Is the US national "debt" an illusion?

A fractional reserve banking system doesn't create money like a printing press, in that it is limited to inflating to ten times the amount of actual money in existence. But all by itself it is destructive enough, especially when it has government sanction, to affect interest rates and cause business cycles.
 
The Gold Standard said:
Yes, I guess I should have read the whole thread. So the whole argument is about semantics? I should have known by now.
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Depending on your view, you could say it's semantics but I think not. Claims have been made that banks immediately lend out $900 if someone deposits $100 with them, which is different from describing multiplier effect; former would be deemed outright fraud by anybody's standards while the latter is a debatable issue (even within the Austrian School of Thought).
 
A bank cannot immediately lend out $900 from a $100 deposit. With a ten percent reserve requirement, the bank must keep back ten percent of that as their reserve or ten dollars. The rest, which then totals $90 is allowed to be lent out. If that $90 is not spent but put into another bank account, the bank now has a new $90 deposit. On that, they must keep a ten percent reserve or $9 and $81 of that deposit can them be lent out. The multiplication assumes the money lent out keeps getting re-deposited at a bank. If the money is spent or a deposit taken out from the bank, the process stops.
 
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Paul Or Nothing II said:
Depending on your view, you could say it's semantics but I think not. Claims have been made that banks immediately lend out $900 if someone deposits $100 with them, which is different from describing multiplier effect; former would be deemed outright fraud by anybody's standards while the latter is a debatable issue (even within the Austrian School of Thought).
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I don't see how it is debatable either way. If I put $100 in a checking account, unless by contract I am told that money might not be available for me to spend immediately, then it is fraudulent if I either can't spend it all immediately, or if they print up some new money to cover me and debase the value of the $100 I deposited. How long they get away with the fraud is another issue, but the act in itself is fraudulent. If banks want to make loans, they shouldn't be lending demand deposits. Period.
 
Zippyjuan said:
The multiplication assumes the money lent out keeps getting re-deposited at a bank. If the money is spent or a deposit taken out from the bank, the process stops.
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Yes, but 99% of the time it is going to be deposited at a bank. If a guy borrows $90 and spends $50 at Walmart and $40 on gas, Walmart and the gas station are going to deposit that money at a bank.
 
The Gold Standard said:
A fractional reserve banking system doesn't create money like a printing press, in that it is limited to inflating to ten times the amount of actual money in existence. But all by itself it is destructive enough, especially when it has government sanction, to affect interest rates and cause business cycles.
Click to expand...

Ok, so let's assume a bankless world where people directly lend money to one another - person A has $100, he lends $90 of it to person B, who buys stuff from person C, who in turn lends $81 to person D & you know the rest. Would you say that any of those people are "creating money" or are engaging in some vile, despicable act?

But the same process would be deemed to be "creating money" (according to some) & considered to be very vile if I introduce banks into the above example. Does that really make sense?

The Gold Standard said:
I don't see how it is debatable either way. If I put $100 in a checking account, unless by contract I am told that money might not be available for me to spend immediately, then it is fraudulent if I either can't spend it all immediately, or if they print up some new money to cover me and debase the value of the $100 I deposited. How long they get away with the fraud is another issue, but the act in itself is fraudulent. If banks want to make loans, they shouldn't be lending demand deposits. Period.
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Now, I'm not a legal expert or anything so I can't be sure about contracts involving demand-deposits as they exist but if contracts say that banks are going to pay "on demand" without any caveats, & then they renege on their obligation then that's a breach of contract, & surely a problem but what if the contracts include a caveat that banks will try to redeem the deposits on demand but they can temporarily deny deposits under exceptional circumstances? If the contracts contain any such caveats then can the banks still be deemed to be in the wrong? If the depositor didn't like the terms of the contract then he shouldn't have entered into it & if did agree to the terms then it's like any other voluntary contract.

As for central-banking, it's largely indefensible for anybody who supports free markets but FRB can definitely be defended so long as parties involved are voluntary participants.
 
The Gold Standard said:
Yes, I guess I should have read the whole thread. So the whole argument is about semantics? I should have known by now.
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Yes, it is semantics and getting caught up in the semantics is where people fall into the trap and miss the bigger picture. I see no point in arguing over the process used to create an illusion of "money".

Acala said:
So you are saying that the treasury bonds I own give me a right to seize your assets (or even your person) in the event of a government default? Hahahahaha! I never knew I held so much power. Please try to live a clean life so you will be able to work my fields efficiently.
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It's cute that you think you could play by the same rules the bankers do.
 
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Paul Or Nothing II said:
Ok, so let's assume a bankless world where people directly lend money to one another - person A has $100, he lends $90 of it to person B, who buys stuff from person C, who in turn lends $81 to person D & you know the rest. Would you say that any of those people are "creating money" or are engaging in some vile, despicable act?

But the same process would be deemed to be "creating money" (according to some) & considered to be very vile if I introduce banks into the above example. Does that really make sense?
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If person A only has $100 and lends someone $90, he or she only has $10 left. If Person A then goes and spends $100, $90 was counterfeited somewhere.

Paul Or Nothing II said:
Now, I'm not a legal expert or anything so I can't be sure about contracts involving demand-deposits as they exist but if contracts say that banks are going to pay "on demand" without any caveats, & then they renege on their obligation then that's a breach of contract, & surely a problem but what if the contracts include a caveat that banks will try to redeem the deposits on demand but they can temporarily deny deposits under exceptional circumstances? If the contracts contain any such caveats then can the banks still be deemed to be in the wrong? If the depositor didn't like the terms of the contract then he shouldn't have entered into it & if did agree to the terms then it's like any other voluntary contract.

As for central-banking, it's largely indefensible for anybody who supports free markets but FRB can definitely be defended so long as parties involved are voluntary participants.
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If the contract says they are not guaranteed to have access to that money on demand, then it isn't fraud. Of course free people would probably choose to bank where they are guaranteed access to their money on demand. But some may not.

In a limited form like this fractional reserve banking might exist in a free market. Luckily, the effects of the business cycles it creates would be mitigated by competition in money, competition in banking, and the lack of government interference in liquidating the malinvestments. If the Bank of Paul or Nothing II was running this way with contracts allowing denial of deposited funds, as soon as prices are driven up by your behavior people would cease to patronize your bank out of fear that their money would be tied up and unavailable to them.
 
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devil21 said:
It's cute that you think you could play by the same rules the bankers do.
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It's cute that you think there is some legal process whereby you and your property have been pledged as collateral without your consent or signature. You may believe that government will eventually ignore the law and that the people in charge will simply take what they want by force, and you may be right. But that is not the same as a legal transaction by which debt has been secured with a pledge of property or servitude. The latter has not happened and cannot happen under any existing legal framework.
 
Paul Or Nothing II said:
Ok, so let's assume a bankless world where people directly lend money to one another - person A has $100, he lends $90 of it to person B, who buys stuff from person C, who in turn lends $81 to person D & you know the rest. Would you say that any of those people are "creating money" or are engaging in some vile, despicable act?
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At this point it is important to have a working defintion of "money" for purposes of understanding how certain activites impact the money supply.

Anything that acts to satisfy the demand for money IS part of the money supply. One part of the demand for money is for use in exchange for goods and services. But another part of the demand for money is storage of exchange value - savings. People keep significant amounts of money on hand as backup. Even though this money is not being used for exchange, it is meeting a demand for money. Money stored in a mattress is meeting a demand for money. If you suddenly made all that "idle" money disappear, people would replace it by taking money out of circulation, proving that saved money and petty cash on hand constitute part of the demand for money.

If I loan you $100 directly, that $100 is no longer meeting any of my needs for money until you pay it back. I can't use that money while it is on loan so if I need money for something, I will have to get it from another supply.

However, if I store my petty cash in a checking account or savings account with the expectation that I can access that money at any time as back up for what is in my wallet, thereby meeting part of my current demand for money, and then the bank lends out 90% of that money to someone else, the money on loan is also meeting the demand of that borrower for money. So suddenly where there was only $100 meeting the demand for money, there is now $190 meeting separate demands for money - my demand for savings and the borrower's demand for exchange value for some goods or services. Voila! The money supply just expanded. This only happens with fractional reserve lending and not with person-to-person lending.
 
Paul Or Nothing II said:
Let me say, over the years, I've read many of yours posts & I've to say they tend to be very well-informed & I can't recall particularly disagreeing with any of them but sorry to say, I've to disagree with the above.
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Hey, that's fine! Disagreement is often when we really get somewhere, really learn! Thanks very much for the compliment. :o

Now, I see that you've had a discussion about FRB with Zippyjuan, & in my opinion, he made the right arguments but you summarily dismissed his arguments.
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I think you are talking about this conversation:

http://www.ronpaulforums.com/showthread.php?453023-Free-Banking
http://www.ronpaulforums.com/showth...xplanation-of-Fractional-Reserve-Banking-Ever!

Is that right?

If so, could you let me know which points I dismissed or did not adequately address? Truly. I would love to know.

Now, after watching the relevant part of the video, you may agree with the fact that banks lend $90 out of $100 (not $900) OR you may come to the conclusion that Salerno is an idiot (& so am I)
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I've listened to many (many! (too many!)) lectures from Joe Salerno and so I probably have heard this one before, but in any case, I am very (very!) familiar with this way of explaining fractional reserve banking. And it's not that I think it's wrong. It's right. And in the end it gets to the same place as what I said:

There's X number of dollars sitting in vaults or whatever, and
There's X-times-ten number of dollars in checking account balances, i.e. X-times-ten phantom dollars circulating about in the economy.

It's the same thing. It's the same result. Pedagogically, for teaching new people my explanation is better, because it's much simpler than the traditional 90, 81, 72, 65,... series explanation. Salerno does go into 90, 81, 72, 65,... in the video above, right? My explanation is also superior for being closer to actually how it really works in reality. If a bank has a million dollars sitting in reserve, it does not cash out $900,000 of it to hand to people as dollar bills for loans. No, if it has a million dollars sitting in reserve, it has -- in reality -- ten million dollars of checking account balances on its ledger. That's how it works! It really, really is. Go ask your local bank president.

My explanation's shortcoming is that it's sometimes hard for people who have already learned a little about fractional reserve banking to accept it, because it's presenting things differently. But it really is true, and no, you're not an idiot, and neither is Professor Salerno and in fact I'm very sure that if I were to explain to him how I explain fractional reserve banking as I did in those other two threads, he would agree completely with it and pronounce it entirely sound.

Regardless, getting back to what I was really addressing with what you posted, even if the bank didn't create ten times the amount of checking account balances as the amount they have in reserves, even if they only created one more dollar of checking account balances than what they have in reserves, they have created money.

And in your counter-example of how "well, maybe commerce creates money, too!", no matter how many times the same hundred dollars is loaned, used in a purchase, and otherwise changes hands, it never has any babies. It never gives birth. There's no spontaneous generation of a second hundred dollar bill. Both in the end and all along the way, there is never more than $100 circulating in the economy. Never are two people both using the same $100 at once. So no: when you loan money, you don't create any money. When you loan the same money to two different people, that's when you create money.
 
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Acala said:
It's cute that you think there is some legal process whereby you and your property have been pledged as collateral without your consent or signature. You may believe that government will eventually ignore the law and that the people in charge will simply take what they want by force, and you may be right. But that is not the same as a legal transaction by which debt has been secured with a pledge of property or servitude. The latter has not happened and cannot happen under any existing legal framework.
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I already advised you via rep message what to study up on. If you chose to ignore that basic starting point, well, you can lead a horse to water but....

You sign things all the time. People have signed things on your behalf. Whether you, or they, knew what was being signed is of no consequence to the outcome.
 
Zippyjuan said:
A bank cannot immediately lend out $900 from a $100 deposit. With a ten percent reserve requirement,
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Oh god. How many angels can dance on the head of a pin? Reserve requirements. Still throwing this bull around. Do tell what is considered a banks "reserve"? Who calculates what they have, and what it is worth? Who audits them?
 
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