Topic: The fatal flaw of Real Bills Doctrine - page 2. (Read 5292 times)

I think you overestimated the power of state. State is not an abstracted super power, it consists of different actors who run vital part of it, and the relation between these people usually are quite complex, it is all politics, violence is seldom involved

John Law's failure is not due to those poor farmers on the street that wish to become millionaire with his Mississippi stocks, but those nobles against his plan. Those nobles organized large scale of redeem at the beginning of his plan to test if his bank indeed has enough gold
backing his paper money. And when the Mississippi stocks reached the top, they bought lots of lands and other assets with his paper money, and that crashed the value of his paper money

Back to today, it seems that governments around the world have lots of power against their citizen, but they don't have much power against banks, in fact they all owe banks money

You are right, these are two different subjects.  

I think the RBD is a system that is slightly better than "just printing money", for two reasons.  The first reason is that "just printing money" is too openly evident.  People wouldn't trust the ministery of finance that prints *directly* dollar bills.  It wouldn't seem fair.  The seigniorage is too evident and visible.

In the RBD, actually, money isn't printed "just like that", but an asset is chosen to be "monetized".  Be it land, stock, gold, whatever.  If the RBD is applied honestly, it just looks like as if that asset is taken out of the economy and "destroyed"  (stored irreversibly in vaults) in a way, and REPLACED by fiat money.  It is as if the asset itself were now enforced to be "money", but that for practical purposes, we use paper instead of physically that asset.

The state could, for instance, just declare that land is legal tender.  But it isn't practical to go to the grocery and buy vegetables with 20 cm^2 of land.  So in order to make that more practical, the central bank buys up the actual land, and issues paper instead, that is "good for so much land".

It could have been gold: suppose the state declares gold to be legal tender.  Now, it is entirely possible to carry around gold and buy your vegetables with gold, but it could indeed be more practical that a central bank buys up the gold, and issues equivalent paper for that.

It could have been just anything.  The state could have declared sea shells as legal tender, and buy up sea shells and issue paper for that.

What the state simply does, is to enforce the choice of an asset to become money, instead of having the market choose it.  Whatever assets the state decides to be bought and issue paper for it, the state implies that the bought-up assets become money (but are exchanged for paper which "stands for" it).

And now exactly the same problems happen with that, as when the market "monetizes" an asset:
1) there is seigniorage due to the *increase in value* of the asset
2) the usage of the asset becomes very expensive, which leads to economic losses, if the asset was useful.

Indeed, if the asset is massively bought up by the central bank to issue paper money, its demand will rise, and the asset (land, gold, sea shells) will increase in price (it will be the monetary part of its value).  People who were holding the asset before, and can sell it to the central bank, enjoy the seigniorage and can become rich.

But there is in fact no big difference between the state using a RBD, and the asset that serves as backing, becoming actual money through the market.  The only thing a RBD does, is to enforce this choice.

And because of the rise in price of the asset, and the taking the asset out of circulation, everybody using the asset for production or consumption, will suffer (and pay the seigniorage).

So it would be most terrible if the state were to use land, because land is very useful.  It would be terrible to increase land prices, and to set land apart "in a vault" so as not to use it any more.

Great insight to infer mbs program to a tend towards owning all land.. However as all suuply is dried up and becomes unaffordable the whole country will default.. Why would the govt have incentive to do this? Or is it judt s byproduct of a malfunctioning system nearing its end? Its like askmg miners to collude so they can double spend.. Theres no incentive to break the network?

Is buying the mbs somehow a way to foot the bill for the interest on the outstanding loans via printing paper through selling treasury notes?

That is true, but that comes about because of the concept of property itself: property only has a meaning if it is backed up by force capable of imposing the rights that go with property.

Property without force is a meaningless concept.

That is true, but it is not linked to any RBD specifically.  It is related to any fiat issuing system.  The one issuing fiat can issue in principle so much that he can buy up anything, as long as that fiat is imposed as legal tender.

And then we come to the second part: the state potentially owns anything anyways, if the state has no limits on taxation.  Even without fiat, even with gold as money, the state can confiscate anything.  Directly, or through taxation.

Barbarians believe in private property also. What you cannot hold by force is theirs. Your only choice is flavor of barbarians. Capitalism, communism, feudalism, it matters not.

No. I owe you, or anyone else nothing. My life and my work for my  own survival is mine alone. There is no ethical/moral base that says if i am more agile, or working harder, learning faster than you, than i HAVE to help you. There is absolutely no moral justification for that. Or the other way around. Please give me half of your income, even though i do not work, just because i am poor ( because i do not give a fack about improving my own situation).  Also the state never equals the people. Never. Not even, and especially not in the commie USSR, where the head of the state official's is practically a god, a new age sun king to do as he wishes (stalin, mao, hruschev, pol pot, etc).

There is no alternative to private property which upon a complex society can be organized. None.

Exactly, this put everything purchasable in the current society under the radar of FED, they could buy all the most valuable assets in the whole country. And this is especially effective during a crisis, where everyone want money


CPI does not include assets, central bank could just buy assets without changing CPI. Even better, they are mostly buying debt nowadays, and purchasing debt will create a deflative pressure on the society. It seems a debt financing can raise the consumption for a while, but in the long run, that debt must be paid back by adding interest of almost equal amount of value. The deflative pressure following the debt financing is much harder to deal with, the only way to out is get more debt exponentially or a total default

Use 100 dollar to create 900 dollar debt by FRB, and create base money to buy these 900 dollar debt during a crisis, then you get 1000 dollar base money. Then create 9000 dollar debt using FRB, and then create base money to buy 9000 dollar debt during the next crisis, then create 100K dollar debt using FRB...

The whole scheme is just rooted from a simple practice of issuing base money backed by assets/debts, and use those money to buy more assets/debts.  It seems each step is reasonable, but the result is huge debt and huge wealth gap between banking class and normal people

Well, the point is that it is one or other policy that determines how much base money there should be.  But even with a RBD, the amount of money that can be issued is not unlimited: it is limited by the amount of value that is available as the stuff that is to be bought by the base money issuer (the central bank).  If it is gold for instance, then the central bank cannot issue more money than there is gold available to be bought (of course, the more the central bank issues money, the lower the value of the money is due to inflation, and the more the bank can print to buy yet another oz of gold - but this is a finite effect).
Once the central bank has bought up all the gold, there is no way anymore to issue money, and the amount of base money is fixed.  Until one changes the rules, and the central bank will now buy up, I don't know, land, or real estate.  Until it has bought up all the real estate that is for sale.  Then it cannot issue bank notes any more, again.  Until something else is allowed to be purchased.

That said, some central banks have "automatic" targets.  The ECB for instance has a CPI inflation target of 2%.  It should in principle issue money such that that target is reached.  They are panicking right now, because they cannot reach it.


Yes, but at the same time, the reserve ratio has been pulled up, so that the actual money creation is actually quite small.


Indeed.  But the idea is to keep higher reserve fractions (Baal III agreement).

So this QE is in part to compensate for this contraction of the leverage.

FRB is a practice similar to insurance, as long as there are not so many people withdraw the money at the same time, banks can lend out some of the money to other clients, that is perfectly fine and has been statistically working very well. (Although a little bit cunning) But FRB does not solve a basic problem: Where is the money originally come from

You can open a bank and practice FRB, but with an empty bank you can not do anything, you must first have some customer deposit (real money) before you start to do FRB

Suppose a bitcoin banker have 100 bitcoin, then under a 10% reserve ratio, by lending the same coin out again and again, the maximum checkbook numbers he could create will never exceed 1000 bitcoin, anything beyond that is impossible. In another word, he can not issue IOU endlessly without increasing the base money supply

The only way for him to generate more checkbook money is to get more real bitcoin. If he get another 100 coins, then his check book money could reach 2000 bitcoin maximum, and these extra 100 coins must be mined by the miners with real cost

But in today's financial system, those extra 100 bitcoins are not mined, they are created as base money by using Real Bills Dorctrine principle that I described in detail throughout this thread. With RBD, there is no limitation on how much money that you can create, because it is effectively a double spending, creating purchasing power out of nothing

The difference here: FRB have a limit of 10x more money creation under a 10% reserve ratio, but RBD has no limit



If you look at the M0 money supply of US, it has been increasing very slowly following GDP until 2008, and it suddenly exploded following the start of QE, now it is 5x more than pre-crisis level

If you look at M2 (which measures chekbook money plus base money), the change is quite consistant, thus many people think that the QE works well. But under the hood, the components of M2 has changed: The increase of checkbook money has mostly been stopped following the deleveraging effort from the banks, now their reserve ratio might be as high as 60%. On the other hand, the number of base money increased by more than 3 trillion, if you consider the M2 increased only 4 trillion during this years, that means most of those increase comes from the increase in M0, and when that 3 trillion base money when muliplied later on, can become 30 trillion M2

Lending is another topic, since it involves the risk of default. In your example, the car salesman would not trust a promise from a third party which he has no idea of credibility. Those 80 coins are not considered as money but a debt. Of course you could rely on large institutions, but risk of the failure of those institutions is still high, just look at how many bank failures during the financial crisis. Maybe the risk is very low under normal time, but when it fails the impact is enormous, so the average risk could be higher, you can not minimize the risk by moving them around, actually you increase the risk when you move all of them to a single point of failure

But let's put it aside and start with basics without involving lending. What RBD theory indicated has nothing to do with FRB, it is this part I am most interested in this thread

Indeed.


Indeed, but then:

1) banks don't serve any purpose.  The central bank can just as well issue "deposits" directly to citizens then, and a bank cannot do anything.  There wouldn't be a way to pay the salaries of bank employees.

2) no-one could borrow money, except directly from other individuals willing to lend them directly the money.



This, I don't understand.  Their ability to do what you call double spending, is exactly the fractional reserve ratio.
They are not really double-spending it.  They are issuing IOU, which are deposits.  It is the fact that people consider deposits to be money, that makes that banks create money.
Deposits are nothing else but an IOU from a bank.  If the bank owes me 100 shells, and the bank lends out 80 shells to Joe against a promise (a contract) signed by Joe that he'll pay back the 80 shells, then I have an IOU from the bank of 100 shells, and visibly, Joe is content with an IOU from the bank mentioning 80 shells worth.  That's what deposits are.  IOU from the bank.  
But people accept them as means of payment, so it becomes money.

If any IOU of a credit is accepted as money, then you cannot avoid money being created each time there is someone borrowing from someone else.

Look at it this way, and forget banking.

Suppose we have a bitcoin economy.  I have 100 bitcoins on an address.  Now you want to borrow 80 bitcoins from me.  I transfer 80 bitcoins to your address (irreversibly), but you sign me a contract that is registered on the block chain, that you will pay me 85 coins next year.  I now still have 20 bitcoins on my address, and you have 80 bitcoins on your address.  But I have also a blockchain registered contract where you engage in giving me 85 bitcoins next year.

Now, suppose that I want to buy a small car, that costs 100 bitcoin.  If the car salesman has enough confidence in your paying back your 85 coins next year, which he values 80 coins today, then I can transfer him my 20 "real" bitcoins, and the contract on the blockchain.  If he accepts your IOU as money then I can buy my car, even though the 80 "real" coins are on your address and not on mine.

Because the IOU where you promise me to pay me 85 coins next year, registered (and transferable) on the chain, is considered money.

Now, for an individual IOU, there are chances that people don't accept it as money.  But if institutional IOU such as bank deposits are used that way, and people accept it as a means of payment, then it IS money, and there's nothing you can do to stop it from being considered money.  And if that's the case, money creation by credit is unavoidable.

You cannot avoid people accepting certain things as means of payment.  And from the moment people do, there is money creation.


That's what I also said.  But then you need to have ANOTHER IOU from the bank.

If I have 100 shells on the bank, and the bank lends out 80 of those to Joe, it may eventually take those 80 from my account, but now the bank has to give me ANOTHER IOU worth 80 shells, because the bank really owes me 100 shells.  But what's the use ?  A deposit was already an IOU from the bank !  What's the point in destroying this IOU and replace it by another one ?

The point is not that.  The point is that people ACCEPT as money, IOU's from a bank.  When people accept that, they turn these IOU (Deposits) into money.

No doubt, it is this logic makes bitcoin a money: If there are enough people who think bitcoin is money, then it is money. So to the end, to make something money is trying to make as many people as possible to believe it is money




If banks strictly follow 100% reserve ratio, they can not borrow you any shell and create deposit numbers, since all those shells would be reserved at central bank, they have no single one shell at hand to lend (In fact that is the liquidity squeeze we have seen in a banking crisis, even they had 10% reserve ratio, banks would still loan out as much as possible and deplete their shell reserve)

But this is FRB, still a small trick comparing with the fact that they could create deposit numbers backed by shell, which is a double spending of shell's purchasing power. Without double spending, the banks ability to create credit money is limited by their shell reserve and multiply ratio, but with double spending, the banks can literally create as much money as they wish. With maybe only one ounce of gold they could acquire the whole world by repeating the process, no FRB needed

Speaking strictly, this is not exactly double spending. Some times when customer withdraw their shell, corresponding deposit numbers on their account must be destroyed, so some of those purchasing power is not duplicated, just like in a FRB system

But banks can prevent this withdraw from happening using many strategies. For example, make the fiat money the only transaction medium, so that when economy expands, the demand for fiat money increases. Another way is to increase the debt of the nation by buying more government bonds, when the debt increases, so increases the amount of money needed to repay the debt. And after removal of gold standard, they have removed the redeem possibility of issued fiat money, means once issued, only central bank have the right to destroy those fiat money by selling assets. This, together with a forever expanding economy, makes the double spending almost a sure thing

If you understand the implication of this double spending practice, then you would easily understand the following quote

"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits." Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain.

The point is that the funny thing with money is that money is money when enough people think it is money.  And when that happens, it is real, and the "dream world" becomes the real world, and the "real world" where "this is not money" becomes, eventually a dream.

There is no "objective", ontological reality to money: money is exactly a thing that is pure belief, but when it is pure belief, it is real.  If enough people accept sea shells as money, then sea shells are REALLY money, and the few people finding that ridiculous (which was the reality before) are now the ones deluding themselves, and living in a dream.

Even more: if deposit accounts telling you that you have sea shells are generally accepted as means of payment (even if there are no "real sea shells" behind it), then those deposit accounts have become real money, and those denying that are deluding themselves.  Even if there are no "real sea shells".

Credit money creation with deposit accounts is in fact unavoidable from the moment you allow for borrowing. 

Look at these scenario's.  Let us assume that sea shells are money.

1) We pay with sea shells.  The money is only base money.  The only way to borrow money is to find someone to lend them to you, and to write out a contract.   That's the financial equivalent of barter.

2) We use banks as vaults.  That is, we go to a bank, give them 100 sea shells, and we get a deposit account with 100 sea shells on it. The bank keeps the shells, and we pay one another with the deposit accounts.

This is in fact exactly the principle of John Law's central bank.  The fiat is now the deposit accounts, and every bank acts as a central bank, having 100% coverage of their deposits.  But


3) Banks can borrow money.  If someone comes to a bank, and borrows 80 sea shells (against a contract with the bank to pay back in due time 85 sea shells), then the bank will CREATE him a deposit account with 80 sea shells on it.
But the bank cannot remove 80 of the 100 shells from my account, because that deposit account tells exactly that the bank owes me 100 shells, which is still right.

But now there is 180 shells equivalent in deposit accounts (which was the de facto money now).

If a bank borrows money, credit money is created, and if the money is in fact deposit money (credit money) then that money creation is unavoidable and is part of the principle of borrowing money.

What in fact happened is that the contract "I will pay you back 85 shells" against the bank's IOU 80 shells, is in a way indistinguishable from the bank's IOU 100 shells of my deposit account.

When people consider IOU from a bank as money (that is, deposit accounts) money creation through borrowing is unavoidable.

You cannot stop people having confidence enough in banks to consider deposit accounts money.  Even if you (in your "dream world" ) are screaming that it is "not real".

It became real money, the day that people considered deposits as money.

Indeed, this back to the question of prefer to live in a dream world or real world. Most of the people live in a world that they believe it is

I think it is all related to the perspective: From personal and short term perspective, it does not really matter. But from a nation's or long term perspective, removing the parasite and cancer will definitely help to improve the financial health of everyone

But it is not easy to escape, people were deeply trapped in this cancer from the day when they were born. The removal of it will likely kill everyone's financial life that is dependent on it

Well put Dinofelis!

"Real's gonna change" was already true long before bitcoin came around. 

Real money is what many people accept as real money in exchange for goods and services.
It doesn't matter what is its form, who created it, how many there is of it.  As long as enough people believe it is real money, it IS real money.


It was real money until it wasn't any more

There's no guarantee that anything that is "real money" at moment t0, is still real money at moment t1.

Real money is a kind of "speculative lock-in", a kind of meta-stable situation, which can last for centuries, or just for a week.

It is interesting to discuss what is REAL money

Many people thought that their bitcoins on MTGOX are real, since they could sell them for fiat and use fiat to buy them on MTGOX. But as long as they don't withdraw, those bitcoins are just numbers on MTGOX's database

In fact those coins might have disappeared as early as 2011, and MTGOX were just playing a game of mixed FRB and using new customers deposit to cover the old customer's withdraw

This is very similar to what banks are doing. Bank's settlement network can be regarded as a giant exchange similar to MTGOX, where every people put their fiat in and trading against each other (in fact their goods are not listed on this exchange, banks purely exchange numbers between different accounts)

When you withdraw fiat money on an ATM, you get real money (cash notes and coins). In a system of 100% backing, numbers on your bank account is backed by real money, but in reality, banks all run FRB. And when they are running out of money, they go to FED asking for new money to pay the old customer

Banks will never run out of borrowers, they borrow from each other, and that is their daily business. But since the aggregate real money is limited, no matter what kind of borrowing activity they carry out, they will run out of real money as a whole in a liquidity crisis (liquidity means real money's liquidity), without real money, they go bankrupt

I modify the dinofelis's word a bit here: Bitcoin is "real bitcoin" if enough people think of it as "real bitcoin". You will clearly see this is not true, bictoin is real bitcoin if you can see them on blockchain

Unfortunately, in today's fiat money system, there is no tools like blockchain to let people inspect the flow of real money, they can only believe what banks tell them, only exchange owners (e.g. banks) know how much real money they have.

That is the reason when the banks all had a liquidity problem, they will create a large shock in economy, just like MTGOX did. Unlike MTGOX, their scale is millions of times larger, if they failed, every one on this giant exchange will lose shirt, thus they must be bailed out by FED using real money, and FED's real money as discussed in RBD theory above are in fact created out of nothing, to make the whole scheme even more unreal

Indeed, it is real money.  Money is "real money" if enough people think of it as "real money".
A bank account with a big number on it is seen, by most people, as "real money" so it IS real money.

You are willing to hand me over your house if I give you my bank account with a very big number on it.
That is what proves that it is "real" money.

The funny property of money is that money is money because enough people say/think so.

However, it is not because something is "real money" that it is WORTH A LOT.  The "price" of money depends essentially on how it is issued, how much is circulating, how much is (expected) to be circulating, and how confident people are in its ability to be a store of value (and are storing value in it for that reason).

If "real money" is too volatile, it will stop being considered as money by many, and hence it will stop being money.
(that's called hyperinflation).

Of course it's real money.  The entire global economy is built on this. 

They can't run out of money if they create it ex nihilo.  They can only run out of borrowers