How the banks create money

[lomiller]

I think he's pointing out that countries without fractional reserve banking can't devalue their currency, and therefore the difference between Zimbabwe and the United States can't be attributed to the use in the United States of fractional reserve banking.

He's wrong at several levels, of course. Countries without fractional reserve banking can easily devalue their currency by simply cranking up the printing presses.

Isn’t that exactly what Zimbabwe is doing? I can’t imagine they have any system of lending given their massive inflation. Inflation would make the loan payments worthless, so why lend money. No lending means no banking system at all so fractional reserve banking doesn’t seem possible.

 

[The Central Scrutinizer]

The only meaningful difference between the Reserve Bank of Zimbabwe, and the Federal Reserve, is that the Federal Reserve has stolen vastly more purchasing power which has been disguised by the incredibly productive power of the US economy.

Have you called the police? If not, why not?

 

[drkitten]

Isn’t that exactly what Zimbabwe is doing?

No, because Zimbabwe does technically use fractional reserve.

I can’t imagine they have any system of lending given their massive inflation.

Oh, they have a system, but the system is broken -- rather like the US system was during the 2008 credit crises. Making money available for loans per se doesn't create money. In Zimbabwe, no sensible lender would loan at sensible rates, and no sensible borrower would borrow at rates that would make the lender's risk worthwhile. So banks in Zimbabwe had (in theory) money they could lend out, but they were putting the money somewhere else, probably in dollar-denominated investments.

... which is why Zimbabwe was forced to resort to the printing presses.

 

[drkitten]

Way off! Sceptic-PK implied that the money system in Zimbabwe is somehow different to the US.

Well, that's an easy implication to prove.

Zimbabwe has a zillion percent inflation. The US has next to none.

Different properties implies a difference somewhere in the systems.

The fact that advocates can't tell the difference between near-infinite and zero says a lot for the anti-FRB position.

 

[psionl0]

Way off! Sceptic-PK implied that the money system in Zimbabwe is somehow different to the US.

<yadda> <yadda> . . . says a lot for the anti-FRB position.

Maybe, if you make your quote selective and out of context enough.

But when you read the whole quote, it is completely different:

Way off! Sceptic-PK implied that the money system in Zimbabwe is somehow different to the US. It is still the same principle - the government prints new money and the banks multiply it. This is what makes printing money risky when FRB is in place.

 

[drkitten]

Maybe, if you make your quote selective and out of context enough.

But when you read the whole quote, it is completely different:

And as usual, you're exactly wrong.

The whole point of what makes Zimbabwe different that the US is that the US uses fractional reserve banking to control the currency supply and therefore doesn't need to resort to the printing presses. In the US, money is created only when there is a) a demand for new money, as measured by someone wanting to take out a loan, and b) a rational supply for new money, as measured by a loan officer willing to issue the loan to the buyer, with a reasonable expectation of turning a profit. Money is therefore created only when everyone involved is expected to benefit, i.e. when new money will help the economy.

In Zimbabwe, as lomiller pointed out, the government "needs" to issue more money through direct creation instead of FRB multiplication because the banks recognize that an increase in money supply would be inflationary and they'd not be able to get back enough money to turn a profit. I use the word "needs" advisedly, because of course issuing more money is harmful to the country as a whole, but it benefits the short-term interests of the politicians, which is why it's done.

The fact that you think that this is "the same principle" says a lot for the anti-FRB position. As I said earlier. The fact that you can't tell the difference between near-zero inflation and near-infinite inflation suggests that you can't actually tell the principle involved there.

 

[Free Thinkr]

And as usual, you're exactly wrong.

The whole point of what makes Zimbabwe different that the US is that the US uses fractional reserve banking to control the currency supply and therefore doesn't need to resort to the printing presses.

That's a poor point, though. First, it's a poor point because the US is hardly comparable to Zimbabwe outside of the scope of banking policy. It's also a poor point because the US did in fact have to run the printing press to paper over the recent banking disaster.

In Zimbabwe, as lomiller pointed out, the government "needs" to issue more money through direct creation instead of FRB multiplication because the banks recognize that an increase in money supply would be inflationary and they'd not be able to get back enough money to turn a profit.

In other words: Zimbabwe is an utter basket case, and no one wants to invest there, thus no banking system could possibly function normally there. It's such a ridiculous example that no honest person would cite it.

The fact that you think that this is "the same principle" says a lot for the anti-FRB position. As I said earlier. The fact that you can't tell the difference between near-zero inflation and near-infinite inflation suggests that you can't actually tell the principle involved there.

Oh, come off it. The fact that you can't tell the difference between the US -the most powerful military and economic force on the planet for a century- from Zimbabwe, says a lot about the quality of your "analysis." To pretend that Zimbabwe's main problem has anything to do with banking policy is ludicrous.

 

[Sceptic-PK]

Zimbabwe prints more money than the rest of the world. Everybody knows that unbridled money printing will cause hyper inflation but the Zimbabwe government isn't interested in the well being of its people.

It’s also because Zimbabwe issues trillions of dollars in “social credit” backed by the wealth of the country of Zimbabwe

You're not thinking again. Existing loans are not about to be recalled or destroyed. As these loans are repaid, the money becomes available for lending again (regardless of what is in trading accounts) just like today when the money supply is at the limit as set by the reserve ratio.

Uh, what? So, the money I’m paying off my house loans, that money doesn’t get destroyed when I pay the loan back? So, by implication, you’re in favour of a one-off, massive explosion in the money supply? And that this “one-off” process would occur over a few decades, as various loan types are paid back? So didn’t you just give the banks a whole lot of free money “out of thin air”?

As a matter of fact, the amount of money available for lending would tend to increase as banks entice their customers to put money into their investment accounts.

So, you’re alleging that reducing the amount of money available to loan (by a fairly substantial margin) will actually increase the amount of money available to loan? Haha. Right now, virtually ALL the money placed in customers’ accounts is available to loan, whereas in your system customers would have to choose to allow their money to be loaned. Presumably some people won’t choose to do this, so how will there be more money to loan? (forgetting for a second your sleight-of-hand massive increase in the money supply you advocate in your previous statement).

 

[respect]

No, I'm afraid you're the one who doesn't understand.



Clearly, the Fed is quasi-private. Rest assured, when the Fed provides credit to a fully-private member bank, the BoG isn't consulted.

Right, the Fed has private aspects, but that isn't related to what you were talking about.

 

[respect]

Details. Since the Fed buys most of the government bonds, the government is effectively printing money.

Since when? The last I heard the Fed held about 9% of US debt.

 

[Sceptic-PK]

No, the Fed doesn't sell bonds in order for the government to raise capital. I didn't claim the Fed doesn't sell bonds, I was pointing how how your claim in its entirety was wrong.

So are you saying that the Fed doesn’t sell bonds to fund government expenditure? Where does all the money from bond sales go then?

The gold standard failed to prevent the monetary inflation that caused the roaring twenties, it merely caused an outflow of gold. This is because while the US dollar was redeemable, there was no statuatory requirement to maintain parity. The dislocations caused by the roaring twenties, coupled with the sharp contraction in the supply of (fiat) money by the Fed caused the Great Depression, not gold. Gold was merely the scapegoat. This is obvious when you recognize that the Fed tightening continued through 1937, four years after Roosevelt declared gold bankruptcy in 1933.

Haha, I love how you quote Bernanke in your sig but then ignore everything else he said in that speech.

The price of assets has to do with the supply and demand of money, and the supply and demand of assets, with no preference to either.

Yeah…Materials, labour, R&D etc play no part at all in the price of goods/assets or services!

 

[psionl0]

. . .
Zimbabwe has a zillion percent inflation. The US has next to none.
. . .
The fact that advocates can't tell the difference between near-infinite and zero says a lot for the anti-FRB position.

What a ridiculous argument! By the same reasoning you could have also said:
Zimbabwe is in the southern hemisphere and the US is in the northern hemisphere. Therefore I can't tell north from south.
Zimbabwe and the US are in different time zones. Therefore I can't tell time.
The people of Zimbabwe are primarily of African descent while in the US the people are primarily Caucasian (factfinder.census.gov). Therefore I am colorblind.

Do you really think the readers here are that stupid?

It bodes ill for fractional reserve banking when you need to use such intellectually bankrupt arguments to defend it.

 

[psionl0]

So, by implication, you’re in favour of a one-off, massive explosion in the money supply?

So, you’re alleging that reducing the amount of money available to loan (by a fairly substantial margin) will actually increase the amount of money available to loan?

And in the same post too. I think the drkitten school of sarcasm isn't helping you at all.

 

[psionl0]

Since when? The last I heard the Fed held about 9% of US debt.

The Fed owns almost 1/2 of US treasury securities. Source.

 

[webb5]

no, you conflated two completely different systems and made a terrible analogy in the process. Are you talking about real life or Monopoly? Either way you're wrong. Interest charges do not reduce the money supply because the banks spend it employing staff, making investments, cleaning the office, lending, paying shareholders, advertising, polishing their golden yachts. For whatever reason, you seem to think the banks destroy all their interest payments. Your entire ideology is based on assertions that are demonstrably wrong.



The banks cover most of their costs by bank charges. The money supply is reduced when a loan is repaid. The Interest part further indebts the real life players of the economy. Whether the interest stays in the economy or not and this is debatable, the interest part increases debt and the money supply must increase in further loans. If the bank or shareholder keeps the money in the country by purchasing a product of this country it won’t magically cover interest payments. The interest part the banks charge is usually reinvested in further fractional reserve banking. Interest is very inflationary and increases the costs of all goods and taxes. So you see the interest part does reduce the money supply for each player.

You could also have the banker as a player in this game of monopoly. The banker of course does not have to borrow anything and will quickly monopolize the game. By the time the players go ten or twenty times round the board as the average home loan is he will own every thing, end of game. You can of course extend the game by allowing more borrowing to be made to the players; if you do not you will have a Recession or a Depression

 

[webb5]

Your nonsense links don't answer the question either. How does the existence of fractional reserve lending force governments to spend more than their revenues? Why do you think it makes it impossible for them to balance their budgets?

The existence of fractional reserve lending means there is never enough money to cover the economy and government expenses. The taxes governments charge will make the people poorer. Many cannot afford this tax. Many are on social security. Government will only charge a very minimum of what is needed as a result. They know that taxing the richer people will have the opposite affect in tax revenue. Health services and education etc are often under funded. A government borrows to cover this gap.

 

[webb5]

no, you conflated two completely different systems and made a terrible analogy in the process. Are you talking about real life or Monopoly? Either way you're wrong. Interest charges do not reduce the money supply because the banks spend it employing staff, making investments, cleaning the office, lending, paying shareholders, advertising, polishing their golden yachts. For whatever reason, you seem to think the banks destroy all their interest payments. Your entire ideology is based on assertions that are demonstrably wrong.

The banks cover most of their costs by bank charges. The money supply is reduced when a loan is repaid. The Interest part further indebts the real life players of the economy. Whether the interest stays in the economy or not and this is debatable, the interest part increases debt and the money supply must increase in further loans. If the bank or shareholder keeps the money in the country by purchasing a product of this country it won’t magically cover interest payments. The interest part the banks charge is usually reinvested in further fractional reserve banking. Interest is very inflationary and increases the costs of all goods and taxes. So you see the interest part does reduce the money supply for each player.

You could also have the banker as a player in this game of monopoly. The banker of course does not have to borrow anything and will quickly monopolize the game. By the time the players go ten or twenty times round the board as the average home loan is he will own every thing, end of game. You can of course extend the game by allowing more borrowing to be made to the players; if you do not you will have a Recession or a Depression

 

[respect]

The Fed owns almost 1/2 of US treasury securities. Source.

Oh, sweet Jesus...it does not. That includes all government agency ownership. The Fed isn't even the biggest player there, Social Security is. The lock box Al Gore was so keen on defending is full of Treasury Securities, the politicians spend extra cash from FICA taxes and leave behind Treasury IOUs.

 

[respect]

The existence of fractional reserve lending means there is never enough money to cover the economy and government expenses. The taxes governments charge will make the people poorer. Many cannot afford this tax. Many are on social security. Government will only charge a very minimum of what is needed as a result. They know that taxing the richer people will have the opposite affect in tax revenue. Health services and education etc are often under funded. A government borrows to cover this gap.

This is complete nonsense. Governments spend on many more programs than they used to, often with built in funding increases that exceed reasonable expectations of economic growth. That is where deficits come from, not fractional reserve lending.

The merits of any given program are up for debate but that is a different topic. What is relevant here is that fractional reserve lending does not force governments to increase spending on welfare, education, health services, public pension plans etc. To blame fractional reserve lending for rising government debts completely ignores the massive increase in programs that governments fund. Doing so is utterly absurd.

 

[psionl0]

Oh, sweet Jesus...it does not. That includes all government agency ownership. The Fed isn't even the biggest player there, Social Security is. The lock box Al Gore was so keen on defending is full of Treasury Securities, the politicians spend extra cash from FICA taxes and leave behind Treasury IOUs.

If my source is incorrect then show us your source.