Is fractional reserve banking inflationary?

There is no money in those bank accounts.
They are merely ledger entries denoting the banks obligation to pay.
It's not a safety deposit box. The money you depsoit doesn;t physically go into a box with your name on it. It is pooled with all the other deposits.

The money as you have noted has been spent on a house somewhere.
The home owner has an obligation to repay the bank, who in turn has an obligation to repay you.
There is no extra money in circulation.
If people default on their obligations no money is there to be repaid. It has been spent.

If you require repayment before the mortgage has been repaid, or after a default in that repayment, the bank can only repay you if it has the reserves to do so. If it has other deposited money in it's pool.

It may take from Jill to give to Jane.
But no extra money is found.

Banks are a middle man service connecting lenders with borrowers for a fee.
They don't add money to the economy, they redistribute existing money.

 

A house is not money.
You cant easily trade it with someone.
It's not a common medium of exchange,

Work for me for a week and i will give you a house?
Hmm no.
I want a BigMac and fries, here is my house in payment.
Mmm no.

You sell your house for money.
Then you trade for other things with that money.
Money is a medium for trade.

The goods you buy with it, are not money.
They do not count as money.
You must trade them for money.

I have a big house. It is worth a lot of money, but that isn't cash in the bank.
I am asset rich but not cash rich.
If we go to the pub together, I can't buy you a beer, just because I have a big house.
Money and the goods you buy with money are seperate items.

 

It's based on the debtor's legal obligation to repay it.

 

Of course there is. Money is what is generally accepted in exchange, and that is what those accounts contain.

No. Unlike other obligations to pay, they are also completely liquid and generally accepted in exchange. You can write a check on them. That is what makes them money.

Yes, there indisputably is. It entered circulation when the loan was issued, and is removed as the principal is repaid.

If a bank debtor defaults, the bank has to write down its loan asset, ultimately reducing retained earnings and thus shareholder equity on its balance sheet by the same amount. I.e., the money that would have been deleted incrementally over time as the loan principal was repaid is all deleted at once, from the funds available for distribution to shareholders.

That is one of the financial services private banks can offer; but their main business and income source is issuance of debt money de novo, as may be confirmed by consulting any good accounting textbook that describes their ledger entries.

That is just false. Private commercial banks act as money issuers and destroyers, charging borrowers interest on the issued debt money while it exists, as I have described a number of times in this thread.

 

A lot of this interest money they are collecting is simply going to pay the cost of routine operations to run the bank, and to the depositors, because they get paid an interest rate too.
(Although things get more interesting when depositor interest rates get down close to zero like they are, which is another topic)

I suppose you could say in a very indirect sort of way that depositors own the houses that have mortgages on them, because (at least traditionally) the interest mortgage payments that borrowers pay ends up going to depositors, and if they stop making payments, the money from the sale of the property will end up trickling back into depositors accounts.

 

Almost all of it goes to pay the bank's operating costs, especially wages. See the people working at your local bank? They are all making decent salaries. That money has to come from somewhere, and that somewhere is mainly the interest on money the bank creates.

No, because depositors are almost irrelevant to bank lending.

No, you are completely wrong. Depositors have no claim on the houses. They do not get the interest income. Their money is not lent to the borrowers. I don't know if there is any clearer or simpler way to explain that to you.

 

I don't disagree with any of that.

I think we can tighten that up by saying depositors don't own mortgaged houses but do have a financial interest in them.

The banks and the homeowners are obviously independent legal entities.
In a building society, (a mutual?), depositing money makes you a part owner of the society.
In a bank it does not.

In law, i suspect all a depositor owns at the bank is a liability.

 

Look, I don't want us to get too hung up on this point, but I'm just saying from one perspective, in a very theoretical, indirect sort of way, they have an ownership stake in the houses.
Or to be little bit more precise, their financial interest in those loans is (in a way) backed up by those houses.
To see this, think what would happen if all the borrowers suddenly refused to pay, and then the banks were not able to pay back the depositors. Those houses would be liquidated in foreclosure, and then the sale from the proceeds (of whatever those houses could sell for) would go to the depositors, probably in a bankruptcy court.

Let's please not get too hung up on exact semantic definitions. Because then you'd be trying to argue against something I'm not really trying to argue.
It's a matter of perspective.

 

Ownership is the wrong word.
That is a legal status that you do not gain from lending people money.

A bank may repossess your house and sell it if you break your repayment contract.
The banks goes to court and the judge transfers legal ownership of the house to them to be sold in lew of debts.

(In the case of negative equity, you will still owe the bank money, the house is not what you owe the bank. The money you borrowed plus the interest is),

Equally, the bank legally owns the debt. Not the depositor.
If a bank defaults on it's debts to the depositor, the depositor must go to a judge to get the banks assets sold off and the ownership of the proceeds transfered to him.

Ownership is a legal status.
A depositor does not own any part of a mortgage that a bank he deposited in arranges.

A shareholder on the other hand, does part own the mortgage.
He does part own the liability and assets of the bank.

But even he doesn't own what the mortgage was used to purchase.


That is why I use the words "having a financial interest" to describe what you are referring to.
Because while that relationship clearly exists, it does not confer any rights of ownership at all.

I apologise if this is too semantic an argument.
I do understand what you are saying and agree in spirit but not technicality.

 

No. Baff's explanation is correct. Depositors are just a red herring. Bank loans create money, period, whether there are any depositors or not. That is the meaning of the ledger entries. If banks had to have 100% reserves, they would still create money by lending, but they would not increase the money supply by lending because they would have to withdraw the same amount from circulation to hold as reserves. With fractional reserve banking, they can not only create money but increase the money supply, which is what causes inflation. This increase in the money supply through bank lending -- and the necessary reduction of the money supply as the loan principal is repaid -- implies a positive feedback process that is inherently destabilizing. That is why central banks have to constantly tweak interest rates to moderate the boom-bust cycle -- and why they always fail to stop it in the long run. People who yammer on about the Fed this, the Fed that are missing the point (I'm not referring here to the Fed's recent outrageous decision to shovel trillions into the pockets of the super-duper uber-rich by buying up their stocks at bubble prices). It's the same in any country that uses a modern monetary system based on private commercial banks' creation of debt money with fractional reserves -- even countries that no longer require a certain reserve fraction because they have realized it is irrelevant.

 

I think we are getting confused now. Where does the money come from to lend money?

That is not money that the banks create. (not directly)

Look, I don't think you're right or wrong here, but the way you're talking about it is not the best way to get to describe the issue we apparently seem to be disagreeing about - if we even fundamentally disagree at all, which I am not sure we do.

 

I agree it has some interesting potential to be destabilizing, but not necessarily in the way you think it is, because my contention is that it would not really affect inflation.

The basic unit of value in bank accounts is denominated in US dollars, so it is really the amount of paper money that affects inflation.
The money in bank accounts is not based off of nothing, and is backed by loan obligations - those people (in a theoretical sense) have to find a way to get paper money to repay those loans.

Expansion of the "money supply", when it is clearly backed by something of proportional value, will not result in inflation. The money in bank accounts is, in a sense, backed by the actual paper money.

Look, if you have trouble understanding this, just imagine that all real dollars were backed by gold. That thought experiment might help you understand this, and see how banks creating money does NOT result in inflation.

Everyone with money in bank accounts would still have, in some sense, a claim to the gold, or at least the value of that gold.

 

No. Not "we." You.

The borrower's legal obligation to repay it.

Yes, it just damn well is.

Then you're wrong, because I'm right.

I am trying to be as clear and concise as possible. Money is by definition what is generally accepted in exchange. Banks create that stuff as loan proceeds when they lend. It is a liability of the bank that balances the new loan asset. It is money because you can spend it almost anywhere. The difference between bank lending and non-bank lending is that a non-bank lender has to hand over cash "reserves" to the borrower immediately, so it does not increase the money supply, whereas the bank only has to transfer reserves later, when a payment is made out of the borrower's demand deposit account. Because private banks are all doing this all the time, and just swap reserves around to effect payments, the money supply is increased by the aggregate outstanding bank loan principal. As that principal is repaid, the money is removed from circulation, reducing the money supply.

If you disagree with any of the above, you are wrong.

 

I have explained why you are wrong.

Wrong. US Federal Reserve notes are almost irrelevant to inflation.

Nope. Any money will do.

No, it is not. It is backed by the borrower's legal obligation to repay it.

That would only make it harder to understand, because gold is commodity money and inherently stabilizing. It is completely different from bank-issued debt money, which is inherently destablilizing.

No, because it is completely different. 100% gold backing would be more like 100% reserve lending, which does not increase the money supply.

You seem to be really good at confusing yourself.

 

No.
There isn't any money in bank accounts.
Bank accounts are a ledger of liability to pay. Book keeping. Nothing more.

The money has been lent out, and a reserve amount of which is kept pooled in a vault, behind the till or in a cash dispenser.




Nor has any person under the Gold Standard ever had the ability to go to the Fed and exchange their notes for gold.

 

My statements keep getting misinterpreted.
It can be hard to communicate unambiguously, because with the type of concepts we are discussing there are not any simple terminologies in the regular language to quickly describe them.

It almost seems impossible to have any argument about this with normal people, in a long thread like this, because every word can be taken out of context.

I was not suggesting there was actually "real money" in bank accounts, in fact my statement was assuming just the opposite.

But in the field of economics, money that does not actually exist in bank accounts is included into the definition of "money".

This is very frustrating.

I don't really feel like wasting any more of my time or effort here.

 

That is false. Money is by definition what is generally accepted in exchange. Bank demand deposit account liabilities are generally accepted in exchange. Therefore, they are money. This is not a matter of factual dispute. It is a matter of the definitions of English words.

A liability to pay that is negotiable -- i.e., that is generally accepted in exchange -- is money. I can buy almost anything by transferring my bank's demand deposit (i.e., checkable) liability to me to the seller. The bank's liability is therefore by definition money. This is not a matter of factual dispute. It is a matter of the definitions of words. You are just wrong by definition.

No, that does not describe actual bank lending or the associated ledger entries. The money is not "lent out." When a bank lends, it simply writes a higher number in the borrower's demand deposit account, a new liability of the bank that balances the new loan asset. The currency in a vault, behind the till or in an ATM is vault cash, not reserves. Reserves are held with the central bank, and are used to clear payments between banks.

 

Crikey you people really just argue over Econ 101 definitions.

 

Baff is from Singapore. They likely don't have those same definitions in the English language in Singapore.

The blame is all on you for using terminology with meanings not everyone can understand.

 

I doubt that. 99% of people are just objectively wrong on the subject of money.

No. I have stated the definitions of the relevant terms in clear, simple words that any competent English speaker can understand. They just CHOOSE not to understand, a defensive debate strategy I encounter very, very frequently. In fact, refusal to know self-evident and indisputable facts of objective physical reality is effectively my opponents' default "argument," as they have realized it is the only way to preserve their false and evil beliefs.

 

No. I have stated the relevant definitions in clear, grammatical English.

What on earth do you erroneously imagine "money" might mean?

 

Baff is from Cambridge.

I think you might be with that one, yes.

Money that is not in bank accounts is called "money".

There is still no money inside a bank account however.
That number is not representative of actual money. It represents a liability only. It is a book keeping entry.
So if you use that figure to calculate money supply, you will get the wrong answer every time.

 

what is inflation?

 

The loss in value of a currency. Rising prices.
When a $ today is exchanged for less than it was yesterday.

 

As is the money in bank accounts.

That is still objectively false, however.

It is a liability of the bank that is generally accepted in exchange, and is therefore money by definition.

Speaking of wrong answers every time, in Chinese cities, few people use physical currency any more. Everything is paid for with bookkeeping entries, through their phones. But I guess they don't have any money....