Askreddit you’re barking up the right tree, you just have a few misconceptions.
Until 0% reserves, infinite money wasn’t really on the table. Even with 0% reserves, infinite money isn’t going to be the result. Unlimited money printing from the fed, but not infinite money from just any bank. The difference being going from 0.8T to… what, 8T in ~12 years vs going to actual infinity (source: Monetary Base; Total (BOGMBASE) | FRED | St. Louis Fed).
It doesn’t require infinite money printing to create a hyper inflation. Venezuela did not print “infinite money” nor did Zimbabwe or Hungary or Argentina. The expectation of a sufficient decrease in the future value of a currency is all that is required for a hyper inflation. Money printing makes a currency vulnerable to financial instability, which decreases confidence. When a breaking point is reached, there’s a reversion to the mean - triggering the aforementioned expectation of lower future currency value - followed by an overcorrection - that’s the hyper inflation.
Don’t be discouraged. Most people have zero, or more accurately an acutely negative idea of just how borked the financial system is. It’s heinously complex, and people are constantly bombarded by extremely false information. So don’t be surprised when you get dogpiled for being alarmed over this teetering house of cards.
Oh, and the CPI? The CPI doesn’t reflect the Cantillon Effect, which right now is concentrated on stocks, bonds and real estate (but also manifest in things like healthcare and tuition - anything that typically requires debt to acquire). Most of the money printing since 2008 has gone directly into the stock market, which so few Americans own that they cannot turn around and use those gains to drive up consumer goods. It’s bypassing the American public entirely, and thereby bypassing the CPI.
OK, you’ve really done it, Askreddit. You left the door open and Austrian economics got in. Now we’ll have to dash around and set out the traps and make sure the windows are closed and hide in the basement till morning. Thanks a lot.
Let’s flesh out your premise a little bit. Bank A has $100 from a depositor. Bank A loans out $90 to Bank B, keeping $10 in reserve. Bank B then deposits the $90 back with Bank A, creating more funds for Bank A to loan out. Bank A issues a second loan to bank B, this time for $81, keeping an additional $9 in its reserve. Bank B again deposits the funds from the loan into Bank A, allowing Bank A to make a further loan. Rinse and repeat until, as described in post #9, Bank A has lent out $900 to Bank B, and has $100 in reserves. Bank A then pays back the $100 from its reserves to the depositor and dissolves itself, leaving Bank B with $900 from loans it doesn’t have to repay. Free money right?
What’s wrong with this scenario?
Banks aren’t allowed to calculate their reserves in this fashion. Interbank loans and deposits need to be netted off before they can be used as reserves.
Bank B has both the loans and deposits at Bank A on its books. If it tries to write off the loans as unpayable (which is difficult for any audited business, much less a bank), it has to also write off the deposits. So that free money isn’t the $900, but the amount of the last loan that wasn’t redeposited – theoretically $0.01.
So let’s add a third party to escape the above issues. Have bank B loan out the $900 (assume they have other reserves) to a non-bank third party. Then have that third party deposit the $900 back with Bank A. Assume the third party is a shell corporation that doesn’t actually care about the deposits. Actually, assume the third party is a structured cartel designed to keep assets that should be written off still on Bank B’s ledger, and the assets aren’t deposits, but complicated opaque financial products also designed to hide transactions that should be reported as losses. Now you’re getting much closer to a real-world scenario.
What prevents banks from exploiting this scenario?
The scenario requires collusion from at least three separate parties. There are laws against this type of financial malfeasance and regulators have almost unlimited powers to investigate banks engaged in financial malfeasance. Building a coalition of organisations willing to commit this sort of fraud is extremely difficult, even if you add several zeroes to the numbers stated above.
The scenario requires a conspiracy within each of the separate parties. A bank isn’t a James Bond SPECTRE cabal. The CEO isn’t the person accounting for the bank’s deposits and loans or designing and submitting the regulatory reports or double-checking that internal processes comply with industry standards. Some of the underlings who do this work may be willing to violate laws to secure their annual bonus, but many will worry about losing their careers for being deemed an unsuitable person.
Does this mean that the “catastrophic flaw” raised in the OP is a miniscule possibility? Yes and no. The points above have been discussing the difficulties of fraud in simple mainstream banking transactions which the regulators understand. That’s the ordinary premise raised in the OP and such basic blatant fraud is extremely unlikely to occur. However, expand the definition of “lent” money to a future obligation to pay and the possibilities of financial malfeasance and fraud greatly expand. The 2008 financial crisis showed that regulators and rating agencies were evaluating financial products such as collateralised debt obligations (CDO’s) without having a full understanding of them, and relying on banks’ self-serving dishonest advice. There are numerous other examples of banks acting in bad faith and sometimes blatantly illegally. And the scope of this discussion has only been on regulated banks. Expand the scope to the shadow banking system and the prospects of creating fictitious owned money supply through fraudulent activity greatly increases.
TLDR: The answer to both of the OP’s questions is No. Bank regulators are well-equipped to evaluate and take action against fraudulent actions that they understand, which includes standard lending. However, there is danger that greedy parties could catastrophically exploit flaws in the regulatory framework via transactions that regulators aren’t prepared to deal with, or via unregulated markets.
Wait, so if Bank B must write off liabilities and deposits at the same time does that make Bank Bs lawsuit worthless? That doesnt make sense to me. There has to be a way to write off liabilities without writing off deposits.
But you did admit that it would work and the regulators would just throw up their arms and call it fraud.
Maybe it’s not a single-case-by-case problem. Maybe its just a gradually building total catastrophe that is only beginning to happen. Or people are deterred because there would be a hodgepodge of patchwork, ad hoc laws once the flaw was exploited.
We are not talking about hyperinflation. You said this *"A catastrophic flaw in the Banking system that must be rectified
Say that bank A has $1 with a 10 percent reserve requirement. Bank A lends $10 to bank B. Then, bank A dissolves and gifts everything to B.
Does the $10 lent to B somehow dissapear? Or because it remains, and Bank B can have no liability to a nonexistent Bank A, was $10 in free money just created?*
I said there is no such flaw. If there is such a flaw, it would have been exploited. Please provides cites showing it has been exploited. In other words, back it up or back off.
Maybe it was, and that’s why hyperinflation happened. The fact that hyperinflation was caused by a central bank was immaterial, the point is that there is a means by which private banks can do the same thing. Since there are only a handful of significant banks you are asking for a very small sample size and none of them want to destroy the world yet.
In my scenario, Bank B is colluding with Bank A, and Bank B is the potential beneficiary of the falsely generated money supply, so there would be no lawsuit. I’m also explaining that such a scenario wouldn’t work for the traditional loan market. Let me be clear. There is no catastrophic flaw in the regulation of banking reserves for loans that would allow a bank or a coalition of banks to generate free money by manipulating the money supply.
The area where there is potential for banks to generate “false money” is in their interaction with non-banking financial institutions such as hedge funds using financial instruments collectively known as derivatives. This is the shadow banking system I referred to previously. A derivative is a contractual promise to pay that can be valued and exchanged. It’s possible to generate extremely complicated, extremely high value derivative contracts that are difficult to value on an ongoing basis. Investopedia estimated that the global notional value of derivative contracts is $640 trillion while the gross market value is $12 trillion. Given the scale and the proportion of those two numbers, it’s easy to see how valuations could be manipulated. Obscure those valuations, move them around a little bit, and then reintroduce them back onto a bank’s balance sheet and then there’s an opportunity for artificially increased asset balances. It’s a real problem that banking regulators are trying to deal with, but they’re way behind in their attempts to deal with the current market.
How on earth can hyperinflation “probably” be happening? It’s like saying that New York City “probably” just got hit with a thermonuclear weapon. If it did, it would be impossible to hide.
Several percent a month, even if it actually happened, would not be hyperinflation.
It depends on the definition. There certainly is not a detectable hyper inflation on consumer goods denominated in USD currently occurring unless you use a very liberal definition of hyper inflation, so I disagree there, and like I said before the mechanism he seems to be stuck on is based on a misconception, but that’s not to say that a hyper inflation isn’t likely.
I personally subscribe to the dollar milkshake theory in the short term, so I don’t see an immediately pending hyper inflation (just the aforementioned cantillon effect), but long term? Yeah… the reaper’s coming for his due.
Actually, by quite a few definitions inflation at that level would constitute a hyper inflation. We can argue on whose definition is valid or not, but until there’s an agreement he’s not actually wrong about describing that hypothetical as a hyper inflation. I’ve seen some economists argue that 20% annual inflation qualifies. But again, it’s important to agree on a definition and then dispute if the circumstances for it are met. Otherwise you’re just barking past each other.
There is more than sufficient nonsense in this thread for you to add more. A hyperinflation is *not *likely in the U.S. in any foreseeable future. There has never been any hyperinflation in the country in its history. There is exactly zero chance that the impossible scenario put forth by the OP could lead to hyperinflation. Let’s stick to these truths as we go forward.
Any line for “Hyperinflation” will necessarily be arbitrary; it would seem very odd to call 49%/month inflation that goes on for a year not hyperinflation, but say 51% inflation in just one month is hyperinflation.
Hyperinflation in any sense that matters is not the precise figure but an assessment of the IMPACT; a better way of putting it would be that hyperinflation exists when inflation is so high that people lose confidence in the value of possessing money and so seek to spend is as fast as it can possibly be spent.
Clearly, the U.S. economy was nowhere near that point in the 1970s and 1980s.