Is Credit Card Debt an expansion of the Money Supply?

[Black Flag]

As long as deposits are more than MB, than MB can not be used to repay MB backed loans. It would be circular logic.

That is why it is fraudulent.

That does not mean they cannot maintain the banking system.

All that is required is timing. As long as people re-deposit what they withdraw, the system works fine.

Let's use an analogy.

Let's not - it confuses you because you do not apply proper economic theory in your analogies.

Use a real example - use a monopoly set with money, notepads to record your transactions, and work it out.

Say a counterfeiter exchanges

Exactly my point with your analogies.

There is NO counterfeiting going on with the Fractional Reserve banking system

Read carefully, sir.

Every transaction is done using REAL, HONEST MONEY

You withdraw REAL money from your deposit account as according to your IOU agreement with the bank.

You hand over REAL money to buy your goods.

The seller deposits REAL money into his bank deposit account based on an IOU agreement with the bank.

So quit with your bizarre counterfeiting nonsense - because it makes NO sense!

Fractional banking is fraud...and fraud is not a proper component of the free market.

Agreed.

It is, as Rothbard said, two simultaneous claims on the same asset. One of them cannot be right. The bank claims both are right. That is fraud.

But there is no counterfeiting, and no "thin air money"

When an economy has trillion dollars in base money and three trillion in deposits...and the deposits are backed by two trillion in loans...how does the economy repay the two trillion?

By earning! - how do you pay off your loan? You get a job, work hard, save money and repay your loan?!?!?!?

Why is this such a bloody mystery to you?

Put another way...say the 3 trillion in deposits all wanted to be cashed out into reserves...what happens?

1st, that will never happen.

If you think it will, explain the circumstance that suddenly crashed Western Civilization - and I will point to that event being the cataclysmic event, and not a failure of the banking system.

2nd, it can happen to banks - happens all the time - hundreds have closed their doors.

When their depositors take their money out - and the bank no longer has capital to repay it, the bank is bankrupt and it closes it doors.

Those that did not get paid are stiffed.

This creates a massive recession/depression if many banks suffer this fate and cause massive losses to its depositors by being unable to repay their IOU.

Now, again, if you believe the IOU is money, this simply is impossible! How can you run out of the thing you have?

But IOU is not money - it is REPAID WITH MONEY, and the money ran out.

There have been 100's of banks that have been bankrupted and dissolved since 1933.
There has not been 1 ... not one .... depositor who has lost their money.

Why?

?? I don't know where you are getting this idea... What I was explaining is how the Fed has to constantly inject reserves into the banking system to keep it afloat.

Bull.

It injects money into the system to keep large BANKS afloat, and to give money to government but it does NOT inject money to keep the "system" afloat - it does not have to.

The capitalist free-market system is already a infinitely, self-sustaining feedback loop - the Federal Reserve couldn't stop the economy if they tried.

Fractional banking is inherently unstable and will always crash because people demand liquidity that is rightfully theirs.

True.

Or they will decide they don't want to borrow as much.

False (that such a thing will collapse the system) - (true, they may choose not to borrow)

Or they have the inability to repay bank loans

True.

(thanks in large part to how bank money plus interest squeezes the demand for reserves).

False.

Let's try this...let's establish what we agree and disagree on.

MB is destroyed = deflation...MB created = inflation. Correct?

No, not quite.

Inflation/deflation is a consequence of the law of supply and demand

Increase in demand for money raises the price of money.
Decrease in demand for money lowers the price of money.

Increase in supply of money lowers the price of money.
Decrease in supply of money raises the price of money.

If the increase in demand of money is met with an increase in the supply, the price of money does not vary.

If there is an increase in the demand for apples, but the apple growers meet that demand, the price of apples does not vary.

This is basic economics 101 - the law of supply and demand.

It applies to apples, computers, labor ... and money.

Yes demand for money (or a lessening of it) will change the price of money and create inflation/deflation
Yes the manufacturing of money (or the lessening of it) will change the price of money and create inflation/deflation.

BOTH in action, one stronger than the other, will change the price of money.

You believe that M1 is not money. Therefore when M1 is either created or destroyed it doesn't affect prices, right?

True.
You obtaining a loan means there is money to lend.
You paying off a loan means there must have been money to earn.

edited

Well, not necessarily true either -

and though not anything to do with the banking system, I can see where people losing their deposits - that is, they got stiffed, - will change their buying habits.

You take a bath in the stock market and lose your retirement fund, you may change your spending habits so to replenish those funds - thus, not buy things, thus cause a recession.

People losing their money due to unpaid deposits may cause the same thing - a reduction in spending so to rebuild excess capital.

BUT!
The amount of money neither increase or decreases in either circumstance.

You believe repaying loans reduces M1, right?

No.

You have "Steven's" disease.

You believe when a loan is repaid, the bank sits on its hands and goes "Whew! Got the money now stuff it in a pillow case and hide it!"

No, it is a business.

It is in the business of making loans.

You repay your loan to the bank.

The bank takes your repayment and loans the money out to the economy and someone else.

It does this because that is what a bank does to earn a living.
It lends money.
It pays its employees, it lightening bills, its electrical bills, its rent from the money earned in doing its business - that is, lending money. It's earnings are called "interest".

So it lends the money again.
To who?
A person who needs money that they don't have to buy something they want today. They want to defer payment for the goods they want today, and pay for that good in the future.
The bank charges a fee for giving you money today to be returned in the future.

There is a fee for using this money for your wants because the bank cannot use that money for its wants. This fee is interest.

The person who borrows money uses it to buy something.
They spend the money.
The seller gets the money, and do you know what he does with it?

He ... deposits it!

A repayment of a loan requires money. True.
Money to repay loan comes from working. True.
The service you give by working trades for money. True.
That money to pay you for your work is withdrawn from a bank account, and lowers DD. True.
The money is repaid to bank, and that lowers loan liabilities. True.

...but you want to stop there. But it does not stop there.

The bank employees need to eat again tomorrow.
They need to earn money to buy food.
They earn money to buy food by lending money at a price.
They have money to lend.
They lend so to earn money.

There is a borrower who..... (repeat forever).

But you don't believe a reduction in M1 results in deflation, right?

Why would it?
IF people are pulling out their money and NOT redepositing it, there must be a reason for this

You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?

It effects individual BANKS and their capital requirements - but it does NOT affect the banking system. Money out of one bank in this banking system and into another bank in the same banking system is:
-1+1=0 ... no change.

If so, do you believe this affects the open market and the amount of t-bills bought and sold as well as the amount of Mb created and destroyed?

The reasons the FED may or may not buy a T-bill has nothing to do with whether a bank takes a deposit or makes a loan to you.

If so, do you then believe that paying off loans can result in a reduction in Mb in the economy due to the Fed Funds Rate and open Market operations, so that this would create deflation but in a round-about fashion?

There are a lot of economic circumstances that change a person's demand for money relative to their demand for other goods. Maybe millions of circumstances, maybe billions.

Picking one that, through a chain of effect, may indeed do as you claim.

But, it might not either.

And equally, it might do the opposite next time.

[Steven Douglas]

Well, BF, I can't say that I blame you for completely turtling. Once again you've done nothing but duck, dodge and evade -- in three separate posts, no less, the last one yet another red herring about how the market works, rather than how the money is created and enters into a regime to pay off some simple loans plus interest, in the aggregate, in a simple thought experiment.

To you our current monetary regime just goes on forever, as it always did. Exponentially even, like some kind of closed loop Alpha-Omega type system, with no beginning or end (hence the circular reasoning, and the inability to entertain its beginnings and possible endings). For all intents and purposes it somehow always existed and always will. Your inability to even humor my scenario is evidence of that, which has a decidedly dogmatic ring to it (like a religious tenet).

Anyone who believes that exponential growth can go on
forever in a finite world is either a madman or an economist.
- Kenneth Boulding, Economist

As long as we're waxing dogmatic and axiomatic, let me state some things which I believe are axiomatic: Our currency is not immortal. It has a life cycle, and will one day die, only to be replaced by another. To you it's so Titanic that God Himself could not sink this ship - but if history has taught us anything it is that all currencies are eventually debauched - and then they die, often horrible, tragic deaths. The death of our particular currency was designed into the system itself, given that it is unsustainable without exponential growth, which really is only possible in the minds of madmen and economists.

Our current regime (post Continentals) had a hard specie beginning, a paper devolution in the middle, and now there is a definite built-in end game to it all - one which you cannot fathom or even conceive as a possibility - even conceptually. Now that to me is beyond bizarre.

Your normalcy bias is so overwhelming that you cannot (won't?) even conceive of another currency entering into an economy and taking over as the new money - even as the prior currency wanes and dies out. Perish that thought, it's so bizarre in your mind (even though it's happened in this very country, and hundreds of others throughout recorded history) that you cannot/will not even entertain the possibility - even as a thought experiment - to test the overall solvency of the system, or how its end game could play out in theory if done deliberately - with a concurrent currency ensuring that the economy continued to roll on despite its death.

And since you have no answers, but prefer instead to engage in red herrings, argument by ridicule, and condescension that is completely unwarranted, labeling a simple thought experiment so "bizarre" as not to be worth entertaining, there's really not a whole lot to discuss with you.

Steel trap minds and all that. It would have been fun if you had played along, I think - but I'll take your evasiveness as a forfeit on your part, obvious enough to anyone else viewing, I think.

[Black Flag]

Well, BF, I can't say that I blame you for completely turtling.

Now you are turning into Roy!

If I don't submit to your irrational plea to believe in fairy tales, you think I am turtling.

I asked you specifically - and you refuse to comply

What event makes all banks stop lending because that is what your fairy tale requires.

than how the money is created

Stop it, Roy.

Already presented:
Money is created by the Federal Reserve through monetizing T-bills, or purchase of assets.

It is NOT created by you getting a loan from your local bank.

and enters into a regime to pay off some simple loans plus interest, in the aggregate, in a simple thought experiment.

That's the problem!

You have presented no experiment -a microcosm of the real world in an effort to understand the world.

You want a fantasy where the entire economy has shut down, then you want to know what happens to the money and interest!!!

Well, if the entire economy shuts down, Steve, the need for any money is zero. You are dead.

Your base premise for your experiment invokes a condition where economics no longer applies, there is no trade, there is no money, you are dead.

To you our current monetary regime just goes on forever, as it always did.

You believe you stop earning? and buying? and consuming?

As long as men do so, yep, the economy runs along with it.

But you are a red herring - I've already presented how this monetary system is unstable and ...

IT
HAS
NOTHING
TO
DO
WITH
YOUR
FANTASY
"THIN AIR"
MONEY

It has to do with dual claims and rights upon the same asset of money -one by the depositor and the other by the borrower.

Exponentially even

Where did this come from?
The economy has grown -averaged- 2 to 3% a year for the last 350 years or so. Hardly exponential, but an order of magnitude better than it did for the previous 2,000 years.

Please show exponential growth.

Anyone who believes that exponential growth can go on
forever in a finite world is either a madman or an economist.
- Kenneth Boulding, Economist

Any man who believes there is a limit to human growth has only demonstrated the limit to his education.

Our currency is not immortal.

I do not disagree.

But that does not make your thin-air money real.

Your normalcy bias is so overwhelming

I have no such thing.

I see reality and it tells me the truth.

You believe in an illusion because you want your fantasy to be truth. You want your thin-air money to be real so you can apply other crackpottery creating even more bizarre proclamations like:
"paying off your debt causes deflation"

[Steven Douglas]

I asked you specifically - and you refuse to comply

What event makes all banks stop lending because that is what your fairy tale requires.

I asked you something first, and you refused to answer with anything but a modified scenario that rephrased the question as a deflection, and so that the discussion could shift to the points you wanted to make. Which I answered anyway.

So two answers to your last question:

Banks might stop lending when they are no longer able to meet their obligations, become bankrupt, and no longer exist.
In the case of two currencies, however, with one being phased out and another in transition, the banks which are solvent stop lending out the dying currency, and start lending out only the prevailing currency.

Money is created by the Federal Reserve through monetizing T-bills, or purchase of assets.

It is NOT created by you getting a loan from your local bank.

I don't care. I'm not on a kick to quibble over how you want to define money, and I'll go with your definitions for the sake of discussion. And I said that I didn't care how or if you created the money needed to satisfy all outstanding principle plus interest debts in the scenario, as long as you showed it in the process.

You have presented no experiment -a microcosm of the real world in an effort to understand the world.

You want a fantasy where the entire economy has shut down, then you want to know what happens to the money and interest!!!

And there you go again. I already told you we're NOT shutting down the entire economy. We're merely phasing out one currency as another currency transitions in to take over. In the real world this happens all the time. Member states of the Eurozone had to phase out their currencies, along with scenario decisions on how that would be done. To wit:

Scenarios for adopting the euro

In the preparations for the introduction of the euro in 1999, Member States applied the ‘Madrid scenario’, so-called because it was agreed at the European Council meeting in Madrid in 1995.



The Madrid scenario set the legal framework and the timetable for the adoption of the euro, which involved a gradual changeover during a three-year transitional period:

• On 31 December 1998, the euro conversion rates for the national currencies of the Member States adopting the euro were irrevocably fixed.
• On 1 January 1999, the euro became the official currency of the participating countries. The national currency units became 'sub-units' of the euro, and national banknotes and coins remained in circulation. Consumers saw dual price displays in euro and the national currency units, e.g. in shops and on bank account statements, but euro cash was yet to be made available. Governments, financial institutions and companies began operating in euro, e.g. for wholesale transactions and for issuing debt. The euro was in widespread use as ‘book money’ and as a unit of account.
• Euro banknotes and coins were first introduced in the euro-area countries on 1 January 2002 (€-day), three years after the euro was launched. During a short period of dual circulation when both euro and national cash were legal tender, the latter was progressively withdrawn from circulation, mainly collected by shops and banks. The dual circulation period came to an end on 28 February – or even before in some countries – so that from 1 March 2002 only euro banknotes and coins were accepted for payment in the euro area.

There's a perfect example of a real world scenario not too very unlike the one I set up. And since now we can see that such a scenario is not as outlandish or bizarre as you once believed, would you mind very much going back and showing me with your monopoly money how to wind the old currency down -- even as you are safe in the knowledge that another currency is circulating around just fine, and in an economy that continues to function using that other currency.

The economy has grown -averaged- 2 to 3% a year for the last 350 years or so. Hardly exponential, but an order of magnitude better than it did for the previous 2,000 years.

Please show exponential growth.

You just did. You just didn't know it. What you called "hardly exponential" was PRECISELY EXPONENTIAL. And not "an order of magnitude" but ORDERS of magnitude larger.

You need to watch this. This is not the usual blah blah to make a point. It's to educate you on what should be a simple concept for everyone to understand:



I did not know that you did not even understand the meaning of exponential growth. It has nothing to do with the size of the rate of growth, or the initial amount, but the fact that it is a steady rate of increase (percentage-wise) over time, which involves doubling rates over time. Even 1% per year is still considered exponential. To get the doubling rate of the entire system (to approximate how long it takes for the original number to double), you divide the percentage over time into 70 (69.3 if you want to be closer to the actual logarithm). So a 1% increase per year has a doubling rate of ~70 years. .5%/yr would be 140 years doubling time. 2%/yr - 35 years. 7% per year, 10 years, and so on. That's how you determine how long it takes for an exponential system with a fixed rate of growth to double.

A growth rate of 2% per year IS EXPONENTIAL, with a doubling rate of 35 years. So while the Earth is big and the economy was relatively small, time passes and it looks to the uneducated as if the potential for exponential growth is boundless and infinite. It's not.

You see 2% per unit of time as a steady number, without realizing the actual numbers that are being accumulated, compounded and multiplied in the process.

Start with 1000 (of anything) in the year 1660. It increases at 2% per year. In 35 years, that number will double, and so on, every 35 years after that, doubling the previous number, until the entire system has been doubled 10 times.

1660 1,000
1695 2,000
1730 4,000
1765 8,000
1800 16,000
1835 32,000
1870 64,000
1905 128,000
1940 256,000
1975 512,000
2010 1,024,000

So when you say that something grows at a mere 2% per year for 350 years, you're really saying it's multiplied roughly a thousand (or four orders of magnitude) times the original number.

Here is a generic exponential curve:



What percent of change is required to make such a curve? ANY. Any steady rate of increase (percent over time) will produce an exponential curve, just like this one.

Any man who believes there is a limit to human growth has only demonstrated the limit to his education.

That very statement shows a distinct lack of education, and sounds more like a mantra for a motivational poster than an educated statement. Human growth limits are factual, based on underlying fundamentals that can be measured. What cannot be measured, but only predicted or projected, is how humans will deal with these limits, because on an individual level humans are complex and adaptive, with infinite possibilities for adaptation. But the fundamentals themselves used in those adaptations can be measured, and once the adaptations are made, those new fundamentals too can be quantified, as they are all finite. Even if we figured out a way to fill the known universe with our adaptations they would be finite, because both mass and energy (the real fundamentals) are finite.

But that does not make your thin-air money real.

Stop with the "thin-air money" strawman, as we're not talking about "thin air money". I don't care how you label money, fiduciary media, demand deposits or anything else. I'll accept ALL your definitions and we'll label them any way you want for the sake of discussion. The ONLY thing we are talking about here is the mechanics of how whatever-it-is-you-call-it actually flows and reconciles -- system-wide in the aggregate.

Now humor me with my scenario -- which I have shown clearly is not so bizarre, not so "fantasy world" implausible after all.

[rpwi]

OF course they are liabilities.

You cannot repay your house in aggregate either! But your mortgage is still a liability!

The difference is the home is a long term asset and it will be backed by a long term liability in a home loan. When a bank mismatches short liabilities with long term loan assets that's when problems occur.

The problem, again, is the Fractional Reserve, not some fairy tale belief of "thin air" money.

If you are arguing that M1 doesn't create inflation and with FDIC insurance/open market operations meaning don't have that many bank runs these days...then what is YOUR arguement against the fractional banking system? How does it hurt John Q. Public?

[rpwi]

Lot to go over :P... Well let's start with the core concepts first since derivative arguments are built upon these.

No, not quite.

...
BOTH in action, one stronger than the other, will change the price of money.

Good...we are agreed that all else being equal a change in MB will either inflationary or deflationary.

True.
You obtaining a loan means there is money to lend.
You paying off a loan means there must have been money to earn.
...
The amount of money neither increase or decreases in either circumstance.

So here we agree to disagree. You clearly believe M1 is not money. You also believe repayment of M1 backed loans is not deflationary. You seem to think that because a person had the money to repay the bank loan...no problem...things even out. But the problem is the person who repaid their bank loan...undoubtedly did so with a bank deposit. Therein lies the deflation.

In response to my statement that repaying a bank loan results in a reduction in M1, you state:

No.

You believe when a loan is repaid, the bank sits on its hands and goes "Whew! Got the money now stuff it in a pillow case and hide it!"

If a bank relends a repaid loan the deflation is counteracted. Now when you refer to a bank 'stuffing money into a pillow case'...this does not make sense. Isn't this what a bank is supposed to do? If I deposit 1k at a bank, I'm asking them to 'stuff money into a pillow case'. In return I receive 1k in demand deposits. This idea that banks are 'hoarding' money if they don't lend out all my deposits (which are promised on demand) is absurd.

The bank takes your repayment and loans the money out to the economy and someone else.

Then yes, deflation is counteracted with quick inflation. The issue is if the economy borrowing in the aggregate drops or raises. The average from new loans - old loans is where inflation/deflation comes about.

It does this because that is what a bank does to earn a living.
It lends money.
It pays its employees, it lightening bills, its electrical bills, its rent from the money earned in doing its business - that is, lending money. It's earnings are called "interest".

An odd argument. A bank's operational expenses (which are a pittance compared to their revenue) hardly matters. It's like me arguing...I counterfeited dollars...but because I had to pay the electric bill...I'm ok! No inflation was caused![/quote]

...But you don't believe a reduction in M1 results in deflation, right? ...

Why would it?
IF people are pulling out their money and NOT redepositing it, there must be a reason for this

Indeed. Perhaps they lost faith in the banking system and learned our fractional banking actually worked. You appear to be arguing that a reduction in M1 would not result in deflation as this meant there was a corresponding decrease in the demand for M1. This is not the case though as there is no 'market for M1' There is a market however for the loans which in turn generate of deplete M1.

You do or don't believe that a repayment of a loan affects the interbank lending market for reserves?

It effects individual BANKS and their capital requirements - but it does NOT affect the banking system. Money out of one bank in this banking system and into another bank in the same banking system is:
-1+1=0 ... no change.

So you are arguing a bank would not have excess reserves from a paid off loan? So what happens if I use 100k in deposits to pay off 100k in loans...and they are both from the same bank? The bank has canceled both a liability and an asset. But since the demand deposit liability is less...than demand deposits / reserves was higher than it was before, right? In fact their ratio of deposits to reserves changed...and assuming they want to return to their same ratio...they would have 'excess reserves', right? You're a supply and demand guy...so if one bank has excess reserves...wouldn't it be logical for this bank to lend to banks that don't reserve shortfalls? Wouldn't there be an average interest rate on these reserves? Then if the Fed monitors this and injects MB accordingly...it is very safe to say that an economy that borrows less...will generate more demand for reserves inside of the banking system and this will mean the Fed will give it more because of targeted fed funds rate.

The reasons the FED may or may not buy a T-bill has nothing to do with whether a bank takes a deposit or makes a loan to you.

Yes it does. Deposits and loans affect reserve ratios, right? A bank seeks to correct reserve ratios that vary from what they want, correct? These corrections results in an inter-banking market for reserves, right? This is what the fed monitors when it determines whether that banking system has too much or not enough reserves right?

[rpwi]

That is why it is fraudulent.

That does not mean they cannot maintain the banking system.

All that is required is timing. As long as people re-deposit what they withdraw, the system works fine.

Well...if people are constantly re-depositing what they are withdrawing...then reserves hardly matter, right? I mean a banking system could have 1 million reserves and a trillion dollars in deposits. If nobody 'checks' under their mattress to see if the reserves are still there then for all practical purposes, they aren't, right? If this is the case, then would the reserves (or MB) be considered an accurate gauge of money? Would not M1 very clearly be a more accurate gauge and do a much better job of for example explaining inflation?

There is NO counterfeiting going on with the Fractional Reserve banking system

Read carefully, sir.

Every transaction is done using REAL, HONEST MONEY

No. When two customers of the same bank partake in a transaction, no 'real money' (mb) has been exchanged. In fact internal banking operations (which are quite common in small towns) totally destroy your argument. Interbank transactions are little different. The bank with the surplus reserves lends back to the bank with a shortage of reserves (somewhat in a round-about fashion) so in essence you can say no 'real money' is exchanged.

You withdraw REAL money from your deposit account as according to your IOU agreement with the bank.

You hand over REAL money to buy your goods.

The seller deposits REAL money into his bank deposit account based on an IOU agreement with the bank.

Say I bank at ABC bank. I want to buy a home for 100k. Frank owns a home...and also banks at ABC bank. We agree to deal. The bank gives Franks a 100k deposit and I get the home and in exchange the bank gets 100k loan asset. Surely you must acknowledge this happened above and beyond reserves and therefore reserves can't be considered the sole source of money.

So quit with your bizarre counterfeiting nonsense - because it makes NO sense!

It does if you think about it. My fake green backs are pretending to be greenbacks. Because they pretend to be greenbacks I can buy more than I should be able to. A banks deposits are fake dollars. Because they pretend to be dollars, the bank can buy more than they should be able to.

Agreed.

It is, as Rothbard said, two simultaneous claims on the same asset. One of them cannot be right. The bank claims both are right. That is fraud.

Rothbard is a wise man Now say the depositors never check to see if their deposits are backed. In such a case you would argue that such fraud would never become uncovered right? Do you argue that fractional banking (unless there is a bank run or bailout) does 0 harm to the economy even though a bank issues more claims on reserves than it can do?

By earning! - how do you pay off your loan? You get a job, work hard, save money and repay your loan?!?!?!?

Why is this such a bloody mystery to you?

It's all about time. A bank works it's magic by mismatching short term liabilities against long term assets. This means the short term assets have to be perpetually rolled over or refinanced to maintain liquidity. Long term assets being long term assets means they will not help a bank's liquidity situation. The only other thing that can help would be money from outside of the banking system (which is scare relative to the scale of the banking system or is plentiful if it comes from the Fed).

Put another way in order for fractionally backed loans to be paid off, the savings outside of the banking system has to grow at a faster rate than the debts to the banking system. However a bank balances their deposits against long term assets which have the best savings rate. I think we agree that sudden repayment is impossible...God could write in the sky 'pay off your debts' and the public could try as hard as they could...but they wouldn't be able to pay off the debt. You seem to be arguing that the debts could be repaid...just over time. In small cases, yes. But not once a banking system has the majority of reserves and they are well invested in long term assets which have the best rates of return, I do not believe this to be possible.

1st, that will never happen.

If you think it will, explain the circumstance that suddenly crashed Western Civilization - and I will point to that event being the cataclysmic event, and not a failure of the banking system.

The great depression? The bank system is constantly crashing and the governments are constantly bailing them out...nothing super special about the great depression...just that the system got exposed for a brief moment before it went back into hiding.

2nd, it can happen to banks - happens all the time - hundreds have closed their doors.

Nowdays it is not relevant. The FDIC just feeds the broken bank to a bigger bank Without the FDIC and more importantly the the open market, the true market would expose and destroy the banking system in short notice.

When their depositors take their money out - and the bank no longer has capital to repay it, the bank is bankrupt and it closes it doors.

Those that did not get paid are stiffed.

This creates a massive recession/depression if many banks suffer this fate and cause massive losses to its depositors by being unable to repay their IOU.

Now, again, if you believe the IOU is money, this simply is impossible! How can you run out of the thing you have?

So if I counterfeit greenbacks and use them to buy dinners and vacations and the like...and I get sued...and I can't pay back the litigants...can I use your argument? Just because M1 can be exposed as fraudulent doesn't mean it doesn't exist and function in our economy.

But IOU is not money - it is REPAID WITH MONEY, and the money ran out.

Anything can be money. It is whatever we accept as a store of value. We accept deposits as a store of value for our labor, so it is money.

There have been 100's of banks that have been bankrupted and dissolved since 1933.
There has not been 1 ... not one .... depositor who has lost their money.

Why?

FDIC.

It injects money into the system to keep large BANKS afloat, and to give money to government but it does NOT inject money to keep the "system" afloat - it does not have to.

If the Fed vanished but left MB in place...there would be a squeeze on reserves...this would result in shortfalls and this would result in depositors not getting their money. Much more than the banking system.

[Black Flag]

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

No, why?

To borrow, you must get real money from someone that you spend.

You need $100, you borrow $100 from you friend.
You spend it with "this guy", now he has $100.

You renege and your friend is out $100.

But the other guy still has it.

There is only $100 in this economy at the beginning of your adventure, during your adventure and at the end of your adventure.

You merely lost a friend and that is not inflationary.

[Black Flag]

Lot to go over :P...

No kidding.
Imagine me having to deal with you and Steven.

Good...we are agreed that all else being equal a change in MB will either inflationary or deflationary.

I think we have to be careful about what the reason.

I sense you believe merely the “change” of amount of money creates inflation or deflation – that is, there is but one leaver. You do not mention demand, nor “price” in your statements around this – which leads me to believe you do not consider them.
I state unequivocally – it is the Law of Supply and Demand, where supply AND demand change the PRICE of money.
I hold that a significant change in either supply or demand or both creates inflation or deflation.
There are reasons that may cause such a change – but it the supply and demand law that is the operative here.

You clearly believe M1 is not money.

Correct.
It is a liability created by an exchange of money for an IOU.

You also believe repayment of M1 backed loans is not deflationary.

A deposit is created by money, and a loan is repaid by money.
The money to make a deposit comes from somewhere, and the money to make a loan comes from somewhere. They are not made up in fantasy as Steven would have you believe.
It is real money being deposited, agreed?
So it is real money being loaned, agreed?
The money has to come from somewhere, and it comes from deposits.
A deposit is saving –the depositor is delayed his consumption into the future.
This is deflationary.
A borrower is delaying his payment into the future for goods now.
This is inflationary.
These two guys cancel each other out – and if you break out the monopoly set and do the work you can see why. There is no increase or decrease in the money supply – and the demand for money is balanced – one wants it now (high demand) and one wants it in the future (low demand).
This unrolling of this (paying debt) simply reverses this, and since the roll up made no inflation/deflation, the roll back does not either.

You seem to think that because a person had the money to repay the bank loan...no problem...things even out. But the problem is the person who repaid their bank loan...undoubtedly did so with a bank deposit. Therein lies the deflation.

Use the monopoly set and see that there is no less nor more money in supply at any time during your transaction.
To pay a loan, you have to earn.
Now, unless you believe earning money is somehow inflationary - … (god, I hope you have better economic sense then that…)
To consume and eat, etc. you need to spend money – now do you believe spending money is deflationary?
All a loan is is a deferment of payment of currents goods into the future
But it is “spending” – except instead of earn-then-spend, you have a spend-then-earn. But the outcome is the same – you have traded money for goods, ending up with the goods and reduced money IN YOUR POCKET, but now in the pocket of someone else (who is out the goods, but in with money).
So unless you have even more of a home-grown economic theory where normal economic transactions now create inflation/deflation… I think you might see where you can apply it with “banking”.

Banking is just another economic service, like a doctor or the garbage man. Banks participate in the marketplace just as you do. They buy things, and the earn.
They obey all the same laws of economics you do.
Do not attribute to them super-man powers that they do not have.

An odd argument. A bank's operational expenses (which are a pittance compared to their revenue)

You jest.

hardly matters.

Of course it matters !
Read carefully:
You earn money.
You have a decision. You spend it on your wants or you save.
That which you do not spend, you save.
To save, you either lend it to the bank as a deposit - which the banks lends, or you invest it.
One day, you get back the money you saved (either by redeeming your deposit, or extracting your investment) so that you can spend it.

So far so good? Nothing bizarre, right?
Now, replace “you” with “bank”.
They do the same thing as you.
They earn.
They spend.
What they do not spend they invest, either in making loans or investing.
One day, they get the money back, so that they can spend – or make loans and invest again.

It's like me arguing...I counterfeited dollars...but because I had to pay the electric bill...I'm ok! No inflation was caused!

Drop the counterfeiting reference – it is irrational to equate trading real money with “counterfeiting” money.

You appear to be arguing that a reduction in M1 would not result in deflation as this meant there was a corresponding decrease in the demand for M1.

There are two reasons people pull money out of a bank.
One, to spend it.
As above, if you hold some bizarre economic theory that “spending” makes inflation … you have more economic confusion then I can fix on a blog – but I do not think you think this anyway, so it is moot.
Or two, they do not trust the bank.
Thus, with (1), the money moves out through one deposit and right back into another deposit …from buyer deposit to seller deposit. Nothing strange here, either.
With (2), the REAL money comes out, reducing the banks capital reserves and threatening the survival of the bank –which has nothing to do with real money created or destroyed – it merely has to do with the bank facing its fraud – too many calls on the same real money.

This is not the case though as there is no 'market for M1' There is a market however for the loans which in turn generate of deplete M1.

Again, only under scenario #2 does such a situation create a crisis – nothing to do with loans or M1, but everything to do with the broken promise and fraudulent practice of the bank
Now, unless you come up with another plausible reason for your scenario that is not covered by (1) and (2)…. that is, I am not interested in fairy tales or an invasion of beings from Mars or any other such nonsense.

So you are arguing a bank would not have excess reserves from a paid off loan?

I did not argue that at all.

The bank has canceled both a liability and an asset. But since the demand deposit liability is less...than demand deposits / reserves was higher than it was before, right?

No, less
Before
$900 DD/$100 cash = 9/1 leverage, that is $1 of reserves backs $9 of deposits.
After repayment of, say, $50 – so $50 out of the bank thru a deposit, and back in to the bank reconcile the loan:
$850 DD/$100 is a 8.5/1 leverage … now $1 backs $8.5 of deposits … a far superior position, if you are a depositor.
Cash counts 100% …. $100 in cash=$100 capital reserve

In fact their ratio of deposits to reserves changed

Yes, it is better, less risk to depositors, towards a 1/1 ratio….

...and assuming they want to return to their same ratio...they would have 'excess reserves', right?

Yes.

You're a supply and demand guy...so if one bank has excess reserves...wouldn't it be logical for this bank to lend to banks that don't reserve shortfalls?

As I said before banks participate in the market place, a bank is in the business of lending, for that it is how it earns.
The free market capitalist system does not change economic laws because you sell your services to Joe A and not to Joe B.
If a business needs a loan, a bank provides it.
A bank is a business.
No surprise that banks lend to banks, right?

Wouldn't there be an average interest rate on these reserves?

I believe the FED sets the rate.

Then if the Fed monitors this and injects MB accordingly

But it does not do this necessarily.

...it is very safe to say that an economy that borrows less...will generate more demand for reserves inside of the banking system

No, it will not generate more demand for reserves as pointed out above – the bank improves its ratio as loans are paid off.
In other words, you are claiming that bank holding excess reserves is less solvent than a bank that has none!
Also remember, loans count as assets only after a modifier, typical 95% to 50% (or 0% in case of credit cards) as assets, whereas cash is 100% of face value – in other words, a bank converting a loan asset to a cash asset doubles the asset base ($100 loan =$50 to asset base; $100 cash = $100 to asset base).
Your claim here is that there is more risk to a bank in NOT making loans than making them!
No, the only risk is that they do not earn as much profit.

[Black Flag]

Well...if people are constantly re-depositing what they are withdrawing...then reserves hardly matter, right?

They matter muchly - the reserves determine the risk to the depositor.

I mean a banking system could have 1 million reserves and a trillion dollars in deposits. If nobody 'checks' under their mattress to see if the reserves are still there then for all practical purposes, they aren't, right?

But you check under the mattress every time you buy something - for that is real money that is transacted. And there is no more real money in the system then there really is in the system! Reality sorta works that way!

So, yes, it all "works" as long as there is not more concurrent transactions then the money supply.

If this is the case, then would the reserves (or MB) be considered an accurate gauge of money? Would not M1 very clearly be a more accurate gauge and do a much better job of for example explaining inflation?

No, and no.
Explaining inflation is easy as long as you are not a Keyensian.

No. When two customers of the same bank partake in a transaction, no 'real money' (mb) has been exchanged.

In fact, it has.
Do not be fooled by the short hand.

All transaction occur with money or it is a barter.

Because the speed of withdrawal to redeposit in now measured in microseconds does not change this.
All it means is the economy can produce more transactions in a given time period.
It does not change the money supply.
It does not "necessarily" change the demand for money or lessen it.

In fact internal banking operations (which are quite common in small towns) totally destroy your argument. Interbank transactions are little different.

This is merely simplified accounting.

The bank with the surplus reserves lends back to the bank with a shortage of reserves (somewhat in a round-about fashion) so in essence you can say no 'real money' is exchanged.

If, in fact, the system worked as you say such lending would be unnecessary - debt is money, right? So why would a bank need to borrow money so to cover money?

But they do. Banks exchange real money to maintain their legal requirements because the deposits are not money, but liabilities called "IOU"

Say I bank at ABC bank. I want to buy a home for 100k. Frank owns a home...and also banks at ABC bank. We agree to deal. The bank gives Franks a 100k deposit and I get the home and in exchange the bank gets 100k loan asset. Surely you must acknowledge this happened above and beyond reserves and therefore reserves can't be considered the sole source of money.

Sorry, no.
It does not happen greater than the reserves.
That is why small banks can only make small loans and big banks make big loans.

Your local bank cannot make a loan for $1 billion to a local who will buy a land from another local, even if that local deposited the loan .... because the new billionaire may want to not want to deposit it!

Your claim is that the bank forces the re-deposit to ensure its liquidity ... and forcing it cannot do.

Rothbard is a wise man Now say the depositors never check to see if their deposits are backed.

He is right.

In such a case you would argue that such fraud would never become uncovered right?

It's worked for 100 years.

Do you argue that fractional banking (unless there is a bank run or bailout) does 0 harm to the economy even though a bank issues more claims on reserves than it can do?

Correct.

As long as the demand of money is lower than the supply.

It's all about time. A bank works it's magic by mismatching short term liabilities against long term assets.

Agreed.

This means the short term assets have to be perpetually rolled over or refinanced to maintain liquidity.

Every microsecond, since the short term is "anytime I get my money"

Long term assets being long term assets means they will not help a bank's liquidity situation.

Correct, unless the bank sells them

The only other thing that can help would be money from outside of the banking system (which is scare relative to the scale of the banking system or is plentiful if it comes from the Fed).

Help...when?
During a banking crises?

Put another way in order for fractionally backed loans to be paid off, the savings outside of the banking system has to grow at a faster rate than the debts to the banking system.

No.

In order for a loan to be paid off is for the borrower to earn.

It has nothing to do with "creating money", unless you believe you earning is 'creating money'.

Take the bank out of the loop.

Just you and I.

I have bread and you are hungry.

We make a deal.

I will give you bread, but you have to mow my lawn.

I takes me 1 hr to mow the lawn, but it takes you only 1/2 hr.

In 1 hour I make more than enough bread to feed me and feed you.

You work for 1/2 hour, and get bread.
I have bread and a mowed lawn.

Where did your bread come from?

Replace me with "bank" and "mowed lawn" with repayment plus interest.

So, no, paying interest on borrowed money does not demand more creation of money.

Banks spend their money or invest their profits (savings, that which they do not spend) - just like you do

You argue the banks are outside of the economic system - they are not. They are equal participants, like you.

Bank of America:
Revenue net: $120.9 billion
Expenses: $72 billion
Net Income: $48.4 billion

And what did they do with what was left of the $48 billion after they paid taxes and dividends etc.?
Loaned it out...again.

You seem to be arguing that the debts could be repaid...just over time.

Could?
Sure, and one day maybe we'll colonize Alpha Centurai too.

No, I am arguing that the banking system exists because it is valuable to the market place

It provides an avenue for savers to invest their money
It provides an avenue for entrepreneurs to get money to make a business.

Banks "borrow" money from savers and lends money to borrowers. It is in the business to get repaid because that it how it earns profit. But it earns a profit by lending.

Therefore, the business is a constant repay/lend/repay/lend ... forever.

There will always be borrowers in the market for there is always will be people who desire goods today but wish to defer payment until tomorrow.
There will always be depositors in the market for there is always will be people who desire goods in the future to consume and defer consuming them today.

Thus, there will always be a banking system that exists to satisfy the desires of both these people ... for a profit.

The FDIC just feeds the broken bank to a bigger bank Without the FDIC and more importantly the the open market, the true market would expose and destroy the banking system in short notice.

Perhaps, but the FDIC is inflationary by its operation.

This is where money is created to satisfy depositors.

A bank goes bust. It cannot pay depositors due to its 9/1 leverage. 8 are out of luck.
The money supply has not changed, still "1" as it was before.

Now FDIC steps in and funds the other 8.
If it can do it out the fund it has created by charging a fee, it is not inflationary - it is merely another "Federal Reserve" fund to offset deposit demands, except aggregated.

But if this is all it was - the same could be done by the FED by lowering the fractional reserve from 9/1 to 5/1 or 3/1 or whatever.

The FDIC exists so it can also pull from the US Treasury.

The US Treasury has no money, but a lot of T-bills.

The FED buys these T-bills with newly manufactured money

...which goes to the Treasury, to the FDIC, to the depositors as real money.
There is your "inflation".