Sure reserves increase by giving the depositors (or more specifically one depositor (ie the Federal Government) more money in open market operations.


I mean lower the ratio of debt to equity that gives alarm bells to the bank managers. Similarly the banks would need to improve their balance sheet and reduce their leverage as well.


That is exactly what I meant as the current paradigm.



Yes they can. Reducing the multiplier by making it more difficult to borrow money can be counteracted by "printing money" by buying Treasuries. Changing the CAR at the same time as releasing additional reserves into the system may balance each other out.



Well lets simplify the problem by stripping out the asset price inflation or deflation. Just think about it in terms of the increased risk of JoeBlow loosing his job. If the downpayment is 20%, and JoeBlow loses his job and can no longer make the payments on the mortgage, the bank forecloses ands sells the asset to recoupe their interest in the house. The house goes for a 100% of its original value providing more than enough capital to save the bank from taking a bath on the loan. Great but say the downpayment had only been 5% hey then the bank would be worried that they might not recoup their costs in supplying the loan.

The increase in risk did mean that the bank loaned less money. Adding in asset price deflation is interesting however since the bank (theoretically) hasn't any better idea whether or not the price of the house is going to go up or down than the buyers and sellers in the housing market, how are they supposed to price in this risk/opportunity. They can't really and just better hope that they have a large enough profit margin to weather the storm if the asset price suddenly falls. I think you are adding in the wealth effect into your model here. I WOULD call that an inherent instability of our monetary system. It is a problem that economists and Federal Reserve chairmen are debating. I don't know if they have found a solution but it sure would be nice if they found a way to keep asset bubbles from happening.

Do the stats show an accurate energy correlation between how GDP is calculated and what is created and consumed in the Swedish economy.

There are two immediate ways that come to mind as to how GDP can increase while it appears energy use is decreasing, due to externalities.

1. A Swedish manufacturer produces procucts (requiring energy) in say an Eastern European nation. Some or all of the profits may flow to GDP at home, energy use increases in the nation of manufacture.

2. Swedish imports from abroad where the energy cost of imported goods is not factored into the local economy, energy use increases in export country and not counted locally.

Interestingly those EIA stats show overall increasing global energy consumption. In todays globalised world I think that would be a more accurate measure of energy and it's relationship to growth.

World Totals from http://www.eia.doe.gov/emeu/aer/txt/ptb1103.html
1993 R 353.28
1994 R 357.25
1995 R 365.87
1996 R 374.82
1997 R 380.33
1998 R 381.45
1999 R 388.76
2000 R 399.10
2001 R 403.91
2002 411.57

This is supposed to be reality? How about we throw in some reality by giving both person A and person B 10 dollars to start off. Now run your simulation. They are loaned 100 dollars each. And they each have just enough money to pay off the loan. Next year they don't choose to get any new loans but the bank buys services from each of them to the toon of 10 dollars each. Great we are back where we started. Persons A and B can now borrow a hundred dollars each again. and so it goes on and on forever. All it needed was that 20 dollars at the start for it to reach steady state.

Where does that initial 20 dollars come from? How about by the federal government borrowing some money from the central bank that the central bank never intends to take back. The Federal governement only has to "borrow" 20 dollars once from the central bank and then persons A and B can continue to happily borrowing money and providing services forever. Yes the interest on the initial 20 dollars continues to grow and grow, but that's alright because the central bank knows it is essential for the economy and is happy to roll over the principle and the interest forever.

I think it would be naive to develop a paradigm with the key being the bank receiving $20 interest from mary and spends $20 at marys shop or giving her $20 in wages.

I could construct a more elaborate example, but what your proposing is not a valid argument, not unless the bankers are idealistic communists who want to make no profit and just want to share the wealth with the people.

The above simplified example of Mary is actually a good illustration of how fractional banking and the profit motive absolutely requires growth.





The US Treasury sells bonds to the Fed.

The Fed "credits" the US Treasury with those funds, but that credit is NOT debited anywhere else.

Effectively the US Treasury is printing money to buy it's bonds.



If the government can't obtain enough receipts from taxation or export related income they have to roll over their debts and pay interest to people who have those bonds.

Quite ok when those bonds are owned between the Fed and Treasury, not so good when those bonds are owned by Foreigners. i.e. they actually may want their money one day.



It goes without saying that if you print money and inflate the money supply then your accounts will show a corresponding increase in currency, or am I missing something?

If I could legally print $100 without having to debit it from somewhere, then depost this into my account sure my bank balance would be increasing by the amout I am able to print.

That just seems idealistic. The bank is not taking any profit and investing every cent from A and B back into A and B. Furthermore the bank is so efficient in all it's energy transfers (i.e. no waste) that the full $20 can be put back into A and B every year, (A and B being the economy). This would be the banking equivalent of a perpetual motion machine.

Idealistic yes, realistic I don't think so.



Again in an ideal world mabye.

What about when external countries start to hold significant FOREX reserves.

What if like Japan in 1987 they decide to try and cash our their positions? The equivalent of the government wanting the original $20 back. I guess you keep doing whats worked in the past and continue to devalue your currency.

The best thing about economics is where theory and reality collide. I forget who said that but I believe it to be true.

Well there are two things the bank can do with its profits. It can distribute them as dividends to its investors, or it can retain them to increase the capitalization of the bank. If they give 100% of the dividends back that isn't any different than giving the money back as a salary to the employees. IF they retain earnings they are performing the equivalent of stuffing dollar bills under the mattress. At some point your mattress gets stuffed and either you get a bigger mattress or you stop piling up more money. Assuming the bank has sufficient capitalization for our steady state model there would be no good reason for them to retain the earnings and could give a 100% of the profits back to the shareholders. Since Person A and Person B are presumably the shareholders of this bank (There being no one else around to own the shares) profits behave exaclty like other expenses incurred by the bank.

I'm glad that I don't have to keep on repeating this then. This is how new money flows from the bank into the system. everyone agree that this goes without saying?

What do you actually mean by waste? I suppose losing some coins down the back of the couch would be possible wastage but somehow I don't think this is what you mean.

Interesting point. If I understand what you're asking you're asking what happens when foreign central bankers choose to redeem their Treasuries. First action would be for them to sell the bond for US dollars, the foreign bank holding cash might be considered to have temporarily removed money from circulation. They would then however sell those dollars to buy their own (or some other currency). This transaction would have the effect of increasing the dollar supply cancelling out the previous transaction's effects on the overall amount of dollars in circulation. The overall effect is that there is no change in the amount of money in circulation but there is selling pressure on the dollar in the foreign exchange market.

Ignore the above response. Mr. Smith (my Macroeconomics prof) would give a failing grade for that.

I'd be fascinated to know what he thought of this discussion so far. It would be most helpful to have the input of an academic. Can you print this thread out and get him to scan through it nero?

Well it has been about twelve years since I took his course so I very much doubt he remembers me.

Well. Since we have covered 7 pages of debate so far and no one has yet addressed how our monetary system will handle peak oil, I guess I’ll exercise my propensity to be verbose. When debt money is created, it is an interest bearing claim upon future production of the economy, thus it requires economic growth. I won't belabor this any more. When the underlying physical economy is no longer able to meet the interest payments: never mind the principle; the entire edifice goes into a liquidation mode, which means bankruptcy, repossessions, and foreclosures. The net effect over the lifetime of loans is that banks are continually draining many times more money from the money supply than they issued into it. This must be compensated at all times by further lending of credit (expanding the money supply) to save excessive contraction of the production/consumption cycle and the ultimate collapse of the financial system.

So, how will our monetary system function if no money, or too much money, goes into the system due to no economic growth as a result of peak oil and permanent higher energy prices? For an initial reaction, we do have a point in history to refer to, do we not? Up until the 1970s, it was generally believed that recession and inflation could not occur at the same time. The Oil Crisis of 1973 shattered that myth and resulted in a new word in financial circles: stagflation. The explosion in oil prices brought us a decade where inflation soared while economies stagnated and unemployment rose. By the end of the decade, the United States experienced double-digit unemployment, double-digit inflation and double-digit interest rates. Inflation was merely contained in the 1980s by persistently high unemployment. It is either or; we cannot simultaneously speed up and slow down the economy.

What produced the stagflation of the seventies was the policy mistakes by the Federal Reserve, namely, a monetary policy that was naively designed to expand the economy by printing money for an extended period far beyond what supply and demand otherwise suggested. Increases or decreases in the level of money supply are thought to influence the level of production in the economy. However, this is true only if the externals to the economy, like a supply of oil, remain constant. When the availability of energy declines, the economy will change in ways not correctable by manipulations of the money supply. If the FED tries to stimulate the economy under conditions of chronic energy shortage, they will create stagflation instead. If the money supply is increased, stimulating demand beyond levels that can be satisfied by existing fuel supplies, then prices will rise as the money competes for the diminishing, absolutely essential commodity, oil. As people see prices rising they may elect to spend now to avoid the loss later, resulting in hyperinflation. Since neither capital nor labor can create energy, the next round of energy-shortage-induced stagflation will leave central bankers helpless, short of imperialistic adventures to garner more supply.

sigh, no response to my modifiied person A person B story? Simply asserting that debt based money requires growth isn't a very good argument. A couple of times now I've described a simple model economy to explain how this assumption isn't invalid and you have failed to come back each time to explain where you believe the model fails. And since this is a fundamental assumption of your question we are at something of an impass.

Strangely though, you and I are not that far apart in our conclusions of what the likely effects of oil depletion are. (ie. stagflation) I wouldn't consider stagflation a collapse of the monetary system unless it leads to hyper inflation. Hyper inflation is a possibility but I do not believe it is an inevitable result of oil depletion due to some inherent deficiency of the frational reserve debt-based money system.

It seems to me like we are only looking at the debt side of the equation. At one point in time, it was possible to create wealth. It was called "industry". Now we here in the US have a service based economy. (everybody doing others laundry) Wealth is created by taking stuff (like dirt) and making other stuff (like iron tools) Mining, agriculture, logging, these are vocations that generate wealth. Oil is a tool to make these more efficient. So, to answer Monte's question, yes, we our economy can function. We will just have to change our vocations. Day-traders will starve, fast food restaraunts will close and we will do our own laundry. The rich, well, they will still be rich, using oil and staying as far away from the real "wealth-producers" as they can.