Is Credit Card Debt an expansion of the Money Supply?

[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?) [h=3]Money in a Free Society[/h][h=3][/h]

 

[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?) [h=3]Money in a Free Society[/h][h=3][/h]

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?) [h=3]Money in a Free Society[/h][h=3][/h]

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)



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!

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.

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.

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.

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.

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..