G Edward Griffin, wtf? Listened to a speech and he was wrong about fractional reserv

[gonegolfin]

The inflation is there in FRB's, we know this because of what happens when everyone takes out their cash, we get deflation. We just don't notice it because it is ubiquitous at the moment. It's already happened.

But FRB inflation is kind of a waxing/waning inflation. We could end it by everyone just dealing in cash and no one using FRB based banks.

But the other more deadly inflation is when the Fed actually monetizes debt. Which is quite literally simply printing up cash.

The government tries to sell bonds to raise cash. If the government can find no foreign buyers for the bond and can't meet it's budget outlays, it turns to the Fed to "monetize" the debt. Meaning, the Fed literally writes a check to the government and uses the bond as collateral.

Now we say the Fed is "printing up money" but the actual moment when the Fed writes the check and the moment when the Fed prints physical bills are not necessarily happening at the same time.

Not to get off track here ... but ...

The Fed does not monetize treasury debt by purchasing treasuries directly from the Treasury. The Fed cannot purchase directly from the Treasury. It must purchase treasuries in the open market. The "newly created money" is deposited in the appropriate reserve accounts at the Fed. This is how reserves increase (and correspondingly the monetary base).

Also, the government has demonstrated that it can purchase much more than treasuries. That is, it can monetize more than just debt. It has been monetizing commercial paper, agency debt, mortgage backed securities, ... But it also must discount these securities, else the monetary system would eventually collapse upon itself.

Brian

 

[wizardwatson]

Not to get off track here ... but ...

The Fed does not monetize treasury debt by purchasing treasuries directly from the Treasury. The Fed cannot purchase directly from the Treasury. It must purchase treasuries in the open market. The "newly created money" is deposited in the appropriate reserve accounts at the Fed. This is how reserves increase (and correspondingly the monetary base).

Also, the government has demonstrated that it can purchase much more than treasuries. That is, it can monetize more than just debt. It has been monetizing commercial paper, agency debt, mortgage backed securities, ... But it also must discount these securities, else the monetary system would eventually collapse upon itself.

Brian

I don't know the accounting details of which entity the Fed specifically takes liability from, I only know that the Fed increases it's own reserves via 'taxpayer backed' liabilities, which in turn allows it to lend out more to the commercial banks.

 

[tremendoustie]

FRB + Fractional Reserve Banking to answer your question. As to above, I never refered to so-called private banks, I refered to commercial banks see below:

"The commerical banks are permitted to create 'checkbook' money on top of federal reserve notes. That is to say, the commercial banks are only obliged by law to hold reserves in the form of federal reserve notes of 10% to back all demand deposits that they have. Ninety percent of the demand deposits are backed by nothing."

By private, I meant commercial. Essentially, I meant any fractional reserve bank, but not the federal reserve itself. Sorry for the confusion. It is true that they are required to only hold FRNs backing 10% of demand deposits. This, after many transactions, leads to an eventual 10x multiplier for new dollars entering the system.

The film says otherwise:

If a central bank (aka Federal reserve bank) has 100.00 worth of gold reserves in its vault, and 10% reserve requirement, it can print up to 1000.00 of new notes and deposits which become the reserves of the commercial banks. The commericial banks take the 1000.00 and if they're required to hold 10% again in their reserve, they can multiply 1000.00 into 10,000.00 through fractional reserve loans. So an inverted pyramid is created with 100.00 worth of hard money at the bottom and 10,000.00 of inflated paper money at the top.

Not trying to beat a dead horse, but looking at this at face value, which is what most people would do, it implies something different than what you and others are saying.

I think they're just plain wrong about this. I am not aware of any requirement on the federal reserve to hold gold. They do hold gold, but they are not restricted, to my knowledge, to only create FRNs worth some set multiple of the value of their gold holdings.

 

[wizardwatson]

edit: made this a while ago to help people visually see how the banking system works:

The Money as debt video is...atrocious IMHO--it comes close to the truth, but then perverts it just enough to point you in the wrong direction and thinking the wrong thing.

edit edit: there's a mistake in the image I made; I do believe scenario A does exist, but only in the instance of a credit union and not a bank (I could be wrong though).

Was responding when I saw your second edit. It seems to me that scenario A is the correct one. But I don't know if I'm understanding "money held upon deposit" and "money held after loan" in the way intended.

Seems like scenario B is what it looks like before all the checks clear.

 

[Josh_LA]

Very misleading, if true. I know I am not the only person who interpreted FRB in this way.

Ok, are you saying you finally get it???
Let me ask you Deborah.

If McDonalds gave me a coupon for "buy one get one free" for a normally $1 cheeseburger, can I tell you I'm getting a cheeseburger "for half off" or "for half the price"?

Technically, I am not wrong, mathematically I WILL pay half the price for each cheeseburger.

BUT, if I told you I "get a cheeseburger for half the price", it's implying to you, that I can walk away with one cheeseburger and pay only 50 cents plus tax. NOT THE CASE.

Furthermore, had the coupon not said "one use per visit", doesn't that mean I can line up 2 coupons and pay $1 for 4 cheeseburgers? Or, can I line up 3 coupons and pay only 12.5 cents to get one cheeseburget?

Do you see how using words differently, can mean something DRASTICALLY different in reality and mathematics?

If my friend says "I don't eat animals that are mean" then says "I don't eat animals that are cute", you ask "what animals DO you eat?" because you are under the impression that he only eats animals that are either not-mean or not-cute, the fact is, he eats NONE.

 

[gonegolfin]

I think they're just plain wrong about this. I am not aware of any requirement on the federal reserve to hold gold. They do hold gold, but they are not restricted, to my knowledge, to only create FRNs worth some set multiple of the value of their gold holdings.

You are correct.

Brian

 

[Josh_LA]

he's explained this in detail before, and he understands how the system works.

The only reason he says what he says is because when you start talking about technicalities of how/why the banking system, as a whole, can create that $900 out of $100, most people will be bored, turned off, or asleep, and you've lost your audience at that point.

really, the bank can only loan out $90, then the second, $81, and so on.....the key here is, they're not actually loaning out $90 of the $100, they're loaning out $90 in totally new money...so, when they make the $90 loan, there's actually a total of $190 in the economy now.

edit: made this a while ago to help people visually see how the banking system works:

The Money as debt video is...atrocious IMHO--it comes close to the truth, but then perverts it just enough to point you in the wrong direction and thinking the wrong thing.

edit edit: there's a mistake in the image I made; I do believe scenario A does exist, but only in the instance of a credit union and not a bank (I could be wrong though).

I was just about to ask what A and B are different.

But I do believe that A exists some times (or, often times between A & B), and some banks simply do not lend out more than they think is reasonable, because they want long term stability or have less overhead.

 

[Josh_LA]

Was responding when I saw your second edit. It seems to me that scenario A is the correct one. But I don't know if I'm understanding "money held upon deposit" and "money held after loan" in the way intended.

Seems like scenario B is what it looks like before all the checks clear.

That is a good question, after bank A lends out 90%, they MUST claim they have more than 10% on reserve, or else they'd not cause any inflation.

There's NOTHING WRONG with lending out 90% (or even 99%) of the money if you HONESTLY ADMIT YOU HAVE ONLY WHAT'S LEFT (that's why people give interest on "savings accounts" when banks are promised they'll never cash out until the time comes)

The problem with fractional reserve banking is exactly what B is!

The bank LENDS OUT 90%, but doesn't tell people only 10% is left, and does business again as if there's more than 10% (but not necessarily 100%).

 

[wizardwatson]

That is a good question, after bank A lends out 90%, they MUST claim they have more than 10% on reserve, or else they'd not cause any inflation.

There's NOTHING WRONG with lending out 90% (or even 99%) of the money if you HONESTLY ADMIT YOU HAVE ONLY WHAT'S LEFT (that's why people give interest on "savings accounts" when banks are promised they'll never cash out until the time comes)

The problem with fractional reserve banking is exactly what B is!

The bank LENDS OUT 90%, but doesn't tell people only 10% is left, and does business again as if there's more than 10% (but not necessarily 100%).

I think I need scenario B explained in more concrete terms if it is different than what I described above. This thread is a vortex of mental entanglements.

 

[Josh_LA]

I think I need scenario B explained in more concrete terms if it is different than what I described above. This thread is a vortex of mental entanglements.

Ok basically.

Scenario A is

Bank gets $10,000 lends out 90%, keeps 10% on reserve, and only does business HONESTLY BASED ON THE FACT THEY HAVE 10% (which means, whoever deposited the $10K is now NOTIFIED he cannot cash out his money, only $1K)

This means, the depositor is going to be so angry, he'll demand to cash out right away, thus, no inflation is created. It's honest, and no fun.

Scenario B (or anything between A & B) is this.

Bank gets $10,000, lends out 90%. BUT, tells the depositor, that he can still get his money whenever he wants it, so he THINKS all his money is still there. The bank does this over and over, and NEVER HAS A PROBLEM as long as only less than 10% of the people ever ask to cash out their money. SO, the bank PRETENDS they still have $10,000 to do business with. In other words, the bank might not do a ROUND TWO of lending out 90% of the money ($9K) because they DON'T HAVE IT.

BUT, the bank can CLAIM they've got $10K stilling in the vault, such that they can be considered credible and reliable.

In scenario B, the bank is LYING ABOUT what they have on reserve, such that people will continue to do business with them, they may not do a round 2 lending of that $10K, but they've already throw out most of the money, such that they don't need to account for it and can do it again as long as another sucker comes in.

(In scenario A, the first sucker will tell the world not to do business with them and they'll never have customers). Does that explain it?

 

[bill50]

Warning, Math Content Below

I don't have a scanner and am not sure what I can attach here that would allow me to generate a document with correct mathematical symbols, but here it goes.

A person deposits $a in a bank. The bank may then loan out x% of that $a. That x% of $a can then be deposited in another bank which can then loan out x^2% of $a. That can then be depositied in another bank. That bank can then loan out x^3% of a. And on and on.


If we drop the percent and write x in decimal form for simplicity we get a sum (I don't know how to put sigma in here) to represent the amount of money from these transactions that looks like:

a+ax+ax^2+ax^3+ax^4+...+ax^n where n represents the number of times this pattern repeats.



This is actually a standard geometric progression.

Using mathematical induction we can prove that the following equality holds for this sum (induction is a little rigorous so I'll omit that).

a+ax+ax^2+ax^3+ax^4+...+ax^n = a*( 1 - x^(n+1)) / (1 - x)


Since the process of depositing money in a bank can theoretically go to infinity, we can evaluate this new equation for the limit as n goes to infinity.

Its actually a very simple thing to do. I'll give a non-rigorous proof. When n--->infinity, n+1---> infinity. Notice that x<1. Since x<1, every time you raise it to a higher power, x^(n-1) actually gets smaller. So as n---> infinity, x^(n-1)--->0.

The a and x in the equation are not effected since they are not multiplied by or raised to n.

This leaves us with the equation:

limit as n---> infinity of a+ax+ax^2+ax^3+x^4+...+ax^n = a / (1 - x)

So lets plug in some numbers. With a loan rate of x=.9 and an initial deposit of a=$100 we get:

$100 / (1 - .9) = $100 / .1 = $1,000.

If we want to make $10,000 out of $100, we can just solve for the reserve rate. Then $10,000 = $100 / (1 - x) so (1 - x) = $100 / $10,000 which implies 1 - x = .01

Recall 1 - x is the reserve rate (x is the amount the bank can loan out).

The reserve rate was not chosen arbitrarily, historically it was the lowest rate that banks could run their scam with a low probability of going bankrupt.

 

[Josh_LA]

The reserve rate was not chosen arbitrarily, historically it was the lowest rate that banks could run their scam with a low probability of going bankrupt.

Amen. However, if people woke up tomorrow with an idea of cashing out their money, we only need 20-30% of the people to demand their cash and the system collapses in an instant.

 

[bill50]

Note that the bank doesn't just make $900 out of thin air because you put a down payment of $100 on a house. The $900 can be taken out of reserve because the bank can use your $100 as its reserve. The precess I described above is what creates the money out of thin air.


And just for clarification, by money in the last two posts, I meant money/credit.

 

[Fox McCloud]

Was responding when I saw your second edit. It seems to me that scenario A is the correct one. But I don't know if I'm understanding "money held upon deposit" and "money held after loan" in the way intended.

Seems like scenario B is what it looks like before all the checks clear.

Money held upon deposit means how much money a bank has upon receiving whatever money is specified (it is assumed that all the banks in my scenario have a $100 deposit initially).

The "money held after loan" is how much money the bank has left, on deposit, after they make a loan to someone.

it's falsely propagated that banks, with a 10% reserve requirement can loan out $90 if there's $100 initial deposits...this is true, but this doesn't mean the bank only has $10 left on deposit AFTER the loan, as the $90 loan created is the money generated out of thin air (thus why scenario B is correct).

Scenario A and B are worlds apart; if our banking system operated on the principles of Scenario A, the only origination of inflation would be the Federal Reserve.

 

[Josh_LA]

Note that the bank doesn't just make $900 out of thin air because you put a down payment of $100 on a house. The $900 can be taken out of reserve because the bank can use your $100 as its reserve. The precess I described above is what creates the money out of thin air.


And just for clarification, by money in the last two posts, I meant money/credit.

Exactly, and that's what they do. see my post about McDonald's coupons.

And in our system, credit and money is literally mixed and matched to confuse people what's real money (or else people won't play the game)

 

[Josh_LA]

Scenario A and B are worlds apart; if our banking system operated on the principles of Scenario A, the only origination of inflation would be the Federal Reserve.

Fed Res is STILL the only primary source, it's their rules that ALLOW banks to fractionally reserve, otherwise banks would literally lend out 99.99% of the money as long as nobody comes back (and when they do, too bad, they say F- you)

But yes, if more banks practiced close to Scenario A (and it seems like they are right now), inflation would be greatly reduced. (and yes, in today's case, Fed Res is racing to shove money down banks' throats, but banks refuse to shove it further down Joes' throats).

 

[Deborah K]

Okay I looked at the Money as Debt video again. It appears we're both right.

Central banks (The Fed) can and DO loan out by multiplying by the reserve ratio of 9 to 1 . So, if a central bank opens its doors with 1,000.00, it can loan out 9,000.00. The person it loans this to can write a check, spending the money. The check goes into yet another bank, that isn't a central bank so it cannot loan out at a multiplied 9 to 1 ratio, like the central bank, instead it is divided by a reserve ratio of 9 to 1 meaning of the 9,000.00 that was just deposited, 8,000.00 can be loaned out.


Right?

Both videos, the Mises one and the Money as Debt one clearly state that the Fed can loan by mulitplying the reserve ratio of 9 to 1. So we're both right.

 

[dannno]

My confusion is what Deborah was just referring to, and it is with this "high-powered money" that banks get from the Fed and what banks can do with it.

The problem is they are so damn secretive I can never get a straight answer from anyone, and monetary definitions of terms like "high-powered money" are not static.

Money As Debt says that a bank can get $1,000 and turn it into almost $90,000 worth of loans, because that $1,000 is high powered money from the Fed. They can use that type of reserve to create a loan to themselves for $10,000. They in turn can loan out $9,000, customer deposits, process repeats, etc.

 

[Deborah K]

Money held upon deposit means how much money a bank has upon receiving whatever money is specified (it is assumed that all the banks in my scenario have a $100 deposit initially).

The "money held after loan" is how much money the bank has left, on deposit, after they make a loan to someone.

it's falsely propagated that banks, with a 10% reserve requirement can loan out $90 if there's $100 initial deposits...this is true, but this doesn't mean the bank only has $10 left on deposit AFTER the loan, as the $90 loan created is the money generated out of thin air (thus why scenario B is correct).

Scenario A and B are worlds apart; if our banking system operated on the principles of Scenario A, the only origination of inflation would be the Federal Reserve.

Crap! I just read your opinion about Money as Debt. Did I use the wrong tutorial?

 

[Josh_LA]

Okay I looked at the Money as Debt video again. It appears we're both right.

Central banks (The Fed) can and DO loan out by multiplying by the reserve ratio of 9 to 1 . So, if a central bank opens its doors with 1,000.00, it can loan out 9,000.00. The person it loans this to can write a check, spending the money. The check goes into yet another bank, that isn't a central bank so it cannot loan out at a multiplied 9 to 1 ratio, like the central bank, instead it is divided by a reserve ratio of 9 to 1 meaning of the 9,000.00 that was just deposited, 8,000.00 can be loaned out.


Right?

Both videos, the Mises one and the Money as Debt one clearly state that the Fed can loan by mulitplying the reserve ratio of 9 to 1. So we're both right.

No, you are not right, or you were not right enough.

But you've corrected yourself now, good.

The Fed Res is the SOLE MONOPOLIZER OF creating money out of thin air via multiplication. THIS is the question you refused to answer me the whole time, if ANY BANK can multiply money supply, who needs Fed Res to meet and adjust interest rates? The ONLY REASON Fed Res rates matter is because all banks HAVE TO COMPLY WITH THEIR RESERVE REQUIREMENTS.

Not every bank can multiply money instantly, or else inflation would happen instantly, not over time. And Fed Res would be powerless to stop it.