Split Thread Fractional reserve credit vs. derivatives

[michaelsuede]

I think the critical thing you are missing here Mike is that money doesn't need to be backed by anything other than the fact that people are willing to accept it.

Indeed.

However, as history has shown us, people do not voluntarily accept money that is backed by nothing.

It must be forced upon them at gun point.

In fact, it is IMPOSSIBLE to have a price structure arise if money is not backed by a commodity first. If I simply printed up some money with my face on it and tried to purchase things with it, people would have no idea how to value that paper unless that paper was redeemable for a commodity of a specific weight.

 

[Francesca R]

You still can't address the issue. You keep swerving to a totally invalid example using gold backed currency which looks like a desparate attempt to obfuscate. The subject is fractional reserve banking. If you cannot justify your objection to it, stop trying to object to it. Your objections ring hollow

 

[NewtonTrino]

You still can't address the issue. You keep swerving to a totally invalid example using gold backed currency which looks like a desparate attempt to obfuscate. The subject is fractional reserve banking. If you cannot justify your objection to it, stop trying to object to it. Your objections ring hollow

Bingo. I want him to explain what his problem is with the current system, not some theoretical system we don't use.

For example in his contrived gold example he isn't clear about what depositors are depositing in the bank.

 

[michaelsuede]

You still can't address the issue. You keep swerving to a totally invalid example using gold backed currency which looks like a desparate attempt to obfuscate. The subject is fractional reserve banking. If you cannot justify your objection to it, stop trying to object to it. Your objections ring hollow

I'm not changing the subject, you are.

I've provided an explicit example of fractional reserve banking.

If you don't like it, that's not my problem.

 

[NewtonTrino]

Indeed.

However, as history has shown us, people do not voluntarily accept money that is backed by nothing.

It must be forced upon them at gun point.

In fact, it is IMPOSSIBLE to have a price structure arise if money is not backed by a commodity first. If I simply printed up some money with my face on it and tried to purchase things with it, people would have no idea how to value that paper unless that paper was redeemable for a commodity of a specific weight.

People generally won't behave at all unless you threaten them with a gun, what else is new. You can't have a gold backed economy without guns either... so what's the your point? If we don't have rule of law then I can just steal your gold... at the point of a gun!

Anyway the money isn't backed by "nothing". It's backed by mutual agreement that we will all accept it. As long as people accept the money it's fine. Also the money supply is ONLY THE LIQUIDITY in the economy, not the economy itself. There's zero reason to tie money to a commodity and plenty of reasons not to. Again how do you grow the money supply as you grow the economy if it's based a commodity like gold? Or do you simply want to ignore that issue?

 

[michaelsuede]

People generally won't behave at all unless you threaten them with a gun, what else is new. You can't have a gold backed economy without guns either... so what's the your point? If we don't have rule of law then I can just steal your gold... at the point of a gun!

Anyway the money isn't backed by "nothing". It's backed by mutual agreement that we will all accept it. As long as people accept the money it's fine. Also the money supply is ONLY THE LIQUIDITY in the economy, not the economy itself. There's zero reason to tie money to a commodity and plenty of reasons not to. Again how do you grow the money supply as you grow the economy if it's based a commodity like gold? Or do you simply want to ignore that issue?

The rule of law can not exist if fraud is institutionalized by the State.

And yes, the money is backed by nothing in a fractional reserve system.

The money the bank gets to lend is created out of nothing and backed by nothing.

 

[michaelsuede]

Lets look at a single bank engaging in fractional reserve lending using fiat money.

Bank A has 100 dollars of fiat money that has been put on deposit with it by savers.

Bank A can now legitimately make 100 dollars of loans.

If Bank A makes MORE than 100 dollars of loans, the bank will be engaging in fractional reserve lending.

If Bank A makes 1000 dollars in loans, it has created 900 dollars out of nothing by simply making a book keeping entry.

The 900 dollars created is new money that did not exist in the money supply previously.

As the total money supply has increased by 900 dollars, the value of everyone's dollars decreases proportionately.

The collateral on the loans is immaterial to how Bank A got the money to make the loans in the first place. Since Bank A made the loans by simply printing money, it does not have a legitimate claim to the collateral in the event of a default.

 

[NewtonTrino]

The rule of law can not exist if fraud is institutionalized by the State.

And yes, the money is backed by nothing in a fractional reserve system.

The money the bank gets to lend is created out of nothing and backed by nothing.

But it's not backed by nothing... you yourself have said it's backed by the point of a gun, also known as the rule of law.

You need to get this idea out of your head that money needs to be backed by a commodity. It's equally valid to have money backed by an idea.

 

[michaelsuede]

But it's not backed by nothing... you yourself have said it's backed by the point of a gun, also known as the rule of law.

You need to get this idea out of your head that money needs to be backed by a commodity. It's equally valid to have money backed by an idea.

Any system that relies on guns to make it work will ultimately destroy itself.

The market rejects the use of violence.

Violence stops economic growth, it does not encourage it.

Forcing people to accept a currency does not make the currency exempt from destruction.

 

[NewtonTrino]

Lets look at a single bank engaging in fractional reserve lending using fiat money.

Bank A has 100 dollars of fiat money that has been put on deposit with it by savers.

Bank A can now legitimately make 100 dollars of loans.

If Bank A makes MORE than 100 dollars of loans, the bank will be engaging in fractional reserve lending.

If Bank A makes 1000 dollars in loans, it has created 900 dollars out of nothing by simply making a book keeping entry.

The 900 dollars created is new money that did not exist in the money supply previously.

As the total money supply has increased by 900 dollars, the value of everyone's dollars decreases proportionately.

The collateral on the loans is immaterial to how Bank A got the money to make the loans in the first place. Since Bank A made the loans by simply printing money, it does not have a legitimate claim to the collateral in the event of a default.

Methinks you haven't explained yourself very well and you don't seem to understand how this works. Banks do not lend out more than they have in deposits. In fact they lend out a FRACTION of what's been deposited leaving another FRACTION in RESERVE.

For example if I deposit $100 and the bank loans out $80 they've got $20 left which is the fraction. This is how it works... no bank works like you've described above.

Now the part you're probably complaining about is that the money can run through the system more than once. For example if the $80 that was lent out gets deposited back in the same bank then they will loan out another $64 of that money. However, in no case has new money been created.

 

[NewtonTrino]

Any system that relies on guns to make it work will ultimately destroy itself.

The market rejects the use of violence.

Violence stops economic growth, it does not encourage it.

Perhaps you could explain which system of government doesn't require guns. I'm all ears.

 

[michaelsuede]

Perhaps you could explain which system of government doesn't require guns. I'm all ears.

I don't believe in government, I am an anarchist.

I don't believe the use of violence against the innocent can provide increased prosperity over voluntary transactions.

Believing that using violence against the innocent can increase prosperity is a fallacy.

 

[Francesca R]

Lets look at a single bank engaging in fractional reserve lending using fiat money.

Bank A has 100 dollars of fiat money that has been put on deposit with it by savers.

Bank A can now legitimately make 100 dollars of loans.

If Bank A makes MORE than 100 dollars of loans, the bank will be engaging in fractional reserve lending.

And you had the audacity to suggest that others did not understand FRB? That takes the cake

 

[NewtonTrino]

I don't believe in government, I am an anarchist.

I don't believe the use of violence against the innocent can provide increased prosperity over voluntary transactions.

Believing that using violence against the innocent can increase prosperity is a fallacy.

Okey dokey then. I don't think we have anything else to talk about.

Have fun living in Somalia

 

[michaelsuede]

Methinks you haven't explained yourself very well and you don't seem to understand how this works. Banks do not lend out more than they have in deposits. In fact they lend out a FRACTION of what's been deposited leaving another FRACTION in RESERVE.

For example if I deposit $100 and the bank loans out $80 they've got $20 left which is the fraction. This is how it works... no bank works like you've described above.

Now the part you're probably complaining about is that the money can run through the system more than once. For example if the $80 that was lent out gets deposited back in the same bank then they will loan out another $64 of that money. However, in no case has new money been created.

I'm not the one who is mistaken here.

 

[NewtonTrino]

I'm not the one who is mistaken here.

Well then explain how fractional reserve banking works.

Keep in mind FR is a different concept than the fed. We are talking about how normal banks like Chase etc. keep their accounts. It's exactly as I described.

Francesca? Did I get anything wrong?

 

[michaelsuede]

Well then explain how fractional reserve banking works.

Keep in mind FR is a different concept than the fed. We are talking about how normal banks like Chase etc. keep their accounts. It's exactly as I described.

Francesca? Did I get anything wrong?

yes, you did, because you are not considering what happens when the bank issues another round of loans based on money that was circularly deposited back into the bank by the people the bank just loaned to.

http://www.youtube.com/watch?v=nH2-37rTA8U

The money supply is expanded because any amount of loans made in excess if the total reserve amount held is new money out of nothing being added to the system.

 

[michaelsuede]

And you had the audacity to suggest that others did not understand FRB? That takes the cake

http://www.youtube.com/watch?v=nH2-37rTA8U

LOL - you are making ME laugh with your nonsense

 

[NewtonTrino]

yes, you did, because you are not considering what happens when the bank issues another round of loans based on money that was circularly deposited back into the bank by the people the bank just loaned to.

http://www.youtube.com/watch?v=nH2-37rTA8U

The money supply is expanded because any amount of loans made in excess if the total reserve amount held is new money out of nothing being added to the system.

Please explain this with an example in your own words. I'm not arguing with or watching youtube videos, I'm discussing something on a forum.

You haven't done anything other than present wrong information. So please, give me a 2 bank example where new money gets created. And please, be specific.

 

[michaelsuede]

If a bank has 1000 gold pieces in its vaults, the maximum amount of outstanding loans the bank could ever have at any given time in a 100% reserve system is a dollar amount equal to 1000 gold pieces.

If the bank issues new loans, bringing the total outstanding loan amount held by the bank, in excess of the actual 1000 gold pieces held by the bank, they are creating new money out of nothing.

If a bank has 1000 gold pieces and has issued outstanding loans that sum to a total greater than 1000 gold pieces, it has engaged in counterfeiting (fractional reserve banking).