Are those the banks who create money? not the central bank? Deep Question

[DD5]

@JAlanKatz

Similarly, the interest rate is the price of money

No its not! The interest rate is the discount rate for buying future goods in exchange for present goods. The natural rate is the equilibrium price of the time market, not money market. price of money is a Keynesian fallacy.

@JAlanKatz

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

There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?

@JAlanKatz

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.

You are clearly missing the point here. This is not about redemptions, nor is this about bank runs! This is a clear indication that you are misunderstanding Austrian Capital Theory. This is about investments that do not equal real savings (I don’t want to repeat the previous explanation of what real savings means). This is about a mismatch between credit and time preference. If you increase the money supply via credit markets, you will misdirect resources into higher order goods by distorting the natural rate of interest, which does not correspond to consumers time preference. There is no place for MV=PQ in Capital Theory. If you value yourself as one who adheres to science, you cannot use a mystical equation.

You are in no position to take this Rothbard vs everyone else tone, for you are clearly confused about basic Austrian theory. We can thank Horowitz and White for that. They are brilliant in many respects but they have deeply blundered on this matter.

[rimon]

Hi Alan… Thank you for the answer.The reason I was so confused is because of this movie, and they said something we left in the conversation between us.

In that movie, they claim as if they the moment the banks deposit a reserve in the central bank, it can ,multiply the money at 9x (in the movie, from $1111 to $10,000) and after they multiply it, they have the reserve ratio of 10%, which allows them to multiply it y 90X totally.

Look at minute 14 “Money As Debt” http://video.google.com/videoplay?docid=-2550156453790090544&hl=en

As you can see, they claim that what they deposit as a reserve in the central bank, could automatically be multiply 9X.
If I understand right, In the movie, they claim the ratio is opposite. If the reserve ratio is 5%, the commercial banks can lend 95% of the deposit. But for the central bank, it is the opposite. It can lend not 1/20 of the deposits, but 20x the deposits. If the reserve ratio is 9:1 (new money: old money) , then the central bank can multiply it 9 times, and for the banks the ratio means - loaned : kept - 90%:10% → 10% ratio. it is not that obvious.

That is what I really didn’t understand, the source of confusion.

2- Reserves are just the money the bank has on hand. Now, part of it stays with the bank. And part of it the bank deposits in central bank. If I deposited $1000, the bank lent $900. Now, it could save $50 and another $50 save in the federal reserve. The reserve ratio is different thing. How much the banks should put in the federal reserve hands? And what the purpose of it anyway. They could keep it in their bank. What I thought was, that it allows the federal reserve to lend the banks money. The reserve ratio, is also applied on the federal reserve. So they have interest to keep all their savings, in the central bank, so they could lend the maximum from it. In this context – does the reserve ratio of the federal reserve is the same as the commercial banks? They deposited the $100 left in the central bank. Now, in 10% reserve ratio, the federal reserve can lend

3- I asked you where the interest collected by the central bank, goes to. And you answered about the commercial banks, so I re-ask it: When the federal reserve loans money to the commercial bank, and collects interest. Where does this interest, of the central bank goes to. It doesn’t go to the government, right (as you might think since it is “federal”, It goes right back to the commercial banks.

To sum it all that up, the Federal Reserve has three main authorities: 1) Buying or selling securities from the government (Open Market Committee). 2) Set the reserve ratio of the banks, and actually its own ratio. 3) Set the interest rate. Anything else?

[scineram]

@DD5

There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?

That tomatoe and cheese are rotting in the deposit being wasted.

[JAlanKatz]

@rimon

In that movie, they claim as if they the moment the banks deposit a reserve in the central bank, it can ,multiply the money at 9x (in the movie, from $1111 to $10,000) and after they multiply it, they have the reserve ratio of 10%, which allows them to multiply it y 90X totally.

Look at minute 14 “Money As Debt” http://video.google.com/videoplay?docid=-2550156453790090544&hl=en

As you can see, they claim that what they deposit as a reserve in the central bank, could automatically be multiply 9X.
If I understand right, In the movie, they claim the ratio is opposite. If the reserve ratio is 5%, the commercial banks can lend 95% of the deposit. But for the central bank, it is the opposite. It can lend not 1/20 of the deposits, but 20x the deposits. If the reserve ratio is 9:1 (new money: old money) , then the central bank can multiply it 9 times, and for the banks the ratio means - loaned : kept - 90%:10% → 10% ratio. it is not that obvious.

That is what I really didn’t understand, the source of confusion.

I dont understand it either, but unfortunately I couldn’t get the movie to play. As such, I can’t evaluate that part of the question, only give my understanding of how the process works.

@rimon

2- Reserves are just the money the bank has on hand. Now, part of it stays with the bank. And part of it the bank deposits in central bank. If I deposited $1000, the bank lent $900. Now, it could save $50 and another $50 save in the federal reserve. The reserve ratio is different thing. How much the banks should put in the federal reserve hands? And what the purpose of it anyway. They could keep it in their bank. What I thought was, that it allows the federal reserve to lend the banks money. The reserve ratio, is also applied on the federal reserve. So they have interest to keep all their savings, in the central bank, so they could lend the maximum from it. In this context – does the reserve ratio of the federal reserve is the same as the commercial banks? They deposited the $100 left in the central bank. Now, in 10% reserve ratio, the federal reserve can lend

The purpose of having an account with the federal reserve is, officially, that this is how the reserve ratios are enforced. In your example, suppose the reserve ratio is 10%, so they have to keep $100 for the $1000 you deposited. The way that the Fed ensures that they do so is to require them to deposit thet $100 in their account at the Fed. If they want to keep $50 on hand, they’ll have to refrain from lending $150. Now, another “benefit” (for the banksters) is, as you say, it allows the Fed to lend money out without printing money (which is actually a benefit to us, too, to the extent that they do it.)

@rimon

3- I asked you where the interest collected by the central bank, goes to. And you answered about the commercial banks, so I re-ask it: When the federal reserve loans money to the commercial bank, and collects interest. Where does this interest, of the central bank goes to. It doesn’t go to the government, right (as you might think since it is “federal”, It goes right back to the commercial banks.

Sorry, I misread your question. According to Fed propaganda, the money it earns, whether through interest on these loans or on the bonds it owns, is used for operating expenses - salaries, building upkeep, and so on. Theoretically, any surplus at the end of the year goes to the Treasury. (Another interesting note - the Fed Chief is supposedly not allowed to invest his own money in securities. I say supposedly, because there was a minor wave of upset, quickly passed over by the media, during the Greenspan years when he mentioned that he indeed doesn’t invest in stocks or bonds, much less trade them - but his wife does with their joint bank account.)

[Juan]

@Joshua

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

I can’t believe you’d say that.

[JackCuyler]

@scineram

@DD5

There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?

That tomatoe and cheese are rotting in the deposit being wasted.

That is ignoring the inherent subjectivity of value. You don’t get a say in how I use (or don’t use) my property. I prefer that my tomato and cheese sit in storage rather than being used by someone else. There is no waste.

[Bostwick]

@JAlanKatz

@DD5

Here we go again with the Crank Equilibrium theories.

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…

You misrepresent us.

We trust the market to punish fraudsters.

Otherwise, good write up on the Fed.

[Bostwick]

@scineram

@DD5

There will be no shortage! The interest rate will rise until demand equals supply. What is you complaint here exactly? The people have not saved enough tomatoes and cheese?

That tomatoe and cheese are rotting in the deposit being wasted.

Idle money is not wasted. Otherwise we could spend ourselves into prosperity.

[Juan]

What ? We can’t ?

[Caley_McKibbin]

Keynesians always argue that without fractional reserve lending there would be less growth, as in “lining up to get supplies”. Aside from other refutations of that, bank lending per se is not even necessary for financing industrial expansion. There’s this thing called the stock market. They clearly don’t understand that anymore than anything else.

[Caley_McKibbin]

On another note, I read some article a long time ago that there was some cheat of the reserve requirement discovered around 2000. Can’t remember where, though.

[Caley_McKibbin]

Oh. Also, “money as debt” is a kook show. Obviously put together by the usual conspiracy nutters. Money is not debt. It’s sort of a caricature of Money, Banking and the Federal Reserve, which is what you should watch instead.

[rimon]

In fact, it is debt.

think about it.

99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. → every dollar in the market is acually is part of a loan → every dollar actaully has interest with it = Money IS debt. got it?

[DD5]

@rimon

In fact, it is debt.

think about it.

99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. → every dollar in the market is acually is part of a loan → every dollar actaully has interest with it = Money IS debt. got it?

Most of the money injected by the central bank is done through what is called Open Market Transactions. That is, the Fed buys Government Securities or any assets it wishes from the Public. Those securities are bought with newly created money. No debt!

[scineram]

@JackCuyler

That is ignoring the inherent subjectivity of value. You don’t get a say in how I use (or don’t use) my property. I prefer that my tomato and cheese sit in storage rather than being used by someone else. There is no waste.

Then put in a safety deposit box.

[rimon]

Just want to tell you thank you for the answers. I could not understand it without you.

regarding what you said: "I dont understand it either, but unfortunately I couldn’t get the movie to play. As such, I can’t evaluate that part of the question, only give my understanding of how the process works. "

Go to google video, and search for “money as debt”. it’s around minute 13.
I explain you what I understand -

the ratio the central banks can lend money to the banks, is needed a conversion.

let’s say the reserve ratio is 10%. it is actually a ratio of: 10% kept money : 90% kept money - 1:9 reserve ratio.

Then, the central bank looks on the 1:9 ratio the opposite 9:1 9 new money: 1 old money. so it lends the banks on every 1 dollar reserve, 9 dollars.

If the reserve ratio is 5% - 1:19. the banks can get 19 dollars, actually new dollars printed, on that 1 dollar reserve.

I’m pretty sure that that’s the way it goes, because I checked what the movie claims here in Israel (we have, by the way, 9:1 ratio, or 10% reserve ratio).

By the way, in the personal leverl, how long are you studying Economics and Austrian Economics, and if you put it into a practical use?

[rimon]

“Those securities are bought with newly created money. No debt!”

It’s good that we agreeing that what the commercial banks create, IS debt. By the way, most of the money that in the circulation, is created by the banks, not the government, by loans. in fact, the movie I mentioned (money as debt) says that 95% is created by the banks.

What about the government? well, the federal reserve loans money to the government. not gives.
As I understand, it is part of the national debt.
and U.S. is paying the income tax for that purpose, (see “America, Freedom to Fascism” or “Zeitgeist”).

Maybe in some countries the government prints money by itself, and it is not goes to the national debt (paid by the inflation tax), and in this case, you are right. but still, most money comes fromt he banks, and it is debt.

[DD5]

@rimon

I’m pretty sure that that’s the way it goes, because I checked what the movie claims here in Israel (we have, by the way, 9:1 ratio, or 10% reserve ratio).

Stanley Fisher, has bought 27 Billion Dollars over the past 2 years. That is about 100 Billion Shekels the Israel Central Bank has created out of thin air in order to buy these US dollars. Those 100 Billion Shekels were injected into the economy not by debt, but buying US dollars from from People holding US dollars who wanted to buy Israeli Shekels instead.

Really, those “money as debt” movies are not a good source for learning how the economy works.

You are in the right place though.

@rimon

what about the government? well, the federal reserve loans money to the government. not gives.
As I understand, it is part of the national debt.
and U.S. is paying the income tax for that purpose, (see “America, Freedom to Fascism” or “Zeitgeist”).

Maybe in some countries the government prints money by itself, and it is not goes to the national debt (paid by the inflation tax), and in this case, you are right. but still, most money comes fromt he banks, and it is debt.

If the Fed lends at 2% interest and the commercial bank at 5% interest, then effectively, the end result is that money was given as “liquidity” for the bank to earn 3% on it. The 2% paid back to the Fed goes out of existence back to where it came from. The term “interest” here is really being misused. It is not interest in the traditional sense of the word. It’s more like a valve on a money faucet, which the Fed plays with to get banks to take more or less money. That is all. It is meaningless to talk about interest when there is no real savings involved.

Also, most of the new money injected into the system is done by open market operations, as I explained before (Like Fisher buying dollars).

Also, if the Fed lends money to the government, the interest on that loan is refunded into the treasury department. It is true that tax payers are repaying that loand + interest, but it’s the government who’s doing the theft. The Fed just provides the service of complicating the process.

If you are serious about educating yourself about how it all works I would suggest for you:

For start, “The Mystery of Banking” by Murray N. Rothbard

Also for a more in depth book on banking and also Capital theory, I hear that “Money, Bank Credit, and Economic Cycles” by Jesus Huerta de Soto is very good.

[Caley_McKibbin]

@rimon

99.9 % of the money right now in the market is created by the central bank (loaning to the banks or government) OR created by the commercial banks. → every dollar in the market is acually is part of a loan → every dollar actaully has interest with it = Money IS debt.

The second half is wrong and the conclusion is non sequitur.

When you say that A is B, that means there is no difference between A and B. Following from that, A cannot exist if B does not exist. If money is debt, debt cannot exist if money does not exist and money cannot exist if debt does not exist. Obviously absurd.

[rimon]

“Stanley Fisher, has bought 27 Billion Dollars over the past 2 years. That is about 100 Billion Shekels the Israel Central Bank has created out of thin air in order to buy these US dollars. Those 100 Billion Shekels were injected into the economy not by debt, but buying US dollars from from People holding US dollars who wanted to buy Israeli Shekels instead.”

You are right… this form of money created is not with debt. this is what is called “imported inflation”. Like what is going in China.
Petter Schiff always says that U.S. biggest export is inflation, which is funny but very true. Think what happens when the dollar will tank rapidly, and all this inflation will be imported back to U.S. this is overwhelming, and can happen in days.

about the how much money comes from the “open market operations”, I have no data for how much the banks create and what portion comes from the government securities. So I really can’t say. if you know specific number (Like what the movie claim - 95%-5%), I’d like to know. for me, it make more sense that the most comes from the banks although it is not a monetary base, but revolving credit.

… and I still think it is an interest, but this is semantics, and my personal view. can’t argue with you.

“Also, if the Fed lends money to the government, the interest on that loan is refunded into the treasury department.” I’m not sure about that. I pretty sure that U.S. pays interest to the internation banking for money it’s can print by itself . a conpiracy, I know, but from my research this is my belief and conviction.
I wish that you are right and really the income tax does not goes to pay the interest, but is used in government expenditure.

Thank you for the book, by the way. I will read it. Look at the movies I suggested, they are facinating and you can find them on Google Video.