CAN THE FED PREVENT DEFLATION? DOES IT WANT TO? (must go to source to get all the links).

FSO ^ | January 26, 2007 | Michael A. Nystrom

[Hostage]

It's pretty clear you do not know what you are talking about. This was a discussion I had with 'theBuckwheat' poster who clearly has sound knowledge; I'll stick with theBuckwheat. Please remove me from your ping focus.

[Toddsterpatriot]

This was a discussion I had with 'theBuckwheat' poster who clearly has sound knowledge

I hope your tinfoil is wrapped counter-clockwise. Otherwise, you're just magnifying the mind control rays.

Please remove me from your ping focus.

Until the next time I see you post something stupid.

[nopardons]

Deflation happens to be a terrible thing. Yes, prices go down, but so do salaries and what businesses make.

Do you even know WHEN we have deflation? It appears that you do not, so I'll tell you when...DURING A DEPRESSION; something you've never had to live through.

Goldbuggery is a mental disease and it appears that you are quite ill.

[nopardons]

Exactly so!

[Hostage]

You can talk to you and your many aliases. We all realize there are sickos on FR and that goes with the territory when posting here.

Goodbye and good riddance!

[Toddsterpatriot]

I have not seen any recent numbers as to how much their "donation" amounts to.

About $21.5 billion in 2005.

Federal Reserve Notes are owned by the Federal Reserve. But we do not only not own the FRNs in our own wallet,

Wrong.

[Toddsterpatriot]

You can talk to you and your many aliases.

You're not making any sense. SSDD.

[krunkygirl]

save for later

[Fan of Fiat]

Please allow me to add that fractional reserve banking allows private corporations to extend the fiat money inflation by also creating money out of thin air.

You wouldn't mind walking me through how money is created "out of thin air" would you?

[capitalist229]

At current US debt levels (350% of GDP) deflation is destabilizing especially if it precipitates a psychological shift from spending to saving.

Because that would cause the Fed to fail in its mission to keep the frog from jumping out of the pot of boiling water.

BUMP

[Kay Ludlow]

Hmmm. Thinking about this...

[theBuckwheat]

Our present banking system allows banks to practice what is known as "fractional reserve" banking. That simply means a bank can lend out more than it has on deposit. If the "reserve requirement" is 10%, a bank only has to have $1000 in cash in order to create $9,000 in loans. It can't be $10,000 because it has to keep $1000 on reserve.

I said this is creating money out of thin air. If the bank has $1000 on deposit and it lends that money out, it should only be able to lend $1000. That is simple. But the bank doesn't stop there. It happily lends more. Indeed many times more. The formula is 1-r/r. If r = 10% (0.10), then 1-.1/.1 = 9. For some types of deposits, at present in the US, r=0.03! This means the bank can create 32 times as much money.

Where does this extra loan money come from above and beyond the amount deposited? The bank just writes the check. The way it keeps from bouncing that check it that it covers it with from its total pool of funds. This does not change the fact that when it did, *it created multiple claims for the same funds*. The whole scheme is based on the real-life fact that not every depositor demands all the money in his account at the same time.



This would all be an interesting academic exercise except for the fact that when the bank loans money it doesn't have (which is the same as saying: creates multiple claims on the same funds), the bank is creating money, or adding to the supply of money in circulation. This inflates the currency (or decreases its value) and thus steals from every party who also holds any of that currency. It matters not that government has allowed it, or even regulates it. It still effects conveying wealth from those who create wealth to who create money.

An excellent book on the subject is available free in PDF from the Mises Institution:

see:
Money, Bank Credit, and Economic Cycles
by Jesus Huerta de Soto

download at:
http://www.mises.org/books/desoto.pdf

Or you can buy it in the hardcover deadtree edition at Amazon:
http://www.amazon.com/Money-Bank-Credit-Economic-Cycles/dp/0945466390/sr=8-1/qid=1170346293/ref=pd_bbs_sr_1/103-3847652-7391063?ie=UTF8&s=books

If you poke around at the mises.org site, there is plenty of printed and media material (and a great podcast) that will cover this topic in far more detail than I can here.

see also:
http://www.answers.com/topic/reserve-requirements


From page 757 of the PDF file of the above book:

===
Specifically, Rothbard compares the banker who operates
with a fractional reserve with the criminal who commits
the crime of misappropriation:

[H]e takes money out of the company till to invest in some
ventures of his own. Like the banker, he sees an opportunity
to earn a profit on someone else’s assets. The embezzler
knows, let us say, that the auditor will come on June 1 to
inspect the accounts; and he fully intends to repay the
“loan” before then. Let us assume that he does; is it really
true that no one has been the loser and everyone has gained?
I dispute this; a theft has occurred, and that theft should be prosecuted and not condoned. Let us note that the banking
advocate assumes that something has gone wrong only if
everyone should decide to redeem his property, only to find
that it isn’t there. But I maintain that the wrong—the theft— occurs at the time the embezzler takes the money, not at the later time when his “borrowing” happens to be discovered. 14

14. Murray N. Rothbard, The Case for a 100 Percent Gold Dollar (Auburn, Ala.: Ludwig von Mises Institute, 1991), pp. 44–46.
==

It matters not to me that this system works most of the time. That is like saying borrowing from the company till is ok because it gets repaid most of the time.

[Toddsterpatriot]

Our present banking system allows banks to practice what is known as "fractional reserve" banking.

Yes, that means the bank has to keep a fraction of their deposits on hand. A fraction that is more than zero and less than 100%. In this case, 10%.

That simply means a bank can lend out more than it has on deposit. If the "reserve requirement" is 10%, a bank only has to have $1000 in cash in order to create $9,000 in loans.

Bzzzzt. As you just said, the bank has to hold 10% in reserves. I think your confused thinking makes you believe $1000 cash creates $9000 in loans. Actually, $10000 in deposits allows $9000 in loans and $1000 in reserves.

I said this is creating money out of thin air.

You just haven't shown it.

If the bank has $1000 on deposit and it lends that money out, it should only be able to lend $1000.

Actually, they can only lend $900. You can't forget the 10% reserve.

That is simple. But the bank doesn't stop there. It happily lends more. Indeed many times more.

No they don't.

Where does this extra loan money come from above and beyond the amount deposited?

Your imagination.

The bank just writes the check. The way it keeps from bouncing that check it that it covers it with from its total pool of funds.

Wrong. The 10% reserve is over their entire "pool of funds".

This does not change the fact that when it did, *it created multiple claims for the same funds*.

No they didn't.

The whole scheme is based on the real-life fact that not every depositor demands all the money in his account at the same time.

This fact allows reserves of 10%, not loans of 900% of deposits.

This would all be an interesting academic exercise except for the fact that when the bank loans money it doesn't have

The bank loans only 90% of what they have.

Like the banker, he sees an opportunity to earn a profit on someone else’s assets.

Yes, banks earn a profit on other peoples assets. That's how they can pay you interest on your deposit.

But I maintain that the wrong—the theft— occurs at the time the embezzler takes the money,

If you don't want a bank to lend out your money you can keep it under your mattress.

[theBuckwheat]

As they say on the Sunday morning talking head shows, you are welcome to your own opinion, but just not to your own version of the facts.

As can be seen by the sources I gave links to, the concept of "fractional reserve" banking allow the bank to keep a *fractional reserve* for its loans. That means, as I previously stated, that when I deposit $1000, the bank can now use that as reserves for more new loans. How much in new loans? It depends on the regulatory environment and management policy.

If the reserve requirement was 100%, for every $1000 in deposits, the bank, or more correctly, the banking system, could make an additional $1000 in new loans. If the requirement as 10%, it could make an additional $9000 in new loans in the entire banking system.

I'll happily post the link to the PDF of de Soto's excellent book (here: http://www.mises.org/books/desoto.pdf) and ask you to look at the walkthrough example he gives on pages 217 - 223 ( or pages 247 - 253 in the PDF file). The section title is: Credit Expansion and New Deposit Creation by the Entire Banking System.

Step by step, deSoto goes through the simple math of an example where 1 million in "monetary units" is deposited in a bank and ends up creating 9 million "monetary units", ex nihilo, or from thin air.

In my previous post, I am sorry that wrote bank instead of banking system. Nevertheless, my point was that fiat money along with a fractional reserve banking system, allows government, working hand-in-glove with the banks, to create money out of thin air.

[Toddsterpatriot]

If the reserve requirement was 100%, for every $1000 in deposits, the bank, or more correctly, the banking system,

More correctly. LOL! In other words, your previous post was wrong. Thanks for admitting it.

could make an additional $1000 in new loans.

Bzzzt. That was fast. If the reserve requirement was 100%, they couldn't make any loans, they'd have to keep all their deposits as reserves.

If the requirement as 10%, it could make an additional $9000 in new loans in the entire banking system.

Wrong. If $1000 in new money was created by the Fed, this could create up to $10000 of loans. Which is much different than saying a bank can lend more than their deposits.

Step by step, deSoto goes through the simple math of an example where 1 million in "monetary units" is deposited in a bank and ends up creating 9 million "monetary units", ex nihilo, or from thin air.

Yes, I already understand how the money supply works.

In my previous post, I am sorry that wrote bank instead of banking system. Nevertheless, my point was that fiat money along with a fractional reserve banking system, allows government, working hand-in-glove with the banks, to create money out of thin air.

I hate to burst your goldbug bubble, again, but we also had a fractional reserve banking system and created money "out of thin air" while we were on the gold standard

[Fan of Fiat]

You goldbugs make me laugh!

So you are saying that if a bank has total deposits of $10M, it is able to loan out $100M. (with 10% reserve requirement)

So lets say the entire $100M was borrowed by one person... me. Remember, the banks total deposits are $10M. When I cash my $100M check, where does the bank get the money?

[theBuckwheat]

How do you assume I am goldbug? I don't recall mentioning it.

But you will have to forgive me for being stuck on stupid with part of my explanation. Even so, that does not change the deSoto's detailed walkthrough and math examples.

My math focused on what happens at one bank with the deposit. Without further explanation, my math jumped to the total impact of the reserve requirement when that money was used as the basis of loans and those funds ended up being deposited in other banks who used the funds as the basis for yet more loans.

Now, to your specific question: Where does the bank get the money. The answer is: it takes it from its total pool of funds. It covers the check from its float. It does it in a manner that depends on the fact that not every demand deposit customer wants all his funds at the same time.

Just by an accident of timing and circumstances, when I went to the ATM today and got some cash, the machine told me that I had over $2000 in my account. I only demanded a fraction of that. What do you think the bank is doing with the remainder of my money while we all wait for the checks I have written to dribble in and be processed? It sits in the one large pool, indeed the only pool the bank has, from which it covers all the loans it has made.

Certainly the bank cannot cover a check that is bigger than its pool. It spends a lot of money on management systems that first insure it remains in regulatory compliance at all times, and secondly never allows the bank to get itself into a bind. One way of guaranteeing that never occurs is the internal loan limits it sets. Bank of America can cover a $100M check because it keeps those reserves, but the Farnsworth State Bank and Convenience Store would never loan that much in the first place.

[TEEHEE]

Mike Shedlock's blog at globaleconomicanalysis.blogspot.com has excellent economic discussion. The main theme running through the daily conversations is the deflation vs inflation debate.

[TEEHEE]

And now ten seconds after making my first post, I see that Nystrom references Mike Shelock (Mish) in his article.

[Freedom4US]

"Deflation is a good thing."

Maybe in theory, but not in real life. Credit evaporates, nobody spends what money they have, because the price of everything is spiraling down weekly. Why pay $100 for a washer that will be $90 next week? Massive layoffs, millions and millions out of work, which means no money to spend, no tax revenue, etc. Then it starts to get bad. /s