OK THANK YOU SO MUCH!! This information is very helpful, that really helps to explain why the electric money is in so large a proportion.
Besides all this, when we talk of “destroy”, we are talking of paying back a loan with paper money, right?
Also, when the FED purchases assets, there will be an increase in M0, and ususally what will it do with the newly-printed paper money?
When Bank A loses the money to the transfer, if the money is already spoken for in loans, it requires money generation (from a Central Bank) to cover the loans on the tranferred currency, this does assume a situation where all physical cash has loans written on it…
But this was not the focus on the example, it was more on how the money is expanded through credit
What we are entering into here is what will likely happen not the mechanics of the system…
It just works out that there is such a case that happened…
You are coming from a after the transfer case, I am also including before the transfer, if Bank A had the money for a year, and wrote loans, the credit allowance would decrease after the tranfer, but that is assuming that the bank wrote no loans on the money transfered prior to the transfer, but this is also a side issue that I only mentioned in passing durign the expalaination, I am not sure why you are so adamantly focusing on this…
Loans are basically “producing future money”, that is it is money now in exchange for future earnings + interest, so when the future becomes now, that would be when the loan is paid off, the principal in credit “is destroyed” and replaced with the physical money. The real problem is that when the money is there, it is transferred in part to “Future Money” again, the system constantly expands the monry supply, causing a seemingly infinite expantion of the money, especially when you combine it with the loans written on loans…
Distribute it like a crack dealer…
My question is that when it distributes the money to the commercial banks, do the banks later need to pay back the money??
Of course. It is not giving away candy for free.
That would require to look at the contract between the bank and the FED…
I am sure it is like the arangement with the government, pay the interest, do not worry about the principle…
OK, now we’re moving forward, but you’re now positing a change in an exogenous variable. That’s fine, but whether or not it is likely is an empirical question, I’ll address interbank lending later, but the fact of the matter is that it is not of necessity that the CB does create money as a result of a transfer between you and an another individual.
Because in most loan contracts, banks retain the option to call in the loan at a price. Of course, this is an empirical issue and is tangential to the discussion at hand.
If the banks don’t have the money, then presumably they won’t be expanding credit anyway. IOW, if the bank that receives the funds is having trouble staying above the reserve ratio then they wouldn’t expand credit once they have received the extra money anyway. Otherwise it’d be more likely that they expand the credit to another bank since it has a far lower risk attached due to the Fed acting as a lender of last resort. What you’re essentially saying is that in a crisis situation banks that don’t have enough money to extend credit to other banks (the will most likely be bailed out if it is necessary) will for some reason have money to extend it to other customers (customers that due to the fact that the crisis has hit will most likely be very risky), it doesn’t make sense.
You can invoke the CB if you wish, but you’re violating the ceteris paribus assumption that all economic analysis proceeds under. So, ultimately, it is you that is discussing what is “likely” to happen, as opposed to analysis the mechanics of the system.
I’m focusing on it because you’re wrong, and there are too many libertarians who speak wrongheaded economics as it is.
It’s not relevant whether the bank has extended loans on “that money” (which makes no sense, especially not in light of the nature of FRB), all that is necessary is that the bank can borrow from other banks to stay above the reserve ratio.
“So the inflation is two-fold. Firstly, the Fed pushes new reserves into the system via the OMOs in order to try to bring the FFR down. Secondly the commercial banks pyramid loans on the basis of those reserves. So normally if the Fed increases the monetary base (not typically notes and coins but more commonly by increasing the total quantity of reserves in the system held on account with the Fed itself) by 100 billion you might expect an actual expansion of the overall money supply of maybe 1 trillion (in a very simple example).”
this was told to me here https://forum.freecapitalists.org/t/the-actual-procedure-of-creating-money-alt-thread/5380
“You need the Fed to then create money out of thin air, buy assets form banks, to give banks more dollar reserves by which banks can pyramid / leverage / expand more credit (create money) from. Inflation is therefore created and perpetuated by the Fed.”
this was told to me here https://forum.freecapitalists.org/t/seemingly-different-statements-about-federal-reserve-inflation/5402
as i understand these explanations, outside of government currency and coin production inflation is a also a Federal reserve dollar-credit increase phenomenon that is further inflated via fractional reserve commercial banking (pyramiding)…i____f this is true at all.
additionally, this post "F__ED just electronically increase the balance of bank account that sold security to FED. New money, out of nothing.__ FED also takes ownership of the security. That’s it.
"Now, banks have new money that they can lend if they wish so. But banks don’t want to lend and leave that money alone. That money has potential to enter economy. But until banks actually extend credit to people or companies, it will not create inflation."
"https://forum.freecapitalists.org/t/the-actual-procedure-of-creating-money-alt-thread/5380/19
i guess it takes awille for 100 billion dollars to trillion-ize its way through the economy and even longer for the trillion+ to get paid back (the money destruction part?). in the meantime i guess the federal reserve keeps on doing what it does in concert with fractional reserve banking practices in an overall inflationary manner.
www.economagic.com displays an m1 money chart - year 1959 140 billion dollars ; year 2009 ~1600 billion dollars.
i have read that the m1 includes currency and coin, bank reserves at the federal reserve and a few types of demand accounts at commercial banks.
It does if it pulls them under ratio…
If the discrimination suit was not a factor, then yes…
But in the reality of the issue, are things not all the same?
Hey Henry, check out this by Garry North: http://www.garynorth.com/public/5119.cfm
The core concept of the article is that an increase in monetary base will eventually and inevitably leads to inflation, because even you do not spend the newly received money and instead deposit the money into a bank, you are still creating inflation, and probably even more inflation due to the fact that the money deposited in the banks HAS TO BE lent out in order for the banks to stay in business (they have to pay the interest for the deposits, and they are able to do so because they lend money out to profit from the rate difference). Also the money you spend will be deposited by someone else. However, my question is that in a Bank Bailout scenario, new money is going to be injected into the banks, but do they have to pay the money back later? If they did not have to, they would not face the pressure to lend out the money, so that would not cause too much hyperinflationary pressure. Please correct me.
Thanks!!
This is fundamentally correct, depositing money in a bank will make the bank offer more credit, it works out fine if they offer credit to entities (individuals, businesses or banks) that have an ability to pay, but it is a wash realistically, because eventually money hits banks unless it is stuffed under your mattress indefinitely.
If we take the cue of what happened in America, the government is refusing to allow the bailout recipients to buy back their shares, in other words pay back the bailouts, I believe, and this is opinion, that the federal government is looking to do a final sweep of nationalization in the United States, swallowing up either by bailout or regulatory sabotage all production in the US…
I do nto have to correct this, injecting money into the system will eventually blossom into a hyperinflationary event, I can’t wait for the $1,000,000,000,000,000,000,000 US Note (Sarcasm Alert) when the US does it, we go all that way baby!!!
Harry Felker, you may well be correct, but it’s not really relevant. In your original post that I responded to, there was no mention of the FRS, or even of crisis conditions. Those were only introduced after your original argument began to look somewhat problematic, now, it’s seems to me that the introduction of both the FRS and the “credit crunch” where somewhat ad hoc, but I’ll give you the benefit of the doubt and assume I’m overlooking something or that you really meant it. In any case, you may well be correct, the Fed may lend money to those banks that fall below the reserve ratio, I’m not very knowledgable about whether or not this is actually the case, so I’ll refrain from judgement. However, what I do know is that most banks have a reserve ratio of their own somewhat above that mandated by the CB, and that if they were to fall below this they would do what they could to make sure their reserves didn’t drop too close to the official RR.
In any case, what you’re describing is not part of the mechanics of FRB but of a system based on fractional reserves with a central bank, which is fine, but you should have been more specific. I did not wish to challenge you, but rather, I wished to point out a problematic assertion you made lest any newcomers who read it be misguided. Transfers of money between individuals do not lead to credit expansion, perhaps they might do in the case you’re describing, but the opposite is also true. Banks may be forced to call in loans causing the money supply to collapse.
I took it for granted that I was talking about the United States and the Credit Crunch situation as that was what I said I understood, having lived in and researched the system…
I am not certain about Erikk, but I also take for granted everyone that askes about this is American, I could be wrong, but it is my own discrimination I suppose…
I understand, maybe I should have noted that a $100 transaction would not have resulted in as much an issue, but he was talking about $100,000, and that does register on the loan scale, here in America…
What I am not sure about is how a bank can call in a loan that has a contracted period, so long as the loan is kept up with, would this not be a violation of contract? I have never had a loan that the loan was called in, I would not sign a contract that stipulated such…
I still do not think that injecting money into the system will necessarily lead to hyperinflation. If a investment bank is going to face bankruptcy, and the government declare capital injection without request for any type of repayment, then the money is simply put in the bank for boosting confidence, that is, assuring the clients that the bank has enough capital to back up the toxic assets so that they will not suddenly take their money out. How will hyperinflationary pressure set in in this Bank Bailout senario??
How much confidence do you have in a bank that has injected funds to keep it afloat?
I do not have much, if they malinvested their money, what will they do with the government money?
Adding money to a system devalues the money in the system, as it takes more and more dollars to buy goods and services, the government is now with precedent on its side going to continue to inject money… Hyper-inflation…
Look into the historical cases of Hyper-inflation…
Harry Felker, I’m not going to continue this. Regardless of what you meant, your analysis of the FRB system was incomplete. You began introducing various assumptions that shifted the debate away from the subject of the mechanics of FRB and towards a discussion of the mechanics of an economy with the institutions of FRB and CBs that is currently in the crisis stage of the business cycle.
Erickk, one thing you’re missing is expectations. Hyperinflation will only follow once enough people subjectively perceive that currency depreciation will continue indefinately. If they have reason to believe that at some point in the future the currency will begin to appreciate then they have some reason for holding on to cash. Mises described hyperinfaltion as the result of a flight into real values.
Whether the bailout is going to work is not my question. What I am asking is that if injecting capital does keep some insolvent banks in business, how can inflation set in (ok, I do not add hyper this time) if the injected money is just put into the banks and banks never spend it.
Or is it like this: The Treasury issue bonds to raise money for money injection to bailout the insolvent investment banks, and the Fed supports the plan by purchasing the Treasury Bills. When the Treasury receives the check from the Fed, it deposits the check in its account at a commercial bank, and then transfer the newly increased money in this account to the accounts of those investment banks. Therefore, even if the investment banks decide not to use this money, there will still be inflationary pressure because the investment banks’ commercial banks see an increase in their liabilities, and as a result, these commercial banks later HAVE TO LEND THE MONEY OUT. Am I right?
If banks malinvested, they are not making money of those investments, so they have to invest something to pay deposit interests, costs, etc, this is why they need the bailout to remain solvent…
So the bank in question really has no choice but to seek ways to use credit it can then expand…
if i am incorrect, or the charts are, it seems that the frb credit inflation always outpaces the credit destruction. which i guess has an overall net inflationary effect?
“It cannot. Reserve ratios are not tending to zero. They usually fluctuate.”
are you sure? did the alleged sweeps and reclassification of accounts have any affect??
is the info at this link true??
http://www.federalreserve.gov/monetarypolicy/reservereq.htm
Reserve Requirements
Type of liabilityRequirement Percentage of liabilitiesEffective date Net transaction accounts 1 $0 to $10.3 million2 0 1-01-09 More than $10.3 million to $44.4 million3 3 1-01-09 More than $44.4 million 10 1-01-09 Nonpersonal time deposits 0 12-27-90
Eurocurrency liabilities
www.economagic.com (if true) shows m1 in 1990 at 800 billion and m2 in 1990 at 3 trillion
in 2009 m1 was at 1.7 trillion and m2 was at 9 trillion. in 1990 the difference between m1 and m2 was about 2.2 trillion and in 2009 the difference was 7.2 trillion. what is the money-stuff that makes up the growing difference in m1 and m2 since 2009 m1 only equals 1.7 trillion and the monetary base (physical cash) in 2009 at approx 1.7 trillion??
1990 physical cash amb of 260 billion subtracted from 3 trillion of 1990 m2 is 2.7 trillion of dollar-stuff 2009 physical cash of 1.7 trillion subtracted from 2009 m2 of 9 trillion is 7.2 trillion of dollar-stuff. is that a 4.5 trillion dollar-stuff increase over the previous 19 years.
doesnt it seem then that non-cash money (bank credit??) creation has outpaced any money or credit destruction???
0
The only way I can think of (real) money being destroyed is if gold or silver get converted from coins or bars into something like jewelry. Although many pastoral societies use livestock as money (“fee” comes from OE feo, which means cattle, for example), so I suppose killing them would also constitute money destruction.
That’s probably not what you meant though…