Economics Questions

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Thu, 21 Apr 2011 11:47:30 GMT

OK well you have fun.

Re: Money flow diagram - reinventing the wheel?

mickanomics — Thu, 21 Apr 2011 07:29:53 GMT

Sorry- but this is getting to be too much work - the money flow diagram I present is for people who already know how FRB works.

If my diagram genuinely misrepresented how FRB worked than I think other people would have pointed it out.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Thu, 21 Apr 2011 00:07:36 GMT

1. I see that as an irrelevant distinction. We are talking about the transactions between two parties, not about how Iphones are used by one person. Or have I misunderstood what you are saying?

2. The plain old vanilla textbooks all have an axe to grind, mais non?

3. Also, what they are saying is true in a bookkeeping sense. The loan no longer exists in anyones books. But let us not confuse bookkeeping entries with reality. After all, if I repay the loan in gold coins, the two entries in that video also disappear, but I think we agree that the gold coins do not. And someone is going to spend them.

4. Does the explanation in that video only apply to banks lending money, or to two neighbors who lend money [in coin] to each other as well? I think it applies to them also. But they of course have nothing to do with FRB.

EDIT: Thinking about it a bit, we have to distinguish between an "asset" and "that which has purchasing power". If in the books I have an asset of Jones owing me money, that does indeed disappear when he repays me. But that asset never had any purchasing power. It wasn't money. It's disapearance does not reduce the money supply.

Now you could argue that I can sell that IOU of his to someone, say a grocer. And he will give me tomatoes for it. But that has not increased my purchasing power. Because by giving the grocer the IOU, I lose the cash Jones borrowed from me.

Re: Money flow diagram - reinventing the wheel?

mickanomics — Wed, 20 Apr 2011 22:14:35 GMT

Sorry but an iphone does not work as an analogy for money because you can use it and then still have it yourself.... whereas when you use money it gets transferred to someone else.

My understanding of FRB is not some contentious quirky minority view - its just plain old vanilla FRB you can find in any textbook.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Wed, 20 Apr 2011 18:16:53 GMT

I am not sure I get the difference between that and the following story:

A lends B his Iphone and says B can lend it to others as well. B uses it for a week, and returns it to A.

During the lifetime of the loan, B was armed with a Iphone and permission to call people up. This calling-up-permission (which can be transferred from one person to another, thereby acting like a real Iphone) is known as "borrowed Iphone". It (the permission) dissapeared when the Iphone was returned.

Am I correct that both [money and Iphone] are the same? If not, where is the difference? If yes, then has an Iphone disappeared as well? Would a chart of this transaction have a garbage can in it, similar to the chart of money flow?

Re: Money flow diagram - reinventing the wheel?

mickanomics — Wed, 20 Apr 2011 17:42:48 GMT

"Then what was destroyed?"

The "demand deposit".

During the lifetime of the loan, someone was armed with a chequebook and permission to write a cheque for up to 987.50 pounds. This cheque-writing-permission (which can be transferred from one person to another, thereby acting like real money) is known as "checkbook money". It (the permission) dissapeared when the loan was paid back.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Wed, 20 Apr 2011 17:32:40 GMT

Then what was destroyed?

Re: Money flow diagram - reinventing the wheel?

mickanomics — Wed, 20 Apr 2011 15:52:01 GMT

"Doesn't sound like it was destroyed to me."

The money left over was simply part of the 1000 pounds that existed originally.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Wed, 20 Apr 2011 15:05:26 GMT

The video ends with the words "The bank is left with 987.50 which is "spare", which they will probably use to issue another loan".

Doesn't sound like it was destroyed to me.

Re: Money flow diagram - reinventing the wheel?

mickanomics — Wed, 20 Apr 2011 14:28:13 GMT

"1. That's not how FRB works at all."

Yes it is: See this short video.

Re: Money flow diagram - reinventing the wheel?

mickanomics — Tue, 19 Apr 2011 16:20:31 GMT

"1. That's not how FRB works at all."

I am very confident you are wrong. Where are you getting your information from? Who do you think I am contradicting?

"2. OK, that may be right. But still, the ultimate use of money is to buy goods and services. The money used to repay aloan, to buy a financial service, to do anything at all, is sooner rather than later used by the recipient."

Why sooner rather than later? Loan repayment arrangements can extend for decades. Also money can circulate back and forth swapping shares and other financial products for a long time. Clearly in the up-phase of a bubble, ever greater fractions of the total money supply are being used for purchasing the bubble-asset.

"Could you show me a link to where your idea came from? Or, if it original, how you arrived at it?"

I did think of the visual presentation entirely on my own - but have yet to find out for sure if anyone else thought of it before me. I have been thinking about FRB for years.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Tue, 19 Apr 2011 15:46:43 GMT

1. That's not how FRB works at all.

2. OK, that may be right. But still, the ultimate use of money is to buy goods and services. The money used to repay aloan, to buy a financial service, to do anything at all, is sooner rather than later used by the recipient.

Could you show me a link to where your idea came from? Or, if it original, how you arrived at it?

Re: Money flow diagram - reinventing the wheel?

mickanomics — Tue, 19 Apr 2011 15:15:44 GMT

"1. Why are principal repayments not respent? Does the bank burn the money?"

That's simply part of the definition of how fractional reserve banking works. I don't know how else to say it. Its just how FRB was designed.

With regard burning - there is no need. It will be the quantity of checkbook money that diminishes.

"2. You assert that if all the other arrows have more money in them than the goods and services arrow, then we will have lower prices. Maybe this is true if the numbers stay in that proportion for a long time, say at least a month. But the numbers in the arrows change every second. Once a financial instrument is purchased at, say, 12 PM, the recipient does not use the money to purchase a financial instrument neccessarily. He may well buy himself a new yacht."

If we are considering the flow rates through the different channels for an entire country then you would not expect there to be enormous changes on their relative sizes in the very short term.

Re: Money flow diagram - reinventing the wheel?

Smiling Dave — Tue, 19 Apr 2011 14:25:25 GMT

1. Why are principal repayments not respent? Does the bank burn the money?

2. You assert that if all the other arrows have more money in them than the goods and services arrow, then we will have lower prices. Maybe this is true if the numbers stay in that proportion for a long time, say at least a month. But the numbers in the arrows change every second. Once a financial instrument is purchased at, say, 12 PM, the recipient does not use the money to purchase a financial instrument neccessarily. He may well buy himself a new yacht.

Money flow diagram - reinventing the wheel?

mickanomics — Tue, 19 Apr 2011 10:42:14 GMT

I like to try and work out economics from first principles. One problem with this is that occasionally I come up with an idea which I suspect is original, only to find out later that it has been though of before.

I have come up with a diagram for showing money flowing in an economy which I have not seen elsewhere and am wondering if it is indeed original. I have put the diagram and a description -> here (the "new" diagram is the second one on the page). Has anyone seen anything like it before? If so where?