There is nothing to stop anyone from having a time deposit from “spending” the money before the date of redemption. Any CD can be exchanged for other goods or services or could be accepted as a deposit instrument at another bank or sold at a discount in a secondary market so the distinction is all nonsense.
Example, Person A has $5,000 CD due in 4 months. Person A exchanges CD for a car now. Repeat process. So person A is using the money while the money is being loaned out to someone else.
The CD trades at a discount because it is NOT cash. Besides, it’s supposed to be fully backed. You still don’t understand your own position.
Ah yes. Inflating the supply of fiat money is the same thing as mining gold. It’s funny that some people bothered to make a disctintion between fiat and hard money, given that, according to banking/monetary cranks, sorry ! respected economists, gold and paper are ultimately the same thing.
how do you exhcange a cd for a car. Meaning the car dealer will wait for it to mature taking it now at a discounted rate. Either way as you said it’s not cash.
Person 1 (P1) deposits 1000oz gold in Bank 1 (B1). Person 2 (P2) borrows 900oz from B1 and deposits it in B2. P3 borrows 800oz from B2 and deposits it in B3. P4 borrows 700oz from B3 and deposits it in B4. P5 borrows 600oz from B4 and deposits it in B5. And so on and so on.
The above scenario (fractional reserve stylee) takes place within a week quadrupling the money supply (1000oz gold (M0) + 3000oz bank liabilities (M1) = 4000oz). This system of banking is obviously and historically unsustainable with sound money thus the fiat currencies of today.
Compare this to:
Person 1 (P1) deposits 1000oz gold in a long term investment account (5yr) in Bank 1 (B1). B1 decides to invest the 1000oz in Joe Brain (JB) for his Phd. B1 oversees the payment and delivery of gold to Mises University (U1) on behalf of JB. JB graduates within two years and pays back B1 with interest within the next 3 years.
This scenario (100% reserve stylee) creates no increase in the money supply (P1’s 1000oz >> B1’s 1000oz >> U1’s 1000oz = 1000oz). The entire risk is born by P1 and to some extent B1’s reputation for soliciting future investors and JB’s credit for soliciting future loans.
There is not a requirement that the CD trade at a discount since the CD is earning interest. The point being that the time deposit from your perspective is supposed to make the money unavailable for other purposes but that is not the case. If I can buy things now with a time deposit then it is not any different than what you claim is happening in fractional reserve. Maybe you don’t understand your position.
Nothing stops P1 from using the long term investment as a vehicle to make purchases now. The scenario you describe for fractional reserve could just as easily take place with a time deposit. Simply because money has been placed in a time deposit does not mean that holder of the time deposit can not use the value of the time deposit now. As I pointed out you could trade the time deposit for a car now thus using the money while it is being loaned out to someone else creating the very situation you propose is fraud.
The CD is not cash, so it’s very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed.
Besides, notice that in practice such an operation resembles direct exchange/barter and so has the same problems barter has. That is, if you have a $5000 CD you can only buy cars which cost $5000. Not very practical. Buying food at grocery store with a $5000 CD may be even more problematic.
That is the case. Trading CDs is not the same thing as drawing money from a bank account by writing checks, or spending cash.
But you can’t. You can only try to find somebody who is willing to accept a title to a timed deposit. If I go to the bar and say : I want a beer, please accept this piece of paper which you can only cash in a year, I doubt I’m likely to be served as promptly as if I had a dollar (or gold!) in my hand.
What could you buy with a time deposit right now. I want some examples before i accept that a cd can act as cash
It can’t act as cash. Cash is universally accepted. A CD won’t.
The idea that a CD could ever act as cash as a joke. It would mean that saving wouldn’t be saving…
I’m not talking about fiat money. Learn to read.
We have a business cycle. So what?
It doesn’t matter how it effects the money supply, since we can all agree that private currencies will only survive if they provide a desirable amount of inflation. The issue is that the supply of credit exceeds the supply of savings, creating a boom-bust cycle.
If CDs were to become liquid like that, they would function the same as tradable bonds. In other words, you’d be exchanging the CD at a discount for money now and using that money to buy the car. If someone wanted to trade a car for a CD you could do that as well, though it wouldn’t matter since there are different dynamics at work. You’re simply transferring the savings from one person to another, you’re not actually employing a double use of the money.
Whether or not it would act as cash is irrelevant. A liquid CD is no different than a liquid bond. Even if you use a CD or bond to purchase another item is NOT the same as fractional reserve banking. The issue with fractional reserve banking is that when the newly created credit spreads into the economy, it will redirect resources away from investment goods to consumption goods, forcing higher order industries to lose profitability, cut wages, and fire workers. Exchanging bonds has no such effect.
I thought it was relevant to what Max was saying…
Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible.
The CD could be broken down into smaller portions, just because the total value of the CD is one thing doesn’t mean I couldnt break up the value into smaller increments. This isnt even discussing secondary markets where these things are sold bought and used everyday.
What exactly is the difference, I trade one piece of paper with perceived value for some good or service I want. The time to redemption in some physical commodity might cause something to trade at a discount but the function is the same.
That is irrelevant. How readily accepted the paper is doesn’t prevent me from the possibility of using it just like your dollars or gold. In some case I might actually get a premium over the face value of the CD. For example the CD is redeemable tomorrow so quite possibly I could sell the CD at a premium to it’s face value.
Do you really think it’s impossible to buy something with a CD being used as payment? If you had a CD worth $50,000 redeemable in one week and went to buy a $50,000 car do you think the car owner would turn you down because he has to wait a week to get his money?
The only distinction is the time frame for redeemability. But if no one is interested in physical redemption then it functions exactly as the fraction reserve system you oppose. All that has to occur in a fractional reserve system to make it a time deposit system is to have some delay in physical redemption which is what most banks already do.
no i imagine he’d tell me to come bback in a week then i could have my car ya know when i actually had money
“That is irrelevant. How readily accepted the paper is doesn’t prevent me from the possibility of using it just like your dollars or gold.”
That is exactly what it means. So buy this logic if i can get someone to occasionally accept dirt as payment then dirt is now money.
Think about this for a minute, rather than hastily thinking that you have “debunked” something without looking at all sides.
Lets say that Tony buys a car from his local car dealer with a $10,000 CD. The CD is not redeemeble for one year and the car dealer is still willing to accept it. The car that Tony bought was already in existance and built and paid for by the dealer and an automoble production factory. No new product creation happened and the dealer will not be able to efficiently replace that car on his lot until he eventually redeems his CD. All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. The dealer cannot access the money that the CD is entitled to and therefore no money has really been used even though at first glance it appears like it has.