The Biggest Scam in History

[Emperor_Gestahl]

No, private banks may lend 90% of their reserves. They don’t create the money, the central banks do (or if we’re getting technical, the mint does). But in any case, yes private banks have an influence on the money supply, through fractional lending, but they do not control it because they cannot lend what they don’t have, whereas the central bank may simply create more money at the behest of the government. The private banks don’t go “Hey, let’s expand the money supply this week!” they say “Hey, let’s lend $X to Fred because he wants to buy a house”.

So, in theory there’s what, a 9x theoretical maximum for money created by the central bank? I forget, maybe its 10x. but that’s not “control” of the money supply.

Sure but given that personal debt is 2x as large as the M2 money supply that's a bit nit-picky. More money is generated directly by lending entities than the Fed.

 

[Sceptic-PK]

The expectation of moderate inflation ill prepares people for deflation. Anyone prepared for deflation can easily gather the assets of those who are not..

Actually, deflation restricts the purchasing of assets because nobody wants to buy something today that will become cheaper tomorrow.

The hypothetical use of the money supply as a tool to siphon wealth from the general population I don't think is in real contention.

You'll have to expand upon this a bit. How is anyone using the money supply to deliberately siphon wealth? Are you saying that banks deliberately (collusion) institute policies of deflation in order to purchase assets? And if this is the case, why has there been so much effort put in by governments & their central banks to avoid a deflationary spiral?

 

[Emperor_Gestahl]

Actually, deflation restricts the purchasing of assets because nobody wants to buy something today that will become cheaper tomorrow.

And those people are right, they benefit by correctly expecting deflation.

You'll have to expand upon this a bit. How is anyone using the money supply to deliberately siphon wealth? Are you saying that banks deliberately (collusion) institute policies of deflation in order to purchase assets? And if this is the case, why has there been so much effort put in by governments & their central banks to avoid a deflationary spiral?

I've been fairly clear in saying nothing of the sort. Just that it hasn't been shown that they can't do that. It's very possible for a bank, especially one allowed to speculate like a hedge fund, to benefit from changes in money supply.

Obviously lending entities can blow bubbles that pop and lead to deflation. When you don't even ask for proof of income when making a loan a bubble is what you get. The Fed didn't write those lending policies. Whether this was regular negligence/greed or something else isn't what I'm making any assertions about.

(Edit: I'm out for the night, but my point remains that the argument should be whether it's a problem or not that private banks can create (and also therefore fail to create) many trillions of circulating dollars. Of course they have the capacity to do this, it's not a question.)

(Edit 2: And the even more central point to how we got on this in the first place is that if something is still possible then old opinions about said possibility may still be valid.)

 

[Tippit]

I would prefer it if you explain how inflation/deflation “siphon” “public” wealth. The increase/decrease of purchasing power isn’t siphoning of anything. Indeed moderate inflation is the natural byproduct of a growing economy, it creates risk and spurs investment. No economic system will ever be perfect and problem free, and I would prefer discussion concerning finance/banking/economics in 2010 limit itself to the facts rather than referencing unsubstantiated opinion from decades/centuries-old people (in bite-sized quotes no less).

You literally do not know what you're talking about. The byproduct of real economic growth is deflation, not inflation. As more goods and services are produced, and assuming the supply of money remains more or less constant, the equilibrium price of goods must fall. This is deflation, not inflation. The only way to have "moderate inflation" given such a scenario, is with monetary expansion at a rate that exceeds the rate of real growth. If you want the discussion to be limited to facts, you might want to acquaint yourself with some.

 

[Tippit]

No, private banks may lend 90% of their reserves. They don’t create the money, the central banks do (or if we’re getting technical, the mint does if we're talking cash). But in any case, yes private banks have an influence on the money supply, through fractional lending, but they do not control it because they cannot lend what they don’t have, whereas the central bank may simply create more money at the behest of the government. The private banks don’t go “Hey, let’s expand the money supply this week!” they say “Hey, let’s lend $X to Fred because he wants to buy a house”.

So, in theory there’s what, a 9x theoretical maximum for money created by the central bank? I forget, maybe its 10x. but that’s not “control” of the money supply.

The Simple Money Multiplier is the reciprocal of the reserve requirement ratio, which varies for a lot of reasons. If the RRR in your example is 10%, then the SMM is 10. This is basic monetary policy, of which you're obviously ignorant. What exactly are you doing here, besides adding insults and ignorance?

 

[Tippit]

Tippit,

A couple of things.

How do Muslim countries work it? I understood that collecting interest was against Sharia law. Do they have a functional system that doesn't use fractional reserve?

I don't know. As far as I do know, your understanding is correct, that Sharia law has a very narrow definition of usury.

The other thing is what happens in a situation where there isn't a government controlled money supply and fractional reserves -- does loan sharking arise in response?

There is no precedent in US history, at least, where we've had a free market in money and the absence of fractional reserve banking. The Wildcat, or "free" banking period was a fractional system. I don't see any reason why loan sharking would be a particular issue, as predatory lending laws could function in any monetary environment. What would happen with monetary reform, however, would be a permanent rise in interest rates, a higher cost of capital for business, and a tightening of credit and credit standards. This would be offset by declining prices (and wages, should they be naturally allowed to fall). It would also make financial asset bubbles largely obsolete, and minimize the frequency and amplitude of the business cycle (recession and depression). It would reward instead of penalize the saver, and it would create sustainable real economic growth. One of the biggest effects would be to cause the government to actually have to use conventional forms of taxation in order to fund their largesse, which is why statists of all persuasions predictably and vehemently oppose any such reforms.

I do not understand much about the topic but have been following the discussion here -- a long way of saying I am actually asking these things and don't have an underlying agenda or point to make.

Most people are bored with the subject, and are content to relegate the control of our money to arcane central bankers in their ivory towers. I am fascinated by it, and I think it is without question, the most important subject in the world, with the broadest of implications - who controls our money.

 

[Hans]

Tippit,
How do Muslim countries work it? I understood that collecting interest was against Sharia law. Do they have a functional system that doesn't use fractional reserve?

The other thing is what happens in a situation where there isn't a government controlled money supply and fractional reserves -- does loan sharking arise in response?
.

Muslim countries also use fractional banking but most of the oil states use currency which is actually petro-dollars and have fixed exchange rates for the US version therein. Most Muslim countries deal with interest or they use Islamic instruments that use fees and other methodologies which avoid interest per se but the time value of money is recognized

Except for Somalia and few other basket case countries all nations use fractional banking. I believe the US was the last major country to set up a central bank system.

 

[Sceptic-PK]

You literally do not know what you're talking about. The byproduct of real economic growth is deflation, not inflation. As more goods and services are produced, and assuming the supply of money remains more or less constant, the equilibrium price of goods must fall. This is deflation, not inflation. The only way to have "moderate inflation" given such a scenario, is with monetary expansion at a rate that exceeds the rate of real growth. If you want the discussion to be limited to facts, you might want to acquaint yourself with some.

If I wanted to be bukkaked with stupid, I would have asked you the question.

 

[plumjam]

Except for Somalia and few other basket case countries all nations use fractional banking. I believe the US was the last major country to set up a central bank system.

Well, several years ago I read in some reasonably reputable publication (the identity of which I don't currently remember) that there were only 4 countries left in the world that didn't have a central bank system on our western model.
They were Iran, Iraq, North Korea and Libya.
Around the time Libya's Colonel Gadaffi became Tony Blair's good friend, and the 'terrorist' label was quickly dropped, it was quietly announced (you had to look for it) that Libya had agreed to adopt a central banking system.
After that there was only the 'Axis of Evil' left.
Iraq will be like that now too.

So now there's only North Korea and Iran left.
And which are the two countries in the World that receive the most negative press from the powers that be?

Yeah.
So it has a lot more to do with banking policy than actual politics.
Control a country via a central bank and they're effectively yours.

Congratulations to Tippit for winning this and most other economics threads by employing reason, argument and evidence.
While his supposed opponents are obviously typically easily propagandized JREF muppets who can only cling to ignorant defence of the status quo, groupthink and weak ridicule.

 

[Hans]

Iran created its central bank in 1960 and its still there

Central Bank of the Democratic's People's Republic of Korea also exists with 220 branches

The Central Bank of Libya was formed in 1956

By basket cases I meant countries with no central government or otherwise in anarchy.

Two nations don't have a central bank Andorra & Monaco but these share the facilities of French and Spainish banking systems

 

[Skeptic]

You are required to remit your income taxes in Federal Reserve Notes, thereby creating the demand for them.

Very good! That's the first lesson in Economics 101.

What makes money money is precisely that, by law, everybody (government included) must accept it as legal payment of debt. (Actually, a legal guarantee isn't needed if everybody is convinced everybody else would accept the medium of exchange; that's how gold and silver became money).

You would have a point about the government promoting a scam if the government refused to accept payment in notes. That the government backs the notes is seen precisely by the fact that it will, indeed must, accept payment in their own notes as legally binding.

This doesn't change the fact that the issuer of fiat money can skim off of the top of the economy by using paper/electronic money that he didn't have to exchange his labor for, unlike everyone else, in exchange for scarce goods and services in the real economy.

No, actually, it CANNOT do that. Sorry, you fail the second class of economics 101.

The result in such cases is very simple -- inflation. You do not create wealth by merely increasing the amount of the medium of exchange in circulation. Look at, say, Germany after WWI for a vivid example.

This is something, by the way, the alchemists of the middle ages missed: if they COULD turn lead into gold, would everybody be wealthy? No -- all that would happen is that gold would be worth no more than lead.

 

[dudalb]

Big surprise. Banks are greedy. The problem about money is that its value is not determined by PEOPLE. Otherwise, we all know its just paper. The problem is not the banks or bankers, but those who truly use banks. NOT small timers like me or you; but those who actually control the resources~oil; land; and sometimes a real entrepeneur.
And since this is a skeptics site, I question the assertion that banks were responsible for killing Lincoln.

The Banks were responsible for Everything Evil That Has Happened In History, according to the Anti Bank Crackpots.
What is amusing about these fools is that they claim to love the Free Market/Capitalist System, but they don't have a clue about how it works.

 

[The Central Scrutinizer]

Where's the irony? Did I miss something?

It would be ironic if he argued that paper money was worthless, and ended up on a deserted island with a bag of cash, and used it to start a fire. You know, something fun like that.

Or if it rained on his wedding day.

 

[The Central Scrutinizer]

If I wanted to be bukkaked with stupid, I would have asked you the question.

That's sig material!

 

[stilicho]

Well, several years ago I read in some reasonably reputable publication (the identity of which I don't currently remember) that there were only 4 countries left in the world that didn't have a central bank system on our western model.

Dear James,
My understanding is that they control every cenytral bank except Iran, North Korea, Libya, Sudan and Cuba. Why do you think they put Mao in power? We may be witnessing a switch in loyalty to China as part of making the US conform to the NWO.
Best wishes
henry

(Source: http://www.henrymakow.com/001383.html )

Your "reputable publication" is actually a network of self-referential internet sites including the above at Henry Makow's "Save The Males". Makow is an anti-semite who argues that equal rights for women are achieved by taking away rights for men. I have no idea what sort of social calculus he uses to arrive at that "conclusion".

@Tippit: One of the biggest effects would be to cause the government to actually have to use conventional forms of taxation in order to fund their largesse, which is why statists of all persuasions predictably and vehemently oppose any such reforms.

What is a conventional form of taxation? What is an unconventional form for that matter?

It looks like your plan is to shrink GDP yet increase the incentive to save. It looks like you also plan to reduce income, consumption, and probably investment. Can you think of an easier and legal way to accomplish this? I can think of several that don't involve dismantling the economic system. Can you?

 

[Tippit]

Very good! That's the first lesson in Economics 101.

What makes money money is precisely that, by law, everybody (government included) must accept it as legal payment of debt. (Actually, a legal guarantee isn't needed if everybody is convinced everybody else would accept the medium of exchange; that's how gold and silver became money).

You're stating what is and was obvious to everyone in the thread, including me, and then spinning it as if it's a revelation.

You would have a point about the government promoting a scam if the government refused to accept payment in notes. That the government backs the notes is seen precisely by the fact that it will, indeed must, accept payment in their own notes as legally binding.

The scam has nothing to do with whether or not the government accepts it's own notes, and everything to do with the inflation tax - the profits of seigniorage. Furthermore, since the imposition of this tax is regulated by a non-transparent, quasi-private institution (The Fed), it's not subject to any direct oversight by Congress. But Congress isn't going to ask any questions, because it stands to gain from the Fed monetizing its debt at our expense.

No, actually, it CANNOT do that. Sorry, you fail the second class of economics 101.

The result in such cases is very simple -- inflation. You do not create wealth by merely increasing the amount of the medium of exchange in circulation. Look at, say, Germany after WWI for a vivid example.

No, you fail. Why are you stating obvious positions that I hold, and then acting as if you're teaching me a lesson? Not only do you not create wealth by monetary inflation, you actually do transfer it. Based on the fact that we usually have positive ("moderate") inflation, the Fed/Government is skimming at least as much purchasing power out of the real economy to account for the positive rate. Due to the enormous productive power of the US economy, they're actually taking much more, because of the price deflation that otherwise would have occured had they not emitted any money to begin with. This is a simple concept to grasp. This is why economists prefer to use the definition of inflation which includes the general price level, as opposed to simple inflation of the money supply - the former disguises the true amount of purchasing power that is confiscated, because of the productivity norm.

This is something, by the way, the alchemists of the middle ages missed: if they COULD turn lead into gold, would everybody be wealthy? No -- all that would happen is that gold would be worth no more than lead.

More importantly, the "alchemists" would have been rich beyond their wildest dreams, and masters of the universe. Modern bankers have one-upped the alchemists - they've convinced people to accept pieces of paper, or electronic representations in lieu of intrinsic value. Paper is even cheaper than lead, and ethereal credits on a server even cheaper still.

 

[Thunderhead19]

There is a fundamental misunderstanding here. Most countries in the world have a government controlled central bank. THE UNITED STATES OF AMERICAN DOES NOT HAVE A GOVERNMENT CONTROLLED CENTRAL BANK! The Fed is an independant organization that represents the private banking interests of the united states of america. The US government can ask for accountability and even force them to be accountable, but they can't dictate any policy to the FED.

I will make one qualification. The US government reserves the right to create and destroy "Money" (among other things), but they have delegated that authority to the Fed. They could take the authority back (if the fed will not be accountable), but I doubt that they will.

 

[Michael Redman]

More importantly, the "alchemists" would have been rich beyond their wildest dreams, and masters of the universe.

How did a nearly unlimited source of gold work out for Spain?

 

[The Central Scrutinizer]

How did a nearly unlimited source of gold work out for Spain?

They won the World Cup.

 

[Sceptic-PK]

There is a fundamental misunderstanding here. Most countries in the world have a government controlled central bank. THE UNITED STATES OF AMERICAN DOES NOT HAVE A GOVERNMENT CONTROLLED CENTRAL BANK! The Fed is an independant organization that represents the private banking interests of the united states of america. The US government can ask for accountability and even force them to be accountable, but they can't dictate any policy to the FED.

I will make one qualification. The US government reserves the right to create and destroy "Money" (among other things), but they have delegated that authority to the Fed. They could take the authority back (if the fed will not be accountable), but I doubt that they will.

Actually, all central banks work in the same fashion (more or less) as the US Federal Reserve (except perhaps for countries like Zimbabwe!). The differences relate more to things like regulatory mandate (ie how much of the financial system the central bank has regulatory authority over) but the structure and the conduct of monetary policy, is more or less identical.

Yes, the Fed is “independent”, but it is independent within government (the Fed being a government agency), and does not represent the private interest of member banks. The reason the Fed is independent within government is to ensure that the institution is not politicised and can conduct monetary policy without interference from politicians.