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The myth of the money multiplier

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The myth of the money multiplier

Unread postby ralfy » Mon 29 Oct 2012, 10:43:59

"To Neoclassical economists, it’s just the way banking works: bank lending is controlled by the Fed because, 'even if banks hold no reserves', Fed control over the currency means that private banks must do what the Fed wants.

"And to anyone who’s done empirical research, it’s a myth."

http://www.businessspectator.com.au/bs. ... 1022-ZAS44
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Re: The myth of the money multiplier

Unread postby evilgenius » Fri 02 Nov 2012, 15:54:49

When I read the topic of this thread I thought you were going to argue against there being a multiplier effect which economic inputs undergo on their way toward full involvement in the economy. You don't seem to be saying that, only that lending on some level is controlled so much by the Fed that no multiplier can exist. I don't really know what you mean. Surely you can see that there is a difference between an input that goes to shore up liquor store and Walmart subsistence living vs. an input that pays the salary of an employee at a Defense Contractor who uses their income stream to borrow themselves into a house. Perhaps what you are saying is that said employees of Defense Contractors can't get loans under the current situation?
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Re: The myth of the money multiplier

Unread postby smiley » Sun 04 Nov 2012, 05:50:27

Read a story a while back which did make sense to me.

Gist of the story is, that the easiest way to inject money into the economy is via QE type of programs. These run via the financial sector. The result of this money injection is that the financial sector will be doing well.

Since the financial world is gravely biased towards the financial sector (and not to eg manufacturing) to value a currency, this will increase the value of the currency.

The resulting currency appreciation will put a drag on manufacturing, supress exports increase imports and increase unemployment. The argument goes on to tell that this has a much more visible effect on the economy than the gains made in the financial sector since the financial sector only employes so many people.

I thinkt this holds when you look at Japan. Every time the BOJ intervenes the value of the Yen goes up not down. Meanwhile the manufacturing is in the doldrums and Japan is postings its first trade deficits in decades.
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Re: The myth of the money multiplier

Unread postby evilgenius » Sun 04 Nov 2012, 13:45:02

I see, you are after the creation of money by the lending of it by banks. That's not what I was taught was the 'money multiplier'. The money multiplier as I was taught it refers to the economic effect of money injected into the economy by means of inputs via the government. In short, when government chooses to spend money in various ways each of those ways comes with a certain multiplier. Money spent on welfare has a very low multiplier, close to one, while money spent for something such as defense spending goes much further, two to three.

As far as creation of money by banks goes, it never was much based upon the first and most simple(the refuted) example in the article. Maybe the theory always allowed for that, but by far the greatest source of money creation has always been through lending. It shouldn't come as much of a shock that when people don't pay their debts in a number larger than the built in level of expected default that the money supply shrinks.

Incidentally, a good aside is the problem encountered when attempting to discover the role of derivative investments in the picture as was before the collapse. Think of the housing market as a huge money supply generator. Too much money supply creation and those pesky workers will want more money. Back in the days of Greenspan and his inflation fighting initiatives workers making more money was considered to be one of the most terrible of sins. Does anybody remember when he put the clamp on the economy in the mid-nineties through higher interest rates out of fear that people would agitate for increased wages? After the dot com bubble burst, and raising rates became more difficult to implement for the twin reasons that recovery would stall and that George Bush might not get re-elected, Greenspan had less ammunition. Enter the derivative as a means to siphon off excess money. What they did, though, was to create the hydra. It wants money that doesn't exist anymore because of excessive defaults. It is plugged more directly into the political system due to its ownership being at the level of political campaign contribution unavailable to average workers. It won't accept a lesser return. It won't negotiate for pennies on the dollar. It is tied directly into the fortunes of the biggest banking institutions. If it dies it will take the economy with it. Where is Hercules when you need him? The whole thing needs somehow to be stuffed under a rock, disconnected from the real economy in some way that ensures the preservation of everything we ordinary people hold dear.
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Re: The myth of the money multiplier

Unread postby joewp » Fri 13 Dec 2013, 14:17:02

Whatever you call it, or whatever you think it does, the basic fact is that banks create money (as "bank credit", aka what a bank says it owes you in your account statement).

As I keep asking people, why do banks get that privilege and we (as individuals or government) don't? After all, the US Constitution says that Congress has the power to create money, nobody else. Why was it shunted off to a quasi-public (but mostly private) entity?

I don't think you can answer that question without assuming a conspiracy by banks to take control of the money supply for their benefit, at our detriment.
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Re: The myth of the money multiplier

Unread postby radon1 » Wed 28 Jan 2015, 00:11:24

joewp wrote:As I keep asking people, why do banks get that privilege and we (as individuals or government) don't?


Because there has to be someone who assumes the risks of lending, and this is banks. Otherwise hyperinflation will follow.
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Re: The myth of the money multiplier

Unread postby Keith_McClary » Wed 28 Jan 2015, 02:30:06

joewp wrote:Whatever you call it, or whatever you think it does, the basic fact is that banks create money (as "bank credit", aka what a bank says it owes you in your account statement).

As I keep asking people, why do banks get that privilege and we (as individuals or government) don't?
So start-up Joe's Bank. You might consider a fancier name, like "First National Bank of Joe".
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Re: The myth of the money multiplier

Unread postby Tanada » Wed 28 Jan 2015, 14:58:51

Keith_McClary wrote:
joewp wrote:Whatever you call it, or whatever you think it does, the basic fact is that banks create money (as "bank credit", aka what a bank says it owes you in your account statement).

As I keep asking people, why do banks get that privilege and we (as individuals or government) don't?
So start-up Joe's Bank. You might consider a fancier name, like "First National Bank of Joe".


I would love too, but the banks in the USA at least require a government charter and have a stack of compliance regulations as tall as I am or taller.
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Re: The myth of the money multiplier

Unread postby Keith_McClary » Wed 28 Jan 2015, 19:30:36

Tanada wrote:I would love too, but the banks in the USA at least require a government charter and have a stack of compliance regulations as tall as I am or taller.

China: Fake bank swindles customers out of $32m
To customers in the eastern city of Nanjing the interior looked like any other state-owned bank, with uniformed clerks working behind the counters, the Southern Metropolis Daily website reports. Almost 200 people deposited their cash, including a businessman who handed over 12m yuan ($1.9m; £1.3m) in 2014. But he grew suspicious when he wasn't paid the promised interest on his money, and went to the police after the bank refused to return his savings. A police investigation found that it was actually a rural cooperative, which had none of the accreditations required to operate as a bank. It had been promising interest rates of 2% per week and high interest subsidies, police say.

The fact the "bank" was able to operate for so long has left some Chinese social media users incredulous. "More than a year, it looks like the authorities have gone blind," says one user on the Weibo social network. "Fake banks, and a fake local government," comments another user. Police have arrested five people over the scam, including a woman who reportedly high-tailed it to Macau, China's famous gambling centre, with the customers' money.
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Re: The myth of the money multiplier

Unread postby evilgenius » Thu 29 Jan 2015, 17:56:48

Tanada wrote:
Keith_McClary wrote:
joewp wrote:Whatever you call it, or whatever you think it does, the basic fact is that banks create money (as "bank credit", aka what a bank says it owes you in your account statement).

As I keep asking people, why do banks get that privilege and we (as individuals or government) don't?
So start-up Joe's Bank. You might consider a fancier name, like "First National Bank of Joe".


I would love too, but the banks in the USA at least require a government charter and have a stack of compliance regulations as tall as I am or taller.

That never stopped the mob, which ought to put paid to the idea that banks function as an arm of some kind of conspiracy. They are simply the most transparent means by which banking activity can take place. You know what you are getting into with a bank, even if you shouldn't be getting into it.

I despair, what with all of the anti-banking hype so popular these days. Does no one have a memory? Can't you hear George Bush riding on the back of the 'more people own a house now' horse into his second term as president? What you sad sacks are blaming on the banks is really down to political shenanigans. The bankers largely hopped on in order to comply with the power. Of course they also engaged in the feeding frenzy when the orgy really got going, so did most of those bitter borrowers who willingly took out loans that they should have known they would never be able to pay back under any kind of return to normal housing market expectations, let alone a crash.
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Re: The myth of the money multiplier

Unread postby davep » Fri 30 Jan 2015, 05:29:41

evilgenius wrote:
Tanada wrote:
Keith_McClary wrote:
joewp wrote:Whatever you call it, or whatever you think it does, the basic fact is that banks create money (as "bank credit", aka what a bank says it owes you in your account statement).

As I keep asking people, why do banks get that privilege and we (as individuals or government) don't?
So start-up Joe's Bank. You might consider a fancier name, like "First National Bank of Joe".


I would love too, but the banks in the USA at least require a government charter and have a stack of compliance regulations as tall as I am or taller.

That never stopped the mob, which ought to put paid to the idea that banks function as an arm of some kind of conspiracy. They are simply the most transparent means by which banking activity can take place. You know what you are getting into with a bank, even if you shouldn't be getting into it.

I despair, what with all of the anti-banking hype so popular these days. Does no one have a memory? Can't you hear George Bush riding on the back of the 'more people own a house now' horse into his second term as president? What you sad sacks are blaming on the banks is really down to political shenanigans. The bankers largely hopped on in order to comply with the power. Of course they also engaged in the feeding frenzy when the orgy really got going, so did most of those bitter borrowers who willingly took out loans that they should have known they would never be able to pay back under any kind of return to normal housing market expectations, let alone a crash.


You don't really seem to understand what Joe said. Money creation should not be dependent on credit, it's a crazy system that requires growth to stand still. And it's a no-risk means of enriching the financial elite at the expense of Governments and citizens. Check out my link in the fractional reserve thread concerning how money is created (from the Bank of England).

We should live in an equity-based system rather than a debt-based one, with the Treasury printing the money based on a formula. Something akin to the Chicago Plan would work. Two IMF researchers looked into how we could transition to such a system https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf. For the lazy, here's the abstract:

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.


If you think banks don't deserve our ire, take a look at this video that explains how bankers engineered the current system entirely for their profit https://www.youtube.com/watch?v=iDtBSiI13fE and then come back and talk about conspiracy. It's long but very good and well researched.
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Re: The myth of the money multiplier

Unread postby radon1 » Fri 30 Jan 2015, 11:06:25

davep wrote:
It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits.



Why would the banks be taking deposits then?
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Re: The myth of the money multiplier

Unread postby davep » Fri 30 Jan 2015, 12:13:21

radon1 wrote:
davep wrote:
It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits.



Why would the banks be taking deposits then?


Banks would become equity deposit banks (as a lot of people used to think they were). If you look at the IMF document, they separate out speculative stuff from banking. And the document describes the transition from a debt-based to an equity-based monetary system. It's a good read. I'm not saying it is the solution, but it does deal with the major flaws of our current economic system.
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Re: The myth of the money multiplier

Unread postby radon1 » Fri 30 Jan 2015, 12:15:15

davep wrote:
radon1 wrote:
davep wrote:
It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits.



Why would the banks be taking deposits then?


Banks would become equity deposit banks (as a lot of people used to think they were).


What does this mean? (the paper is very long). Will they invest the deposited money in equities?
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Re: The myth of the money multiplier

Unread postby davep » Fri 30 Jan 2015, 12:20:08

A quicker alternative is the Money Masters Monetary Reform Act, but the page doesn't seem to work for me at the moment: http://www.themoneymasters.com/monetary-reform-act/

A brief synopsis is here https://en.wikipedia.org/wiki/User:Jeffrey.Rodriguez/The_Money_Masters#Monetary_Reform_Act

Basically the Government would pay off debt at the same time as it increases fractional reserve requirements, ending up with no debt and 100 reserves for the banks. The IMF and the Money Masters approaches differ slightly, and I haven't read the details of the IMF report for a few months, but plough through it and it should make sense.
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Re: The myth of the money multiplier

Unread postby radon1 » Fri 30 Jan 2015, 12:34:58

Well, yeah... But how the banks would be making money, and how the depositors would be earning interest, if any?
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Re: The myth of the money multiplier

Unread postby davep » Fri 30 Jan 2015, 13:12:33

radon1 wrote:Well, yeah... But how the banks would be making money, and how the depositors would be earning interest, if any?


Banks can charge for their services, but there's no interest IIRC. There are other types of companies allowed that are specifically NOT banks that can do more speculative stuff with their clients' money. Actually, that may be the money masters reform act.

Read section 4A of the IMF report for the future status of banks according to their vision of the Chicago Plan.
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Re: The myth of the money multiplier

Unread postby evilgenius » Sat 31 Jan 2015, 12:40:14

You're right. I don't understand how you can think that money can be kept on a leash like you seem to propose. Nor do I see how, simply because it is out of your control, that it has to be engendered by a conspiracy of bankers. The simple truth is that the value of money is based upon the faith of the people. Whether that faith is registered in the complexities of markets, in the voodoo of market dynamics representing what everyone believes about the value of something over time and somehow pulled out in a quote at any one time, or in the actions of people borrowing and, therefore, causing expansion of the money supply based upon their faith represented in that action the value of money is always based upon what people believe it to be.

Being based upon the faith of 'the people' and not one man, money can never go onto a leash for any one man. If you seek to understand it that way, if you fall in love with it like that, you will always see a conspiracy or cabal or whatever behind its machinations. It's simply a tool that we use to communicate our faith to and with each other, and that not necessarily in the value of the instrument itself. Often it represents our faith in each other, in the direction our society is taking or in the possibilities we see in our collective futures.
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Re: The myth of the money multiplier

Unread postby Ibon » Sat 31 Jan 2015, 14:23:10

I am admittedly somewhat naive over the workings of economies and money as it is not my area of strength knowledge wise but I was thinking about what would happen with a severe economic depression. No doubt the poor would suffer most as always has been the case. In reference to the severe disparity we see between the rich and the poor am I right in assuming that the vast amount of wealth from the 1% that make up this disparity is really fictitious fiat paper wealth tied up in hedge funds and all the other financial fancy instruments. If this is the case won't we see in the aftermaths of a severe economic correction a degree of a more level playing field in terms of severe disparity as it would seem that the major loss will be paper wealth as apposed to physical assets.

On the other hand there will be the ability of the 1% to buy up all the physical assets which will depreciate as a result of severe economic contraction and failed businesses, farms etc.

On one hand I can imagine a contraction of disparity and on the other hand I could see a further consolidation of wealth as a result of a severe depression. How do others see this? Just curious.

Sorry if this question if off topic. I was looking for a thread to post this and it seemed the most relevant.
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Re: The myth of the money multiplier

Unread postby evilgenius » Sat 31 Jan 2015, 16:05:38

How is money ever fictitious? Isn't that only when the people lose complete faith in it, like in a hyper-inflationary spiral? It certainly is not under deflation, when there isn't enough of it to go around and everybody, for various reasons, would like more of it.

The only way to address income inequality, which is a whole different thing than wealth inequality, is to do something to further mature the way we go about understanding all of the ways that money flows within our systems. Insofar as all equality is a result of a further maturity, which respects people at every level, the flow of money through the instrument of the corporation can undergo change. And not that whiny faux communist change that so many expect, as derived from those tragedy of the commons arguments. Those arguments don't respect money as a thing invested by people at different levels of expectation in relation to their circumstantial identity. They can see 'stakeholders' alright, but they can't see how those who want a corporation to function philosophically one way (say to pay more dividends) ought to have a voice within that corporation against those who desire a different direction (say to raise EPS) without having to sell their shares in order to get that outcome, or to have a voice for their position. Figuring this out is how you can address income inequality because figuring this out is how you address how competing interests for the proceeds of a corporation can all get what they want without it being a winner take all forum. This is important because it assumes participation by any investor, not just those on the side of the majority who can decide who is on the board, can result in that investor getting what they want from that company inasmuch as they invest wisely.
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