Similar questions probably get asked a lot, but this one is very straightforward.
I am curious about how fractional reserve banking is inflationary but yet 100% loan banking is not.
Loan banking would be where you place your savings in an interest paying loan account from which the bank would make loans to third parties with. These loan banking accounts would be used to make loans to customers which must be paid back during a certain time window and depositors would also not be able to withdraw their funds during that same window of time. Bunk runs would be impossible.
Fractional Reserve banking is still a bit mysterious to me on how it is inflationary while the above banking is not. I realize that a fractional reserve bank is subject to runs, but how is it inflationary? If a bank has a $1000 deposit and loans out $900 of it under the full extent allowed with a 10% reserve requirement. How is this inflationary? I know that the bank now has $1900 on its books but the original depositor is not using his $1000. It doesn't seem like any new credit has been created. So as long as the bank does not experience a run, how is this inflationary?
I am very interested in clearing this up for myself so that I can more properly explain this to others.
Juan:Person A has $5,000 CD due in 4 months. Person A exchanges CD for a car now. Repeat process. So person A is using the money while the money is being loaned out to someone else. The CD trades at a discount because it is NOT cash. Besides, it's supposed to be fully backed. You still don't understand your own position.
Person A has $5,000 CD due in 4 months. Person A exchanges CD for a car now. Repeat process. So person A is using the money while the money is being loaned out to someone else.
There is not a requirement that the CD trade at a discount since the CD is earning interest. The point being that the time deposit from your perspective is supposed to make the money unavailable for other purposes but that is not the case. If I can buy things now with a time deposit then it is not any different than what you claim is happening in fractional reserve. Maybe you don't understand your position.
bbnet:Person 1 (P1) deposits 1000oz gold in a long term investment account (5yr) in Bank 1
Nothing stops P1 from using the long term investment as a vehicle to make purchases now. The scenario you describe for fractional reserve could just as easily take place with a time deposit. Simply because money has been placed in a time deposit does not mean that holder of the time deposit can not use the value of the time deposit now. As I pointed out you could trade the time deposit for a car now thus using the money while it is being loaned out to someone else creating the very situation you propose is fraud.
MaxLiberty:There is not a requirement that the CD trade at a discount since the CD is earning interest.
The point being that the time deposit from your perspective is supposed to make the money unavailable for other purposes but that is not the case.
If I can buy things now with a time deposit then it is not any different than what you claim is happening in fractional reserve.
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What could you buy with a time deposit right now. I want some examples before i accept that a cd can act as cash
The idea that a CD could ever act as cash as a joke. It would mean that saving wouldn't be saving...
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scineram: First, this is about fiduciary media, no one was talking about fiat money. Learn the difference.
First, this is about fiduciary media, no one was talking about fiat money. Learn the difference.
I'm not talking about fiat money. Learn to read.
Second, then what? Once credit expansion made it through the system there is no more expansion. Banks cannot create credit indefinetly without risking runs. Additional money creation requires more base money in reserves.
We have a business cycle. So what?
All I am saying it is inflationary exactly as much as hard money. If the amount of base money, coins for example, doubles, the entire money supply doubles under both systems.
It doesn't matter how it effects the money supply, since we can all agree that private currencies will only survive if they provide a desirable amount of inflation. The issue is that the supply of credit exceeds the supply of savings, creating a boom-bust cycle.
Maxliberty: krazy kaju: scineram: krazy kaju: I have $100 in a demand deposit and $90 is loaned out. I buy something online for $50, the money is transferred from my bank account to the online vendors. In this situation, we have the borrwer using my $90 and myself using $50 for a total of $140, even though there is only $100 in bank deposits. If fractional reserves weren't inflationary, there wouldn't be a difference between M0, M1, and M2. Those diffferences are irrelevant. The relevant is whether there is a difference in one of them between time t_1 and t_2. The differences aren't irrelevant. If I'm using the money I have in the bank as physical money by using checks while someone else is using that same money because they borrowed it, you have two things happening: Inflation, as the money supply is expanded. The beginning of the business cycle as the amount of credit exceeds the actual amount of savings. There is nothing to stop anyone from having a time deposit from "spending" the money before the date of redemption. Any CD can be exchanged for other goods or services or could be accepted as a deposit instrument at another bank or sold at a discount in a secondary market so the distinction is all nonsense. Example, Person A has $5,000 CD due in 4 months. Person A exchanges CD for a car now. Repeat process. So person A is using the money while the money is being loaned out to someone else.
krazy kaju: scineram: krazy kaju: I have $100 in a demand deposit and $90 is loaned out. I buy something online for $50, the money is transferred from my bank account to the online vendors. In this situation, we have the borrwer using my $90 and myself using $50 for a total of $140, even though there is only $100 in bank deposits. If fractional reserves weren't inflationary, there wouldn't be a difference between M0, M1, and M2. Those diffferences are irrelevant. The relevant is whether there is a difference in one of them between time t_1 and t_2. The differences aren't irrelevant. If I'm using the money I have in the bank as physical money by using checks while someone else is using that same money because they borrowed it, you have two things happening: Inflation, as the money supply is expanded. The beginning of the business cycle as the amount of credit exceeds the actual amount of savings.
scineram: krazy kaju: I have $100 in a demand deposit and $90 is loaned out. I buy something online for $50, the money is transferred from my bank account to the online vendors. In this situation, we have the borrwer using my $90 and myself using $50 for a total of $140, even though there is only $100 in bank deposits. If fractional reserves weren't inflationary, there wouldn't be a difference between M0, M1, and M2. Those diffferences are irrelevant. The relevant is whether there is a difference in one of them between time t_1 and t_2.
krazy kaju: I have $100 in a demand deposit and $90 is loaned out. I buy something online for $50, the money is transferred from my bank account to the online vendors. In this situation, we have the borrwer using my $90 and myself using $50 for a total of $140, even though there is only $100 in bank deposits. If fractional reserves weren't inflationary, there wouldn't be a difference between M0, M1, and M2.
I have $100 in a demand deposit and $90 is loaned out. I buy something online for $50, the money is transferred from my bank account to the online vendors. In this situation, we have the borrwer using my $90 and myself using $50 for a total of $140, even though there is only $100 in bank deposits.
If fractional reserves weren't inflationary, there wouldn't be a difference between M0, M1, and M2.
Those diffferences are irrelevant. The relevant is whether there is a difference in one of them between time t_1 and t_2.
There is nothing to stop anyone from having a time deposit from "spending" the money before the date of redemption. Any CD can be exchanged for other goods or services or could be accepted as a deposit instrument at another bank or sold at a discount in a secondary market so the distinction is all nonsense.
Example, Person A has $5,000 CD due in 4 months. Person A exchanges CD for a car now. Repeat process. So person A is using the money while the money is being loaned out to someone else.
If CDs were to become liquid like that, they would function the same as tradable bonds. In other words, you'd be exchanging the CD at a discount for money now and using that money to buy the car. If someone wanted to trade a car for a CD you could do that as well, though it wouldn't matter since there are different dynamics at work. You're simply transferring the savings from one person to another, you're not actually employing a double use of the money.
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Juan:It can't act as cash. Cash is universally accepted. A CD won't.
Whether or not it would act as cash is irrelevant. A liquid CD is no different than a liquid bond. Even if you use a CD or bond to purchase another item is NOT the same as fractional reserve banking. The issue with fractional reserve banking is that when the newly created credit spreads into the economy, it will redirect resources away from investment goods to consumption goods, forcing higher order industries to lose profitability, cut wages, and fire workers. Exchanging bonds has no such effect.
Whether or not it would act as cash is irrelevant.
Juan:The CD is not cash, so it's very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed.
Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible.
Juan:That is, if you have a $5000 CD you can only buy cars which cost $5000.
The CD could be broken down into smaller portions, just because the total value of the CD is one thing doesn't mean I couldnt break up the value into smaller increments. This isnt even discussing secondary markets where these things are sold bought and used everyday.
Juan:Trading CDs is not the same thing as drawing money from a bank account by writing checks, or spending cash.
What exactly is the difference, I trade one piece of paper with perceived value for some good or service I want. The time to redemption in some physical commodity might cause something to trade at a discount but the function is the same.
Juan:If I go to the bar and say : I want a beer, please accept this piece of paper which you can only cash in a year, I doubt I'm likely to be served as promptly as if I had a dollar (or gold!) in my hand.
That is irrelevant. How readily accepted the paper is doesn't prevent me from the possibility of using it just like your dollars or gold. In some case I might actually get a premium over the face value of the CD. For example the CD is redeemable tomorrow so quite possibly I could sell the CD at a premium to it's face value.
Shawn77: What could you buy with a time deposit right now. I want some examples before i accept that a cd can act as cash
Do you really think it's impossible to buy something with a CD being used as payment? If you had a CD worth $50,000 redeemable in one week and went to buy a $50,000 car do you think the car owner would turn you down because he has to wait a week to get his money?
krazy kaju: If CDs were to become liquid like that, they would function the same as tradable bonds. In other words, you'd be exchanging the CD at a discount for money now and using that money to buy the car. If someone wanted to trade a car for a CD you could do that as well, though it wouldn't matter since there are different dynamics at work. You're simply transferring the savings from one person to another, you're not actually employing a double use of the money.
The only distinction is the time frame for redeemability. But if no one is interested in physical redemption then it functions exactly as the fraction reserve system you oppose. All that has to occur in a fractional reserve system to make it a time deposit system is to have some delay in physical redemption which is what most banks already do.
no i imagine he'd tell me to come bback in a week then i could have my car ya know when i actually had money
"That is irrelevant. How readily accepted the paper is doesn't prevent me from the possibility of using it just like your dollars or gold."
That is exactly what it means. So buy this logic if i can get someone to occasionally accept dirt as payment then dirt is now money.
Maxliberty: Juan:The CD is not cash, so it's very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed. Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible.
Think about this for a minute, rather than hastily thinking that you have "debunked" something without looking at all sides.
Lets say that Tony buys a car from his local car dealer with a $10,000 CD. The CD is not redeemeble for one year and the car dealer is still willing to accept it. The car that Tony bought was already in existance and built and paid for by the dealer and an automoble production factory. No new product creation happened and the dealer will not be able to efficiently replace that car on his lot until he eventually redeems his CD. All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. The dealer cannot access the money that the CD is entitled to and therefore no money has really been used even though at first glance it appears like it has.