Wild Speculation - ff on Teh Economy

[Jerome]

Originally Posted by SR71

Some of the more popular CT's out there center on fractional and central banking. OMG, The Fed! All new money is debt! Money out of thin air! I am not well versed in the area, so can not very well separate fact from fiction. Can anyone do a Central/Fractional Banking for Dummies on the topic? How does it work? Pros and cons? Any relevant or important historical back ground?

Not understanding something does not make it a CT.

Fractional banking means that banks can loan out more money then they have in the bank. This is the creation of new money, money that did not exist prior to the creation of the loan, money which is in fact a debt owed to the bank.

[Crumb]

Fractional banking means that banks can loan out more money then they have in the bank.

Not true. In fact it means that they have to not loan out a certain fraction of their deposits. They have to keep a certain "fraction" in "reserve", hence the name.

[ceptimus]

Yes but it still results in money being created.

Say I have $100 and put it in a bank. If the bank has to hold a 10% reserve, then they keep $10 and loan out the remaining $90 to, say, person A.

Person A now buys some goods from shopkeeper B with the $90, and shopkeeper B puts that $90 in the bank. The bank now keeps 10% of that new deposit ($9) in reserve and loans out the remaining $81 to person C who spends it...

So the money goes around and around (or at least it can sometimes) - my initial $100 deposit has already bought $171 worth of goods, and it's only visited the bank twice yet! The bank now has $19 of that original money in reserve, so the 'total amount of money' (whatever that means) has doubled!

[Kael]

True, but that kind of 'money creation' happens whenever you have a bank taking deposits and making loans, with or without the reserve (unless the bank reserves 100% of all deposits, of course), which makes Jerome's statement at best trivially true, and probably deliberately deceptive. Especially since the target of such rhetoric is usually the dismantling of the Federal Reserve system. Does anyone truly believe that private banks would hold more in reserve if they didn't have all those pesky regulations to worry about?

On the other hand, he did post an old political cartoon with lots of labels on it...

[SR71]

Originally Posted by godfry n. glad

And here I thought that it was that all new debt was new money.

I'm not sure what you are referencing with "CT's", but wiki has a basic overview of the orthodox money creation theory, with links to some heterodox theories.

Understanding the concept of money supply might be helpful, too.

CT - Conspiracy Theory

Originally Posted by Kael

True, but that kind of 'money creation' happens whenever you have a bank taking deposits and making loans, with or without the reserve (unless the bank reserves 100% of all deposits, of course), which makes Jerome's statement at best trivially true, and probably deliberately deceptive. Especially since the target of such rhetoric is usually the dismantling of the Federal Reserve system. Does anyone truly believe that private banks would hold more in reserve if they didn't have all those pesky regulations to worry about?

On the other hand, he did post an old political cartoon with lots of labels on it...

No, put me on the highly skeptical list in that regard.

[Megatron]

Originally Posted by davidm

Here is what FDR did.

First, he gave a stunning Inaugural Address that rallied a frightened nation. Then he went on radio every week, for his fireside chats, to explain exactly what he was doing, and why he was doing it.

When he ran into significant Rethuglican opposition that thwarted his aims, he didn't babble about compromise with people who wanted to metaphorically (if not even literally) cut his throat. He said: "They hate me, and I welcome their hatred." He called them "plutocrats" and he relentlessly mocked and reviled them. He called them the money changers that had been evicted from the temple. He told the nation that there was more to life than greed.

And the people gave him four terms, even though unemployment, in 1936, when he was running for a second term, was about 16 percent.

If FDR had been confronted with this current Congress, he would have gone right over their heads and straight to the people.

What is so puzzling to me is that Obama clearly has exceptional communication skills. He could have, and should have, constructed some kind of progressive narrative to combat the lies of the right wing, the way that FDR did. Yet he completely abdicated what the first Roosevelt (Teddy) called "the bully pulpit." He doesn't give press conferences. He doesn't appear on the Internet, exploiting the new technology the way that FDR exploited radio, the new technology back then. His speeches, for a man who was supposed to be a great writer, are all lackluster, poll-tested boilerplate. Can anyone think of a single memorable line out of his mouth?

He deserves to lose this election. He squandered a great historic opportunity for reasons that are rather inexplicable.

I am quoting this because it is the best political post I have ever fucking seen and you win the whole goddamn internet.

That is all.

[SR71]

I thought it was extraordinarily awesome too.

[SR71]

Sir ceptimus and I had a nice chat the other day. We discussed the current big trends and dynamics. Perhaps the next big transformation, when the current model runs out of options, will be a general restructuring with an eye to sustainability. In the mean time, here is yet another article about our current model run amok. Preaching to the choir, I know. Also, .

Corporate Profits at All-Time High; Wages at All-Time Low: Can We Call it Class War Yet? | News & Politics | AlterNet

This week, David Segal at the New York Times broke the news to America that not only was Apple -- the computer and gadget manufacturer formerly seen as a symbol of good old American ingenuity -- making its profits on the backs of abused factory workers in China, but also on poorly paid store employees here in the US.

Apple store workers, he wrote, make up a large majority of Apple's US workforce—30,000 out of 43,000 employees in this country—and they make about $25,000 a year, or about $12 an hour.

Lawrence Mishel at the Economic Policy Institute notes that that's just a dollar above the federal poverty level. This for a company that paid nine of its top executives a total of $441 million in 2011.

“The discrepancy between Apple’s profits/executive pay and its compensation to its workers is a particularly glaring example of what is occurring in the wider economy,” Mishel writes.

And he's right. Also this week, Henry Blodget at Business Insider posted three charts that show just how out of whack our economic system really is. Corporate profits are now at an all-time high, while wages as a percent of the economy are at an all-time low, and fewer Americans are employed than at any time in the previous three decades.

This brings me back round to my somewhat Luddite inclination that perhaps there is an upper limit as to just how much automation (in the broadest sense of the word) is still good for the economy and society in general.

[Jerome]

Originally Posted by Crumb

Not true. In fact it means that they have to not loan out a certain fraction of their deposits. They have to keep a certain "fraction" in "reserve", hence the name.

No.

When I borrow $100 from the bank, that is newly created money that did not exist before. They did not take that $100 from a depositors account.

[Jerome]

Originally Posted by ceptimus

Say I have $100 and put it in a bank. If the bank has to hold a 10% reserve, then they keep $10 and loan out the remaining $90 to, say, person A.

They create the $90, they still have the full $100 in the deposit account.

[Crumb]

Originally Posted by Jerome

No.

When I borrow $100 from the bank, that is newly created money that did not exist before. They did not take that $100 from a depositors account.

Let's be clear that is not the same thing that you said before. They CANNOT loan out more money then they have in the bank. Otherwise why would they bother borrowing money from the government?

They do loan out money that they get from depositors and no of course they don't deduct the amount from the depositors account. This does have the effect of creating money when loan proceeds are deposited and loaned out repeatedly. BUT THAT IS NOT THE SAME AS "banks can loan out more money then they have in the bank".

Also it is certainly not a phenomenon caused by fractional reserve banking. It is caused by loaning out money deposited in the bank. The fractional reserve requirements just mean that they can't loan out 100% of that money.

[ChuckF]

For a second I thought I had been Jerolled but then I saw "more money then they have in the bank" and knew it was the real thing.

[Crumb]

That's how you know I am the genuine Crumb, too...

[ChuckF]

Now that you mention it, I don't know that you are the genuine Crumb. Have you ever even offered proof of that on ?

[Crumb]

[chunksmediocrites]

Ask to see his Tom Pettyquin- the Tom Petty mannequin that he keeps in his bathroom, that electronically issues affirmations. The real Crumb knows what I am talking about. The fake Crumb haxxoring the real Crumb's account from

Library!

Is clueless about that.

[Jerome]

Originally Posted by Crumb

Let's be clear that is not the same thing that you said before. They CANNOT loan out more money then they have in the bank.

You are not understanding at all.

The bank has $100 of deposits, it loans me $90. Now the bank still has the $100 of deposits and a debit asset of $90. That $90 is deposited in my account. Now the bank has $190 in deposits from which to loan. Now they can loan out $171 which is more than the $100 they had in deposits just a moment before.

[mickthinks]

You are not understanding at all.

Crumb is very understanding, Jerry. It's you—you're the one who doesn't understand.

[erimir]

Originally Posted by Jerome

You are not understanding at all.

The bank has $100 of deposits, it loans me $90. Now the bank still has the $100 of deposits and a debit asset of $90. That $90 is deposited in my account. Now the bank has $190 in deposits from which to loan. Now they can loan out $171 which is more than the $100 they had in deposits just a moment before.

Ummmm...

I think it goes more that they can now loan $81 of that $90 you deposited. Which still makes it so that there's "more money than there was before" but not quite as extreme.

ETA: Errr.. If they loaned out that $81, there'd be the original $100 and $171 in loans, with total deposits being $190. But they couldn't loan out $171 in addition to the $90 they already loaned, which is what I thought you meant.

At any rate, the thing is that the bank doesn't have to be concerned with where they money came from. If someone loaned money from another bank and deposited it into their accounts, it wouldn't be their concern that the money wasn't "really" the depositor's. Setting the fraction that they have to keep in reserve is an issue... but the only way to keep them from "creating new money out of nowhere" is to not allow them to loan out ANY depositor's money. But that's kinda how a bank works.

[Dragar]

Originally Posted by Jerome

You are not understanding at all.

The bank has $100 of deposits, it loans me $90. Now the bank still has the $100 of deposits and a debit asset of $90. That $90 is deposited in my account. Now the bank has $190 in deposits from which to loan. Now they can loan out $171 which is more than the $100 they had in deposits just a moment before.

You've just described them lending $90 of $100, and then when more money is placed in the bank, $171 of $190. In neither case is more loaned than is in the bank.

So when are they lending more money than they have in the bank, which is what you asserted?

[Crumb]

Now the bank has $190 in deposits from which to loan. Now they can loan out $171 which is more than the $100 they had in deposits just a moment before.

But clearly not more than the $190 that they have now. So, yes, money is created, but now the bank is not loaning out more money than is deposited in the bank.

Can you suggest an alternative way the banks should be run? Should they not be allowed to loan out any money that is deposited? That would be the only way to eliminate this creation of money. It would also completely destroy the banking industry and the world economy.

[Jerome]

Originally Posted by Dragar

You've just described them lending $90 of $100, and then when more money is placed in the bank, $171 of $190. In neither case is more loaned than is in the bank.

So when are they lending more money than they have in the bank, which is what you asserted?

Wow, there was only $100 to start with, the $90 was created from thin air. Now they are loaning money on money that did not exist before they created it, hence the ability to loan more than their deposits.

More money was not placed in the bank, new money was created which did not exist.

[ceptimus]

Originally Posted by Crumb

Can you suggest an alternative way the banks should be run? Should they not be allowed to loan out any money that is deposited? That would be the only way to eliminate this creation of money. It would also completely destroy the banking industry and the world economy.

It would destroy the banking industry and world economy as currently constituted. In the short run that would be a bad thing.

In the long run, not so much. People would still want a form of banking to keep their money safe and allow easy payments/transfers without having to carry loads of cash everywhere; people would still want to be able to invest their savings in ventures that might make a profit.

Maybe it would be better if banks functioned just as giant money boxes, and a means of processing payments without using cash. Banks would then have to charge for their services if they couldn't make money by investing our cash.

In the very long run, if and when automation and robotics renders most everyone unemployed, there will have to be a new way of distributing goods around to where they're needed. Maybe this could be done without using money at all - the Star Trek model - or perhaps everyone will just be issued with an allowance to spend however they wish.

We'll need to come up with something - otherwise the machines will be producing all these goods and food items, but no one, except maybe celebrities and athletes, will be earning any money to buy the items.

[Jerome]

Originally Posted by Crumb

Can you suggest an alternative way the banks should be run? Should they not be allowed to loan out any money that is deposited? That would be the only way to eliminate this creation of money. It would also completely destroy the banking industry and the world economy.

The world economy is destroyed, it is just being propped up with the creation of vast amounts of new monies, this will last only temporarily.

The solution is to have government regulate the amount of currency within the economy commensurate with actual real wealth in the society. The cost of an egg today should be the same as it was for your grandfather. The only thing the current system does is transfer wealth from the worker to the elite.

[Jerome]

Originally Posted by erimir

Ummmm...

I think it goes more that they can now loan $81 of that $90 you deposited. Which still makes it so that there's "more money than there was before" but not quite as extreme.

Right, my mistake. On the deposit of $100 and the creation of one debt the total amount able to be loaned is $171.