Do I have this right on how the money supply is increased?

[fight4liberty]

Man, I'm glad I've got this economic forum to help me grasp our monetary system.

OK, so see if I have this right. Money comes into existence by banks using the fractional reserve system and loaning out 90% of each individuals deposits. So for instance a $1000 gets deposited and then that bank can loan out $900. And then that $900 is given to someone who deposits it into his bank and his bank can loan out 90% of it and this process continues until the original $1000 deposit has resulted in $9000 in loans.

So am I right that in this example the nation's money supply was increased by $9000?

So if I'm right then this is one way the money supply gets increased or putting it another way the fractional reserve system is one cause of inflation.

Then, of course, when the Fed "prints" money out of thin air it is another cause of inflation. I don't have any doubts on this.

I just want to check if the fractional reserve system (loans) cause inflation.

If I have this right I would also like to know if that means the loans that come from the bonds and other instruments of debt that are sold by the US to investors both foreign and domestic are also increasing the money supply in the US?

So, o' learned ones. Do I have this right or do I have to "hit the books" some more?

 

[noxagol]

The money supply is increased when the Federal Reserve buys government or bank bonds. These bonds are bought with money it creates from nothing.

 

[micahnelson]

(to the tune of, Do Your Ears Hang Low)

When Congress is in a Bind,
with a Bill they want to sign
But haven’t got the cash so they can’t sign the dotted line.
There’s no need to give up yet,
They just Monetize the debt
A fancy IOU will keep the books all set.

The Treasury issues a Bond
And it doesn’t take too long
For the Federal Reserve to find its way into our song
They put the Bonds into their stash,
turn the value into cash,
Thats how debt turns into dollars for the Congress in a flash.

But in case you weren’t aware,
The Fed doesn’t stop there.
For each dollar they give congress they pull 9 out of the air.
This gives banks the green light
to make loans out day and night
Collecting interest fees for nothing with no end in sight.

Though the Fed, you See
Is a private entity
They control all of the banks that are used by you and me.
For every dollar you put in,
The bank can loan out ten,
And they’ll never have a bank run, they can print it on a whim.

So it should come as no surprise
when you see the prices rise
The Market is reacting to the currency supplies.
Wages don’t keep up the pace-
So we work harder to replace,
The spending power taken by this financial disgrace.

 

[noxagol]

Very catchy.

 

[smoke.stack]

So for instance a $1000 gets deposited and then that bank can loan out $900. And then that $900 is given to someone who deposits it into his bank and his bank can loan out 90% of it and this process continues until the original $1000 deposit has resulted in $9000 in loans.

I am pretty sure that it is a 10 to 1 ratio on the fractional reserve. $10,000 deposit results in $100,000 in loans. I might be simplifying.

So if I'm right then this is one way the money supply gets increased or putting it another way the fractional reserve system is one cause of inflation.

I believe that anytime money is created it makes the currency already in existence worth less, and thus causes inflation.

 

[micahnelson]

Do realize that when the loan is payed back, the money dissipates into the ether from whence it came.


The problem is persistent debt.

I think there are moral problems with this system, but persistent debt is the functional problem from our perspective. From their perspective, it isn't. They are collecting the interest on money that didn't exist until they created it.

They aren't accountable, because if it all goes south (they don't have enough to cover the reserve ratio on the debt they hold), they will go hat in hand to congress and congress will don its cape of ignorance and bailout the bank. Now they are bailing out all lending institutions. This is remarkable in Economic History. We will all learn a great lesson from this, either way it goes.

 

[Isaac Bickerstaff]

I believe that anytime money is created it makes the currency already in existence worth less, and thus causes inflation.

In order for this to be true inflation, the money supply needs to be growing. True, the banks keep creating new money by lending, but the debt burden is so great that the newly created money goes straight to servicing debt and thus is uncreated. The M1 (most liquid money supply) is, if anything, shrinking. The "inflation" that we are experiencing is the accumulative interest burden that must be passed on to consumers.

True inflation would show up in the price of raw materials. Lumber is as cheap as it has been for over a decade, the price of basic food commodities is on its way back down again while "inflation" appears to be around 15%. True inflation of the money supply would also affect wages, which is not happening.

 

[Conza88]

Fractional Reserve banking.. anything less than 100% is inflationary. Yes.

 

[scooter]

There are two types of money creation that you need to learn about. There is money creation that comes from the treasury (which is permanent) and credit money that comes out of the banking system. The credit money eventually is erased as the loans are paid off.

One thing people need to note is that the Fed can't create money from nothing. They have to back their new money with government treasuries. The Fed can only "print" money to purchase US government treasuries, so the real money creation mechanism comes when the government borrows.

The credit money expansion is pretty close to what you were describing. If I deposit $10,000 into a bank, the bank can loan out some portion of it (for the example we'll use 90%). So $9,000 is loaned out and $1,000 is kept as reserves. That $9,000 goes into another bank, of which $8,100 is loaned out and so on.

The key thing to remember is that money created by the government is never erased. It actually goes into the banking system and expands credit even further. However, the credit money created by the banking system only expands and contracts based on market demand for loans. As the loans are paid back, the new money contracts. Also, remember that credit money has some backing. There is an asset that the bank would take over in the case of a borrower failing, and that asset could be sold to return the original depositor's money.

In my opinion the credit expansion is not too bad, if allowed to work freely by the government. Unfortunately, the government has a knack for bailing out the bad financial institutions who expand their credit too far. Once that bailout happens, the credit money becomes permanent money and you get some bigtime inflation.

 

[Dsylexic]

can someone explain what Debt monetization is?or how the fed does it? and how it affects the money supply

 

[scooter]

can someone explain what Debt monetization is?or how the fed does it? and how it affects the money supply

Debt monetizing is when the Fed prints new money to buy government bonds.

As I explained above, new money can only be created by the government running a deficit. They finance the deficit by creating bonds, which the Fed purchases with new money. That is debt monetization.

 

[Isaac Bickerstaff]

There are two types of money creation that you need to learn about. There is money creation that comes from the treasury (which is permanent) and credit money that comes out of the banking system. The credit money eventually is erased as the loans are paid off.

"The Federal Reserve Board (or the 'Fed' as it is often called) has several ways of allowing money to be created, but the actual creation of money always involves the extension of credit by private commercial banks." (emphasis added)

-Russel K. Monk
Department of the Treasury
Assistant General Counsel
(International Affairs)

From Tales from the Treasury
compiled by Byron Dale

 

[acroso]

The Fed sells T-bonds, it doesn't buy them. heh

 

[gutteck]

Watch:

The Money Masters:
http://video.google.com/videoplay?docid=-515319560256183936


Money as Debt
http://video.google.com/videoplay?docid=-9050474362583451279














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