The Interest Rate

[MMMark]

Thurs. 10/04/08 18:48 EDT
.post #52

@DD5

So it is inflationary according to your definition

Yes, it is. I retract my earlier assertion that it isn’t, and thank you for clearing that up.

@DD5

So now you’re talking about not being a rise in prices.

Sort of. I’m making a distinction between new money that sits in an account, unspent (“inert” new money), and new money that is actually spent (“active” new money), because only in the latter case does this inflation cause a rise in prices.

@DD5

Under a free banking system, unless the recipient of MOTS’s check is a client at the same bank as Mr. MOTS, the recipient of the check will deposit the check in his own bank. When his bank attempts to redeem the check, the bank of Mr. MOTS is found to be insolvent.

I understand and agree.

@DD5

Under central banking, the central bank will coordinate this process by essentially acting as a clearance house. It will make sure that all banks expand at the same rate so that the above doesn’t occur. If Mr MOTS’ bank also receives a deposit by one of its clients with a check belonging to the same bank that had received the check from Mr. MOTS’ recipient, then the two can cancel out their debts to one another by simple book keeping

I understand and agree.

@DD5

The fed lending banks money is just one of the tools available to facilitate the above coordination process.

I understand and agree.

@DD5

The major point that you have missed is the multiplier factor that results from the process of credit expansion. At the end of the expansion, the bank will have pyramided approximately $900 on top of the original deposit of $100. So the money supply has increased from $100 to $1000. That’s where most of your inflation comes from.

No no, I understand this, and I have not missed it.

I’m not suggesting that the $10 Fed loan is the only, or even the major, “tool.”

What I’m suggesting is that, contrary to what you said, the Fed does need to create new money. It needs to create 10 new dollars to lend to Effar Bank, so that Effar Bank can maintain its 10% reserve ratio.