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  1. #11
    Quote Originally Posted by Paul Or Nothing II View Post
    While it is true that central-banks do help commercial-banks sustain the "illusion of solvency", it usually doesn't lead to inflation & siphoning of the purchasing-power in the long-run because as I've said, banks have to pay back the loans with interest & when they do, the money gets destroyed...
    For the record, and for the sake of precision, and clarity of understanding, I avoid the unqualified use of the word 'inflation' wherever possible as it applies to economics.

    Price Inflation, or 'inflation' as commonly understood when used by itself, refers only to a general increase in price levels. Thus, it is a description of an effect, without regard to its many possible causes. So it is no wonder that this definition is the much preferred default by statists, monetarists and Keynesian-spawned schools of thought, because the term is so nebulous and imprecise as to be forever moot, as it lends itself to myriad reality-obfuscating interpretations.

    Monetary Inflation, on the other hand refers only to an increase in the aggregate currency supply--by any amount, regardless how, when or where it circulates. If you counterfeit and circulate a single dime you have caused monetary inflation to that extent. This definition is an extremely precise, indisputably positive description of a specific cause, without regard to its many effects. How that might lead to 'price inflation' is another story altogether. Follow the money--the cause, and not its much-debated effects, or whether or not they are discernible, or can be attributed to monetary inflation.

    Each loan under the currency creation/destruction process you described above has a monetary inflation/deflation curve of its own. Considering the case of only a single loan in the creation/destruction process, monetary inflation occurs the very moment that new currency comes into existence as a result of that loan, with monetary deflation occurring as that loan is repaid and the principle is destroyed. The only thing that ultimately happens, once the loan is repaid, is that wealth was transferred in the form of interest as it was channeled into/through the bank. Monetary inflation occurs, however, so long as any counterfeited currency in that creation/destruction process still exists. Thus, loan payments only deflate the bubble originally created in the supply--not the original supply.

    You say that "...banks have to pay back the loans with interest & when they do, the money gets destroyed...", which implies 1) there was no net effect on the exchange value of the currency in the interim, and 2) there is no net new money in the system when all is said and done.

    Two problems with that:

    1) there is always an interim effect, and
    2) nothing is ever "all said and done"

    In reality, there is always monetary inflation which leads inexorably to price inflation) in this process. That is because there is always a new and ever-expanding crop of loans to replace all the principle that is being destroyed from prior loans long before they are repaid. You say that principle is destroyed as banks pay back loans with interest, but the aggregate debt pool always expands at a faster rate than the loans that are being repaid. That is an absolute mathematical requirement for the survival of the entire FRB system, which cannot survive otherwise (under any regime), making it little more than a Ponzi scheme. The Federal Reserve is there to facilitate and provide cover and efficiency to that scheme, and to disguise its inherent insolvency.

    This is where increase-consumption-at-all-costs ("grow the economy") comes into play, and goes to the heart of why I believe mainstream economists (Krugman et al) do not include private debt as factors in macroeconomic models, and yet will argue out of the other side of their mouths that spending, consumption, and private debt in the aggregate must expand to keep the economy 'stimulated'.
    Last edited by Steven Douglas; 10-18-2012 at 11:11 AM.



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