The Creation of the Federal Reserve System (Part 2)

the fed has created money it is just devalued, the bank helps to devalue the 10$ deposit by redistributing it out in the market in the form of loans and collecting interests on it. this helps to spread wealth around by dividing the net worth of the original 10$ the fed created into the economy

unless someone does business overseas devalued money shouldn't mean anything to them

 

I could try to show you again that a Primary Dealers may be a bank but is not the same as a bank, and could try to once again to explain to you how banks do not create money out of "thin air" but lend reserves which multiply deposits.

But I've explained these things in great detail to you at least a couple times.

And nothing I say can disprove what you said because in your head you aren't open to learning. You have already made up your mind how the system works and there is absolutely nothing anyone in this world can do to change your mind.

 

They fact that your position is the same as Akphidelt's should give you grounds for reflection.

 

That is the best explanation I've seen so far.

 

Yeah, I know how it works. What I'm saying is that none of that deposit money ends up in circulation. The only way any circulating money is created by this is if depositors try to withdraw more than the bank has in reserves, and the Fed intervenes to bail out the bank with money creation. Which still means that the only way any circulating money is created is if the Fed creates it.

 

People saving money does not cause price inflation.
None of the things you listed are causes of decrease in real private GDP/capita or an increase in U-5 unemployment.

People saving more money is a consequence of recessions and depressions, not a cause. There is zero evidence to back up your claim that "people saving money causes recessions and depressions".

Yeah but it causes unemployment. So you have less peoeple working, but they're making higher wages...instead of more people working for lower wages. I disagree that government artificially redistributing wealth from the bottom up in that manner is a viable solution for a healthy economy.

Unconstitutional government intervention in the free market is always artificial.

Wrong. The dollar was redeemable in silver until 1968 and foreigners could exchange the dollar for gold up until 1971.

Wrong. Gold has been used as jewelry for millenia.

"Almost" impossible to destroy? Tell me, how does one go about "destroying" gold?

Define being "easy to keep track of".

Also, what makes paper money superior? Why don't people use paper money in the absence of legal tender laws?

The market does. That's why leaves and paper don't get used as currency in the absence of govt force.

What do you mean there wouldn't be "enough structure"? What sort of "control" does it need?

Chickens and cows are not gold. You're comparing apples to oranges. It's a false analogy.

There is none. The money is out of circulation.

They only word it that way because it's easier to understand. That pamphlet was designed to explain the basics to people who do not understand banking theory. What they are really saying is that the banks have created claims on their reserves. Everybody knows that banks that get run on don't have the money to service their depositors. That's because they haven't actually created the money. If they created any money, they'd be able to pay off all of their depositors when they get run on.

Depends on what bank the customers are transferring their money to. If they are transferring it to the same bank, then there is no issue. But if depositors try to electronically transfer more than the amount the bank has in reserve to another bank, then that will create an electronic bank run. That's exactly what happened to Continnental Illinois.

See above.

If it's not lost, then why do depositors lose their money when the bank fails? You're not making any sense. Deposits are not money. They are claims on a bank's reserves.

Why wouldn't they have the money or means to get it?

I agree that raising taxes reduces private sector demand, but that is not the reason that governments coin clip. They coin clip because you can only tax a population so much before revolutions occur. The rest of the revenue they could get through coin clipping, without the public realizing that it was their own government doing it.

The productivity is never permanent. It always leads to an artifician expansion of credit that busts.
Aside from that, by destroying the purchasing power of savings like that, you're saying that we need to economically destroy the individual for the greater good of the greater number. There is zero logic in that mentality, because what's bad for the individual is bad for the economy as a whole.

 

That is not representative of my position at all. It doesn't matter if the reserves are physical or digital: If people try to withdraw more than the bank has in reserves, they will fail.

I agree, the only way new circulating money is created is by the Fed. Bank-created deposit "money" never enters circulation unless the Fed bails out the bank when it gets into trouble.

 

If the initial deposit is $10, that means that the bank has to keep $1 in reserve. The rest is excess reserve. $10-$1=$9. Kindergarden math.

There is not $100 circulating in the economy. See my last example. The most that can ever be circulating at one time is the initial $10.

Borrowing money from another bank is not creating money.

 

I really don't think you understand.

The Fed buys 10k worth of treasuries. When it does this it makes a payment to the primary dealer in the form of increasing its reserves. So now we have Bank A sitting with $10000 of which it can loan $9000. When it goes to make a loan it increases both its assets and liabilities by the loan amount.

So now it looks like this - Assets(Loans) - $9000 / Liabilities(deposits) - 19000.

It created that extra $9000 out of thin air. If you still refuse to accept reality on this subject after seeing this you are beyond help.

Please see above. Money created out of thin air by the fractional reserve process certainly ends up in circulation.

 

I really don't think you understand.

The Fed buys 10k worth of treasuries. When it does this it makes a payment to the primary dealer in the form of increasing its reserves. So now we have Bank A sitting with $10000 of which it can loan $9000. When it goes to make a loan it increases both its assets and liabilities by the loan amount.

So now it looks like this - Assets(Loans) - $9000 / Liabilities(deposits) - 19000.

It created that extra $9000 out of thin air. If you still refuse to accept reality on this subject after seeing this you are beyond help.

Please see above. Money created out of thin air by the fractional reserve process certainly ends up in circulation.

 

I agree that money the Federal Reserve creates does end up in circulation. But the deposit claims ("money") the banks create do not end up in circulation.

 

Banks increase the deposit amount simply to avoid paying out of their reserves. Make no mistake though, the money credited to someones account in the form of a loan was created out of thin air and that money hits circulation.

 

According to the Federal Reserve Bank they state that banks are the primary creators of money by increasing deposits, since deposit money is real money that is used in real transactions. If you are telling me the Federal Reserve Bank is not a reliable source than there is literally no hope for you.

The fact you are arguing against this is hilarious. The money I have in my account is my money, it is not a claim on reserves, it is my money that I can go use to purchase crap that I want.

 

What do you define as in circulation? Over 90% of transactions in America are done through deposits. How is that "not" in circulation?

You are too fixated on physical currency. Those little bytes in the computer are REAL DOLLARS that are in circulation and used to purchase real goods and services. There is no difference between me paying for something with cash or me paying for something with my deposit account.

If you guys do not budge on this issue which is clear as glass than there is no hope that you will understand anything else I'm saying.

But make no mistake about it, the banks DO create money out of thin air and they do purchase Govt debt with money out of thin air.

 

I don't think you understand how accounting works. What is the Fed depositing in to? Deposits are liabilities to the banking system. The Fed does not create deposits for the banking system they create reserves which are assets for the bank.

So if the Fed gave $10 to the bank than what is the banks liability in this situation? Who owns the deposit?

And your insults are noted!

There is $100 circulating the economy. If someone can spend $100 on real goods and services than there is $100 circulating the economy.

Sure it is. Even the banks tell you it is.

 

It's basic math. The less people spend the less GDP. The less GDP the less employment. Very very easily graspable concepts.

It's basic common sense. The more you save the less there is. That is like literally one of the most simplest concepts to understand.

And you tell me I have no facts to back up my claims, lol.

Only in your head

Nope, only silver certificate dollars were. So now foreigners can't, how does that change anything other than how foreign countries deal with us?

Awesome!

Smash it in to dust and sprinkle it in to the bottom of the ocean.

You can count it and maintain it easier than most commodities.

Lack of structure

No, it's because there is not enough structure to use paper.

It needs to be protected by a legal system, which the private sector can not do. Why would I take your paper dollars if you can't guarantee that I get paid in those dollars with a contract?

They were still used as medium of exchanges

False

No, what they are really saying is banks have created money in which we go out and purchases goods and services with. This "claims" idea you have is laughable. Deposits are money, every semi-intelligent economist in the world understands why deposits are money.

Depositors lose their money, but the money is not lost.

Why are there people unemployed and impoverished?

 

Sure, but then it has to be taken back out of circulation in order to be used as the base reserve for another loan. The banks do not create any money that actually ends up in circulation. There will never be more than the initial amount that the Fed created in circulation at any given time.

 

Thats not true, we use commercial paper as a means of money. Its transferable and can be used, even if there is no money else where to pay for it at the time of creation or transfer. There are many different types which have different rules applied. But the thing that is distinguishable in fractional reserve banking is that they are able to loan out more money than they hold in their reserves. The flaw is when more money is trying to be withdrawn than the bank holds in its reserves. With the central bank attached, there is essentially no reason to limit banks to limit their loans and financial activity because the central bank is able to insure them (or bail them out). Of course this is why we should distinguish the difference between a local bank or credit union and JP Morgan, US Bank, Wells Fargo, Goldman Sachs etc..

Unless I am mistaken what you said as in meaning the actual paper money. In that case I would have to agree because each paper dollar that circulates represents another person's debt.

 

I don't think you really understand.

The $10,000 is created out of thin air by the Fed when it creates money to purchase the Treasury.

The bank does not create the money out of thin air. It must have the reserves in deposits to make the loan.

Please see above. What is being created are deposits, as I've explained.

 

That is correct.

If banks could simply create money out of thin air, there would have been no need for bailouts.

The simply would have created more money out of thin air and *poof* problem solved.

 

Yes there will be. How is this concept escaping you?

The bank created an additional $9,000 on top of the original $10,000 deposit so the bank now has $19,000. When you put that $9,000 loan check in another bank the originating bank then transfers $9,000 to your bank leaving the originating bank with its initial $10,000 and your piece of paper saying you will pay it $9k at interest.

That is how the system works. If you are under the impression that the originating bank actually pays out of the original $10k then you are mistaken.

Oh but I do.

Yep.

It creates an additional 9k on top of the original $10k deposit. See above.

But you are wrong.

 

Not at all. Read MMM. Banks ultimately need reserves to pay the loan (and must hold 10% of deposits in reserves).

See steps 4-6 in MMM:

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

The Fed (and only the Fed) can simply create reserves, out of thin air. Banks cannot.

What happens when they pay the loan proceeds? What happens when the check to the car seller is cashed?

See step number 6 showing your statement and understanding is incorrect. When the borrower writes checks on the loaned amount (or the bank writes a check for the amount) the banks reserves are decreased by the amount of a loan, and the payee's bank's reserves are increased.

The net about of reserves never changes. No reserves are created.

Very differently, actually. Compare steps 1-2 at MMM with 4-6.

 

The idea that the requirement of a 10% reserve means banks cant create money is so stupid it is beyond words.

Please see my explanation. I can use smaller words if needed.

 

I have read MMM front and back and your understanding of it is wrong.

It is paid out of the banks liabilities. But the bank has added $9k to its deposits out of thin air and pays the loan with that money...not its original $10k deposit.

Did you miss the part where the banks liabilities(deposits) are first increased by the loan amount?

Created money is created money. The Fed simply requires a piece of paper saying someone will pay it back at interest to create money...so do banks.

 

The lending bank pays out the $9k loan, reducing its reserves to $1k. The 9k deposited in the payee's bank is available for that bank to loan (90%). The process has not created additional reserves. Only the Fed does that.

That is the difference.

Then you have a chance to prove it.

But unlike the Fed transaction, it only creates more deposits, not reserves.

Unlike the Fed, banks cannot create unlimited amounts of money (counting deposits) because they are limited to lending 90% of their deposits in reserves.

The Fed has no such limitation. It and only it can create reserves out of thin air.