Is fractional reserve banking inflationary?

But keep in mind, it only increases the money supply when debts are increased. That is, the money supply only increases in proportion to the increase in personal debt.

Let's play a thought game here and imagine what would happen if you "borrowed" money from the bank and then just put that money right back into your own account. The money in your own account would basically be owed to yourself (in a manner of speaking, from one perspective).

Do you think that would cause inflation?

Would a rational person in that situation be more likely to spend money as a result?

Use some mathematics and quantitative logic here and try to put things into proper perspective.

That's kind of no different than buying something on credit, isn't it?
Do you think buying things on credit creates inflation?

 

I have no idea what a "right to liberty" is, so I can't answer your question.

 

Yep. When the bank issues a loan and creates money, that increased the money supply which causes inflation (i.e. lower price of money)

 

What?! How in the world did you get that out of what I just stated?

People really need to use some more critical thought skills.

I think you people are falling into a common logical fallacy.

If someone owes money, it has the exact opposite effect as if someone is owed money.
"Money in the bank" is similar to being owed money, and the two have a lot more overlap than many of you seem to want to see.

Owing money on a loan functions a bit like "negative" money in the bank.

Try to think about it.

If people borrow money, they're going to have to pay it back eventually. In terms of labor power, it would be denominated in units of dollars, and that would not include fractional reserve money created by banks.

You might need to conduct some rudimentary thought experiment to be able to see this.

 

Owing money doesn't decrease the money supply. When the bank issues the loan, it creates money. It increases the money supply. Increase in supply results in a fall in price. Inflation.

 

You are making a simplistic logical fallacy here, assuming inflation is only affected by the supply of money, and further choosing to define that money to include something that you refuse to include the opposite of.

To try to answer this, I think you have to go back a little bit and look a little more at the fundamentals, to understand what exactly causes inflation and how it is caused.

Owing money counteracts inflation for the same reason that "non-existent" money in bank accounts is included into the category of money, for the purposes of determining inflation.

How is owing money not the exact opposite of having money in a bank account that the bank owes you?

The value of money is denominated in the unit of money (worth of currency) and (theoretically) does not change just because more money is owed.

There is no simple thought experiment you could create where your contention holds true. If you don't believe me, try. Imagine for the sake of theoretical argument a world with only two people. And there is only one real dollar that exists.

 

Why can't you ever remember that slavery already proved you wrong? Every time you have made that claim it has been wrong, as slavery proved. It will also continue to have been proved wrong by slavery every time you make it in the future.

What nobody really has a right to is forcibly to deprive others of their rights without making just compensation, whether they paper over their crime by calling it "property" or anything else.

 

Future expectations about prices, not whether you have a debt you can collect. Give your head a shake.

But an IOU from a non-bank debtor doesn't give anyone any reason to think there will be more money out there, and a bank's IOU already IS more money out there.

No they don't. You can't spend Treasury bonds any more than you can spend stocks. You are talking nonsense.

 

You were talking about the difference between bank lending under fractional reserve and non-bank lending. I was trying to explain that a non-bank lender's IOU is not money, while a bank's IOU -- i.e., demand deposit liability -- is.

 

Of course you do, because you want others to respect your own right to liberty. You have merely decided not to know what other people's rights to liberty are. Simple.

 

The issue of whether you can spend them or not is sort of besides the point.

I don't think you understand how inflation actually arises. It's not so simple as just quantity of money. You do have to look at what is backing that money, so to speak.

You can easily sell Treasury bonds for money, so in a sense they are very liquid.

If someone owns Treasury bonds, they will likely feel less of a need to keep other money in their savings accounts. It can replace money in savings.

Since the money in bank accounts is backed by loans, it's not just adding more worthless paper money into the system (so to speak).
The value of each dollar, whether real or not, is still based on the value of the paper dollar actually issued by the country's Central Bank.

 

Let me put it to you this way. Do you think an economy overall has more money to spend if there are more IOUs?

We're not talking about adding more paper money into the system, we are talking about adding more money that people have to repay.
Think about that.

When people have to repay something, they're going to be more reluctant to spend it.
Don't think about fractional reserve banking for a moment, think about my example of individual consumers buying things on credit.
If you allow them to buy on credit, would that start creating inflation?
When seen that way, you can see it is kind of ridiculous.

 

Depends what you mean by an "IOU." Demand deposit liabilities of private banks are in a sense IOUs, and they are indisputably money because they are generally accepted in exchange. If I write you an IOU, however, that is not money because you can't spend it: it is not generally accepted in exchange.

Oh, I think you'll find I have.

Huh?? Why on earth would they borrow money at interest in the first place if not to spend it?? You seem to be unaware that a large amount of debt these days is assumed IN THE ACT of spending it, when people use their credit cards.

That depends on the type of credit. If you mean running up a tab at the local greengrocer or bar, no, that would not be inflationary because while the customer using the credit would have more money to spend, the proprietor of the bar or greengrocer would have the same amount less. The situation with a bank loan is completely different, because the bank does not have any less money to spend as a result of the loan, and neither does anyone else.

That way is not the way a bank loan actually is.

 

Well, there certainly is housing inflation caused by banks having more money to lend people, but that is kind of a different type of inflation than that which I am talking about.

So are you claiming that borrowing money to spend it creates inflation?
Even in the absence of fractional reserve banking?

Let's just clarify that one point.

So it seems you are able to embrace my basic argument, the issue all comes down to creation of money in banks.

Let me ask you, do you think people will be likely to spend less of their money if they have huge debts looming over their head that eventually need to be repaid?

It's not like we are talking about releasing more "intrinsically worthless" money into the system. This money is going to have to be repaid.
Viewed from one way, we are basically adding more demand for money into the system, because these people are going to have to repay that new "money" they played a part in bringing into existence.

 

No, it is the point, because money is defined as what is generally accepted in exchange, and Treasury bonds are not generally accepted in exchange.

<yawn>

I.e., the relationship between the amount of money in circulation and what it is used to buy. OK.

So what? You can also very easily sell stocks or pork belly futures for money, too. That doesn't mean they ARE money.

So what? So can a vacation home or a car collection. They aren't money either.

What do you mean, "backed by" loans? It is created by loans.

What do you mean, "worthless paper money"? Money is generally accepted in exchange, so it is very definitely not worthless.

What on earth do you erroneously imagine you think you might be talking about?

 

If that's how you define money, then it is my contention that inflation will not necessarily be in proportion to how much money there is.

Perhaps we could start the argument there.

Can we take a look at how things in the system could provide a sort of "backing" to money?
(Do you know what I am talking about?)

Like, if we add more money into the system, but then also promise that with this new money, you could trade it in for something of equal value that would be added into the economic system, can we agree that would not lead to inflation?

Example: When the country was on the gold standard, issuing more money would not cause inflation, assuming the government had all the gold to back the new money.


Now, to go back to your quoted statement, things of value can also be exchanged, as money can. But that does not mean that adding more things of inherent value will cause inflation, even if they served as money and were used to barter over things.

 

No, it's caused by people being willing to borrow more to buy houses. Banks don't need money to make loans.

I don't think you have a very clear idea what you are talking about.

No, cet. par., net money creation -- whether aggregate borrowing from commercial banks or sovereign money issuance -- that exceeds economic growth creates inflation.

Fractional reserves enable banks to create money because they can issue more than they have to withdraw from circulation to hold as reserves.

I'm not optimistic.

That is the essence of modern monetary systems.

Sure, because they've already spent the loan proceeds.

I don't know what you mean by "intrinsically worthless money." Money is by definition generally accepted in exchange. It is worth whatever it will buy.

And circulates in the economy until it is. First it enters the economy all at once when the loan is written, then it leaves the economy gradually as the loan principal is repaid.

If I understand you correctly, yes, money that entered the economy through bank loans has to leave the economy as the principal is repaid.

 

But I'm saying more than that. I'm saying, because it has to leave the economy in the future, it will avoid having an inflationary effect now.

(Of course it's much more complicated than that, but that's just the basics to start off with, if you can grasp that point)

I'm basically saying that the money is backed by something, because the borrowers are going to have to work for that money to get it back, so they can repay their debt.

Since the money is essentially backed by something, in the economy, that "money" ceases to operate merely as additional fiat currency (which we would expect to lead to inflation).

 

No, debt money has an inflationary effect when it enters the money supply, a deflationary effect when it leaves. That is the point: its positive feedback creates the boom-bust cycle.

 

No.

When a bank issues a loan, it uses existing money from the existing money supply.
Deposits.

The exception to this is quantative easing, When the state bank issues new money and lends it out/spends it. (The Fed, The Bank of England etc.)
Commercial banks are not allowed to do this. That's called counterfeiting and is a crime.

 

There are two factors in inflation.
The availability of money and the availability of things to trade money for.

As people become more efficient and more productive, or even as more people are born to provide a greater availablility of labour, as humans acquire more resources over time, deflation occurs.

This may be countered by printing more money.
These naturally occuring deflationary forces can be used to mask the inflationary forces of money printing.

 

Professor Bill Mitchell (MMT) has this to say:

http://bilbo.economicoutlook.net/blog/?p=45091&cpage=1#comment-68194


"The money multiplier myth (in fractional reserve banking) also leads students to think that as the central bank can control the monetary base then it can control the money supply. Further, given that inflation is allegedly the result of the money supply growing too fast then the blame is sheeted home to the “government”. This leads to claims that if the government runs a fiscal deficit then it has to issue bonds to avoid causing hyperinflation. Nothing could be further from the truth.

That is nothing like the way the banking system operates in the real world. The idea that the monetary base (the sum of bank reserves and currency) leads to a change in the money supply via some multiple is not a valid representation of the way the monetary system operates".

 

Correct. Fractional Reserve Banking does not expand the money supply.
If anything at all, it contracts it.
Placing a small amount of the deposits beyond reach.

And the multipler effect of fractional reserve banking is a negative one.
Technicially speaking a divider.

Typically the available money supply is multiplied by 0.9 with each deposit made.

(A bit spurious that one as not all of a banks reserves are held in cash).

 

slavery has nothing at all to do with anything being discussed. Comparing owning land to owning a human being is retarded, and you are fully aware of that as I've had to point that out to you dozens of times.

The facts remain. Nobody has a right to property someone else owns.

 

Yes, of course it does. You claimed no one has a right to any property anyone else owns. But slaves have a right to liberty even though their rights to liberty are the property of their owners. You are just trying to find some way of not knowing the fact that slavery proves your beliefs are false and evil.

Speaking of things that are retarded, I didn't mention land. I simply explained how slavery proves your claim is false and evil.

No, you have only claimed it, falsely, and I have proved that claim is false and evil dozens of times, and in several different and independently conclusive ways.

Everyone has rights to life, liberty, and property in the fruits of their labor, even if evil people falsely claim those rights are someone else's property.