Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".
Why the quotes?
Topic: The Real Differences Between Fractional Reserve in Fiat, Gold, and Bitcoin. (Read 2922 times)
October 28, 2013, 09:44:50 PM
No Federal Reserve involvement was needed.
I would like to know from where you got the idea that fractional-reserve banking cannot happen without the involvement of a central bank. As I said several times, fractional reserve banking originated before central banking, which should be enough to prove the opposite.
I can lend you gold, and still turn your debt into money if somebody will accept your debt as payment.
By doing that, you are just transferring my debt to someone else in exchange for their money: debt remains debt, and money remains money. You are not monetizing my debt.The borrowed money wasn't given its value by the fact that you borrowed it, no, it was valuable because it was gold. So what the heck.
Neither the money for which you exchanged my debt got its value from that same debt, which is the reason why this is not debt monetization.Except people DO indebt themselves in exchange for debt. We do it all the time. The currency we use is Federal Reserve Notes, which is a debt of the Federal Reserve. The US Government borrows these Federal Reserve Notes from the Federal Reserve. That's debt. They indebted themselves, in exchange for the debt, and their debt is only repayable payable in the resulting debt.
Federal Reserve notes are not "a debt of the Federal Reserve": the central bank is a creditor, not a debtor. Additionally, Federal Reserve notes are money valuable as debt, not merely debt.
The central bank issues money by buying debt instruments from the government. Before buying those instruments, there are neither money nor debt. Once bought, the same debt instruments become debt, which then gives value to the money buying them. The operation creates both money and debt.
The only reason to self-impose a borrowing limit is the awareness that people won't continue to lend to you once they realize that your true credit line, under the current system, is indeed infinite.
Once again, it is the borrower who has a "credit line," not the loaner: your credit line is always limited by how much can people lend you. Therefore, it is never "infinite."
October 28, 2013, 08:30:05 PM
Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM).
Debt becomes money when banks create new money in exchange for new debt. The process of monetizing debt is first and foremost a process of money creation.
Then show me another way.
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Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".
Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".
Why the quotes?
No Federal Reserve involvement was needed.
I would like to know from where you got the idea that fractional-reserve banking cannot happen without the involvement of a central bank. As I said several times, fractional reserve banking originated before central banking, which should be enough to prove the opposite.
When one person defaults, the trickle-down effect works as if that money was destroyed TWICE, rather than just once.
We have an agreement.
The problem comes when that money becomes spendable, rather than just an asset.
If money were "just an asset," then it would no longer be money, hence indeed also not "spendable."
If you deposit into a CD/Bond, you know perfectly well you don't have that money, because you can't spend it. Thus, you might lose your investment, because its just that, an investment. When somebody accepts debt as payment, which is pretty much whats going on behind all MZM, is when the doubling effect actually matters. So, the money supply is increased only when newly-issued debt is treated as transferable payment. The act of issuing the debt didn't create the money, the act of making it spendable leveraged it up.
Debt only becomes money when the promise to repay a loan gives the borrowed money its value. Exchanging already existing debt for already existing money could not possibly turn money into debt.
The difference that matters, is the size of each credit line.
What really matters is whether new money gets its value from new debt.
Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).
It is borrowers, not loaners that have a credit line, and the credit line of the government is certainly not infinite (as the debt-ceiling soup opera shows). Additionally, for each dollar of reserve money commercial banks can create nine more, so their impact on the money supply is far larger than that of the central bank. The current situation, in which reserves sit at the central bank earning interest is a complete aberration (it is the system starting to eat its own tail).
It is the central bank that gives us (via the government) a line of credit, not conversely. Likewise, it is your bank that gives you a line of credit, not conversely. What we gave the central bank was the power to create money valued solely by our promise to repay that money after borrowing it from the same central bank. Only then, having received that power from us, can the central bank in turn give us a "line of credit."
The Federal Reserve uses this infinite line of credit to provide infinite demand for US Debt, which in turn provides the government with an infinite line of credit, in return for an ever-increasing share of their own debt to spend into the economy as they please.
How could demand be provided?
Nobody (including the government) gets indebted in exchange for the resulting debt (whatever that possibly means): they get indebted in exchange for money. It is the central bank that ends up holding government bonds, not the government, which in turn gets money to spend.
