Will fractional reserve banking create hyperinflation?

[Zippyjuan]

It can happen!

 

[Sentient Void]

No.

Fractional Reserve Banking, in-and-of-itself, doesn't create hyperinflation - nor does it create inflation. I'm more specifically pointing to fractional reserve banking under a Free Banking system - which means no central bank, virtually no (to literally no) regulation, and interest rates, regulation, competition, currency, etc is all taken care of by the free market. There has been banking such as this numerous times throughout history - and most of the time, monetary values were pretty damned stable, actually. It's arguable that they were even MORE stable than those currencies backed by gold - see Spain during the discovery of the new world and the influx of gold leading to massive inflation.

Does creating *excess* currency (increased currency beyond the proportion of capital goods/production) lead to monetary inflation? Yes, absolutely. But a free banking system only increases currency in relation to the increase in production, maintaining a stable currency through the free market. Can banks still fail? Yes - and the shareholders and assets of the bank will be liquidated to pay back depositors. However, canada maintained a stable currency and had virtually no banking failures even during the Great Depression, under FRB with a Free Banking system. There are a good number of other examples of this throughout history.

Let's isolate the real issue here - the problem is not with FRB in-and-of-itself... the problem is with a government mandated monopoly (central bank aka the Fed) on the issuance of currency, blocking out competition... and banks and the economy to be regulated and controlled by special interests, with a govt that looks to them to pay for their special interest projects (ie the Fed).

 

[heavenlyboy34]

No.

Fractional Reserve Banking, in-and-of-itself, doesn't create hyperinflation - nor does it create inflation. I'm more specifically pointing to fractional reserve banking under a Free Banking system - which means no central bank, virtually no (to literally no) regulation, and interest rates, regulation, competition, currency, etc is all taken care of by the free market. There has been banking such as this numerous times throughout history - and most of the time, monetary values were pretty damned stable, actually. It's arguable that they were even MORE stable than those currencies backed by gold - see Spain during the discovery of the new world and the influx of gold leading to massive inflation.

Does creating *excess* currency (increased currency beyond the proportion of capital goods/production) lead to monetary inflation? Yes, absolutely. But a free banking system only increases currency in relation to the increase in production, maintaining a stable currency through the free market. Can banks still fail? Yes - and the shareholders and assets of the bank will be liquidated to pay back depositors. However, canada maintained a stable currency and had virtually no banking failures even during the Great Depression, under FRB with a Free Banking system. There are a good number of other examples of this throughout history.

Let's isolate the real issue here - the problem is not with FRB in-and-of-itself... the problem is with a government mandated monopoly (central bank aka the Fed) on the issuance of currency, blocking out competition... and banks and the economy to be regulated and controlled by special interests, with a govt that looks to them to pay for their special interest projects (ie the Fed).

Excellent answer! +a bunch.

 

[HOLLYWOOD]

Word out of Jackson Hole, WY and the Banking Cabal (FEDERAL RESERVE) meeting...

Bernake and the Central Bankers are looking at a plan for a controlled 4-5% Inflation Rate per year.

Which means it's a 8-10% inflation rate on the Peasants. I'm sure they will have policies for Banking/Corporate rebates on the inflammatory repercussions.

 

[hugolp]

Word out of Jackson Hole, WY and the Banking Cabal (FEDERAL RESERVE) meeting...

Bernake and the Central Bankers are looking at a plan for a controlled 4-5% Inflation Rate per year.

Which means it's a 8-10% inflation rate on the Peasants. I'm sure they will have policies for Banking/Corporate rebates on the inflammatory repercussions.

Stagflation is their objective and preferred option to get out of the crisis. There is no doubt about it.

The only good part about it is that during the 70's stagflation libertarian conversions grew exponentially.

 

[HOLLYWOOD]

Stagflation is their objective and preferred option to get out of the crisis. There is no doubt about it.

The only good part about it is that during the 70's stagflation libertarian conversions grew exponentially.

Yeah, 7-10 years of Stagflation and then to curb deflation, another Bernake tool he's hinting at lowering FIOR and buying more crap QE. None of these clowns address the cost of government at all levels. The Goldman Plan sends spends 10's of Billions, which THE FED is going to dump into; Tax Credits to Small/Community Banks, Small Business Lending and Capital Expenditures Deductions. All of these are currently in the halls on Capital Hill and count on it spinning up on September 15th when the hacks come back for some more "Campaign Talking Points" Look for mortgage rates to drop another 25-50 basis points, another lesson in futility.

More write offs and spending at our expense. Man how they push the debt on the people... gimmick after gimmick after gimmick.

I just ran across Paul Krugman's "DEBT BASED DEFLATION IS BAD BAD ARTICLE"

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/

http://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf

Comments Section has some losers, but doozies, on Socialist Paul Klunkman

Deflation is bad for banks. The problem with our economy is we don't produce anything anybody needs, we just produce worthless junk while creditors cash in on our servitude to debt. Debtors need inflation to encourage you to go into debt on homes, autos, etc. We have an economy where brand new homes were being destroyed to keep prices high and clunkers were being destroyed to make room for more expensive autos on the market. We are serfs to banks and Krugman is feeding the propaganda.

Another reason the government hates deflation occurred to me on the way into work this morning; The gain purchasing power is not taxed. If the price of a car were to drop from $20,000 to $18,000, the state would not collect it's 8% of the $2000 cost reduction. It loses $160 of revenue.

Now contrast that with inflation. If the price goes from 18,000 to 20,000, that is an extra $160 I have to pay them for the same car.

Governments hates revenue reduction. So, they hate deflation.

One other point, the deferment of spending the professor and others fear is only temporary, and may not occur at all. In my case, when the freezer died last year, I needed a new one immediately. If the car dies, I need a new one immediately. I can't wait until prices fall to buy. Even in cases were I can wait, like replacing an outdated but still functioning computer, I am not likely to wait more than a year.

All these subsidies (cash for clunkers, the housing tax credit) only pull forward demand at bit. They don't create demand. Modest deflation would push demand back a year at most. So it would be a short term effect.

One last thought. The professor seems to advocate a system where you have to spend your wages immediately or lose them to inflation. Squander your money on things of very low utility, because if you wait you'll get nothing at all? This does not seem to be consistent with minimizing your ecological footprint, or have Liberals abandoned their goals?

 

[hugolp]

^^ That is a very good comment. Specially because its not very technical and its at the level of the majority mindless drones that read Krugmans articles to reinforce their statists believes.