When people hoard cash, prices fall. There's a deflationary effect. Converesely when people dishoard cash, prices rise. There's an inflationary effect.
Credit cards cause people to dishoard cash because they don't have to carry such large cash balances in their wallets or in their checking accounts. Therefore credit cards cause price inflation, just as surely as any increase in the money supply. What's wrong with that argument?
leonidia:No I'm not and I know how fractional reserve banking works. You took two of my statements out of context, stictched them together and made It look line I was sayng something else.
OK, my apologies. But if it's not like fractional reserve banking, then how will the pooling of balances cut any corners from what would originally have been separate reserves?
leonidia: Everyone seems to be missing the point; I'm not taliking about fractional reserve banking, nor am I talking about defaulting on the loan, nor on whether or not merchants deposit the cc slip right away. I'm talking about something more subtle, so follow closely here. Most people who have only a checking account never let their balance get close to zero. They keep a certain amount in reserve. That money just sits there, but it serves a very importatnt function. It's there because people need a reserve "just in case". It's what Rothbard calls the reservation demand for money. Now the total demand for money is made up of this "reservation demand" and the "exchange demand". (I'm ignoring any non-monetary uses) When the reservation demand decreases, that necessarily increases the exchange demand, and this casues prices to rise. Put another way, previously idle cash is being used to buy goods, so prices go up. That's pretty starightforward stuff. OK, now suppose you didn't need this reserve cash any longer because you could use the unused balance on you credit card as the back-up instead. You'll probably never have to use this back-up, just as you wouldn't have if it were cash lying around in your checking account. But it's available if you need it and it serves exactly the same function as if it were reserve cash....except there's no actual cash there! And the reserve cash that was in your checking account has been set free. Make sense?
Everyone seems to be missing the point;
I'm not taliking about fractional reserve banking, nor am I talking about defaulting on the loan, nor on whether or not merchants deposit the cc slip right away.
I'm talking about something more subtle, so follow closely here.
Most people who have only a checking account never let their balance get close to zero. They keep a certain amount in reserve. That money just sits there, but it serves a very importatnt function. It's there because people need a reserve "just in case". It's what Rothbard calls the reservation demand for money. Now the total demand for money is made up of this "reservation demand" and the "exchange demand". (I'm ignoring any non-monetary uses) When the reservation demand decreases, that necessarily increases the exchange demand, and this casues prices to rise. Put another way, previously idle cash is being used to buy goods, so prices go up. That's pretty starightforward stuff.
OK, now suppose you didn't need this reserve cash any longer because you could use the unused balance on you credit card as the back-up instead. You'll probably never have to use this back-up, just as you wouldn't have if it were cash lying around in your checking account. But it's available if you need it and it serves exactly the same function as if it were reserve cash....except there's no actual cash there!
And the reserve cash that was in your checking account has been set free. Make sense?
Leonidia,
I follow what you're saying and agree completely. Credit cards are an alternate source of liquidity so reduce the demand for cash. Therefore, the value of cash falls; ie, prices rise. That's not what I would call "inflation" since the quantity of money has not changed (yet).
I think Rothbard mentions other factors that have a similar effect, such as changing pay schedules, for example.
A-R
A-R: I follow what you're saying and agree completely. Credit cards are an alternate source of liquidity so reduce the demand for cash. Therefore, the value of cash falls; ie, prices rise. That's not what I would call "inflation" since the quantity of money has not changed (yet). I think Rothbard mentions other factors that have a similar effect, such as changing pay schedules, for example.
Thank you A-R. Finally somenody gets it!
And I agree, it's not inflation, but it does cause prices to rise.
As regards Rothbard, are you referring to his argument that people who get paid weekly, for example, can keep a lower average balance than people who are paid monthly? If I remember right, he talked about how there was a period in his life when he was paid every six months!
LanceH:how will the pooling of balances cut any corners from what would originally have been separate reserves?
If you accept the premise that a credit card issuer can provide the liquidity to replace (or partially replace) its customer's reservation demands for cash, then the cash on hand required by the issuer for this purpose (and this purpose only) will obviously be much less than the aggregate reservation demand it provides.
leonidia:Why has it been captured? Explain that process. The reserve cash that was in my checking account has been spent. It doesn't have anything to do with the cc company. I'm now "using" my cc as my "reserve" fund, but I haven't used my cc for that purpose yet.
It is simple. The merchant will still get paid regardless of if you use your reserves or your credit card. The money have to come from somewhere.
The extra supply of money you create when you set loose your reserves will be meet by an equal increased demand for reserve money by your credit card company. They cancel out, it's just the same as if you where to withdraw your reserve and spend it, but deposit an equal reserve in a different bank.
However if the credit card company does not keep your entire credit balance in cash reserves you are right. If they only promise you credit if funds are availiable they can go invest a portion of the reserves in higly liquid assets (or not so liquid assets and rely on there ability to get credit).
This would be similar to say if you and your neighbours decided to have a common pool of emergency funds. It would not need to be as high as your individual pools added up, simply because the chance of all of you needing the max amount at the same time is much smaller then the chance that you do. Or more realistic scenario would be youth that keeps no own reserves because they can borrow from there parents if they get into sudden money trouble.
So it would set more money "loose" and decrease the price of money. Still neither of this actually increases the money supply.It only shifts the balance between money held in reserves and money used.
The money supply is only increased when more money is printed or when currency substitues are traded with no discount at the same time as the currency they are substituting. Well at least I think, I am not quite sure of the exact border for FRB operations and why myself.
Zeddicus: So it would set more money "loose" and decrease the price of money. Still neither of this actually increases the money supply.It only shifts the balance between money held in reserves and money used. The money supply is only increased when more money is printed or when currency substitues are traded with no discount at the same time as the currency they are substituting. Well at least I think, I am not quite sure of the exact border for FRB operations and why myself.
You are absolutely correct. There is no actual money creation, but by shifting money from reservation use to exchange use, it has the same effect as creating money.
It's interesting that the supply of money is usually portrayed as a vertical line (the money stock), and the demand for money, consisting of reservation and exchange demand combined, as a downward sloping curve to the right. But you could, if you wanted to, portray it a different way. You could define the total money supply as total money stock less reservation demand, which would be an upward sloping curve to the right, and the demand for money would then just consist of exchange demand. This picture of the relation between supply and demand would of course yield exactly the same price of money, but it's just a different way of looking at it. Under this defintion of the money supply, as reservation demand switched to exchange demand, the supply curve would become more vertical and shift to the right.
This is really hard to explain without a chart!
leonidia:If you accept the premise that a credit card issuer can provide the liquidity to replace (or partially replace) its customer's reservation demands for cash, then the cash on hand required by the issuer for this purpose (and this purpose only) will obviously be much less than the aggregate reservation demand it provides.
I don't think that this is obvious, no (under a 100% gold reserve standard).But, let's suppose that it is true. Forget about credit cards for the moment.Suppose Bank A offers cash warehouse facilities, 100% cash on demand.
Bank B also offers 100% cash on demand (under normal conditions), but it invests that part of its reserve which, according to your aggregation principle, is surplus to practical requirements. As a result, it is able to pay a small amount of interest on its deposits, or at least to waive storage costs. We'll suppose that it is up-front about what it is doing, that it iinvests only in highly liquid AAA+ investments, that it is audited frequently, and that it guarantees that, even if there were a bank run, it would be able to liquidate its investments within a few days, and everyone would be paid in full.I'm not sure if I would deposit money at Bank B. Would you?
I only skimmed through the replies and I had not seen this mentioned yet, however if it has already then I apologize.
If I have a $10,000 total credit limit on a credit card and have used half of it, my balance on that card is $5,000. I have borrowed $5,000.
But what happened to that $5,000? I either withdrew it as cash, or transferred it into an account of my own, or into the possession of someone else in exchange for goods and services. In any of these scenarios the $5000 has been accounted for in a properly counted money supply and to count it would constitute double counting of the same $5000.
see http://nimamahdjour.blogspot.com/2008/03/money-supply-watch.html
LanceH:I'm not sure if I would deposit money at Bank B. Would you?
Maybe, maybe not, but I'm not quite sure where you're going with this. Are you attempting to equate bank B with the credit card issuer? I don't see the similarity. I haven't deposited any money with my card issuer, or are we talking about something else here?
dsimo04:But what happened to that $5,000? I either withdrew it as cash, or transferred it into an account of my own, or into the possession of someone else in exchange for goods and services. In any of these scenarios the $5000 has been accounted for in a properly counted money supply and to count it would constitute double counting of the same $5000.
We're not talking about money spent on purchases, or cash withdrawals, or cash transfers to another account, all of which nvolve debits on you card . Ans as you rightly point out, these kinds of transactions are paid by the card issuer and to count this as any kind of money creation would indeed be double counting. But this is not what we're talking about.
We're talking about the fact that having a card allows one to reduce one's reservation demand for cash (in other accounts or physical cash) because your credit card can provide you the liquidity instead. The term "reseravtion demand for cash" has a very specific meaning. It's money that you would NOT normally spend, but which you keep in your account to provide yourself with needed liquidity. If your credit card can do this for you, then you no longer need to hold this cash.
When the reservation demand for cash falls, the purchasing power of money falls and prices rise.
I wish money supply was defined as "total money stock minus reservation demand" and money demand were defined as "exchange demand only" . This is how supply and demand for goods that have a reservation demand are usually defined.
Unfortunately, money supply is usually defined as "total money stock" and money demand is defined as "exchange demand plus reservation demand". Defining it this way makes it harder to see what's going on.
double post