Any ABCT agnostics out there?

DD5:

The money supply is whatever is circulating and accepted as money or money substitutes. checkbook money is just one type of substitute. The fed does not need to print money. There are now new $900 worth of money substitues in circulation. They are part of the money supply: M1=M0+demand deposits. This is mainstream economics. Any mainstream macro text book will explaint this. Read more about it.

I'm still working through the details to provide a good response to this, but in the meantime, I'd like to hear a response from the guy who said that economists double count when they say that fractional reserve banking expands the money supply. How do you respond to DD5's post?

Alex M:

DD5:

The money supply is whatever is circulating and accepted as money or money substitutes. checkbook money is just one type of substitute. The fed does not need to print money. There are now new $900 worth of money substitues in circulation. They are part of the money supply: M1=M0+demand deposits. This is mainstream economics. Any mainstream macro text book will explaint this. Read more about it.

I'm still working through the details to provide a good response to this, but in the meantime, I'd like to hear a response from the guy who said that economists double count when they say that fractional reserve banking expands the money supply. How do you respond to DD5's post?

 

 

Don't bother! 

You've already decided on the final result before even realizing the full problem.  You are working backwards now from end to start.

Justin Spahr-Summers:

Leprechauns and tooth fairies aren't entities created by humans, nor has anyone rationalized how they could possibly exist.

You don't get it.  I was saying that if the conditions have already existed for fractional reserve banking as you idealize it this would mean that it should have happened then.  Stop throwing around crap like "negative proof fallacy".

Caley McKibbin:

I was saying that if the conditions have already existed for fractional reserve banking as you idealize it this would mean that it should have happened then.

Not necessarily. For instance, banks today are not (as far as I know) legally bound to state in their terms that demand deposits will be loaned out. I'm assuming that libertarian courts would require fractional reserve banks to explicitly explain this—this combined with an absence of government bailouts means they would assuredly get fewer customers, but I disagree with those who say that fractional reserve banking practices would disappear.

DD5:

Don't bother! 

You've already decided on the final result before even realizing the full problem.  You are working backwards now from end to start.

Ok?

krazy kaju:

Many people claim that credit expansion does occur with modern FRB and they point to the money multiplier as evidence. The problem is that economists double count, triple count, quadrouple count, etc. when they calculate money multipliers.

I agree that there probable is a lot of that double counting going on in calculating money multipliers and monetary base, however fractional reserve banking can definitely increase the money supply, especially with some government help. I've read articles from people like Bob Murphy who argue that credit shouldn't be considered part of the money supply for precisely that reason: when I spend $10 on my credit card, my bank takes out $10 for that loan. I think one of the issues that some economists overlook(a very important issue with a central bank in existence) is that they are assuming that loans and checks get called in instantaneously. While most consumer checks get called in quickly, this is not necessarily the same for interbank lending(although it would come close to this in free banking system).

Lets suppose we had some institution thats one of many purposes was to clear checks and loans between banks. I have an inkling that they might delay clearing these checks(especially from privelaged banks) and slow down the drainage of reserves from having loans called in, allowing them to make even more loans in the same amount of time. Now who on Earth would do such a thing?

In America's Great Depression,if I recall,  he said that he the government to outlaw it.

TheOrlonater:

In America's Great Depression,if I recall,  he said that he the government to outlaw it.

You should really your posts for missing words.

"I agree that there probable is a lot of that double counting going on in calculating money multipliers and monetary base, however fractional reserve banking can definitely increase the money supply,...."

really?

www.economagic.com states ( if true)  that in dec 2007 there was about 7 trillion dollars of m2.

additionally, this link states http://mises.org/story/3556

 "in December of 2007, currency was $763.8 billion..."

currency should be pretty easy to track....so when 763 billion in currency exists alongside of (according to economagic.com) nearly 7 trillion of m2 in dec of 2007  (~6.2 trillion if you subtract currency) how is there any double counting and why would that even take place?

i assume there would have to be 6.2 trillion in credit-dollars on financial insitutions books in addition to the 763 billion of physical currency held in various places?   is this not the case?  would audits of banks , etc -  show that there is nowhere near 6.2 trillion credit-dollars?

if the information i have posted here is true, where does double counting come into play?

 

Justin Spahr-Summers:

Caley McKibbin:

I was saying that if the conditions have already existed for fractional reserve banking as you idealize it this would mean that it should have happened then.

Not necessarily. For instance, banks today are not (as far as I know) legally bound to state in their terms that demand deposits will be loaned out. I'm assuming that libertarian courts would require fractional reserve banks to explicitly explain this—this combined with an absence of government bailouts means they would assuredly get fewer customers, but I disagree with those who say that fractional reserve banking practices would disappear.

I need no permission to make loans with my own property.

krazy kaju:

scineram:

krazy kaju:

I would also say that price deflation - of any kind - is bad. It prevents the market for loanable funds for clearing properly, which further reduces the efficieny with which savings are used. In a pure free market, price deflation would be avoided, since it would increase the profitability of currency production.

What is wrong with price cuts due to produtivity increases?

When the price level falls, this causes the real rate of interest to rise. It essentially creates a price floor for the real rate of interest, which in turn causes the loanable funds market not to clear if real interest rates are supposed to fall but nominal interest rates have hit their limit of 0%.

In other words:
The real interest rate at which the loanable funds market clears is 3%.
The price level is falling at 5%.
Thus, to bring the loanable funds market to equilibrium, lenders would have to charge -2% nominal interest rates.
Thus, it is more profitable and less risky for lenders to simply withhold their money from the market, causing a shortage of loanable funds, which increases interest rates, reduces the productivity of saving, and lowers economic growth.

Just so I'm clear on what you're saying, you are stating that falling prices are negative since you propose that the loanable funds market would not be able to clear?  How would you explain the 4% real GDP growth for nearly the last 25 years of the 19th century in the US when their was a general decline in the price level during this time, yet investment boomed?  In other words, the loanable funds market was clearing just fine during this period of prolonged and persistent price declines. 

 

Also, the example that you have set up would not be able to occur in a free market.  The real rate would never fall below the price level falling rate as that doesn't even make sense.  In other words, if prices as you suggest are falling at 5%, why would the real rate that funds would clear at be 3%???  That implies a nominal return of -2% as you suggest.  But why would anyone risk their capital to earn a -2% (or 3% real yield in a 5% decline in the price level environment) when all they have to do is literally put their money under their mattress and earn a real 5% yield.  People would simply not lend and hence the supply of loanable funds would shrink and the real rate would increase back to a minimum of 5.01% (it would need to be something even just slightly north of 5% since they could just hold onto their funds and earn a 5% real return with no risk).

You also talk about how not lending at less than the price decline rate (so something less than 5% in your scenario) is somehow indicative of reduced efficiency of savings?  Why?  Savings earning a 5% real yield is a more efficient use of savings than loaning it out at a 3% real yield.  Locking in a -2% real loss by lending at a 3% real yield in a 5% price decline environment is an INefficient use of savings.

But here is another idea that could also create a situation where the loanable funds real yield could clear at something less than the ESTIMATED FUTURE price level decline because of the increase in real purchasing power created by loaning the money which presumably was used in order to increase the productivity of the country and hence more goods brings the price level down further than estimated and hence the value of money increases so the lender is willing to accept a rate less than the initial estimated price level decrease because they understand that the calculated 3% real yield will actually end up being 6% real yield due to the increases productivity resulting from his/her loan.

DD5:

The money supply is whatever is circulating and accepted as money or money substitutes. checkbook money is just one type of substitute. The fed does not need to print money. There are now new $900 worth of money substitues in circulation. They are part of the money supply: M1=M0+demand deposits. This is mainstream economics. Any mainstream macro text book will explaint this. Read more about it.

Whatever is "circulating and accepted as money or money substitutes" depends entirely on this idea of availability that I've been talking about. If the supply of Fed notes is constant (i.e. additional notes aren't printed), then if person A writes person B a check, and they are clients of different banks, then B will take the check to B's bank, which will try to redeem the check for Fed notes at A's bank. If A's bank doesn't have the Fed notes on hand, the check is rejected and person B will require an alternate form of payment from person A in order to make the exchange. So even if person A supposedly has $100 in bank deposits, he is only able to transfer to another bank the amount that the bank actually keeps on hand. The only kind of transaction which doesn't require the bank to have all of the money on hand is an intra-bank transaction -- e.g. if persons A and B were clients of the same bank, their bank would need only update the books, subtracting the amount from A's deposits and adding it to B's, and a physical exchange of Fed notes need not occur at all. It is only in intra-bank exchanges that the new money (M1 - M0) created by fractional reserve banking on top of an initial deposit of Fed notes can be used.

But then, intra-bank transactions don't increase the money supply at all, they merely make use of an already-expanded money supply. The only way to increase the money supply is via an inter-bank transaction, and inter-bank transactions are entirely limited by the amount of money that the banks keep in their fractional reserves (they are limited by their availability). The claim that an initial deposit of $100 in a world of 10% reserve banks will create an additional $800 of money is therefore hugely exaggerated, because the $800 can only be used in intra-bank transactions, which themselves don't expand the money supply. If there were only one bank in the economy that anyone with a bank account subscribed to, and it practiced a 10% reserve, you could argue that a $100 deposit of Fed notes created $90 in new deposits, but those $90 could only be used in transactions between depositors, which cuts out a significant number of transactions that would occur with non bank clients who simply prefer to hold on to the Fed notes themselves.

So I guess I agree with you that M1 will increase, but its effects will not be anywhere near as severe as if M0 had increased, i.e. the Fed printed more Fed notes. It's the printing of the new notes that is arguably the main culprit, since there's no question of availability when you're holding the Fed notes in your hand.

"but its effects will not be anywhere near as severe as if M0 had increased, i.e. the Fed printed more Fed notes. It's the printing of the new notes that is arguably the main culprit,........"

www.economagic.com states that in 1960 currency in circulation was at about 40 billion and m2 at about 400 billion dollars.

subtract out 40 billion of currency from  1960 m2 and there was about 360 billion of non-currency dollars - if economagic.com is correct.

in oct of 2009 (from economagic) currency in circulation was was about 1 trillion and m2 was at about 9 trillion dollars  - leaving about 8 trillion of non- currency dollars.

if only currency was made without the phenomenon of bank credit expansion (i assume its true) 40 billion of currency in 1960 to 1 trillion in currency in 2009 would be about a 2500 percent increase.

m2 in  2009 (minus any currency) would be at 8 trillion and m2 minus currency in 1960 was about 360 billion....a 2200 percent increase...m3  i am not sure about.

i am not sure if bank credit expansion had stopped in 1960, would the additional 8 trillion of bank credit (again if true)   - harm more than it helps (the culprit??) - than if only 1 trillion in physical currency now existed.

is their any reason that anyone posting here would repeatedly exaggerate the process of bank credit expansion?  

is their 1 trillion in currency in existence in the us economy today?  

what do you call the 8 trillion 'things' in m2 minus 1 trillion of currency?