Or you could take the paper with the 10 on it and buy 33 gallons of gas, which would be worth $116 today.
Plus they would check your oil and clean your windshield.
To understand the logic, there must be logic there. This is simply another WONJCT.
What source would you be happy with? Shall we try, Wikipedia, the very first paragraph defines what FRB (fractional reserve banking) is:
Let’s elaborate this definition.
When you or a corporation take a loan - it is a loan only for a bank; for you or a corporation it’s a debt. Agreed?
Because I’ll call it a debt further on – not a loan.
The next step is taken directly from definition “Most of these loaned funds are later redeposited into banks, allowing further lending” which means you or a corporation that took the debt have converted it (not all of it but most of it) into a deposit; well, deposits cannot go anywhere else but to a bank and for the bank that received it, it is a basis upon which to lend. More deposits – more loans – more debt. Agreed?
So, what permits a bank to lend your or corporation’s deposit? The answer is in the definition: “fractional-reserve banking” (FRB) is the concept that allows a debt to be converted into another debt for someone else or another corporation that will take a loan at the bank where your or corporation’s original debt ended up as deposit. Agreed?
And finally, as this cycle is repeated several times what happens is – again, taken verbatim from the definition - “the money supply (to) grows to a multiple of the underlying reserves of base money originally created by the central bank”. Agreed?
A “multiple” meaning there is a factor of deposit-to-debt cycle that is used to multiply original money amount created by the central bank to arrive at the total money in the circulation on various balance sheets. Agreed?
For example, if we start with $100 of central bank created money there could be up to $1,000 of money in circulation. So, the factor of money-to-debt cycle is 10. Agreed?
It is a staggering fact – CB created $100 and fractional reserve banking permitted creation of another $900 – that’s 90% of the total money now in circulation originated by FRB. Agreed?
So, looking back from the beginning, what is the event that enables repetition of this process or deposit-to-debt cycle? It is the event when you or a corporation takes a loan from the bank or, - as I like to call it - you or a corporation taking on a debt. Without you or a corporation being there to take that the debt the factor of money-to-debt cycle would be lower; when you or a corporation take on a loan, the factor increases. Very simple math. Agreed?
So, where do we arrive then? The question: “what determines amount of thus created money?” It is determined by your or a corporation willingness to take on a debt (AKA loan).
Which is exactly what I said: “banks can create as much money as we can borrow”. Agreed?
Your turn is to show at what step of this post you disagree and WHY.
Well, let’s first agree on something very important.
Situation on the ground with respect to minimum wage, money printing and Government issuing ever more debt are a result of some very smart people considering all the options available to them. It did not happen by accident, okay? I hope you don’t accept the argument of “incompetence”?
In terms of wealth distribution, recent financial crisis intervention by Feds and Government is similar to Bush-era cuts – it further increased wealth of 1% while the rest stagnated or saw their wealth reduced.
I’d argue that if most people are kept on a minimum of wealth the only way for them to improve their situation is to take on more debt. I know you can say they don’t have to and what about personal responsibility but they do take on new debt.
If we had a more reasonable, affordable and balanced wealth distribution there would not be need for enormous ratio of debt to income. Having less debt outstanding makes overall economy more stable.
But, the impetus is on the money to procreate and not simply to be used as a tool of exchange for goods and services.
So, instead of more reasonable, affordable and balanced wealth distribution you actually have Government supported and funded wealth re-distribution.
Example of how it is done - How Washington Gifts the 1 Percent
The way I’m reading what you posted from the wikipedia link is:
If I deposit $100 in a bank, it has to keep a dollar, and can loan out the other $99.
So then, say it loans out the other $99 to Bob.
Bob deposits $99 in another bank–Bank Two.
Now Bank Two has to keep ninety nine cents, and can loan out the rest.
So then, say it loans out the other $98.01 to Carl.
Carl deposits this in Bank Three.
Bank Three has to keep 98.01 cents, and can loan out the rest.
So it loans 97.0299 to Diana.
Etc.
After the money goes through this entire cycle (which becomes finite, I suppose, due to rounding) we’ve got $100 sitting in banks, and (if I’m understanding what I’m reading about how to sum these fractions) about $6339 owed by the various people who took out loans in this scenario.
Is this what you’re talking about?
With apologies, I’m having trouble seeing how the above is an answer to my question–I don’t see where you’re telling me who the “I” and the “you” are in what you posted.
When I was a kid, my mother used to say “If you don’t study, you’ll end up being a ditchdigger!” Appropos of the comment about computers causing productivity gains - all machinery causes productivity gains. Somewhere around the 1980’s it occurred to me that “ditchdigger” was a heavy equipment operator now, earning premium wages on any site, and incidentally digging with a backhoe in an hour what would take a dozen people all day to do with shovels.
Caddy (angling for scholarship recommendation): “I’d like to go to college but I don’t think I can afford it”
Ted Knight: “The world needs more ditchdiggers too!”
-Caddyshack
No, I understand perfectly well HOW money is created in fractional reserve banking. I just don’t understand why you use such bizarre and inflamatory language while trying to explain it.
Banks CANNOT “create as much money as we can borrow” because the amount they can lend out is a fixed multiple of the amount they hold in reserves. Money Multiplyer = Total Reserves / Reserve Ratio.
Banks also WONT lend out as much money as you can borrow because theoretically you can borrow an infinite amount of money. Banks don’t get paid by lending out money that never gets paid back.
That was the whole cause of the 2008 financial crisis. Banks and financial companies like AIG created elaborate debt instruments no one could adequately assess the risk of. Bottom line is in a very complex way, they lent out more money than could ever be paid back and almost went out of business.
You don’t seem to understand the difference between “money” and “wealth” or what makes an “asset” like gold, a home, business or car different from a “liability” like a debt obligation. Our economy is based on the concept of exchanges. Every accounting transaction must have an offsetting transaction. I get a mortgage loan from a bank but I now owe them. I exchange the money from the loan for a home and I exchange my labor for money to pay off the mortgage over time. Ideally the value of the home increases, I pay off the mortgage with interest and wealth is created for everyone. What part of this process needs to be tied to gold or any other element from the periodic table?
The only reason people used gold and silver as money in the first place was because it was rare, it can’t be duplicated and it’s divisible (ie 2 halves of a gold coin = 1 full coin).
That is correct. But what happens is that a couple of boring machine operators or “sandhogs” (who in NYC can make up to $100k a year as I found out another thread) can replace hundreds or thousands of low/unskilled laborers or one John Henry.
Ah, well, then, pardon me.
I was under impression you came to debate but your worry only is using “inflamatory language”.
Got it!
There’s a lot to reply to in this thread, and I won’t be able to get to it until later, but since you’re responding to me I’ll start here.
What happens if you convert a factory to completely robotic labor? Productivity per worker soars, although you have to include supervisors, maintenance, repair and other humans to find any workers at all to divide by. The workers who would formerly be in that factory are unemployed, and must find new jobs. We know the outcome of that. Some get equivalent jobs elsewhere, some leave the labor market entirely, and some are underemployed in jobs that do not pay what the former jobs do. That is is current situation. Productivity is up, but we pay for that with large percentages of the workforce permanently unemployed or underemployed. Many of those new jobs are in the service sector rather than in manufacturing or building, which makes their productivity harder overall to measure.
How do people in service industries survive? One way is to set a minimum wage. Where to set that minimum is always controversial; it is necessarily arbitrary. At best the government can look to standard numbers. Divide the poverty level by 2000, say. Or look to the consumer price index and let it rise concomitantly. Or, as Warren suggested, look to productivity levels and translate them.
This is an interesting area of economics because for many years there seemed to be no evidence that computerization had raised productivity, known as the productivity paradox. My understanding - I am not an academic - is that this has completely changed in recent years and huge productivity gains are showing up throughout our economy. And the human cost after the meltdown of 2008 is reflective of it and why the stock market has recovered to a record high but employment is stuck at historically high levels. The New Normal is the cliche, but it’s accurate. We aren’t going back.
Your use of “bizarre and inflammatory language” seems to be in service of misdirection. I think that’s the point.
I don’t know what your “debate” is because it appears to be mostly incoherent rambling and personal attacks.
As I said before, I know what fractional reserve banking banking is. I don’t need you to explain it to me. But you are acting as if you just discovered it on some web blog and that it should be self evident to be some sort of complex scam or something. I don’t know.
I’m not explaining it to you so let’s stop with diva syndrome and get to the issue.
Because, even after I wrote a “clean” post in which I argue that “debt is money” step-by-step you still keep repeating the same thing instead of writing down why you think debt is not money.
And then I’m the one who’s using inflammatory language for misdirection. As for my credentials I worked for banks in risk implementing Basel II and III - credit, market and liquidity risk for more than 12 years now in 2 major US banks and 5 major Canadian banks. My specialty is auditing and tracing ANY bank’s balance sheet line to its origin and back.
Now, I want you to explain to me that “debt is not money” or point in my “clean” step-by-step post where you disagree and why. Or, simply agree that “debt is money”.
But what’s the purpose of explaining fractional reserve banking? That fractional reserve banking is some kind of complex scam?
Anyone willing to lend money can create money. If someone comes to you on Monday and will gladly pay you Tuesday for a hamburger today, and you agree, you have created money via that transaction. Before there was X money and a hamburger, now there is X + (value of hamburger) money and a hamburger. Then there is X + (value of a hamburger) money, and no hamburger because he eats it. Then tomorrow, he pays you back, and there is just X money. And so money is created out of thin air, and destroyed back into thin air.
Note that this would happen even if we used gold coins, or paper money pegged to gold, or cacao beans, as money.
Is your argument that we shouldn’t allow fractional reserve banking? That only 100% reserve banking is constitutional? But then we don’t have banking, we have safe deposit boxes, plus venture capital.
To add one thing. Even given that fractional reserve banking, and/or allowing purchases on credit and other such things can create money by creating a asset and a corresponding liability out of thin air, it’s not correct to say that “debt is money” or “money is debt”.
Money can be created by allowing debts/loans. It can also be created when you create any good that can be used as money. So commodity money like cacao beans or cowrie shells or cigarettes aren’t debts, even though cacao beans can be used as money. But you can surely denominate debt in cacao beans or gold. “I gave Bob six baskets yesterday. He owes me 4 cacao beans”. Money equal to 4 cacao beans created out of thin air, even though no actual cacao beans were created or destroyed by the transaction.
I didn’t realize we were debating with Ben Bernanke. :eek: