In response to economic illiteracy

You were, back when I asked the question, talking about a fixed money supply, correct? What I want to point out is that the population is always growing. If the money supply stayed fixed, then there would be more people competing for the same pool of money.

Do you think that the money supply should stay the same even as the population increases?

 

Yes.

 

Also, yes.

Why not? £10 = 1000 pence.

£10 / 10 people = £1.

£10/1000 people = 1p.

How much more money do you need in supply? You just use more Pence and less Pounds to trade with. You just lower prices.
Why would I have to issue more money?

(Other than to give it to myself and my friends in return for nothing?)

 

I'll stick with Milton Friedman's order of the terms, thanks.

 

I gave you an example why it's wrong and you can't tell me why I'm wrong.

Here, here's another explanation....

The commonly-held belief is that savings fuels investment. For instance, the bank takes in your money and loans it out to other people, therefore it's necessary for people to save in order to have investment in the economy. This is actually completely wrong. It not only is incorrect on the mechanics of banking, it isn't paying attention to the rest of the balance sheets.

Investment (in monetary terms) is better defined as the act of creating assets. This does not require any savings in advance. For instance, if I decide I would like to build a factory, then I can create bonds (investment). These bonds, my IOUs, aren't widely accepted for payment, so I can sell them to you in exchange for cash, which is widely accepted. Notice what happened: the act of my creating and selling a bond didn't reduce your savings, it just changed their form (from cash to bonds). Meanwhile, I have savings that I didn't have before (the cash) which I can then swap for other assets (like factory equipment.) The investment created the savings.

Now, tell me why am I wrong?

 

Sorry that's bollocks.

Reduce it to its simplest form.
To invest in a factory I need bricks.

No matter who gives an IOU to who, I need bricks.

In order for me to get bricks someone else has to have a surplus of bricks. To have saved some up.

Investment does not create assets, it transfers assets. Transfers the ownership of them. The guy with the bricks, delivers them to me.
People then use those assets hopefully profitably and return an equal or greater amount of assets to the investor.
In this case, the Brick maker.

Fancy and confusing accountancy tricks .... doesn't get the job done. No bricks are created in the bank. No assets.

Investment requires acquired resources. Or savings to you and me.
Money is just a tradable resource. A trade good. Banks don't make money, they trade it. They don't create assets, they trade them.

Central banks make money. Governments.

Queue some wiki quote from a bank saying they "create assets".
This means, "they write those assets down in their log books". That they create an entry for them in their records. Not... that they pull them out of their arses and invent money from thin air.

 

In 1776 the U.S. population was estimated to be about 2,500,000 with the first census taken in 1790 showing the population to be 3,929,326.
In 1913 the U.S. population was estimated to be about 97,225,000 following the 1910 census count of 92,228,496.
From 1776 to 1913 the U.S. money supply was a creation of the people, while paper money (debt) was created by government at times when spending greater than what could be acquired through taxation they were redeemable for real money or like the Continental became worthless.

There is a quote, while as best I can determine to be falsely attributed to Thomas Jefferson nonetheless has a ring of truth about it.
"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(these banks) will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."

If the money supply remained relatively constant what would be the effect? Would there be billionaires? Would inflation run rampant or be controlled by offsetting periods of deflation? How would it effect government and the general population? How would it effect trade between Nations/States/people? Would banks be able to create money out of thin air?

 

Where is the money?

 

If "monetary inflation" is a thing, then why didn't QE produce hyperinflation that many predicted?
Because they haven't done enough of it yet to cause that result. A result they wish to stop before achieving. And so far have managed to do so.

 

It's held by the nation's banks

 

Enough? At its peak, it was $3.4 trillion. If I had asked any of you in 2008 before QE started what the effect of creating $3.4 trillion dollars, you all would have sung from the rooftops (anyone familiar with Peter Schiff?) about how it would create hyperinflation. Now you're telling me that $3.4 trillion isn't enough? Talk about moving the goalposts.

 

So you borrowed my saved money in order to buy your factory equipment.

 

What ever the current number is... yes, that has not been enough. Whatever number enough is, it is clearly higher than that one.
What we do believe, is that it all causes inflation. There are obviously a whole host of other factors affecting inflation, but this is a classic one. One we have already identified through other economic events.

For examples of hyperinflation consider, Zimbabwe and Germany.

 

Income is determined by investment, and saving is a function of income.

A firm decides it would like to invest in production. It believes it can do so profitably. But it needs financing. One possibility is to draw upon past savings, whether its own (retained earnings) or the savings of others (e.g. by issuing shares). But this merely pushes the question back a step, because past savings are the result of past income not yet spent. The other possibility is for the firm to borrow from a bank. Let’s say the firm applies for a bank loan.

The bank assesses the loan application. If it shares the firm’s optimism concerning the profitability of the investment, it will extend the loan. The loan simultaneously creates a deposit. Specifically, the loan is an asset of the bank and liability of the firm; the deposit is an asset of the firm and liability of the bank.

At this stage, investment has not yet occurred. Nor has income been created. The deposit, at this point, does not constitute either income or saving. Income only results from spending on goods or services, and saving is a portion of income. So far, no spending has actually occurred.

Having obtained the loan, the firm is now in a position to invest. It draws down its account in order to purchase investment goods. The bank account of the firm supplying the investment goods is credited. In other words, the investment spending of the investing firm simultaneously creates income and saving for the supplier of the investment goods of an amount equal to the investment spending.

Of course, the supplier will subsequently use some of the income to spend, some to pay taxes and some to save. But the total amount of leakage from the circular flow of income that is generated by this particular act of investment spending is equal at all times to the amount invested. Warren sometimes sums this up as, “Saving is the accounting record of investment spending”. This is the immediate impact. Ultimately, part of the leakage will go to taxes and imports. The marginal propensity to leak to taxes, saving and imports will determine the size of the expenditure multiplier, and so the ultimate impact on income, but it will not affect the amount of leakage.

No prior saving was needed to finance the investment. Nor could anybody’s savings in a bank account be the source of finance. Banks do not – and cannot – lend out deposits.

 

If I said the world would end eventually, would that come as any insight? Saying that "Whatever number enough is, it is clearly higher than that one." There is nothing insightful in that statement.

As far as Weimar and Zim...

If I said that a person who was pushed from 6th-floor balcony died because they hit the ground. Would you blame the ground for their death or the person that pushed them?

Clearly, the person would not have fallen off the balcony if they hadn't been pushed. So the precipitating cause was the push, the resulting cause was hitting the ground.

No push, the person in question would not have died as a result.

In the same way, money creation wasn't the precipitating cause of hyperinflation In Weimar, it was the resulting cause. The precipitating cause was the loss of productivity due to the destruction of factories during the war combined with reparations and the massive foreign debt payable only in gold.

In virtually all cases of modern day hyperinflation, money creation wasn't the cause of hyperinflation, rather it was the response to it. This is because money has value relative to what it can buy. To create high rates of inflation, all you'd have to do is destroy a nation's industry. After industry is destroyed, the number of goods available for purchase at prevailing prices would plummet. In other words, the loss of industry would mean that there is too much money in circulation relative to what can be bought, this would cause rampant inflation without printing a single dollar. In all cases, money printing is last desperate attempt to fix what is already broken, which in the case of Weimar and Zim didn't work because so much of the money created was spent to foreign entities.

 

@Econ4Every1
The issuing a loan does not simultaneously create a deposit.

If you don't already have it, you can't give it to anyone. You can't eat the imaginary apple I lend you. It has to exist. I have to give it to you to lend it you.

The bank gets deposits from another customer placing it there. It's a middle man service matching lenders to borrowers.

I place my money in a bank. That creates the deposit. It may be my savings, it may be my wages it may be my capital. It may be a gift, it may not even be mine. I may be keeping it for someone else. It's money. acquired resources. An amount of trade goods.
The deposit comes first. I can't lend what I don't actually have.

Money is a commodity. It's a trade good. The investment is not what you exchange those trade goods for. It is the very trade goods themselves. The money. We use a universal medium of exchange for convenience,



Imagine the days before electronic money. All these transactions occured physically in cash.
Actual trade goods were transferred physically.

It is impossible to physically hand over something you do not have,
A deposit is required before money can be lent out from it. So while I can place money into an empty vault, I can't take money out of an empty vault.

 

Massive money printing was a response to economic problems.
I'll agree that far.

If money has too little value, and too many notes are required for one small purchase, printing more money is not an intuitive response to that problem.
Reducing the amount of money in supply would be. Doing the opposite.

It is for this reason that I reject your theory.
And will continue to accept the normal one. They tried to print themselves out of debt and got to greedy.
Being dependent on foreign food meant that to devalue the currency was to starve.

 

Of course, it does.

When people borrow money, they usually borrow it because they wish to make a purchase, agreed?

When a purchase is made, the seller usually deposits that money in their bank account, agreed?

I don't know what this statement is supposed to refute.

My claim was that loans (when people borrow money) create deposits (once money is used to make a purchase, the seller deposits the money earned back into a bank). Large amounts are often moved directly between banks via the check system. Thus when loans are created, they create new deposits from money that did not exist.

I don't dispute any of that, but none of that disputes my claim.

Ummm...This is where things get a little blurry.

Money is not a commodity in the traditional sense. It has extrinsic value, literally speaking there is no real constraint on the amount of money that can be created and the vast majority of it exists virtually as numbers in a computer.

We haven't agreed on much, so let me agree with you here. You are totally correct, however, the nature of money changed in 1974 when the government went to a full fiat standard. US dollars are no longer redeemable from the US government for anything other than dollars.

Baff, with all due respect my friend, you really don't understand modern banking in light of the changes that took place in 1974.

Banks don't loan customer deposits.

They take loans from customers, which from the banks point-of-view is an asset and is held as collateral against the dollars the bank creates "out of thin air".

This really isn't all that controversial, the people that have the hardest time accepting it are people who understand the economy prior to 1974 and the end of the gold standard. The modern money system changed a lot of things that few people, 44 years later understand.

 

In Weimar's case it was war, in Zim's case it's a bit more complicated, but the loss of farming productivity was the most obvious of the precipitating causes.

Again, I agree that is a possible solution.

If we agree that inflation happens when demand exceeds supply, then another solution is to create and spend money in such a way that it either creates or incentivizes the creation of the industries that are currently unable to meet demand.

For example, if the Zim government had spent the dollars it created boosting it's agricultural output via machinery, training, and labor, it possible that it could have increased it's output so Zim citizens could have purchased locally and spending could have circulated in the country.

The greed started when the government violated leases they had with foreign companies who were leasing land to create crops. Those western companies used modern techniques and when they were supplanted, the local farmers couldn't maintain output and, as you rightly point out, food had to be imported.

Of course, we could go even farther back. The reason the government violated leases and gave land to locals was that the government had made promises to powerful people within the military. As I understand it, the government fearing an overthrow, took land they leased and gave it to members of the military as payment.

The series of cause and effect goes way back.

Printing money was at the end of that chain....

 

Not agreed sorry.

If you have money and you are not using you may lend it to me.
If you have no money you cannot lend it to me.

Your deposit is required in the bank that lends it me for the transaction to take place.

So bank needs a deposit before I can borrow any money to spend any way I choose including making a bank payment to you that you may or may not deposit in an entirely different bank under an entirely different name and are under no obligation to ever repay to me. Because you are a third party entirely independent of my lending and borrowing transaction.

No new loans are not created from money that doesn't exist. All are transfers of existing deposits. Banks are audited daily to ensure this has taken place. It is a legal requirement. Since 1974 I have made money lending overnight funds to banks. Making sure their deposits are big enough to cover their loan obligations.


Money is a commodity. A trade good. I give you 2 chickens in exchange for a ten pound note. You give a ten pound note in exchange for a pack of cigarettes.
That is all it is..

I can trade $ for £. It's a trade commodity. I buy it, I sell it. I exchange it for stuff. Trade with it.
Yes, money can have any number placed on the note and I will trade more for the higher value notes.

Who would accept payment of imaginary money? Would you?
If I do not trust the guys cheque, the name on his bank is "the bank of magic money", I ask for cash.



With respect Econ, you really are coming out with one of the most classic internet financial conspiracy theories of them all. cf Zeitgeist.
The most commonly held misconception,

Banks create money.

They don't. Only governments create money. Central banks.

 

99.9% of the time...it does.

That is in fact exactly what the Fractional Reserve banking system does. It creates money that didn't otherwise exist simply because there is a demand for that money and they have the reserves to justify it.

Yes, banks can and do lend what they don't have. They only need for the sake of argument 10% of the money they have loaned out in deposits.

That is not current reality.

You're right in that you can't take money out of an empty vault....but in our current system if you have $10 in that vault you can take out roughly $100.

 

You aren't wrong regarding the mechanics of how it works. However I would suggest that the system in your example creates nothing but a completely levered up debt fueled economy that is fragile beyond words.

 

UG.

Here we go.

Fractional reserve banking.

I lend the bank 100$. The bank keeps a reserve and then lends out what's left of the deposit.

So 100$ goes into the bank vault.
The bank is only allowed to lend on 90$ because it must by law keep a fractional reserve of 10%.
10% of 100$ = 10$. The bank must keep a 10% fractional reserve of 10$.

So the banks lends out 90$.

10$ reserve in the vault plus 90$ lent out = 100$ that was deposited by me.

No money is created.

You don't put 10$ into an empty vault and then take out 100$.
FFS. Have I said UG yet?

If there is only 10$ in a bank vault you cannot take out 100$. It is a physical impossibility. Engage your noddle. Think about what you are saying please.
UG.
Just UG.

Who teaches you this stuff? Where did you learn such anti-knowledge?
Seriously, you didn't get this from school right?
It's a conspiracy theory mate. Occupy Wall street stuff.

cf zeitgeist.
Here is the man himself better explaining all you are trying to explain to me.


This man is an excellent communicator, tells a great story... but unfortunately he is wrong. It's not correct information.

 

The bank doesn't ever actually lend out the deposits. It simply creates money in the form of the loan and keeps the original $100 and in theory could create 10 $90 loans on that initial $100 deposit.

It's not a conspiracy theory...its how it actually works.

I suggest you read Modern Money Mechanics published by the Chicago Federal Reserve where they flat out say exactly what I am saying to you.

You speak like you know what you are talking about when it is quite clear that you dont understand fractional reserve banking in today's world.

 

The bank does lend out those deposits. I walk in get an overdraft and walk out with cash.
It happens every day. I leave the bank with the cash.

I know enough to have earnt money from it.
I suggest you have misunderstood what you have read or have been reading conspiracy theories and not known any better. Now you do.
So that excuse is no longer yours. From now on, if you make this mistake it is not out of ignorance any longer. Only Teh Stupid.

Fractional reserve banking is explained above. it's not rocket science.

A bank keeps a reserve to prevent bank runs. If it lends out all of it's deposits, then a depositor comes back and ask to withdraw his money, it's not there and he gets muchos angry.

So they don't lend it all out at the same time. They keep a reserve. The reserve they keep is a fraction of the deposit. A fractional reserve.
This particular fraction is typically expressed as a percentage.
We use 10% for easy maths in our examples.
10% of your deposit is by law not allowed to be lent out. It must be held back in reserve.

Simples.
No conspiracy theory. No one magicing money out of their arses.
Just boring old banking. Matching lenders with borrowers.

Lets do the common sense test. You claim if I put £10 in a bank vault that I can then take £100 out of one.
I claim that if you put £100 in a bank vault, you can then take £100 out of one.

Which of these two claims sounds more likely to be true? LOL.
LOL lol lol.