Full Reserve Banking

[Aeson]

I'm not sure what you're trying to say, but there's a hard cap on transactions. It occurs when a dollar is being transferred to the bank, either as an interest or principal repayment. Both effectively take money out of the money supply. A new loan has to be issued to compensante or risk deflation.

You said asset inflation is necessarily a result of fractional banking. It isn't. The mechanism you described CAN happen in fractional banking, but isn't required to. It also CAN happen in full reserve banking.

Also it should be pointed out that asset inflation isn't necessarily a bad thing. In general it's a good thing in moderation.

[Fake Boris]

You said asset inflation is necessarily a result of fractional banking. It isn't. The mechanism you described CAN happen in fractional banking, but isn't required to. It also CAN happen in full reserve banking.

No. Loans are assets, and a fractional reserve system can only sustain itself through increasing loans.

Asset inflation can still occur, in theory, in certain variants of a full reserve system, none of which are endorsed by anyone in this thread. In the systems I approve of, it's not possible.

Note by that asset inflation I mean inflation of asset prices unreasonable wrt to nominal growth.

Also it should be pointed out that asset inflation isn't necessarily a bad thing. In general it's a good thing in moderation.

Asset inflation higher than CPI inflation is helping the rich at the expense of the poor. It's wrong.

mythological beliefs in the efficiency of private business blabla

Your unfounded opinions on the essential deficiency of government are duly noted and disregarded.

[Sir Og]

Asset inflation is one consequence of fractional reserve banking. It takes the following pattern:

- All money is created as credit
- But the interests are not created with the loan
- Thus, I need to find new money to pay for the interests on my loan
- That money will necessarily have been created as credit
Thus:
- loans are only ever repaid with loans (either yours, or someone else's)
- this is the source of asset inflation through credit bubbles

How does asset inflation follow from the above?

Asset prices reflect people's valuation of said assets. If people want to consume goods and use all their money to buy goods you will get inflation of good's prices. (If supply is unable to keep up with the new high demand) Same goes for services and for assets.

You can get the same nominal size of economy prices etc. with a number of different monetary and banking systems. The most significant way that money affects the real economy is in the short term due to price stickiness. That is why you need to have a competent central bank that would not allow the nominal economy to experience drastic changes. If it contracts too much there will be recession, unemployment and deflation. If it expands too quickly you would get unnecessary inflation (in case there is no slack in the economy).
In the long run money is neutral. The only difference that money makes in the long run is how big the numbers on the price tags are.

Once the central bank is keeping the nominal economy on a steady growth path everything that happens in the economy is determined by real factors. (people's preferences, resource constraints, institutions/legislation, etc.)

P.S.
Also agree with Aeson that the government/CB determines the money supply in current fractional reserve systems.
Maybe free banking is a system where the money supply is not determined by the government.

[Fake Boris]

How does asset inflation follow from the above?

Asset prices reflect people's valuation of said assets. If people want to consume goods and use all their money to buy goods you will get inflation of good's prices. (If supply is unable to keep up with the new high demand) Same goes for services and for assets.

When money is created as credit, it tends to benefit asset owners first, as they collect interest, either directly or indirectly. The monetary supply has gone up tremendously in the G8 in the past 15 years, but has not been reflected in the CPI. This is because richer people are less likely to consume their income and gains.

[Sir Og]

Yes rich people cannot eat and drink all their money. This shows clearly their great contribution to society. They provide people with actual goods and services and in return get useless money which most of them do not use to consume societies resources.

People tend to benefit from assets irrespective of what the banking system is. That is why they are called assets.

If you claim that banks/"rich people" benefit because they somehow get the new money first this is definately not the case. When the FED started QE3 and the US economy picked up everybody benefittend from that. Asset prices rose for everybody. Not just for people who receive money from the FED. The incresed spendig put people back to work no matter if thay had assets or not.

[Aeson]

No. Loans are assets, and a fractional reserve system can only sustain itself through increasing loans.

No, it's not a requirement of fractional reserve banking that more money be created to pay back interest. This is because money once created can be used in more than one transaction.

What you seem to have a problem with is the economy growing. It's good if the money supply grows in step with the economy. (Assuming it's set right to begin with.)

Asset inflation can still occur, in theory, in certain variants of a full reserve system, none of which are endorsed by anyone in this thread.

Citizen's income will drive up the price of some assets for sure. Housing in nparticular. That's just a simple reality of redistributing wealth to those who previously could not afford housing. (I'm not saying this increase would be a bad thing, but it's an undeniable result that you are denying.)

Asset inflation higher than CPI inflation is helping the rich at the expense of the poor. It's wrong.

So in your universe, a gallon of milk jumping to $50/gallon while the bottom drops out of the housing market is a good thing?

Your unfounded opinions on the essential deficiency of government are duly noted and disregarded.

I'd say my opinion that "a business run like the US Government would quickly go out of business" is rather well founded.

[C0ckney]

Government determines the amount of money out there. You call this "altering the conditions", but the reality is it alters what is in the bank's best interests, and will guide their actions.

yes. this is exactly what i have been arguing. governments indirectly control the money supply by altering the conditions under which banks create money. this is different to the mint telling someone to cut x amount of paper to make x amount of bills. this is why your analogy doesn't work.

In fact, your whole proposal is reliant on government's ability to tell the banks exactly how much money they can create.

no it isn't. there are diverse possibilities for money creation. some have been mentioned in this thread; a little bit of thinking will reveal others. if you honestly don't understand, then there is a wealth of material out there on the subject.

Which is good, because they're more efficient at it than government.

....

What you aren't accounting for though is that government is far worse at being efficient than a private business.

these are unsupported assertions, and this has been pointed out, yet you base your argument on them. let's see some evidence; and a definition of "efficiency" while we're at it.

Your claim was that government screwing up was perfectly analogous to a business screwing up, and thus the argument about government not being suited to the task was a non-factor. The reality is that government screwing up has far more potential for harm than any given business screwing up.

no. i made a statement of the obvious: all humans and human institutions are prone to errors, which served to ridicule your "governments make mistakes therefore x is bad" argument.

It's not just about the interests of those determining the amount of money. It's about the efficiency of the system and how it provides for the interests of everyone.

indeed. so why do you think that the public's interests will be served better by people acting in their own, and their institutions' private interests than by people who will act in the...errr...public interest?

[C0ckney]

In the long run money is neutral. The only difference that money makes in the long run is how big the numbers on the price tags are.

this is very true, yet as i have pointed out in this thread, you have to look at what the money being created is actually used for. if it's going into financial assets and land speculation, and not into producing goods and proving services then fewer of those goods and services are produced (than otherwise would be), leading to them costing more. of course the banking system is not the whole cause of this, but it is a vital part of the system which allows financial and land speculation to flourish.

[N35t0r]

lolwut? If you create money and give it to people to buy stuff, you will not magically increase the amount of goods and services available to be purchased, you will only increase prices. If you don't believe this, come to Argentina

[Aeson]

yes. this is exactly what i have been arguing. governments indirectly control the money supply by altering the conditions under which banks create money. this is different to the mint telling someone to cut x amount of paper to make x amount of bills. this is why your analogy doesn't work.

In both cases the government is determining how much money gets created. The methods they use are different, but the aspect the analogy is tailored to illustrate (as it was what was being discussed) ... who determines the size of the money supply ... is the same.

no it isn't. there are diverse possibilities for money creation. some have been mentioned in this thread; a little bit of thinking will reveal others. if you honestly don't understand, then there is a wealth of material out there on the subject.

Yes it is, because if government doesn't have the ability to dictate to banks how large the money supply will be, then banks could set the money supply wherever they want ... which would certainly lead to some form of fractional banking. You couldn't possibly have full reserve banking unless government has the ability to tell banks they can't create more money than their reserves allow.

these are unsupported assertions, and this has been pointed out, yet you base your argument on them. let's see some evidence; and a definition of "efficiency" while we're at it.

Efficiency in regards to profitability and sustainability. Efficiency in regards to expenses to get something accomplished. These are areas where government clearly fails all the time ... to such ridiculous extents of waste that even the largest businesses out there couldn't possibly hope to match them even if they went full-on bankrupt themselves mode.

You'll probably knee-jerk "that's opinion" this ... but customer service as well.

no. i made a statement of the obvious: all humans and human institutions are prone to errors, which served to ridicule your "governments make mistakes therefore x is bad" argument.

Here is what you actually said:

"you keep asserting that governments are bad at this and that, and while it's true that governments can make poor decisions, it's also true that businesses, charities, and individuals can and do make poor decisions. so saying that it about as worthwhile in the context of this debate as saying that humans can and do make poor decisions. "

Clearly you are saying that because everyone can screw up, there's no use in discussing it at all. You are ignoring very real differences between an individual or business screwing up, and a government screwing up. How many people are affected, and what alternatives exist matter.

indeed. so why do you think that the public's interests will be served better by people acting in their own, and their institutions' private interests than by people who will act in the...errr...public interest?

You said "indeed" to my statement, but then you dropped "efficiency" entirely. It does matter.

Ideally government provides an environment where people are free to pursue their own best interests. Then government provides a basic safety net for those who need it.

[pchang]

... if it's going into financial assets and land speculation ... financial and land speculation to flourish.

Money gets spent the way the people who have it, want it to be spent. Your "Distortions" are merely most people expressing their disagreement with you. There isn't anything in the "system" that encourages this. The people make the systems in their own image.

[C0ckney]

Money gets spent the way the people who have it, want it to be spent. Your "Distortions" are merely most people expressing their disagreement with you. There isn't anything in the "system" that encourages this. The people make the systems in their own image.

[C0ckney]

lolwut? If you create money and give it to people to buy stuff, you will not magically increase the amount of goods and services available to be purchased, you will only increase prices. If you don't believe this, come to Argentina

well it's a good thing i'm not arguing that, isn't it...

i've already dealt with one aspect of this (posts 146 and 151), but let's consider another example. the cost of housing is mostly the cost of land - that is of land speculation. as i've discussed before there are other causes and solutions to this problem: a lot of the problem is that land isn't taxed and so attracts a lot of capital that could be used for productive investments; the solution is a land value tax (in an ideal world a lot of popular expropriation, but i'm arguing from within a capitalist context here); but what we're interested in is the effect of this situation under a fractional reserve system. a lot of money is created through mortgages to buy this land, this money raising the price the land, and being a claim against people's future labour. in other words people who buy houses, and people who rent houses - almost everybody, except the small minority of bankers and those who live as rentiers - have less money to buy goods and services.

[C0ckney]

In both cases the government is determining how much money gets created. The methods they use are different, but the aspect the analogy is tailored to illustrate (as it was what was being discussed) ... who determines the size of the money supply ... is the same.

well i disagree, but i'm not going flog this particular dead horse anymore.

Yes it is, because if government doesn't have the ability to dictate to banks how large the money supply will be, then banks could set the money supply wherever they want ... which would certainly lead to some form of fractional banking. You couldn't possibly have full reserve banking unless government has the ability to tell banks they can't create more money than their reserves allow.

you have simply not understood what is being proposed. governments could create money directly, in various way, instead of money being almost wholly created by banks.

Efficiency in regards to profitability and sustainability. Efficiency in regards to expenses to get something accomplished. These are areas where government clearly fails all the time ... to such ridiculous extents of waste that even the largest businesses out there couldn't possibly hope to match them even if they went full-on bankrupt themselves mode.

i don't see any evidence that that is the case. governments, or rather states, provide things that cannot be provided by private actors (national defence, large scale infrastructure for example), and provide many things more efficiently than the market can provide (health and education for example). it's true that private actors are more efficient at providing things that are within the economic model provided by classical economics, but there's no reason to believe that money creation falls under this category.

(of course i disagree that capitalist 'efficiency' necessarily leads to better outcomes, but that's another debate)

Clearly you are saying that because everyone can screw up, there's no use in discussing it at all. You are ignoring very real differences between an individual or business screwing up, and a government screwing up. How many people are affected, and what alternatives exist matter.

i'm saying that the distinctions you draw ("i can change my bank, but i can't change my government" etc.) are irrelevant for the purposes of this discussion.

You said "indeed" to my statement, but then you dropped "efficiency" entirely. It does matter.

Ideally government provides an environment where people are free to pursue their own best interests. Then government provides a basic safety net for those who need it.

i asked what you meant by "efficiency" and for some evidence for your claims about it.

the second sentence is a meaningless platitude *(in an ideal world, there would be no government, no state - see i can do this too).

[Fake Boris]

Yes rich people cannot eat and drink all their money. This shows clearly their great contribution to society. They provide people with actual goods and services and in return get useless money which most of them do not use to consume societies resources.

People tend to benefit from assets irrespective of what the banking system is. That is why they are called assets.

If you claim that banks/"rich people" benefit because they somehow get the new money first this is definately not the case. When the FED started QE3 and the US economy picked up everybody benefittend from that. Asset prices rose for everybody. Not just for people who receive money from the FED. The incresed spendig put people back to work no matter if thay had assets or not.

Now you're getting into the field of pure BS, conflating the issue of asset inflation (i.e. speculative bubbles) with the merits of private capital ownership.