- Erm, what I stated was after an inital fiat injection (whether directly from the government, foreign banks or local savings), bank screate credit , this serves as reserves and yes then look for reserves later. Now I thought the answer to this question was yours was obvious “well, if they can constantly create money, but creating credit, then reserves, then why have savings?” Firstly, they would need reservers, of course, if there were rumours of insolvency (bank runs or sudden withdrawl of foreign deposits, as happened in Austrlaia in 1890) / demand for deposits or to pay off assets is needed. Secondly, and more importantly, the reason they are creating this money is precisely because people are willing to take on the debt: most of the newly created money is loaned out as a debt, only a small part of the newly created money is in the vaults to satisfy the legal limit, not all - the rest is out in the economy, affecting capital intensive industries (once the bubble burst, the debts cannot be paid off and any foreign reserves are also withdrawn). This, partly, explains why we see debt way above other for of money (as seen in the graphs above). A mathematical paper on this is available:
http://www.debtdeflation.com/blogs/wp-content/uploads/2007/03/KeenKeynesCircuit.pdf
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Um, dude, the reserve bank of Australia didn’t exist in 1890 because Australia wasn’t yet a nation (Federation occured in 1901), but a laizze-faire colony. Moreover, REITs were fderegulation: no central bank injections occured. Maritime Corporation.
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Well, I’m sorry, that’s not what happened in Australia in 1890 under free banking, because the nature of the system. Firstly, the events I described are perfectly possible under a endogenous money supply and secondly, most collateral was on real estate values (uh oh, to bank capital once land values collapse). Thirdly, you assumed banks were fair and honest: so many ponzi schemes resulted in the 1890s - so there are institutional problems with your analysis. Also you missed the main point: if land values are going up and there are reservers around, the first place where money will be invested in will be real estate. More reserves are than created, more credit and then more reserves. Also because of gold production (as if there were and competition among the banks (ie low interest rates), generated what today would be exacerbated by a centrabl bank. Free banking is not immune to credit explanation (unless its a FULL reserve system). Plus, I said:
“… So collateral values go up, banks become more liberal in their lending, and the credit cycle is ignited by the natural processes like population growth …”
Investor 1: wow, land is going up. and rents are skyrocketing…go population growth and government infrastructure
Investor 2: fuck yeah… let’s go to the bank and take out a loan
Investor 1 [to banker]: my house collateral is now worth 10% more than last year
Banker: Cool, bannana’s. Here’s a loan to build more bla bla
For me to say “banks become more liberal in their lending” sort of presupposes that there are reserves in the first place…I’m merely making the point that a rise in land values helps contorts, shifts and distorts the capital structure of the economy in the same way as low interest rates do…and when you combine the two you get one huge depression. Most credit cycles fuel real estate cycles, and real estate cycles/demand fuel credit cycles (I gave the point high interests of 10 plus percent, but high land prices rising at 35%). Gosh, I wonder what I’m going to invest in…
- Um, again I thought this was obvious: because debt (or credit) has a real impact on the real economy. The graphs show a clear connection between debt and the real economy - employment in particular. GDP = AD plus the change in debt. Furthermore, consumption shifts as people have to pay of debts, wealth effects plummets even further, banks refuse to lend as most people cannot pay of their loans etc - and if people cannot pay of debts, there is less investment (as banks won’t lend) and more insolvency (as people cannot pay back debts.
Also, I challenege you to show me just two depressions where debts did not cause a) a collapse of the banking system, b) insolvency, and c) when the depression struck, banks decided to lend more (ie disprove to me the money supply is endogenous - if there are no credible lenders to lend to, the money supply falls because there are people with too much debt).
You do not get a depression without a spillover effect or a contagion (eg real estate values or people cannot pay of their large sums of debt, for their mortgage or malinvestment). That’s is what makes a depression, not a recession. It’s also a question of resources - the more resources that were misallocated the bigger the downturn - but why should 10% of bad investments, effect the grocer who
The more debts in the economy the more sever and ugly the downturn will be. 1974 was a recession (ignited by low interests), but not a depression because debts were paid off thanks to inflation and only about 8% of real capital inestment went into construction. The same with 1990. Today, a much larger part of the economy was dedicated to building (much like in 1929). Furthermore, a collapse in one sector of the economy cannot explain the collapse in an entire economy but there are spillover effects - construction falls, manufacturing falls, debts, which now cannot be repaid, sharpen the downturn (as noted above: poor or untrustworthy creditors and debtors make a depression, not a recession etc), making the situation worse - with deflation, the more debts pay, the more they owe.
http://www.complexity.org.au/ci/vol06/keen/keen.html
Anyways, show me a depression without a debt deflation, by all means.
