of incoming reserves from depositors.  The other source of reserves in the Fed Funds Market can provide reserves at as fast a rate.  

Now you say it can 'work' given your 'concurrency' criteria.  Surely a million to one conversion from reserves to deposits justifies inflation, no?  What about a trillion to one?  A zillion to one?  Remember the Fed uses float...so we weren't not talking cut and paste...we're talking copy and paste and then delete the old file.  Float as a hidden generator of MB is quite evil...it makes it easier for banks to borrow the reserves they need.  Still in a hyper leveraged economy...this would favor certain bank characteristics.  Bank mergers would become more prevalent (and perhaps just one super monopoly bank would result) as the shock of having to meet such serious reserve transfers (while possible in many cases due to inter-bank lending and the open market) would favor bigger banks.  Only the big pelicans can eat the big fish.  In fact this explains why we don't have small mom-and-pop banks.  While inter-bank reserve transfers are irrelevant to the bigger banks...they can cripple the small ones.




> No. When two customers of the same bank partake in a transaction, no 'real money' (mb) has been exchanged.
> 			
> 		
> 
> In fact, it has.
> Do not be fooled by the short hand.
> 
> All transaction occur with money or it is a barter.
> 
> ...


No reserves are transferred when two customers of the same bank do a deal.  Say my local bank has 10x in deposits, 1x in cash/credit at the fed and 9x in loans.  If I write a check to Bob who banks here too...no reserves moved.  The bank would not change it's credit/deposit of reserves at the local Federal Reserve Bank of Chicago.   The Fed Bank of Chicago's liability to our bank would not change.  In fact none of our banks assets including cash would be changed on the ledger.    Only liabilities swapped.  So I just bought a widget from Bob...and no reserves were transferred!  You have yet to explain this.  Your logic is that M1 does not equal inflation because all checks written (using your logic) require a transfer of MB.  But where is MB transferred?  What are the accounting entries?  




> If, in fact, the system worked as you say such lending would be unnecessary - debt is money, right? So why would a bank need to borrow money so to cover money?


To meet reserve requirements.  Although they tricked regulators in the 90's by temporarily converting their demand deposits into 'savings deposits' at night when the Fed checked...and in this way they avoided the reserve ratio requirement and were able to ramp up fractional banking much more than they should have been able to legally.  The other concerns are the threat from cash withdrawals.  Now the 'over-night' bank lending market is not 'perfect'.  So the Fed also uses the Discount Window to provide reserves to poor needy banks. 




> Sorry, no. 
> It does not happen greater than the reserves.
> That is why small banks can only make small loans and big banks make big loans.


Small banks can make big loans...they just borrow the reserves from other banks to cover them.  Or in our modern system they sell the big loans to big banks.




> Your local bank cannot make a loan for $1 billion to a local who will buy a land from another local, even if that local deposited the loan .... because the new billionaire may want to not want to deposit it!


If it doesn't accept it...then there never was a deal to start with.  Yes...a bank can't make unreasonable loans...otherwise it's credit rating tanks and it can't get money from the Fed Funds Market to meet outgoing reserve transfers. 




> It's worked for 100 years.


Kind of my point.  If we have been accepting bank money as dollars...and we haven't faced the consequence of bank runs (thanks to Fed aid), then we face another consequence from fraud and that is inflation.  You are not fan of fractional banking right?  You do think it is fraud to promise more deposits than dollars, right?  Are you saying it is ONLY fraudulent during a bankrun?   That there are no other side-affects from Fractional Banking...no inflation...not even mal-investment?

----------


## Paul Or Nothing II

> I do not believe it to be an erroneous claim. The Fed "could" do anything it wants. As a agency above the law working in total secrecy, it can issue currency by purchasing assets rather than purchasing T-Bills or extending credit to banks but 99.99999% of the time it does not. In the United States today our system is debt-based and the Fed is the reason for this. If the Fed stayed with its current policy and all debt was paid off it would be extremely hard to find any FRN in circulation.


Ok, let me re-quote you :
http://www.ronpaulforums.com/showthr...=1#post4333243



> If the entire country was debt free, no money would exist at all.


Again, it isn't necessarily true at all, as I've said, Fed can buy stocks, gold or whatever & "create money" that way, they don't "have to" buy Treasuries, money doesn't necessitate debt, it's simply untrue
What they do is irrelevant, they'd never bought companies' assets on such large scale as they did during the crisis but now they have, who could've seen that comingso so they can buy anything else too, whether they do or not is irrelevant to your original proposition that existence of money necessitates debt, which isn't true, & THAT IS ALL I'm trying to say

I'm merely trying to point out that making such erroneous claims weakens rest of our arguments when we're arguing with someone who doesn't look at things from our perspective; he's going to hold onto that erroneous statement & therefore think & claim that everything else you're saying is equally untrue, even if the rest of your argument is completely on the point




> To a point you made on your last post, I disagree with the fact that the people are the only ones to blame for the debt crisis we are now in.


Please re-check, I haven't said that people are responsible for "debt-crisis", I've said they're responsible for the "personal debt" they CHOSE to take on; sure, Fed's policies & government's stupid regulations are to blame for the "debt-crisis" but the only the people themselves are responsible for their own "personal debt" 




> It is easy to say, *"Just don't get into debt and it is all your own fault if you do."* That mentality is harmful because it will divide (and could possibly derail) the Revolution. Granted, in a free-market economy it would be your own fault if you went into debt, but that is not the case today. Inflation does not hit all industries equally. Inflation hits industries that are closes to the government first (healthcare, education, real-estate, energy) and then spreads to other sectors (agriculture, transportation, entertainment) while only allowing a few extremely efficient sectors to resemble a free-market (electronics, social media). This manipulation of the system allows the banks to get people into debt even when they do not want to. A few examples:


This is just as bad as justifying a thief's theft because he was poor; existence of certain bad situations doesn't absolve us of the CHOICES we make

Look, freedom is about CHOICE! Now, we don't all always the perfect set of options to choose from, sometimes it's like choosing between bad & worse but that doesn't mean we shouldn't be held responsible for it

As I've explained before, when one borrows money, they increase moneysupply & inflation & are essentially taking purchasing-power from existing holders of money so it is incumbent upon them to repay it & thereby decrease the moneysupply
Also, when one borrows & uses it to purchase goods/services, they are drawing on the existing LIMITED pool of goods/services, & it is incumbent upon them to produce goods/services worth that much & repay it

Whether a free market exists or not is irrelevant, it may never but that doesn't absolve people of the CHOICES they've made & they must learn to take responsibility for their actions

If one wants to hold the government responsible for its actions then one must first learn to take responsibility for one's own actions; we've runaway big government only because people don't want to take responsibility for their actions, they want the big government to take care of everything, that's the fundamental problem & we won't advance towards freedom unless people understand personal responsibility

----------


## Paul Or Nothing II

> Going bankrupt on your debt is destruction of money. If it weren't then why did all the foreclosed homes cause price deflation in 2008?


That's not how it works! Fractional-reserve-banking creates the illusion of there being more money/goods/services than there actually are, the collapse only lays bare the reality that there isn't as much as previously thought, that's why Austrian Economists call deflation followed by an inflationary boom, a "correction"; it's sort of a "correction" in market-participants' perception of market-factors

Prices of homes went high because people were getting cheap loans, which pushed up the demand & prices, without regard to repayment capability of the borrowers; when the eventual reality set in, the demand plummetted & consequently so did prices

----------


## Paul Or Nothing II

> In other words, your monetary theory (albeit popular) _is wrong_
> 
> And, until the illusion that deposits are "money", incredibly serious errors are made in determining: inflation/default consequences and other general monetary policies.


It's not "my theory", it's the theory that whole economics community follows, be it mainstream economists or Austrians; while your "theory" is probably only restricted to your imagined little world of your own definitions




> Central bank money is not fictional - open your wallet, and you will probably see a bit of it.
> 
> PS: I dare to open your wallet and see "commercial-bank-money" in there....gee! Not one ...single..bit ...of it...
> 
> So, which one is an illusion, and which one is real?
> 
> Now unless you often do not believe what you see and can touch ... well, that would mean you have a mental problem ... but I do not believe you do as you are often, on other matters, incredibly lucid.
> 
> So, it must be an error on your part - an error of fundamental proportions.


Seems you've a short memory!

Didn't I tell you a while back that even if all the notes & coins are taken out of circulation, then STILL you could have central-bank-money as well as commercial-bank-money, so they're both equally fictional & therefore, claiming that one is "money" while the other isn't is height of ridiculousness




> Bubbles have nothing at all to due with the illusion of "Commercial-bank-money" -- it has everything to do with the central bank's interest rate and lending *policies*


Austrian Economists have been trying to scream to the world for decades that fractional-reserve-banking creates inflation & bubbles, & it would only be too obvious to any reasonable person who takes the time to understand it but you seem intent on living in your own imagined "bubble" & unwilling to learn & revisit your understanding of things

What's really funny is that you DO understand that commercial-bank-money are claims on central-bank-money & despite it don't realize such an obvious thing that an increase in bogus claim-checks necessarily distorts the market's perception of total supply, causing market-participants to think there's more than there actually is, which naturally leads to bidding up of prices to unsustainable levels & bubbles

----------


## Paul Or Nothing II

> Let's return to the goldsmith example.  Don't you agree that a goldsmith that issues more gold slips than he has gold is dishonest and creates inflation?  If he uses these gold slips to loan out money...isn't it logical, that if this money were to be repaid the amount of gold slips and therefore inflation would be reduced?  What's the difference between what the goldsmiths did and what banks do now?


+1

I don't know how anybody could not understand such a basic thing! I think you should push forward with this example, which was never replied to




> There is no question that demand deposits are a different type of money than base money...but claim slips are technically money as they are stores of values accepted as a means of exchange.  Certainly they can create inflation and deflation just like base money can.


+1

Again, this is elementary stuff that should be comprehensible to any reasonable person

----------


## Paul Or Nothing II

> ed:
> Steven, you might argue gold would be a "better" money then FRBN, and likely -on some points at least- I may agree with you. 
> 
> But it is not money now.


Well, it isn't common form of "money" right now but surely, some people DO use it as "money" to make their dealings, as Steven himself has stated that he does business with it on occasions

What is "money"? "Money" is simply anything that people accept, not necessarily because they want to consume that thing itself but only to exchange it for other desirable things in the future

Surely, there can be more than one form of "money", & not all people may perceive it as "money" but that doesn't cease it from being "money" for those who are using it as "money"; I'm sure, in the past, when gold was more common form of "money", there were other communities that didn't use it as "money" but does that have any effect on the perception of that community which IS using it as money? NO! Not at all! 
I, Steven & others could sell each other goods in exchange for gold, it mayn't make it "money" to others but surely for us it IS & anyone else saying otherwise doesn't make an iota difference

I'll cite your own statement :



> ...as if your opinion of value held some universal merit - which we have seen does not.


.....and as if your or anyone else's opinion of what "money" is has some universal merit? 

It doesn't! As I've said, some people may perceive something as "money", others not but that doesn't change anything for those who do

----------


## Paul Or Nothing II

> Relativley speaking I have a new and probably flawed view on this but I'd like to _try_ to answer what's highlighted in green.
> 
> From what I understand aren't other nations already in the process of slowing lending to the US?  I believe I read somewhere that the Federal Reserve had to buy nearly 60% of our debt for the fiscal year 2011?
> 
> What happens when China and the other big players stop lending real production for our funny money?


Either US will have to stop issuing additional debt (which is unlikely) or the Fed will have to keep buying more & more of it; & remember, every time Fed buys something, it "creates money", so you get the picture, right!

----------


## Black Flag

> It's not "my theory", it's the theory that whole economics community follows, be it mainstream economists or Austrians; while your "theory" is probably only restricted to your imagined little world of your own definitions


I do not care how much you appeal to authority, your argument remains a fallacy.

Please prove how an instrument_ created by a transaction using money, measured in terms of money – is…money!_

As I’ve said to Steven – you believe a dog’s bark is another dog so that there are two dogs outside your door. 

As long as you do not open the door, you believe there are two dogs guarding your house and the moment you do open the door, and see one, you bizarrely  claim the other “disappeared” and then claim that because now there is only one dog when there was two, your property is less secure and the home invaders are more likely to attack you!

If you feel you are in command of your monetary theory to such a degree you can convert it into understanding reality – prove it! 

Show me the money!




> Seems you've a short memory!
> 
> Didn't I tell you a while back that even if all the notes & coins are taken out of circulation, then STILL you could have central-bank-money as well as commercial-bank-money, so they're both equally fictional & therefore, claiming that one is "money" while the other isn't is height of ridiculousness


You have a real problem with reality!

You see the money in your wallet and bizarrely claim its fictional!

Well, send it over bud! I take all that fictional money out of your hands at no charge to you!

But your argument is bizarre.

Because I say one is not money and the other is money, your response is “well if all the money is taken out of circulation, the IOU’s would still exist, therefore the money must be fictional”. 
Do you actually read the utter incomprehensible gibberish you typed there?




> Austrian Economists have been trying to scream to the world for decades that fractional-reserve-banking creates inflation & bubbles, & it would only be too obvious to any reasonable person who takes the time to understand it but you seem intent on living in your own imagined "bubble" & unwilling to learn & revisit your understanding of things


They are correct. It does.

But you cannot ascertain the reason it does without making up fairy tales.

Instead you ascribe a theory requiring leprechauns and “debt” money that appears magically when money creates, and is equal to the money that creates it and has an effect EXCEPT when you actually reach for it and put it into your hand, then it disappears into a debt that needs to be repaid with real money, but probably will not be.

!Gasp! Utter crackpottery! 

Appearing and disappearing money! And to you, this is a great theory because it make real money fictional because what you say is money is money except its fictional too, explains why you like gold, because all of this doesn’t happen with gold except when it does!




> What's really funny is that you DO understand that commercial-bank-money are claims on central-bank-money


Yes, I have a firm grasp on what is money and what is debt and an obligation to pay satisfied only with money....which makes the two not the same thing.

For your theory to work, you have to make two, dissimilar, things become the same thing ... not because they have the features of similarity as they are not the same thing (given you have to add a bunch of adjectives to them for you to keep them straight) but merely to satisfy your THEORY about the behavior of one over the other.

So they are not the same thing - the necessity of adjectives demonstrates this - but once you get your nod that they are the same thing, you drop the adjectives and apply the powers of money to both of them as if they were the same thing.

Then you stand back and proclaim wisdom and understanding about reality!

But your theory leads you to this:

You think the latter is money, except its fictional.

You think the former is money because it is an IOU based on the latter, which you think is money, but it is fictional.

You then make up cause and effect stories of reality based on the latter being money, but is fictional – thus arguing that fairy tales manifest in reality.

Then you yell at me that I am living in a fantasy world by demanding reality be held firm in assigning cause and effect!




> despite it don't realize such an obvious thing that an increase in bogus claim-checks necessarily distorts the market's perception of total supply


Total supply of ….what?




> causing market-participants to think there's more than there actually is, which naturally leads to bidding up of prices to unsustainable levels & bubbles


So your story is this:
You and I go to an auction. 
You have no money called “thin air money”.
I have real money.

The auction starts.

Because you think you have money, but you really don’t, you bid on products against me, raising the price of the goods that I have to pay.

So, answer these questions:
Why do I continue bidding? 

If you raise the price higher than my value, I stop bidding.

But that is what I do anyway in making choices to spend. I do not spend more than my value.

So if you “somehow” raise the price of your goods by participating, and I do not bid –what happens to you? 
You can’t pay since no one takes your thin-air, non-existent money.

The bid starts again and I get it at my price.

I agree that you believing you have money when you do not have money creates bad things for you.

But it does not create bad things for me.

----------


## Black Flag

Paul,

Further to the auction story.

You can only buy what you can pay for.

So you look into your account and see a bunch of IOU's owed to you.

You convert as many of those IOU's as necessary to pay for your goods.

But at no time can you convert more IOU's into money then there is money.

Thus at no time can you bring into the auction more money then there is money.

No matter how much money you think you have, you can only spend the amount of money that exists.

Thus, you cannot buy any goods greater than the amount of money you can actually spend, no matter how many IOU's you hold.

----------


## Black Flag

Paul,

Rothbard held to the same monetary theory as I - so your claim that the Austrians agree with you and disagree with me is false. It means, really, you do not understand Rothbard's argument nor understand mine.

----------


## Paul Or Nothing II

Seriously, your delusions have no limits! Just like Roy L, you've your own little imaginary world in your mind where reality is very different from what other people experience in the real world

As I've said, you're probably the only person who believes in your "unique" understanding of nature of money & it's effects so good luck with your delusions 




> Paul,
> 
> Rothbard held to the same monetary theory as I - so your claim that the Austrians agree with you and disagree with me is false. It means, really, you do not understand Rothbard's argument nor understand mine.


Oh! So you're going to talk about Rothbard now? He was the really HARDCORE gold-standard guy while you're clearly not!

He must be turning in his grave that someone like you is citing him in his defense, when the facts are that he was a vehement opponent of fractional-reserve-banking, specifically BECAUSE he understood that it leads to inflation & bubbles - which you clearly don't

He would pity someone like you who can't even discern the difference between an empty claim-check & the actual claim-money; again, he was the gold-standard guy & usually exhibited little respect for those who supported toilet-paper-money

Many Austrian economists have clearly expounded on the role of commercial-bank-money in causing inflation & bubbles, this is a widely known fact among those who have ACTUALLY understood it & claiming anything otherwise, especially in the name of Rothbard, is pure nonsense

----------


## Steven Douglas

> Please prove how an instrument_ created by a transaction using money, measured in terms of money – is…money!_


That's easy. Isn't that pretty much the defining characteristic of all the paper you now define as the only money? 

The original dogs were gold and/or silver coin, an undeniable historical fact that will never go away. Paper IOU instruments were created by a transaction using this money, which instruments were measured in terms of money, and are what you now indeed call...money! 

The paper currency, once issued by banks and now widely referred to as "money", were the original barks, _not dogs_, created far in excess of the hard specie they [mis]represented.  Somehow these instruments, these barks, which were created by a transaction using money, and were measured in terms of money, were magically elevated to the status of real dogs, not barks, once the gold and silver origins were removed. *Woof!* 

Ironically, right now we have an echo of that original scenario, wherein substitute instruments _of paper instruments that were once substitutes themselves_ are created.  The paper instruments (original barks which you now refer to as dogs), are now being used to create yet other instruments (mere echoes of the same bark). These instruments, which are measured in terms of the paper instruments, are but nothing but echoes of barks (which echoes you don't want counted as a dogs)!  Now that's rich.

Now that Sweden is going paperless, and Canada is looking to follow suit, you may have to evolve your thinking, and adapt your paradigm, as what you consider barks, not dogs, may be the only things circulating if the paper itself is removed, as gold and silver once were, after which even the concept of "reserves" becomes a virtual abstract - a controlling number and a fiction in itself. No actual money. Just a number, as whatever-it-is-that-circulates-electronically out in the real world is the only thing that is counted by anyone as money.  And I've no doubt that a future Black Flag will defend these transactions as such, crying out, as you now do against gold and silver coin, "Paper and coins are not money! Can you use them to buy food? No. Can you pay your taxes with them? No." lol

----------


## Paul Or Nothing II

> That's easy. Isn't that pretty much the defining characteristic of all the paper you now define as the only money? 
> 
> The original dogs were gold and/or silver coin, an undeniable historical fact that will never go away. Paper IOU instruments were created by a transaction using this money, which instruments were measured in terms of money, and are what you now indeed call...money! 
> 
> The paper currency, once issued by banks and now widely referred to as "money", were the original barks, _not dogs_, created far in excess of the hard specie they [mis]represented.  Somehow these instruments, these barks, which were created by a transaction using money, and were measured in terms of money, were magically elevated to the status of real dogs, not barks, once the gold and silver origins were removed. *Woof!* 
> 
> Ironically, right now we have an echo of that original scenario, wherein substitute instruments _of paper instruments that were once substitutes themselves_ are created.  The paper instruments (original barks which you now refer to as dogs), are now being used to create yet other instruments (mere echoes of the same bark). These instruments, which are measured in terms of the paper instruments, are but nothing but echoes of barks (which echoes you don't want counted as a dogs)!  Now that's rich.
> 
> *Now that Sweden is going paperless, and Canada is looking to follow suit, you may have to evolve your thinking, and adapt your paradigm*, as what you consider barks, not dogs, may be the only things circulating if the paper itself is removed, as gold and silver once were, after which even the concept of "reserves" becomes a virtual abstract - a controlling number and a fiction in itself. No actual money. Just a number, as whatever-it-is-that-circulates-electronically out in the real world is the only thing that is counted by anyone as money.  And I've no doubt that a future Black Flag will defend these transactions as such, crying out, as you now do against gold and silver coin, "Paper and coins are not money! Can you use them to buy food? No. Can you pay your taxes with them? No." lol


+1

Great analogy 

And yes, if paper & coins are gotten rid of then that definitely puts a huge, irreconcilable hole in his "theory", which he's made up in his own mind in his own imaginary world, just like our other friend Roy L

----------


## Black Flag

> +1
> 
> Great analogy 
> 
> And yes, if paper & coins are gotten rid of then that definitely puts a huge, irreconcilable hole in his "theory", which he's made up in his own mind in his own imaginary world, just like our other friend Roy L


Nonsense, Paul.

You get confused between *digital money* which is real money, and *debt* which is what you believe is money.

Digital money is not debt - it is not an IOU. It is a *bailment* - it is your money, only your money and always your money.

But because you hold a crack pot theory of money, you can't even tell the difference between them.

----------


## Black Flag

> That's easy. Isn't that pretty much the defining characteristic of all the paper you now define as the only money?


Nonsense, Steven.

It is your claim that debt is money.

I ask how can an IOU - something created that is *referenced by money* be money.

It would be it's own reference - but then its not an IOU!

Your bizarro world is irrational - and when confronted, you merely fall back into your irrational definition, and try to shove it on me.

Sorry, you still have not provided any coherent theory, Steven.

----------


## Steven Douglas

> I ask how can an IOU - something created that is *referenced by money* be money.


You mean like Gold and Silver Certificates back in the day? Greenbacks when they were issued? State issued currency notes?  Those were all debt instruments once upon a time -- IOU's, all of which were nothing but references to real money, which debt instruments were counted by most people as money. 

And what, exactly, does "referenced by money" mean to you, anyway? Clumsy syntax, how can a thing be referenced "by" money? I assume you mean "is a reference to money" but you'll have to clarify on that point. 

By all means follow the money - whatever you consider to be real. But when you follow the genesis of that money, your theory is self-conflicting. The paper no-longer-debt notes that you now consider money, given their self-reference and irredeemability in anything but more of the same note, were once only debt notes, and they were not self-referencing; they were in fact multiple references issued against the same specie, or what was then considered the only real money.  At some point these debt instruments, these IOU's, which were not money themselves when they were issued, but rather "PAYABLE IN LAWFUL MONEY" of that time, became the only thing you now count as "real money".  At what point did that come to pass?  When did these IOU's become real money? Was it at the point that they became self-referencing? Did later welching by banks and government on all these debts magically transform these IOU's into a new kind of real money?  In other words, is that all it takes to create "real money" in your mind - make it self-referencing?

----------


## Paul Or Nothing II

> Nonsense, Paul.
> 
> You get confused between *digital money* which is real money, and *debt* which is what you believe is money
> 
> Digital money is not debt - it is not an IOU. It is a *bailment* - it is your money, only your money and always your money.
> 
> But because you hold a crack pot theory of money, you can't even tell the difference between them.


So now "digital money" is "real money"? What happened to paper being the "real money"? 
"Commercial-bank-money" is also digital so that proves my point that both central-bank-money & commercial-bank-money are equally fictional 

It's debt because it's an obligation of the issuer, an acknowledgement of indebtedness for the goods/services rendered by the receiver

As for "crackpot theories" go, you've created your own "theory" unlike nobody, one which completely bereft of any rational thought, let alone economic basis so good luck swimming in your own imaginary world that bears little resemblance with reality as experienced by others

----------


## Black Flag

Steven Paul

If your crackpot theory of money was correct, inflation would track M2 - that is, M0+check-able deposits+traveler's checks (M1)+ savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals (M2)



The graph shows a massive increase in M2 over M1 - and given your insistence that M2 is "money", should be equally reflected in the inflation rate over the same period.



But surprise to the crack pots - it doesn't follow a bit.



So the first test of your theory falls horribly flat.

----------


## Black Flag

> So now "digital money" is "real money"?


This is a surprise to you?

You are more confused than I thought!




> What happened to paper being the "real money"?


It is.

But since you do not understand the term "bailment", the distinguishment is lost on you.




> "Commercial-bank-money" is also digital so that proves my point that both central-bank-money & commercial-bank-money are equally fictional


Only to someone who is ignorant of the difference between debt and bailment




> It's debt because it's an obligation of the issuer, an acknowledgement of indebtedness for the goods/services rendered by the receiver


It is not a debt - it is a bailment. Look up the terms, Paul.

----------


## Steven Douglas

> If your crackpot theory of money was correct, inflation would track M2...


You're using your own crackpot theory to falsify a straw man version of what you think is mine. I don't subscribe to an uber-simplistic Quantity Theory of Money versus [price] inflation with no dynamics other than the sheer quantity of M1/M2 alone. 

The money supply's effects on the general level of prices are dependent in part on both the quantity and velocity _that is actually circulating_.  Ignore those dynamics at the peril of creating a crackpot theory of your own - or even worse, a crackpot test of a straw man theory. 



Your chart, the source of which is "THEY WHO ARE IMMUNE FROM AUDITS" and must be taken at their word, supposedly shows what you (as well as some crackpot monetarists) simplistically believe _ought to be_ a direct correlation (real-time, no less!) between M1/M2 and [_price_] inflation. This in turn is supposed to falsify the static, simplistic Quantity Theory of Money straw man it pretends to refute. But your chart proves nothing, and is sorely lacking. For one, it doesn't tell you a single thing about the lag times involved. Nor do you mention that any might apply.  Crackpot strike one.  Furthermore, all other dynamics are completely missing. 

For as large as the actual M1/M2 supply is now, your assumption does not take into account the velocity of either, which are naturally decreased as a percentage of total size (i.e., simple physics, as galaxies rotate slower than solar systems which rotate slower than planets), and which ignores other factors which have affected both localized and aggregate velocities, which have been abysmally low (in the aggregate) since 2000.   Crackpot strike two. 

What happens when the supply of both M1 and M2  in the aggregate continue to increase -- even as the velocity, or the  frequency in which money changes hands, *decreases*, despite and regardless of the supply?  

And furthermore, did _your personal supply_  increase in the process?  Is there an aggregate chart that happens to  reflect what's happening to your economy in your little neck of the  woods?  Not mine. That's not rare.   

Your chart shows exponential M2, and yet the post-QE velocities of M1/M2 are nothing but dips. Wherefore, and do you think that dynamic just might have an effect? 



Crackpot strike three, but let's keep at it. Another dynamic that is missing from your charts and your test, and something not even a simple velocity chart will reflect, are the _localized velocity differences within the economy_. In other words, *WHERE* are all those increases or decreases in velocities actually occurring, and why?  Not so obvious to those crackpots who tend to think in collectivized aggregate terms (which average and ignore cancelling effects) -- and like to employ terms like "the economy" and "economy-wide", without considering "whose" economy is adversely or beneficially affected. 

If I have less (and/or less frequent) access to money, and you are in the same boat (nobody's buying our $#@!, except as they must, because "they" are also in the same boat), and the aggregate velocity of money is flat, or down for our particular region/market/industry/etc., that does NOT mean that the velocity of money elsewhere has not increased.  If one particular subset of the economy is playing a fast game of money catch amongst themselves - the velocity of THEIR money might well increase, which will be reflected in that wonderful aggregate, even as we are personally left out of that mix, and experience instead the equivalent of _a deflationary depression_ (i.e., demand for OUR goods and services, and therefore OUR money supply begins to dry up).  So while Folgers and other goods inflates from $6.99 a can to $12.99, we might be stuck with a decidedly more deflationary scenario for our particular goods or services.  

As for me, I'm not in a position to raise prices, even though that is PRECISELY what is needed, and must happen in time. But not now, because it will cost me in my industry, where my competitors are already laying off, cutting their own throats and slashing prices. The dynamics for us, for all intents and purposes, are like that of a DEFLATIONARY DEPRESSION. Why? Because that big fat M1/M2 scrilla sitting out their isn't making its way to us with any kind of velocity.  Someone else is busy playing with it...  

Which brings me to another dynamic you completely ignore, and that is a Fed that lowers interest rates and injects precious "liquidity" (into the banks), but then turns around and pays banks to PARK their funds with them. My banks have very little incentive to lend me money at this point - they're just hovering like vultures, hoping and praying that I'll miss a few mortgage payments. 

And what's with this joke of a chart, used as a red herring by so many crackpots? 



This chart is widely circulated by some intellectually dishonest people all over the internet, because they know that the casual observer will think it's actual PRICE INFLATION (calculated from the CPI, no less), rather than the *CHANGES IN THE RATE* of price inflation.  And what's the source of this information? Why, that paragon of accuracy and truth called the CPI!  Double deception. 

But if you were honestly attacking, why would you leave out this chart, one which happens to take velocity into account: (MV = PQ) 



Surprise to the crackpot straw man erectors: it follows nicely.  Could it be that it was your test only that failed to be any kind of valid test?

And your little failed test was not a response to my post:




> I ask how can an IOU - something created that is *referenced by money* be money.


You mean like Gold and Silver Certificates back in the day? Greenbacks when they were issued? State issued currency notes?  Those were all debt instruments once upon a time -- IOU's, all of which were nothing but references to real money, which debt instruments were counted by most people as money. 

And what, exactly, does "referenced by money" mean to you, anyway? Clumsy syntax, how can a thing be referenced "by" money? I assume you mean "is a reference to money" but you'll have to clarify on that point. 

By all means follow the money - whatever you consider to be real. But when you follow the genesis of that money, your theory is self-conflicting. The paper no-longer-debt notes that you now consider money, given their self-reference and irredeemability in anything but more of the same note, were once only debt notes, and they were not self-referencing; they were in fact multiple references issued against the same specie, or what was then considered the only real money.  At some point these debt instruments, these IOU's, which were not money themselves when they were issued, but rather "PAYABLE IN LAWFUL MONEY" of that time, became the only thing you now count as "real money".  At what point did that come to pass?  When did these IOU's become real money? Was it at the point that they became self-referencing? Did later welching by banks and government on all these debts magically transform these IOU's into a new kind of real money?  In other words, is that all it takes to create "real money" in your mind - make it self-referencing?

What is it, BF?  What is the magical defining determinant for money in your mind?

----------


## Paul Or Nothing II

> So now "digital money" is "real money"?





> This is a surprise to you?





> What happened to paper being the "real money"?





> It is.


This shows you've no clue what you're talking about!

So let's see, earlier you'd said paper-notes are "real money" then you say "digital-money" is "real money"!

Ok, but as has already been pointed out that you can get rid of all the paper-notes & you'll still have "money" so paper-notes aren't really "money" at all 
Further, if you say "digital money" is "money" then "commercial-bank-money" should also be considered "money" but you don't 

You just contradict yourself every step of the way!

You're all tangled up in your elusive definitions, in your deluded worldview that nobody but you ALONE subscribe to 

Again, you're the probably the only person who disagrees with the most rational & logical thing that an increase in "commercial-bank-money" DOES cause inflation, it's just pure logic, one doesn't even have to know a great deal about economics, like another poster pointed out earlier, if goldsmiths issue many more claims than they've gold then inflation is inevitable, same holds true when more claims are issued than the amount of central-bank-money in existence, it's just simple logic

Anyways, I don't see the point of continuing this anymore because not only do you not understand the basic laws of economics as recognized by people with a sound mind but you're also impervious to any reason or logic; you've your own little worldview, completely different from that of people with a fuctioning mind & you seem to believe that everyone else is wrong, & you're the only who's right!

----------


## rpwi

> ....


You used inaccurate inflation stats.  The real stats are much higher.

http://www.shadowstats.com/alternate...flation-charts

(lower right corner)

John Williams goes into an detailed explaination as to why the pre-1980 measure of inflation is more accurate than the current one.

http://www.shadowstats.com/article/consumer_price_index

----------


## Black Flag

> You used inaccurate inflation stats.  The real stats are much higher.
> 
> http://www.shadowstats.com/alternate...flation-charts
> 
> (lower right corner)
> 
> John Williams goes into an detailed explaination as to why the pre-1980 measure of inflation is more accurate than the current one.
> 
> http://www.shadowstats.com/article/consumer_price_index


My references only pertain to 1980 to present so it doesn't matter

----------


## Black Flag

> This shows you've no clue what you're talking about!
> 
> So let's see, earlier you'd said paper-notes are "real money" then you say "digital-money" is "real money"!


No, I have said FRBN represented by computer digits is real money too. 
Because you do not understand the concept of "bailment" is not my fault.

----------


## Black Flag

> don't subscribe to an uber-simplistic Quantity Theory of Money versus [price] inflation with no dynamics other than the sheer quantity of M1/M2 alone.


Of course you won’t.
You have to make MORE crackpot theories to explain why your first crackpot theory holds no relevance in the real word.
Immutable economic law of supply and demand would show inflation – IF your theory is correct.

There is none (or little). 

Instead of reviewing the crackpottery of your theory, you make up ANOTHER crack pot theory to explain it.

The “velocity” of money is was dreamt up by the crackpot emeritus, Iriving Fisher.

I am not surprised you’d take up Fisher as your economic soul mate. This is where you got your crackpot “money is debt” theory and “paying it off creates deflation” – Fisher made it up!

ED: (I mean, this is the guy Bernanke loves! ... and who theory he bases a part of his interventionist actions upon! - that should have been the death-kiss of this theory for you - but you and Bernanke - Fisher classmates!)

But the idiocy of such a theory – that you and I passing the same dollar between us faster makes the economy inflate (or the reverse deflate) is laughable on mere dialogue of the process!

I agree with Mises:
_ "The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true."_

----------


## rpwi

> My references only pertain to 1980 to present so it doesn't matter


The 'pre-1980' inflation reference is a measure...not a reference to a period in time.

The US government changed the inflation rates once in 1980 and again in 1990 to understate the real level inflation so they wouldn't have to pay as much in SS (all detailed at shadowstats.com).

You quote a US inflation graph that uses the status quo measure of inflation.  For example, peak inflation from 2000 to 2008 on your graph barely get's above 5% for a brief moment.

Using the original pre-1980 measure of inflation we see (which Ron Paul frequently references):

http://www.shadowstats.com/imgs/sgs-cpi.gif?hl=ad&t=

From 2000 to 2008 we were ALWAYS above 5% annual inflation and in 2008 got close to 13% (we're at 10% now).

Simply put...you understate inflation which skews argument that M2 doesn't correlate to inflation (aside from the fact that you use two different types of graphs to make your comparison).

----------


## Steven Douglas

> "The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true."


I agree with Mises, but not the way you seem to agree with him.  I actually gave critical thought to what Mises wrote, which is why I agree with him, and have no conflict with what he wrote.   Mises said, _"It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available."_ And I agree. 

Did you even read that sentence and think it through for yourself, or did you just buy into Mises' authority and agree with his conclusion because it appeared to agree with your premise?  Mises used the words, "must" change, "other things being equal" and "total supply of money available" (static supply), none of which are my assumptions.  

And btw, stow the whole 'crackpot' thing - it's ad hominem and argument by ridicule. It's as completely meaningless as your appeals to authority (Mises) and attempts to poison the well (Fisher).  Whatever anyone says - you, me, Mises, Fisher or anyone else - can be addressed on their own merits.   

I'm not a monetarist, as central control over the supply of money entails artificial systemic choices between winners and losers.  It distorts the entire market in numerous ways, as the very movement of that controlled supply, and especially the channels and ways it is introduced into the market, are decided mostly by banks, and vary the pressure (up or down, never evenly distributed) that is placed on prices throughout the entire system. Not that prices "must" change, as some believe.  And it's not control (price "must" change), as there is no such requirement. Only influence. Pressure. How individuals in the market respond to that pressure will always be different, but it's _not the same pressure_ felt throughout "the whole economic system", and the very process of malinvestment is proof enough of that - regardless of the aggregate effect.  

I like and adhere to the Austrian school because it approaches the market from, and deals directly with, individual behavior and choice, whereas other schools attempt to dissect and understand the economy (and controls over it) in the aggregate, using a more physics-based model approach.  Wonderful for me, as my primary background happens to be physics, not economics.  What I have learned, however, is that mainstream economists (and others in the soft sciences) like very much to mimic physics, as it gives a prestige-borrowing 'scientificish air' about their work.  I have read many published papers by economists, only to come away with nothing but astonishment. Like a gibbering, babbling children At Play In The Field of Scientists, most of whom (I conclude) really have absolutely no idea what they're talking about. They aren't talking about economics _or_ physics that I can see. They look like they're shuffling unnecessarily complicated toy blocks around as they speak to each other in a language only they _appear_ to understand. Not that they even agree with each other, or can put their theories to any meaningful tests! As such, this is what most economists look like to me when they speak with each other:




Whatever they were saying, they meant that, baby!  They are as certain in their responses as Paul Krugman ever was.  It is also no wonder to me that, unlike basic physics, there are so many schools of economic thought, and myriad factional (and contradictory) theories! Since most economists are not actually grounded in physics  a lot of what they expound appears to be gibberish, with faulty assumptions, misplaced or meaningless variables, and equally meaningless equations. If you're going to borrow from physics, at least have an understanding of the basic fundamentals.  

I understand the relationship, for example, between things like force, mass and acceleration. With a simple Newtonian equation, F=ma, I can understand clearly - without mistaking it for crackpottery or magic - how a 1 kilogram rock can have _the exact same force_ as 1,000 kilogram rock, by simply varying the acceleration of each.  Whatever the acceleration of the 1,000 kilogram rock, multiply that by 1,000 for the 1 kilo rock, and it will have same effective force, the same kinetic energy.  That's simple Newtonian physics, like leverage - where a 90 lb. weakling can move 10 tons with a well-placed lever.  Not magic. Simple Newtonian physics. 

The F=ma analogy deals with single blobs with single forces.  For the velocity of money in a system, a physics analogy of which deals with the kinetic energy of many units in motion is more fitting - like the relationship between air (MONEY), heat (FIDUCIARY MEDIA), and temperature (VELOCITY).  

Take two hot air balloons with the same amount of lift, each having the same quantity of hot air at the same temperature (velocity of molecules).  You can remove half the air (MB) from one balloon, and all else being equal the entire balloon system will deflate and lose lift.   However, you can add heat, increasing the temperature (average motion, or kinetic energy) to half the molecules extant until they expand to twice their volume. Half the molecules, twice the heat and temperature, expanding to twice their volume (inner velocity), and you'll get back more than your original lift, because the density of the entire system is less than it was. 

That's the aggregate, as temperature is nothing but an average measure of motion.  In localized reality, individual molecules in the same gaseous system are another story altogether.  Some are moving at tremendous velocity while others are standing relatively still.  

In my example, I talked about localized velocity (read=frequency variances with which goods and services are exchanged for money _within my industry or economy_). In individual terms, and accounting for the time value of money, if a particular part of the economy slows down, such that the frequency of demand for my goods or services decreases, fewer orders (per unit of time) is deflationary TO ME.  "THE" money supply didn't dry up. "MY" money supply did.  It's not that the same orders are not pending - in many cases they are.  It's that my customers are waiting, because their frequency of exchange has also slowed.  So they aren't getting the same money-per-unit-of-time either.  And when that happens to large enough sectors of the economy, it can appear in aggregate as a strong correlation between M2, velocity and inflation (the chart I posted that you ignored, and never addressed except by dismissal).  

In other words, you can have all the "otherwise demand" in the world - you have many of the orders, but not the capital to fill them, or your customers are waiting for funds to finally release a purchase order - but if everyone is waiting longer and longer for their own money (e.g., credit is tightened), this will, in the aggregate, have an affect on the value of the currency (up or down - in relation to the units available but NOT exchanged, and all for want of timely money).  

That isn't Fisher, nor is it a simplistic, rigid, Quantity Theory, nor is necessarily contradictory to what Mises wrote.  It could well be argued that it conflicts with what Hazlitt wrote [LINK] - but that's another discussion altogether.  I think Hazlitt split some hairs, as he tied everything into individual expectations and fears.  And while I think that's a valid approach with merit, it appears to me as just the mechanism behind the fundamentals. 




> The value of a unit of money is determined, like the value of a unit of a commodity, primarily by psychological factors, and not merely by mechanical or mathematical factors.


I agree with Hazlitt that all these are factors. I strongly question his premise that psychological factors, not physical fundamentals, are the primary factors...  




> As with commodities, the value of money is influenced not merely by the present quantity, but by expectations concerning the future quantity as well as the future quality.


And that's precisely why. Because my individual expectations as a merchant don't necessarily change unless my individual fundamentals (actual frequency and magnitude of orders) change.   And Hazlitt goes onto write:




> At the beginning of an inflation, many prices and wages remain as they are through habit and custom, and also because, even when the increase in the money supply is noticed, it is assumed to be purely a past event that is now over. Confidence in a sort of fixed value of the monetary unit remains high. Of course an increase in the supply of money will probably raise some prices, though the average of prices will not necessarily rise as much as the monetary increase.


See that? "the increase in the money supply is noticed".  How is it "noticed" at the individual level?   As a merchant, I don't look at "money supply".  I look at ORDERS.  MY money supply.  That's how I notice an increase or decrease - as it relates to me.  




> In the middle stage of an inflation, prices may respond rather directly to an increase in the supply of money. But as the inflation goes on, or perhaps becomes accelerative, fears begin to spread that the inflation will continue into the future, and that the value of the monetary unit will fall further. These fears for the future are reflected in the present. There is a flight from money and a flight into goods. People fear that prices are going to rise even further, and that the value of the monetary unit is going to fall even further. Their own fears and actions help to produce that very consequence.


And I agree. 




> Now when such developments are called to the attention of, or noticed by, the adherents of a rigid quantity theory, these adherents have a ready answer. The discrepancy, they say, is accounted for by changes in V, the "velocity of circulation." And they state or assume that these changes in the velocity of circulation are of the exact mathematical extent necessary to account for the discrepancies between the increase in the supply of money and the increase in the price level.


And there's where Hazlitt parts from me, as I am NOT an adherent to "rigid quantity" theory.  To me the rigid quantity of money is, as Hazlitt claimed, but one factor among others, such that there is no direct correlation (especially real time) required between the supply of money and inflation.  And not that Hazlitt FULLY believes that the quantity of money affects the value of the currency - just not for the reasons Fisher claimed.  And on both those counts we fully agree. 

It's interesting to note that Hazlitt further states (regarding rigid quantity proponents) "They do not offer any mathematical proof of this. As we shall see, such mathematical proof does not and cannot exist."

And he is correct.  What he fails to note is that there can be no mathematical proof for his own assertions (that psychological affects are the primary factor of inflation), and for the same reasons.

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## Black Flag

> Simply put...you understate inflation which skews argument that M2 doesn't correlate to inflation (aside from the fact that you use two different types of graphs to make your comparison).


1st, I did not use "two" different types of graphs. I used relative graphs - you are trying to use two different types.

2nd, whether or not I agree with shadowstats .... and I have equally no reason to agree or disagree ... the point remains the same - a lack of correlation.

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## Black Flag

> Mises said, _"It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available."_ And I agree. 
> 
> Did you even read that sentence and think it through for yourself, or did you just buy into Mises' authority and agree with his conclusion because it appeared to agree with your premise?  Mises used the words, "must" change, "other things being equal" and "total supply of money available" (static supply), none of which are my assumptions.


Where have you been?

Do you think I buy into *any authority* dictates merely because "he said so?" - that's been your game, sir, not mine. You have repeatedly raised the fallacy of argument by authority, and not me.

I said I agree with Mises - I did not say to you "see you're an idiot if you disagree with Mises" ... as you have done with other references of yours.

So "buck up, sir" and stop playing that stupid game.

He is right, because he unequivocally relies on the laws of economics - supply and demand. Thus, as he states - all things being equal an increase in the supply of money will change the price - so says the law of supply and demand - which I have been harping on since page 1 or so of this blog.


PS: Crackpot is not an ad homenien - it is a state of adherence to a theory that is not supported by realty. I did not say you were stupid, nor did I even say it was your theory. I did say that you merely parrot Fisher's utterly bizarre theory as if it held something meaningful.

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## Steven Douglas

Won't even quote you, as there was not a single accurate or correct thing that you wrote, and you didn't really argue against or address the merits of a thing I wrote.  

And for the third time, I'm asking in earnest:





> I ask how can an IOU - something created that is *referenced by money* be money.


You mean like Gold and Silver Certificates back in the day? Greenbacks when they were issued? State issued currency notes?  Those were all debt instruments once upon a time -- IOU's, all of which were nothing but references to real money, which debt instruments were counted by most people as money. 

And what, exactly, does "referenced by money" mean to you, anyway? Clumsy syntax, how can a thing be referenced "by" money? I assume you mean "is a reference to money" but you'll have to clarify on that point. 

By all means follow the money - whatever you consider it to be. When you follow the genesis of that money your theory becomes self-conflicting. The paper _no-longer-debt_ notes, which you now consider money, given their self-reference and irredeemability in anything but more of the same notes, were at one time only debt notes. They were not self-referencing when they were originally issued. They were in fact multiple references issued against the same specie, as in, "PAYABLE IN LAWFUL MONEY" (of that time), and not money themselves.

At what point did these IOU's become the only thing you now count as "real money"? Was it at the moment they became self-referencing? Did later welching by banks and government on all these debts magically transform these IOU's into a new kind of real money?  Is that all it takes to create "real money" in your mind - just remove its underpinning claims and make it self-referencing?

What, in your mind, is the magical defining determinant for money? Because whatever it is, M2 is now the new IOU, which you don't count as real money. It is nothing but multiple claims on the same M0 (the newer, lighter, far more abstract functional equivalent to gold and silver coin). But why does M2 need to be backed by anything?  If we went paperless and coinless, and the Fed pulled the M0 rug underpinnings out from under everyone, M2 could become fully self-referencing. Would you then defend M2 as the only real money - the way you now defend M0 that was enthroned in exactly the same way?  And if so then, why not now? 

If a dream is a solid substitute for tangible reality, why wouldn't a dream within a dream be just as solid?

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## Black Flag

> Won't even quote you, as there was not a single accurate or correct thing that you wrote, and you didn't really argue against or address the merits of a thing I wrote.


Nonsense.

I do not have time to write a book for you - however, I am still correct in what I said.

[quote]
And for the third time, I'm asking in earnest:




> You mean like Gold and Silver Certificates back in the day?


_The gold certificate was used from 1882 to 1933 in the United States as a form of paper currency. Each certificate gave its holder title to its corresponding amount of gold coin. Therefore, this type of paper currency was intended to represent actual gold coinage. In 1933 the practice of redeeming these notes for gold coins was ended by the U.S. government and until 1964 it was actually illegal to possess these notes._

...which is utterly nothing like the FRBN.

The Gold certificates represented _gold_.
Gold represented itself.

FRBN does not represent anything but itself, just like gold.




> Those were all debt instruments once upon a time -- IOU's, all of which were nothing but references to real money, which debt instruments were counted by most people as money.


Gold was never an IOU.
FRBN are never an IOU.

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## Steven Douglas

> Gold was never an IOU.
> FRBN are never an IOU.


I never said gold was an IOU, where did that nonsense come from?  Gold was money, not an IOU. 

The notes that represented gold and silver, including FRN's, were certainly IOU's. 

However, so were FRBN's, _once upon a different time_.  


*Series 1929 FRBN - REDEEMABLE IN LAWFUL MONEY
*

*Series 1914 FRBN - WILL PAY TO THE BEARER ON DEMAND
*
Those aren't FRN's. As far as I can tell, those are FRBN - which at one time represented what was then LAWFUL MONEY. In other words, IOU-THE-BEARER. 

There is a genesis to that. While gold and silver coin certainly were lawful money, FRBN, while not redeemable now, not circulated now, and not IOU's now, were not considered money back in the day, once upon a very different time, any more than you consider anything but M0 money now.  At some point this changed. What was that point, and what was the defining characteristic that made it "money" in your mind, and not just a reference to money?  Was it the removal of the requirement that it be paid in the specie it denominated and represented? Was it when it became self-referencing?  What? 

What am I missing?

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## puppetmaster

> Using credit cards does not increase the money supply.


until the banks get another bailout to cover losses

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## Black Flag

> until the banks get another bailout to cover losses


Correct.

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## Black Flag

> I never said gold was an IOU, where did that nonsense come from?  Gold was money, not an IOU. 
> 
> The notes that represented gold and silver, including FRN's, were certainly IOU's.


Try to stay on topic, Steve.

FRBN are not IOU's and are money and are redeemable for more of itself.
Take a $10 to the bank, and they will redeem it with 2x $5.

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## Steven Douglas

> Try to stay on topic, Steve.


Cute deflection and absolute avoidance of our subtopic of this topic, which is germane, and therefore very much on topic, Mr. Flag-who-is-not-the-OP.  




> FRBN are not IOU's...


The operative deflection word being "are", as opposed to "were" - which would have a different answer, and was the basis of the question I asked, which you completely and deliberately dodged. 

And from that deliberate repeated non-answer, the actual answer (which everyone knows anyway) becomes self-evident.

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## Black Flag

> The operative deflection word being "are", as opposed to "were" - which would have a different answer, and was the basis of the question I asked, which you completely and deliberately dodged.


Steven,

Let's end the confusion.


FRN are not, and never have been IOU's and are in circulation.

They are the only type of U.S. banknote that is still produced today and they should not be confused with Federal Reserve Bank Notes.

Certificates represented a certain mix and amount of ore.

FRN represent themselves. FRN were never, ever, never represented anything else - they did not represent "gold" or "silver" or anything.

FRBN were removed from circulation by 1945.

United States Notes, Certificates, etc. which look about the same, called the same thing, have the same pictures are are the same size but are not FRN.

Most people are confused about this - since the reason for the similarities is completely purposeful - so to confuse the people into thinking they are the same thing.

But they are not the same thing.

PS: I have, myself, muddled them up too in my abbreviations using FRBN instead of FRN - though essentially the same thing.

http://en.wikipedia.org/wiki/Federal_Reserve_Bank_Note

http://en.wikipedia.org/wiki/Federal_Reserve_Note

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## rpwi

> FRN are not, and never have been IOU's ...FRN represent themselves. FRN were never, ever, never represented anything else - they did not represent "gold" or "silver" or anything.


This is not true.  On the wikipedia page you referenced, you can see the different issues:

http://en.wikipedia.org/wiki/Federal...eries_overview

The 1914, 1918 and 1928 series clearly explain that they are redeemable in gold (albeit at the Treasury Department).  This was not a 100% gold backing...but a fractional backing.  Similar to how banks operate now.

The 1934 series clearly is off of the public gold standard as FDR dropped the gold standard for FRN's.  The international standard remained...until Europe (especially France)  traded their FRN's (and Federal Reserve Deposits) for gold.  Because FRN's were on a fractional based system off of gold...Nixon really didn't have a choice but to take us off of the gold standard as it was going to happen on its own anyways.

Steven has a very good point.  Why is it that bank deposits on top of dollar reserves are not money...but when the FR deposits and FRN's are fractionally based off of gold (as late as the Nixon era)...then FRN's are?  They are both fractional banking.  One is on a private level and the other on the a federal level.

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