Until now I thought that the central bank is loaning the banks money at the discount interest, and they to the borrowers. So central bank → banks → borrowers. in other words, the central banks are those who really create the money, and the government (at least where the central bank is in the hands of it) is taking low interest from the banks. that is why, interest rate by the central bank is so important.
What this is saying, is that banks can multiply the base money (in the past, gold, now resrve money), by 100 times. They claim that banks create 95% of the money, the government only 5%. which means, COMMERCIAL BANKS create new money and not the government. and the the one who create inflation.
It doesn’t make any sense to me, since:
why the interest rate is so important, if the banks can creating new money by themselves? they do not need to borrow money from the central bank anyway, so it wouldn’t have any serious effect. let’s say it 5%. who cares? they can lend in 2%, it doesn’t matter, they create it.
In my place, in Israel, we have in the last 20 years about 4% inflation (my estimation based on the changes in prices). if the banks could create 100 times the money, + the government prints is own money as taxation, how it could possibly be 4%? doesn’t make sense.
Why I hear Austrian Economics warning that the Government deficit will result in inflation. It’s anyway, mostly, been created by private borrowers… not the government prints money. if the government will print like 2 trillion dollar to pay the Chinese, still private borrowers can borrow more all over America, and by that creating more new “money” (currency), in the supply
do you get my point here?
There is no doubt that new money (currency) ic created when a new loan is being made. the question is, does it come from the central bank, that charge interest from the banks (it fot the power), or if it comes directly from the banks themeselves.
Yes it’s the commercial banks that create most of the money that comes into existence through credit expansion. The Fed regulates how much money banks are allowed to create. Since under normal circumstances a bank will always create as much money as it can, the Fed is effectively the real money creator.
thank you for the response.
In other words, what you are saying is that the banks CAN’T create as much money as they want, as the movie suggests.
The second thing is, are the banks create their money out of a thin air, or the money they create they actually lending from the central bank at the
discount rate (which today is actually nothing in U.S). as I explained, it doesn’t make any sense based on the economic history (inflation level, dependance ofn interest rate of the central bank) that they create it. it make more sense they lend it. but this movie claims otherwise.
I think they got it wrong in the movie. it not just the power in the handsof the banks, but it is shared with the central bank.
The second mistake, I believe they made, is claiming that the banks can keep multipliying the money they create 100 times, not just 9 times.
It doesn’t make any sense. Tell me if I right. If I deposit $1000 at a bank, it can’t multiply it. It CAN convert those to $100 central bank note.
On;y central banks notes are enabling the banks to create new money, in the ratio of 1:10. but nothing more, as the movie claim (minute 15:00).
No, they don’t technically multiply it (i.e., create new bank notes) but what they do is loan your money to someone else, all-the-while pretending that it’s still yours. They use your 1000 to loan out something like $900, and so on.
So what would happen without the Fed or a similar central-banking system? The banks would be in competition, and a bank that creates money beyond the demand for holding money from its depositors would quickly be subject to a run, or its competitors can simply accept its notes at face, stockpile them, then go in demanding payment for the notes - thus shutting the bank down.
The Fed prevents this in a few ways. First, they’ve made it such that the underlying money simply is the same thing as the banknote itself, thus rendering moot the question of covering the bank notes. There is no backing, and essentially there is a paper standard. Second, by being essentially a cartel, removing the banks from a competitive situation. Why don’t other banks break this cartel? First, because of legal tender laws - since legal tender laws force us to use banknotes as money, there is no real way to bankrupt them by the method described earlier. Second, because of the privilege given to Fed member banks, thus enabling them to quickly outcompete rivals.
Thank you JAlanKatz,
that was an excellent answer. It really a conspiracy of the government, the banks, and the big lenders against the people. essetially, the most powerful forces in the society are involve in this scam, and combining with the fact that the avarege person can hardly grasp it, espacially with no teaching at school or university, that explains a lot.
Anyway, my question really was technical, about exactly how this ingenious system works. As you can re-read, it was on the specific relations and autorities the commercial banks and the central banks (basically government and , although I understood that in U.S. the federal reserve is also basically outside the governement, which is an ADDITIONAL scamming on the top of it.). I try to put it again:
O.k. the banks take the federal reserve note and multiply it by 10 times. But can banks keep multiply the money in the market even more? how much new money can the COMMERCIAL banks can create? (the central bank, as much as it pleases) as I explained, it doesn’t make sense since it would grow inflation much more than 3%. look above.
And one more thing. If I understood right, the banks create new money in two ways: 1) Loan deferal reserve notes, that stays in the federal reserve,
and create 10X against it. but they are (that one way how inflation is controlled)
The second way. They can take your deposits, and lend 90% on them. by that, creating new money since that 90% didn’t exist before. But they need a deposits base in order to lend 90% of them. if someone withdraw their deposits, now they need to reduce their loans. So that is actually the second way the inflation is controled.
Ok, maybe I’m missing something. The Fed has two roles - one to be the issuer of Fed reserve notes, and one to serve as a cartel organization for the 20 member banks. The Fed reserve notes stand for nothing in particular, and to vary their number, the Fed buys or sells bonds to and from the member banks. Suppose the Fed buys bonds from Chase in the amount of $1000, and Chase previously had the minimum reserve on hand - say it’s 10% just for easy numbers. Now Chase can make additional loans in the $1000 cash that has now been added to their reserves. How much can they loan out? $900. But whoever borrows that money will now deposit it in an account somewhere. For simplicity, say they deposit it at Chase (why am I entitled to this simplifying assumption? Because the banks are members in a cartel.) Now Chase has another $900 on hand, and they loan out $810, which is deposited in Chase, which then loans out … This is how we get the 10 times multiplier. That is, the 10 times includes all that the commercial banks create. (By the way, exactly the same thing happens if the original $1000 is in the form of a deposit from my mattress rather than in the form of the Fed creating reserves, except that now the structure is less stable. The same thing does not happen if it is a deposit from earnings, since then it had to be matched by a withdrawal from the employer’s account.) Now do you see also why the Fed contributes only a small amount to the money creation, mathematically speaking? For every $1000 they create, the banks can then create $10,000 - but it’s not independent.
Yes, the reserves are deposited in the bank’s Fed account (the Fed serves as a bank for banks.) And yes, the Fed could vary the reserve requirement, and by raising it could control inflation. Why would it? This is, by the way, one reason to give it a government-sounding name. It then sounds plausible to people that the Fed can regulate the member banks. In fact, though, the Fed is composed of the member banks - for it to be expected to regulate is silly.
Actually, as you noted, the banking system as a whole can loan 1000% on them (at 10% reserves, which is far higher than the system is at currently.) But yes, they need a deposit base, and if someone withdraws their money, they in theory need to reduce their loans. Why in theory? Because that money is going somewhere, and most likely, whoever borrows it will deposit it. If it’s at the same bank, then at the end of the day, everything is still good. If it’s at a different bank, at the end of the day one bank will have too many reserves, and one too few. Then the one with more reserves will lend overnight to the one with less at the overnight rate (set by the Fed) and the loans remain. In a non-cartelized system, on the other hand, they’d have to run around trying to call in loans - and thus learn not to overextend themselves that way. The only way that withdrawing money can actually reduce the reserves in the system overall is to put it in your mattress - or to buy gold. Notice that the Patriot Act required gold dealers to report their sales of gold - now why would they not want people buying gold…? You might ask - what if I withdraw money and spend it in foreign markets? Notice that the actors in those markets have traditionally bought a lot of bonds - from the member banks, thus putting it right back in. Notice also that countries which threaten that system by selling oil in Euros have a tendency to be invaded.
Thank very much for your thorough answer. I think I got it now, finally plus, a few comments.
I probably misunderstood. They banks create only 10X new money.
Tell me if I got it right this time - they really lend in a ratio of 10:9 ($900 on $1000 deposits or loan from the central bank), but EFFECTIVELY, since it is in a loop system, it is actually 1:10.
and one thing to make sure - I thought the federal reserve has his special notes that it loans to the banks, and I now understand that the reserve is just simple money. they can take simple deposits and put in a reserve.
About Reserve Ratio - the reserve ratio his actually: base money: new money created by the banks. If I understand it right, the reserve ration is 10:9, which is effectively 1:10, right? I mean, the banks need to have a deposits of $100,000 in order to lend $90,000 (10:9), but effectively, because it is in a close loop, they can lend $10 on $1 reserve, so it is 1:10.
by the way, you said: “at 10% reserves, which is far higher than the system is at currently.” What is the reserve ratio today?
About Inflationary Effect. The reason that the inflation in only 3% although the money supply has effectively grown by 10 times, is because most of the new created money, is outstanding credit, and not in the circulation. right?
By the way, I just learned that there are two types of “moneys” - monetary base (money in circulation), and revolving credit. I guess that the above example is revolving credit, and results in lower inflation.
If the government prints 10X the money supply, it affects the monetary base, and results in inflation of 90 percents, actually 91 percent (yes?).
About the fed borrowing money to the banks.
the money the commercail banks are getting from the Fed (in the discount rate), is loaned to them,right? I mean, they pay interest on it.
Now, where does this interest go to? back to the banks? and only to make the illusion of “regulation” and federal control?
If I understood it correctly, if everyone withdraw their money, the banks cartel will go bankrupt since they could not, by the system, lend and more money and soon be out of business. But I guess that then the Fed would probably lend them new money, and prevent it from happening.
(OR Obama will probably bail them out, saying they “too big to fail”, since they financed his campaign)
You said also “The only way that withdrawing money can actually reduce the reserves in the system overall is to put it in your mattress - or to buy gold.”.
I don’t think it is the same. the gold miner will get the money and return it to the system.
It hurts the system in a different way, that people by gold, which is by pushing up the price of gold , and by that reduce the market value of the cartel notes, aka U.S. dollars.
Last thing, really..! - about the relation between the central bank and government. the fedral reserve lending money not only to the commercial banks, but also to the government, by that allow it to spend more than it could (I actually understood that the income tax is used to pay that debt).
I just wonder if the money the federal reserve lends, is in the official deficit, or, where it goes. and if you know how much money the government owes to the federal reserve.
P.S. you know, I think that here in Israel it’s a bit different. the central bank is in the hands of the governement, so I believe. and the government is controlling the cartel banks. So it may be a fraud of the government against the people, in this case. But it is better, I think. at least it spent as tax, and not going directly for private hands.
Assuming a 10% reserve requirement, the math works this way:
Deposit $100 (smaller numbers for simplicity this time)
Lend 90 - system has 190
Deposit 90
Lend 81 - system has 271
and so on
So here’s the formula:
Sigma (.9^n)x; n=0, inf
Which works out to 10x
Reserves just means the money that the bank has on hand. The way they hold that money is to deposit it in their own account at the Fed, which is a bank for bankers. When the banks need loans (because they find at the end of the day that they don’t have enough reserves) they borrow from each other. If they all need loans, they’ll borrow from the Fed - which will lend based on the money deposited in it by the people who are borrowing the money!
The reserve ratio is what portion of deposits you are allowed to loan out. If you view it as you suggest, then yes, a 10% reserve requirement amounts to a base money:new money ratio of 10:9, meaning that you have to have 1 on hand for every 10 you loan out. I think the base money/new money terminology is a bit confusing, though, since one aspect of our system is that there is no distinction between base money and new money - it’s all the same kind of thing. This is a huge difference between commodity-based free banking with fractional reserve and a fiat system with fractional reserve that’s sometimes glossed over. If I wanted to maintain a reserve of 10% in a commodity-based system, I’d be writing 100 notes for 10 ounces of gold - they’d be of different form. I would not lend out 100 ounces of gold for 10 ounces of gold - that would be physically impossible. But in our system, we deposit USD, and they loan out USD.
Last I checked (admittedly, some time ago) it was around 5%. However, I wouldn’t expect it to move much since the Fed stopped using it as a major instrument of monetary policy some time ago, and focused on other methods of controlling the money supply.
I don’t put much stock in the government figures, or in this kind of distinction. On that 3% figure, though, remember that the 10 times growth is constant. The fact that the system inflates money that way is not constantly felt. Whenever money is deposited, the money supply grows by 10 times what is deposited. That’s not going to figure into today’s inflation figure, though, it’s already happened.
What ends up happening is this - today, Chase is $100 short at close, and it borrows from Citi at the discount rate. Tomorrow, Citi is $100 short at close, and it borrows from Chase. The interest largely comes out in the wash.
Ok, everyone withdraws their money. Now what? Let’s chase it through. Point one - not everyone got their money. How come? Because deposits were $100 for every $1000 that appears on the books. So the bank pays 1/10 of what it’s supposed to, and gives out IOUs for the rest. Point two - the banks still have loans outstanding, and now have 0 deposits, making for a reserve ratio of 0, which is below the requirement. Each bank, not aware that this is a coordinated event, wants to borrow from another bank. Can’t be done. So all the banks want to borrow from the Fed. The Fed can only make loans on the basis of its deposits - but since all banks have 0 in reserves, the Fed has no deposits. So what can be done? Well, assuming everyone hasn’t also cashed in their bonds, including foreign bondholders, the Fed can inject a large amount of reserves into the system by buying bonds that are held by the banks and printing the money to buy them. So assume that, at the same time that everyone withdrew their money, they also cashed in their bonds. Now the banks, if they don’t file for bankruptcy, have to call in their loans to pay their depositers. Of course, only $100 left the banks in cash, and they’re trying to call in $1000 in loans, so they’ll get back…1/10 of the loans they call in. Now they have to foreclose on the loans, and now the banks own…pretty much everything in the country. But they then have to liquidate everything in order to pay their depositors, who then use the money to buy back what they lost when their loans were foreclosed… In the end, we have a much more rational allocation of resources - things go to depositors and are lost by people who bought things they couldn’t afford. It all works out pretty well. In reality, though, instead the Fed bails out the banks and prevents this from happening.
Yes, good point. Thanks for pointing that out.
I don’t know how much the government officially owes to the federal reserve, but I don’t think the Fed loans directly to the government. Instead, the Treasury issues bonds, which are then bought by banks, individuals, companies, and so on. When a non-bank buys a bond, they frequently have a bank hold the bond. The Fed then buys the bonds from the banks, both the bonds that the bank owns and those that it holds. How much they spend buying bonds at any particular time is under the direction of the board of governors, and is called “open-market operations.” By buying or selling bonds, they influence the reserves in the system (with every dollar they spend on bonds generating 10 dollars of loans) and hence move the interest rate to their target. So the money that the Fed “lends” to the government is simply the amount that it spends on bonds, and is counted together with all the outstanding bonds, not reported separately (as far as I know.) If the Fed were audited, we’d know exactly what it’s holding in bonds. Now, in theory, the Fed is independent and thus makes the decision as to how much debt to monetize isolated from politics. In reality, as Arthur Burns put it, the Fed does what the President wants, or else it might lose its independence.
I don’t see the advantage. What does the government do with the money - certainly spend it into private hands, no?
Here we go again with the Crank Equilibrium theories.
If I am holding money, I am investing in money! Lending it out defeats this purpose.
Fractional Reserve Banking is inherently inflationary (defining inflation as an increase in the money supply). There will be more money channeled to investments then real savings. The interest rate will be artificially lowered. There will be a boom and then a Bust. If Banks want to profit in the absent of a Central Bank and an FDIC type welfare programs, then don’t expect banks to be creating much money.
After spending a lot of time around Austrians who somehow want to prevent banks from lending at fractional reserves, I am no longer at a loss to explain how others can trust the free market in all things except defense. After all, if Austrians can trust the market to do all things except money…
I have no idea what this is supposed to mean in this context. How is this a response to my pointing out that, in competition (as opposed to a cartel), competition limits the ability to print more notes?
Well, sure, if you define things that way. But it’s not particularly useful to prove things by definition. Defining flying as removing oneself from the ground, I fly whenver I walk - but I cannot use this as a proof that I can walk to Japan. Why not? Because the statement “it is possible to fly to Japan” relies on a different aspect of flying. So, yes, defining inflation as an increase in the money supply, fractional reserve banking is inflationary. But the demonstration that inflation increases investments over real savings relies on inflation meaning an increase in the money supply in excess of demand to hold money. In a competitive banking system, a bank can only increase money supply in response to an increased demand for savings - hence the created money goes into savings, maintaining the equilibrium. On the last sentence, it’s funny, I’ve always been convinced that a free market enhances creativity, profitability, and entrepreneurship with calculation. Most Austrians agree, most of the time.
What are you talking aobut?? I defined inflation just so we don’t start arguing about terminology.
No matter how many times you’re going to use this claim about “excess of demand to hold” , it’s not going to get more convincing. You are proving nothing but your own confusion about the issue.
If I save $100 by not consuming that $100, I am investing $100 in whatever. No middle man called a Bank is going to magically multiply it and channel more then that $100 without misallocating resources. I cannot believe we have to argue about this fact. Even If I am holding that $100 (Not investing it in capital goods for example), you can still only loan out that $100 until I decide I want it back. But Fractional Reserve Banking creates multiple copies of that $100.
The word “inflation” is used in two senses - one by Rothbardian Austrians, and one by the rest of the world. If you wish to use the Rothbardian definition, fine - but that definition doesn’t give you the statement “inflation always produces the business cycle.” If you use the definition used by the rest of the world, you get that statement, but you don’t get “fractional reserve banking always is inflationary.” To insist on the first definition, but then make use of consequences of the second, is equivocation.
And no matter how many times 100% reservers insist that they really are anarchists, and really want to have a free society, and then insist on laws (enforced by whom?) to prevent banks from engaging in fractional reserve banking, that’s not going to be any more convincing.
Look at any other market whatsoever. Say, for instance, the cheese market. What do we do when demand for cheese rises? The price increases, and cheese companies increase their production of cheese. We can look at expenditures not just in consumption vs. investment, but other consumption vs. investment vs. cheese consumption. Now, when a person chooses to forgoe $100 worth of other consumption and/or investment, he now puts $100 into cheese. No one can make that into more than $100, right? So the cheese company should not increase its production of cheese, because that person will not put more than $100 into cheese, right - so by making more, all the company is doing is increasing its costs without increasing its revenue. Now, I think that’s an absurd conclusion. If that’s the case, then perhaps we should reconsider the logic of this kind of argument.
Here’s an accounting truism: MV=PQ
Keeping velocity constant, and money supply constant, PQ must be kept constant - so every increase in production must be met by a corresponding price deflation. Now, if Q rises, we all agree that it “punishes” savers. So, falling Q must “reward” savers, and thus is also non-neutral. To allow production increases to drop prices also skews the economy, this time towards more saving. On the other hand, if M is increased with P so as to allow Q to remain constant, we have a neutral monetary policy - depending on how M is increased. If M is increased in a distorted manner, say as is done by a central bank, then any advantages of increasing M disappear. The increase in M must be accomplished in a neutral manner - such as by banks that government doesn’t regulate. (What - arguing for an unregulated market - how unAustrian of me…) Furthermore, how do we go about making sure that the increase in M matches the increase in Q? As Horwitz explains, until M equals Q, producing money remains profitable, but producing money beyond that is not profitable. Oh, wait, so prices provide signals to move economies towards equilibrium? I can swear I heard that before…oh yes, it’s how Austrians explain every market besides money. But didn’t Menger say that commodity money is just another market good? Well, yes, actually.
Trying to discredit me by associating me with Rothbard? I haven’t mentioned him in my converstion with you but thanks for the complement.
So let me get this straight: Horowitz is now mainstream Austrian economics? But anyway you have just associated Horowitz with the rest of the Keynsian world. This is a joke right?
If the $100 goes to cheese instead of ham for example, then $100 worth of resources would shift to cheese. The consumer has changed his preferense from ham to cheese by a value of $100. Your FRB would somehow divert $1000 worth resources from Ham or from whatever to cheese, despite the fact that only $100 worth of resources should have been directed to cheese from Ham.
A truism that is useless for analyzing or predicting anything. It is mathematically invalid. 3 of its variables cannot be properly defined, calculated or measured. You entire passage about this truism is nothing but “planning”. It is Monterism! You’ve simply changed the goal for the price level.
Horowitz is making the same fatal mistake as Milton Fiedman did, among other mistakes. There is no point to even talk hypotheically about adjusting M to any desired Q if the money supply is not dropped from a Helicopter. The whole point of the Austrian business cycle is that money is injected into the Capital Markets, thus creating the temporal misalocation. There is no way to increase the money supply via specific points in the credit marketsand expect the interest rate to reflect time preferense.
By using the MV=PQ to justify an increase in the money supply, you have now joined the mainstream economists who are claiming that investments and real savings need not be equal.
Well, no, actually, I’m just mentioning who uses the two definitions. I tend to think that definitions ought not to carry ideological content, and so someone could, conceivably, advocate a free market in banking and still use the Rothbardian definition of inflation. He could say things like “the rate of inflation ought to be controlled by the market, not the government” and his use would be consistent with his definition. It turns out, though, that generally all and only Rothbardians use the definition you mentioned, while the rest of the Austrians, and the rest of the profession, uses the other definition. I don’t think this means anything in terms of which is “right” and I also don’t think the point of definitions is to be right, it is to communicate. A person is usually best off using terms in their accepted definitions. If you don’t want to, though, that’s fine. But then you have to acknowledge that there might be sentences that everyone else thinks are true, and you think are false, without having any disagreement except about the definitions. An example would be “fractional reserve banking is always inflationary” - which by your definition is true and by the one I use is false. Another would be “inflation produces business cycles” which is false by your definition and true by mine. My objection is to your attempts to use sentences like the last, combine them with sentences like the first, and produce conclusions which play on the definitions of words.
I don’t see what makes either of the first two sentences consequences of what I said. That Horwitz uses a definition that the Keynesians use doesn’t make hima Keynesian. How do you define “purchase?” My guess is I’d get a similar answer if I asked a Keynesian, but that doesn’t make you a Keynesian. I don’t know what mainstream Austrian economics is. My view of intellectual history in the Austrian school begins with Menger, sees development with BB and Wieser - but also failures to grasp Menger’s original thoughts in certain ways, with Mises recapturing Menger’s original insights and combining them with his own philosophical understandings, while incorporating much of the development offered by previous greats. Hayek developed the ideas in a somewhat different (not complementary, not contradictory) direction. These two important strands come back together with Kirzner, who I think identified the sources of tension in Mises (for instance, what is a entrepeurship in Mises - is it a creative action that depends on the individual, or does it depend only on the position of the individual in the market order) and used Hayekian insights about emergent order to put them together. Rothbard developed the normative theory of anarchism and systematized the nuts and bolts of the Austrian system. I have no interest in comparing Kirzner and Rothbard as students of Mises, although it is true that Rothbard cleaves more fully to Mises than Kirzner does. On the banking question, I agree with Kirzner and his students, including Horwitz.
Capital is not homogenous, and there is no such thing as $100 worth of resources. Worth $100 to whom? None of these measurements make sense without assuming such a thing as “the price” of cheese, and so on. The question is the underlying value, not the numbers.
This is indeed Friedman’s mistake - but it’s not the lack of a helicopter that makes it fatal, rather the verb form “adjusting.” Friedman advocates an extra-market force following a long-term rule to increase money supply - in a decidedly non-neutral way as you point out, and doesn’t worry about the short-term discoordination. Horwitz’s point, on the other hand, is precisely that no one in the market cares about, or ought to care about, macreconomic figures. What matters to actors in the market is not adjusting M to match P, but microeconomic equilibrating - that is, reacting to market pressures in order to make money. Money supply in free banking is endogenous, and its suppliers react to the profit motive and price signals just like the cheese makers.
What happens in the inflationary portion of the ABCT? Investments get ahead of savings, causing projects that cannot last until completion. That is what happens when there is an imbalance such that there is more money than is demanded for savings. In the bust, savings have to equilibrate with investments, both through forced savings and disinvestment. What happens if we go the other direction? That is, what if through deflationary policy - such as sending policemen to arrest bankers who react to market pressures and increase money supply - we cause savings to get ahead of investments? Then investments that are economically feasible, and that would have come to fruition, will not be made. Later, there will be forced investments - i.e. consumption goods sitting on shelves since they were made based on an artificially high interest rate, and incentives to unsave - low prices. There is no reason to describe this latter situation as investments=real savings. When do investments=savings? When the market is left free to operate, not by artificially raising interest rates by prohibiting certain types of financial arrangements.
What do free banks have that central banks don’t? Three things:
Different base money from issued money - hence, overissue of notes results in notes being returned for redemption at face value, and the bank suffering loses. With the base money the same as the issued money, as in our system, there is no real redemption.
Competition
Profit motive - this and competition go together. Central banks have political motive, and will continue to issue money beyond the point at which a competitive bank would take a loss.
What reserve ratio should the free bank maintain? I don’t know. That’s why bankers are entrepreneurs. What they will do is watch consumer behavior. If there are more people seeking loans than depositing money, they will lower their ratio. If there are more people depositing money than seeking loans, they will increase their ratio. They will also increase their ratio if there are a lot of people redeeming notes.
The ABCT has a natural rate of interest, from which the market rate can diverge. Yet the assumption among 100% reservers is that the market rate can ony diverge downwards. Why can’t it diverge upwards due to regulations?
This is a strawman again. The argument is over the productivity of FRB in a free market. The fraudulent argument per se is not what I am debating about you right now, although, it is a related topic.
It is because you cannot invest what you had not saved. You are kidding yourself with this exchange equation nonsense. Real savings amount to real tangible goods that have been previously produced and not consumed. You cannot invest tomatoes or cheese that have not been produced. But now we have a system of money and this truth is scrapped away? All of a sudden you bring in the mystical MV=PQ. There is no way to introduce money via credit markets and not distort the interest rate. There is no way that you can maintain the interest rate at the natural rate, that is, the interest rate that is reflecting the true market time preference of the consumers. It is impossible. It is impossible for the simple fact that you cannot save what has not been previously produced.
If you save 2 tomatoes and 2 apples, then that is all you can invest. You cannot invest 4 apples and 4 tomatoes. Yet, now we have a medium of exchange and all of a sudden you bring in an equation that says it is possible?
Make up your mind: Either investment must equal real savings or they do not. There is no middle ground. If it’s real savings that must fuel investment then it’s real goods that have been produced and not consumed.
Anyhow, how are you basing your argument on a purely mystical concept such as MV=PQ. The only variable that is properly defined and measurable is M! The money supply! which is why it only makes sense to define inflation as an increase in the money supply. Any other definition is pure mystical for the simple reason that you cannot measure it. I cannot measure the price level and I cannot measure your equilibrium point for it based on an invalid equation.
I don’t know why I must struggle so hard to convince you that this equation is mathematically invalid. You cannot use it unless you are a pseudo-scientist. Just because you are into economics, does not mean you must make a mockery out of yourself.
Credit expansion in a free banking system will not last. Why? Because of what you had already stated: The profit incentive. FRB would prove unprofitable and would be out competed by near 100% reserves, where time deposits constitute real savings. Only with time deposits, can you actually channel to investment real savings and not distort the natural rate of the market.
The assumption here is that, if banks do not create money, then the interest rate will be at the natural rate. But the natural rate is supposed to reflect consumption and investment preferences. If the banks use 100% reserves, there can be people lined up at the doors asking to borrow money, and insufficient supplies to loan to them. This is not a way to maintain the price at a natural rate. In the cheese market, we recognize that the natural price is the equilibrium price - we do not say that producers are causing the price to deviate from the natural rate by making more cheese than they had before. Similarly, the interest rate is the price of money, and its natural rate is the price at which equilibrium is achieved. But what you’re doing here is using policy to freeze the supply curve, and make it vertical.
Of course, in any other market we don’t worry that you cannot measure the equilibrium point - we recognize that the market process moves towards equilibrium.
Imagine a situation with 100% reserves, and free banking. If I move my reserve ratio slightly, say to 99%, how exactly would you be able to achieve higher profits than I can, if you stick with 100%? It seems pretty clear to me that I can get a higher interest return than you can, and that I will continue to do better as I move to 98, 97, and so on, until I hit a point where, if I moved another percentage point, I’d lose more money in increased redemptions than I would gain in interest, on the margin.
Regarding time deposits - does it matter what the time period is? I assume a year will work - how about a monthly timed deposit? Weekly? Daily? Minutely? A minute by minute time deposit, with the default being that it is renewed, is for all practical purposes a demand deposit account that you’ll let me loan out.