Is Credit Card Debt an expansion of the Money Supply?

[jt8025]

I'll admit I haven't read all 159 post but have we come to an agreement on an answer for the question?

I was thinking that if one persons payment date was on the 1st and another persons due date was on the 15th, even if both people paid off their credit cards at the end of their billing cycle there would always be a debt between the two people.

Do we think this is a inflation of the money supply?

I trying to help answer the moral question for myself of does my using a credit card cause a decrease in purchasing power for another person? Am I robbing someone of there personal savings indirectly so that I can earn reward points?

[jt8025]

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[Steven Douglas]

To claim paying off "debt" is deflationary is utterly bizarre. There is never more money in the system then $100 - NO DEMAND DEPOSIT ACCOUNT CAN WITHDRAW MORE THAN THAT. though should many withdraw their demand deposit, serious issues arise.

Yes, serious issues certainly do arise, because the entire system is inherently insolvent.

You started with: $100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. You traced a lowly $10 loan repayment, with no mention of how much of that was interest - one of the all-important terms of any loan. Even if the interest was included in that $10 payment, the insolvency of the system is only revealed when you try to pay everything off in the aggregate - not just make a single payment, as people do every day.

For simplicity's sake, to illustrate what is fundamentally wrong - a fatal flaw in the system that makes it a Ponzi scheme, let's look at this in terms of modest, but not implausible, extremes.

Make all those for thirty years at a fixed rate of 7%, compounded annually, and further stipulate that all loans were made in a single month, and merely have to be repaid over time. Since we're talking about the possible deflationary effects of paying off all loans repaid in the aggregate, and the ultimate ability for the entire system to reconcile, let's stipulate that no new loans can be made. Also, no runs on banks. Only money needed to service loans is withdrawn.

You can only reconcile with what actually exists, or with what the Fed can create as M0 - so even if you need the Fed to create more M0 to reconcile the entire system show that in your steps. Meanwhile, no new loans to anyone - no expansion of credit, no robbing Peter's grandchildren to pay Paul's grandchildren. We're just reconciling - closing the banks out to test the solvency of the entire system. Now take your monopoly money out and pay off all those loans. You get thirty years to do it.

We only have 100$ FED reserves. $900 in outstanding loans, $900 in demand deposits outstanding. To reconcile we need $1,207.02 in interest - over and above that $900 principle that must be repaid. Now lets' ignore the fact that at some point nothing will be in circulation. Like you said, to make a payment, a demand deposit has to be tapped somewhere.

Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?

[rpwi]

Steven

You directed this question to Steven, but I'm going sneak into here too.

Deposit $100, and the series of loans, redeposits and loans....

$100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding.
I think Steven agrees up to here....

Your example is confusing as it isn't clear whether the $100 comes from equity investment or from a depositor. If from a depositor, I believe this should be 800 in loans... [Assets]: 100 reserves + 900 loan credit != [liabilities/equity]: 900 demand deposits

I repay $10 of my loan.
To repay $10 of my loan means someone had to withdraw $10 from their demand deposit.

$90 FED, $900 Loan, $890 Demand deposit, $10 cash.

They pay me the cash, and I pay off my loan

$90 FED, $10 bank excess reserve, $890 loan, $890 Demand deposit.

Where is the deflation?

What the bank does with the money is irrelevant - but usually they Loan it out again to a new borrower

To claim paying off "debt" is deflationary is utterly bizarre. There is never more money in the system then $100 - NO DEMAND DEPOSIT ACCOUNT CAN WITHDRAW MORE THAN THAT. though should many withdraw their demand deposit, serious issues arise.

A couple of relevant points... The first is yes...in some cases paying off a debt doesn't result in the destruction of M1 (and deflation). This is because when a bank loans out money...they do not do so exclusively against demand deposits. They also finance these loans with equity and other liabilities like corporate bonds. So therefore when a bank sees a loss in reserves...it will always go against equity or non-deposit liabilities first. However... Banks are actively seeking to maintain constant reserve ratios and capital requirement ratios. If their reserves drop, they either have to get reserves from another bank (and then the other bank will be the ones to create deflation) or they have to regain their ratio by curtailing new loans or not rolling over existing ones (or by getting new depositors or by selling assets). So yes...repaying a loan doesn't result in an INSTANTANEOUS act of deflation...it does result in a rather a quick form of it through cause and effect.

[rpwi]

I'll admit I haven't read all 159 post but have we come to an agreement on an answer for the question?

I was thinking that if one persons payment date was on the 1st and another persons due date was on the 15th, even if both people paid off their credit cards at the end of their billing cycle there would always be a debt between the two people.

Do we think this is a inflation of the money supply?

I trying to help answer the moral question for myself of does my using a credit card cause a decrease in purchasing power for another person? Am I robbing someone of there personal savings indirectly so that I can earn reward points?

I'll take a stab at your question.

The first is that the credit card company itself doesn't practice fractional banking (isn't allowed to by law) so it doesn't create M1 nor inflation directly. However...credit cards companies just really facilitate transactions and get most of their money off of transaction fees.

The cards are issued from either private banks or credit unions. Now rightaway...they do not create inflation. If charge my CC for 1000 to buy some furniture and my bank is ABC Bank...then ABC bank transfers 1000 in reserves to the banker of the furniture dealer and gets a 1000 loan credit in my name. Now a modern bank immediately will probably rebalance their funds by borrowing from an upstream bank to rebalance their reserves. The upstream bank isn't probably a big player in the depositor market and probably will in turn borrow from another smaller community bank which had 'excess reserves'. These reserves weren't 'excess' though...they were promises to repay depositors...so this was theft and inflation.

So basically...yeah. When you borrow from a credit card (or from any bank for that matter) you contribute to fractional banking/inflation/instability/bailouts Sorry. That you may delay payment is not relevant. For in that time, the money was created. Sure it maybe a 0% loan for a little bit...but that debt was backing deposits erroneously (but in probably a complicated and indirect fashion).

Now some fractional-bank critics are actually as critical of the borrowers in this system as the bankers themselves and equate them as co-conspirators. Image if you will, one can counterfeit. But there is a caveat... you can only buy motorcycles with this fake money...even if you can create trillions of dollars. Not the end of the world as you can resell the motorcycles...but this is a huge boon for anybody making a motorcycle.

In describing the above system, by which reserves are allocated and inflation created through use of a credit card, I neglected to bring up the Federal Reserve. In reality...if your bank that gave you the credit card loan can't get the reserves from the private banking market...they can get it from the Fed. Basically...once 'reserves' become scare thanks to all the CC borrowing...banks will auction up their inter-bank rates for reserves. The fed sees these and supplies new reserves into the market to meet their target interbank lending rate (that famous rate we hear about in the news). They do so through the open market. They buy t-bills from huge banks (primary dealers) and give them brand new dollars. Then the primary dealers relend these reserves to the rest of the market. In this fashion, the fed makes sure that anybody that wants to make a stupid loan and a stupid CC purchase can. With the injection of MB, the money multiplier wratchets up M1, M2 and M3 and we get inflation (thank in part to financial tools like credit cards). So in all likelihood a credit card purchase will result in an increase in the monetary base AND a bigger increase in bank money (M1,M2,M3).

[Black Flag]

Yes, serious issues certainly do arise, because the entire system is inherently insolvent.

We agree

You started with: $100 in FED reserve, ~$900 in loans outstanding, ~$900 in demand deposits outstanding. You traced a lowly $10 loan repayment,

Oh come on, Steven - add zeros behind all the numbers and the story does not change. The process operates the same whether $1, $10 or $10 trillion.

with no mention of how much of that was interest - one of the all-important terms of any loan.

This is irrelevant in any discussion of fractional reserve banking.

All banking systems process - fractional or full reserved - operate by offering an interest earning loan.
The issue therefore is not their similarity but their difference.

Even if the interest was included in that $10 payment, the insolvency of the system is only revealed when you try to pay everything off in the aggregate - not just make a single payment, as people do every day.

Nah!

To pay off a loan means either you have cash or a bank IOU.

You can trade your bank IOU for your IOU with the bank - this does not require you to withdraw a thing - it is merely an accounting reconciliation.

Obviously if you hold cash, the system was capable of managing your withdrawal, but in the end, faces receiving your money anyway, the money going (until loaned again) into excess reserves.

[Agorism]

So if somebody racks up massive unsecured debt and then declares bankruptcy, the money supply increases.

First off it depends on who is loaning the money. Are they loaning with a 1:1 system or a fractional reserve system. A 1:1 system would not be an increase in the money supply.

But more obviously, if the person then declared bankruptcy...this would SHRINK the money supply back to whatever it was before he was lent the money if there was indeed an initial increase.

[Black Flag]

Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?

The banks are businesses like any other.

They pay their employees out of their profits, their rent, buy computers, etc, out of their interest and fees earnings.

They loan out the money they get in interest back out into the economy.

They are no different then any one or company - if your money "never stands still" and goes out as loans, etc., well...that is exactly the same here - their money never stands still either (generally).

[Black Flag]

We only have 100$ FED reserves. $900 in outstanding loans, $900 in demand deposits outstanding. To reconcile we need $1,207.02 in interest - over and above that $900 principle that must be repaid. Now lets' ignore the fact that at some point nothing will be in circulation. Like you said, to make a payment, a demand deposit has to be tapped somewhere.

Where did people get the interest to pay those loans - how does that come into existence, and how do you reconcile that?

So, putting some monopoly money to this:

~900 dd/~900 loan/$100 FedRes, you are repaying your loan of $10+$1 interest.

To pay back your loan, you need to have earned from someone else, $11 - so "whoever" pays you $11 for your services which they withdraw from their account and pay you

~889 dd/~11 cash/$89 FEDRes/~900 loan

Then you pay your loan....
~889 dd/~0 cash/$89 FEDres/$11 ExcessReserve/$889 loan

...so where is the problem? None exists.
Loans/Deposits .... still equals "1", as it did before you paid back your loan with interest.

[Black Flag]

o reconcile we need $1,207.02 in interest - over and above that $900 principle that must be repaid.

So, recap:

We have shown how interest gets paid - and nothing abnormal happens to the banking system
We have shown what the bank does with its earnings - it spends them or invests them or lend it.... just like you would.

Now, your specific issue of a repayment of $900 in loans.

The vital concept that we have to understand:
All transactions use real money

This is why "bank runs" are a threat - if the withdrawals of real money to engage in transactions is too great at once, it causes a bank run.
You agree with this effect.

But a loan repayment IS a transaction - which means money needs to be withdrawn to engage in the transactions!
(withdraw money-pay for goods-seller deposits) ....

...remember a "loan" is really a deferred payment for the goods today .... and now the transaction is to the loan holder to move the goods and the payment to be equal in time...that is, today "the debt is cleared"... so:

(withdraw money -pay for goods used in the past "pay off debt" - creditor deposits)

If this withdraw money risks the same situation as a bank run ... if suddenly EVERYONE withdraws money (the reason does not matter, whether to hold cash or pay off loans), the banks default on their promise.

The key, Steven, is the reason for the bank run is irrelevant... you here thought that paying off a debt is different then paying for goods, or withdrawing cash to hold in hand... but it is not.

It triggers the same default scenario.