I flushed my brain of all I thought I knew about our money, now I just need help plz!

[tggroo7]

Ok, these are probably basic questions. Actually I hope they are because I'm tired of spending days trying to understand one concept.

So, simply, will someone please explain to me how and when the inflation happens?

For example, we'll use the same scenario (sorry for those probably sick of seeing this due to my last thread) from how I was taught about Fractional Reserve Banking ($100=>$900...yea this bitch of a topic). I'm trying to create a powerpoint compiling reasons why Fed=bad. Sooo, here is some of my info on my slides and maybe you could help me figure out where the f*** I was trying to go with this....

Slide:

Fractional Reserve Banking – Bank monetary reserves must be no less than a fixed fraction of the money deposited

i.e. A bank gets $100 deposit, then it creates $90 to lend. This actually makes possible for the banking system to lend up to $900 over a long cycle…even though it only has $100!​

The government can get any amount of money it wants from the Federal Reserve

That money is not balanced by actual levied taxes, it is just used how and when the government feels​

Principles of Accounting basically do not apply to the gov. in this case​

When paper money is withdrawn, the value is then decreased – Inflation occurs​

“Diluting” the pot of money​

Inflation is essentially a tax on American savings

First of all, are there any problems with what I have there?
Secondly, I do go into some detail about the stuff above during my presentation, but I am losing my understanding of how to explain the cause of the inflation. I was going to say something like, "Both the government (via the Fed) and the banks can cause inflation. When the government spends the money it asks for from the Fed, new money is created and injected into the economy. The new money is not like real money, because it was created with no backing. It was just worthless paper when the government magically gives it value of real dollars and it's added to the total money supply in the economy. However it dilutes the value of the rest of the money supply when that happens. Like pouring water into a bowl of soup, the government pours paper into a bowl of dollars. Now, how the banks create inflation is through the loans they give that are in excess of their actual reserves. That example of the $100 deposit leading to $900 worth of loans shows how it happens..." Now I don't know how to explain. Also is everything I said fairly accurate?

Ok, here's another question too: What does the bank do with the money it gets back from the, say, $90 loan? I.e. they get the $90 plus interest. They obviously pocket the interest, but my question is does that $90 go into the reserves or what?

Thanks much!

 

[dannno]

Turn this:

This actually makes possible for the bank to lend up to $900 over a long cycle

Into this:

This actually makes possible for the banking system to lend up to $900 over a long cycle

The person depositing the $90 won't neccessarily go back to the same bank, but we are looking at this from a macro perspective.

 

[brandon]

Ok, these are probably basic questions. Actually I hope they are because I'm tired of spending days trying to understand one concept.

So, simply, will someone please explain to me how and when the inflation happens?

For example, we'll use the same scenario (sorry for those probably sick of seeing this due to my last thread) from how I was taught about Fractional Reserve Banking ($100=>$900...yea this bitch of a topic). I'm trying to create a powerpoint compiling reasons why Fed=bad. Sooo, here is some of my info on my slides and maybe you could help me figure out where the f*** I was trying to go with this....

Slide:


First of all, are there any problems with what I have there?
Secondly, I do go into some detail about the stuff above during my presentation, but I am losing my understanding of how to explain the cause of the inflation. I was going to say something like, "Both the government (via the Fed) and the banks can cause inflation. When the government spends the money it asks for from the Fed, new money is created and injected into the economy. The new money is not like real money, because it was created with no backing. It was just worthless paper when the government magically gives it value of real dollars and it's added to the total money supply in the economy. However it dilutes the value of the rest of the money supply when that happens. Like pouring water into a bowl of soup, the government pours paper into a bowl of dollars. Now, how the banks create inflation is through the loans they give that are in excess of their actual reserves. That example of the $100 deposit leading to $900 worth of loans shows how it happens..." Now I don't know how to explain. Also is everything I said fairly accurate?

Ok, here's another question too: What does the bank do with the money it gets back from the, say, $90 loan? I.e. they get the $90 plus interest. They obviously pocket the interest, but my question is does that $90 go into the reserves or what?

Thanks much!

What you have looks pretty good. But it's important to remember that the Fed and fractional reserve banking are two separate things. One can exist without the other. Some Austrian's (such as myself) actually think fractional reserve banking is tolerable at the least, and possibly beneficial. They are universally opposed to central banks though.

 

[tggroo7]

What you have looks pretty good. But it's important to remember that the Fed and fractional reserve banking are two separate things. One can exist without the other. Some Austrian's (such as myself) actually think fractional reserve banking is tolerable at the least, and possibly beneficial. They are universally opposed to central banks though.

Ugh! You're right. aaargh, my brain is turning to mush. Why the heck am I acting like there is a link between the Fed and FRB??

Oh well, I'll just change my overall topic to be essentially about Inflation. My title went from "The Federal Reserve and HR 2755" to "U.S. Monetary Policy: The Fed, Fractional Reserve Banking, and Inflation"

 

[Dequeant]

Here's how the fed causes $100 to turn into $900 (it can be more than 900, fyi).

Fractional Reserve banking means each bank is only required to hold a "fraction" of each loan in their reserves. The law says this fraction is 10%. Here's the problem...

Fed lends bank A $100

Bank A loans Bank B $90

Bank B loans Bank C $81

Bank C loans Bank D $72.90

Bank D loans Bank E $65.61

Bank F loans Bank G $59.05

Bank G loans Bank H $53.14

With this example (i could go on forever theoretically), the fed printing $100 and loaning it to a single bank lead to $521.70 of new "dollars" in the market. As I said, I could keep going, however, once you pass the 1:9 ratio the amounts become very small and not worth wasting my time calculating.

So, by the fed introducing over $2,000,000,000,000.00 of new dollars into the system in the last two months, this means a total of $18 trillion dollars worth of new money is in the system. With the supply of money increased by $18 trillion, eventually prices will adjust for this by increasing. [technically its not the $18 trillion directly, or even the $2 trillion directly that does the inflating..........its the HARD money that it creates that leads to inflation. More detail on this at the end, but dont skip to it.......read through.

That is what inflation is......the prices of goods and services going up relative to a currency.

Ok, here's another question too: What does the bank do with the money it gets back from the, say, $90 loan? I.e. they get the $90 plus interest. They obviously pocket the interest, but my question is does that $90 go into the reserves or what?

They pay back the fed. The fed's interest rate is very cheap...... (right now 1%). So the fed loans them $100 at 1%, and bank A loans bank B $90 at 3%. When Bank B repays the loan, they pay Bank A $90 back + $2.70 interest. This gives bank A $92.70. Now Bank A pays the fed back its $100 loan, plus $1 in interest. Bank A just made $1.70 profit......which pays the meager interest rates for all the customers + its employees.

You're probably thinking right about now........well gee, if the federal reserve gets paid back all this money, what is the problem? The problem is the $1.70 worth of new hard money in the system. That's the money that causes the inflationary pressure. You see, the lower the Fed's interest rate is, the easier (and faster) it becomes to create this money. With interest rates so low for so long, a metric shit ton of this money was in the system. This metric shit ton was multiplied by 9 through fractional reserve banking............it went into the market in the form of credit....car loans, mortgages, broker margins, etc. All this money in the system meant loans were easier to get. Once people started defaulting on these loans, all this new wealth evaporated and that brings us to where we are now...... Lots of companies finding they no longer have nearly the amount of money they had just a couple months ago.

The only way to erase all this bad money is through bankruptcy filings, defaults, debt forgiveness etc. The problem is that the government is not letting it happen. It's very akin to a boat being full of water. The pressure has caused holes at the bottom of the boat. Rather than let the boat drain out through the holes, the government (and the fed) are patching up the holes. The problem they haven't even grasped yet is......the pressure is just going to make new holes, and if they continue patching like that, and filling the boat with more water, it is literally going to explode.

 

[gonegolfin]

So, by the fed introducing over $2,000,000,000,000.00 of new dollars into the system in the last two months, this means a total of $18 trillion dollars worth of new money is in the system.

This is absolutely incorrect.

First, the Fed has not introduced $2 trillion "into the system". There are only $773.216 billion of reserves in the system as of EOB Wednesday 12/10. Nearly all of those reserves have been created in the last three months.

Second, even if the Fed had created $2 trillion of reserves, this does not mean $18 trillion worth of new money is in the system. Reserves are not money supply. There has only been a modest increase in the M1 money supply as the result of these additional reserves ... thus far. The injected reserves increase the monetary base, not the money supply. The banks must either lend off of their reserves or invest these reserves in order to impact the money supply.

Brian

 

[Dequeant]

This is absolutely incorrect.

First, the Fed has not introduced $2 trillion "into the system". There are only $773.216 billion of reserves in the system as of EOB Wednesday 12/10. Nearly all of those reserves have been created in the last three months.

Second, even if the Fed had created $2 trillion of reserves, this does not mean $18 trillion worth of new money is in the system. Reserves are not money supply. There has only been a modest increase in the M1 money supply as the result of these additional reserves ... thus far. The injected reserves increase the monetary base, not the money supply. The banks must either lend off of their reserves or invest these reserves in order to impact the money supply.

"Into the system" is obviously meant as potential. Without an act of government or the federal reserve, 2 trillion in reserves absolutely could lead to 18 trillion "in the system".......as in the fractional reserve system. Either way, the point here is being lost....

I was editing my post to be more descriptive at the same time you were writing this. Should be a bit clearer now. Also, i used this as the basis for my 2 trillion figure...which ultimately is not really important. It is just a number I used to explain the system, it could have just as easily been 2 dollars....the process is what the OP was asking about and what I was explaining.

 

[gonegolfin]

Fractional Reserve Banking – Bank monetary reserves must be no less than a fixed fraction of the money deposited

i.e. A bank gets $100 deposit, then it creates $90 to lend. This actually makes possible for the bank to lend up to $900 over a long cycle…even though it only has $100!

The government can get any amount of money it wants from the Federal Reserve

That money is not balanced by actual levied taxes, it is just used how and when the government feels

Principles of Accounting basically do not apply to the gov. in this case

When paper money is withdrawn, the value is then decreased – Inflation occurs

“Diluting” the pot of money

You have several things wrong here ...

- "A bank gets $100 deposit, then it creates $90 to lend. This actually makes possible for the bank to lend up to $900 over a long cycle…even though it only has $100!"

The only way "for the bank to create/lend up to $900" over the leverage cycle is if all lent deposits are deposited back into the same bank. The banking system can create approximately $900 from $100 in reserves provided the fractional reserve lending system utilizes such leverage (via loans). In practice, the banking system does not utilize this amount of leverage and nowhere near $900 is created from these $100 in reserves. In fact, very little leverage is being used at present with (M1 - outstanding currency) being not much greater than aggregate banking reserves.

- "Fractional Reserve Banking – Bank monetary reserves must be no less than a fixed fraction of the money deposited"

The reserve ratio depends on both the capitalization of the bank as well as the type of deposit account.

- "The government can get any amount of money it wants from the Federal Reserve"

The government/treasury does not obtain money from the Federal Reserve. The Fed cannot purchase debt directly from the Treasury. The Fed creates banking reserves by purchasing securities in the open market.

- "When paper money is withdrawn, the value is then decreased – Inflation occurs"

I am not quite sure what you are trying to say here. But if cash is withdrawn from the banking system (and not redeposited, but say hoarded under a mattress), this is deflationary and it reduces the amount of reserves in the system.

Brian

 

[gonegolfin]

I was editing my post to be more descriptive at the same time you were writing this. Should be a bit clearer now. Also, i used this as the basis for my 2 trillion figure...which ultimately is not really important. It is just a number I used to explain the system, it could have just as easily been 2 dollars....the process is what the OP was asking about and what I was explaining.

You need to whack the following paragraph as it is wrong ...

"So, by the fed introducing over $2,000,000,000,000.00 of new dollars into the system in the last two months, this means a total of $18 trillion dollars worth of new money is in the system. With the supply of money increased by $18 trillion, eventually prices will adjust for this by increasing. [technically its not the $18 trillion directly, or even the $2 trillion directly that does the inflating..........its the HARD money that it creates that leads to inflation. More detail on this at the end, but dont skip to it.......read through."

Brian

 

[Dequeant]

Ummm, whats wrong about it? I went on to explain how the 18 trillion leads to inflation. I suppose I worded it as if the 18 trillion IS the inflation.......but as I said, I explained that it isn't the 18 trillion thats the problem, its the interest rate.

 

[gonegolfin]

Ummm, whats wrong about it? I went on to explain how the 18 trillion leads to inflation. I suppose I worded it as if the 18 trillion IS the inflation.......but as I said, I explained that it isn't the 18 trillion thats the problem, its the interest rate.

Reread my original post carefully.

#1 If $2 million in reserves were created, the money supply is not affected. Only the monetary base.

#2 You state that $2 million in reserves being created "means a total of $18 trillion worth of new money is in the system." This is also incorrect as no new money is in the system (money supply). "The supply of money" is not "increased by "$18 trillion". The supply of money is unaffected by the creation of bank reserves.

Brian

 

[CzargwaR]

I've seen Brian and others on this board explain well the banking system and correct people on banking and the FED over and over again.

We need to create a good sticky post that answers many of the questions about federal reserve and inflation and etc, all of the ones that keep coming up. Something concise and to the point. Maybe a post like that already exists and people just don't know about it.

The best way to approach it is start a new threat to collect the questions and then answer them in a new one. It's late now, maybe I'll bring this up tomorrow.

 

[tggroo7]

You have several things wrong here ...

- "A bank gets $100 deposit, then it creates $90 to lend. This actually makes possible for the bank to lend up to $900 over a long cycle…even though it only has $100!"

The only way "for the bank to create/lend up to $900" over the leverage cycle is if all lent deposits are deposited back into the same bank. The banking system can create approximately $900 from $100 in reserves provided the fractional reserve lending system utilizes such leverage (via loans). In practice, the banking system does not utilize this amount of leverage and nowhere near $900 is created from these $100 in reserves. In fact, very little leverage is being used at present with (M1 - outstanding currency) being not much greater than aggregate banking reserves.

Yes, yes, this had been changed, just forgot to in the original post. The first reply in the thread said the same thing.

- "Fractional Reserve Banking – Bank monetary reserves must be no less than a fixed fraction of the money deposited"

The reserve ratio depends on both the capitalization of the bank as well as the type of deposit account.

I'm not sure what you want me to change with that.

- "The government can get any amount of money it wants from the Federal Reserve"

The government/treasury does not obtain money from the Federal Reserve. The Fed cannot purchase debt directly from the Treasury. The Fed creates banking reserves by purchasing securities in the open market.

This one I might need help with. Ok, so let's say the government wants $1 million. They go to the Fed, and the Fed purchases securities (is this basically a lot like getting a loan) worth $1M so it has the reserves. Is the Fed then essentially giving those purchased securities (or at least, the face value) to the government (except with the burden of interest still with the Fed)?

- "When paper money is withdrawn, the value is then decreased – Inflation occurs"

I am not quite sure what you are trying to say here. But if cash is withdrawn from the banking system (and not redeposited, but say hoarded under a mattress), this is deflationary and it reduces the amount of reserves in the system.

Yea, that doesn't sound very clear...i need to change it

Thanks for the help!

 

[tggroo7]

Reread my original post carefully.

#1 If $2 million in reserves were created, the money supply is not affected. Only the monetary base.

#2 You state that $2 million in reserves being created "means a total of $18 trillion worth of new money is in the system." This is also incorrect as no new money is in the system (money supply). "The supply of money" is not "increased by "$18 trillion". The supply of money is unaffected by the creation of bank reserves.

Brian

Might be a misunderstanding here. Maybe he - like me - thought/thinks the Fed created the $2M reserves out of nothing at all, instead of being created through purchasing of securities like you had told me.

Maybe he listened to the same G Edward Griffin lecture I did. He talks about a scenario of the government going to the Fed for money starting around 21:15 mark...

"They (Congress) walk into the Federal Reserve and the officer of the Federal Reserve opens up his desk drawer and pulls out a checkbook and he writes a check to the U.S. Treasury for $1 Billion...Who put that Billion dollars into the checking account for the Federal Reserve so they could lend it or give it to the government? Where did that money come from? And the amazing answer is: There is no money! There isn't even a checking account, just a checkbook! And that billion dollars springs into being precisely at the instant the officer signs the check."

The first time I hear this, I'm thinking he's telling us that the Fed can just give out whatever amount of money they're asked for. But now, I'm wondering if it goes back to what you said about the reserves being securities??

 

[gonegolfin]

I'm not sure what you want me to change with that.

This is simply additional information concerning reserves (easy to present) that provides more clarification.

This one I might need help with. Ok, so let's say the government wants $1 million. They go to the Fed, and the Fed purchases securities (is this basically a lot like getting a loan) worth $1M so it has the reserves.

If the government wants $1 million, it issues more debt via treasury auction. It does not go to the Fed as the Fed cannot purchase treasuries directly from the Treasury.

When the Fed wishes to inject more reserves into the system, it conducts open market operations to purchase securities.

Brian

 

[gonegolfin]

Might be a misunderstanding here. Maybe he - like me - thought/thinks the Fed created the $2M reserves out of nothing at all, instead of being created through purchasing of securities like you had told me.

No. This is the typical misunderstanding many people have concerning how money/reserves are created. This usually comes from reading too much of the wrong texts that leave out the details, focus on end results, and often make mistakes.

The Fed does create reserves out of nothing ... via the purchase of securities in the open market. But this does not increase the money supply. It increases the monetary base, from which money supply can be created/destroyed.

The original poster incorrectly assumed ...

#1 ... that the Fed recently created $2 trillion worth of reserves. This comes from people not understanding how to read the balance sheet of the Fed. This error is pervasive in the financial media.

#2 ... that the fractional reserve lending effect of this $2 trillion of reserves (which is really about $773 billion) resulted in an $18 trillion increase to the money supply. This is woefully incorrect. The money supply does not increase when a reserve injection is executed.

Maybe he listened to the same G Edward Griffin lecture I did. He talks about a scenario of the government going to the Fed for money starting around 21:15 mark...

The first time I hear this, I'm thinking he's telling us that the Fed can just give out whatever amount of money they're asked for. But now, I'm wondering if it goes back to what you said about the reserves being securities??

This is another topic. And the way Griffin explains it in his book is not correct. It is a dumbed down version of what happens. The Fed can create any amount of money (reserves) it chooses via monetization. But this money goes into the banking system as reserves (the Fed conducts securities purchases). It is not money that is handed over to the government.

Brian

 

[shocker315]

This is from I prior post I wrote months ago.....see bottom half for securities/bonds/T-bills and their realtionship to the FED.




A Bond or a Treasury Note is nothing more than a piece of paper the government prints on command. They put pretty borders, stamps, and numbers on it. But in reality... in invisible ink... it just says "IOU" . It is marketed to the public and is said to be a good investment because it is backed by the "full faith and credit of the US Government". Now most people don't know what, "the full faith and credit of the US Government" means. It means...The Government solemnly and faithfully promises to pay you back for your loan to them....PLUS INTEREST! Hooray! Fine print: (even if they have to tax YOU... for everything YOU have... to pay YOU back...they will do this!).

But all kidding aside, Bonds as I have described them above, do not increase the money supply (thus inflation) because the Government is simply borrowing from the public (existing money) to pay is expenditures. On the other hand, it does add to the problem of government debt since they now owe more than they borrowed when you add the interest.

----------------------------------------------------------------------------
However, the public doesn't buy enough Bonds to fund all the Government's expenses. The Government likes to spend..a lot. So figuratively speaking, the Government walks down to the Fed Reserve. From here the unsold Bonds and Treasury Notes are used for a different purpose....

These are packed into something with a very important sounding name called a, "Securities Asset". These "assets" are used as the foundation for the Federal Reserve to write the government a... Federal Reserve Check (a "liability" from the Feds perspective). The Government now has a check it can use to pay for its expenditures.

Where did the Fed get the money to write a check to the government? Does it have an account with lots of money sitting there ready to be given to the Government? The answer is... NO. The Fed doesn't have any money sitting in vault. It just writes the check to Government. That money springs into existence out of the void, and is created as a checkbook ledger to the government. This process is called, "Monetizing the Debt". However, the books are then said to be balanced because the government "assets" (the bonds) offset the Fed's "liability" (the check). Everything balances!! Its all good!! However, what they want you to forget is..........(see the first bold sentence of this post)

So on other words, the a basis of the Fed's check to the Government is simply bonds printed on command by the Government. This is a tricky and round about way of simply turning on the printing press and creating money on command (like a counterfeiter). It is done this way to wrap the whole process in economic mumbo jumbo and impressive words to give it an appearance of legitimacy to the public. If the government openly printed large quantities of money, it would be obvious and controversial to most of the public...this way is preferred. This is how our currency is debased and why the value of our dollar falls.

In this process the money supply is increased, the government gets their money for expenditures, and the result is bigger government and inflation (hidden tax) for the public.

 

[Rock Sexton]

What I'm curious about is this argument that the money shall sit in reserve with these banks never to make it out into circulation. You'll have to forgive me as every single day I'm attempting to wrap my mind around concepts, that which I never used to pay any attention to, but am now forcing myself too.

Isn't that ONLY if America is somehow allowed to continue running it's ponzi scheme on the rest of the world? Aren't foreign investors and owners of such instruments as credit default swaps, etc. going to want their money? Don't U.S. commercial banks now carry over $180 trillion in derivatives on their books? I get mixed information when reading about the banks, but it would appear that they don't appear in that great of standing. Then if the dollars collapses and it's no longer being held as the world's reserve currency won't it just get shipped right back to us which would explain the inflation many fear?

 

[Rock Sexton]

Meanwhile, commentators are scratching their heads over where the money is supposed to come from to pay for all this. Congress hasn't approved these multi-trillion dollar sums, and the Federal Reserve doesn't show them on its books. Some clues to this mystery came on November 25, when according to The New York Times:

"In the first of two new actions . . . , the Treasury and the Fed said they would create a $200 billion program to lend money against securities backed by car loans, student loans, credit card debt and even small-business loans. The Treasury would contribute $20 billion to the so-called Term Asset-Backed Securities Loan Facility and assume responsibility for any losses up to $20 billion. The Federal Reserve would lend the new entity as much as $180 billion. The new facility would then lend money at low rates to companies that post collateral based on securities backed by consumer debt or business loans."

It appears that the $20 billion in Treasury money will be serving as the "reserves" to create $200 billion in credit on the books of the Fed and its network of banks. Ten to one is the reserve requirement established by the Federal Reserve for private bank lending under the "fractional reserve" system. The New York Fed has now deleted its earlier discussion of this process from its website, but as it explained the money-creating process in 2004:

"Reserve requirements . . . are computed as percentages of deposits that banks must hold as vault cash or on deposit at a Federal Reserve Bank. . . . As of June 2004, the reserve requirement was 10% on transaction deposits [deposits immediately available to depositors]. . . . If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+ . . . =$1,000)."

http://www.opednews.com/articles/-Oops-We-Meant-7-TRILLIO-by-Ellen-Brown-081130-741.html

 

[tggroo7]

This is pissing me off just tryin to understand this. I'm losing my f'ing mind.

Gonegolfin and shocker, are you two saying the same thing? It doesn't seem like it. Gonegolfin, u are saying the Fed doesn't do anything to give Congress money it wants, right? While shocker, you are saying Congress just asks to borrow from the Fed and uses bonds or other securities as a symbol of the transaction and debt to the Fed?

I don't know that I've ever had as much trouble understanding something as I am with this shit.