Is Credit Card Debt an expansion of the Money Supply?

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 There is also a limit to how much can be withdrawn at one time, IIRC-to (theoretically) prevent bank runs.

 

[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.

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.

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

 

[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)

 

[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.

 

[UK4Paul]

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

And no t'Internet! :O

 

[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.

 

[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

 

[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



Ever heard of "money-multiplier"?



+1

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



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)

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.

 

[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.

 

[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!

 

[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?".

 

[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?

 

[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.

 

[Jordan]

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

 

[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.

 

[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".

Oil is not money.

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.

 

[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.



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.

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.