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Thread: Is the US national "debt" an illusion?

  1. #121
    Quote Originally Posted by Acala View Post
    At this point it is important to have a working defintion of "money" for purposes of understanding how certain activites impact the money supply.

    Anything that acts to satisfy the demand for money IS part of the money supply. One part of the demand for money is for use in exchange for goods and services. But another part of the demand for money is storage of exchange value - savings. People keep significant amounts of money on hand as backup. Even though this money is not being used for exchange, it is meeting a demand for money. Money stored in a mattress is meeting a demand for money. If you suddenly made all that "idle" money disappear, people would replace it by taking money out of circulation, proving that saved money and petty cash on hand constitute part of the demand for money.

    If I loan you $100 directly, that $100 is no longer meeting any of my needs for money until you pay it back. I can't use that money while it is on loan so if I need money for something, I will have to get it from another supply.

    However, if I store my petty cash in a checking account or savings account with the expectation that I can access that money at any time as back up for what is in my wallet, thereby meeting part of my current demand for money, and then the bank lends out 90% of that money to someone else, the money on loan is also meeting the demand of that borrower for money. So suddenly where there was only $100 meeting the demand for money, there is now $190 meeting separate demands for money - my demand for savings and the borrower's demand for exchange value for some goods or services. Voila! The money supply just expanded. This only happens with fractional reserve lending and not with person-to-person lending.
    I'd have thought that those who support gold-standard would readily agree that MB is "money". I mean if a person deposits 100 ounces of gold in a checking account & the bank lends 90 ounces, it's not really "creating money" because obviously, the process doesn't create more gold (although it could be argued that the process creates a perception of there being more money than there actually is). Accordingly, since the money issued by the central-bank is MB under a paper-standard, by the same token, only MB would have to be considered "money".

    What I'm trying to argue with the person-to-person lending thing is that (just like fractional reserve banking) it leads to spending of $90, then $81, then $72 & so on into the economy, which drives up prices of goods & services. So person A lends $90 to person B, who spends it to buy stuff from person C, who lends $81 to person D, who spends it & so on. As far as the relationship between spending & price-inflation, it should be obvious considering the fact that Fed's Balance Sheet has more than tripled since the crisis but the prices of goods & services haven't tripled because most of the newly created money hasn't been spent.

    Again, just to be clear, I don't support central-banking but I do support voluntary FRB & don't necessarily see it as a "problem that needs to be solved".
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman



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  3. #122
    Quote Originally Posted by Paul Or Nothing II View Post
    I mean if a person deposits 100 ounces of gold in a checking account & the bank lends 90 ounces, it's not really "creating money" because obviously, the process doesn't create more gold (although it could be argued that the process creates a perception of there being more money than there actually is).
    Actually, it does because the check I write on the gold I deposited into my checking account has the same function as money. I use the checks just as if I had the 100 ounces of gold in my pocket. Merchants will treat those checks as if they were actual gold. Yet the gold represented by those checks has been loaned out to another person who also uses those gold ounces as money at the same time I do. So the money supply has indeed been expanded.

    But the person-to-person loan does NOT have the same effect. When I loan somebody 100 ounces of gold I can no longer spend those gold ounces. Only the person I loaned them to can spend them. I cannot spend them until he pays me back and then HE can't spend them.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  4. #123
    As I've said in my reply to Acala, I think people who understand & support gold-standard should more readily understand what "money" is & that FRB doesn't create it because when a person deposits 100 ounces of gold in a checking account & the bank lends 90 out ounces, they are NOT "creating money" because they aren't creating more gold; yes, it could be argued that FRB creates a perception of more money but only a perception.

    Quote Originally Posted by helmuth_hubener View Post

    It's the same thing. It's the same result.
    Of course, the results are important but so is the process that leads to those results; sometimes, it's the "how" that makes all the difference in how we view something. If a person has died, the HOW matters; whether he died of natural causes or if he was killed. So from that point, 100, 90, 81, 72....thing isn't the same thing as 100 to 900 thing.

    Quote Originally Posted by helmuth_hubener View Post
    Pedagogically, for teaching new people my explanation is better, because it's much simpler than the traditional 90, 81, 72, 65,... series explanation. Salerno does go into 90, 81, 72, 65,... in the video above, right? My explanation is also superior for being closer to actually how it really works in reality. If a bank has a million dollars sitting in reserve, it does not cash out $900,000 of it to hand to people as dollar bills for loans. No, if it has a million dollars sitting in reserve, it has -- in reality -- ten million dollars of checking account balances on its ledger. That's how it works! It really, really is. Go ask your local bank president.

    My explanation's shortcoming is that it's sometimes hard for people who have already learned a little about fractional reserve banking to accept it, because it's presenting things differently. But it really is true, and no, you're not an idiot, and neither is Professor Salerno and in fact I'm very sure that if I were to explain to him how I explain fractional reserve banking as I did in those other two threads, he would agree completely with it and pronounce it entirely sound.
    Again, no, if a bank has a million dollars in checking accounts then it can ONLY lend $900,000. And yes, such high amounts are rarely handed over in cash but that does NOT mean they can't be converted to bills/coins; of course, they can be.

    Look, if you have yourself convinced that you know something that Salerno & so many Austrian as well as non-Austrian scholars & economists don't know then it wouldn't matter what point anyone raises & we'll just have to agree to disagree. But just because I'm so inclined, I'll just try to try one last time to show how the process works & how Fed's Balance Sheet would look like under certain circumstances.



    Ok, initially, Person A has $100 in cash.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person A - $100
    Bank reserves held by Fed
            Bank A - $0
    Person A deposits his cash in Bank A. Typically, banks don't keep more cash than what is necessary to meet their daily cash-transactions so they send it over to Fed & ask for cash as & when necessary but just to keep things simple & because there's no fixed criteria for how much vault cash each bank keeps, I won't show "Vault Cash" as a separate item on these Balance Sheets.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person A - $0
    Bank reserves held by Fed
            Bank A - $100
    Bank A loans $90 to Person B, who has an account with Bank B.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person A - $0
    Bank reserves held by Fed
            Bank A - $10
            Bank B - $90
    Person B buys stuff from Person C & pays by check, which Person C deposits in his bank, which is Bank C. It goes without saying that Person B could have encashed the money on his account & paid in cash.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person B - $0
    Bank reserves held by Fed
            Bank A - $10
            Bank B - $0
            Bank C - $90
    Now, Bank C lends $81 to Person D, who banks with Bank D.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person C - $0
    Bank reserves held by Fed
            Bank A - $10
            Bank C - $9
            Bank D - $81
    Now, Person D buys stuff from Person E, who banks with Bank E.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person D - $0
    Bank reserves held by Fed
            Bank A - $10
            Bank C - $9
            Bank D - $0
            Bank E - $81
    And, so on goes the process.

    So, as can be seen, no new money is generated by FRB itself; of course, central-bank may create new money by buying assets in order to lower-interest or whatever else it wishes to accomplish out of it but the point is that FRB itself doesn't necessitate creation of new money, the existing merely gets spent & re-lent over & over.

    You could say, why can't Bank A lend $900 immediately as soon as Person A deposits $100? Because it doesn't have the money. Of course, it can lend $900 if it takes a loan of $900 from Fed but that's the whole point, that central-banking creates money, not FRB.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  5. #124
    Quote Originally Posted by Acala View Post
    Actually, it does because the check I write on the gold I deposited into my checking account has the same function as money. I use the checks just as if I had the 100 ounces of gold in my pocket. Merchants will treat those checks as if they were actual gold. Yet the gold represented by those checks has been loaned out to another person who also uses those gold ounces as money at the same time I do. So the money supply has indeed been expanded.

    But the person-to-person loan does NOT have the same effect. When I loan somebody 100 ounces of gold I can no longer spend those gold ounces. Only the person I loaned them to can spend them. I cannot spend them until he pays me back and then HE can't spend them.
    If the bank has already lent 90 out of the 100 ounces you'd deposited then your check of 100 ounces won't go through because the bank has only 10 ounces, which is the "problem" that many Austrian economists raise with FRB - the NON-AVAILABILITY of funds on demand.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  6. #125
    Quote Originally Posted by Paul Or Nothing II View Post
    So from that point, 100, 90, 81, 72....thing isn't the same thing as 100 to 900 thing.
    It really is, because it's an ongoing phenonenon, not a one-time event (like a death). We don't have to do forensics and reconstruct it. We don't have to be amazing detectives. The reality is right there in front of us! We just have to look at it! Every bank's finances look like this:

    Bank of Kazoos

    Reserves held at the Fed vault or our vault: 58.5 million dollars
    Total checking account balances: 580 million dollars


    Municipal Picture-Framing Workers Credit Union

    Reserves held at the Fed vault or our vault: 22.8 million dollars
    Total checking account balances: 200 million dollars

    That's the reality! Don't take my word for it: Go check it!

    Are we agreed on this?

    Again, no, if a bank has a million dollars in checking accounts then it can ONLY lend $900,000.
    Checking accounts =/= reserves. And this statement doesn't even parse, because creating checking account balances is how banks loan money! That's how they do it!

    Look, if you have yourself convinced that you know something that Salerno & so many Austrian as well as non-Austrian scholars & economists don't know then it wouldn't matter what point anyone raises & we'll just have to agree to disagree.
    I'm not trying to come off as arrogant or know-it-all in any way, and no, those men know far more than me. It really is just a communication problem, and so I am trying to improve my communication skills to the point where someone (anyone!) on RPF can understand what I'm saying. That's all.

    But just because I'm so inclined, I'll just try to try one last time to show how the process works & how Fed's Balance Sheet would look like under certain circumstances.
    Sounds good! I think you'll probably be mostly right; if I find something I take issue with I'll comment with a precise, defined correction according to my understanding. Then, if I'm wrong, if you could reply likewise with a precise, defined correction, that would be much appreciated.

    Ok, initially, Person A has $100 in cash.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person A - $100
    Bank reserves held by Fed
            Bank A - $0
    Person A deposits his cash in Bank A. Typically, banks don't keep more cash than what is necessary to meet their daily cash-transactions so they send it over to Fed & ask for cash as & when necessary but just to keep things simple & because there's no fixed criteria for how much vault cash each bank keeps, I won't show "Vault Cash" as a separate item on these Balance Sheets.

    Code:
    Liabilities                                 Assets
    Money in circulation                                 Gold + Treasury Securities + MBS - $100
            Person A - $0
    Bank reserves held by Fed
            Bank A - $100
    Right so far! This is exactly how it happens!


    Bank A loans $90 to Person B, who has an account with Bank B.
    Wait! Halt! Stop! This is actually not how it works in the real world at all! Bank A is not going to loan any money to Person B unless he has an account at Bank A! That's how it works! Have you ever gotten a bank loan? They will require you to set up a checking account with them as a condition for making the loan. Then, they fill that account up with imaginary funds.

    Banks only loan to people who have accounts with them. Any exceptions are very rare.

    So, let's stop with that error, because it's simple, easy-to-understand, narrow, and defined. I would like you to look up online, or to simply go down to your local bank and ask them about their loan-making process. After you have thus independently verified that what I am saying is absolutely true, I'd like you to come back to the thread and state as much. Not in the spirit of any kind of humiliation or "you're right, I'm wrong," just in the interest of the dispassionate pursuit of truth. OK?

  7. #126
    Quote Originally Posted by Paul Or Nothing II View Post
    As I've said in my reply to Acala, I think people who understand & support gold-standard should more readily understand what "money" is...
    Exactly. Money grows on trees.

    The fact that my avacados and oranges aren't deposited in a safe as a reserve currency is not going to affect "mother nature's" money supply. The fact that they are not made out of a scarce, shiny metal means nothing.

  8. #127
    Quote Originally Posted by helmuth_hubener View Post

    Wait! Halt! Stop! This is actually not how it works in the real world at all! Bank A is not going to loan any money to Person B unless he has an account at Bank A! That's how it works! Have you ever gotten a bank loan? They will require you to set up a checking account with them as a condition for making the loan. Then, they fill that account up with imaginary funds.
    Why should that have any bearing on Fed's Balance Sheet? I've shown Fed's Balance Sheet, which reflects the money held in various banks that have an account with the Fed, not of every person that may have an account with these banks. So, while the money is with the Bank A, obviously, there's no impact on the reserves held by Bank A with the Fed.

    I've made the illustration the way I have because I thought it would be less confusing. For example, I have also shown "persons" under Money in Circulation but that does NOT mean that Fed actually knows who has how much of the bills/coins in circulation, I've only presented it that way for easier understanding. I've also avoided the whole vault cash thing for the same reason. The purpose of the illustration is to show that FRB doesn't create money, & that is the most relevant aspect of the illustration.

    I was also going to show banks' Balance Sheets in my previous post but I thought that the whole thing might become confusing & lengthy. Anyway, let me post Bank A's Balance Sheet now :

    Initially, Person A has deposited $100

    Code:
    Liabilities                                 Assets
    Checking Account of Person A - $100                 Reserves held with Fed - $100
    Person B gets a Loan.

    Code:
    Liabilities                                 Assets
    Checking Account of Person A - $100                 Reserves held with Fed - $100
    Checking Account of Person B - $90                   Loan to Person B - $90
    Person B buys stuff from Person C, who banks with a different bank.

    Code:
    Liabilities                                 Assets
    Checking Account of Person A - $100                Reserves held with Fed - $10
    Checking Account of Person B - $0                    Laon to Person B - $90
    Obviously, Bank A isn't actually in a position to redeem $100 to Person A because they have only $10, which is the "problem" that Austrians talk about - non-availability of demand-deposits on demand! I mean this has been the raison d'etre for central-banking, to minimize bankruns by issuing new money when banks are unable to redeem demand-deposits because they have lent out the money in demand-deposits. But again, the new money comes from the central-bank, not from FRB itself.

    Quote Originally Posted by helmuth_hubener View Post
    Every bank's finances look like this:

    Bank of Kazoos

    Reserves held at the Fed vault or our vault: 58.5 million dollars
    Total checking account balances: 580 million dollars


    Municipal Picture-Framing Workers Credit Union

    Reserves held at the Fed vault or our vault: 22.8 million dollars
    Total checking account balances: 200 million dollars

    That's the reality! Don't take my word for it: Go check it!

    Are we agreed on this?
    Yes, I agree to that extent but I don't agree with your conclusion that any "money" is being created there.
    Last edited by Paul Or Nothing II; 03-23-2015 at 04:19 PM.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  9. #128
    Quote Originally Posted by Paul Or Nothing II View Post
    If the bank has already lent 90 out of the 100 ounces you'd deposited then your check of 100 ounces won't go through because the bank has only 10 ounces, which is the "problem" that many Austrian economists raise with FRB - the NON-AVAILABILITY of funds on demand.
    Not so. The checks WILL go through because the bank will take the needed gold from other accounts to cover my checks. You think that if I deposit $100 into my checking account and then write a check for $100 the bank will not honor it because it loaned out 90%? Fractional reserve banking is a shell game. The bank juggles the reserves to cover daily demand. That's why a run on the bank causes people to lose their money because the bank can only cover the checks from the 10% fractional reserves if they come in at a low rate. If they come in all at once, the bank can't honor them and it must close.

    The purpose of the Federal Reserve was initially to create a central clearing house that could shift money among all the banks and accounts so it would require a run on ALL the banks to break the system. Later, when the shift to fiat money was complete, the problem was solved because the Fed could just pull money out of a hat. Of course solving that problem just created a bigger one.
    Last edited by Acala; 03-23-2015 at 04:20 PM.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton



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  11. #129
    Quote Originally Posted by Acala View Post
    Not so. The checks WILL go through because the bank will take the needed gold from other accounts to cover my checks.
    And how does taking money from other accounts constitute "creating money"? I don't think so.

    Quote Originally Posted by Acala View Post
    You think that if I deposit $100 into my checking account and then write a check for $100 the bank will not honor it because it loaned out 90%?
    I thought it was obvious enough that I was talking about a hypothetical scenario, for the sake of simplicity, where you're the only depositor; in which case, your check will definitely not go through because banks can only lend the money that they actually have & can't create it. Unless of course, the bank gets a loan from Fed but that again, doesn't constitute creation of money through FRB.

    Quote Originally Posted by Acala View Post
    Later, when the shift to fiat money was complete, the problem was solved because the Fed could just pull money out of a hat.
    Which demonstrates the fact that banks can't "create money", otherwise they'd never need Fed.....
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  12. #130
    Quote Originally Posted by Paul Or Nothing II View Post
    Why should that have any bearing on Fed's Balance Sheet?
    It doesn't! Not at all! I'm just trying to keep things simple and take one step at a time, because this can be a technical topic in which discussions can get complex fast, to the extent that it becomes unclear what either person is saying and what is even being disputed!

    So, it sounds like you are tacitly agreeing that banks loan money, in reality, by creating checking accounts for the loanees and filling them with funds. You raise no objection to this. It seems like we're on the same page.

    I also agree with everything you wrote on your ledger sheets. Great! So, here's my one question:

    Bank A is able to increase the reserves they hold with the Fed by some amount -- in our examples, $100. They somehow know this money is going to be sticking around for a while, not going to be yanked out again immediately. Also, these reserves count towards their Reserve Requirement, legally speaking. Now, just to review, legally according to the Reserve Requirement rules, they can pyramid up to ten times (more or less) the amount of checking account balances as they have in their legal Reserve. So, if the reserve has increased by $100, the maximum amount of checking account balances they can have outstanding is now $1,000 greater.

    Bingo! That's my whole point! Well, the legal side of it. They are legally able to do it.

    Practically, can they? This is perhaps where you have doubts, if I read you correctly. You write:

    Obviously, Bank A isn't actually in a position to redeem $100 to Person A because they have only $10, which is the "problem" that Austrians talk about - non-availability of demand-deposits on demand!
    And, I'm having to fill in the blanks of your thinking a bit here, but I think you're point is: look, FRB doesn't create money -- there's no additional money anywhere! Just a bunch of loans without the money to cover them!

    If that's your point, I can somewhat agree with it. My somewhat disagree is this: for all practical purposes, that money does exist, it is there. Because all the banks are inflating at the same rate (they all have that same 1-to-10 reserve ratio), the system is stable. There's no banks which are far less sound than others, and so for each bank the balance of checks in and checks out matches. It all goes along smoothly, nobody is yanking out their cash.

    Now if everybody was constantly yanking out their cash, that would be a whole different story. Then, you'd have what amounts to a permanent perpetual bank run and the banks would not be able to pyramid nearly as much checking account balances on top of their reserves. But they're not. They don't. Nobody yanks out cash. A very small and predictable percentage of cash ever needs to be doled out. And so you have ten times the money that you would otherwise have. Maybe not "real" money or whatever. No dollar bills are being printed up nor having babies. But a balance in a checking account is for all practical purposes money. Everyone uses it as money. All accounting rules and laws, right down to Sarbanes-Oxley, permit you to count "Checking Account Balance" as "Cash Asset". Same as cash.

    So that's the point. That's the sense in which taking in X amount of money as bailments and then turning around and issuing X+1 amount of checking account balances is creating one additional dollar of money in the economy. If the bailors came to yank out their money, yes, that extra dollar would go away. Poof! See, fractional reserve banking can both create and destroy money, depending on what's going on.

  13. #131
    Quote Originally Posted by helmuth_hubener View Post

    So, it sounds like you are tacitly agreeing that banks loan money, in reality, by creating checking accounts for the loanees and filling them with funds. You raise no objection to this. It seems like we're on the same page.
    No, they aren't filling them with funds. A checking account is merely a liability on the books of banks while it's an asset for the person holding that account - that is, an asset that CAN BE converted to money - it does NOT mean that the bank just created money & now, it's sitting there at all times. If they could do that then they'd never need Fed to bail them out when a big chunk of the demand-depositors try to redeem their deposits.

    Quote Originally Posted by helmuth_hubener View Post
    Bank A is able to increase the reserves they hold with the Fed by some amount -- in our examples, $100.
    They didn't increase their reserves with the Fed willy-nilly, Person A deposited that money so no money was created.

    Quote Originally Posted by helmuth_hubener View Post
    But a balance in a checking account is for all practical purposes money. Everyone uses it as money.
    Again, I think this is the crux of the matter. As I've said, a checking account is a liability for the bank & an asset for the accountholder - it is NOT "money", no matter what anybody thinks about it - it's an asset that can be converted to money, given that the bank actually has enough money, which mayn't always be the case.

    Quote Originally Posted by helmuth_hubener View Post
    So that's the point. That's the sense in which taking in X amount of money as bailments and then turning around and issuing X+1 amount of checking account balances is creating one additional dollar of money in the economy. If the bailors came to yank out their money, yes, that extra dollar would go away. Poof! See, fractional reserve banking can both create and destroy money, depending on what's going on.
    Except, there's no extra dollar to go away, it never was created in the first place! As I've said before, it could be argued that a perception was created as such but nothing more than perception.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  14. #132
    It is the right idea just backwards in execution. Checking accounts are not created out of reserves (whose name would go on the account if the banks are creating them?). Reserves are created out of deposits which can include checking accounts. The money comes from people who deposit money at the bank (loan it to the bank until they need it). The banks then have a Reserve Requirement- a portion of those deposits they are required to keep in reserve and not loan out. They can loan out the rest of the money if they want to.

    If Steve goes into a bank and deposits $1000, that goes into an account in his name. They have the $1000- Steve no longer does. What he does have is a promise to pay it back later. With a ten percent reserve, the bank has to take ten percent of that or $100 and keep it. The other $900 can be lent out to others who feel they need some more money for something.

    A check is also a promise to pay- not real money. It says "I'm giving you this. Take it to my bank and they will give you the money out of the money I have already given them to hold for me".
    Last edited by Zippyjuan; 03-23-2015 at 06:37 PM.

  15. #133
    Quote Originally Posted by Paul Or Nothing II View Post
    I thought it was obvious enough that I was talking about a hypothetical scenario, for the sake of simplicity, where you're the only depositor; in which case, your check will definitely not go through because banks can only lend the money that they actually have & can't create it. Unless of course, the bank gets a loan from Fed but that again, doesn't constitute creation of money through FRB.
    You will eventually get all the way there. You are so close. So we were using gold as money, correct? So person A deposit $100 worth of money in a checking account, and lends $90 to person B. Person B isn't getting a bag of coins from the bank, they are getting checks, or promises to redeem for money. The way FRB works, person A can write checks for up to $100 and person B can write checks for up to $90. If they both spend every penny, the bank doesn't care. The bank didn't mint any gold coins, but anyone can see how this is inflationary.

    They only time they give a $#@! is when someone comes in and demands money for their note. If people come in looking for more than $100, they are insolvent, barring a government bailout. This means the people with the notes for the other $90 really have nothing. When the market discovers that those notes are worthless, that is practically $90 sucked out of circulation. Hence the deflation that accompanies the bust.

    Now would a bank with only one depositor act in this matter? Without a government backstop, probably not. With more deposits and money in the vault, I'm sure many would try it for a while, until it bites them in the ass and bankrupts them.

  16. #134
    Quote Originally Posted by The Gold Standard View Post
    You will eventually get all the way there. You are so close. So we were using gold as money, correct? So person A deposit $100 worth of money in a checking account, and lends $90 to person B. Person B isn't getting a bag of coins from the bank, they are getting checks, or promises to redeem for money. The way FRB works, person A can write checks for up to $100 and person B can write checks for up to $90. If they both spend every penny, the bank doesn't care. The bank didn't mint any gold coins, but anyone can see how this is inflationary.

    They only time they give a $#@! is when someone comes in and demands money for their note. If people come in looking for more than $100, they are insolvent, barring a government bailout. This means the people with the notes for the other $90 really have nothing. When the market discovers that those notes are worthless, that is practically $90 sucked out of circulation. Hence the deflation that accompanies the bust.

    Now would a bank with only one depositor act in this matter? Without a government backstop, probably not. With more deposits and money in the vault, I'm sure many would try it for a while, until it bites them in the ass and bankrupts them.
    If Person B has already spent $90 then Person A's $100 check won't go through as A's bank will only $10 :
    1) Not under a gold-standard - because the moment Person A buys something & that seller takes the check & deposits it in his bank, his bank will ask for $100 from Person A's bank & obviously, Person A's bank would only have $10 worth of gold so Person A's check can't go through.
    2) Not under paper-standard - because, as I've already illustrated in my replies to helmuth_hubener, when the check is deposited at another bank, the money will have to be transferred from Bank A's reserves with the Fed to the reserves of the other bank but again, since Bank A only has $10, Person A's check won't go through.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  17. #135
    So, while all that useless crap about how to create the perception of fake money was posted in the last couple pages of this thread, did anybody see anything about the debt ceiling extension?
    Last edited by devil21; 03-25-2015 at 05:47 PM.
    "Let it not be said that we did nothing."-Ron Paul

    "We have set them on the hobby-horse of an idea about the absorption of individuality by the symbolic unit of COLLECTIVISM. They have never yet and they never will have the sense to reflect that this hobby-horse is a manifest violation of the most important law of nature, which has established from the very creation of the world one unit unlike another and precisely for the purpose of instituting individuality."- A Quote From Some Old Book

  18. #136
    Quote Originally Posted by Paul Or Nothing II View Post
    If Person B has already spent $90 then Person A's $100 check won't go through as A's bank will only $10 :
    1) Not under a gold-standard - because the moment Person A buys something & that seller takes the check & deposits it in his bank, his bank will ask for $100 from Person A's bank & obviously, Person A's bank would only have $10 worth of gold so Person A's check can't go through.
    2) Not under paper-standard - because, as I've already illustrated in my replies to helmuth_hubener, when the check is deposited at another bank, the money will have to be transferred from Bank A's reserves with the Fed to the reserves of the other bank but again, since Bank A only has $10, Person A's check won't go through.
    Think about what you are saying. Person A with $100 in his account will have any checks for over $10 bounce? You would think this would be some widespread problem then. I'm surprised we never hear about it. Oh, we don't because that isn't how it works.



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  20. #137
    Quote Originally Posted by The Gold Standard View Post
    Think about what you are saying. Person A with $100 in his account will have any checks for over $10 bounce? You would think this would be some widespread problem then. I'm surprised we never hear about it. Oh, we don't because that isn't how it works.
    It was a widespread problem under gold-standard & caused frequent bankruns; it isn't anymore because the bank can borrow from Fed but I didn't mention that to demonstrate what would happen if it didn't, to make the point that banks can't honor checks for more money than what they have.
    Last edited by Paul Or Nothing II; 03-24-2015 at 08:37 AM.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  21. #138
    Quote Originally Posted by Paul Or Nothing II View Post
    Again, I think this is the crux of the matter.
    Exactly. That is the crux (at least the crux of the issue we've drifted to). You're very perceptive, you have good reading comprehension and cognitive abilities, and it's been a pleasure talking with you.

    The crux, for all those following along at home:

    You don't want to call checking account balances money. You don't think they qualify.

    I, on the other hand, have been calling them money throughout the discussion. And I will probably continue to do so, because for all practical purposes, they are. And I am a very practical man. But, I don't have any problem with changing terminology for the sake of this particular discussion. And you're right, according to how you have defined the terms. I agree that checking accounts are certainly not money in the exact same way as dollar bills are money, nor (one level deeper) as gold could be used as money. So if we want to call checking account balances not 100% backed by dollar bills (or gold) as "the perception of money," not real money, let's do it.

    I have one other "crux" I want to get back to, though, before we wrap up. You had written, in the beginning:

    If one were to believe that fractional-reserve-banking "creates money" then one would have to believe that lending money itself "creates money" but does it really??? I mean if we take the banks out of the argument for a moment, & imagine a bankless world, where people saving money (or even Fed-created money, for that matter) lend it to other people - say person A has $100 & he loans it to person B (or assume that B got a loan from Fed), now, person B buys stuff from person C, person C lends the whole $100 to person D & so on & on the cycle goes, just like it does when banks lend; except when banks lend (at 10% reserves), the leverage is capped close to 900% but when there's no reserve-requirement, as it would be the case with individuals lending to one another directly, the potential leverage is theoretically infinite, so would these people be "creating" money??? So, again, does lending create money? If someone (erroneously) believes so, then do they hope to outlaw all lending itself? If yes then that would be a huge blow to the whole concept of free market capitalism because people saving & lending is a very important part of capitalism & the prosperity it is able to generate, if anything, it's the most important aspect of capitalism.

    This equates fractional reserve banking with regular people loaning to each other, and even simply conducting commerce with each other. You seem to be saying that whenever money changes hands for any reason (buying things, loaning, gifting) that's just the same as FRB, except for FRB is limited in its leverage because they're forced to keep 10% of the money each time there's a transaction, whereas normal humans can go ahead and spend or loan all 100% of whatever's in their pocket, and so the leverage is infinity!

    I disagree with that. Fractional Reserve Banking does create the perception of additional money. We're agreed on that now, I think. But just passing money from hand to hand does not create the perception of additional money.

    Money in the FRB system is being used simultaneously by many people, which creates the perception of additional money. The same exact money is being used at the same exact time to back multiple checking accounts.

    Money in regular commerce and person-to-person loaning is being used by only one person at a time. It moved from A to B to C. Even if say B wrote a bounced check or does a charge-back, the money is then pulled back to B, away from C. It's never being used by two people at once for any significant period of time. There's never any perception of additional money created.

    FRB is like juggling. You're only holding two balls at once, max (those two are the "real" money as you're putting it), but you have twenty more balls flying around in the air (playing the part of the perception of money). In regular, non-embezzling commerce, there's no balls in the air. The balls are just passed from one hand to another, person to person. One ball, one hand.

  22. #139
    Quote Originally Posted by helmuth_hubener View Post
    You don't want to call checking account balances money. You don't think they qualify.
    Stocks, bonds & a whole bunch of assets can be converted to money but they aren't "money", so no reason to consider checking accounts as "money" either. They are all assets that can be converted to money but they are not "money" by themselves, & although it may be understandable why many people may confuse checking account balances with money, this belief is what leads to their "perception" that there's more money than there actually is. Just imagine what we call "money" is extended to encompass stocks as well; suddenly, there's more "money" but would such "perception", by itself, cause a general price-inflation in the economy? No.

    Apart from this, a significant part of the discussion so far has revolved around whether banks can lend $900 when someone deposits $100. They can't.

    Quote Originally Posted by helmuth_hubener View Post
    And you're right, according to how you have defined the terms. I agree that checking accounts are certainly not money in the exact same way as dollar bills are money, nor (one level deeper) as gold could be used as money. So if we want to call checking account balances not 100% backed by dollar bills (or gold) as "the perception of money," not real money, let's do it.
    Yes, it's more obvious what "money" is under a gold-standard, & that the FRB does't create money as it doesn't create more gold by itself.

    Quote Originally Posted by helmuth_hubener View Post
    I disagree with that. Fractional Reserve Banking does create the perception of additional money. We're agreed on that now, I think. But just passing money from hand to hand does not create the perception of additional money.
    I agree, person-to-person lending doesn't create the "perception" of more money. This is because with FRB, certain assets are created (checking accounts) that are denominated in the units & face value of "money", which causes people to confuse these assets with money, which is what causes the perception of more money but no such assets are created with person-to-person lending & hence, no such change in perception is observed.

    Nonetheless, my point with the comparison was to get to the fact that spending drives price-inflation/deflation, & I've made the point in the one of the subsequent posts. I didn't want to jump straight to spending & prices because a lot of people here likely believe that FRB drives up prices because they see the money being spent 90, 81, 72 & so on, & they naturally expect prices to rise, & they would rise (temporarily) but only because the money is being spent. So, I said, let's take banks & FRB out of the equation, & just have the people lending (& spending) money & the effect on prices would be the same in essence. So I've tried to put two things, side by side, which would in essence have the same effect but one of which would be considered bad (FRB) by many people here while very few would be against the other (person-to-person lending).
    I've a lot to disagree with mainstream economics but one thing that they stress about, & rightly so, is that spending (or lack thereof) dictates prices, at least in the short-run, which can easily be seen by the fact that Fed has more than tripled MB since the crisis began & yet, the prices of things haven't tripled because most of that money hasn't been spent.

    Quote Originally Posted by helmuth_hubener View Post
    Money in the FRB system is being used simultaneously by many people, which creates the perception of additional money.
    It could be argued that such money is "available to be used" by many people simultaneously but it can't actually be "used" by more than one person at a time. If A deposits $100, the bank credits a loan of $90 to B, the money is "available to be used" by both A & B but if B spends $90 then A can't spend that $90 so only one person can spend the money at a time even under FRB.

    Quote Originally Posted by helmuth_hubener View Post
    The same exact money is being used at the same exact time to back multiple checking accounts.
    I've already illustrated the Balance Sheet of Bank A; the checking accounts are backed by banks' assets, & "money" may be one of the assets held by the banks but there could be other assets as well, like in the illustration of Balance Sheet of Bank A, loan given to Person B is the asset held by Bank A, apart from the money it has.
    There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
    - Milton Friedman

  23. #140
    Quote Originally Posted by Paul Or Nothing II View Post
    Stocks, bonds & a whole bunch of assets can be converted to money but they aren't "money", so no reason to consider checking accounts as "money" either.
    Well, they are a little different (each of these assets is different from each other, actually). Checking account balances are more immediately liquid, and more convenient, and more commonly used and thought of as cash reserves for day-to-day expenses. This could change, should an entrepreneur make it happen. And so, fundamentally, I think that stocks and bonds could be counted as money. Certainly T-bills could be.

    And luckily for us, there's no such thing as a fractional-reserve stock broker! Or at least we hope there isn't!

    Apart from this, a significant part of the discussion so far has revolved around whether banks can lend $900 when someone deposits $100. They can't.
    Absolutely, because what you mean is: banks cannot lend $900 of money when someone deposits $100 of money. And we're using money in the sense to only count cold, hard, shiny cash. So obviously a bank cannot loan out even so much as $101 dollars of money when they get $100. Where would the extra one come from? There's only 100 of them. Gold coins don't have babies. It's simple laws of physics.

    But what they absolutely do do is stack $1,000 of checking account balances on that $100; or in other words juggle $1,000 of balls with only $100 in hand at any time.


    Money in the FRB system is being used simultaneously by many people, which creates the perception of additional money.
    It could be argued that such money is "available to be used" by many people simultaneously but it can't actually be "used" by more than one person at a time.
    Well again, going back to practical reality: for all practical purposes when I swipe my debit card for $100, as far as I'm concerned I just used that. I made use of it. I don't know what better word we could employ than "used". Now that's just my "perception of money" that I'm using, but meanwhile many other people are using their "perception of monies" which are based on the very same "real" money. And meanwhile our bank is using a certain amount of money to back all of that "perception of money". It's using it, to make possible something that it wants to do (have a bunch of checking account balances). Once again, I don't know what better word we could employ than "used".

  24. #141
    The corporate oligarchy is another ball of wax. At the end of the day, it really is the government's fault. In this case, I blame the SBA.


    Isn't the widespread corporate consolidation really just a result of the difference between the cost of capital for small and big business? Big business borrows at a 2.5% interest rate, paying only interest for the term of the loan. Small business borrows at 5-7%, amortizing (paid off in full) over 5-10 years.


    The debt constant (annual payment/total loan) of small business can be upwards of 25%-30% vs 2.5% for big business. Small business loan payments are typically TEN TIMES MORE EXPENSIVE than big business loan payments.


    Additionally, small business loans are capped at $2-5 million. Big business loans have no limit. Also, small businesses loans restrict passive and "rent extracting" activities. Big business loans encourage them. These economic realities make small business investment nearly imposible and big business consolidation inevitable.


    If America cares about small business and the middle class, we must lower interest rates on government-guaranteed small business loans (through SBA reform), offer more "interest only" options to keep small and big business borrowing costs competitive, increase small business loan limits, and widen the scope of small business loans to include financial and rent extracting activity. These moves would strengthen the small businesses that currently exist, stimulate the formation of new small businesses, and enrich American business owners and small business employees alike.


    Otherwise we all be working at Wal-Mart for the rest of our lives. F- that. Let them eat my cake.

  25. #142
    Quote Originally Posted by Paul Or Nothing II View Post
    It was a widespread problem under gold-standard & caused frequent bankruns; it isn't anymore because the bank can borrow from Fed but I didn't mention that to demonstrate what would happen if it didn't, to make the point that banks can't honor checks for more money than what they have.
    It ceased to be a problem long before we went completely off the gold standard in 1971, which was long before every bank became part of a nationwide chain. This was done through deposit insurance, which I believe was a private industry before Washington nationalized and socialized it with the FDIC.

    Quote Originally Posted by Matthew Libman View Post
    Isn't the widespread corporate consolidation really just a result of the difference between the cost of capital for small and big business?
    No, though that's an important piece of the puzzle. There is also, just to name one major thing, regulation. If it takes three lawyers and five CPAs just to keep any business in compliance in any state, is that going to be more of a drain on Wal Mart or Mom and Pop's Shop?

    Back when we actually honored the Ninth and Tenth Amendments, one reason small business could compete was the big corporations had to comply with the laws of all the states they traded in, while small business was unlikely to trade in more than one or two. The New Federal Tyranny has eliminated that, further tilting the playing field in the favor of those corporations huge enough to make bigger brib--er, I mean campaign contributions.
    Last edited by acptulsa; 03-26-2015 at 02:04 PM.
    Quote Originally Posted by Swordsmyth View Post
    We believe our lying eyes...

  26. #143
    FDIC was created in 1933- during the Great Depression by the Glass- Steagall Act. Yes- there were bank runs under a gold standard. http://banking.about.com/od/security...s-The-Fdic.htm

    The FDIC was created as a result of thousands of bank failures in the 1920s and 1930s. In those failures, bank customers lost staggering sums of money -- if you didn’t get your cash out before the bank went under, you were out of luck. From time to time, individual states attempted to insure deposits, but none of those programs survived.

    Amid chaos and fear about continuing bank failures, the Banking Act of 1933 created the FDIC as a temporary measure to restore order (signed into law by President Franklin D. Roosevelt). Bank failures and bank runs quickly declined, suggesting that FDIC insurance helped to bolster confidence in the banking system. The FDIC was initially funded by the US Treasury with $289 million; that funding was repaid to the Treasury in 1948.

    The Banking Act of 1935 made the FDIC a permanent agency and refined how the organization works (for example, funded by banks instead of by the US Treasury). Since that time, the FDIC notes that “no depositor has lost a single cent of insured funds as a result of a failure.”

  27. #144
    Quote Originally Posted by Zippyjuan View Post
    FDIC was created in 1933- during the Great Depression by the Glass- Steagall Act. Yes- there were bank runs under a gold standard. http://banking.about.com/od/security...s-The-Fdic.htm
    Yes?

    Who asked?

    And who ever said there wasn't a bank run under the gold standard?

    Lots of primitive things happened while we were under a gold standard. For example, a lot of fools set up central banks and watched their new currency get inflated away to complete worthlessness while we happily grew to rival the world's superpower while we were on the gold standard.

    Why don't you dig up information on which female the Fed is going to use as an excuse to kick that heroic Central Bank Killer Andy Jackson off the twenty? You would have more inside information on that than any of the rest of us.

    Twenty FRN's say it won't be Lady Liberty.
    Last edited by acptulsa; 03-26-2015 at 08:47 PM.
    Quote Originally Posted by Swordsmyth View Post
    We believe our lying eyes...



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  29. #145
    Why don't you dig up information on which female the Fed is going to use as an excuse to kick that heroic Central Bank Killer Andy Jackson off the twenty? You would have more inside information on that than any of the rest of us.
    The Fed has nothing to do with printing up currency- that is the US Bureau of Engraving and Printing at the US Treasury. (There are no official plans to change the note).

  30. #146
    Quote Originally Posted by Zippyjuan View Post
    The Fed has nothing to do with printing up currency- that is the US Bureau of Engraving and Printing at the US Treasury. (There are no official plans to change the note).
    No?

    I'll repeat myself. Twenty FRN's says they're going to kick the Central Bank Killer off of the twenty dollar bill and replace him with a female whose identity has yet to be announced. And she won't be Lady Liberty.

    If you don't want to bet FRN's I'll bet you a six month vacation from the forums. The loser takes it.
    Last edited by acptulsa; 03-26-2015 at 09:39 PM.
    Quote Originally Posted by Swordsmyth View Post
    We believe our lying eyes...

  31. #147
    Quote Originally Posted by Zippyjuan View Post
    The Fed has nothing to do with printing up currency- that is the US Bureau of Engraving and Printing at the US Treasury. (There are no official plans to change the note).
    Pfizer Macht Frei!

    Openly Straight Man, Danke, Awarded Top Rated Influencer. Community Standards Enforcer.


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    The Federalist Papers, No. 15:

    Except as to the rule of appointment, the United States have an indefinite discretion to make requisitions for men and money; but they have no authority to raise either by regulations extending to the individual citizens of America.

  32. #148
    Quote Originally Posted by acptulsa View Post
    No?

    I'll repeat myself. Twenty FRN's says they're going to kick the Central Bank Killer off of the twenty dollar bill and replace him with a female whose identity has yet to be announced. And she won't be Lady Liberty.

    If you don't want to bet FRN's I'll bet you a six month vacation from the forums. The loser takes it.
    I'm pretty sure it'll be the new $20 US Note that gets the facelift, not the FRN, so be careful of the exact bet you make. You know Zippy is all about word play, like a good Keynesian shill.

    No, the Fed doesn't print 'currency'. It enters numbers into computers and calls it 'money'.
    "Let it not be said that we did nothing."-Ron Paul

    "We have set them on the hobby-horse of an idea about the absorption of individuality by the symbolic unit of COLLECTIVISM. They have never yet and they never will have the sense to reflect that this hobby-horse is a manifest violation of the most important law of nature, which has established from the very creation of the world one unit unlike another and precisely for the purpose of instituting individuality."- A Quote From Some Old Book

  33. #149
    Account Restricted. Admin to review account standing


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    “The [private] banks do create money. They have been doing it for a long time, but they didn’t realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it.” H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.

    (wow! sounds like a giant fraud has been perpetrated!..you'd think that any honest knowledgeable political and/or media apparatchik would be screaming about thi$ gd filth..but not a stinking peep from any of them..

    ...btw, some of you throw around an awful lot of number$, fa$t and loo$e, obtained from apparatchik$ who've NEVER been honestly scrutinized/audited..number$ promulgated by the same folks who feed you a CONSTANT stinking diet of circuses and gmo bread...
    Last edited by H. E. Panqui; 03-27-2015 at 08:58 AM.

  34. #150
    Quote Originally Posted by acptulsa View Post
    No?

    I'll repeat myself. Twenty FRN's says they're going to kick the Central Bank Killer off of the twenty dollar bill and replace him with a female whose identity has yet to be announced. And she won't be Lady Liberty.

    If you don't want to bet FRN's I'll bet you a six month vacation from the forums. The loser takes it.
    http://www.boston.com/news/odd/2015/...1DL/story.html

    The secretary of the U.S. Department of the Treasury is in charge of the designs and portraits that appear on paper currency, and by law only a deceased person can appear on U.S. currency or securities.
    Maybe the image will get changed in the future, maybe it won't. But it isn't the Fed which decides.

    Right now, it is only a suggestion on a White House Petition form (and those rarely lead to any actual changes but don't rule out pandering to female voters if the President or other representatives decide to promote the issue as well).
    Last edited by Zippyjuan; 03-27-2015 at 12:55 PM.

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