Fractional Reserve Banking: a myth?

[LinusK]

As sort of a preliminary, I simply don’t have time to parse every word in every sentence; and in any event - at least as far as you’re concerned - I think I lose either way: either I’m being “overly literal” or you jump down my throat for making a general statement that’s not true in every case. There’s no “winning”, and I’ve lost interest in the game. Plus, I don’t want to wind up sounding like an academic, anyway.

@Hellestal

The problem is that you’ve made these sorts of arguments before.

I responded to several of them in previous threads. I tried to walk you through a different way to think through some of these issues in previous threads. I pointed out what I perceived to be holes in your argument. You didn’t respond to the issues I raised, as I noticed in the last post of the first thread I just cited. You left with those issues almost entirely unacknowledged. Then later you started new threads and made the same mistaken assertions all over again.

I took a dim view of this behavior.

You have to accept that - while you’re certainly entitled to take any view you want of anyone’s behavior - you’re not the king of economics on the SDGD board. You can attack them if you want, ignore them if you want, but people will continue to say things you disagree with. And you can’t stop them. (Unless you ARE the king of SDGD, in which case I guess I’ll find out when I get banned.)

I’m willing to walk through these issues again. This stuff isn’t easy. You’re trying to argue a “balance sheet effect” (what you call a wealth effect). This balance sheet effect does not work as you believe. I’m willing to rephrase my previous arguments in a way that might make more sense this time around. But if I make a criticism against your argument that goes unacknowledged, if I see an error that’s not admitted, only to see the same argument or error resurface three months later in another thread, my current dim view is not likely to change. You should also know that my patience is much more limited past the first page of one of your threads. My expectations are low based on previous experience. If few other people are reading, as would often be the case past post 50, there’s less incentive for me to put extended effort into the explanations.

The point is that the total amount of base money stays identical when the government issues Treasuries.

That was exactly my point.

If the government were to issue new currency in order to finance its spending, then total base money would increase rather than staying the same.

True. It’s an identity, since you’re saying base money goes up when base money goes up.

Before the present “liquidity trap” conditions, there was an extremely strong relationship between increases in monetary base and the inflation rate. Robert Barro’s macro textbook lists part of these relationships.

Country   MB growth RGDP growth Inflation Time period

Brazil       77.4%     5.6%      77.8%    1963-90
Argentina    72.8%     2.1%      76.0%    1952-90
Bolivia      49.0%     3.3%      48.0%    1950-89
Peru         49.7%     3.0%      47.6%    1960-89
Uruguay      42.4%     1.5%      43.1%    1960-89
Chile        47.3%     3.1%      42.2%    1960-90
Yugoslavia   38.7%     8.7%      31.7%    1961-89
Zaire        29.8%     2.4%      30.0%    1963-86
Israel       31.0%     6.7%      29.4%    1950-90
Sierra Leone 20.7%     3.1%      21.5%    1963-88

. . .

Canada        8.1%     4.2%       4.6%    1950-90
Austria       7.1%     3.9%       4.5%    1950-90
Cyprus       10.5%     5.2%       4.5%    1960-90
Netherlands   6.4%     3.7%       4.2%    1950-89
U.S.          5.7%     3.1%       4.2%    1950-90
Belgium       4.0%     3.3%       4.1%    1950-89
Malta         9.6%     6.2%       3.6%    1960-88
Singapore    10.8%     8.1%       3.6%    1963-89
Switzerland   4.6%     3.1%       3.2%    1950-90
W. Germany    7.0%     4.1%       3.0%    1953-90

I’m not sure what to make of these numbers. In the second group, which I take to be countries with modern economies, the GDP growth rate and inflation rate are all similar, with the exception of Cyprus, Malta and Singapore. (Why are they in there, anyway?)

In the others, MB growth doesn’t seem to have much effect the other numbers. Not sure what to make of it, honestly. I’d like to see more recent numbers, since these are 25 years out of date.

The question is what’s likely to happen when the government finances with base money. The answer pops out of the data. There is a strong relationship between more base money and more inflation before the “liquidity trap” era.

There are a couple slightly more subtle things to notice here. First is that the relationship is stronger in high inflation countries. In the low-inflation group, the relationship isn’t as strong, because in low-inflation countries, “real” factors in the economy have a disproportionately strong effect on any price changes. This makes sense because price changes are so small, “real” factors are better positioned to push around nominal figures.

This relates to the reason why “liquidity trap” conditions can only happen in low-inflation countries, but that’s a more troublesome area.
Let’s posit that this is correct.

The federal government has a deficit. They issue Treasuries to finance the deficit. There’s a “wealth effect” (a balance sheet effect) that increases the velocity of base money, with total base money held constant. All else equal, as you said. This means expected NGDP has increased. There is more aggregate demand.

The problem here is that all else is never equal in macro.

I know this. That’s why I kept saying “all things held equal” over and over again.

***Very Strange. It says “the text is too long.”

I think what it means is your is too long, because I certainly haven’t written 25,000 characters.(!)