in fractional reserve banking there are two types of monies. 1)Obligations of the central bank = currency (vault cash and cash in hands of public) + bank's checking account with the FED + US treasury's checking account with the FED and 2)Obligations of commercial banks = demand deposits + other checkable deposits. your TEMPORAL vs ATEMPORAL distinction is USELESS because both types can be used as money(medium of exchange, store of value, unit of account.).
What I was saying is that by your definition, dollars are not money, as they are not redeemable in anything, whether in the present or in the future.
The point is that fractional reserve lending (FRL) makes the value of dollars go down, because people treat claims of future dollars as actual dollars, just like they treat dollars as something of value even though they're not.
So FRL does increase the money supply, at least while people still value those future dollars as dollars.
"There is a difference between a title to something, and the thing itself."
But if peolpe project the same value onto the title as onto the cash itself, then both have the same value.
The example I gave about how printing dollars made the price of gold go down back in the day is perfect to explain why FRL makes the price of dollars go down today.
First of all, people do not project onto a check, the same value that they project onto money. A check can only be "spent" at a bank, and only exchanged for money, whereas money, can be exchanged for goods and services, just about anywhere.
Secondly, printing dollars expands the QUANTITY of money, whereas lending money (which is all FRB is) simply increases the VELOCITY of money (the rate at which is circulates), so no... your comparison is not "perfect" at all.
The point is that electronic money competes with cash for the same resources, so if there's 10 trillion dollars in cash and 90 trillion "future dollars", since people project value onto those future dollars, you will need 10 dollars to buy something that otherwise would've costed you only $1, because there's 10 times as much money, even if there isn't 10 times as much cash.
Let's say I loan you $105. I then have an asset of $105 future dollars. Let's say I sell those future dollars for $100 present dollars. Those present dollars have to come from someone else, who can no longer spend that $100 because they don't have it any more.
The money has NOT been expanded, just because I sold my debt for cash in the present. All that has happened is that money has changed hands. There's still the same amount of money that there was before.
You deposit $1000 into a bank and then you use your debit card to buy a TV for $900. And the person who took a loan for $900 from the bank also buys a TV. Now the TV company has sold 2 TVs for $900 cash and $900 in their bank accounts.
In both cases, the purchases were made with cash. In one case, the cash came from your deposit, and in the other case, the cash came out of the bank's reserves.
I'm not sure what your point is.
If everybody saved their money, instead of spending it, then prices would be super low. However, what's the point of low prices if nobody spends their money?
Also, spending may increase prices in the short term, but it also signals producers to produce more, which can reduce prices by increasing supply
I think it is more appropriate to say that the fractional reserve acts as a substitute for inflation, in the same way as thievery by stealth is a substitute to thievery by overt force.
No, new money is not created. However, additional claims to money ARE created, which serve a similar effect.
What's supposed to counterbalance liberal loaning policies, is the moral hazard of a bank run, and any applicable contractual obligations. The real problem arises when you get a coercive cartel...
If bank deposits are used as a medium of exchange and people project onto it the same value that they project onto cash dollars, then bank deposits ARE money and thus FRL expands the money supply.
The fact that this cash doesn't really exist doesn't mean it won't inflate prices.
Back when dollars were backed in gold, but there wasn't enough reserves to cover them 100%, when the Fed printed more dollars the price of gold went down, because people thought dollars were "as good as gold".
The price of gold only went up when they finally realized that dollars weren't really as good as gold.
Bank deposits ARE money. When you make a deposit into the bank, you are depositing money (not rocks, fish, or beaver skins).
Depositing money into a bank, doesn't increase the quantity of money however. It simply transfers money from you to the bank.
What people are failing to understand (for some reason I can't imagine), is that when you give something to someone, you no longer have that thing. When you put money into a bank, you no longer have the money.
If only a couple percent of deposits are backed by cash in the bank how do they all get paid in the event of a bank run, unless the Fed prints it all? If they don't get paid, why haven't they withdrawn their funds already is it because they are unaware? When they become aware will there be a bank run?
The Fed has been printing more and more money to keep the banks going, even as ever more people are withdrawing their dollars.
A bank run will not occur if The Fed keeps printing all this money.
If a bank run does occur, cash should be worth more, at least temporarily, because even if nobody wants it, debtors need it to pay back their debts so as to not get evicted by the banks.
That would hurt the federal government and banks a lot, so I doubt they will allow it. It's gonna hyperinflate.
If spending causes inflation, does a loan being paid back have the same impact on prices as a loan being issued? Do they both make the price fall, to the same extent or does the loan being paid back raise prices, deflation, why?
First of all, I'm not convinced that spending causes inflation. I think it might cause inflation in the short term, but that will stimulate further production, which would then cause deflation. I'm not sure about this yet. I'm still researching the issue.
When a loan gets paid back, I assume it the money just gets loaned out again.
...what if it doesn't though, what if a loan gets paid back and there is no new loan to replace it does that raise prices, lower them or leave them unchanged? For what reason is it impossible for the loans to be paid down, if paying back always leads to new loans.. what mechanism drives this, Why can't they get paid down?
If more money was actually saved (as in stored in the banks vaults), then there would be less money chasing after goods, and we would expect to see lower prices.
I'm not saying that people can't pay back their loans. What I'm saying is that when they pay back the bank, the bank will loan that money to someone else. The bank makes a profit (interest) by keeping the money in circulation.
What do you mean when you say less money chasing after goods, this sounds like a reduction in money supply but your position is that commercial banks don't alter the supply of money so how can there be less money chasing goods? If that is not what you meant by less money chasing goods, that this does not mean an increase in supply, can you clarify?
Do you consider the "money supply" to be all money that is currently in the process of being spent? Thus, if you had $5 in your pocket, it wouldn't count as part of the money supply, because technically, at the moment, it's being stored, not spent?
no, as far as i am concerned the money supply denotes the quantity of money available to people in the system so the money not being spent still counts. Does money chasing after goods need to be money being spent, what does this mean?
But when I deposit money in the bank I get a claim to that deposit and people in the economy give me things of value for that claim, they project the same value onto those claims as they project onto worthless paper money.
Thus that claim to the deposit is money, because people treat it as money, so it has the same effects on the economy as if it was new money.
Just because you can sell something, doesn't make it money.
If I owe you $5, you can sell that debt to someone else. However, all you are really doing is borrowing money from them (you are agreeing to give them future money in exchange for present money).
That's because a claim to money, is redeemable for money. If you write somebody a check, you are transferring a debt (you are transferring ownership of [title to] future money). All the person has to do is take the check to the bank, and they can redeem it for money.
Likewise, all they have to do is take that money to a vendor, and they can exchange it for goods and services.
I don't know why this it hard to understand. Debt is future money. When you loan somebody something (such as money), they agree to pay you back in the future. That's how a loan works. If I loan you my basketball, I no longer have the basketball in the present. You OWE me a basketball, and so it can be said that I have a future basketball.
I think what you mean to say, is that if debt is not money, than neither is one's account balance (since one can't withdraw the amount you are owes if too many people do it at once). On that count, I agree with you. This is what I've been saying this whole time. All your account balance is, is a record/statement of how much the bank owes you.
If bank deposits aren't money, what gives them value? Are people aware of the Government guarantee and trusting of it or are they ignorant of the nature of banking? In other words, as information becomes more widespread and people learn the facts, will they trust the Government to bail them out or will they panic?
that (your def. of bank deposits) sounds like reserves to me but whatever, what makes bank balances expensive, why are they worth the same as cash and what happens when everyone knows about the banking system, will they trust the guarantee or will they panic?
ok, so definitions aside what about the rest: what makes bank balances expensive, why are they worth the same as cash and what happens when everyone knows about the banking system, will they trust the guarantee or will they panic?
I'm a little tired, but if my brain is still working, I would assume that an increase in deposits would cause the interest on loans to drop.
The Fed probably has a lot more influence over interest rates however.
Come to think of it, an increase in the velocity of money (an increase in deposits) might actually decrease inflation, because the Fed wouldn't have to print as much money in order to keep interest rates low.
"because the Fed wouldn't have to print as much money in order to keep interest rates low."
I think of this the other way around. It's not that The Fed prints money to keep interest rates low, rather they keep interest rates low so that they have an excuse to print more money.
Inflation is cause by the Federal reserve monetizing debt...ie... buying treasury bonds with fiat money they just add to their books. Inflation is never caused by bank lending or how quickly money circulates. When money circulates, it only shows the efficiency of the system. Money circulates faster as the "new money" is finally felt by everyone, prices stabilize.
For 500 years, Brittan had no inflation. They had a fixed currency based on gold. "Wealthy of a Nation" by Adam Smith.
Whether or not you choose to call them money, the extra liabilities of the bank created when a loan is issued affect the price of cash because people treat the money in their banks equivalently. If people are (and remain) indifferent between credit and cash, as we know they are, there is no reason that extra credit would not have the same impact on prices as extra cash.
Yes... people can sell debt, but still... that doesn't create any new money. See my video (basketballs and banking for an explaination).
Whether or not increasing the velocity of money has the same effect as increasing the quantity of money... is an interesting question. However, in order to anser that, people first need to understand the difference (which is what I'm trying to explain).
the difference between what, credit and debt? Demand deposits are a liability of the banks and are thus credit, in the sense of an IOU. Either way, is your contention that extra demand deposits don't affect the price of cash?
I'm referring to the cash that was loaned. We must assume it ends up in another bank somewhere, otherwise there would be a run on the bank(s) and the system would crash. By its very nature the artificial money can't leave the banking system since it is in the form of a deposit account.
If the cash is deposited back into the bank, %90 will just get loaned out again. At any given time, the money could either be in the bank, or out of the bank. It's a toss up.
If there was a run on the bank, then yes, the system would collapse (and get bailed out, most likely). People have no reason (normally) to make a run on the bank, however. The system works just fine for them.
If there was a run on the bank, the system would crash.
my bad: Not all the money (cash) must stay inside the banks certainly some may remain outside of course, I should have said that if the cash leaves the bank it so too does reduce the quantity of demand liabilities within the bank. In your video you claimed a fallacy was that the cash remains in the bank, but I believe in that example it does. It has been loaned out but simultaneously an equivalent bank liability is created, if not at the same bank then a similar bank.
What you are referring to as a "bank liability" is not cash; it is debt. The bank owes the depositor the amount indicated. This amount only exists ON PAPER (as a record of the debt). It doesn't exist as money in the bank.
I'm aware it doesn't exist as money in the bank, but it does exist as an extra quantity in your bank statement which people are willing to pay an equivalent amount of cash for when they deposit funds. Does the extra bank deposits influence the price of money, for example when demand deposits increase will this dilute the money supply so that prices rise?
Why do you conflate an increase in demand deposits with an increase in velocity, and subsequently spending, if that is what you are doing? Would an increase in cash also increase velocity, spending?
When someone makes a deposit, 90% of it is loaned out. Generally, when people borrow money, they intend to spend it. Money loaned is money spent, and money deposited is money loaned.
sounds reasonable, so then does normal spending, that is not attached to a loan cause the price of money to fall? eg when I buy something not on credit, but direct out of my paycheck does this cause inflation? If yes, why and would it also apply to the object being purchased, for example does buying gas make fuel cheaper?
These are things I'm currently in the process of exploring. I have some theories, but I'm not ready to convey an absolute opinion yet.
I will say this however:
Loaning money is no different then spending it. The only difference is that someone else is spending it instead of you. So... when you deposit money into a bank, all you are doing is letting someone else spend it, while you don't need it.
In other words: In our modern banking system, spending and saving are the same thing.
But does the spending generated by the banking system have precedence over other spending, in the impact on prices, or are they equivalent in their effects?
Well... it used to be that loans were more likely to be spent on capital goods, rather than consumer goods. However, I don't know if that's still the case. These days, the effects are probably more similar. Don't quote me on that though. I'm just guessing.
It's not on the assets side that you need to be looking for the increase in money supply; the demand deposits show up on the liabilities side. All the money remains in one of the Federal Reserve member banks only there are now a greater number of promises for that cash than could actually be redeemed.
I am not denying that the Federal Reserve Banks can create money. I am rejecting the notion that COMMERCIAL banks can create money.
I fully recognize, that if there is a run on a bank (and there's not enough cash for people to redeem), the bank will likely get bailed out by the Fed, through a process of money creation (which will take place at that time).
This is a special case, and it is the Fed (not the commercial banks) creating the money.
in fractional reserve banking there are two types of monies. 1)Obligations of the central bank = currency (vault cash and cash in hands of public) + bank's checking account with the FED + US treasury's checking account with the FED and 2)Obligations of commercial banks = demand deposits + other checkable deposits. your TEMPORAL vs ATEMPORAL distinction is USELESS because both types can be used as money(medium of exchange, store of value, unit of account.).
nunezger 7 months ago
MAKE MORE VIDEOS
theVAGINAntichrist 1 year ago
What I was saying is that by your definition, dollars are not money, as they are not redeemable in anything, whether in the present or in the future.
The point is that fractional reserve lending (FRL) makes the value of dollars go down, because people treat claims of future dollars as actual dollars, just like they treat dollars as something of value even though they're not.
So FRL does increase the money supply, at least while people still value those future dollars as dollars.
NoCryingNowYes 2 years ago
Dollars are redeemable for goods and services, so I have no idea what you're trying to say about that.
Anyways... You're trying to tell me that because people THINK banks increase the money supply, that means they do.
Back in reality, the fact that people THINK banks increase the money supply, simply means they are incorrect.
The banks don't work however people think they work. The banks aren't being controlled by people's minds.
People can not increase the quantity of money WITH THEIR MINDS
D4Shawn 2 years ago
"People can not increase the quantity of money WITH THEIR MINDS"
Yes they can. Money is whatever medium of exchange people use to exchange things of value.
Can you use cheques, bank wires, credit cards, to pay for things? Then those things are money.
NoCryingNowYes 2 years ago
No. If someone writes me a check, I can not use that as money. All I can do, is use it to retrieve money.
Someone has to go to the bank to get actual money. The only thing a check does is transfer that obligation from the customer to the vendor.
A $5 bill is not a sandwich. A warehouse receipt is not gold. A check is not money.
There is a difference between a title to something, and the thing itself.
D4Shawn 2 years ago
"There is a difference between a title to something, and the thing itself."
But if peolpe project the same value onto the title as onto the cash itself, then both have the same value.
The example I gave about how printing dollars made the price of gold go down back in the day is perfect to explain why FRL makes the price of dollars go down today.
NoCryingNowYes 2 years ago
First of all, people do not project onto a check, the same value that they project onto money. A check can only be "spent" at a bank, and only exchanged for money, whereas money, can be exchanged for goods and services, just about anywhere.
Secondly, printing dollars expands the QUANTITY of money, whereas lending money (which is all FRB is) simply increases the VELOCITY of money (the rate at which is circulates), so no... your comparison is not "perfect" at all.
D4Shawn 2 years ago
The point is that electronic money competes with cash for the same resources, so if there's 10 trillion dollars in cash and 90 trillion "future dollars", since people project value onto those future dollars, you will need 10 dollars to buy something that otherwise would've costed you only $1, because there's 10 times as much money, even if there isn't 10 times as much cash.
NoCryingNowYes 2 years ago
No. You're overlooking something:
Let's say I loan you $105. I then have an asset of $105 future dollars. Let's say I sell those future dollars for $100 present dollars. Those present dollars have to come from someone else, who can no longer spend that $100 because they don't have it any more.
The money has NOT been expanded, just because I sold my debt for cash in the present. All that has happened is that money has changed hands. There's still the same amount of money that there was before.
D4Shawn 2 years ago
You deposit $1000 into a bank and then you use your debit card to buy a TV for $900. And the person who took a loan for $900 from the bank also buys a TV. Now the TV company has sold 2 TVs for $900 cash and $900 in their bank accounts.
So the price of TVs goes up.
NoCryingNowYes 2 years ago
In both cases, the purchases were made with cash. In one case, the cash came from your deposit, and in the other case, the cash came out of the bank's reserves.
I'm not sure what your point is.
If everybody saved their money, instead of spending it, then prices would be super low. However, what's the point of low prices if nobody spends their money?
Also, spending may increase prices in the short term, but it also signals producers to produce more, which can reduce prices by increasing supply
D4Shawn 2 years ago
I think it is more appropriate to say that the fractional reserve acts as a substitute for inflation, in the same way as thievery by stealth is a substitute to thievery by overt force.
No, new money is not created. However, additional claims to money ARE created, which serve a similar effect.
What's supposed to counterbalance liberal loaning policies, is the moral hazard of a bank run, and any applicable contractual obligations. The real problem arises when you get a coercive cartel...
PanzerDivisionBOM 2 years ago
What is money?
If bank deposits are used as a medium of exchange and people project onto it the same value that they project onto cash dollars, then bank deposits ARE money and thus FRL expands the money supply.
NoCryingNowYes 2 years ago
The fact that this cash doesn't really exist doesn't mean it won't inflate prices.
Back when dollars were backed in gold, but there wasn't enough reserves to cover them 100%, when the Fed printed more dollars the price of gold went down, because people thought dollars were "as good as gold".
The price of gold only went up when they finally realized that dollars weren't really as good as gold.
NoCryingNowYes 2 years ago
If there is a bank run right now, and people are still using cash, then cash will be worth much more. At least until they stop using cash.
But I don't think they will continue using cash.
And the Fed can always stop a bank run by printing more cash and giving it to the banks, which is what they've been doing.
NoCryingNowYes 2 years ago
Bank deposits ARE money. When you make a deposit into the bank, you are depositing money (not rocks, fish, or beaver skins).
Depositing money into a bank, doesn't increase the quantity of money however. It simply transfers money from you to the bank.
What people are failing to understand (for some reason I can't imagine), is that when you give something to someone, you no longer have that thing. When you put money into a bank, you no longer have the money.
D4Shawn 2 years ago
If only a couple percent of deposits are backed by cash in the bank how do they all get paid in the event of a bank run, unless the Fed prints it all? If they don't get paid, why haven't they withdrawn their funds already is it because they are unaware? When they become aware will there be a bank run?
YoAnarchy 2 years ago
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The Fed has been printing more and more money to keep the banks going, even as ever more people are withdrawing their dollars.
A bank run will not occur if The Fed keeps printing all this money.
If a bank run does occur, cash should be worth more, at least temporarily, because even if nobody wants it, debtors need it to pay back their debts so as to not get evicted by the banks.
That would hurt the federal government and banks a lot, so I doubt they will allow it. It's gonna hyperinflate.
NoCryingNowYes 2 years ago
If there's a bank run, realistically, the Fed will just bail out the bank. In such cases, money is usually created (by the Fed).
D4Shawn 2 years ago
If spending causes inflation, does a loan being paid back have the same impact on prices as a loan being issued? Do they both make the price fall, to the same extent or does the loan being paid back raise prices, deflation, why?
YoAnarchy 2 years ago
First of all, I'm not convinced that spending causes inflation. I think it might cause inflation in the short term, but that will stimulate further production, which would then cause deflation. I'm not sure about this yet. I'm still researching the issue.
When a loan gets paid back, I assume it the money just gets loaned out again.
D4Shawn 2 years ago
...what if it doesn't though, what if a loan gets paid back and there is no new loan to replace it does that raise prices, lower them or leave them unchanged? For what reason is it impossible for the loans to be paid down, if paying back always leads to new loans.. what mechanism drives this, Why can't they get paid down?
YoAnarchy 2 years ago
If more money was actually saved (as in stored in the banks vaults), then there would be less money chasing after goods, and we would expect to see lower prices.
I'm not saying that people can't pay back their loans. What I'm saying is that when they pay back the bank, the bank will loan that money to someone else. The bank makes a profit (interest) by keeping the money in circulation.
D4Shawn 2 years ago
What do you mean when you say less money chasing after goods, this sounds like a reduction in money supply but your position is that commercial banks don't alter the supply of money so how can there be less money chasing goods? If that is not what you meant by less money chasing goods, that this does not mean an increase in supply, can you clarify?
YoAnarchy 2 years ago
Do you consider the "money supply" to be all money that is currently in the process of being spent? Thus, if you had $5 in your pocket, it wouldn't count as part of the money supply, because technically, at the moment, it's being stored, not spent?
D4Shawn 2 years ago
no, as far as i am concerned the money supply denotes the quantity of money available to people in the system so the money not being spent still counts. Does money chasing after goods need to be money being spent, what does this mean?
YoAnarchy 2 years ago
If money isn't being spent, it's not "chasing after goods", and yet, according to you, it's still part of the money supply.
As such, you've answered your own question.
D4Shawn 2 years ago
so paying down a loan reduces the velocity of money and reduces spending?
YoAnarchy 2 years ago
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But when I deposit money in the bank I get a claim to that deposit and people in the economy give me things of value for that claim, they project the same value onto those claims as they project onto worthless paper money.
Thus that claim to the deposit is money, because people treat it as money, so it has the same effects on the economy as if it was new money.
NoCryingNowYes 2 years ago
Just because you can sell something, doesn't make it money.
If I owe you $5, you can sell that debt to someone else. However, all you are really doing is borrowing money from them (you are agreeing to give them future money in exchange for present money).
D4Shawn 2 years ago
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"Just because you can sell something, doesn't make it money."
Yes it does!
This is what gives fiat currency value. Ideology.
NoCryingNowYes 2 years ago
Well... then everything is money. A hot dog is money. People who make hot dogs are inflating the money supply!
D4Shawn 2 years ago
But hot dogs can't be used to buy stocks. Claims to bank deposits can.
NoCryingNowYes 2 years ago
That's because a claim to money, is redeemable for money. If you write somebody a check, you are transferring a debt (you are transferring ownership of [title to] future money). All the person has to do is take the check to the bank, and they can redeem it for money.
Likewise, all they have to do is take that money to a vendor, and they can exchange it for goods and services.
D4Shawn 2 years ago
"That's because a claim to money, is redeemable for money."
Not if 10% of more of people want to redeem it at the same time.
Just like money itself is not redeemable if a large proportion of people wants to redeem it at the same time.
So if you say debt is not money, then I would say money is not money.
NoCryingNowYes 2 years ago
I don't know why this it hard to understand. Debt is future money. When you loan somebody something (such as money), they agree to pay you back in the future. That's how a loan works. If I loan you my basketball, I no longer have the basketball in the present. You OWE me a basketball, and so it can be said that I have a future basketball.
D4Shawn 2 years ago
I think what you mean to say, is that if debt is not money, than neither is one's account balance (since one can't withdraw the amount you are owes if too many people do it at once). On that count, I agree with you. This is what I've been saying this whole time. All your account balance is, is a record/statement of how much the bank owes you.
D4Shawn 2 years ago
If bank deposits aren't money, what gives them value? Are people aware of the Government guarantee and trusting of it or are they ignorant of the nature of banking? In other words, as information becomes more widespread and people learn the facts, will they trust the Government to bail them out or will they panic?
YoAnarchy 2 years ago
Do you mean "bank balances"?
A "bank deposit" is MONEY that you deposit into (loan to) a bank.
D4Shawn 2 years ago
that (your def. of bank deposits) sounds like reserves to me but whatever, what makes bank balances expensive, why are they worth the same as cash and what happens when everyone knows about the banking system, will they trust the guarantee or will they panic?
YoAnarchy 2 years ago
I am defining a "bank deposit" as a sum of money handed over to (DEPOSITED INTO) a bank.
I am not sure how you are defining it.
Only 10% of a bank deposit is held in the banks vaults. The other %90 is lent out.
D4Shawn 2 years ago
ok, so definitions aside what about the rest: what makes bank balances expensive, why are they worth the same as cash and what happens when everyone knows about the banking system, will they trust the guarantee or will they panic?
YoAnarchy 2 years ago
Well, you have got me to pay attention to economics a little with these videos. I suppose I have to do research.......*sigh*.... goddamnit.
UcanbeGOD 2 years ago
thanks for the vid. its simple stuff but stuff people need to understand
JahLoveOnline 2 years ago
If this is the case though, whence cometh inflation?
sharperguy 2 years ago
Inflation is caused primarily by the Fed's expansion of the money supply.
Inflation might also be caused by an increase in the velocity of money. However, I'm not sure yet, about this second possibility.
D4Shawn 2 years ago
What would prevent commercial bank deposits from affecting the price of cash?
YoAnarchy 2 years ago
I'm a little tired, but if my brain is still working, I would assume that an increase in deposits would cause the interest on loans to drop.
The Fed probably has a lot more influence over interest rates however.
Come to think of it, an increase in the velocity of money (an increase in deposits) might actually decrease inflation, because the Fed wouldn't have to print as much money in order to keep interest rates low.
D4Shawn 2 years ago
Would an increase in cash, rather than demand deposits have the same impact on the interest on loans, causing them to drop, why?
YoAnarchy 2 years ago
"because the Fed wouldn't have to print as much money in order to keep interest rates low."
I think of this the other way around. It's not that The Fed prints money to keep interest rates low, rather they keep interest rates low so that they have an excuse to print more money.
NoCryingNowYes 2 years ago
Inflation is cause by the Federal reserve monetizing debt...ie... buying treasury bonds with fiat money they just add to their books. Inflation is never caused by bank lending or how quickly money circulates. When money circulates, it only shows the efficiency of the system. Money circulates faster as the "new money" is finally felt by everyone, prices stabilize.
For 500 years, Brittan had no inflation. They had a fixed currency based on gold. "Wealthy of a Nation" by Adam Smith.
ZullGostnu2 2 years ago
Whether or not you choose to call them money, the extra liabilities of the bank created when a loan is issued affect the price of cash because people treat the money in their banks equivalently. If people are (and remain) indifferent between credit and cash, as we know they are, there is no reason that extra credit would not have the same impact on prices as extra cash.
YoAnarchy 2 years ago
I'm not sure what you mean by "extra credit".
SHAWNONOMICS 2 years ago
By extra credit I meant the demand deposits that are issued by the commercial banks.
YoAnarchy 2 years ago
Oh... you mean debt.
Yes... people can sell debt, but still... that doesn't create any new money. See my video (basketballs and banking for an explaination).
Whether or not increasing the velocity of money has the same effect as increasing the quantity of money... is an interesting question. However, in order to anser that, people first need to understand the difference (which is what I'm trying to explain).
SHAWNONOMICS 2 years ago
the difference between what, credit and debt? Demand deposits are a liability of the banks and are thus credit, in the sense of an IOU. Either way, is your contention that extra demand deposits don't affect the price of cash?
YoAnarchy 2 years ago
"the difference between what, credit and debt?"
No; the difference between the velocity of money, and the quantity of money. I'm going to make a video about it in a few minutes.
D4Shawn 2 years ago
When I said "Federal Reserve member banks" this is a reference to commercial banks.
YoAnarchy 2 years ago
When you say, "all the money remains in the bank", what money are you referring to?
SHAWNONOMICS 2 years ago
I'm referring to the cash that was loaned. We must assume it ends up in another bank somewhere, otherwise there would be a run on the bank(s) and the system would crash. By its very nature the artificial money can't leave the banking system since it is in the form of a deposit account.
YoAnarchy 2 years ago
If the cash is deposited back into the bank, %90 will just get loaned out again. At any given time, the money could either be in the bank, or out of the bank. It's a toss up.
If there was a run on the bank, then yes, the system would collapse (and get bailed out, most likely). People have no reason (normally) to make a run on the bank, however. The system works just fine for them.
If there was a run on the bank, the system would crash.
SHAWNONOMICS 2 years ago
my bad: Not all the money (cash) must stay inside the banks certainly some may remain outside of course, I should have said that if the cash leaves the bank it so too does reduce the quantity of demand liabilities within the bank. In your video you claimed a fallacy was that the cash remains in the bank, but I believe in that example it does. It has been loaned out but simultaneously an equivalent bank liability is created, if not at the same bank then a similar bank.
The money is redeposited.
YoAnarchy 2 years ago
What you are referring to as a "bank liability" is not cash; it is debt. The bank owes the depositor the amount indicated. This amount only exists ON PAPER (as a record of the debt). It doesn't exist as money in the bank.
D4Shawn 2 years ago
I'm aware it doesn't exist as money in the bank, but it does exist as an extra quantity in your bank statement which people are willing to pay an equivalent amount of cash for when they deposit funds. Does the extra bank deposits influence the price of money, for example when demand deposits increase will this dilute the money supply so that prices rise?
YoAnarchy 2 years ago
It's a good question.
To put the question more succinctly, we would ask:
Does increasing the velocity of money cause inflation, the same way increasing the quantity of money does?
An even shorter version would be:
Does increased spending create price inflation?
I will be exploring this issue soon.
D4Shawn 2 years ago
Why do you conflate an increase in demand deposits with an increase in velocity, and subsequently spending, if that is what you are doing? Would an increase in cash also increase velocity, spending?
YoAnarchy 2 years ago
When someone makes a deposit, 90% of it is loaned out. Generally, when people borrow money, they intend to spend it. Money loaned is money spent, and money deposited is money loaned.
D4Shawn 2 years ago
sounds reasonable, so then does normal spending, that is not attached to a loan cause the price of money to fall? eg when I buy something not on credit, but direct out of my paycheck does this cause inflation? If yes, why and would it also apply to the object being purchased, for example does buying gas make fuel cheaper?
YoAnarchy 2 years ago
These are things I'm currently in the process of exploring. I have some theories, but I'm not ready to convey an absolute opinion yet.
I will say this however:
Loaning money is no different then spending it. The only difference is that someone else is spending it instead of you. So... when you deposit money into a bank, all you are doing is letting someone else spend it, while you don't need it.
In other words: In our modern banking system, spending and saving are the same thing.
D4Shawn 2 years ago
But does the spending generated by the banking system have precedence over other spending, in the impact on prices, or are they equivalent in their effects?
YoAnarchy 2 years ago
Well... it used to be that loans were more likely to be spent on capital goods, rather than consumer goods. However, I don't know if that's still the case. These days, the effects are probably more similar. Don't quote me on that though. I'm just guessing.
D4Shawn 2 years ago
It's not on the assets side that you need to be looking for the increase in money supply; the demand deposits show up on the liabilities side. All the money remains in one of the Federal Reserve member banks only there are now a greater number of promises for that cash than could actually be redeemed.
YoAnarchy 2 years ago
I am not denying that the Federal Reserve Banks can create money. I am rejecting the notion that COMMERCIAL banks can create money.
I fully recognize, that if there is a run on a bank (and there's not enough cash for people to redeem), the bank will likely get bailed out by the Fed, through a process of money creation (which will take place at that time).
This is a special case, and it is the Fed (not the commercial banks) creating the money.
SHAWNONOMICS 2 years ago
come on
pairunoyd 2 years ago