Split Thread Fractional reserve credit vs. derivatives

[michaelsuede]

Counterfeiting has a definition. Expansion of the money supply through banking does not fit it.

Surely it does.

The effects are the same as if I printed money in my basement.

Why should the banks get to print money while you or I may not?

Do you simply love to be defrauded and have your money debased?

I suppose some people may enjoy this, but I for one do not.

 

[NewtonTrino]

Screaming and stamping your feet does not make the math go away.

The video I posted uses graphics to explain fractional reserve banking so you don't get lost.

Refusing to watch the video and demanding I explain it to you by typing is ridiculous, but I shall humor you since I have nothing better to do.


Bank A opens and gets 1000 dollars deposited by savers that acts as base reserves.

Bank A is a 10% reserve bank, meaning it can lend 90% of these reserves out.

Bank A proceeds to issue 900 dollars in loans, holding 100 dollars in reserve.

Bank A's loan recipients, who just borrowed that 900 dollars, then deposit the money they just borrowed from Bank A back into savings accounts with Bank A.

Bank A now has total outstanding loans of 900 dollars.
Bank A now has total deposits of 1900 dollars
Bank A now has total reserves of 900 dollars that it can issue new loans on since it held 100 dollars in reserve for the original 10% reserve requirement.

Bank A can now make a new loan for 90% of its base reserves. So Bank A issues another loan for 810 dollars while it holds 10% of the 900 in reserves (90 dollars).

That 810 dollars is then redeposited back into Bank A by the loan recipients.

Bank A now has total outstanding loans of 900 + 810 = 1710 dollars.
Bank A now has total deposits of 2710 dollars
Bank A now has total reserves of 810 dollars that it can issue new loans on.

Bank A has added 1710 dollars to the original money supply of 1000 dollars.

In a 100% reserve system, Bank A could have issued a maximum of 1000 dollars in loans and the money that was redeposited back into Bank A would not be counted as new reserves able to be lent upon.

In a central banking system, the Fed is responsible for manipulating the amount of base reserves that a bank can pyramid loans upon.

Clearly, the money supply is expanded, the dollar is depreciated, and the bank is inherently in a state of bankruptcy.

I'm still not seeing where this "new" money is coming from. All your doing is describing the movement of money in a system over time.

Let's talk about another example. Let's say that the fed switched over to using gold backed certificates redeemable in gold to the holder of the cert. If I deposit these gold backed certificates into a bank in your world the bank wouldn't be able to lend them out because it doesn't hold the physical gold. The exact scenerio above would play out exactly the same way even with the gold backed certs. Basically you're full of ****.

 

[NewtonTrino]

Surely it does.

The effects are the same as if I printed money in my basement.

Why should the banks get to print money while you or I may not?

Do you simply love to be defrauded and have your money debased?

I suppose some people may enjoy this, but I for one do not.

You can do exactly the same thing by starting a bank. There is LITERALLY nothing stopping you from doing that. So start your own bank, problem solved and then you can get in on the "free" "magical" money you keep talking about that doesn't exist.

 

[michaelsuede]

I'm still not seeing where this "new" money is coming from. All your doing is describing the movement of money in a system over time.

Let's talk about another example. Let's say that the fed switched over to using gold backed certificates redeemable in gold to the holder of the cert. If I deposit these gold backed certificates into a bank in your world the bank wouldn't be able to lend them out because it doesn't hold the physical gold. The exact scenerio above would play out exactly the same way even with the gold backed certs. Basically you're full of ****.

The certificate is 'as good as gold' for the purposes of the bank receiving it.

If you were to deposit that money into a time deposit savings account with the bank, they would count it as a part of their reserves and could issue loans upon it.

At any time if the bank wanted to, it could call up the issuer of the note and demand a redemption for the actual gold and take delivery of the gold for themselves. At which point the issuing institution would destroy the bank note in question.

If your bank were to chose not to lend that money out while at the same time taking physical delivery of the gold, they could then issue their own bank notes for that amount of gold and spend them as they saw fit.

Also, if a miner were to bring in a block of gold to the bank and deposit it, the bank could print new money equal in value to the gold the miner just dug out of the ground.

 

[NewtonTrino]

The certificate is 'as good as gold' for the purposes of the bank receiving it.

If you were to deposit that money into a time deposit savings account with the bank, they would count it as a part of their reserves and could issue loans upon it.

At any time if the bank wanted to, it could call up the issuer of the note and demand a redemption for the actual gold and take delivery of the gold for themselves. At which point the issuing institution would destroy the bank note in question.

Ok, so I walk into the bank with $100 gold certificate and deposit it.

The bank gives an $80 loan to JimBob, who then takes out the loan in cash (gold certs) and walks over to another bank and deposits them. That bank now has gold certificates worth, say $80.

Can the second bank now lend out a fraction of the $80? If not, why not?

 

[michaelsuede]

You can do exactly the same thing by starting a bank. There is LITERALLY nothing stopping you from doing that. So start your own bank, problem solved and then you can get in on the "free" "magical" money you keep talking about that doesn't exist.

Bank startup capital requirements are more than I have on hand at the moment.

Further, I'd rather buy commodities and watch them explosively appreciate given that our banking system is counterfeiting money at a record pace these days.

Easier, less risk, more money.

 

[NewtonTrino]

Bank startup capital requirements are more than I have on hand at the moment.

Further, I'd rather buy commodities and watch them explosively appreciate given that our banking system is counterfeiting money at a record pace these days.

Easier, less risk, more money.

So get together with some friends and start a bank. It's "free" money right?

I can't wait to see your response to my gold certificate deposit/loan question. I predict you weasel or misunderstand.

 

[michaelsuede]

Ok, so I walk into the bank with $100 gold certificate and deposit it.

The bank gives an $80 loan to JimBob, who then takes out the loan in cash (gold certs) and walks over to another bank and deposits them. That bank now has gold certificates worth, say $80.

Can the second bank now lend out a fraction of the $80? If not, why not?

100 deposited with Bank A

Bank A loans 80 which is deposited in Bank B

At this point, Bank A's gold holdings have decreased by 80 while Bank B's gold holdings have increased by 80.

Bank B can now lend the 80 it has on deposit without any problems.

Bank B doesn't have any problems because Bank A is preventing you from withdrawing the 100 you initially deposited (since you placed it in a time deposit and made that money available for lending).

This means the 100 at your bank that you put in is entirely out of circulation.

No new money was created in this exchange.

 

[NewtonTrino]

100 deposited with Bank A

Bank A loans 80 which is deposited in Bank B

At this point, Bank A's gold holdings have decreased by 80 while Bank B's gold holdings have increased by 80.

Bank A's holdings have decreased but it still has the liability of the original depositor.

Bank B can now lend the 80 it has on deposit without any problems.


Bank B doesn't have any problems because Bank A is preventing you from withdrawing the 100 you initially deposited (since you placed it in a time deposit and made that money available for lending).

I didn't say anything about "time deposits". How about just normal banking like we do today? Once we clear up the normal case we can go to the crazy whackaloon case.

This means the 100 at your bank that you put in is entirely out of circulation.

No new money was created in this exchange.

The 100 is not out of circulation, what we are describing here by definition IS CIRCULATION which you seem to have a hard time with.

Basically you weaseled by making up some kind of new "time deposit" stuff which I'm guessing in the equivalent of a CD? Sorry I'm talking about regular checking accounts here, not some special account with made up restrictions.

Also, how does the bank know that the original deposit of 100 wasn't made as part of a loan as well.

You are a very very confused person.

 

[michaelsuede]

I didn't say anything about "time deposits". How about just normal banking like we do today? Once we clear up the normal case we can go to the crazy whackaloon case.

The bank could not give your 100 back until it acquired 100 in new reserves either from outside deposits or from money paid back on the loan. You are usi


The 100 is not out of circulation, what we are describing here by definition IS CIRCULATION which you seem to have a hard time with.

Basically you weaseled by making up some kind of new "time deposit" stuff which I'm guessing in the equivalent of a CD? Sorry I'm talking about regular checking accounts here, not some special account with made up restrictions.

Also, how does the bank know that the original deposit of 100 wasn't made as part of a loan as well.

You are a very very confused person.

You are the confused person.

You can't create an example using gold and then demand I explain it using a fiat system of currency.

The entire point of using gold is to prevent counterfeiting.

 

[NewtonTrino]

You are the confused person.

You can't create an example using gold and then demand I explain it using a fiat system of currency.

I can do whatever I want. My example was using a gold backed certificate issued by another bank, NO FIAT CURRENCY in my example AT ALL. Only gold backed certs.

My point was that you are confusing the two, and that seems clear from this response. Fiat vs gold backed and fractional reserve vs non-fractional reserve are unrelated to each other.

Now, go back to your room and wait for your mommy to call you to supper. Once you graduate from high school we can have this conversation again.

 

[michaelsuede]

I can do whatever I want. My example was using a gold backed certificate issued by another bank, NO FIAT CURRENCY in my example AT ALL. Only gold backed certs.

My point was that you are confusing the two, and that seems clear from this response. Fiat vs gold backed and fractional reserve vs non-fractional reserve are unrelated to each other.

Now, go back to your room and wait for your mommy to call you to supper. Once you graduate from high school we can have this conversation again.

You're stamping your feet demanding the bank give you your money out of deposit. It can't do that because it lent your money out.

I'm sorry if this upsets you, but that's how it works.

If you lend a person your car, and then they loan your car to one of their friends, you can stamp your feet all day long and demand your car back, but the guy is not going to be able to give you that car no matter how much he wants to.

 

[NewtonTrino]

You're stamping your feet demanding the bank give you your money out of deposit. It can't do that because it lent your money out.

I'm sorry if this upsets you, but that's how it works.

Technically when you deposit money it's done with certain terms. I do expect a certain amount of liquidity in a checking account. You seem to think "none" is a good amount.

Basically you don't know what you're talking about.

 

[michaelsuede]

Technically when you deposit money it's done with certain terms. I do expect a certain amount of liquidity in a checking account. You seem to think "none" is a good amount.

Basically you don't know what you're talking about.

Yeah, and those "terms" are set by the bank you are depositing your money with.

If you put your money into a demand deposit account, such as a checking account, you could get your money out as soon as you wished.

If you want to earn interest on that money though, the bank will need to lend it out on your behalf.

If the bank lends it out on your behalf, then obviously the bank does not have the money on hand to give to you should you want it back.

The bank must first acquire new money in the amount you wish to withdraw before it can give it back to you.

 

[NewtonTrino]

Yeah, and those "terms" are set by the bank you are depositing your money with.

Yup. And banking regulations.

If you put your money into a demand deposit account, such as a checking account, you could get your money out as soon as you wished.

Yup.

If you want to earn interest on that money though, the bank will need to lend it out on your behalf.

Or invest it somehow, yes.

If the bank lends it out on your behalf, then obviously the bank does not have the money on hand to give to you should you want it back.

May not have it on hand, which is different than does. Hence the fractional part.

The bank must first acquire new money in the amount you wish to withdraw before it can give it back to you.

Assuming there is a run on the bank, yes.

Wow, a post without too many factual inaccuracies. Keep it up.

Then again you also didn't actually make any new point.

 

[psionl0]

There are NO GOLD PIECES involved in fractional reserve banking. None, zippo, zero. So please explain the CURRENT SYSTEM we have and how it creates new money at the bank level. Sure the fed issues new money but Chase or any other bank doesn't. If you're claiming they do then please show the math. Otherwise go away.

You are thinking only about M0 or base money (which could be fiat or gold pieces). However, bank accounts are also money - even though they have no physical backing.

Like most people I'm sure you pay the majority of your bills with a cheque or some form of electronic banking. What you are doing is transferring some of the credits in your bank account to your supplier's bank account. Your bill gets paid without a single currency note or coin being touched.

When you add bank accounts to the notes and coins in circulation (not in bank vaults) you get M1 money. It is this money that gets created when a bank practises fractional reserve banking.

 

[Sceptic-PK]

A 50% reserve ratio on our pyramid scheme would accomplish the same task as a 100% reserve gold standard.

A 50% reserve gold standard means the bank could issue 2000 in loans on 1000 in gold.

A 10% reserve gold standard means the bank could issue 10,000 in loans on 1000 in gold.

I don't know why I am required to correct the numpties so regularly on this very simple premise. If there is a 10% reserve gold standard then the bank could issue $900 in loans on the $1000 gold.

This is why you rarely see libertarian economists, because few libertarians actually understand even the most simple fundamentals. It's all ideology rather than technical knowledge.

 

[michaelsuede]

I don't know why I am required to correct the numpties so regularly on this very simple premise. If there is a 10% reserve gold standard then the bank could issue $900 in loans on the $1000 gold.

This is why you rarely see libertarian economists, because few libertarians actually understand even the most simple fundamentals. It's all ideology rather than technical knowledge.

That is with a central bank that manages the reserve. That is not what we are talking about.

In a fractional reserve gold standard without a central bank, a 50% reserve means the bank has half of its outstanding loans in gold.

You don't see libertarian economists because you must not have eyes.

CATO, Mises, CSS, CFP, CSIF, PFS, etc.. etc.. etc.. there are a ton of libertarian economic think tanks.

 

[Sceptic-PK]

It's not a 10% reserve gold standard, it's a 1000% money creation mechanic.

 

[Francesca R]

It does not disagree with what I posted at all.

It does. Moreover you contradicted yourself in a subsequent post. Do you think others cannot see this?

Go ahead and try and quote me and show where I am wrong.

I thought I already did, in post 33. Thus:

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. [You are saying that it can lend its entire deposit base before even crossing into fractional reserve territory. In fact it cannot even lend this much as a fractional reserve bank]

If Bank A makes MORE than 100 dollars of loans, the bank will be engaging in fractional reserve lending. [You are saying it becomes a fractional reserve bank if it lends more than its deposit base. In fact that would be a "negative reserve" bank]

[ . . . ]

Then in post 49 above, you state it correctly:

Bank A opens and gets 1000 dollars deposited by savers that acts as base reserves.

Bank A is a 10% reserve bank, meaning it can lend 90% of these reserves out.

Bank A proceeds to issue 900 dollars in loans, holding 100 dollars in reserve. [ . . . ]

Your first example was a zero reserve bank, and you didn't even think it was reserving fractionally; you apparently thought it was a full reserve example (it was not reserving at all). Your second example is correct but it is as plain as day that you have changed the explanation.

I am happy if the Khan academy has educated you. Before you posted it, you evidently did not know what FRB was, nor what full reserve banking was.

This prior lack of knowledge is beside the point that you have been able to give no justifiable objection to fractional reserve banking and credit creation, given the prevalence of derivative exposures across broad areas of finance, commerce and production--all of which you are fine with.

It does go some way towards explaining your illogical opposition though.