Topic: Very nice story about John Law - page 3. (Read 10201 times)

Now you're contradicting yourself, because you previously said that commercial banks cannot create money, and now you claim they do.

It's not the banks' opinion, but the end-user opinion what determines the composition of money supply. Demand deposits are a part of the money supply (M1) because end-users use them as a medium of exchange and view it as a near perfect substitute to cash (M0). During a bank run, for example, people stop viewing demand deposits as a close substitute to cash, and this can cause bankruptcies.

Because even though from the point of view of end users, demand deposits are a near perfect substitute to cash, from the point of view of bank's accounting, they aren't. The ability of a bank to create new loans does not automatically allow the bank to settle their own debt.

Because a commercial bank loan does not help the bank to meet their own debt.

Totally illogical. First of all, the velocity is not caused by banks, but by the preferences of the people who hold the money. Indeed, the alleged reason for QE was to prevent the velocity from dropping.

The article arbitrarily declares that commercial bank loans are not money. But what is and isn't a part of the money supply is an empirical issue. It follows from the behaviour of the holders of the balances. You cannot just get around it by redefining it by looking at whether there is a corresponding debit transaction to the credit one. I repeat, the debit transaction does not affect the money supply, so from the point of view of money supply, the difference between debit and credit account balances of banks is irrelevant. It's like saying that you cannot really create any product, such as a computer, because it must be offset by a corresponding consumption of input factors, and thus the end result is zero. It's a trick, redefining the money supply as a difference between debit and credit balances. But that's not what the money supply is.

The article does not prove anything, it just creates its own definitions to match the predetermined conclusion.

Do you also disagree with the M1 definition at WiKi?
https://en.wikipedia.org/wiki/Money_supply

M1 is not real money supply. Just as the wiki page's example of M1 showed, when there physically are only $1000 in M0, M1 could be  $9000, it is just the same $1000 counted multiple times, banks have to lend this $1000 out again and again (And it will take a long time to do this) to reach a M1 of $9000 (in reality it typically reaches $4000 to $5000)

The reason M1 is used is because from bank's point of view, M1 is easy to use, it is just a summarize of all their customer's saving account. But if 10% of those savings were withdrawed and never deposited back, all the rest of the saving account would have nothing to withdraw, so M1 is just a derivative of the M0, every change in M0 will be amplified 9 times in M1

If commercial banks indeed can create money out of nothing, why there were so many bank failures? They could just create some new money and lend to each other to cover their loss and they don't even need FDIC to protect their customer's saving account
http://www.fdic.gov/bank/individual/failed/banklist.html

That's cause I'm not putting out my substance on this thread.  I'm leaving it to kjj to beat his head against this one.  And the bleeding forehead his is developing, and the lack of cracks in the brick-wall that is johnyj prove to me at least that I picked the right debate to avoid.

If you desire to study the stuff that does not circulate and that no one uses as money, I've already given my blessing.

I would strongly disagree though on which of us is interested in what really happens.  We all live in the illusion.  The illusion is how the world really works.  By restricting your view to only the part that doesn't matter*, you miss out on the show.


Sigh.  No, you have this backwards and inside-out.  The bank lends 10 dollars out of thin air, and then borrows one FED-dollar from the federal reserve.  That FED-dollar sits in an account at the federal reserve.

You keep mixing up cause and effect because you refuse to learn how the system actually works.  The "reserve" in "federal reserve" is a metaphor.  It isn't actually a stockpile of something that people dip into.  It is an accounting fiction that tracks what has already happened.

*  The exact degree to which central bank money is unimportant in reality can be seen here

Have you read the article carefully? The author clearly distinguished the velocity of circulation and the money supply, saying that commercial banks can only affect velocity of circulation but not money supply. Since 2008, FED increased money supply a lot while commercial banks did not loan out enough money, causing velocity of circulation decreased, therefore no inflation, totally logical

Let's follow your reasoning that bank can just create a digital loan and give it to you without having any money: "If you walk into a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it."

You might get this impression with your side of double entry book keeping. For this single transaction the debit side on your current account will be increased by $1000, while the debit side on your loan account will have a -1000

But this is only what you see as a customer, what happened behind the scene is, the debit side of bank's liability account decreases by $1000 and the credit side on banks liability account increases by same amount. At the same time, the debit side on bank's current account should decrease by $1000 and the credit side of bank's current account should increase by $1000

In one word, your loan becomes bank's asset and your money becomes their liability, the loan is facilitated with current account. When their current account reaches zero, they won't be able to issue any more loans, that will be a liquidity problem

Actually loan is a bad example here since it involves several operations, a single debit action to your current account is better to understand how backoffice works in banks



I don't follow you, why all of those things are money? In my opinion, there is only one kind of money: Those created by central bank. This is simple enough. If you regard all these different concept as money, then you won't be able to spot what is really happening, since what you see is just an illusion


Deposits in the FED is only a small part of the created money. For every 10 dollar that banks get from FED, they only need to keep 1 dollar at FED as reserve, they are free to loan out the rest 9 dollar


I can simply throw this statement back to you or anybody with a different opinion, so it is universally working thus useless in proving anything  

In order to spend them, they need to be accepted by the market as close substitutes to extant money. Most likely the transfers will not be accepted at all, because the clearing bank won't let them through, and they will be unspendable. This is in addition to the regulation issues mentioned by kjj.

The article is nonsense. That granting credit must have a corresponding debit entry in accounting in no way addresses the changes in the money supply. The debit record of a bank loan does not affect the money supply, but the credit entry does. It's kind of like saying that refrigerators or airconditioning can't really cool down anything because they just transport heat. It also confuses the velocity of circulation and the money supply, which are two different variables. Since the 2007- crisis, the money supply (in the US) has grown immensely, but the velocity has decreased, for example.

Nice strawman.  Good job ignoring banking regulations, fraud statutes, capitalization, etc.  A+


/sigh

You must've missed these before:


If you choose to define virtually everything used as money by real people as being not-money, then you are absolutely right.  The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.


At first, I thought that you were interested in figuring out how the system that actually exists in the world today works.  Now it is clear that you just want an audience for your academic masturbation.  I'll leave you to it.

The classic stealth-trolling comeback!


All of recorded economic history was one long crash and burn? Not sure, but...


They do, seems that you don't get exposed to the output of these types, or that they do not meet your definition of "conservative"?


Similar sentiments as yours to jonnyj, I see you talking alot, but the substance is very thin.

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

Indeed, if anything reached a complex level as today's banking system, the debate of the underlying fundamentals becomes more difficult, each party will have enough theories, books and professors to support their opinion. That's the reason economics in recent centuries are closely related to politics

In order to avoid pointless politics debate, I prefer to study the early days of economics and a money system under a gold standard, things were much easier to understand that way. Even better, on an island with only a few people, I think 4 people is enough to represent any macro economy concept (Money creator, merchant, producer and consumer)

Just like a computer, if you look at it from an operative system point of view, you get endless confusion and many politics debate, but if you look at it from early days of computer, it's just a wire, a bubble, a switch and a relay. Although there are many layers of complexity up to OS level, each step is simple and clear, no debate required

I'm sorry, but you are just plain wrong about this.  There is no such thing as "digital money reserve".


Money is not gold coins.  Modern fiat money is not a token representing something.  It really does get created out of thin air by your local bank down the street.

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

Maybe property is not the right term, but what I mean is that money is something of value, as long as it has value, the ownership will become an important character

Ownership is always the most important character for any property. It does not matter the money is in digital form or paper form, their ownership won't change with their form, this is simple accounting

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money



True, FRB added some complexity into the picture, but the basic principle still holds

Gold smith must physically deliver 1000 gold coin to the borrower, so he must have the ownership of those coin at the first place. If he don't have those coin, he can steal some other customer's saving, as long as other customer did not withdraw

This is FRB, but the maximum number of coin he can steal at any time will not exceed all the coins he have at hand, the same 1000 gold coin might be again and again saved into gold smith's bank, and he recorded many savings from different customer, but that is just a checkbook count, the gold coin number is always 1000 at any time, if one customer take out 1000 coin and disappear, then rest of the customer will lose all their savings

FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

Money is not property as such it is an IOU for property, to be produced in the future, you are confusing Hard Money for Fiat.
Welcome to the evil that is banking.
The riddle wasn't solved with the gold smith so it was allowed to persist. RFB is the method of creating new money, and instead of deflating when called apon, the FED is the lender of last resort they "hold the Gold Fiat"

There is a problem with the FED system in that it needs to hold hard money to maintain a balance of payments ... or does it? well not after 1971, If, as has been illustrated before you can get the public to use an IOU as money, then you can manage the whole thing without having to produce any wealth, and yes you are correct fiat doesn't come to you as property, it comes to you as trust that everything will be backed by the government and managed by the CB.  

While it is in God we trust, that trust is actually in people who earn huge bonuses and think of themselves as gods, but they're just people with the legal power to abuse.

Just out of curiosity, what makes you think this?

If the act of loaning happens at the point when you walk out the door with a wad of cash, then I would say that the bank does indeed need to own that much paper to make the loan.  But in reality, loans don't work that way.  Most loans never ever see physical paper.  They credit your account, you write a check, you deposit a check, you pay back the loan.  All done with numbers, no paper money at all.  Banks make loans first, and then seek reserves to cover afterwards. 

It sounds like you want to define money strictly as paper and coin.  You may choose to do so, but that is just masturbation, you might learn about the system that you made up, but you won't learn about reality.

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

300 years ago, if you go to a goldsmith and borrow 1000 gold coin, he can't just write you some numbers and record your debt in his book, he must physically deliver the gold coins to your hand, it means he must OWN those coins at the first place

Although banking has evolved a lot, same principle still holds when you borrow from a commercial bank today. Commercial banks can not lend you some money they don't OWN. They can not just create some numbers and credit it to your account, that will be crime (counterfeiting), be it paper notes or digital numbers, since only central bank has the right to create money. Commercial banks only have the right to move money. If a commercial bank can lend you $1000, it means they must OWN that $1000, and after they lend it to you, they lose the ownership of these money, and you take over the ownership

If they could lend you some money that they do not OWN, then any people on the street could open a bank and start to loan out digital money that they don't have

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.