Ron Paul on Glen Beck Discussion

[Onyx]

Good interview. There was one thing that bugged me abit though. RP said that big banks are also to blame for inflation because of the fractional reserve system. Personally I think he is wrong about that one, because banks create credit, not money. Money (base money) is created by the fed. Therefore the responsibility for inflation falls only on the fed, not the banks. I think RP got his too broad defintion of money from Rothbards.

(Inflation is not created by credit. As in it does not matter how much credit you have in the bank, you cant buy anything with that. You have to change your credit to money to buy anything with it, and if the banks does not have the money to exchange for your credit they have to loan some cheap money from the fed. This is where the inflation happens. This is where and when money is created. The fed could just say "No" or it could make these base money loans to the banks more expensive to stop inflation. Therfore inflation is not the banks fault, its the fed that creates the base money. Fed is in charge of the money supply not the banks. If you are interested in the details I would recommend reading the book "Gold: the once and future money")

Other than that I think it was a great interview

Cheers

Inflation is caused by the "fiat monetary system"
Simply put each time money is created from nothing which banks do every time each and every one of you decides to borrow from the bank. This process dilutes the very wealth of each and every dollar that is in the economy. It's akin to pouring water into the soup, it ultimately dilutes and its flavour dissipates. This dissipation is referred to as inflation. The central banking cartel (FED) has an enormous amount to answer for our deterioration in savings and wealth. Inflation usurps us of our hard earned income and ultimate wealth. Explain to me the fairness in receiving a 2% return on savings where the dollar is weakening at 12% per year in actual purchasing power over the past 3 years. You are 10% per year worse off per year. Where is the justice and credence in that type of banking behaviour? There is none. Simply put it is government endorsed theft. The banks supposedly lend you money. That’s not true they never do. They loan you “nothing money” or “fiat money” which is magically created upon your loan approval and have the veracity to charge you interest on nothing.

This is the monster we are all contending with each and every day, its name is Fiat and this medusa money serpent needs to be slain. The system has no accountability to the public and serves only one purpose which is to further cement the FED and it’s central banking cartel as the richest and most dominant owner of the planet, far more than any government could ever wish for. The FED has it’s hand firmly on the lever of the “fiat” money making machine and has the ability to push and pull whichever way it feels to protect itself and it’s unimaginable wealth.

 

[satchelmcqueen]

Yep, its fractional reserve banking. If you borrow or make a deposit. if you borrow $1000.00, the bank is then allowed by law to "type in " in their computers new loans or withdrawals, of up to $9000.00 based off of the original 1K. So on paper there is now 9K in the system instead of the real 1K. It is lawful to do this on a 1/9 ratio. So technically, 90% of the money thats in the system doesnt really even exist. Its almost all false credit or debt. Scary huh??

Watch Money masters on google video.

 

[DriftWood]

I understand what your saying, but I think that higher demands will also raise prices. In the age of digital computer entry and debit/credit cards, you don't need to physically create every FRN for each new credit card issued.

When people have that extra credit, or the extra loans( fractional reserve banking is the main point remember) they spend that money on goods they demand which causes the rise in prices. The Fed is at fault, but the banks can not be forgiven for their use of fractional reserve banking that leads to even more inflation.

To put it simply, a number of things combine to cause the inflation. At least thats what I think....

Thanks for your reply and the others. I'll try and explain my point in more detail.

I have seen the money masters "documentary" and it also scared me the first time i saw it. Now I think most of that fear mongering it contained came from a missunderstandings between credit and money.

Anyone of us can create more credit by going to the bank and taking a loan. (Credit is a promise on your future work, time and energy denominated in money). The banks create credit, and the central bank creates money (notes and coins). The central bank does not create credit (it does not make loans) and can therfore not control credit creation. Just as the banks do not create money and can therefore not control money creation or inflation. The point is that you can not buy anything with credit. You have to go to the bank and get some money (coins and bills) out first. If there is to much credit and not enough money in the bank, then the banks will have to raise the interest rates to make loans more difficult to get, and to get more deposits. This is the self regulation that the banks have to do to keep in business. They will want to create alot of credit, but if they create to much they will run out of money when people demand their money back. If the banks have to much credit, people will increasingly demand their deposited money back. The bank will run out of money and will have to ask other banks for money. If the other banks dont have any money eighter. Then the bank has to ask the federal reserve as the lender of the last resort for more to avoid going bust. The fed could and should let badly managed banks like this to go bust, by not lending them any money, or by lending them money at a very high price / interest rate. If the bank manages to loan some money they will have done so at a great loss and they will want to avoid doing this again. They will have to cut down on their credit and increase their money reserves (more deposits, less loans, higher interest). The force of free market will make sure the banks self regulate like this. Only when the central bank makes makes the money creation to the banks to cheap will inflation happen. At the precent it is way to chep, its at 2.25%.This means the banks have access to alot of cheap money and they will foolishly create more credit than they could handle on their own. This is the heart of infation. The central bank has complete control of the money supply, but it chooses to inflate anyway.

Even when you buy something with your credit card, the credit has to be converted into money behing the scenes. Actual money will in the end be shuffled from your bank to the sellers bank. The ratio between money and credit will be as big as the banks can get away with without causing a run on the bank. This might sound really bad but it is a good thing. I'll paste this from one of my other post:

There is no incompatibility between the gold standard and fractional reserve banking. I know fractional reserve banking has a bad rep but its very good for the economy. I think part of this comes from a confusion that money and credit is the same thing. Its not. When "you put money in the bank" you are buying credit. Credit gets interest, money does not. Credit is an investment with a small risk involved (that a run on the bank happens). Money is the coins and notes in your wallet, it gets no interest. You can store it in a safe if you don't like the risk involved with credit. Credit is a good thing because it means that most available money keeps in circulation. At any one time the money is used where it is most needed. If you got temporary surplus of money, and someone has a temporary short on money. Why not loan it to him. Its better for both of you. You make profit on interest and he can, say, keep his business running so that he can continue and make a profit.

Imagine what would happen to the economy if everyone in the country kept their gold or paper money under their mattress or in bank vaults. Fractional reserve banking is important for an effective economy.

Hard as it is to believe. Inflation is not an increase in the supply of credit. Inflation is the increase of the supply money (coins and notes).

To sum up: The problem is creation of money, not the creation of loans/credit. Fractional reserve banking does not create inflation, because that is a system for credit creation not money. I hope all this makes sense.

Cheers

 

[Jason726]

I understand the difference there, but to inflate means to expand. You don't need to physically create the dollars to cause inflation. Here is a quote from Peter Schiff's Crash Proof,

PG. 69 " So inflation is monetary expansion or, in other words, more money chasing a constant or diminishing supply of goods and services. it doesn't have to be just physical dollars added to the supply of money. It can just as well be expanded CREDIT. Anything that artificially increases aggregate demand for goods and services is inflation. Printing money is a figurative term referring to the different ways the FED adds liquidity to the economy............ The demand is artificial because it does not result from increased productivity, but from inflation."

 

[DriftWood]

I understand the difference there, but to inflate means to expand. You don't need to physically create the dollars to cause inflation. Here is a quote from Peter Schiff's Crash Proof,

PG. 69 " So inflation is monetary expansion or, in other words, more money chasing a constant or diminishing supply of goods and services. it doesn't have to be just physical dollars added to the supply of money. It can just as well be expanded CREDIT. Anything that artificially increases aggregate demand for goods and services is inflation. Printing money is a figurative term referring to the different ways the FED adds liquidity to the economy............ The demand is artificial because it does not result from increased productivity, but from inflation."

Well i would say that that increasing in credit by the banks, would also cause an increase in the demand on (physical/base) money (because you have to convert credit to base money before you can buy anything), banks would increasingly demand that the Fed create more money (so that the banks could loan it, and use it to back all that credit). If the Fed refused to create more money or made it very expensive then the cost of credit creation at the bank would also rise. Banks could not no longer willy-nilly create large amounts of credit by give out cheap loans on low interest rates, because they would simply not be the base money to back all that credit. You see. The Fed still is in control of base money and therfore inflation. If fed made base money creation expensive then the private banks would have to follow and make credit creation more expensive. If the banks kept cranking out credit (or other types of even less "liquid money") they would go bust because they would not have the neccessary reserves of real base money.

Cheers

 

[micahnelson]

Well i would say that that increasing in credit by the banks, would also cause an increase in the demand on (physical/base) money (because you have to convert credit to base money before you can buy anything), banks would increasingly demand that the Fed create more money (so that the banks could loan it, and use it to back all that credit). If the Fed refused to create more money or made it very expensive then the cost of credit creation at the bank would also rise. Banks could not no longer willy-nilly create large amounts of credit by give out cheap loans on low interest rates, because they would simply not be the base money to back all that credit. You see. The Fed still is in control of base money and therfore inflation. If fed made base money creation expensive then the private banks would have to follow and make credit creation more expensive. If the banks kept cranking out credit (or other types of even less "liquid money") they would go bust because they would not have the neccessary reserves of real base money.

Cheers

Im not sure I follow you. If i take out a loan and buy a house on credit, The seller gets money and is used to buy things in the market, so that inflates the money supply. The discussion of base money is moot with checks and electronic banking.

 

[DriftWood]

Im not sure I follow you. If i take out a loan and buy a house on credit, The seller gets money and is used to buy things in the market, so that inflates the money supply. The discussion of base money is moot with checks and electronic banking.

Thats the thing. You cant buy anything with credit. Its a bit of an illusion. Your credit has to be exchanged for base money. Even with credit cards and electronic banking your credit is exchanged for money behind the scenes. The seller can go to the bank and demand all that he get all that base money out in 100 dollar bills. Credit always has to be redeemable for base money on request.

I reread my previous comment and notices its a bit unclear.. here is an updated version of my previous comment:

I have not read that book. However i would say that i do not agree with its definition of money and therefore inflation. As i see it only (physical) base money is money and credit is just a contract redeemable in money. An increase in the credit supply is no more inflationary than say an increase in the supply of corn or any other product. You can argue that corn is money just as well as credit is money. Corn is also redeemable in money (you can sell corn for money). You can buy things with corn just as well as you can buy things with credit. However before you buy anything with corn or credit you have to exchange it for base money.

I know its a bit counterintuitive to argue that credit is not inflationary.. but look at it this way:

The increasing in credit by the banks, would also cause an increase in the demand on base money (because you have to convert credit to base money before you can buy anything), banks would increasingly demand that the Fed create more money (so that the banks could loan it, and use it to back all that credit). If the Fed refused to create more money or made it very expensive then the cost of credit creation at the bank would also rise. Banks could not no longer willy-nilly create large amounts of credit by giving out cheap loans on low interest rates, because they would simply not be the base money to back all that credit. You see. The Fed still is in control of base money and therefore all the "money" that is built on top of the base money. Because all that less "liquid money" on top has to be exchanged for base money for anyone to buy anything with it, Fed still has control of the whole money pyramid, and therefore has ultimate control of the whole money supply pyramid and it could stop inflation completely if it wanted to. If the Fed made base money creation expensive then the private banks would have to follow and make credit creation more expensive. If the banks kept cranking out credit (or other types of less "liquid money") they would go bust because they would not have the necessary reserves of real base money that would be needed when its customers wanted to buy something real with all that credit.

I hope thats makes more sense

Cheers

 

[DriftWood]

Put yet another way:

It's not that a increase in the credit at the bank cause and increase in base money at the fed. Its the other way around. And increase in base money at the fed, will allow banks to create more credit. So its the Fed that is directly in control of the base money creation, and therefore indirectly also in control of how much credit is created at the banks. The banks only create as much credit as they think they can get away with given how the size of their base money reserves. (If the Fed for whatever reason wanted to limit the amount of credit banks create then the Fed could start reducing the amount of base money in circulation. That would force the banks to also reduce the amount of credit they create.)

Cheers