The Capitalist System Is Decaying Because Of Its Own Contradictions

So, let's be clear. When I deposit my check into my savings account, you believe that that money is invested?

 

Yes, absolutely.

 

What do YOU think happens to that money you deposit?

 

Depository institutions hold money on deposit as reserves. It is not lent to anyone outside the banking system, nor does the amount on deposit in the system determine the rate of interest. Deposits are NOT used as investments.

Prior to 2008 banks lent deposits only to other banks to meet their reserve requirements. Today banks earn interest on the excess reserves they hold as a way to create a price floor for interest rates.

When banks invest, they do so out of their own capital - bank profit (liabilities - assets) or investor capital. What depository institutions don't do, is lend out customer deposits to other customers.

https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_Me_8_14_13.pdf

https://www.forbes.com/sites/stevek...-banks-cant-lend-out-reserves/5/#5591f2496134 (this articel lays out the math).

http://www.bankofengland.co.uk/publ...lletin/2014/qb14q1prereleasemoneycreation.pdf

 

This is fundamentally wrong. Without deposits a bank can't lend. It can however lend about 10 times more than it has on deposit so what it lends is always a multiple of what it has on deposit. You might say 10% of what it lends is from deposits and 90% is created but 100% of what it leads is dependent upon deposits. So, as always, S=I ( savings = investment)

 

In the system we have today, loans create deposits, so all a bank needs is a creditworthy borrower and it creates the loan and the deposit.

Source: http://www.pragcap.com/loans-create-deposits-in-context/

In this sense, creditworthy borrowers determine the amount of reserves in the system, it has nothing to do with the reserve ratio, which is little more than a mechanism the Fed used before 2008 to control interest rates. Other countries like Canada and the UK have no reserve requirement because they don't control interest rates via a reserve ratio. Yet the reason that most people believe there is a ratio at all is to prevent "bank runs", which in moder times is extremely unlikely as the Fed gauruntees deposits.

You don't understand modern banking. The notion of a ‘market for loanable funds’ makes little sense. There is no supply of loans independent of the demand for loans. Deposits are created by banks out of nothing (ex nihilo) in the act of lending to credit-worthy borrowers. If, upon lending, a bank finds itself short of reserves, it can obtain them after the fact from other banks or, if the banking system as a whole is in deficit, from the central bank, either by exchanging government bonds for reserves or by borrowing (i.e. incurring an overdraft on its reserve account) at a penalty rate determined by the central bank. The cost of obtaining reserves will be factored in by the bank in evaluating the profitability of the loan, but the bank’s lending behavior is not constrained by reserves.

Because of this, the Central Bank does not determine the amount of money in the economy directly, rather it manipulates the amount by increasing or decreasing the amount of reserves available within the banking system and therefore maipulating the price (interst rates) via open market operations.

You have it backward...Savings does not fund investment, Investment funds savings.

Here I'll let Warren Mosler explain it to you.

[video=youtube;phnqEBEtQEI]https://www.youtube.com/watch?v=phnqEBEtQEI[/video]

If you can't be bothered to watch, let me explain....

Firm decides it wants to invest ---> Firm applies for a loan ---> Bank assesses the firms creditworthiness--->Bank approves the loan (assuming good credit)--->The loan simultaneously creates deposit---> Firm withdraws from it's loan account to invest in goods--->The investment spending simultaneously creates income and saving equal to the investment spending.

 

wrong of course, we have a fractional reserve system. a bank needs deposits before it can make loans which of course explains why banks compete to get deposits!!

 

https://www.kreditopferhilfe.net/doc...Me_8_14_13.pdf

https://www.forbes.com/sites/steveke.../#5591f2496134 (this articel lays out the math).

http://www.bankofengland.co.uk/publi...eycreation.pdf

 

we can all post a million links that make our case. You must learn to express yourself

 

You are merely pointing out a portion of how the accounting is done.

If a bank has no deposits, then it's going to have a problem with the Fed when it makes loans.

The point here is that retail deposits do not just sit in a bank somewhere. They get used.

 

There are a few problems intrinsic to socialism.

• It weakens the nation's population by rewarding mediocrity and personal failure. Weakness and indolence are the natural results of meeting all individual needs regardless of whether the individual earned them.
• It weakens the nation by discouraging excellence. It discourages excellence by confiscating the rewards of excellence, thus removing the extrinsic drivers to achieve.
• It impoverishes the nation by removing individuals' needs to create wealth in order to survive.
• It impoverishes the nation by using taxation to remove capital from the hands of investors.
• It destroys the moral fabric of the nation by using the state to steal the rewards of labor and ingenuity earned by some citizens, only to give those rewards to those who did not earn them.

Socialism rewards the least deserving at the expense of the most deserving. Socialism is thereby disastrously self-destructive and morally corrupt.

 

As has been documented in "The Commanding Heights - The Battle for the World Economy" - Yergin & Stanislaw - 2002

 

Your ideology prevents a consideration that wealth might be created by the public sector, as well as the private sector.

Private sector wealth creation is motivated by the profit motive, but some socially desirable activity necessarily falls outside the scope of the private sector. You need to expand your definition of wealth beyond mere 'stuff' to include 'quality of life'.

My propostion is that the public sector can allocate resources (whether labour, knowledge or materials presently unused by the private sector , in order to maximise a community's wealth (see below).

Your comment that this has nothing to do with inflation shows you are (possibly deliberately) not following my proposition.

Commitment to the present dysfunctional financial system is the reason why a community cannot productively engage all its available working-age labour, at above poverty-level wages, there-by eliminating the need for welfare so despised by the Right

And confusion abounds (in this thread, despite contributions from reasonably intelligent people, and regarding economics in general; witness the disagreements even at nobel laureate level).

Eg, look at this comment (which I believe is correct) from Econ4Every1 (post #356)

There is no supply of loans independent of the demand for loans. Deposits are created by banks out of nothing (ex nihilo) in the act of lending to credit-worthy borrowers

followed by an argument with another poster

You have it backward...Savings does not fund investment, Investment funds savings

Regardless of all this, the fact that the public sector (government) has to pay interest on debt to the private sector, is an abomination.

I believe the US government is currently handing over c.$250 billion annually to sevice the interest bill.

The government should be empowered to create the amount of debt-free money it needs in order to ensure full-capacity utilisation of the community's resources - but no more than that, to avoid inflation.

-------

The private sector has its strengths and efficiencies which however certainly do not necessarily align with total community wellbeing.

Heard on the radio today: Trump has a limited time to produce the results desired by the electorate. Growth of 4% (your goal, IIRC) plus reduction in poverty levels in the inner cities and 'rust-belts', plus infrastructure spending as promised.

Supply-side - tax reduction, minimum wage reduction, removal of bank regulation etc - with simultaneous reduction in government debt and poverty levels?: Good luck with that combo.

 

LOL, expression is not something I've ever had a problem with. Now, I've already expressed myself. The links don't say anything I haven't already said, they are just there in case you decide to question what I've already told you. The problem is, you just don't understand the implications of what I've already said.


But here, let me say it again....

Fractional reserve banking, as a constraint on lending, only works if banks can only make loans if they have the reserves on hand. As I've already pointed out to you, There is no supply of loans independent of the demand for loans. Deposits are created by banks out of nothing (ex nihilo) in the act of lending to credit-worthy borrowers. If, upon lending, a bank finds itself short of reserves, it can obtain them after the fact from other banks or, if the banking system as a whole is in deficit, from the central bank, either by exchanging government bonds for reserves or by borrowing (i.e. incurring an overdraft on its reserve account) at a penalty rate determined by the central bank. The cost of obtaining reserves will be factored in by the bank in evaluating the profitability of the loan, but the bank’s lending behavior is not constrained by reserves.

What that means is, when a borrower signs a loan doc, the loan doc is the asset against which credit is created from nothing. Banks create credit they don't loan existing money to other people. That system ended 47 years ago. It also means that banks can ALWAYS obtain reserves needed to make loans. Again, that does away with the constraint the fractioanl reserve system put on the banking system prior to 1971.

Deposits are reserves and reserves are nothing more than a system for controlling interest rates prior to 2008. After 2008 the system changed because the Fed flooded the banking system with reserves. Over $2 trillion dollars of reserves. You now why there wasn't a lending frenzy? Because banks don't lend reserves. The irony is even the Fed (or at least the members of the board) doesn't understand banking. They, like you, beleived in "loanable funds theory". They thought if you increased the quantitiy of reserves it would spur more lending. It doesn't because lending is driven by DEMAND not SUPPLY.

Yet another failure of a different type of supply side theory.

 

Yes, but notice the warning contained therein

The market also requires something else: legitimacy. But here it faces an ethical conundrum. It is based upon contracts, rules, and choice – in short, on self-restraint – which contrasts mightily with other ways of organizing economic activity. Yet a system that takes the pursuit of self-interest and profit as its guiding light does not necessarily satisfy the yearning in the human soul for belief and some higher meaning beyond materialism. In the Spanish Civil War in the late 1930s, Republican soldiers are said to have died with the word "Stalin" on their lips. Their idealized vision of Soviet communism, however misguided, provided justification for their ultimate sacrifice. Few people would die with the words "free markets" on their lips.

 

I never said they don't get used, what I said is that customer deposits aren't lent to other customers. Banks use customer deposits to meet their reserve requirement. If they have more than they need (excess reserves), they try to lend those reserves to other banks to make money on the excess usually at a rate between what they are earning from the Fed and what borrowers are borrowing at.

Prior to 2008, the Fed manipulated the system of reserves as a way to control interest rates. Today, the banking system is still flooded with excess reserves (thanks, QE), so the Fed can't manipulate the system the way it used to. Now the way the Fed creates the interest rate floor (i.e. above zero) is to pay banks interest on the excess reserves they hold. So if the Fed pays .75%, then banks have no motivation to lend at anything less than that. Given the zero risk in holding reserves and earning .75% a bank will want to make at least 2% (probably closer to 3-4% for most people) or more before it turns excess reserves into required reserves by making a loan.

 

Wealth cannot be created by the public sector. It can only be redistributed. The preceding has nothing to do with inflation which is completely a product of gov monetary policy.

 

American soldiers in the Revolutionary War died for free markets.

There is nothing more human than to lead a productive life both providing for self and family and producing goods and services which improve the standard of living of fellow humans. The system of capitalism is the best system to achieve this goal. It has done more to improve the human condition than any other system.

 

abw...

I want to help you understand a little better. You seem genuine and I think your head is in the right place.

Let me toss out a few ideas and you chew on um and let me know what you think....

I wrote a really long explanation, but let me start out saying a few quick ideas and see if it makes any sense. We can go from here if you're interested.

I hate to be the bearer of bad news, but the government paid $432 billion in interest
last year.

But on the bright side, interest is paid as an income to those that hold US Treasuries. So that is largely a good thing.

Also, government debt as a percent of GDP is well within its historical norm....



Paying interest isn't a problem and despite claims the contrary, the US government is not going t be overwhelmed with debt payments. Debt has never been higher than 3% of GDP and there's no reason it ever will be. This is because the government sets the interest rate, not the market. All the projections of interest rise as a percent of GDP make false assumptions I'd be happy to get into if you're interested.

This is a fascinating request because it get's the heart of what debt is and it shows just how skewed our intuitive understandings of money and debt really are. I'm not picking on you, most people feel just like you do. I did not so many years ago....

What is debt?

Let's think about other tokens in a society that have no value on their own that we recognize as valueable, then ask ourselves why a worthless token has value.

A movie ticket. A subway token. A gift card.

Three things that have no intrinsic value, yet we understand they have value. Why? Because they are all debts. It is the debt that gives them value.

A movie ticket is a debt redeemable in a seat for a specific movie at a specific time. A subway token is a debt redeemable for a ride on a train. A gift card is a debt redeemable in merchandise for the face value on the card.

It is the debt that gives these things value. What would a debt free movie ticket be? A movie ticket that isn't redeemable for a movie? A debt free subway token? A token that can't be used to ride a train? It seems silly when you say it that way, but that is, in fact, what you're asking for when you talk about debt free money.

US dollars are created as a debt payable in the satisfaction of your taxes. US dollars are the ONLY tokens that can be used to satisfy your taxes. That is the debt.

What would debt free dollars look like? Dollars that can't be used to pay taxes?

Now it occurs to me you might mean interest-free debt. And certainly the government could do that, but I don't think you fully understand the implications. US Treasuries are the single most secure asset in the world. Many retired people put their money in treasuries because they are safe and help protect money from the effects of inflation. If you take away interest paid on debt, retirees might look for more risky options in order to keep pace with inflation.

There are other reasons, but it's getting late and I want to get to bed. If you are interested in follow up, let me know, we can discuss more.

-Cheers

 

Hmm.

I have never read it. I was merely stating what seem to me to be obvious weaknesses.

The conversion of my observations and the writings of Yergin & Stanislaw indicates how obviously flawed socialism is.

That obviousness would seem to indicate that the only people who would advocate for socialism are the weak-minded, the weak or lazy, and those who would use government to enslave their fellow citizens.

 

The argument was that deposits get used, and you're presentation of mechanism and limits goes to support that argument - not rebut it.

 

yes the greatest social welfare program by a factor of 1000! China just switched to it from socialism and instantly eliminated 40% of the entire planets poverty!! Our liberal prefer socialism only because they lack the IQ to understand Republican capitalism. What other reason could there be?

 

if so what would be the best example of lib soviet bureaucrats creating wealth with other people's money that they did not earn rather than wasting the money? Why are you so afraid to present that example?

 

So you're wrong.

And...?

That's what it is.

That's not getting treatment.

It's one component that indicates the relationship.

It's the cost to the patient.

Blatant false dichotomy fallacy. Overtreatment and inappropriate treatment with patented drugs and equipment IN ORDER TO EXTRACT MONOPOLY RENTS is one of the major causes of premature death in the USA, claiming hundreds of thousands of lives every year. Google "iatrogenic" and start reading.

 

China's public education system, which made its economic growth possible.