[Pops]

that is our fiat-fractional reserve system money creation is dependent on bank loans ie GROWTH.

My assertion is growth only happens in the rare case where population and surplus energy meet. Let me try another experiment.

Lets say I borrow $100 to start a flint knapping business at $10 interest
The bank creates $100 out of thin air, Mr GrenEyeShade adds it to their asset column and debits me some paper

I buy 100 bucks worth of flint with the paper and go to knapping and sell out for $120 creating enough value to pay back the loan and $10 interest and still have $10 profit

The bank adds it to the debit column and subtracts the loan from the asset column - poof, the hundred bucks is gone - didn't exist before, doesn't exist again.

Where did my profit come from?
From the value of my labor (resource+labor).

And what happened to the flint/arrowheads?
The flint/arrowheads are consumed: lost, broken, dulled, discarded

And what happened to my profit?
Consumed or used for the next flint boulder

But where did the $20 come from - HaHA!
It's just paper, just an abstract representation of value, it was there all along, Pops just didn't have none.
No new $20 bill was created to give me, the arrowhead buyer received it for some value he created and passed it along to me. I just passed along half to the banker and half to the bartender. The banker passed off his $10 to pay for his Cadillac and the bartender did the same... The $20 was there all along by common consent, it is just a facility to represent value as a convenience. We don't all want what the other has to trade and certainly not at the same time and definitely not in appropriate amounts so we use a representation of value.

But why doesn't the economy grow? It might in the short term, while everything - $20 bill, the loan, the flint, the arrowheads, the cadillac, still has value but in the long run it is all consumed. Obviously the money, just an abstract symbol of value that was creates off screen - stage left, passes through all our hands and exits stage right. It was just a symbol of convenience, an abstraction. And further, it is self regulating in value. One only has to look at the current value of the dollar, which, if you are to believe a gold bug, is as debased as a Weimar Mark, to realize that try as they might, the Fed just can't control it.

Obviously that leaves out the whole bit about productive assets, return on capital, etc, but you get that.

--
I'm reading a book about the collapse of fiat money called, imaginatively enough, "paper money collapse." It is all about how great gold is and how terrible paper is. Obviously it is not meant to be objective, to say the least. The book is not in any fashion about Limits, end of capitalism, etc, it is straight ahead conservative (nominally "liberal") economics. And of course like has been happening since '71, it predicts the collapse of debt, fiat money and whatnot just because it ain't conservative.


But one point the author makes fairly well is that the value of money is self regulating. He emphasizes it emphatically because it is his main argument agains soft money. Essentially he says if there is a high demand for money, its value rises (and asset values fall - deflation) and of course if there is too much money in circulation for the demand the value of money falls (of course asset values rise - inflation) and that explains away the whole Keynesian argument that governments should hold the levers on the money supply and decrease the value of money (increase the supply) to ease recessions.

--

So, what happens if everything unwinds this afternoon and all those bank entries turn to pumpkins?

It's all imaginary, it all just goes poof.
Unless the government tries to make everyone whole the columns just cancel out and those with clear title to physical assets (including gold, btw) have something and those with clear title to entries in a column have, well, nothing.

[Pops]

You don't need to explain the rest.

You merely need to understand what you just described, what just transpired. The bank not only adds interest to the loan, it now has $110 dollars in its receivables, its new assets. The aggregate money supply of the nation just grew. MI, M2, M3 got bigger huge giguntus in fact.

So?

[Pops]

The bank can immediately lend out another $107.80 ($110-$2.20, the the required fractional-reserve requirement) in new loans.

Ah Pete, I didn't expect that from you.

The fractional reserve requirement is a portion of liabilities, not assets.

Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.

They are required to hold a portion of demand deposits, in other words, so obviously the amount of loans are limited by deposits, not loans. Currently 14.5% if I'm reading this right:
http://www.federalreserve.gov/monetaryp ... rvereq.htm


The point of a bank, aside from having a big safe, is to match savers with borrowers, charge interest to borrowers, keep some for itself and pay the rest to the saver. A Ponzi would not make enough from borrowers to pay savers and would dip into principle. From my experience, borrowers pay a LOT more than savers receive so I can't figure out where the whole ponzi thing comes from anyway..

Again, since a bank actually makes money from all those loans, it has no need for new loans (to pay saver's interest) except of course a desire to receive the income to buy a newer Cadillac.


As far as safety if that is what your concern is, if a bank made just one loan, just one, from a demand depositor's funds (keeping all those funds on hand, in the safe, of course), that bank would not be able to redeem every deposit it held if it were asked to do so. You could say they can only loan out of time deposits, not sure how much it would reduce the reserves available. That is called a full reserve bank I just read and if that is the kind of bank you want, one that merely has a big safe and a security guard, I'm sure you can find one for a fee.

As far as future of capitalism and fractional reserve goes, like anything else there are risks, that is why you earn interest on your deposits. sometimes

[Pops]

Naw, I didn't think you were. I don't think gold is all bad, I've just never had enough usable assets to have any left over for something that just sits there.

[Pops]

Specific amount doesn't really matter to my argument, as I correctly deducted the reserve amount from the assets.

Actually that is the main problem with your argument.

The reserve is a percentage of deposits, not assets.

If as you say, reserves were a portion of assets - and loans themselves are assets - each loan would increase the allowable lending limit. That wold be some kind of pyramid scheme - a pretty amazing one in fact considering how obvious it is, LOL

But it is not true.

The limit to loans is a percentage of deposits, not assets. The only way for a bank to increase it's loans is to increase it's deposits.

Because, again, loans can only be made up to 85% of deposits.

But that is not the point of my post. The first loan and subsequent loans (smaller because of the reserve requirements) are still the cause of money creation/future bank receivables.

No wonder people think it is a big scam, LOL It may be a scam but not because of this.

I'll just repeat, pete:
If a bank wanted they could make one big loan up to 85% of deposits - but that is the limit, they could make no more. Then they are done because the limit is 85% of deposits. Or they could make a million loans, as long as they didn't loan out more than 85% of deposits.*

A simple balance sheet would say
Assets:
Loans + capital + reserves

Liabilities:
Deposits + owners equity

(I'm no accountant so I stand to be corrected.)

*(btw, there are no reserve limits that I know of on the percentage of time deposits like CDs that can be lent)

--
In as much as you think you have $100 in the bank but some guy is driving around in a F-350 he bought with the same money, I suppose you could say banks create money but even then it really isn't true, in effect you laoned your money to that sob to buy his truck and the bank just took a cut.
The option of course is the bank puts your money in the vault, charges you a fee to keep it safe and it just sits there.

--

But these receivables (future assets) can disappear without QE or future loans.

Why?

Loans go bad, sure, and the bank loses money. But again, loans are not a requirement for future loans, only increased deposits increase lending ability. People work, create value, pay back the loan with interest from the value they create. I can't figure out what is so hard to understand about the idea that value is created when we work...

- or maybe I can. Maybe because so few of us actually create any real value at work we have lost sight of the concept. I mean I guess I get it, when I do my day job and shuffle some pixels around for a brochure or magazine ad, at the end of the day all I have is some rearranged pixels and some billing hours. OTOH, when I'm working on the house or tending a calf or growing a rutabaga, at the end of the day I can see that I have actually accomplished something of value.

[Pops]

Loans go bad, sure, and the bank loses money. But again, loans are not a requirement for future loans, only increased deposits increase lending ability.

To clarify "the banks loses money" - the reason banks need owner's (shareholder's) equity put up in the first place is to cover that bad debt. That is supposed to cause them to be diligent in granting loans and protect depositors.

Of course In practice, the government (FDIC) covers bad debts and that allows banks to not be as tough in their lending standards as they should be but nevertheless, the "banker" does have skin in the game.

[radon1]

Fractional reserve banking is not some evil conspiracy. It emerged spontaneously and naturally, and long before capitalism got into full gear.

[AgentR11]

And it is far better, and safer for all of us than some pegged instrument "based" on some metal. With even the most modest of depressions, food rots in the field while people starve when you base the currency on something non-flexible.
The gold bugs out there are never going to get their gold-based dollar back.

That said, the QE portion of this thing is how there will be book-value growth, even if and when real growth dies or even sustained real contraction begins. Capitalism and banking don't actually need *real* growth; they only need book value growth; and the Fed has all the tools necessary to insure that book value growth is possible *regardless* of economic conditions. QE is only one of those tools; a modestly strong one, but by no means the most powerful.

[Subjectivist]

I thought this thread was about how fractional reserve banking can save us from hyperinflation. The theory goes something like this, as money floods back into the USA the Federal Reserve merely has to increase on demand reserve requirements to compensate, locking that money up in notional vaults where it lays dormant. Then as the inflation driving money pouring into the country abates they can gradually lower the reserve requirement at a controlled inflation rate of their choosing.

[Pops]

That's pretty good, Sub, had never thought of it.

But, if you look at the link I posted above to the Fed that is exactly what has been happening - the reserve requirement increase anyway:
1999 - 5%
2009 - 10%
today - 14.5%

Although it is more than likely the increased reserves are just QE dollars.

[Pops]

--Loans create money

I sometimes wonder why even go to the trouble of trying to look things up so I can explain them. I thought I explained fairly well that commercial bank loans create nothing, they simply loan out depositors savings.

But you know, whatever.

[dinopello]

Are you both a little right and both a little wrong ? Or, as pstarr says all the time - who cares ?

Who is the authority on this anyway? (not me!)

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased. A central bank may introduce new money into the economy (termed "expansionary monetary policy", or "money printing" by detractors) by purchasing financial assets or lending money to financial institutions. Commercial bank lending also creates money under the form of demand deposits. When banks had sizable reserve requirements (freezing an important percentage of their deposits in mandatory reserves at the central bank) it was said that the process multiplied this base money through fractional reserve banking.

[Pops]

When a commercial bank loan is extended, new commercial bank money is created if the loan proceeds are issued in the form of an increase in a customer's demand deposit account (that is, an increase in the bank's demand deposit liability owed to the customer).

A "demand deposit" account is your savings or checking account.

Not sure a lot of people are taking out loans, putting the proceeds in their savings accounts and then paying 3 or 4 times the interest on the loan than they are getting on their savings account.

LOL

[Pops]

When banks had sizable reserve requirements (freezing an important percentage of their deposits in mandatory reserves at the central bank) it was said that the process multiplied this base money through fractional reserve banking.

Again here fractional reserve does not "Create" any new money it simply makes the money savers deposit available to borrowers.

To not have any lending of savings is called full-reserve banking.