Is Credit Card Debt an expansion of the Money Supply?

[Black Flag]

What you propose is impossible. Let's first address the graph, you used: "Excess Reserves of Depository Institutions". This is basically how much reserves banks have above their reserve ratio. So basically this is telling us that the ratio between checking accounts and the dollars/MB they correspond with is shrinking (my point entirely).

It is a ratio, but such a ratio is meaningless in determining inflation/deflation.

This ratio only has meaning as a measure of risk to the bank's capital requirements, solvency and continuity.

If I am *allowed* to loan $9 to 1$ in reserve, my risk of such loans defaulting must be less than 1 out 9, or my bank capital is exhausted.

If I am *allowed* to loan $9 to 1$ in reserve, and I only loan 2$ to 1$, my risk of my own capital is dramatically reduced - I can sustain less the 1 out 2 loans into default.

Measuring today's economic climate - the bank's piling up excess reserves is doing exactly that - they believe even more, substantial, defaults are coming down the time-pipe and are piling up reserves like crazy so they survive the fall-out.

The consequence of that, they are not selling the money as loans - no selling, no supply change, no inflation.

 

[Black Flag]

In that context, using your logic, it would seem that the following is some kind of criteria for what is NOT money:

1- being laughed at - OR
2- suffering a huge discount to a commodity price
3- not universally accepted

No, what is "not" money is a commodity in a trade that needs to be discounted or converted before the trade happens.

If you go to your grocer with a gold coin to pay for your veggies .... current trade of 1oz. gold being, say, $1600 for easy number - and you say to him "here, is $1600 for this box of veggies", he will wrinkle up his eyebrow and probably discount your coin to ...maybe...$800. You will be "paying" twice as much with the coin vs. had you taken the coin to a dealer, got $1600 FRBN, and given the money to the grocer.

That is why gold is not money. Very few accepts it directly (except such dealers in business to do so) and the trade in coin is invisibly thin.

I do not have your problem with FRBN.

FRBN is money.
Gold is not money.

(PS: we are taking about "this" economy. Other economies can use different money, such as Rai stones... but that does not effect this economy and this money)

Further point, Steven.

This discount happens with other currencies .... which is the Japanese yen is not money in the US, though money in Japan.

If you go to the grocer with your yen, he will -like with gold- wrinkle up his nose and either send you away to a dealer to convert it, or massively discount the yen to his goods before he takes your yen.

Further, this is why FRBN has won your "currency" competition that you believe does not exist.

I can go to Venezuela today with a pocket of FRBN and buy more goods with the $ directly from a local producer than I would be able to if I converted the FRBN to Bolivars, then used the Bolivars to buy the goods -- the locals discount their own currency!

FRBN is the world's money in the great global competition of money - so it is your answer to your question regarding competition.

 

[rpwi]

No.

The mechanics:
- Deposit withdrawn
- Spent for product
- Producer Deposits

The amount of money in the system can never exceed the amount of money.

What is your definition of money then? I believe you feel that because in many transactions in which checks are written...only really MB is transferred between banks...therefore only MB and not M1 is money. Well lets try a mental experiment...

Say all the banks in the US are combined to create one super bank. So when I write a check to my grocer, the bank's balance sheet doesn't really change. We both deposit at the same institution. In such a scenario...surely there would be no practical brake to curb the bank from creating many more deposits than they have in reserves, right? Also in such a scenario...the bank would create inflation right? If the bank has 1 trillion in dollars and creates 10 trillion in deposits...why wouldn't there be inflation?

If so... Then say this super bank was broken up into two banks. One west of the Mississippi and one east. By and large most transactions would circulate internally. But on occasion MB would have to be transferred to the other bank to meet checking account transactions. By and large though...outgoing fund transfers would be roughly matched statically by incoming fund transfers. Surely inflation would still exist under this scenario as well, right? There would be little conceptual difference between a mega bank and two mega banks.

What if there were three banks...wouldn't we still have inflation as the banks created more deposits than they had in dollars? What about 30 banks? 300 banks? 3000 banks? Where do you draw the line?

What if we had a complicated system in which the banks largely specialized along either regional grounds or in the types of deposits and loans they handled. Banks with insufficient reserves could borrow them from other specialty banks and if the interest rate got too high (signaling a shortage of reserves) the friendly central bank would fabricate lots of dollars and keep inserting them into the banking system until the 'shortages' were alleviated. A national insurance system for deposits would be setup that would merge failed banks into bigger banks so customers would never have to worry about losing their deposits. Surely that system would allow bank money to create inflation, right?

If "everyone" withdrew, the system would collapse, because there is not enough money.

Therefore, the system can never have, right now, more money then there is.

What if our checking deposits were for dodo eggs (now extinct obviously). We could have millions in dodo egg deposits and happily be trading with each other...oblivious to the fact that there aren't the dodo eggs to back up our deposits. Dodo egg deposits are still money...even though there aren't enough reserves...because we accept it as money. We accept bank deposits as money...so it too is money.

So the amount of money in the system can never be more then M0 at any one time, given the system has not collapsed.

The system has not collapsed because there hasn't been a massive run on the banking system and because the Fed is CONSTANTLY bailing the banking system out through open market operations, the discount window and more. No fed = mass bank crash (good thing as banks are parasites).

 

[rpwi]

I did so, sir, which is why you look at the excess reserves graph.

If I print up a bunch of money, but you merely stash them under your pillow, does the creation of money create inflation. No.

Where has money been stashed under a pillow? If I deposit 100 dollar bills at a bank...and they keep 100% on reserve for my checking account. Does that mean they are stashing this cash under a pillow? No. If they keep 90% on reserve and loan 10% out because they know statistically, I'll probably not withdraw my money...is that 'stashing money'? No.

So you think apples and the law of supply and demand "does this", but when it comes to money, the law of supply and demand is completely different, you make up bizarre theories of thin-air money, debt-money, and massive other cause/consequence stories that never actually reflect anything of reality.

Supply and demand doesn't apply to bank money for two reasons. One is that the Fed is constantly bailing out by constantly creating more MB. Look at history...MB is constantly on the rise. This is because the banking system would choke on it's internal contradictions without the Fed constantly bailing it out. The other reason, bank money is exempt from the laws of supply and demand is because it operates on belief which trumps supply and demand. It's like believing snake oil will cure your ills. Just because the body demands healthy cures...doesn't mean unhealthy cures will be erroneously applied because belief trumps supply and demand. We think bank money is money (even though we shouldn't) so it is money.

If I said to you that the a guy ordering a bushel of apples and pays in advance, and gets a receipt for delivery in 30 days, and then declared that receipt was the same as physical apples in hand, you'd look at me cross-eyed. *Ed: If I further said the receipt for apples has increased the supply of apples, and thus caused the price of apples to fall...ie: inflation of apples... you'd laugh at me!... and demand "what bizarre law of supply and demand are you applying, BF???"

Yet you want me to believe the same story after you substitute "money" for "apple".

Let's continue with the analogy. Nobody is really concerned about delayed delivery by 30 days. The issue becomes...what happens when the apple dealer promises more apples than he has? Now apples are consumed...so these mistake would be readily exposed. But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver. If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should! Bank deposits get away with this because money is a store of value. We don't eat our money. Therefore bank money is money and it does create inflation.

So, inflation and monetary expansion all operates under the laws of Supply and Demand

So if I counterfeit dollars bills...that's subject to the laws of supply and demand? I create inflation because naive people think my dollar bills are the same as real dollar bills. Counterfeiting is conceptually the same as fractional banking when it comes to inflation.

If I produces a billion zillion diamonds, because diamonds are not rare, but I stuff the diamonds in a huge warehouse, and only take a handful out a month, what price do you believe the diamonds will demand? The a price based on the number in the warehouse, or the number brought out for sale?

That's not how a bank operates though. They don't withhold from the market. My cash deposit into the bank are the market. When the banks create loans onto my deposits they are 'expanding' the market...but through a dishonest and inflationary way.

 

[Black Flag]

Where has money been stashed under a pillow? If I deposit 100 dollar bills at a bank...and they keep 100% on reserve for my checking account. Does that mean they are stashing this cash under a pillow? No.

Yes, because they forgo lending the money out.

If you produced 100 apples and gave it to a grocer to sell, but he merely places it his warehouse and does not put them on the shelf, what happens to the price of apples?

Answer: nothing. Supply has not changed to the consumer.

Same here, but using money instead of apples.

If they keep 90% on reserve and loan 10% out because they know statistically, I'll probably not withdraw my money...is that 'stashing money'? No.

That is NOT the purpose of the legal reserve requirement - a bunch of cash stored to pay back withdrawing depositors.

The legal reserve requirement sits as a measure of the amount of loans a bank can issue. Important: it has NOTHING to do with depositor and being a fund to satisfy a withdrawal

 

[Black Flag]

Supply and demand doesn't apply to bank money for two reasons.

**Blink**

And that is why your theory is crackpottery.

You deny fundamental laws of economics and make up new ones out of thin air ... just like the "debt" money.

Economic alchemy and witchcraft is your economic theory.

 

[Black Flag]

One is that the Fed is constantly bailing out by constantly creating more MB.

And this does not change the money supply?

Well, you said it does.

Then you said the money doesn't obey supply/demand law.

But now you show it does.

Egads!

Return to some first principle, sir .... you are fragmenting like a spent grenade.

 

[Black Flag]

The other reason, bank money is exempt from the laws of supply and demand is because it operates on belief which trumps supply and demand.

So, let me see here.

Because you "believe" you can trump the law of gravity, the law of gravity no longer applies to you

Because the banks (and you) believe they can trump the law of supply and demand, the law of supply and demand no longer applies to them.

No sir.

No matter how you believe you can fly after you jump off the cliff, your falling is not you flying and is not you "trumping" the law of gravity. The sudden stop at the end will enlighten you on such a folly of belief.

No matter how you believe bankers and their money trumps supply and demand, the consequences created by the law of supply and demand will impact them - and you - and hopefully, enlighten you and them on such a folly of belief.

 

[Black Flag]

Let's continue with the analogy. Nobody is really concerned about delayed delivery by 30 days. The issue becomes...what happens when the apple dealer promises more apples than he has? Now apples are consumed...so these mistake would be readily exposed. But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver. If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should! Bank deposits get away with this because money is a store of value. We don't eat our money. Therefore bank money is money and it does create inflation.

You fail to apply your analogy to completion, jump from it half-way, claim some sort of enlightenment, and then misapply the lesson.

Do you really believe grocers buy apples and that they will "forget" to take delivery? Well, if they do, they won't be in business for very long!
At some point in time, delivery is demanded.

If it is not filled, huge problems occur for the supplier and the grocer.

Suddenly the supplier goes bankrupt, and what remains of his assets are dispersed to his creditors, at a loss to all or most of his creditors.

The grocer, now under constraint of apples, raises the price of apples.

Well, same with money.

The supplier defaults (the bank) and its assets are used to pay back its creditors (depositors), all probably at a loss.
Money is now under constraint - and its price rises....it becomes more valuable

The price of money goes up - means it takes less money to buy goods - which, as all goods are priced in money, the price goes down

Exactly 1932 scenario.

As banks renege, depositors lose, money becomes more valuable .... deflation...the fall of prices happens.

Again, stand on the universal foundation of economic law - here, the law of supply and demand and clarity of cause and effect will be yours.

 

[rpwi]

Yes, because they forgo lending the money out.

I'm not sure what you're arguing then. Initially you have stated that a bank creating deposits and lending them out did not create inflation. Now it does?

That is NOT the purpose of the legal reserve requirement - a bunch of cash stored to pay back withdrawing depositors.

The legal reserve requirement sits as a measure of the amount of loans a bank can issue. Important: it has NOTHING to do with depositor and being a fund to satisfy a withdrawal

Well reserve requirements do serve a two-fold purpose. One is to curb lending/inflation...the other is to help ensure solvency and the ability of the bank to meet withdrawal demands.

 

[Black Flag]

Nobody is really concerned about delayed delivery by 30 days. The issue becomes...what happens when the apple dealer promises more apples than he has? Now apples are consumed...so these mistake would be readily exposed. But if a large enough percentage of these apple receipts were not redeemed...the apple dealer could issue more order than he could deliver. If the appler dealer thinks...hmmm...30% of my apple customers who pay for my apples don't claim them...then why don't I issue 30% more contracts than I should! Bank deposits get away with this because money is a store of value. We don't eat our money. Therefore bank money is money and it does create inflation.

Continuing....

...so what if the supplier, giving out receipts for apples for a future delivery - far more than he can deliver at once.

As long as the supply of apples is forth coming to him, he can "manage" his customers saying "can we roll-over your demand for another 30-days?"...stuff like that.

Some one is getting delivery, others delayed -- but as long as the supply keeps up with the delivery promises, he can -indeed- over promise while managing the supply and customers ...as long as they all play along.

So, they are all playing along....

What does the promises of delivery do to the supply of apples? Well...nothing.

Only apples on the shelves, being sold, is applied to the law of supply and demand. What is bought and sold today ... or the near future matters, right?

If you demand apples today, but there are few, and *you* is the market place ... then the demand goes up vs. real supply (not fictitious supply), so does the price.

But if the supply on the shelves meets demand - no matter how much is promised in the future for delivery, price is not affected.

 

[wgadget]

I read recently that because people are so scared of the future, they are not spending their cash..it's just sitting there...low velocity. Which has a deflationary effect.

BUT--When the world determines that the dollar is becoming even MORE WORTHLESS WHEN THEY START QE3, dollars will flood back to the US from foreigners who will want to GET something for their dollars, and the people here in the US will be spending them to buy things before the prices go up due to inflation.

 

[Black Flag]

I'm not sure what you're arguing then. Initially you have stated that a bank creating deposits and lending them out did not create inflation. Now it does?

I said banks do NOT create money - you infer a deposit receipt is money.

 

[rpwi]

**Blink**

And that is why your theory is crackpottery.

You deny fundamental laws of economics and make up new ones out of thin air ... just like the "debt" money.

Economic alchemy and witchcraft is your economic theory.

I don't deny that higher prices encourage competition generally which can in turn drive down prices. What I do say is that people frequently ignore supply and demand. They buy incorrect products. They pay too much for their products when cheaper alternatives are available. Supply and demand works when people want to use it. This is quite evident in the banking sector. I mean what is the supply and demand when it comes to checking accounts? Generally speaking Bank A offers free checking...then again so does Bank B. Do I or the public compare balance sheets of the banks to see if they would have solvency issues to meet my withdrawals? No. My deposit is an investment in the bank (a lousy one in which I get 0% interest) yet I don't care because the government backs it up. The banking system we have now is NOT a natural market but one propped up by government support. If for example the government guaranteed to pay all auto-repair costs...would we have a supply and demand for quality autos? No. Same deal with banks.

 

[rpwi]

And this does not change the money supply?

When the Fed creates more MB for the banking system...this results in an increase in the supply of MB as well as an increase in the supply of M1 and higher aggregates (although there can be a delay).

Then you said the money doesn't obey supply/demand law.

Aspects do...but the core premise of bank money doesn't obey the laws of supply and demand for the same reason supply and demand doesn't work to prevent counterfeiting. If I counterfeit dollar bills, I benefit because somebody else assumes they are dollars. I'm taking advantage of their ignorance. Counterfeiting = fractional banking.

 

[Black Flag]

I read recently that because people are so scared of the future, they are not spending their cash..it's just sitting there...low velocity. Which has a deflationary effect.

No.
Where is the cash?
Not under a pillow, but in a bank account.

When you buy a good it goes out of your account and then back into another account.
Both accounts are in the same banking system.
Deposits in the banking system has not changed
Your X out is an X in somewhere.

Whether it moves or not does not change X.

There is no deflation.

 

[rpwi]

You fail to apply your analogy to completion, jump from it half-way, claim some sort of enlightenment, and then misapply the lesson.

Do you really believe grocers buy apples and that they will "forget" to take delivery? Well, if they do, they won't be in business for very long!

Quite true in the apple industry. Not so true in the banking industry. We has a nation have truly forgotten to take deliver of our dollars from our bank deposits...and banks have sneakily created more deposits than they should have. Bank deposits are money (store of value) so they can get away with this, while an apple industry can't.

At some point in time, delivery is demanded.

If it is not filled, huge problems occur for the supplier and the grocer.

Suddenly the supplier goes bankrupt, and what remains of his assets are dispersed to his creditors, at a loss to all or most of his creditors.

The grocer, now under constraint of apples, raises the price of apples.

Well, same with money.

Not the same with money. People don't cash out their checking accounts. Why? Because they are content (erroneously) to accept checks as payment instead of dollars.

 

[Steven Douglas]

No, what is "not" money is a commodity in a trade that needs to be discounted or converted before the trade happens.

By whose reckoning? That criterion is personal to you, and not based on any universal monetary principle or law of economics (you never cited a source or argued why that criterion holds as true). Furthermore, by your own criteria can FRBN's even be considered money? Ubiquitous sales taxes discount those automatically before a trade happens, and income tax withholding discounts them in many cases before a trade in labor happens.

Everything you are debating about this subject appears to be a semantics game - all of which hinges on your personal criteria, which is also why I believe you are having such a tough time selling your ideas to anyone. Both you and Roy L. share that in common, as you argue from your own personal definitions and governing assumptions which are not agreed upon or established.

I gave you a personal example, here in the US, wherein I use US minted silver coin as money. That caused you to make an ad hoc repair to your theory of what is not money: "trade in coin is invisibly thin" - followed by "we are taking about "this" economy. Other economies can use different money..."

You didn't have a problem throwing up ancient Fijians rejecting gold when we were supposedly talking about "this economy". And yet within "this" economy there is another economy, which uses "different money" - namely, US minted silver coins. My little micro-economy is an economy within the wider economy which does use silver coin as money (even according to your narrow personal view). And since you grant that "other economies can use different money", and my micro-economy is one that does just that, it also falsifies your theory that gold (and silver) aren't money. Today.

Understand two things before you respond:

1 - You are NOT talking to someone with a counter-semantics problem. I am not one who insists that money can only take on a certain form in order to be called such, or in order to be "valid". There is no purist definition of money for me, because money is a term that has been bastardized through common usage. I accept that and use its broader meaning (i.e., money=currency=whatever can be used as exchange in trade). So when you say that M0 is money I agree. There is no dispute because that fits the bill just fine.

2 - I recognize "the economy" and "economy-wide" as meaningful terms only when they are qualified. That's another bastardized term, given that all micro-economies are subsets of the wider economy.

 

[matt0611]

Steven, I really enjoy your posts on money (in this thread and in others) and find that your logic is very solid and consistent.

What is your response to Black Flags assertion that fractional reserve banking is not inflationary and that demand deposits (M1) are not in themselves "money"? (putting the gold vs fiat debate to the side for the moment)

Would be curious to get your take on that...

 

[Zippyjuan]

Inflation (meaning a rise in prices for goods and services) can occur under any sort of mone system. All that is required is that demand is greater than supply of a good. In this country we saw inflation under a gold standard and under fiat.

Money has its own supply and demand and that too can effect prices. If there is a small supply of money relative to goods then it will take a small amount of money to exchange for those goods. If the supply of money is increased, then there is more money available for the same amount of goods and the sellers or producers can get more money in exchange for what they are producing.

But increasing the supply of money will not necessarily mean higher prices- if the economy is growing and has a higher demand for money and the amount of money is not increasing faster than the amount of goods then there may not be price increases.

When the economic crisis hit in 2008, the demand for money dropped significantly because economic activity dropped significantly. The Federal Reserve tried to get things going again so they tried to increase the supply of money by purchasing securities- US Treasury notes and Mortgage Backed Securities. This failed to increase the economy. Why? No demand for that extra money. So the banks (who sold the securities to the Fed) just kept that money. Money has to be circulating in order to have any effect on prices. Money in the bank or under your pillow is doing nothing. Nearly all of that money ended up either with the banks themselves or they put it in storage at the Federal Rerseve in the form of excess reserves.

Why didn't this extra money cause prices to go up? Again, because there was no demand for it- the money didn't end up circulating. End of story? No. The money is still there and as the economy picks up so will the demand for money. If that money at the banks and the Fed starts to flow faster, then it will have more of an impact on prices and the price inflation will still happen.