Money as Debt - How the Central Banks create "money" (Google video - 47 min. long)

[Roland99]

http://video.google.com/videoplay?docid=-9050474362583451279&hl=en


I had no idea how the central banks truly worked and how they literally create "money" out of debt. The real power in the world is held by the central banks and there is no amount of gold and silver on this planet to cover all of the paper "money" out there.

Must See TV!

[Roland99]

1. The Gold-Plated Sting (free market Libertarian article)

The Gold-Plated Sting
http://www.lewrockwell.com/north/north512.html


That's kind of a 10,000ft overview of what the video covers. :)

[ryanus]

26. Best.Video.Ever highly, highly recommended

This is the BEST video for explaining how the modern banking system works. You will also understand what the problem is with central banking and why there must be more and more debt just for the system to survive.

arg. meant to reply to OP.

[Kagemusha]

2. Uh no, we went off the gold standard several decades ago.

Do you mean that seriously, that you never knew, or is that just a good line? I've dealt with a lot of gold standard enthusiasts in my young life.

[Roland99]

3. Not sure what you mean. Did you misinterpret something, perchance?

I know we went off the gold standard long ago...what I didn't know was how "money" was created...at the 9:1 ratio (factorially speaking)

[Kagemusha]

5. Okay, I'll get down to basics for a second then. Fractional reserves are necessary.

No matter how you account for assets, be they actual precious metals or other things of value, without fractional reserve banking, the supply of money would be so stingy and low that economic activity considered routine today would be starved of liquidity. Yes, to some degree, cutting the amount of money would simply raise the value of that money, but in the real world, greasing the wheels of the economy ('maintaining liquidity') is about credit. The economy depends on a large amount of credit for simple convenience, to reward people enough - with a minimum of defaults, bankruptcies, fraud and so on - that they are willing to go out on a limb and generate economic resources, be they physical goods or numerous services such as legal services, medicine, education, data management, and so on. Yes, there's some insecurity built in, but it's shared insecurity, and most of the time, it works out.

The alternative to this shared insecurity is great security at the cost of far less general economic activity, because money is so precious that no one will spend it unless they are absolutely certain of getting a positive result.

Plus, at its heart, banking is about managing the distribution of credit (based on fractional reserves) in a way that intelligently puts money into the economy to generate wealth. It doesn't always work out. It can't always work out. But the system is literally about managed risk. The whole nature of the financial system simply supports this objective in the bank-friendliest manner possible, but attempting not to overdo it and create greater problems.

It's simply the nature of banking, and rejecting it because there's not enough physical gold to support it isn't the point - if there was more gold, the price of gold would drop, and we'd still have fractional banking, because it's not about the bullion, it's about the allocation of economic resources. Money is just a token system to achieve this.

[Roland99]

7. And that's what this video conveys...along w/the message that almost everyone knows nothing about it

including me, up until a few days ago.

[Kagemusha]

11. Okay, what I'm telling you is, most people are OK with not knowing.. this part.

In and of itself, fractional banking is no big deal, surprising to financial newbies, but nothing dark or underhanded.

There are dark and pretty underhanded parts of the financial system, and they are ultimately driven by the inherent risk of fractional reserves, but in practice, this is nowhere near the worst of it. There's some genuinely scary stuff out there that either unwinds so slowly it rarely breaks out into the open (esp. these days), or breaks seemingly at random and leaves ordinary people wondering what the hell just happened. (Like with that German bank bailout not long ago.) Those are the parts that should worry us for real. But, they're more complicated and even people who can understand them, need to have the data in hand to recognize what's going on so, it's pretty much pure victimization for most of the public...

[JackRiddler]

10. Don't deceive yourself.

"At its heart," banking is about making money for banks. If banks exercise an essential function, so do other businesses. They aren't charities, they weren't created to maintain liquidity for the productive economy.

The need for liquidity in a modern economy is undeniable, and may well necessitate fractional banking, as you argue. The question you are begging is whether this power should be privatized, as is the case with cental banks not under the control of governments (in the case of the Federal Reserve with shares owned by other (private) banks).

[Kagemusha]

13. I was explaining why central banks - private and public - support banking.

And by banking I mean fractional reserve banking.

That the banks make money for themselves in the process is only a tangent to the matter of why society tolerates usury and fractional reserves and fiat money and so on and so forth. As I said, it's a token system to a large extent. Governments could shut banking down if they dared; they do not, for reasons that are obvious.

[JackRiddler]

14. And what if banking as it is was replaced with...

a public system?

What really galls me is that we pay taxes on income (meaning: the lower classes pay, the upper classes have "capital gains") to pay off interest on debt. If it was going to run a deficit (to pay for wars) instead of taxing the rich, why the hell didn't the government pull fictional paper out of its own damned ass interest-free, instead of borrowing fictional paper from others who pulled it out of their ass at interest?

We the people get fucked every which way. And it starts with almost no one even knowing where the money comes from in the first place.

[Trillo]

15. Which is why I decided to recommed the post.

The only one, apparently.

[Kagemusha]

16. You seriously want to end modern banking and replace it with government?

Isn't that called, communism?

I guess I was too subtle earlier. The rationale for banks charging profit, the service they believe they are providing to mankind, is risk management. That's why bankers go to university to get degrees as if they're supposed to be doctors or lawyers. The bankers manage the risk of credit allocation, partially backed by assets, and believe themselves to, on the whole, do a far, far better job of allocating that money than a centrally managed government system.

And the government does not simply print the money because then the dollar would not be loosely connected to reality, but wholly disconnected from reality. The feedback of the market, interest rates, and so on, is intended to keep the government in check, inflation under control, and to maintain a rough, relative balance so that the government does not borrow so far beyond its means that the country's finances are seriously threatened.

I have taken the time to respond like this because laughter would have seemed wholly uncivilized.

[JackRiddler]

19. Laugh away, and call whatever names you like.

I want the people to control their own economic fate, and I call that democracy.

You've learned to repeat the propaganda of banking in a way that suggests you went to college and got a degree in alchemy, erm sorry, economics. Its central myth tells us that private owners of the money-creation power (or of production) are going to act more responsibley than a public power over money (as though a public power couldn't be subject to division of powers, checks and balances and meritocracy, but never mind). Because bankers better embody an abstraction called "the market," which mere mortals (who apparently can't go to university) could never figure out.

Speaking of laughter, one of your percepts is particularly ludicrous: Bankers do not acquire banks by going to university, did you know? They don't dole out banks to the economics majors with 4.0 averages. There is no requirement that a Morgan or a Rockefeller actually studies anything; they still get to own their banks, and through that shares in the central bank. Bankers get to say how capital is distributed in the economy, and all that matters is bottom line. They get to externalize costs like ecological impacts or lowered wages or the health system for the wetware (the humans that are still unfortunately necessary for the production process).

When it goes wrong however, suddenly these worshippers of the "free market" banking system turn into the most fervent socialists. When their casino tilts, they suddenly love to have the government step in. Failure - which happens on a serial basis - is rewarded by massive bailouts, financed by the taxpayers. Bankers are that important to the functioning of the world, you see. Everyone else, when they fail, they can fuck off and die.

Your assertions are simply ahistorical. The modern banking system has produced a series of spectacular crashes, and in all cases it was governments - the public purse - who stepped in to get the system working again, on behalf of the bankers. I can name dates: 1873, 1893, the post-WWI hyperinflation, 1929, and after the war that followed from 1929 a long series of crises that have been regulated by government. The modern banking system (more broadly: capitalism, the rule of privately-owned capital) has produced a situation in which war is profitable and health care is not. A situation in which it's logical to invade Iraq because that's going to boost the war industry and, more importantly, grab real-world collateral to back the air-dollar. (Where do you live? It's clearly not as a peasant in Mexico or Argentina, but again they don't count, they're externalized.)

It has also produced a situation in which the dollar is a global disaster, propped up at this point only by the threat of nuclear war and the hot air produced when Asia and Europe throw another cycle of surplus into the fiery pit, in an effort to protect their own dollar investment and out of fear of what happens when the inevitable occurs: the dollar melt-down. Bankers have produced a derivatives bubble in the trillions, and they're going to want YOU to pay for it (of course, my impression is that you work for a bank, so maybe you feel secure about this).

And although the inevitable will make a mockery of your condescension, I doubt either of us will find it funny.

[flashl]

20. Yeah, what he said. n/t

[Kagemusha]

21. Sir, you don't need to insult me by implying I have an economics degree. I do not.

Managers of banks go to university. Bankers do not own banks, they run banks. Bank owners own banks.

Communism produced the Soviet Union's economy. Do you seriously want to compare the long-term history of capitalism against communism when it comes to wealth creation? I guess you don't just want to be poor, you want to be ignorant, too.

Government can redistribute wealth, but government cannot create wealth.

And no, a public power can't have absolute financial control and be properly subject to checks and balances. The two don't mix. Whenever a private sector firm becomes an undisputed monopoly, it tends to run off the rails because it becomes insensitive to conditions. That's why I oppose private monopolies that become de facto governments in their field. That's why I don't view the Pakistani military, with its position of economic dominance in Pakistan, as healthy for that economy.

And no, don't insult me by saying I work at a bank. Read some Sun Tzu, will you? Know yourself, know your enemy, and you will win every battle. Though against the willfully ignorant, I don't think there really is such a thing as winning.

As Churchill said about democracy, fractional reserve banking is the absolute worst system until compared against every other system.

[JackRiddler]

29. I don't advocate "communism"

Certainly not the Soviet system, which was communist in name only. That's your strawman. Keep beating it.

Whereas capitalism is aptly named - for it is the rule of private capital.

And sorry, I don't know what you studied - only that you talk up the common rationalizations of bankers and economists for portraying plunder as charity.

[Kagemusha]

35. I said they believe they get paid for a service.

And they do believe that.

[Karenina]

39. The "dollar" IS

TOTALLY DISCONNECTED FROM REALITY!!!

:rofl:

[Kagemusha]

49. No, it's not completely.

I'm not in the mood for even trying to explain why but, in very vague terms, yes, the dollar is connected to reality. It's a loose, fluid process, but even water has weight to it, even if trying to grasp any particular part of it with your hand is a silly proposition. People can measure the weight and displacement, though. That's how they figure out how much large ships weigh.

[Karenina]

56. Great analogy!!!

When you are in the mood, please do say more.
As a fiat currency, the dollar's value is hooked to an almost religious belief by the ROTW. Undermine that and all bets are off.

[Kagemusha]

57. Actually I do not have a clue what ROTW means.

All I can really say is, it - the value of the dollar, the belief in the value of the dollar, and so on - is all relative. There are relative rises and falls based on the actual supply of the dollar and the belief in what the supply (and worth) of the dollar is. That's what drives the daily tickers.

Now, we can either accept that the dollar has value, a relatively slowly changing value, or we can reject that it has any value at all and just say, it's not real, we do not accept it. The first allows us to function in the real world, which is based on a certain amount of faith educated by facts. The second lands us in a fantasy world where no money should exist, even though in reality, it does.

As I said earlier, water is also wet, but that does not make its being wet an exceptional thing. Yes, undermine confidence in a fiat currency and all bets are off. I see no point in anything but wholly accepting your words and asking, yes, and? In the meantime, the dollar's value is what it is.

[Karenina]

58. Rest Of The World.

$1.40=1€ My siblings will soon visit and get to wrap their brains and wallets around that one. BUY LOONIES!!!

[Trillo]

51. You must think the U.S. Constitution is the Communist Manifesto.

"To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures"

By objecting to the public control of banking, and by further claiming that it is "communism", you display a huge ignorance of both our own founding documents as well as what communism (the abolition of all private property) appears to be.

Recently Senator Dodd told Bernake (I'm paraphrasing) that the Fed Reserve Chairman needed to use every tool in the book in response to the sub-prime mortgage crisis. That doesn't sound like Congress "'regulating' the value thereof" to me, it's more like a buddy telling a very drunk friend in a bar to drive home quickly and giving him an Indianapolis 500 race car to get there.

Unfortunately, through the years, and undoubtedly through supreme court cases, the phrase "To coin Money" has been parsed well (in my view, beyond reasonable bounds) by generations of lawyers, and no longer seems to have any semblance to the plain meaning of the words which should be evident to any adult citizen that can read English. (since paper money isn't metal coin, the phrase doesn't apply?)

Therefore, it was my experience, and apparently the experience of some others, that precisely how money is created by private banks has been carefully hidden from the general public's view. "Federal Reserve Bank" was coined as a name to give a false impression (read that as LIE) to the public that it had something to do with the "Federal" government. Those who took introductory economics classes, like myself, were not told the truth of how money is created, it was excised from the professor's lectures, the text used, and possibly from the community college's larger library of works, as well. That was like excising number theory from math class.

In a document that briefely explains the difference between Common, Equity (Uniform Commecial Code, or UCC), and Admiralty law:

Less than one hundred years after we became a nation, a loophole
was discovered in the Constitution by cunning lawyers in league
with the international bankers. They realized that a separate
nation existed, by the same name, that Congress had created in
Article I, Section 8, Clause 17. This "United States" is a
Legislative Democracy within the Constitutional Republic, and is
known as the Federal United States.
....

By 1938 the gradual merger procedurally between law and equity
actions (i.e., the same court has jurisdiction over legal,
equitable, and admiralty matters) was recognized. The nation was
bankrupt and was owned by its creditors (the international
bankers) who now owned everything -- the Congress, the
Executive, the courts, all the States and their legislatures and
executives, all the land, and all the people. Everything was
mortgaged in the national debt.

Source: http://www.supremelaw.org/library/freeman.html

So is it any wonder why we have electronic fraud machines counting our votes, and why after California's Debra Bowen decertifies them, that a Republican proposal appears as if by magic to change the way electoral votes are counted in California, one of the more populous states, as a tactic to elect more Republicans to California's portion of Congress simply by changing the way votes are counted. Why Congress takes impeachment "off the table" and says the Iraq war is not "on the table" for discussion, even after democrats were given a voter mandate in 2006 to end the war. That there is a minimum wage that isn't anywhere near a living wage and that won't buy a home to live in and hasn't kept up with inflation for some 40 or more years, while CEOs salaries are going up in excess of 20% per year (they have no trouble with housing or healthcare). That the less privileged among us must keep working harder and for more hours with each passing year and decade just to keep our heads above water, while the rich idiots laugh and take larger and larger portions of our monetized labor to their bank accounts, while claiming a "trickle down" effect (a lie) is something for us to be grateful for.

It sounds to me like we no longer have a representative democracy or democratic republic.

The country is no longer run by us, the people, it's run by greedy bankers keeping their pawns in power and granting largess to their corporate shell friends who bribe legislators with reelection funds, and they keep hoping we don't figure out the truth from the web of lies they've spun, and even if we do, their answer is "so what?" changes are "off the table".

[JackRiddler]

54. I'm sorry I don't follow a lot of this, especially the linked article

by counting semi-colons I discover that Art. I Sec. 8 Clause 17 must be this one:

To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

Am I right? Why doesn't this article simply cite the passage that's meant?

Now how does this create, or how was it abused to create, two separate entities known as the United States? And if no one knows about it, including I figure the entire membership of the Congress and the executive, then how does it apply?

I don't buy it. Not without a translation into something I can understand, for starters.

[Trillo]

55. I think the dude means this passage

"To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of Particular States, and the Acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards and other needful Buildings;--And"

Source: http://caselaw.lp.findlaw.com/data/constitution/article01/

I counted 17 paragraphs. The one you quoted was, as I count them, 16. Would you care to count again?

Another method might be to use a google search.
http://www.google.com/search?hl=en&lr=&safe=off&as_qdr=all&q=+Article+I%2C+Section+8%2C+Clause+17&btnG=Search

Unfortunately, the site referenced earlier has a huge library, I've only been able to pick through small portions of it. I don't agree with everything it appears to advocate, including not needing to pay income taxes, but there's some mighty deep tinfoil there for the legal type mind.

edit: One primary document on the site:
http://www.supremelaw.org/fedzone11/index.htm
The concepts of the multiple legal forms of "United States" are explained in Chapter 4. (which I believe was in part of my prior excerpt that you may have found confusing) Perhaps a DU lawyer can give us a plain English version.

From Chapter 10, there is more information regarding the multiple legal uses of the term United States:

The remedy provided for us in the Uniform Commercial Code was first brought to our attention by a Patriot named Howard Freeman, who has written a classic essay entitled "The Two United States and the Law". This essay does an excellent job of describing the tangled legal mess that has resulted from the bankruptcy of the federal government in the year 1933. Specifically, the Supreme Court decision of Erie Railroad v. Thompkins in 1938 changed our entire legal system in this country from public law to private commercial law. Prior to 1938, all Supreme Court decisions were based upon public law, i.e., the system of law that was controlled by Constitutional limitations. Ever since the Erie decision in 1938, all Supreme Court decisions have been based upon what is termed "public policy". Public policy concerns commercial transactions made under the Uniform Commercial Code ("UCC"). Freeman describes the overall consequences for our system of government as follows:

Our national Congress works for two nations foreign to each other, and by legal cunning both are called The United States. One is the Union of Sovereign States, under the Constitution, termed in this article the Continental United States***. The other is a Legislative Democracy which has its origin in Article I, Section 8, Clause 17 of the Constitution, here termed the Federal United States**. Very few people, when they see some "law" passed by Congress, ask themselves, "Which nation was Congress working for when it passed this or that so-called law?" Or, few ask, "Does this particular law apply only to residents of the District of Columbia and other named enclaves, or territories, of the Democracy called the Federal United States**?"

The "Federal United States**" to which Freeman refers is the federal zone. Because of its sweetheart deal with the Federal Reserve, Congress deliberately failed in its duty to provide a constitutional medium of exchange for the Citizens of the 50 States. Instead of real money, Congress created a "wealth" of commercial credit for the federal zone, where it is not bound by constitutional limitations. After the tremendous depression that began in 1929, Congress used its emergency authority to remove the remaining real money (gold and silver) from circulation inside the 50 States, and made the commercial paper of the federal zone a legal tender for all Citizens of the 50 States to use in discharging their debts. Freeman goes on to describe the "privilege" we now enjoy for being able to discharge our debts with limited liability, that is, by using worthless commercial paper instead of intrinsically valuable gold and silver:

... Congress granted the entire citizenry of the two nations the "benefit" of limited liability in the discharge of all debts by telling the citizenry that the gold and silver coins of the Republic were out of date and cumbersome. The citizens were told that gold and silver (substance) was no longer needed to pay their debts, that they were now "privileged" to discharge debt with this more "convenient" currency, issued by the Federal United States**. Consequently, everyone was forced to "go modern," and to turn in their gold as a patriotic gesture. The entire news media complex went along with the scam and declared it to be a forward step for our democracy, no longer referring to America as a Republic.

much more --->http://www.supremelaw.org/fedzone11/htm/chaptr10.htm

There are further references to the Federal Reserve system in Chapter 8

The Federal Reserve system was conceived by a conspiracy of bankers and politicians who met secretly off the coast of Georgia to create the Federal Reserve Act. This Act of Congress was designed to remove the Constitution as a constraint on the financial operations of the U.S. government. It created a private credit monopoly which Congressman Louis T. McFadden once called "one of the most corrupt institutions the world has ever known". Congressman McFadden was Chairman of the House Banking and Currency Committee from 1920 to 1933.

The operations of the Federal Reserve are complicated and secretive. For example, this huge syndicate of private banks has never been publicly audited. We will do our best to simplify its operations for you. The Federal Reserve was set up to encourage Congress to spend money it doesn't have -- lots of it. Rather than honestly taxing Americans for all the money it wants to spend, Congress runs up a huge deficit which it covers by printing ink on paper and calling them bonds, or Treasury Bills ("T-Bills").

Some of these T-bills are purchased by hard-working Americans like you and me, with money that we obtained from real labor, something that has real value. But the deficits have become so huge, the wage earners do not have enough money to purchase all these bonds every year. So, Congress walks across the street and offers these bonds to the Federal Reserve. The FED says, "Sure, we'll buy those bonds. Your interest rate is 8.25, or 9 and a half. Take it or leave it." Congress always takes it, because there's nobody else with that kind of money. Remember, the Federal Reserve is a private credit monopoly.

Now, what does the FED use to purchase those bonds? They create money out of thin air, using bookkeeping entries to manufacture credit out of nothing. They used to do it with pen and ink, then typewriters, and now computers do the job. This artificial money would normally create very rapid inflation. This happened in Germany just prior to World War II, when Louis McFadden was a Congressman. It eventually took a wheel barrow full of Deutsche marks just to buy one loaf of bread. Imagine that, if you can!

much more ---> http://www.supremelaw.org/fedzone11/htm/chapter8.htm

[Selatius]

18. We used to have public banking before English Parliament outlawed it.

It was called Colonial Scrip. Its abolition is one of the biggest reasons, asserted Benjamin Franklin, that caused the Revolutionary War. Actually, I wouldn't call it public banking; I'd call it full reserve banking, as the colonial governments didn't nationalize all the banks, merely outlawed the practice of fractional reserve banking, at least until Parliament weighed in.

[Kagemusha]

23. My quick research shows something slightly different than you do.

Colonial Scrip was the name of fiat, paper money issued by American colonies. Let me reiterate my previous points briefly:

- Money is a token system.
- Money is required for economic activity.
- If you don't have gold or silver, you still have to have money.

So that's what the colonies did. They created money not backed by gold or silver, because they had to, in order to have a functioning economy, and just prevented inflation as best as they could; apparently Pennsylvania was particularly successful in doing so. And it sure as hell beat not having money at all.

So why would abolishing it cause the Revolutionary War? Because it created a vast absence of liquidity and duh, caused a depression. As I would have asserted it would.

The problem is that this is not full reserve banking at all... it is, in fact, no-reserve banking.

Do you realize that outlawing fractional reserve banking would create a depression in a precisely similar manner? I guess you think one revolutionary war wasn't quite enough.

[JackRiddler]

30. Pennsylvania

Surely you're wrong about Pennsylvania managing it well. After all, as you argue elsewhere, the public could never manage money and its risks as well as a group of completely unaccountable bank owners meeting in private. That would be c-c-com-m-munism!

By the way, this post shows you're a lot better when you ground yourself in real history than when you repeat the ahistorical ideologies of bankers and capitalists.

[Kagemusha]

37. Are you trying to tell me Penn state acted as a bank back then?

No, it acted like a government. It wasn't lending colonial scrip. It was paying people in colonial scrip.

Isn't that a big difference?

[JackRiddler]

42. That's right.

What I said was merely to repeat your own statement that Pennsylvania managed this system well, in contradiction to your elsewhere stated belief that a public institution could not run the monetary system without creating disaster. That doesn't mean Pennsylvania was acting as a bank, and more power to it. As you say, it was acting as a government. I'll add, as a government should. Rather than taxing people to pay off interest on a deficit borrowed from banks that pulled paper out of their ass (as per the present system), i.e. sucking money out of all of us and giving it to the banks, Pennsylvania intelligently cut out the bank altogether and just pulled the paper out of its own ass, no interest attached. Voila - it works if run responsibly, since the people so paid go out and use that liquidity and it stimulates production and they are happy people with fiat currency in their pockets working hard to make more things and get more of that fiat. (Picture radically simplified but not untrue.)

Then the British came and crashed this thing overnight - hey, they paid a lot to beat the French and they wanted revenue coming back to London in pounds, not a bunch of scrip useless outside PA - and they tried to finance their operations in the colonies instead by raising taxes, and surprise, there was a revolution.

[Selatius]

44. You pretty much just defined Colonial Scrip policies in two paragraphs. Bravo.

:hi:

[JackRiddler]

45. golly, thanks.

This is a thread worth kicking, though who knows who's reading what...

[Roland99]

53. Yeah...I've been enjoying the input from various mindsets here.

:)

[Selatius]

33. It would cause a massive depression only if you reversed what the banks have done.

i.e. You eliminate all the money created under fractional reserve banking. Nobody I've seen who pushes fiat currency of any kind has ever advocated such a thing, but proposals I've read about include a transition period from fractional to full over several years, so as not to shock the money supply or expand or contract it in rapid fashion.

[Kagemusha]

36. Uh, in the modern economy, credit largely is the money supply.

Actual cash is a pretty small fraction of "money".

[Selatius]

41. And that's fine, because nobody who pushes full reserve wants to eliminate credit

They merely want to end the practice of fractional lending because of inflation's effect on the economy and to suspend the business cycle. If the government simply tried to print out all the cash needed to cover credit without reining in fractional lending, you'd end up with Germany-style hyperinflation.

[Kagemusha]

48. So instead we have a flawed system of greater liquidity & limited inflation.

With risk of upwards and downwards variations known as booms and busts.

It's just, okay, like I said, it's a token system. Wiping out fractional lending is not going to, in and of itself, suspend the business cycle. It'll suspend a lot of business - as in, greatly contract the money supply (because credit is money too) - but it won't suspend the cycle in and of itself, because money is, in the end, simply a symbol, an accounting weight, with which we choose to quantify the cost of physical things, like oil, concrete, steel, grain, copper, and so on.

[Trillo]

4. Did you view the video?

When I viewed it several weeks ago, I saw nothing in the video that called for a return of the gold standard, at least that I recall.

In the event you've viewed the video, please post the time (video time) that backs up your assertion.

[Kagemusha]

6. I didn't view the video, and you didn't read my post. What assertion?

The #1 reply by the same poster to his own post cited "The Gold-Plated Sting" which I assumed had something to do with gold standard issues. I was mistaken and I replied to the larger issue of fractional reserves, which long predates the end of the gold standard, and which is the foundation of er, banking.

But I never claimed the video called for a return of the gold standard. I was stating a fact and probing as to what the point of marveling at fractional reserve banking, if not for wanting a return to the gold standard, because I couldn't otherwise see the point. Yes, banks lend money with only a fraction of the assets to back that money up. Water is also wet. I'm sorry if either one should come as a shock but, it shouldn't...

[Roland99]

8. It shouldn't but it does. Honestly. how many people in the US (or the world)...

are taught how the central banks operate?

[Trillo]

9. LOL! You were probing!

The point not well made in the video is the hyperinflation aspect.

You know, you also made this statement "Do you mean that seriously, that you never knew, or is that just a good line? "

I took Econ 101 some 20 years ago, and neither the professor or the text assigned explained how money was created. They gave a lot of blather about the Federal Reserve, but not one word about the actual monetary creation aspect. In fact, everyone had to give a speech to the class at some point, and I chose the Federal Reserve, did a lot of library research for it, and still couldn't find that most basic monetary information.

Probe!

[Kagemusha]

12. Well the other person genuinely didn't know. Fair enough.

I learned about this outside of school through the stubbornness and stupidity of youth when I thought knowing it would do me some good. Heh, not really. But I did come to understand a lot of it just the same. It's about as useful as my French, which means, not a whole lot.

I think it's been too long since stagflation for people to remember the hyperinflation risks well. I guess one aspect of the US economy being so huge is that it's hard to push dramatically in any direction.

[Selatius]

17. I don't favor gold standards either. I favor fiat currency, just not the kind controlled by bankers.

The money supply should be stable. Because it isn't, we get perpetual inflation, which eats into consumer purchasing power and causes business cycles of expansions and contractions and all the displacement it causes for many people.

I favor something like Colonial Scrip that was in place before the English Parliament abolished it in favor of a gold standard/silver standard currency controlled by English bankers. It was not debt-based money but credit-based money instead, its purchasing power controlled by the state government. In general, inflation was either lower or non-existent under this fiat currency, depending on the state government's policy, which varied from state to state. When the Parliament outlawed the Several States' currencies with the Currency Act of 1764, it caused an immediate contraction in the money supply, throwing the colonial economy into a depression. It was passed through lobbying by English banking interests, which saw Colonial Scrip as a threat to their model of banking.

[Kagemusha]

25. I'll just briefly say, the economy is not stable and constant, money cannot be either.

My previous reply to you will say more about Colonial Scrip but... you're asking for the impossible. Even under Colonial Scrip, banking existed, and banking had to exist, even if it had nothing to do with Scrip. If banking didn't exist, trade with the wider world would have been impossible, any more than prior to the rise of the Euro, trading in oil or opium in anything but US dollars would have been laughed off.

[Jeffersons Ghost]

22. hi Roland... long time no see... here's a vote

[porphyrian]

24. Everyone who hasn't yet watched this needs to. - n/t

[Poll_Blind]

27. K&R! n/t

PB

[ProfessorGAC]

28. Be Cautious

There is a very spurious element to this whole thing. This has been bouncing around for a couple of decades.

In fact, NO NEW MONEY IS CREATED! Debt increases the velocity of money, which helps build the "mv" side of the equation.

Unfortunately, this pushes the "pq" side, and unless the debt fuels productivity growth, then it triggers price inflation.

Just a watch out: The Cato Institute and some U of C professors have developed this theme, and Ron Paul is a strong proponent of it.

If you want to follow Ron Paul, be my guest.
The Professor

[JackRiddler]

31. Semantics - and false ones to boot.

Of course new money is created by debt! The total amount of dollars in circulation rises, and the money comes from no previous store thereof, i.e. from nowhere.

Your objection that more money triggers higher inflation means only that no new value is created by debt (per se - how debt is invested by the borrower in a way that possibly raises production is another matter).

And then you go for guilt by association. That's two cheap fallacies of bad rhetoric in one post. To share a given critique of something with someone else does not mean you are following them, or that you agree with them on other things.

[ProfessorGAC]

32. Wrong and Wrong

You're just completely wrong. And it's not semantics. The same amoung of money in the supply being used an extra time, (say 11 vs. 10, as the final stage of transaction) raises the "V". The "M" stays the same, but the product of those two factors goes up. I don't think you understand what you're talking about. The money is in the existing stores.

Many times the debt fuels consumption growth that actually improves productivity, meaning inflation doesn't accelerate. You read that right, and VALUE IS ADDED.

There is no need, therefore, to create new money or add to the supply. It is a more efficient use of the existent supply.

Your last paragraph doesn't even make sense, so you should be careful about tossing around the insults. I didn't associate anybody with anything to assign guilt. I provided a CAUTIONARY statement about the origin of this theory. If someone wants to accept it, i'm not assigning guilt to anyone.

If it were in reference to an Iraq war theory espoused by Bill Kristol, i don't think you'd object to such a cautionary statement.

Hey, if you don't want to believe me. Fine. I've published as many papers as the economist in the OP. This is a tenuous theory for which little data exists, and is rooted in a desire to return to a standardized monetary system, which would be great to those holding gold and silver, but valueless for the rest of us.

But, whatever.
The Professor

[Roland99]

34. But are we at a point where increased debt *will* lead to productivity growth, or, as I suspect....

is it merely a case of robbing Peter to pay Paul?

[ProfessorGAC]

40. No, We're Not

Look i'm not defending the current economic condition. It's a problem, just not for the reasons in the video.

And, we are, as you surmised, not seeing any real advancement in productivity, except in the building markets. Once those markets dry up (like they're doing now), the P will drop, which could trigger heavy core inflation.

The way the fed has handled things under Greespan and Bernanke have been dreadful, because they have done NOTHING to incentivize productivity improvements. They just got lucky with the housing boom.

But, the basis of money and the generation of new funds when it's all based upon the overall capital investment of the country does not require new money to be printed to fund debt.

Yes, you're right. We're seeing some core inflation which is high compared to real growth. So, the pollyanna reports from the fed, Commerce, and Treasury are illusory. But, not in the way the video suggests.

The Professor

[Kagemusha]

50. I agree with you. Well put.

Fractional lending is not the worst concern at the moment. We'll see how it all turns out. I just can't let a professor making sense in concise, legible paragraphs go without praise. :) See you around.

[JackRiddler]

38. Not tossing any insults.

Just to clarify, an insult would be to call you a name.

To call your argument fallacious may be a correct description thereof, and nothing more.

But tell me (or don't), what are you playing here?

"The same amoung of money in the supply being used an extra time, (say 11 vs. 10, as the final stage of transaction) raises the 'V'."

The point of fractional reserve banking is that it's often not the same money as on deposit being re-lent to the borrower; what's on deposit is kept there and withdrawable even as a new, separate account is opened on extending a new credit. The formula can pretend it's just a higher V, but it's actually new M. Which came out of nowhere, on the assumption that it will be ultimately covered through repayment.

Please note: I do not desire a gold or silver standard, though one exists de facto past the inevitable failure of the current spiral system.

I would support publicly controlled fiat, supplemented by community currency.

[ProfessorGAC]

43. The Money In The Fractional Reserve. . .

. . . is part of the money supply. It's not in continuous circulation but is part of M2 and M3. (Even though they don't report M3 anymore.)

And, in some cases, the fractional reserve is in circulation but is intentionally pinched so the velocity is kept down. The reserve is then accelerated through lending which increases the V.

It's impossible to have a higher M unless there is MORE MONEY IN THE SYSTEM. The money in the reserve already counts as printed. Not M1, but in circulation. So, it's not pretending a higher V. It is a higher V. The only thing that allows a system to grow without constant inflation at equal level to the growth, is the ability to use the supply more efficiently. That's the whole history of U.S. capitalism.

And lastly, (i'm out after this), my argument is NOT FALLACIOUS. It is rooted in, and supported by 100 years of data in U.S. economics.

I'm not going to go into a full econometric modeling dissertation here, but the video is based upon flawed theory and is a two dimenstional concept. There has NEVER been an economic model that predicted anything of value with only two dimensions applied.
The Professor

[JackRiddler]

46. So what you're saying

is that M2 and M3 are theoretical, and possibly even fictional, in M3's case unpublished. What matters is what's actually lent and thus truly circulated, and not what's theoretically there due to M2 and M3 including potential credits.

But tell us, what is the whole history of "U.S." capitalism? (Funny idea after 1945, when it becomes near-equivalent to global capitalism.)

Strangely enough, I see a string of disasters - in each case government(s) bail(s) out the banking-plunder complex so that it can lead the way to the next disaster. What do you see?

[ProfessorGAC]

47. The History Retreats Back to The Mid-18th Century

Of course the variables shift but taken in even sized slices, certain behaviors can be deduced in the overall economy. But, the inputs shift along with the global nature of the economy, so the factors and effects move in a similar fashion. One cannot compare 1910 to 1980, but one can trend the causative behaviors of 1910 to those of 1980.

As to your first question, M1 has always been the most critical factor in finding causation of certain macroeconomic behaviors. Outstanding credits are exponentially weighted, so that small changes have little effect, and only if they get extreme do they show statistically significant leverage. That same thing happens on M2 and M3, but to not at as strongly sigmoidal a curve.

I see the banking-plunder issue (good name, btw), as bad, and probably will in fact cause a bail-out, based upon more borrowed money, which will trigger a recession (even by classical definition). But, i don't see disaster, just tough economic sledding. The economy is so glacially-paced, that it will survive such things without catastrophe. But, that doesn't mean it's impervious to pain.
The Professor

[Trillo]

52. It strikes me that increased velocity

Likely correlates to increased social and individual stress. (I'm no economist, BTW)

More changing of hands of existing money. Earn more. Get taxed more. Spend more. Get taxed more. Have more kids (future debtees). More taxpayers! More. More. More.

It seems that increasing the velocity simply brings all of us closer to the stressful edge where reality ends and that which lies beyond externality begins.

If anyone wants to read what ProfessorGac means by MV=PQ, remember the search engines are your friend.