Elements of Monetary Science

[Pranav]

Pranav wrote:

Steve Keen is bang on target ... among the first (outside the bankers themselves) to figure out that fractional reserve banking actually meant the commercial banks (not just the central bank) creating currency out of thin air

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

[Pranav]

Sri wrote:

^^^ Pranav jee, you hit problem on it's nail. The problem is that there isn't enough money to go around. What we see now is the game of passing the parcel, last one holding the instruments is the sucker. We will soon know his name. The whole system is dependent on the basic premise that all the depositors will not call the bank at the same time. But problem is that is exactly what is happening.

Need is to step back and identify the toxic loans. Write them off and save the ones who generate wealth or those who invest prudently. Alas easier said then done.

[Pranav]

Hari Seldon wrote:

Steve Keen is bang on target ... among the first (outside the bankers themselves) to figure out that fractional reserve banking actually meant the commercial banks (not just the central bank) creating currency out of thin air

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

Well, not quite. Keen certainly did point out the conflating of money with debt.

Here's how the FRB game worked - with $100 in deposits, and a fraction of that (say 10%) required by law to be held in reserve, the bank was free to lend out $90 and make money on the interest. But the banks were lending out $200, sometimes $400 etc on that $100 deposit base. Which is where FRB led to currency creation of sorts. Did money supply increase? On the face of it, certainly seemed so, but that 'money' was debt-based. Had to be returned. And when the creditors (in the construiction sector and consumer sector based on home equity) couldn;t repay, the banks came under strain because on their books, they'd lent out this huge much in capital that wasn't coming back.

Now it seems like there's no money in the system preciswely because the excess currency (debt based) which was in earlier is deflating to its actual size. Not a pretty sight that. There're no creditworthy borrowers plentyfully around anymore.

[Pranav]

johneeG wrote:

The theory seems to be to take loan for investing and then make more returns, so that the loans can be paid and profit also be made.
Banks were supposed to lend to such ventures that would do the above. So where did it go wrong? Was the theory itself flawed? Were the bankers corrupt? Or did the borrowers messed up?

[Pranav]

Pranav wrote:

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

Well, not quite. Keen certainly did point out the conflating of money with debt.

Here's how the FRB game worked - with $100 in deposits, and a fraction of that (say 10%) required by law to be held in reserve, the bank was free to lend out $90 and make money on the interest. But the banks were lending out $200, sometimes $400 etc on that $100 deposit base. Which is where FRB led to currency creation of sorts.

Well, what happens is that with $100 in deposits, they lend out 90% i.e. $90, which gets deposited again, out of which they lend out $81 and so on.

From a $100 initial deposit, the total loans can be as high as $900. But the catch is that at every stage, loans are balanced by deposits. Nothing new is being created, it's the same gold coin getting counted again and again.

[Pranav]

Hari Seldon wrote:

^^^ Sure, why would you borrow at 5% and deposit at 2%? The 9x possible upper bound on leverage was the academic argument for banks to lever up 9x not all of which was redeposited.

[Pranav]

Pranav wrote:

^^^ Sure, why would you borrow at 5% and deposit at 2%? The 9x possible upper bound on leverage was the academic argument for banks to lever up 9x not all of which was redeposited.

No, what happens is that Tom borrows at 5%, goes and buys a Jacuzzi from Dick, who then deposits it at 2% in the bank, which then lends it out again.

At each stage the 10% CRR (cash reserve ratio) is maintained.

[Pranav]

Hari Seldon wrote:

^^^ True. Problem is not all that was lent out was for investment activity from which returns could be expected higher than the cost of borrowing. Even when it seemed like it would be the case (the housing/construction industry, for example), it wasn't the case. The system was unsustainable without additional money being created to replace that which was being repaid (and hence, the debt there was extinguished).

Yup, this is from wikipedia but it brings out the essential point:

Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. While there is no controversy over the fact that the commercial banking system expands the money supply, critics find it problematic that banks "create money out of nothing."[7]

One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent. This was the argument of the Social Credit movement of the 1930s, who proposed to remove the job of money creation from banks and give it to governments.

Other criticisms relate to the potential fragility of bank liquidity in a fractional reserve banking environment, the financial risk of bank runs that depositors bear when depositing money with banks, and the impact that demand deposits have on the stock of money, and on inflation (that is, the implicit expansion of the money supply and its associated impact on prices and the exchange rate). An alternative to fractional reserve banking is full-reserve banking.[9] With full-reserve banking, some monetary reformers, such as Stephen Zarlenga of the American Monetary Institute, support the concurrent issuance of debt-free fiat currency from the Treasury, while others such as Congressman Ron Paul and some economists from the Austrian school, call for a commodity currency as existed under the gold standard.

It is the last bolded part which Keen had championed too in one of his earlier works, IIRC.

[Pranav]

Pranav wrote:

^^^ A number of points -

1. Interest rate is market determined. It will tend to be less than expected return on investment, otherwise nobody will borrow.

2. It's true that you need to create additional money ... you should create money at the rate of economic growth to maintain zero inflation. Of course, newly created money should be injected into the economy in a fair and transparent way. One way to go about it is for the Central Bank to purchase government bonds in the open bond market.

3. Commercial banks appear to "create money out of nothing" only if your definition of money supply counts only the loans without subtracting the balancing deposits.

4. Full reserve banking is not practical. If the bank is just going to sit on my money, I might as well put it under the mattress. I put the money in the bank because I want to put the money to work.

5. Full reserve is also likely to lead to deflationary spirals.

6. Gold standard will not solve any problems, the 1929 Great Depression happened on the Gold Standard. In fact, it will exacerbate the problems, since banksters will have huge gold reserves with which they will play havoc with the money supply, and governments will have their hands tied.

7. Fiat currency per se is not a problem. The problem (in the US) comes from the fact that the banskters own the Fed and then jerk around the money supply, creating boom-bust cycles which they can milk. The solution is to nationalize the Fed, and then transparently regulate money supply to strictly keep inflation at a predetermined low value (say 1%).

[Pranav]

Hari Seldon wrote:

^^ No argument with any of your points there. Point is what folks are doing currently isn't helping any. What needs to be done is a curious mix of initiatives that don;t fall neatly into any one rubric - Austrian, Keynsian, goldbuggered, or otherwise. Not that Keen's infalliable but he is bold enough to borrow from different schools and create a potent mix that may actually work.

A 24-Nov bbc hardtalk interview of Keen. Worth watching, IMO.

http://socialdemocracy21stcentury.blogs ... dtalk.html

[Pranav]

sumishi wrote:

Pranav & Hari Seldon saars,
If time permits, can you please look up this article and comment on its "soundness"?
Central Banks, Gold, and the Decline of the Dollar

[Pranav]

Neshant wrote:

4. Full reserve banking is not practical. If the bank is just going to sit on my money, I might as well put it under the mattress. I put the money in the bank because I want to put the money to work.

Full reserve banking is the only type of banking that makes any sense. Money counterfeiting subtracts value from the productive people in society. People put it in the bank to safe guard (or so they think) the fruits of their labor. Fractional reserve banking can best be described as a Bernie Madoff ponzi scheme with a printing press.

If you want to put your capital to work, start a business, make an investment in a company.. etc and reap 100% of the profit or loss. Don’t gamble with OTHER people’s money or offload losses onto their backs and tell them its good for them because its not. That aside, interest paid on deposits linked to a bogus rate of inflation is not putting anything to work. Its subtracting from real work.

5. Full reserve is also likely to lead to deflationary spirals.

There’s no such thing as a spiral. Prices correct to a point where the free market supports it. It clears out bad debt and sticks creditors who made bad bets with the losses and savers with the gains and sets the stage for economic growth. Aside from that, there’s nothing wrong when things get more affordable for the productive who have deferred their consumption through savings.

6. Gold standard will not solve any problems, the 1929 Great Depression happened on the Gold Standard.

Wild credit creation in the 20s was the reason for the Great Depression. The fastest economic growth in America’s history in the late 1800s to the early 1900s occurred on the gold standard. The roman empire was wrecked as it moved towards a fiat standard as it debased its currency.

7. Fiat currency per se is not a problem. The problem (in the US) comes from the fact that the banskters own the Fed and then jerk around the money supply, creating boom-bust cycles which they can milk. The solution is to nationalize the Fed, and then transparently regulate money supply to strictly keep inflation at a predetermined low value (say 1%).

Aside from this silly notion of “promoting inflation” and the disasterous role of clueless “wise men” micro-managing the economy (or at least pretending to), I agree with your idea of getting rid of the Federal Reserve. But what should replace it is not government which is already bought & paid for by the useless middleman industry (banking & financing).

In my opinion, the best system is one of competing local currencies with few/no rules. It transfers the power (and responsibility) of money to those who EARN it letting them select the medium of storing their wealth and exchanging it. It shifts the power of money away from those who didn’t earn it but instead seek to perpetuate a counterfeiting monopoly.

In short, the market should choose the money. It would have to exist along side gold as gold periodically does an accounting of everything.

[Pranav]

Pranav wrote:

Full reserve banking is the only type of banking that makes any sense. Money counterfeiting subtracts value from the productive people in society. People put it in the bank to safe guard (or so they think) the fruits of their labor. Fractional reserve banking can best be described as a Bernie Madoff ponzi scheme with a printing press.

Fractional reserve banking looks like a printing press to folks who only count loans, but don't count the balancing deposits!

If you want to put your capital to work, start a business, make an investment in a company.. etc and reap 100% of the profit or loss. Don’t gamble with OTHER people’s money or offload losses onto their backs and tell them its good for them because its not.

The point is that I want the bank to put MY money to work, instead of just sitting on it.

That aside, interest paid on deposits linked to a bogus rate of inflation is not putting anything to work. Its subtracting from real work.

Interest rates are determined by the market; they depend on the rate of economic growth, amongst other things.

There’s no such thing as a spiral.

Look up deflationary spiral.

Wild credit creation in the 20s was the reason for the Great Depression.

The point is that whatever happened happened on the Gold standard.

Aside from this silly notion of “promoting inflation” and the disasterous role of clueless “wise men” micro-managing the economy (or at least pretending to), I agree with your idea of getting rid of the Federal Reserve.

I didn't say get rid of it. Nationalize it. The Central Bank guarantee any rate of inflation desired. Even negative inflation i.e. deflation. Though there are advantages in a small positive rate. No 'wise men' required, it can be a transparent algorithm, as first suggested by Milton Friedman.

As regards the Gold standard, not only is it completely unscientific and irrational (why should production of xyz mineral in the hands of a few super-rich mine owners determine the money supply), but will also allow recreation of 1929 Great Depression conditions.

[Pranav]

Christopher Sidor wrote:

6. Gold standard will not solve any problems, the 1929 Great Depression happened on the Gold Standard.

Wild credit creation in the 20s was the reason for the Great Depression. The fastest economic growth in America’s history in the late 1800s to the early 1900s occurred on the gold standard. The roman empire was wrecked as it moved towards a fiat standard as it debased its currency.

I am going to expand on what Pranav had said earlier. I will try to keep it as simple as possible.

Let us assume that Country A has gold reserves of about 100 metric tons. It has pegged its currency at say 1 unit is equal to say 500 grams. i.e. 1 Rupee/Pound/Franc/Yen/Dollar/Dinar will be exchanged for say 500 grams of gold. this puts the total amount of currency that can be in circulation = (100000000/500) = 2,00,000 units or 2 lakh rupees/pound/franc/yen/dollar/dinar.
If the country looses gold, due to outflows, then the only way to maintain significant reserves of gold would be to raise interest rates. Even if the economy were slowing down or stalling or stagnating, then also the central bank would have to raise rates. Raising interest rates would hurt industry and commerce in a slowing economy. This is what happened partially after 1929 in many countries. If we had been on gold standard in 2008, then unemployment would have been in double digits and world-trade would have decreased massively.

On its own Gold does not grow. If we put a ton of gold in a vault somewhere in this planet today and take it out after say 1 year, it will still remain one ton. It will not grow.

Further there is not enough gold that has been mined in this world or will be mined in the future to sustain the level of trade and commerce that goes on in this planet. Gold standard is a means to keep everyone poor. Only the elite will profit from it. Not industrious people. Only people who have accessed to gold ore.

The Gold standard is a friend in good economic times and a terrible foe in bad economic times.

[Pranav]

johneeG wrote:

I am going to expand on what Pranav had said earlier. I will try to keep it as simple as possible.

Let us assume that Country A has gold reserves of about 100 metric tons. It has pegged its currency at say 1 unit is equal to say 500 grams. i.e. 1 Rupee/Pound/Franc/Yen/Dollar/Dinar will be exchanged for say 500 grams of gold. this puts the total amount of currency that can be in circulation = (100000000/500) = 2,00,000 units or 2 lakh rupees/pound/franc/yen/dollar/dinar.
If the country looses gold, due to outflows, then the only way to maintain significant reserves of gold would be to raise interest rates. Even if the economy were slowing down or stalling or stagnating, then also the central bank would have to raise rates. Raising interest rates would hurt industry and commerce in a slowing economy. This is what happened partially after 1929 in many countries. If we had been on gold standard in 2008, then unemployment would have been in double digits and world-trade would have decreased massively.

On its own Gold does not grow. If we put a ton of gold in a vault somewhere in this planet today and take it out after say 1 year, it will still remain one ton. It will not grow.

Further there is not enough gold that has been mined in this world or will be mined in the future to sustain the level of trade and commerce that goes on in this planet. Gold standard is a means to keep everyone poor. Only the elite will profit from it. Not industrious people. Only people who have accessed to gold ore.

The Gold standard is a friend in good economic times and a terrible foe in bad economic times.

Pardon the noobish/dumbish queries: what if gold and silver(or some such commodity) is used as standard? Gold is less quantity, then why not support it with silver( or such commodity)? Also, if mine owners control the gold(or some such commodity), then banks control printed currency, whats the difference? Atleast, gold or silver cant be created as and when one wants it unlike printed currency.

[Pranav]

Neshant wrote:

Fractional reserve banking looks like a printing press to folks who only count loans, but don't count the balancing deposits!

I'm afraid you've been taken in by the farce of savings backing the fractional reserve system.

The reality is nothing backs the fractional reserve system other than faith & obscurity and robbery of the productive. Deposits appear out of thin air when the banks park money (itself conjured out of "loans" from the Federal Reserve) back with the Federal Reserve through bond purchases at a higher interest rate than the borrowing rate. Its nothing more than fancy paper footwork to disguise banks getting money aka "deposts" for free with the saver being the loser.

Mostly this is directed at big banks that setup the Federal Reserve as the entire reason the Federal Reserve was setup was to perpetuate their monopoly at all costs.

The point is that I want the bank to put MY money to work, instead of just sitting on it.

The original purpose of a bank is to store the fruits of labor, not to grow anything. Theft through inflation of the worthless paper money system was devised to force people to deposit the fruits of their labor with the useless middleman industry. Maybe you are referring to it from that context.

You surely cannot be ethical in asking for growth of your money while demanding that potential losses be offloaded onto some other sucker via FDIC should the bank go under.

Interest rates are determined by the market; they depend on the rate of economic growth, amongst other things.

If its determined by the market why is a guy like Bernanke fiddling around with it?

Look up deflationary spiral.

Deflationary spiral is keynesian textbook nonsense put forward by the useless middleman industry to justify printing of money - a robbery scheme which they have set themselves up to benefit from. The free market does not need any guidance on how to set prices. That aside, intuitive sense will tell you that its silly to say that higher prices (aka lowering purchasing power) is good for anyone. If it makes no sense on a personal level, it certainly makes less sense on a national level.

The point is that whatever happened happened on the Gold standard.

Taking things out of context produces no point. The point is also that America's fastest economic growth occured under the gold standard. What is the point? Bernanke has vaporized more wealth than just about anyone in recent memory under the fiat standard. What is the point?

I didn't say get rid of it. Nationalize it. The Central Bank guarantee any rate of inflation desired. Even negative inflation i.e. deflation. Though there are advantages in a small positive rate. No 'wise men' required, it can be a transparent algorithm, as first suggested by Milton Friedman.

Sorry I don't agree with nationalising it. Politicians are corrupt and up for auction. Regulators are packed with ex-employees from companies like Goldman Sachs. Lobbies are crawling all over the place. That is the reason only honest money (gold) can be trusted by anyone doing productive work in the economy.

Now if you are part of the useless middleman industry making a living off expropriating other people's wealth through fiat money and other paper scams & schemes, then of course a return to honest money would be against your interest.

As regards the Gold standard, not only is it completely unscientific and irrational (why should production of xyz mineral in the hands of a few super-rich mine owners determine the money supply), but will also allow recreation of 1929 Great Depression conditions.

There is no such thing as "unscientific" when it comes to money. For 5000 years, almost all civilizations have independantly selected gold as money. One does not need a PhD to know why it has been regarded as having value for that long. About 50,000+ fiat currencies have existed during that time and 99.5% of them ended up as worthless toilet paper. Now calculate the statistical odds that gold is not money. Ah! I've found a scientific proof.

That aside, does it strike you as odd that banking goons from the useless middleman industry are eager to have the masses NOT use gold as money - and to instead use paper money & their fee based paper shuffling "expertise". Ever ask yourself why?

What I advocate however is not that govt enforce a gold standard as forcing people to use a certain kind of money be it fiat, gold or whatever is wrong. Rather I advocate a system of privately issued competing local currencies. That allows the market (aka individual) to choose the money and frees society from the useless middleman industry which seeks to monopolise the issuance & control of money. It would of course exist alongside gold which again the market must be free to choose as money which its currently impeded from doing. Anyway much to say on this topic and not enough time.

I'll post my favourite video soon on the Federal Reserve.

[Pranav]

Neshant wrote:

If the country looses gold, due to outflows, then the only way to maintain significant reserves of gold would be to raise interest rates. Even if the economy were slowing down or stalling or stagnating, then also the central bank would have to raise rates. Raising interest rates would hurt industry and commerce in a slowing economy.

Raising rates is what's *needed*. When rates rise, the free market is signalling that the nation is consuming beyond its capasity to generate wealth. i.e its on the path to becoming a Greece. Its a early warning system that tells the nation it needs to either generate more productive output or cut back on wasteful consumption.

Its NOT a signal to fire up the printing press and start counterfeiting money.

If the free market were allowed to work (without being distorted by central banking fools) and the free market were to set interest rates, the housing bubble would not exist. Savers would never in a million years lend money to dead beats with no income trying to buy a 500K home. Nor would savers want to put their money in a bank which are leveraged up the wazoo on that worthless collateral. Its only because people believe the govt will transfer any potential loss of the bank onto some other sucker via FDIC that people do not care. But they will eventually care when they see these govt promises to be as worthless as the paper fiat money they are vested in.

On its own Gold does not grow. If we put a ton of gold in a vault somewhere in this planet today and take it out after say 1 year, it will still remain one ton. It will not grow.

I don't know what you mean by grow. If you put a pile of worthless paper money in a vault and open it 500 years from now, has it grown?

If anything, it would have lost all its value through the miracle of inflating aka counterfeiting and people discovering they've been duped into exchanging the fruits of their labor for worthless paper (<-- this inevitably happens over & over in history).

Further there is not enough gold that has been mined in this world or will be mined in the future to sustain the level of trade and commerce that goes on in this planet.

That's about as silly as saying there are not enough trees on this planet to stay on the worthless paper money standard. Or not enough electrons in the universe to cater to digital money printing.

Its not quantity but price. You will find no gold for sale in the open market at $20/oz. You will find tons of gold for sale on the open market at $200,000/oz. On average, the net quantity of gold in the world increases at the rate of approx 2% which co-incidentally is the approximate rate of global growth - not that it should matter.

In any case, I'm not advocating a gold standard but the existance of gold alongside locally competing currencies of private issue.

But certainly a gold standard (aka having money that is intrinsically worth something) is a lot better than having intrinsically worthless paper promisory notes which history shows almost always ends up being worth less than toilet paper.

[Pranav]

Pranav wrote:

Fractional reserve banking looks like a printing press to folks who only count loans, but don't count the balancing deposits!

I'm afraid you've been taken in by the farce of savings backing the fractional reserve system.

The reality is nothing backs the fractional reserve system other than faith & obscurity and robbery of the productive.

Neshant, you keep thumping the bible with statements like "the truth is that X is a farce and Y is nonsense and Z is robbery". Along with the bible-thumping are personal remarks (not that I mind, but they are irrelevant). Very often unrelated issues are garbled in a confused mish-mash.

It is very difficult to extract any logic from the mess. But a fruitful discussion may be possible if you are able to avoid these pitfalls. So I suggest you repost, keeping in mind these suggestions.

Also, you can try address issues which you are avoiding, namely why tying the money supply to XYZ mineral mined by the super-rich is somehow "honest money", and how bankers can pull off Great Depressions on the Gold Standard.

Also, you thumped the bible regarding deflationary spirals, I suggest you try to argue the point rationally. Keep in mind that if you have borrowed money to expand your business, a price collapse followed by bankruptcy and a forced sale to the bank is the last thing you want.

[Pranav]

Neshant wrote:

It is very difficult to extract any logic from the mess. But a fruitful discussion may be possible if you are able to avoid these pitfalls. So I suggest you repost, keeping in mind these suggestions.

I understand your difficulty having a fruitful discussion. It is hard when one lays out the facts and exposes falsehoods.

I didn't see any answer to my questions in your reply. What's the point about rambling about fruitful discussions when the message is devoid of any content.

How about addressing my message point by point and showing me where I'm wrong. I'll willing to take on all questions. That should be fruitful.

[Pranav]

Christopher Sidor wrote:

I am going to expand on what Pranav had said earlier. I will try to keep it as simple as possible.

Let us assume that Country A has gold reserves of about 100 metric tons. It has pegged its currency at say 1 unit is equal to say 500 grams. i.e. 1 Rupee/Pound/Franc/Yen/Dollar/Dinar will be exchanged for say 500 grams of gold. this puts the total amount of currency that can be in circulation = (100000000/500) = 2,00,000 units or 2 lakh rupees/pound/franc/yen/dollar/dinar.
If the country looses gold, due to outflows, then the only way to maintain significant reserves of gold would be to raise interest rates. Even if the economy were slowing down or stalling or stagnating, then also the central bank would have to raise rates. Raising interest rates would hurt industry and commerce in a slowing economy. This is what happened partially after 1929 in many countries. If we had been on gold standard in 2008, then unemployment would have been in double digits and world-trade would have decreased massively.

On its own Gold does not grow. If we put a ton of gold in a vault somewhere in this planet today and take it out after say 1 year, it will still remain one ton. It will not grow.

Further there is not enough gold that has been mined in this world or will be mined in the future to sustain the level of trade and commerce that goes on in this planet. Gold standard is a means to keep everyone poor. Only the elite will profit from it. Not industrious people. Only people who have accessed to gold ore.

The Gold standard is a friend in good economic times and a terrible foe in bad economic times.

Pardon the noobish/dumbish queries: what if gold and silver(or some such commodity) is used as standard? Gold is less quantity, then why not support it with silver( or such commodity)? Also, if mine owners control the gold(or some such commodity), then banks control printed currency, whats the difference? Atleast, gold or silver cant be created as and when one wants it unlike printed currency.

One of the quirks of the gold standard was the fact that Gold replaced Silver as the reserve currency. Till the 17th and 18th century it was silver which was the standard on which currency were based. Gold ETF's popularity is known, Silver ETF's are practically non-existent. Further having a reserve currency based on commodity has one problem. Countries lacking these commodities will remain poor. Wealth will be measured by what can be extracted from the ground and not from one's own hard work or ingenuity.

The difference is that Central banks control the printing press. And by large they are answerable to the people. Course corrections can happen, like what happened during the new deal era. With case of mine owners they are not questionable by anybody. Rather they may do as they please.

Your sentiments about gold or silver was held by many bankers right upto 1930s. The loss of gold standard was bemoaned by many bankers as the one thing which would have kept the governments and sovereigns in check from unnecessary profligacy.

Gold standard was helpful when we were trying to move from a metal/commodity based currency system to a pure paper based currency system. To instill a sense of confidence for the paper notes being issued, it was necessary to anchor the paper based currency to some precious commodity. First it was silver and then it was gold. But as paper based currency gained acceptance and people began to trust it, this crutch of precious commodity was no longer needed. i.e. the commodity based reserves are a thing of the past. We need to move on.

[Pranav]

Neshant wrote:

The difference is that Central banks control the printing press. And by large they are answerable to the people. Course corrections can happen.

You pass off the above as if it is fact. But it is not.

The one thing we have learnt (or should have learnt) is that a central bank acts primarily in the interest of its share holder. In the US, those are private banks. If that means offloading the massive gambling losses of these private banks onto productive society, that is what is done - and that is what has been done.

Aside from this rather damaging croney capitalism aspect of central banking, the idea that some "wise oracle" sitting up top should be fixing & manipulating prices, fiddling around with interest rates and pretending to know what ails the economy can have disasterous consequences - as we have seen.

As for the monetary system, in my opinion, its best served with no entity having a monopoly over it. With monopoly comes corruption & theft, favouritism & croneyism - and it comes at the expense of productive society.

Here's a riddle : If commodity based money is a thing of the past, how about removing capital gains on gold ?

[Pranav]

Pranav wrote:

It is very difficult to extract any logic from the mess. But a fruitful discussion may be possible if you are able to avoid these pitfalls. So I suggest you repost, keeping in mind these suggestions.

I understand your difficulty having a fruitful discussion. It is hard when one lays out the facts and exposes falsehoods.

I didn't see any answer to my questions in your reply. What's the point about rambling about fruitful discussions when the message is devoid of any content.

How about addressing my message point by point and showing me where I'm wrong. I'll willing to take on all questions. That should be fruitful.

You are not "laying out facts", you are just bible thumping, that too in a garbled way.

Take for example the first paragraph in your first post (http://forums.bharat-rakshak.com/viewto ... 3#p1201093) with which you entered the discussion I was having with Hari -

Full reserve banking is the only type of banking that makes any sense. Money counterfeiting subtracts value from the productive people in society. People put it in the bank to safe guard (or so they think) the fruits of their labor. Fractional reserve banking can best be described as a Bernie Madoff ponzi scheme with a printing press.

You have 4 sentences in that paragraph -

Sentence 1 is bible thumping
Sentence 2 is more bible thumping
Sentence 3 is OK, but does not make any point
Sentence 4 is more rhetoric and bible thumping

Pretty much everything you have written is equally garbled.

I'd suggest you put forward precisely one point at a time, without any rhetoric or personal remarks, or mixing up of different issues. Include a precise statement of what the claim is, in one sentence, and then provide a logically sound argument. If you can do that, I'd be happy to answer.

[Pranav]

ldev wrote:

Fractional reserve banking makes sense when the loans being made under the system are utilized for productive activity. As traditional banking has been disintermediated over the last 20 years and especially since about 1998-99, a greater and greater proportion of "loans" by whatever name they can be called have been invested as assets which seek price appreciation. Just trying asking a bank for a loan for productive activity without a tangible asset backing that loan in a service oriented economy!! This is especially true of western countries in general and the US in particular. As paper money equates to "value/buying power", there has been tremendous price deflation in manufactured goods...just visit the nearest Walmart. However the US banking system in particular is allergic to price deflation in "price appreciating assets", and is backed 100% in that effort by the Fed. The Chinese must be feeling cheated. Here they have converted themselves into the world's factory, only to see prices drop continously!! Under the 1970s inflationary environment, they would by now have by far been the world's largest economy even in dollar terms but they underestimated the West!! Making them do all the donkey work while the West enjoys the fruits of their labour in ever decreasing prices!!

In a gold linked, gold backed or full reserve system, there will be continous price deflation in all asset classes. Is that so bad? Not really, but what it fails to do is to motivate economic producers i.e. how hard will you work to expand output when the only benefit in the long term is a general price deflation....that your money will buy more over a reasonably long period of time. Compare that with the present system, where gratification is immediate and instantaneous. There is a huge element of piskology involved in determing which monetary standard will be successful in what period of human/economic evolution. One can therefore argue that the explosion in consumer goods which one has seen in the last 50 years would not have been possible without the fractional reserve system. However that system in the last 10 years has been converted into a "asset price protection racket".

So what comes next? If bad loans are recognized everywhere and the world is groaning with bad loans, the present system with a few reforms can continue i.e namely to stop propping up asset values and to balance out the current lopsided pendulum in favor of borrowers at the expense of savers.

[Pranav]

Pranav wrote:

There is a huge element of piskology involved in determing which monetary standard will be successful in what period of human/economic evolution.

Money is essentially a token. Whether it is gold or paper, it get its value by social convention.

The things that matter are (a) the total volume of money circulating (b) how new money is introduced into circulation.

[Pranav]

Pranav wrote:

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased?

Neshant, this question posted some time back is for you too.

[Pranav]

Neshant wrote:

You are not "laying out facts", you are just bible thumping, that too in a garbled way.was having with Hari -

Full reserve banking is the only type of banking that makes any sense. Money counterfeiting subtracts value from the productive people in society. People put it in the bank to safe guard (or so they think) the fruits of their labor. Fractional reserve banking can best be described as a Bernie Madoff ponzi scheme with a printing press.

Can you point out what isn't fact in the above statement?

You keep rambling on and on about bible thumping when you're the one passing off one ignorant statement after another as fact.

Again, point out what isn't fact in the paragraph above. I'll distill it for you :

1) Is the Federal Reserve not a money counterfeiting operation pretending to act in the interest of the public?
2) Does it not exist to perpetuate the monopoly of its private bank shareholders behind a wall of secrecy at the expense of productive society?
3) If money printing is good, shouldn't we all be doing it? (i.e pirnting $100 on our laser printers). If not why not?
4) Is fractional reserve with the gains going to banking goons & losses going to savers not a fraud?
5) Is the notion of some joker like Bernanke sitting up top pretending to shephard the economy, fiddling around with interest rates (effectively price fixing for his cronies) compatible with free market economics.
6) Does not the useless middleman economy rely on destruction (inflation) of fiat money of the productive economy to perpetuate its existance.
7) From an intuitive sense (nevermind fancy pants jargon), is destroying the value of money a good thing or a bad thing.

Start by answering #3. I'll be most interested in hearing your response to that.

A little less pointless bantering and a more addressing of the issue will get us somewhere.

[Pranav]

Neshant wrote:

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased?

Neshant, this question posted some time back is for you too.

A loan implies interest.

Is there interest payable on the loan? If there is, in what form is that interest payment being made.

Before you claim the above represents fractional banking follows similar lines and has limits, be aware that isn't how fractional banking works.

[Pranav]

ldev wrote:

There is a huge element of piskology involved in determing which monetary standard will be successful in what period of human/economic evolution.

Money is essentially a token. Whether it is gold or paper, it get its value by social convention.

The things that matter are (a) the total volume of money circulating (b) how new money is introduced into circulation.

If you have studied Economics you will know that the prerequisites of money are:

1. a medium of exchange

2. a unit of account

3. a store of value

I dont think anybody will argue against the notion that fiat currency has already lost the third essential definition i.e. a store of value. Nobody will keep their savings in the form of currency for a period of 10 years in today's world.

As to your questions regarding total volume of in circulation and how new money is introduced, under the present orthodoxy, all central banks follow virtually the same norms i.e. they monitor interest rates, various indices for measuring inflation and conduct open market operations to introduce or withdraw money into the system. Again under the present orthodoxy,the reason that central banks usually target a low inflation rate as opposed to "no inflation" is to ensure that the economy does not hit a bottleneck for lack of adequate money.

However, the present orthodoxy does not measure the prices of "investment assets" where a significant part of money created today is being channeled. It also does not measure the debt servicing capacity of the economy as a whole to determine whether cashflow is adequate to service the debt that is being built into the system. In fact it does not even measure tertiary assets created by the monetary system such as all forms of derivatives whose settlement makes/can make demands on the monetary base. When the central bank's preoccupation rests with whether the money supply will be adequate in the event of a funding squeeze e.g in Europe when European banks cannot even fund their dollar denominated assets and have to rely on the ECB which in turn is dependent on swap lines with the Fed, you know that something is really wrong. Does it mean that the fiat money standard has to be thrown out? I dont think so. You dont throw out the baby with the bathwater.

[Pranav]

Hari Seldon wrote:

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased?

Neshant, this question posted some time back is for you too.

A loan implies interest.

Is there interest payable on the loan? If there is, in what form is that interest payment being made.

+1. Good Qs. Which brings back the whole debate on why creation of debt-based currency by commercial banks under FRB isn't likely to be sustainable to start with.

[Pranav]

Pranav wrote:

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased?

A loan implies interest.

Is there interest payable on the loan? If there is, in what form is that interest payment being made.

Before you claim the above represents fractional banking follows similar lines and has limits, be aware that isn't how fractional banking works.

Interest is irrelevant to the question of whether the money supply has increased. We're talking about a possible discontinuous jump in the money supply at the instant Dick hands over 5 gold coins to Harry, out of the 8 he has borrowed from Tom.

But anyway, suppose all the loans are zero interest. Now say whether the money supply has increased.

[Pranav]

Pranav wrote:

Money is essentially a token. Whether it is gold or paper, it get its value by social convention.

The things that matter are (a) the total volume of money circulating (b) how new money is introduced into circulation.

If you have studied Economics you will know that the prerequisites of money are:

1. a medium of exchange

2. a unit of account

3. a store of value

As regards gold, it gets its value in 2 ways -
(1) you can use it for jewelry etc.
(2) you believe others will also consider it to be valuable, so you will be able to exchange it for anything you need at a later date.

The second point relates to "social convention". This is also the reason that paper money has more value than old newspapers.

[Pranav]

Pranav wrote:

3) If money printing is good, shouldn't we all be doing it? (i.e pirnting $100 on our laser printers). If not why not? ....

Start by answering #3.

Simple, whatever is being used as currency has to be restricted in quantity, and the manner in which it is introduced into circulation has to be fair to everybody. No reason why that cannot be done by a publicly owned central bank.

[Pranav]

Interest is irrelevant to the question of whether the money supply has increased.

If there is no interest, it is not a loan but an act of charity.

Lending means giving something with the expectation of having it returned. Whether you charge a high interest or a low interest or no interest is immaterial.

Anyway, to avoid irrelevant distractions, let us continue (for now) with a zero interest scenario.

There is no increase in the money supply if there are 10 gold coins in the system at all times.

Good, we are making progress.

Now suppose Dick is a bank who lends out a fraction of what he receives as a deposit, repeatedly, until the total amount lent by Dick is 900% of the original deposit (as elaborated upon previously in this thread here and here).

Still no increase in money supply?

I expect you will try to equate this to fiat money and fractional reserve banking and be dead wrong on it.

You are welcome to concisely state and logically argue your points.

[Pranav]

Simple, whatever is being used as currency has to be restricted in quantity, and the manner in which it is introduced into circulation has to be fair to everybody. No reason why that cannot be done by a publicly owned central bank

How do you decide what is "fair to everybody"? ...

So where does "fair to everybody" come into the equation? Your whole premise has collapsed.

We'll come to that in due course. Let me assure you that a publicly owned central bank can introduce money into circulation in a way that is a lot fairer than a super-rich mine owner.

[Pranav]

Continuing the discussion -

There is no increase in the money supply if there are 10 gold coins in the system at all times.

Good, we are making progress.

Now suppose Dick is a bank who lends out a fraction of what he receives as a deposit, repeatedly, until the total amount lent by Dick is 900% of the original deposit (as elaborated upon previously in this thread here and here).

Still no increase in money supply?

We have proved that a bank, lending out a fraction of what it receives in deposits, repeatedly, until the total amount loaned out is 900% of the initial deposit, does not change the money supply at all.

Now let us bring interest into the picture. If the bank is giving interest to depositors, and charging interest from borrowers, it has absolutely no impact on the number of gold coins in the system.

Ergo, the money supply remains unchanged.

You can ask, however, whether there will be enough gold coins in the system for all the interest to be paid. That is a separate question that we will address later.

[Pranav]

Now suppose Dick is a bank who lends out a fraction of what he receives as a deposit, repeatedly, until the total amount lent by Dick is 900% of the original deposit

How does he lend out gold coins he does not have.

Is he is running a counterfeiting operation?

You can't repeatedly lend out gold unless you are breaking into the borrowers house at night and stealing it.

You're getting dangerously close to exposing what central banking, banking cronies & fiat money is all about.

That has been answered. As the post you are quoting from says ...

(as elaborated upon previously in this thread here and here).

In short, what gets lent out will, in all likelihood, be deposited into the banking system again, possibly by somebody else, possibly in some other bank.

[Neshant]

In short, what gets lent out will, in all likelihood, be deposited into the banking system again, possibly by somebody else, possibly in some other bank.

How do you lend it out gold coins in the first place if you don't have it?

Also how do you know it is deposited "in all likelihood" into the banking system?

If there is no interest on lending as you said, there will be no profit to pay interest on deposits. Neither will there be any inflation since the money cannot be counterfeited (i.e. money supply is the same). There is thus no reason to deposit anything with a bank. If anything, a person who deposits a gold coin in a bank account is putting himself at risk of Madoff schemes like that which you describe above with the bank paying him no risk premium (interest).

Thus the role of banking as a useless middleman industry becomes apparent.

The whole reason fiat money is promoted by banking crooks is so that they can counterfeit money. That's the reason the big banks setup the Federal Reserve. It allows them to take with ease from the productive economy and uses the force of government (i.e violence) to confiscate wealth from the productive.

[Pranav]

In short, what gets lent out will, in all likelihood, be deposited into the banking system again, possibly by somebody else, possibly in some other bank.

How do you lend it out gold coins in the first place if you don't have it?

Also how do you know it is deposited "in all likelihood" into the banking system?

The bank gets an initial deposit of gold coins, lends some of them out. Assume that what is lent out gets deposited again into the banking system. Our goal, for now, is simply to see what happens to the money supply in these circumstances.

[The assumption is in fact reasonable, but that discussion is not germane to the immediate point. We can get back to it later. And even if the assumption does not hold it will not affect our thesis at all.]

If there is no interest on lending as you said, there will be no profit to pay interest on deposits. Neither will there be any inflation since the money cannot be counterfeited (i.e. money supply is the same). There is thus no reason to deposit anything with a bank. If anything, a person who deposits a gold coin in a bank account is putting himself at risk of Madoff schemes like that which you describe above with the bank paying him no risk premium (interest).

Thus the role of banking as a useless middleman industry becomes apparent.

The whole reason fiat money is promoted by banking crooks is so that they can counterfeit money. That's the reason the big banks setup the Federal Reserve. It allows them to take with ease from the productive economy and uses the force of government (i.e violence) to confiscate wealth from the productive.

One thing at a time. First recognize that the banking system, lending out a fraction of what it receives in deposits, repeatedly, until the total amount loaned out is up to 900% of the initial deposit, does not change the money supply at all.

[paramu]

Let me add one more assumption. There is no reserve requirement. Is it possible to create infinte money from 1 gold coin?

[Pranav]

Let me add one more assumption. There is no reserve requirement. Is it possible to create infinte money from 1 gold coin?

Well, the total amount loaned out could approach infinity.

Sum of geometric series a + a r + a r^2 + a r^3 + ... = a (1/(1 - r)). a is the initial deposit, and r is the fraction of a deposit that can be loaned out. Each term in the series is the amount of a loan. Zero reserve means r = 1, i.e. 100% of a deposit can be loaned out again.

Whether that means infinite money depends on your definition of money supply. After all, there is only one gold coin, and the loans are balanced by the deposits.

The money supply as per the "M0" definition remains at 1 gold coin.