The downside to deflation in a debt-based monetary system?

[thoughtomator]

Whereas it is true that the bank is earning interest on its loans, and re-loans, to a measure greater than it pays on deposits - roughly 7 to 9 times to 1 - this is fact of banking operation and has nothing to do with any increase in the money supply which is the dialogue here.

Federal Reserve Notes are a debt-based currency. Pull a bill out of your pocket and read it, it specifically says so right on the front of each bill. They are added to the system by creation of more debt, which is what lending does. Review the Crash Course I linked above for a deeper explanation of how it works.

You're caught up on a tree and not seeing the whole forest.

P.S. Citibank's books are a total fraud, but that's a whole 'nother discussion

 

[Roy L]

It's not bizarre - it's the law.

Regardless of how you view the situation, the fundamental problem is the same - the monetary power is a privilege held by a limited number of unaccountable private parties who abuse the system in order to purchase the real wealth of others using legally counterfeited money.

You are essentially correct. The banksters create money in order to charge interest on it. The result is that they can buy real wealth with that interest, and if a loan is defaulted, they can confiscate the borrower's collateral (real wealth) on the strength of his legal obligation to repay the money the bank created. They get real wealth, but do not contribute to production of real wealth. BF has no idea what he is talking about.

 

[Black Flag]

It's not bizarre - it's the law.

Regardless of how you view the situation, the fundamental problem is the same - the monetary power is a privilege held by a limited number of unaccountable private parties who abuse the system in order to purchase the real wealth of others using legally counterfeited money.

Sir, your claim is bizarre as was your calculation - but be heartened, you are not at alone in the confusion that surrounds fractional reserve banking.

We've got banks printing money in thin air (they don't), thinking that if it was all gold, the fractional reserve system couldn't exist (it could just as easy), we have the fed lending against assets to 10x (do ya think a bank lends to you 10x the asset you put on as collateral? Why would you think the FED does that...they are dumber than your bank manager?).....so on and so forth. Hundreds of little pet theories mulling around here - and no one willing (except me) to demonstrate their theory in reality by using the monopoly money.....

Whereas you may be able to superficially understand the underlying problem - a monopoly on money creation by an elite - it is equally important to understand the mechanics of this monetary system because the solution of ending such a monopoly will not necessarily change the mechanics - and it is the mechanics that is the most dangerous part of the monetary system.

 

[Black Flag]

You are essentially correct. The banksters create money in order to charge interest on it. The result is that they can buy real wealth with that interest, and if a loan is defaulted, they can confiscate the borrower's collateral (real wealth) on the strength of his legal obligation to repay the money the bank created. They get real wealth, but do not contribute to production of real wealth. BF has no idea what he is talking about.

*sigh*

Do you really believe the bank is out to own your house?
Why do you think they would bother with such a facade if (as I assume you believe) they can print money out of thin air.
Why wouldn't they just do that, and buy your house outright?
If they wanted to own your house, why do they sell them at a banking loss in foreclosure sales? Wouldn't they just keep them?

As typical, you have no real grasp on the banking industry.

 

[Black Flag]

Federal Reserve Notes are a debt-based currency. Pull a bill out of your pocket and read it, it specifically says so right on the front of each bill.

Where? It says it is legal tender and payment for all debt, public and private.
How does that make it "debt-based"?

They are added to the system by creation of more debt, which is what lending does. Review the Crash Course I linked above for a deeper explanation of how it works.

Nonsense.
You cannot demonstrate this whatsoever in reality. You are merely creating some sort of bizarre pet theory based on somebody else's crackpot theory on how the monetary system works.

You can't demonstrate your pet theory at all with your monopoly set, because, well, it is all made up in your head.

 

[Black Flag]

That is gibberish.

*cough*
That is a fact.

The money you deposit becomes an asset to the bank - it no longer your money.
Your account becomes a liability to the bank.
The money lent by a bank is an asset of the bank.
The capital raised by the bank by its shares is an asset to the bank.

These are fundamentals of the banking industry and if this is gibberish to you, it means you do not understand the industry.

But they do create money out of borrowers' obligations to repay that very same money (with interest). That is in fact all there is to demand deposit money. See "Modern Money Mechanics published by the Federal Reserve.

Get out your monopoly money and prove this to me.

 

[thoughtomator]

Why do you think they would bother with such a facade if (as I assume you believe) they can print money out of thin air.
Why wouldn't they just do that, and buy your house outright?
If they wanted to own your house, why do they sell them at a banking loss in foreclosure sales? Wouldn't they just keep them?

As typical, you have no real grasp on the banking industry.

/facepalm

The manner in which they create free money is by lending. So of course they want to lend against anything, the larger the better. When gov bailouts insure no real risk of loss, AND the loan is secured by the property, they can collect interest and servicing fees while the loan is good, and if it goes bad they get the property and a bailout to cover the loss. Any real downside risk is securitized and sold off to pension plans (including government pension plans) further ensuring that any losses will be bailed out.

Go review Crash Course before adding another post because you are simply incorrect about your understanding of how the monetary system works. Several people here are trying to explain it to you, but you seem insensitive to comprehending them, and to continue with this further is going to be a huge waste of everyone's time.

 

[Roy L]

Oh, sorry, Steve - yes, you account just fine - but that does not prove that money was created - only by accounting someone's debt to be a deposit do you make your mistakes in assuming you are creating money.

Loans are indeed granted in the form of deposits. The bank just writes a higher balance in the borrower's demand deposit account, and that is the proceeds of the loan. The resulting demand deposit liability balances the loan asset. That newly created demand deposit is money.

One more time, I will do it for you.

Put 10 x $10 Monopoly money on a sheet of paper called "Deposit in Bank" .. you can account in a book as "Deposited by Guy A, $100 (10x$10) for credit to account".

Put 1 x $10 Monopoly money on a sheet of paper called "Federal Reserve" ... you can account in your book as "Deposited to FED as reserve for bank"

On another piece of paper, write "Guy B loan to buy a car - $90"
On another piece of paper, write "Guy C Car for sale - $90"

Place 9x $10 - the amount available via the fractional reserve to lend - on the "Guy B" paper.

That's not how it works. The bank does not move paper currency when it makes a loan. It simply writes a higher balance in the borrower's demand deposit account.

Then, move that 9 x $10 to "Guy C Car for sale" and write on "Guy B"..."owns a car".

Then, move the 9 x $10 to "Bank Deposit" and you can account this in your book as "Deposit by Guy C = $90".

So you must agree, we have $90 on the Bank Deposit, and not one piece of paper more.

Demand deposit money is not pieces of paper. It is account entries. That's all. The pieces of paper are currency, which the bank uses as reserves.

You also agree (since you pointed to your diagram) that 10% of the $90 must be placed at the Fed Reserve so that the bank can lend the remainder ($81).

Absolutely nothing here - not one thing - has changed the money supply - it remains at $100.

It is true that there are a lot of demands upon that $100 ... Guy A and Guy C as depositors, and Guy B who used it to buy a car.... but the money supply has not changed

Because what you described is not how it works.

A demand on the deposit does not create money. It creates risk of a whole mess of other nasty things, like a default - but money supply? Nope.

Demand deposits are M1 money, period.

 

[thoughtomator]

Just to add some info, the last reported Citibank tier 1 capital ratio I can find is from 1Q2010 and it is at 11.6%, just above the 10% required by law. And this is under relaxed (read: open license for rampant fraud) FASB accounting rules.

 

[Black Flag]

/facepalm

The manner in which they create free money is by lending.

Prove it.

I provided a detailed example using monopoly money.
Where did you get lost?

So of course they want to lend against anything, the larger the better.

False.
The banks are not as stupid as you wish they were.

A bank, because of the fractional reserve, is very leveraged against loan defaults - these threaten a bank terribly because of the leverage of the fractional reserve.

They have lent you $90, while holding back $10 from the deposit of $100.
If you fail to pay the $90... they only have $10 left over from the $100.
If the depositor wishes his money back.... he gets only 10c to the dollar in return.
If that happens, it is the end of the bank.

You believe them to be idiots and will lend to anyone with a song.

Bad thinking.

When gov bailouts insure no real risk of loss,

Yes, this certainly does create a moral hazard.

AND the loan is secured by the property,

Really? Have you seen the collapse of the housing market?
The statistic has 75% of mortgages underwater - meaning the loan is greater than the value of the home.
This is NOT an example of property being security for the loan....

they can collect interest and servicing fees while the loan is good, and if it goes bad they get the property and a bailout to cover the loss.

First, such bailouts are not the norm - indeed, this is among the first examples in American banking history - so it is a mistake to believe this is the normal operational climate and a worse mistake to build economic and banking theory upon this.

Second, a loss on any loan is leveraged in direct negative proportion to the fraction of the reserve - that is, a mere loss of 10% of the portfolio would represent 100% loss of the bank.

Several people here are trying to explain it to you, but you seem insensitive to comprehending them, and to continue with this further is going to be a huge waste of everyone's time.

Sir, the process is simple.

Get out your monopoly set and demonstrate it.

I did it for you - you ignored it, because -darn- it showed that I was right.

But, hey, you can do the same thing. Use the monopoly set and let's see that bank make money out of thin air.....

 

[Roy L]

*sigh*

<double sigh>

Do you really believe the bank is out to own your house?

They want wealth in return for nothing, and will certainly take the house if they don't get their somethihng-for-nothing in the normal course of the mortgage payments.

Why do you think they would bother with such a facade if (as I assume you believe) they can print money out of thin air.

They can't create money "out of thin air." They need the loan as a balancing asset. Money is created out of the legal obligation to repay it.

Why wouldn't they just do that, and buy your house outright?

Because we live in a DEBT MONEY SYSTEM not a FIAT MONEY SYSTEM. That means the bank can't create money on its own, it needs someone to borrow it.

If they wanted to own your house, why do they sell them at a banking loss in foreclosure sales?

They aren't doing that. Fannie Mae is bailing them out by taking over bad mortgages and underwater properties.

Wouldn't they just keep them?

They are legally obliged not to keep them. But they will gladly sell them to get the money they want.

As typical, you have no real grasp on the banking industry.

<yawn> As they say in Japan, "It's mirror time!"

 

[Steven Douglas]

Absolutely nothing here - not one thing - has changed the money supply - it remains at $100.

It is true that there are a lot of demands upon that $100 ... Guy A and Guy C as depositors, and Guy B who used it to buy a car.... but the money supply has not changed

A demand on the deposit does not create money. It creates risk of a whole mess of other nasty things, like a default - but money supply? Nope.

Alright, I see now part of the genesis of the mental sleight of hand that you're pulling on yourself.

You make your own personal distinction between "money" and fiduciary media created by the banks - which you don't technically consider 'money', and therefore not part of the 'money supply'. And since we're being semantics sticklers, we're even using the term money very loosely, when referring to it as the reserves created by the Fed - even that's a misnomer, because it is the Treasury that actually creates money, while the Fed creates accounting entries. Which, by the way, the Central Bank of Libya saw as money when it took out some $5 billion in loans from the Fed. Nothing but accounting entries -- out of thin air. Without the Treasury, the only money printer, knowing about it (or so we've been told). BUT...no law against it, right?

Anyway, if you also notice in my chart, the green cumulative deposit entries for each bank total around $100, while the red bottom-line entry shows a boatload of claims on that same $100 in aggregate reserves - not just a case of Guy A and Guy C; that original deposit whore was had by everyone on the football team. And, for the sake of simplicity, we could call those two banks the entire closed loop banking system under the Fed. More than two are not required for the sake of illustration.

So you are technically, semantically and irrelevantly correct - given your definition (taken in the context of your words) of "money". Fiduciary media is created by completely different mechanisms than reserve currency created (or destroyed) by the Fed. What they do have in common:

a) They are both fictions. Voodoo Monopoly money in a cancerous system that could never have started without a an otherwise healthy host to begin with, and
b) they are coupled, in that the supply of fiduciary media affects the market value of the Fed media that backs it, and vice versa. And finally,
c) all of them represent debts - which, if I'm going to be stickler myself, I don't consider money anyway.

That is why it does not matter whether it is a digital entry from the Fed, paper currency fresh from the Treasury presses, or demand deposits from the bank. If they circulate or otherwise behave as currency, and their values are coupled one with another, the market itself - that all-important 'economy', 'sees/feels' it all as "money supply". I conflate the two readily, because in this fine little closed loop banking system of not ours, that is precisely what the market does.

 

[thoughtomator]

They have lent you $90, while holding back $10 from the deposit of $100.

That's not how it works. A bank with $100 of real money on deposit can lend out $1000. Hence Citibank's 11.6% tier 1 capital ratio, pushing within 1.6% of the limit of what the law allows.

There's nothing quite so dangerous as a person who is really truly convinced he understands something he doesn't.

 

[Roy L]

*cough*
That is a fact.

<yawn> No, it is not. In post #74 you wrote:

the cash the depositor makes is an asset in favor of the bank.

That is gibberish. Maybe you meant to say, "the cash the depositor DEPOSITS is an asset in favor of the bank." But that's not what you wrote.

The money you deposit becomes an asset to the bank - it no longer your money.
Your account becomes a liability to the bank.

Both true.

The money lent by a bank is an asset of the bank.

False. It is an asset of the borrower. The LOAN -- i.e., the legal obligation to repay the money the bank created -- is the asset of the bank. You clearly understand nothing whatever about banking, the banking industry, or monetary theory.

The capital raised by the bank by its shares is an asset to the bank.

And...?

These are fundamentals of the banking industry and if this is gibberish to you, it means you do not understand the industry.

Mirror time.

Get out your monopoly money and prove this to me.

Please explain, in your own words, what you imagine the relationship to be between paper currency, demand deposits, and the money supply. Take your time.

 

[Black Flag]

Loans are indeed granted in the form of deposits. The bank just writes a higher balance in the borrower's demand deposit account, and that is the proceeds of the loan. The resulting demand deposit liability balances the loan asset. That newly created demand deposit is money.

No sir that is not at all how it works.

The bank for any loan must withdraw the money from its own cash account - which it holds from the deposits of the customer cash accounts (among other sources, such as share capital etc.)

No bank in the world merely types digits into someone's account to make a loan!
Where the heck did you think this one up???

Further, as I have already explained, loans are assets based on a multiplier depending on the loan type called the capital ratio ... a government loan has a 100% multiplier ..it can be applied as an asset 1 to 1, to a mortgage @ 75% ...only 75% of the loan can be applied as an asset ... car loans 15%... and credit card loans...0%.

Given this is brand new to you, I can see why you are confused about banking.

http://en.wikipedia.org/wiki/Capital_requirement

That's not how it works. The bank does not move paper currency when it makes a loan.

You, too, are totally confused by digits in a computer vs. paper.

You believe that something fundamental changes between digital currency and using paper currency.

Nothing changes at all fundamentally except convenience of transfers.

You are boggled by such convenience into believing something "different" is happening.

Demand deposit money is not pieces of paper. It is account entries. That's all.

No, it is NOT MONEY and it is ACCOUNT ENTRIES!

When you place your money into a bank account, it is no longer your money. It is the bank's money.
They move THEIR money into THEIR deposit account and give you a little piece of paper that promises they will give you money bank upon demand to the maximum value of that piece of paper you have.

But that is all you have - is a promise. They have your money and it is their asset.
Your little piece of paper is their liability

Now, this is all fundamentals of the banking industry and appears totally foreign to you.

I will suggest that you do not understand the banking industry.

 

[Roy L]

Sir, the process is simple.

Indeed: "The process by which banks create money is so simple, the mind is repelled." -- John Kenneth Galbraith

 

[Black Flag]

<double sigh>
They want wealth in return for nothing, and will certainly take the house if they don't get their somethihng-for-nothing in the normal course of the mortgage payments.

Wealth for "nothing"... eek!
I can see why you are so terribly confused.

They can't create money "out of thin air." They need the loan as a balancing asset. Money is created out of the legal obligation to repay it.

Where? Get out the monopoly set and show me where this money creation happens.

Because we live in a DEBT MONEY SYSTEM not a FIAT MONEY SYSTEM.

Huh?
Now you're twisting ever tighter.

Of course this is a fiat money system! Money is manufactured on demand without physical restraint.

That means the bank can't create money on its own, it needs someone to borrow it.

Banks do not create money.
They lend depositor's money, and they do need borrowers because that is how a bank normally makes its money.

They aren't doing that.

Because they are scared to death you won't be able to pay it back.

Fannie Mae is bailing them out by taking over bad mortgages and underwater properties.

Fannie is doing no such thing.

 

[thoughtomator]

you are confused as to your understanding how the flow of money and credit behaves in the aggregate

http://www.chrismartenson.com/crashcourse/chapter-7-money-creation

don't make another post until you take the few minutes to view that chapter

 

[Black Flag]

Indeed: "The process by which banks create money is so simple, the mind is repelled." -- John Kenneth Galbraith

Quoting the fool who is the reason you are so utterly confused will not reverse your confusion.

 

[Black Flag]

you are confused as to your understanding how the flow of money and credit behaves in the aggregate

http://www.chrismartenson.com/crashcourse/chapter-7-money-creation

don't make another post until you take the few minutes to view that chapter

Do not make another post unless you can prove your crackpot theory of banking by using the monopoly set.