Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Posted: Wed May 24, 2006 3:50 am Post subject: Re: fractional banking and the gdp
MrBill wrote:
So if Big Bank issues a credit card to Joe Consumption with a $10.000 credit limit has Big Bank increased either the money in circulation or money supply or just credit which is a fancy word for IOUs? If Joe buys a TV maybe the Big Bank can get back pennies on their dollars, but if Joe blows it on consumables, Big Bank and Big Bank's shareholders, plus any credit card receivables they flogged-off on Investor Jane are just plain out of luck, if Joe does not pay that IOU back. Credit is not money supply.
True, you can have credit creation without increasing the money supply, as when you borrow from a friend. But when a bank creates credit by loaning money, it increases the money supply (in the broader M1 sense) by creating bank deposits.
Any process of credit creation that involves a net increase in bank deposits, also increases the money supply, by definition.
Posted: Wed May 24, 2006 4:06 am Post subject: Re: fractional banking and the gdp
MrBill wrote:
If I am a bank, I use liabilities that I have incurred, in the form of on demand site deposits from customers to make those payments.
Interesting. So when I make a payment with a credit card, a bank customer has their deposit balance reduced? If not, then (M1)money has been created, because on paying the merchant, the merchant's bank deposits increase while nobody else's decreases.
Posted: Wed May 24, 2006 4:15 am Post subject: Re: fractional banking and the gdp
CrudeAwakening wrote:
MrBill wrote:
So if Big Bank issues a credit card to Joe Consumption with a $10.000 credit limit has Big Bank increased either the money in circulation or money supply or just credit which is a fancy word for IOUs? If Joe buys a TV maybe the Big Bank can get back pennies on their dollars, but if Joe blows it on consumables, Big Bank and Big Bank's shareholders, plus any credit card receivables they flogged-off on Investor Jane are just plain out of luck, if Joe does not pay that IOU back. Credit is not money supply.
True, you can have credit creation without increasing the money supply, as when you borrow from a friend. But when a bank creates credit by loaning money, it increases the money supply (in the broader M1 sense) by creating bank deposits.
Any process of credit creation that involves a net increase in bank deposits, also increases the money supply, by definition.
Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits. Of course, you may argue that they can borrow from the lender of last resort, the central bank, but then gets back to the central bank printing money, not the banks creating it.
The problem that we have experienced has been low interest rates by central bankers in the face of benign inflation which has inflated asset bubbles around the globe in various assets. There has been too much liquidity and not enough good investments to invest in, so that liquidity has found its way into housing prices, junk bonds, commodities and emerging markets.
And not just in America, but as other central banks tried to keep their interest rates low to curb inflows of capital into their domestic economies, and to try to keep their currencies undervalued to protect their competitive advantage. Now as a result of that artificial growth from too much monetary stimulus, we are starting to see inflation rates going up, which will trigger interest rate hikes, a removal of that stimulus, and therefore slower growth, plus perhaps recessions as those asset bubbles deflate.
This is a pretty good article by Steven Roach at Morgan Stanley explaining how central banks failed to address money supply growth, while concentrating only on inflation and therefore created these asset bubbles and contributed to global imbalances.
Quote:
Inflation may well have been conquered — a conclusion financial markets are actively debating again — but that was yesterday’s battle. Over the past six years, monetary authorities have turned the liquidity spigot wide open. This has given rise to an endless string of asset bubbles — from equities to bonds to property to risky assets (emerging markets and high-yield credit) to commodities. Central banks have ducked responsibility for this state of affairs. That could end up being a policy blunder of monumental proportions. A new approach to monetary policy is urgently needed.
Posted: Wed May 24, 2006 4:44 am Post subject: Re: fractional banking and the gdp
MrBill wrote:
Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .
FR Banks can and do create deposits, whenever they make a loan. However, they have no say in which bank(s) those new deposits end up in.
Example to clarify: I deposit $1000 with Bank A. Let's say this allows Bank A to lend $900 to X. X then buys something from Y for $900, who deposits the cheque with Bank B.
Result: Bank deposits have increased by $900 (within the banking system as a whole, but not at Bank A).
Posted: Wed May 24, 2006 6:09 am Post subject: Re: fractional banking and the gdp
CrudeAwakening wrote:
MrBill wrote:
Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .
FR Banks can and do create deposits, whenever they make a loan. However, they have no say in which bank(s) those new deposits end up in.
Example to clarify: I deposit $1000 with Bank A. Let's say this allows Bank A to lend $900 to X. X then buys something from Y for $900, who deposits the cheque with Bank B.
Result: Bank deposits have increased by $900 (within the banking system as a whole, but not at Bank A).
$1000 asset owed to CrudeAwakening
$1000 liability for Bank A
$900 asset for Bank A
$900 liability for Customer X
$900 asset for Vendor Y
$900 liability for Bank B
Bank A is paying interest on $1000, and receiving interest on $900
Bank B is paying interest on $900
Customer X is paying interest on $900
Vendor Y is earning interest on $900
All have been financed from CrudeAwakenings original $1000 in savings. I do not see any money being created? _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Joined: Oct 01, 2004 Posts: 214 Location: Germany/Ohio
Posted: Wed May 24, 2006 7:32 am Post subject: Re: fractional banking and the gdp
CrudeAwakening wrote:
MrBill wrote:
Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .
FR Banks can and do create deposits...
Example to clarify ...
And then the discussion turns full circle.
Now Deconstructionist can repeat what he said, etc..
Thanks, Bill, for taking up my argument. I can't write as proliferant as you. Besides, even on my stay at home vacation I don't have enough time to keep the argument going. As if that were the point of this all.
How are things going in Cyprus?
After reading everything about the anti-FRB fraction, I THINK I understand the problem. It has *nothing* to do with lending and borrowing. It has *nothing* to do with savings and credit.
The problem is...
Joe puts $10,000 in a CHECKING account.
That is a *demand deposit*, not a savings account. Joe is allowed to take it out/ write a check at any moment - and it HAS to be honored.
Instead of keeping the deposit in reserve, the bank lends it out again - almost to 100%. Very risky.
The anti-FRB fraction wants to complain about this by ripping on the accounting practices behind it.
Me and you, Bill, would complain about the lender of last resort and about centrally guided increasing money supply above growing GNP.
They obviously can't keep the two things separate. Don't argue. It won't help.
BTW, according to this definition, a credit line is also a "demand credit" and must be put on the liabilities side of the accounting sheet. That's only being consistent, don't you think? _________________ This is the way the world ends,
Not with a bang but a wimper!
T.S. Eliot
Posted: Wed May 24, 2006 8:24 am Post subject: Re: fractional banking and the gdp
Well, I certainly see the fractional lending side of it. The original deposit gets lent out again. The money multiplier effect. Of course, the reverse happens when Depositer A takes his money out of the bank. Either the bank(s) have to find another source of primary funds or they have to borrow it from the central bank. If the central bank is running an expansionary policy, blowing up bubbles, then we all know what they are going to do? Keep printing and keep lending. Hence borrowing money you do not have to buy things you do not need which results in trade and current account deficits!
Fortunately for me, I type very fast. Unfortunately for you, sometimes I tend to write too much! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Wed May 24, 2006 7:39 pm Post subject: Re: fractional banking and the gdp
MrBill wrote:
$1000 asset owed to CrudeAwakening
$1000 liability for Bank A
$900 asset for Bank A
$900 liability for Customer X
$900 asset for Vendor Y
$900 liability for Bank B
Bank A is paying interest on $1000, and receiving interest on $900
Bank B is paying interest on $900
Customer X is paying interest on $900
Vendor Y is earning interest on $900
All have been financed from CrudeAwakenings original $1000 in savings. I do not see any money being created?
To see the creation of money, simply compare total bank deposits before and after the loan transaction.
I deposit my money: Bank A owes me $1000.
Customer X borrows:Customer X owes bank A $900.
Vendor Y deposits: Bank B owes Vendor Y $900.
Before the loan, bank deposits were made up of my $1000 deposit.
After the loan, bank deposits amounted to $1900; therefore $900 of new deposits.
Demand deposit liabilities of the banks are considered part of the money supply, M1. These have increased by $900 as a result of the loan. Has anything occurred to offset this increase in M1? No. Customer X's liability to Bank A can't be considered a decrement in the money supply.
This process is quite different from a simple credit transaction, where I withdraw $900 from my account to lend to Person X (thus reducing my deposit balance by $900 and increasing his by $900), and he later repays me (with the opposite changes occurring, ignoring interest paid). In this situation total bank deposits remain unchanged, there is simply a transfer of deposits from me to X.
When X borrows from the bank, however, a new deposit is created, ending up in Vendor Y's account.
I feel like I'm belabouring the point a bit - it's a well recognised fact that FRBs create new bank deposits via the multiplier effect, and these deposits add to the money supply, M1. This is the essence of FR banking - an initial injection of reserves by the Fed is expanded into a greater amount of bank deposits (in parallel with debt) by the loan process. These additional deposits are only fractionally backed by bank reserves; depositor's withdrawals are met by use of these reserves, so not all depositors can withdraw their money at the same time.
Of course, to blame FRBs for increasing the money supply irresponsibly is missing the point - they are only doing what they are institutionally mandated to do. It is quite correct to point the finger at the central bank - but to claim that FRBs play no role in increasing the money supply is wrong.
Posted: Wed May 24, 2006 8:01 pm Post subject: Re: fractional banking and the gdp
MrBill wrote:
CrudeAwakening wrote:
MrBill wrote:
Banks can only attract deposits, which are existing savings, not create them. If they have insufficient liquidity they must borrow from the interbank market, which are other people's savings entrusted to another bank; or sell assets of their own, which may be a portfolio of syndicated loans; but they cannot create deposits .
FR Banks can and do create deposits, whenever they make a loan. However, they have no say in which bank(s) those new deposits end up in.
Example to clarify: I deposit $1000 with Bank A. Let's say this allows Bank A to lend $900 to X. X then buys something from Y for $900, who deposits the cheque with Bank B.
Result: Bank deposits have increased by $900 (within the banking system as a whole, but not at Bank A).
$1000 asset owed to CrudeAwakening
$1000 liability for Bank A
$900 asset for Bank A
$900 liability for Customer X
$900 asset for Vendor Y
$900 liability for Bank B
Bank A is paying interest on $1000, and receiving interest on $900
Bank B is paying interest on $900
Customer X is paying interest on $900
Vendor Y is earning interest on $900
All have been financed from CrudeAwakenings original $1000 in savings. I do not see any money being created?
Uh, yeah. Real quick. Vendor Y has claims to their $900 at any time, and CrudeAwakening still has claims to his $1000. If money wasn't created, they would both have claims to the same money, which they don't. _________________ -Jeff
Posted: Thu May 25, 2006 12:52 am Post subject: Re: fractional banking and the gdp
CrudeAwakening wrote
Quote:
To see the creation of money, simply compare total bank deposits before and after the loan transaction.
I deposit my money: Bank A owes me $1000.
Customer X borrows:Customer X owes bank A $900.
Vendor Y deposits: Bank B owes Vendor Y $900.
Before the loan, bank deposits were made up of my $1000 deposit.
After the loan, bank deposits amounted to $1900; therefore $900 of new deposits.
Demand deposit liabilities of the banks are considered part of the money supply, M1. These have increased by $900 as a result of the loan. Has anything occurred to offset this increase in M1? No. Customer X's liability to Bank A can't be considered a decrement in the money supply.
This process is quite different from a simple credit transaction, where I withdraw $900 from my account to lend to Person X (thus reducing my deposit balance by $900 and increasing his by $900), and he later repays me (with the opposite changes occurring, ignoring interest paid). In this situation total bank deposits remain unchanged, there is simply a transfer of deposits from me to X.
When X borrows from the bank, however, a new deposit is created, ending up in Vendor Y's account.
I feel like I'm belabouring the point a bit - it's a well recognised fact that FRBs create new bank deposits via the multiplier effect, and these deposits add to the money supply, M1. This is the essence of FR banking - an initial injection of reserves by the Fed is expanded into a greater amount of bank deposits (in parallel with debt) by the loan process. These additional deposits are only fractionally backed by bank reserves; depositor's withdrawals are met by use of these reserves, so not all depositors can withdraw their money at the same time.
Of course, to blame FRBs for increasing the money supply irresponsibly is missing the point - they are only doing what they are institutionally mandated to do. It is quite correct to point the finger at the central bank - but to claim that FRBs play no role in increasing the money supply is wrong.
Okay, I get your point on all accounts. Thanks. So then it comes down to managing money supply using a) printing of new notes, and b) doing either repos or reverse repos to drain or add liquidity, knowing that the multiplier effect of fractional banking exists. It would be highly inflationary to print a dollar for every dollar transaction in the economy, so money supply has to be some fraction of the total amount needed to run the economy, but not overheat it. That is a balancing act for the central bank. Obviously, if they take their job seriously, the more fiscal stimulus the government gives, the more restrictive monetary policy has to be.
I think the central bank has done a good job of targeting inflation, but a poor job of managing liquidity with the end result of many assets bubbles distorting the economy which were painless to inflate, but will not be so easy to deflate without causing problems for the real economy. Also, as others have pointed out, this has eroded the savings of those who chose not to partake in the asset bubble frenzy! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu May 25, 2006 2:48 am Post subject: Re: fractional banking and the gdp
MrBill wrote:
This is a pretty good article by Steven Roach at Morgan Stanley explaining how central banks failed to address money supply growth, while concentrating only on inflation and therefore created these asset bubbles and contributed to global imbalances.
I don't really understand here. Isn't inflation tied to money supply? I mean, how can you have inflation under control and money supply growth not be right?
Posted: Thu May 25, 2006 3:15 am Post subject: Re: fractional banking and the gdp
MrBill wrote:
I think the central bank has done a good job of targeting inflation, but a poor job of managing liquidity with the end result of many assets bubbles distorting the economy which were painless to inflate, but will not be so easy to deflate without causing problems for the real economy. Also, as others have pointed out, this has eroded the savings of those who chose not to partake in the asset bubble frenzy! ; - )
Yeah, I agree. The great thing about asset bubbles from the central bank's POV is they provide an outlet for inflation, and make people feel wealthy at the same time. A kind of "have their cake and eat it too" situation. But it's going to bite them (and everyone else) in the bum at some stage. (or should that be )
Posted: Thu May 25, 2006 3:19 am Post subject: Re: fractional banking and the gdp
Doly wrote:
MrBill wrote:
This is a pretty good article by Steven Roach at Morgan Stanley explaining how central banks failed to address money supply growth, while concentrating only on inflation and therefore created these asset bubbles and contributed to global imbalances.
I don't really understand here. Isn't inflation tied to money supply? I mean, how can you have inflation under control and money supply growth not be right?
Traditional inflation measures the cost of consumables or goods. It does not measure asset prices. For example, too much global liquidity might end up in over capacity at steel factories in China. China instead of being an importer of steel and competing for imports (inflationary) may become a net exporter and start flooding world markets with cheap steel to cover their variable costs, but not their fixed costs to the benefit of other steel users (deflationary).
However, that same liquidity may also find its way into housing bubbles, golf course, property development, junk bonds and other emerging markets who may not be able to invest that extra liquidity wisely or worse may enter into projects because the cost of money is low (low interest rates) that they would have shunned had the cost of money truly reflected local conditions and risks.
The problem was compounded as foreign central banks competed to keep their interest rates lower than US interest rates, not because local conditions warranted it, but because they did not want US dollars flowing into their economies and driving up the value of their local currency and eroding their export competitiveness.
Of course, due to artificial demand due to below neutral interest rates, now we are seeing inflationary pressures, so interest rates have to rise to contain them. That means lower growth and higher interest rates at the same time. So the two are tied, but there is a timing issue. But also a local and a global component between inflation targeting and money supply growth. Focus too much on one and you lose sight of the implications on the other as Mr. Greenspan did time and again despite his big brain and obvious intelligence! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu May 25, 2006 4:50 am Post subject: Re: fractional banking and the gdp
If we look at the equation of exchange: M * V = P * Q , then does it matter whether we see what the banks are doing as (temporarily) creating additional (credit) money supply, or as increasing the velocity of (high powered) money? _________________ The Future of Money
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