BJ,
Ok, that makes more sense.
If you had said that so eloquently in the first place this thread would be significantly shorter. Though, assuming that turnips definition was the definition you support, there has been no actual change in my opinions toward non-FR because my opinion was already for non-FR. lol.
What I wonder is why something so obvious and apparent was not apparent to me immediatly. Though in my defence most of your arguements were to sidepoints essentially irrelivant.

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Sapient

At any given instant interest is owed on every dollar in existence and borrowed.

The money to pay it does not exist.

When it is created, interest is owed on it.

respectfully
BJ

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Oh, and I spent so much time trying to make that tidy.

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BJ,
I agree that FR, under Turnips definition, will tend to create bubbles which then pop and cause much pain.

I do not beleive in things for which i cannot provide an arguement supporting my beleif. I do not, for example, beleive that it FR does not need growth but likewise I can see no arguement that means it must.
I acknowledge that loans are essentially promises of work and that money thus created is a promise; it is after all an evolution of the certificate of deposit.
I am sorry, but i can just not see why growth is neccesitated if the currency continues to circulate through the economy. If person A takes out a loan totaling 100 and pays interest of 10 and person B takes out a loan of 110 and pays interest of 11, person A earns that 110 from B and pays back the loan in full, person B owes 121, person B earns the 10 interest paid by A through working for the bank as well as promises (his own) equal to 111 and uses this 121 to pay back his loan. The money has come full circle and has not neccesitated growth at all, though the bank does use promises to pay, in a system with more actors it would likely be someone elses promises. I still dont seen the need for growth.

Creditor Bank A B
0 210 0 0
(+210) (-210) (0) (0)

0 0 100 110
(+210)(-210,+210,+21)(-100,-10) (-110,-11)

0 110 0 0
(+210)(-210,+11,+110) (0) (-110,-11)

0 99 0 121
(+210) (-210,-110, (0) (-110,-11)
+110,+11)

0 210 0 0
(+210) (-210) (0) (0)

210 0 0 0
(0) (0) (0) (0)

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In other words, it is not the transaction between the landlord and tenant that is important.

It is the transactions that involve the banks, the ultimate source of ALL money in the system.

No matter how long and involved the chain is, if the person dealing with the bank must pay the bank interest on the loan, then that interest, being money, bust be created by someone else’s taking out a loan for the same amount plus the interest and paying interest on that amount.

It is a never ending story… until the amounts get ridiculous and people can’t pay. It is almost axiomatic that it will create bubbles in all manner of commodities.

BJ

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What matters is what the money IS.

If the money is debt, which is basically a promise of work or a promise of future work or if you wish a claim on future wealth – and demands interest:

The $250 paid to the landlord comes from someone else’s promises.
The $200 the landlord pays is in service of his own promise (canceling the 200).

As long as the money is backed by debt rather than “wealth” “savings” “work” “gold” ( NOT the promise of same ) each one of those promises (money) includes a demand for interest and forces the next player to earn more money but the “more” money earned is itself “created” somewhere attracting interest. The amount of money must grow.

If the money is real (not FR) then money is not created by borrowing (whether or not there is interest). The next player’s money earned is not created by “debt” and therefore does NOT include a demand for interest to be paid on it.

If the money is thought of as a claim on wealth it isn’t obvious. If it is thought of as representing work, then any engineer will see the problem almost instinctively.

My assertion that it represents my work has its basis in a reality… in the absence of money, if I desire something that someone else possesses I must exchange my work (either directly or something created that contains my work) for that thing, and the thing they possess is theirs by dint of their own work.

______________________________

This is why the Fed is so terrified of deflation and has been lending and guaranteeing loans like mad to try to prime the pump and force the system to resume its controlled inflation. It has been trying every trick in its repertoire to persuade people to borrow and spend and get consumption growing again.

FR based economics don’t work without growth.

Right now the real unemployment in the US is North of 10% and deflationary pressures are massive. Instability remains, and the overhang of retail space and housing along with the unemployment numbers do not bode well for the “green shoots’ rhetoric. I rather expect a second collapse of the economy later this year… maybe not as visible in terms of the banking world, but the man-in-the-street will feel it fully.

Unemployed and scared people aren’t borrowing and consuming more anymore, they are saving and staying home. Empty houses and ghost malls exist all over the country.

Goldman will recover. The jobs market? Nope… The people on the street are watching their standard of living disappear, but do not have any idea how or why, or how much of it was false.

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson,

respectfully
BJ

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BJ,
I can see where you are coming from but it does not seem to stack up to me.
The $100 initially introduced inflates to $1000 assuming a reserve requirement of 10%. If interest is charged at a rate of 5% per annum then a total of $50 is charged.
This is the same amount as if the $100 dollars was lent out only once at a rate of 50%: $50.
Likewise if the land lord pays $200 per week in interest and collects $250 per week from letting the propety a profit of $50 is made.
To me it all seems the same, I cant see why the source alters the way the the interest effects the economy. You could charge a billion dollars interest and it would just mean the person needed to do some dodgy deals or default, it wouldint mean the economy needs to grow purely because of this.

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I fail to see how the ROI (interest) generated is different to the ROI of rental properties, shares, or business;

The rental property isn’t borrowed originally, it actually exists. The shares in the business are shares in something that actually exists. Neither the rental property nor the business are borrowed into existence in the first instance.

Every dollar in the system however, must be borrowed into existence. Which means that the interest paid has to be added to the system continually.

BJ

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BJ,
I agree that bankers create money under a FR framework.
I agree that the banking system acts to redistribute wealth to the bankers because the competition is too small and the regulation to loose given the lack of competition. This allows profits far in excess of what is ideal.
I agree that FR allows banks to charge interest several times over on what is essentially a single unit of currency.
What I dont understand or agree with it the assertion that growth is necessitated by the charging of interest. I fail to see how the ROI (interest) generated is different to the ROI of rental properties, shares, or business; though granted on a different scale entirly, a scale which would not vary in the presence of proper competition or regulation.

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Those actors were reduced to that so that the fact that the totally debt backed currency requiring interest on every dollar be paid, requires growth in order to function. I could not make it any simpler. It is easy to make it more complex.

My point is that in FR banking the bank DOES create money through lending, as banks around the world continually do. The bank’s money to pay expenses, being money, must originally be created through borrowing, which attracts interest.

You cannot get away from the requirement to borrow to create money if debt is the thing behind the money.

Asserting that all debts attract interest, such a system MUST grow or someone cannot get enough money to pay the interest on their debt.

The transfer of wealth effect outlined by von Mises is real. The system is broken in ways that are so fundamental that I was nauseous when I first learned about it.

I doubt that most bankers or banks realize how the paradigm is broken, and I reckon that most of the people in the trenches are passably honest. Hell, if YOU don’t understand it what chance does Joe Six-Pack have?

I don’t doubt however, that some people at the very top… the ones who profit from it most, understand very exactly how this house of cards is built.

Fractional Reserve without interest payments on debt, does not require growth.

Fractional Reserve plus interest on debt however, does.

The inputs and outputs CAN NOT balance otherwise.

respectfully
BJ

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BJ and Turnip,
I am fully aware that much of what I have been saying is already known by you. They are the basics and that is why they are worth repeating.
The first matter:
Turnip, you make a distinction between on-call accounts and accounts to which access is denied. I have made this distinction previously and have stated that on-call accounts should have a full-reserve requirement due to the potential for bank runs and the like while accounts with denied access – timed deposits – should have no such limitations. I have been defining FR as including both such accounts and talking about a non-FR world as one in which both these types require full-reserve. You seem to define FR as only relating to on-call accounts. If we define it thus then we have been arguing past each other as I too believe that there should be a full-reserve requirement for such accounts.
If we work off your definition then my statement as to the social and economic effects of removing it is rendered void; if we work off my definition then it is entirely legitimate because of the inhibition of entrepreneurship and the favouritism for the status quo.

The second matter:

As I have said many times money isn’t wealth but rather a claim to wealth.

And as I have maintained this entire time: money is not wealth but a claim to wealth.

If they supply of money grows at a rate bellow the rate at which the demand for that money grows then there will be deflation. That we have not observed this is because, as you say, money is constantly being created. If it were not then we would observe this phenomenon.

Yes, if you print enough money it will eventually become so worthless that it is no longer a valid currency and a net currency will need to be established. The total value of money still does not exceed the total wealth of society for any prolonged period. It is true that it can for a short period following massive issuance.

The third matter:

Not true as either she will need to default on that debt or repay it by handing over her own wealth. FR debt is the enabler for governments, it is a drug especially for democractic nations as it enables them to spend money without taxing the citizens

And I repeat: This is not the fault of FR, this is a fault of those whom govern the FR system; the bankers and the politicians and as such it is irrelevant as an argument against correctly managed FR.

The fourth matter:

Lets take it down to an economy of 2 people and a bank *and a “reserve bank”. The bank borrows 11 from the reserve bank and loans 100 to person A, 10 to person B. Person A is on the hook for 10 bucks, he sells goods to person B and gets his 100 + 10 (profit) and pays back the bank (incidentally destroying the money). Person B has to come up with 11 bucks and has no source for the extra $1 unless the system is growing (either by inflating or actually producing more). It doesn’t matter. The GROWTH is built in.

Three actors can hardly represent an economy unless those actors also represent the cyclic nature of the economy and a accurate model could hardly be explained in a book due to the complexity of the money proliferation and the effects of any withdrawal or transference on this proliferation. I would propose an alternative model but it would take far too much time to create. First, the bank cannot create 110 from 11 itself but must do so through lending, it itself still only has a net wealth equal to that 11. Second, the money is only temporarily destroyed when the bank is paid back, the bank soon lends that money out all over again and the money is recreated. Third, this assumes it works one way, the bank too must pay for expenses and in this way the money cycles and is made acquirable to person B, that the money is recreated means that the same amount is still cycling assuming a constant rate of ‘money in pocket’ among all actors. Fractional reserve does not require growth; it requires redistribution of money, and by extension wealth.

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sapient:
“Interest on a loan is no different from paying rent on a house, paying mark-up on goods, or dividends distibuted through shares. It is simply a redistribution of wealth.”

You are both right and wrong. Interest like rent, markup and dividends IS a form of redistribution of wealth, a redistribution UPWARD. The greater the margins, the more wealth is redistributed upward. That is why a true free market is so important, because it puts a limit on those margins and as a consequence reduces how much wealth is vacuumed up by the rich.

“That the USA has a reserve ratio of 3% IS the problem.”

Smart individuals will ALWAYS find creative ways of avoiding impediments to their drive to accrue wealth as amply demonstrated by the Muldoon era of dictatoral control of the economy.

It was an absurd mix of ad hoc rules, made up with very little input from anyone other than Robert Muldoon, the finance minister and prime minister.
http://www.chrislee.co.nz/index.php?page=20th-july-2006-nz-finance-sector-under-muldoon

They already do so even to avoid such minimal capital requirements in the current monetary regime.

“There are a number of ways through which financial intermediaries find reserves beyond their formal or legal lending capacity—ways that have come to be known as “liability management”
http://www.cbpa.drake.edu/hossein-zadeh/papers/HowFinanceCapital.htm

“Moreover, even where banks still issue loans there is a trend to “securitisation”. This means that the loans are sold to non-bank investors who are not subject to reserve requirements.”

“Yet the evolution of private clearing mechanisms like the US net settlement system CHIPS threatens to erode the central bank role even here. The combined results of all these developments could well be to reduce, perhaps to the point of elimination, the need for bank reserves and even the need for banks and cash altogether.”
http://www.samuelbrittan.co.uk/text14_p.html

This letter that I link to, corraborates that a similar regime is in effect here in New Zealand.

All the recent twaddle in the press concerning the RBNZ using too tight a definition of CPI to regulate interest rates is totally insignificant, when the government of the day employs the RBNZ through a contractual arrangement with the Debt Management Office to enter the market via its daily OMO to monetise authorised private financial credit created when the same banking institutions purchase New Zealand Government Stock.

These banking entities only have to retain a maximum of 4% capital adjusted by the 10% credit weighting for tier 1 capital and as much 8% adjusted by 10% for tier 2 capital to raise an international short term forward sale money market liabilty on their balance sheet to purchase Government Stock at tender from the Debt Management Office via the RBNZ on behalf of the Government (taxpayer). In return the RBNZ will supply the same institutions the full amount in cash for a marked to market amount of bonds using reverse term repos conducted on a daily basis for a total current rolling amount near $2.5bn.
http://www.omo.co.nz/NZ%20Minister%20of%20Finance%20Letters.htm

It is NOT fractional reserve banking as in such a regime the government through its Central Banks has a measure of influence on the monetary supply growth in the economy. Such a regime was abandoned in the 1980s with the introduction of the Reserve Bank Act. We live under an almost completely credit fueled economy.

“The wealth and power held by bankers is not due to fractional reserve itself but rather due to, in the first instance, the lack of competition which allows for cartel-like opperations and, in the second instance, lack of government regulation to account for this lack of competition.”

This is as true of ratings agencies as of banks.

“The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.”
http://seekingalpha.com/article/58304-time-to-break-up-the-credit-rating-cartel

“There is a fundamental conflict of interest that — if you’re being paid by the person who controls your hiring, then you do have a real incentive to tilt your report,” said Dean Baker, co-director of the Center for Economic
and Policy Research in Washington.

Naturally when there is a State charter for a certain function, especially in such a crucial one as rating the quality of financial securities, they will be free from the discipline of the market should they fail to deliver a quality service. Free from such discipline of course they have no incentive to perform and are instead are prone to the conflicts of interest and outright criminal negligence that was highlighted by the current crisis. They are in effect free to fail and fail again no matter how many times it occurs.

“It wont be supplied past the limits of the availible wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.”

Its important to distinguish between different types of wealth and between wealth and claims on wealth. I’m beginning shift towards turnip’s way of thinking. Wealth are goods and services that are beneficial to humanity, that make life more enjoyable. Money and its approximates such as securities and legal contracts are merely claims on wealth enforced by the State. They do not add wealth, but instead destroy it as it restricts the consumption of wealth already produced. Since the 1980s government policy has skewed the economic regime away from the former in favour of the latter. Enriching a few at the expense of the many.

New Zealanders have only been able to maintain our standard of living by paying off current maturing debt by rolling it over into new debt issuance by other lenders. The party is now over. The creditors are now about to demand their pound of beef.

“Prime Minister John Key has revealed China’s US$200 billion ($349 billion) sovereign-wealth fund has signalled its interest in a stake in NZ dairy giant Fonterra if it changes its capital structure.”
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10569671

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“I hold that it is fundamentally the same thing. There can be no loans in a non-fractional reserve world for the very act of creating a loan requires a non-full reserve requirement.”

Ok Sapient it seems clear to me that you don’t quite understand FR. The above statement proves it. In a Non FR world there are two types of deposits Timed and On Call. The Bank in a NON FR world is free to lend the timed deposits and in return for not giving you access to your money the bank will pay you interest. You CAN”T access that money for the ENTIRE length of the deposit, The reason why you can’t access that money is because IT ISN’T in the bank it has been lent out.

The On Call deposit can be accessed by you at anytime as the money never leaves the bank, this account also doesn’t pay any interest.

So as you can see by the above statement lending in a NON FR world is POSSIBLE.

“If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.
As soon as the bank can lend out even a small portion of that $100 it is operating in fractional-reserve and the money creation starts.”

If I invest $100 I will decide how much to keep on call and how much to place on time. Lets say I keep $20 on call and put $40 in a 1 year CD and another $40 in a 5 year CD. The bank can loan $40 for 1 year and $40 for 5 years. No FR lending has taken place in the above scenario. If I walk down to the bank I can only demand $20. A RUN on the bank is IMPOSSIBLE, In 1 years time I might get bank my $40 and in 5 years time I might get back $40 dollars.

“In the absence of the loan option society and the economy will stagnate, as will scientific advance. I hold this undesirable and as such the elimination of fractional reserve is undesirable.”

I am sorry but your logic fails one statement does not lead to the other. Society has functioned fine without fractional reserve banking, science does not require fractional reserve lending to prosper. If you believe that the fractional reserve banking of the 20th century was the reason for our great technological achievement, well you have no EVIDENCE to back that claim. My personal view is that you are overlooking OIL and its net energy effect to a civilization.

“No, it is possible for a country to use more than its wealth by borrowing the wealth of others but the value of any currency is defined by the willingness of people to accept that currency in exchange for goods.”

As I have said many times money isn’t wealth but rather a claim to wealth.
The money will only operate as a claim on wealth as long as the people believe in it.

“If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency.This change in the demand vs supply means that goods cost more currency despite having the same value”

The money supply grows all the time, periods of deflation are non-existance and in fact rather destructive for a fiat currency. Your just repeating something both BJ and I are very aware of.

“You can print as much currency as you like but it will not exceed the total wealth of the society. To take an example from Russia: people would sooner steal the wheel barrow than the money contained.”

Of course you can print as much money as you like, however at a point this money will stop being money, you will no longer be able to exchange it for wealth, at this point it is no longer money, you will then need to either issue a new form of fiat money. History provides ample evidence of fiat currency that can no longer be redeemed for wealth.

“That your daughter was born with debt is irrelevant. That is not the fault of FR but of the government. That the government is in debt is the result of the government borrowing and that debt is offset by credit to others. ”

Not true as either she will need to default on that debt or repay it by handing over her own wealth. FR debt is the enabler for governments, it is a drug especially for democractic nations as it enables them to spend money without taxing the citizens.

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That extra $10 is profit, no different to if you sold a hammer and some nails.

Take the economy as a whole Sapient. Someone else had to HAVE the 10 in order to pay you 10. Over the whole economy EVERY dollar is backed by debt. The 10 is borrowed money somewhere else. Borrowed from the fed and then multiplied by the lending, and ultimately paid to you but still borrowed, and still owing interest.

Lets take it down to an economy of 2 people and a bank *and a “reserve bank”. The bank borrows 11 from the reserve bank and loans 100 to person A, 10 to person B. Person A is on the hook for 10 bucks, he sells goods to person B and gets his 100 + 10 (profit) and pays back the banlk (incidentally destroying the money). Person B has to come up with 11 bucks and has no source for the extra $1 unless the system is growing (either by inflating or actually producing more). It doesn’t matter. The GROWTH is built in.

If the economy has stalled or goes down, person B defaults. Over the larger economy, steady-state rather than growth MUST drive some people bankrupt. Mathematical certainty.

“If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.”

No, it is possible to borrow, but the lender has to give up control of the money while it is lent, EXACTLY as you do when you loan it to your friend.

The bank may still balance accounts to allow money to be aggregated and disbursed in amounts different from the amounts that people deposit in the bank (lend to the bank), but this does not release the bank from maintaining deposits that match its lending overall. It is not possible for the bank to lend from a DEMAND deposit, like a checking account.

If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency.

If you assume a perfect market and people with perfect knowledge making rational decisions in a closed system. That isn’t the case.

Your key phrase was here – “borrowing the wealth of others”

What would be the value of the $US if the Chinese and Japanese abandoned their support of it? Are they acting rationally? I think so, but not within the context of the US economy. They are taking losses every day…. for reasons related to their own requirement to grow.

(( You keep explaining inflation to me… I know how it works… probably knew before you were born! … just stop already ))

Fractional Reserve creates debt based money. How much depends on the reserves. I have just shown that debt based money in combination with the requirement to pay interest (not all cultures permit “interest” payments, other arrangements are made) requires perpetual growth.

I am Green Sapient. Perpetual growth isn’t an option on my planet, and is a particularly nasty problem for us right now.

Hence the “evil” connotation.

Mises showed how FR generates boom and bust cycles which are predictable and favors the banks and the borrowers earliest in the cycle of money creation.

http://mises.org/story/2882

” – Monetary expansion is a massive scheme of hidden redistribution. ”

I don’t much care for the libertarian view of money privatization and their total mistrust of government itself, but the portion which analyzes the effects of fractional reserve on the various players in the market for money is spot-on.

respectfully
BJ

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BJ,
I have only read the first page of that forum, it was so cyclic and pointless it bored me; I only read those sort of arguments when I’m participating in them .
There seem to be two main points to the first page.
First; A bank receiving a deposit of 1000 may lend out 9000 with a reserve ration of 10%. This is blatantly false as FR requires that only money or certificates of deposit which the bank receives may be lent out. While ultimately it may inflate to 10,000 through people taking out and spending loans which are then re-deposited, it is not created all at once by the bank and 1000 does not allow a single bank to create it instantly in the manner cited. If a bank did practice this it is not a fault of FR but of regulation of the banks and is in-fact a incident of fraud.
Second: A bank collecting interest on money created through FR require growth. Again, not necasarily true. If the bank loans out $100 and gets back $110 including interest that does not mean money has to be created. That extra $10 is profit, no different to if you sold a hammer and some nails. That $10 goes to the bank, which uses the money to pay the banker or the cleaner or some other contractor whom then uses it to pay for food, to purchase goods, or to pay contractor for property improvement. If the banker, the cleaner, the grocer, or the contractor had taken out the loan then the money has come full circle. It does NOT require a growing economy. That money is created as part of a growing economy by a central bank is an effort to control deflation and thus allow the growth to continue. Yes, defaults will be higher in a non-growing economy but those defaults are the result of slack reserve requirements and credit rating requirements.

On to your post;
I fail to see how interest paid because of real money and interest paid because of money created by FR is any different. In each case the interest is ROI and is paid because the recipient of the loan expects to gain greater utility from the money than the utility lost through interest. So long as the utility is present there exists no difference. And the utility IS present because the population can not tell the difference between real money and money created thus.
That FR creates inflation is irrelevant as that inflation is in actuality created by the Fed intentionally and takes account of the FR effect; it uses the banks as a method of distribution.

No, and this is where we are getting off the rails.

I hold that it is fundamentally the same thing. There can be no loans in a non-fractional reserve world for the very act of creating a loan requires a non-full reserve requirement.
If you invest $100 in a bank and it has to keep all of it (full-reserve) it is IMPOSSIBLE for it to then create a loan from your deposit. Its no different if you were to lend that $100 to a friend.
As soon as the bank can lend out even a small portion of that $100 it is operating in fractional-reserve and the money creation starts. In the absence of the loan option society and the economy will stagnate, as will scientific advance. I hold this undesirable and as such the elimination of fractional reserve is undesirable.

Sure it can be. All that is required is additional promissory notes issued in the name of our children.

No, it is possible for a country to use more than its wealth by borrowing the wealth of others but the value of any currency is defined by the willingness of people to accept that currency in exchange for goods. If the money supply grows without an increase in productivity then inflation takes place as the currency is now in greater supply relative to the demand for the currency. This change in the demand vs supply means that goods cost more currency despite having the same value. You can print as much currency as you like but it will not exceed the total wealth of the society. To take an example from Russia: people would sooner steal the wheel barrow than the money contained.

That your daughter was born with debt is irrelevant. That is not the fault of FR but of the government. That the government is in debt is the result of the government borrowing and that debt is offset by credit to others.

You are taking your strife against a system when that system is the very thing that enables you to take strife against the system. What your strife should be directed against is the practices of those whom run the system, the bankers and politicians, not the system itself.
Yes, fractional reserve allows for the creation of currency from the issuance of debt but you have yet to provide any reason why fractional reserve would be bad compared to other systems if fractional reserve was in-fact managed correctly.

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Also relevant to the message that Fitch is sending –

http://www.huffingtonpost.com/ralph-gomory/manufacturing-and-the-lim_b_227870.html

Let us by all means do the things in which we have the greatest advantage. But let us make sure the new things we do, together with the things we continue to do, add up to enough to make us a rich nation. Vague talk about future innovations, about a post-industrial society, or of an enormous explosion of services exports to where they can balance the manufacturing trade deficit is not the stuff on which to bet the prosperity of a nation. This vagueness disguises our real situation and the need to rethink both our fundamental economic goals and how they can be attained.

respectfully
BJ

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Banks act as intermediataries, in the absence of government intervention.

Of course they do and I don’t mind this at all, and I understand the function perfectly well. You have explained it nicely too, but… in the case of money, they create the damned stuff.

No, borrowing and debt is the same beast as borrowing and creating money. They are exactly the same process.

No, and this is where we are getting off the rails.

Borrowing and going into debt requires someone else to save in a non-fractional, redeemable system. Interest paid does not require the creation of additional money and it is merely the fee for the time-value of the money. It comes from someone else spending their savings somewhere else.

When money is backed by debt however, borrowing is itself the source of money. Since ALL debt attracts interest, all the money in the system has interest being paid on it. This REQUIRES a constant flow of additional money (debt) into the system. The system is only stable as long as there is growth. As soon as growth stops it is mathematically certain that some people are going to default because there is no way to provide enough debt for everyone to pay their obligations.

Which is why the Fed is so desperate to create new debt.

This problem stems from the money being based on debt ( assuming the interest rate is different from zero ).

Without growth the system is broken. Debt-based-money is EVIL.

I find it hard to separate fractional-reserve from the debt-as-money paradigm. They go together. It (fractional reserve) is by definition, a way to expand the money supply through creation of debt. Thus SOME “money” is debt (attracting interest) in fractional reserve systems and the reserve requirement tells us what percent of the money it might be.

http://forums.randi.org/showthread.php?t=127497

“I want a fractional reserve savings account where I earn interest on $1000, but only have to front $100.”

On such a point the bank’s advantage in this system becomes more clear.

A redeemable currency (not based on debt) imposes some discipline on the system but I asserted earlier that it has to be coupled with an end to the fractional reserve habit if we are to regain power over our currency, our country and our future.

The currency gets its value not from gold but from the fact that other parties, particuarly the government, are willing to accept it in exchange for goods, services, and the payment of tax.

Of course. This isn’t really relevant to the issue.

The economy must continually and relentlessly expand and create new money to pay the interest. The money supply MUST grow whether wealth increases or not.

It is inflation if the wealth does not grow and this is fundamentally an indication of the system being broken. An inflation rate of zero should not have the government panicking about deflation or entail the destruction of jobs. It does.

It is growth if the wealth does grow, and this is also a broken paradigm from a deep Green point of view, because the growth of wealth is tightly connected with additional energy being consumed/controlled per capita and such growth cannot go on in perpetuity on a finite planet… or in a country with finite resources.

Growth without the capture of additional work is something I have never ever seen an example of. I don’t care if it is inflation or not.

It wont be supplied past the limits of the available wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.

Sure it can be. All that is required is additional promissory notes issued in the name of our children. Whether they can pay or not is for THEM to find out. The system doesn’t know how much work they will have accessible to them. It bankrupts them without even noticing.

The additional money created is a glut. People don’t even know what to do with it, they build stuff they don’t need, expand production to meet nonexistent demand… malinvestment is rampant. Consume-consume-consume isn’t just a feature of the culture of the USA, it is required by the damned money itself.

Much of it winds up in the hands of those who already had lots, without them doing anything at all. They are the collectors of the interest, the loaners of the money. The entire system favors this result.

With peak-oil and the climate both apt to crunch that available work, real growth is going to be difficult to manage.

The supply cannot expand without limit as there is a reserve ratio but even in its absence if individuals choose to keep small change in their pocket then there is a very real limit on the abilit of banks to inflate the money supply.

You are joking? Well sort of… the reserve ratio of 3% is a joke to be sure. The Sweeps make it a bigger joke.

My Daughter was born with over 200,000 dollars owed. That number has only ever increased. Trust me, they can inflate as much as they like, yet their ability to do so is not the problem I care about.

I care about the fact that the definition of the currency enforces growth of debt, thus growth of the money supply. This can be inflationary or not. If inflationary it is damaging because it is theft from all. If it is not inflationary it is damaging because it entails increased production, increased consumption of energy and relies on increasing (somehow) consumption for stability.

BJ

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BJ,
Banks act as intermediataries, in the absence of government intervention when a loan is defaulted on that default is absorbed by the bank itself. When the defaulted loans are too large in number and size, as is the case with the present crisis, the bank is unable to absorb the losses and depositors take a hit; in both instances the debt disappears along with the credit; in the first instance the credit is the banks and in the second the credit is both the banks and the depositors.
I have said previously that the problem is not fractional reserve but the way it is opperated due to cartel like behaviour and lack of redeeming legislation. That the USA has a reserve ratio of 3% IS the problem. This reserve ratio allows FR to create far more money than is needed and because of this, and the motives of the managers, loans which are far more risky than should be taken are taken. If these loans were not allowed then there would be no problem. If the reserve ratio was higher or the required credit rating was higher/present then the bubble would have been far smaller and the decline far less steap. Alternativly, removing government backing or making the shareholders personally accountable would also assist in this respect.

No, borrowing and debt is the same beast as borrowing and creating money. They are exactly the same process. If your engineering firm takes out a loan to purchase chips, boards, displays, or what-ever, as soon as the money is used to purchase those goods the recepient of the money is then able to deposit that money in their own account from which the bank may then lend out the money. It is the same process. So long as money cycles any loan can become credit in someones account which is then free to again be lent out.

The currency gets its value not from gold but from the fact that other parties, particuarly the government, are willing to accept it in exchange for goods, services, and the payment of tax. The ‘creation’ of money through fractional reserve inflates the money supply and inflates the costs of anything in dollars. So the merchant demands more for each pumpkin, the government demands more in tax, the worker demands more in pay. If we moved from a full reserve to a fractional reserve then people would be victimised by the massive devaluation but that devaluation happened progressivly long ago. Fractional reserve does not decrease the value of the dollar at present, they are just as useful as if there was an equal number of real dollars instead of part real part created. And ultimatly since the Fed takes into account the inflation of printed cash due to FR there is no more inflation than the Fed desires.
It wont be supplied past the limits of the availible wealth because every additional dollar created devalues the other dollars, the actual wealth stays the same and the actual wealth represented in dollars stays the same; only the value of each dollar changes.
The supply cannot expand without limit as there is a reserve ratio but even in its absence if individuals choose to keep small change in their pocket then there is a very real limit on the abilit of banks to inflate the money supply.

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Debt cannot exceed the resources of society as every debt is backed by credit

All this means is that someone signed up for credit, not that they can or will pay it back.

The banks were responsible for extending credit (and creating money) and they did it with GREAT irresponsibility. It wasn’t as if it was “their” money.

The society never had the wherewithal to pay back what was borrowed. This was obvious from square one. The houses built with that borrowed lucre stand empty or foreclosed in every corner of the country. The empty malls and testify to the cost of making money from nothing. The real unemployment is well north of 10% and the taxpayers have been forced to cover by taking on the debt themselves.

http://tinyurl.com/nca6v7

You are conflating the issue of borrowing and debt with the issue of borrowing and creating money. They are two different beasts. I don’t care if people sign up for debt and go deep to build something new and innovative. The system can take care of itself if the money is real.

I DO care if when they do that, they are creating money.

The thing is that if it is “real” money it will be in short supply when the actual available wealth of the country is fully committed to various investments. If it is ponzi-money, it will be supplied well past the limits of the available wealth and it will expand the available money without limit, continually chasing ever more elusive returns until the top-heavy structure breaks down. Because people WILL be finally discovered to be unable to pay. The only way they can pay is if someone else takes out loans somewhere else and creates money to pay them. The connection is indirect but the requirement is inexorable… otherwise they wind up unemployed and if the economy contracts it doesn’t just contract, it implodes.

The difference isn’t academic. The reserve for demand deposits in the USA is 3% vs your 100% .

http://tinyurl.com/d7dyfe

respectfully
BJ

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BJ + Turnip,
Debt cannot exceed the resources of society as every debt is backed by credit, every loan by a deposit, the net debt will never exceed the net credit unless there is actual creation of debt in the absence of credit; not a result of fractional reserve but of dishonesty.
To use the single bank explanation does not do justice to the matter. To take the gold example; I have 100 ounces of gold, I deposit 100 ounces with bank A, that bank then lends out 90 ounces of gold to another. I no longer have any gold but instead have a certificate of deposit worth 100 ounces of gold. If this certificate is itself accepted as payment due to its redeemability it may be treated as if the gold itself. Total gold: 100, total credit: 100 total debt: 100 (10 + 90). The 90 that is lent out may then be deposited with bank B in which exaclty the same process takes place and the same certificates are made: Total gold 100, total credit 190, total debt 190 (19 + 81 + 90). This repeats untill it reaches: Total gold: 100, total credit: 1000, total debt: 1000 (100 + 91 + 81 + …). There is still only 100 gold, the gold is not in two places and does not defy any laws of physics. (though to be purely pedantic it is theoretically possible to create gold out of thin air )
The bank can give you your gold by foreclosing on the loans it has made, in collecting the money. That is of course assuming they hold no reserves, in reality, in the absense of a bank run, they can give you the gold as they are required to keep a significant portion of that ‘gold’ from deposits. It doesint matter if it is the same coin you deposited, what matters is that it is the same weight. I favour a much higher reserve ratio as this can almost entirly eliminate bank runs and vastly flattens out the crests and troughs.

When you purchase a share issue you give the issuer of the share ‘gold’, this gold may then be used to fund development or, as is the case for mutual funds, to buy more shares, some of which may may be in other mutual funds. Each time the gold moves from where you have deposited it to another body opperating at effectivly a zero-reserve-ratio, this is no different than a bank and if you look at the historical evolution of funds in NZ those that were not designed to terminate tended to change to finance companies and then regional banks as the regulations changed; most of which were to do with capital volume. Each of those shares you brought are able to be traded and hopefully will hold more value than the you actually invested in the share; they are as good as money, esspecially in a market with high liquidity. This is also true of all the shares purchased by the funds in which you dirrectly and indirrectly invest.

Put a collar on the dog, a choker chain if need be. But dont put it down just to protect your rose garden if doing so means you loose all the rest of your assets.
I have no desire for a pre-guild society; and that IS what you are asking for. Banks and the fractional, or nihil, reserve that inevitably arises allows the new to replace the old and redundant, the innovative to replace the dull. as an engineer you should sympathise; I know of no small engineering business which could have obtained the materials to produce that they create in the absence of loans or a vastly wealthy proprietor. Society would be much poorer without such innovation.

I propose a full reserve requirement for access/chequing accounts. A 90% reserve requirement for accesable savings accounts which require you to transfer funds to a chequing accoutn to use. a 66% reserve on defaultable term deposits, and a 0% reserve requirement for term deposits with no opt-out option. Choker chain; not the penta-whatever kill-you injection.

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