Fractional Reserve Lending and Risk Taking.

[1456200423]

money I loaned. I pay you an interest on the money you placed in my vault.

Lets use a real life example of this in action:

So you come into my bank and give me $1,000 to deposit and I promise you 1%/m interest. After a month your account balance is $1010 (then I subtract access fees and account maintenance fees roughly $15). So you have $995 at the end of month 1. Meanwhile I've taken $900 of your money and lent this out to someone else with an interest rate of 2.5% and various fees totaling $25/month. After the first month I've turned that $900 of your money into $900 of your money and $22.50 interest and $25 loan fees ($47.50 after first month).

After the first month:

You have $995 of your $1000 deposit
I have $47.50 I acquired with your money

Imagine if the person you are lending "invests" the 900$ back with your bank. Now keep dividing that pie collecting interest on all the loans. What you end up with after the first month is 1000(original investment) + 9000(vapor money) + accumulated interest(reserve). Keep repeating...

[Ryan Rudolph]

Cory,

Increasing the money supply isn't necessarily bad, just as long as the culture itself has increased value. A huge amount of currency with a low quantity of valuable products, makes for a weak dollar.

yes, I see what you mean. And another way of looking at the danger of an inflated money supply is if you introduce a gigantic amount of currency into a country with very little economic activity, the result is hyper inflation. Actually, it is funny that such tactics have never been used in warfare. For instance: if the developed world really wanted to topple the North Korean regime, for fear of them selling nuclear weapons to rogue groups, instead of sending in ground troops, why not try to perfectly counterfeit their currency, and introduce trillions of dollars into their economy as a one time surge? could be enough to cause disorder in the nation long enough to take control over their government.

Both options would be rather hellish, but necessary depending on how irrational some of these rogue nations become.

Animus,

This is something behavioural economists have asked and it turns out that "hard work" and "talent" as much products of chance themselves. People born into poverty, whose parents are impoverished and don't stimulate them to achieve anything, are generally lazy. This a kind of inhereted laziness, they are taught to put in so much effort by their parents. Children born to upper class parents are usually over-stressed with all kinds of ambitious activities and extracurricular tutoring. So they are taught to be ambitious from a young age and probably feel shameful if they are not working towards some economic goal all the time. Behvarioural economists have also asked the question: are people innately talented? And what they have found is that in general people are not innately talented, but achieve a level of mastery after about 10,000 hours of practice.

I bet the speed of metabolism is another key factor in a person's level of ambition, along with levels of testosterone, and other hormones. A person's personality type is also key. People who can become self-absorbed in activity, and have a high tolerance for emotional and physical pain are probably the best candidates for talent and success in society. They must also derive happiness from setting materialistic goals and achieving them.

Alpha males are probably best as leaders and owners due to their high level of indignation towards being controlled. Alpha's are probably either leaders or loners in the work place. The more feminine Beta males and women are mostly the bitches of the world. They are the ones that derive happiness from submissive obedience and impressing the boss.

I suspect that there is probably a disproportionate ratio of gay men who are beta males - I could be wrong though, just a hunch.

Nick,

And the part that Bill Clinton repealed; the introduction of the separation of bank types according to their business, e.g. commercial and investment banking.

And I thought Bill Clinton was a little more whole than that. now, do you believe he repealed the bill because he profited from the deal from being connected to bankers, or did he sign it not fully understanding the ramifications of his actions. Because sometimes companies will pitch a revision to a bill as if it is one thing, when in actuality, there are a whole host of things in the bill that they do not bring up, and that is the real reason for the repealing of the bill in the first place. Its sneaky, but corporations know that most politicians are generally lazy, and do not have time to read the fine details of every bill they are voting on, so they use that to their advantage. Its a huge problem with the system I think.

guest of logic,

I will need to think about your explanation of how fractional lending works, as it seems to make more sense than the explanation I have read many times from different sources. I need more time to let the idea stir...

Animus,

I can relate to your work place experience, irrational people make work hell, period. Now, when I work a job, I try to get in a position in the company where I deal with irrational members of that company as little as possible to minimize the chances an incident. Especially irrational management who generally whore out their employees and treat them dog shit until they are forced to quit.

[guest_of_logic]

money I loaned. I pay you an interest on the money you placed in my vault.

Lets use a real life example of this in action:

So you come into my bank and give me $1,000 to deposit and I promise you 1%/m interest. After a month your account balance is $1010 (then I subtract access fees and account maintenance fees roughly $15). So you have $995 at the end of month 1. Meanwhile I've taken $900 of your money and lent this out to someone else with an interest rate of 2.5% and various fees totaling $25/month. After the first month I've turned that $900 of your money into $900 of your money and $22.50 interest and $25 loan fees ($47.50 after first month).

After the first month:

You have $995 of your $1000 deposit
I have $47.50 I acquired with your money

Imagine if the person you are lending "invests" the 900$ back with your bank. Now keep dividing that pie collecting interest on all the loans. What you end up with after the first month is 1000(original investment) + 9000(vapor money) + accumulated interest(reserve). Keep repeating...

It's actually not $9000 of vapour money: it's the same money going around in circles - and that happens throughout the economy, not just with loans. What if you buy $9000 worth of goods at a shop, and the shopkeeper then pays his accountant $8100, and his accountant buys $8100 worth of your items off eBay, and you then use that $8100 to buy more goods from the original shop? The same money (equivalent to your "vapour money" in the loan scenario) has been used to generate a profit multiple times at the same store. That's all that's happening when loaned money is re-invested in a bank - it's nothing sinister, and keep in mind that for each loan, there's a corresponding deposit on which interest must be paid by the bank.

[Nick]

And I thought Bill Clinton was a little more whole than that.

He's also the one who executed NAFTA, giving the manufacturing base in the USA it's final blow.

now, do you believe he repealed the bill because he profited from the deal from being connected to bankers, or did he sign it not fully understanding the ramifications of his actions.

I'm sure he benefited in some form by repealing it. I refuse to believe people on his level are that ignorant about the ramifications of the policies they put in place. They have too many advisers and too much intelligence for ignorance to play a major factor in what they end up doing.

Because sometimes companies will pitch a revision to a bill as if it is one thing, when in actuality, there are a whole host of things in the bill that they do not bring up, and that is the real reason for the repealing of the bill in the first place. Its sneaky, but corporations know that most politicians are generally lazy, and do not have time to read the fine details of every bill they are voting on, so they use that to their advantage. Its a huge problem with the system I think.

Not that I don't think overly complex wording of bills is a problem, but politicians have entire staffs of lawyers and secretaries to break it down for them. It's not like they have to read every word of a bill on their own to get a basic understanding of what is likely to happen by passing or repealing a law.

[guest_of_logic]

I try to stay on top of things. This is an understanding I've developed from the likes of Gladwell and Ariely, but also coheres with my understanding of human psychology and my understanding of reality in general. All of this is a rather large undertaking and I don't have the necessary lifespan to realize everything. But I mean, that's the ideal and this is all in the service of doing that. So certainly there is a whole heck of a lot I don't know and will never know. Probably an inexorable amount of stuff in any given subject. Anyway, as far as I know anything its what I know.

Do you plan on doing anything with your accumulated knowledge, other than sharing it with others on newsgroups and YouTube and through personal conversations?

What I like about Gladwell and Ariely is that they aren't strictly economists crunching numbers in some boardroom. They are behavioural economists doing actual experiments with human beings and currency. For example Ariely found that students in a draw for local sports game tickets put more or less value on the ticket whether they won or lost (respectively). People were more likely to travel 15 minutes by car to save $7 on a $15 purchase than on a $1,000 purchase, an irrational choice considering the cost (15 minutes by car) and the savings ($7) are equivalent in both scenarios. They found that people given the choice to cheat openly on tests indulged in the ability to do so, but not so after signing a code of conduct. When people were not prompted with a code of conduct or told that they could openly cheat, they cheated moderately. A great example from Ariely's book Predictably Irrational is the Economist subscription page.

So it's a mix of economics and psychology. I notice some of these sort of tendencies in myself. To take a non-economic example, I'm far more likely to read online the same amount of material split up over multiple smaller pages than presented on a single lengthy page. A friend told me that this is "irrational" behaviour, but I think that it depends on your definition of rationality: all other things being equal, if one option feels psychologically better than another option, isn't it rational to choose the first option over the second?

All of this kind of stuff is readily utilized by marketers in order to systematically exploit the subconscious human mind. And as far as they are aware there is nothing intrinsically wrong with it. All is fair in love and war, and I guess business too.

Hence your question in another thread re the morality of using techniques consciously as opposed to unconsciously. My opinion is that in this context the ends justify the means if the ends benefit the manipulated person (by their own standards), otherwise not. Unfortunately that's an easy condition for marketers to claim to have satisfied: "The purchase of our product will greatly benefit the consumer whose purchase we are manipulating".

Edit: on reflection I'm not satisfied with that condition, but I haven't yet figured out how to adjust it.

Edit: Sorry, the economist subscription thing is probably because people feel like they are getting something free with latter choice. I don't know exactly, its a strange one.

Right, the word "free" sets off bells of intrigue in the minds of most people. It does seem like there's some psychology going on with that one.

[1456200423]

money I loaned. I pay you an interest on the money you placed in my vault.

Lets use a real life example of this in action:

So you come into my bank and give me $1,000 to deposit and I promise you 1%/m interest. After a month your account balance is $1010 (then I subtract access fees and account maintenance fees roughly $15). So you have $995 at the end of month 1. Meanwhile I've taken $900 of your money and lent this out to someone else with an interest rate of 2.5% and various fees totaling $25/month. After the first month I've turned that $900 of your money into $900 of your money and $22.50 interest and $25 loan fees ($47.50 after first month).

After the first month:

You have $995 of your $1000 deposit
I have $47.50 I acquired with your money

Imagine if the person you are lending "invests" the 900$ back with your bank. Now keep dividing that pie collecting interest on all the loans. What you end up with after the first month is 1000(original investment) + 9000(vapor money) + accumulated interest(reserve). Keep repeating...

It's actually not $9000 of vapour money: it's the same money going around in circles - and that happens throughout the economy, not just with loans. What if you buy <EDIT: $1000> worth of <goods> at a shop, and the shopkeeper then pays his accountant $8100, and his accountant buys $8100 worth of your items off eBay, and you then use that $8100 to buy more goods from the original shop? The same money (equivalent to your "vapour money" in the loan scenario) has been used to generate a profit multiple times at the same store. That's all that's happening when loaned money is re-invested in a bank - it's nothing sinister, and keep in mind that for each loan, there's a corresponding deposit on which interest must be paid by the bank.

Keep thinking guest of *logic*. The money is a promise to pay a loan, not tangible "goods". Wow is this really such a difficult concept...

[guest_of_logic]

The loan is the service, just as I used accountancy services in my example. Whether what's being paid for is a good or a service is irrelevant.

Admittedly my example isn't an exact analogue of the loan scenario, because the money that's being considered multiple times is flowing opposite ways in each scenario: in my example it's flowing from consumer to provider whereas in the loan scenario it's flowing from provider to consumer (to be paid back with interest eventually of course, so in the end it flows the same way). The point remains though that the same money can pass multiple times - earning a profit - through the same organisation.

[1456200423]

The loan is the service, just as I used accountancy services in my example. Whether what's being paid for is a good or a service is irrelevant.

Ohh, I see. Here is $1000000
Thank you for using my service... <- sign here.
I expect you to pay me back tomorrow with interest. No counterfeiting now... :-)

Try to follow this...

When you borrow money from a bank in the form of credit, all that happens is that new money is created, and given to you.


They take your signature on the signed credit agreement, and use that as a promissory note, i.e. the promise of your future labour. There was no liability created by them lending the money.

Admittedly my example isn't an exact analogue of the loan scenario, because the money that's being considered multiple times is flowing opposite ways in each scenario: in my example it's flowing from consumer to provider whereas in the loan scenario it's flowing from provider to consumer (to be paid back with interest eventually of course, so in the end it flows the same way).

Your example was comparing apples with oranges. It's pretty funny though... :-)

The point remains though that the same money can pass multiple times - earning a profit - through the same organisation.

And my point was that not only is money being created trough interest rates, but money is also being duplicated.

This money that has been created, and that is backed by your signature, is your money.
So you are paying your own money back to the banks WITH INTEREST!

YOU PAY TAXES ~
Your Taxes are given to the Banksters.
The bank OWNS You ~ You are a SLAVE.
YOU borrow money to pay TAXES.
The bank OWNS You ~ The Government owns YOU.
You are a SLAVE.
Your Slave number is your National Insurance Number.

[guest_of_logic]

When you borrow money from a bank in the form of credit, all that happens is that new money is created, and given to you.


They take your signature on the signed credit agreement, and use that as a promissory note, i.e. the promise of your future labour. There was no liability created by them lending the money.

I've explained more than once in this thread that money isn't being created, just moved around, but you keep on repeating your claim anyway. The bank's liability is what it owes to its depositors, who are the source (caveat: there can be other sources) of the "new" (loaned) money.

[Animus]

Do you plan on doing anything with your accumulated knowledge, other than sharing it with others on newsgroups and YouTube and through personal conversations?

I have thought about writing. I haven't really planned anything though.

So it's a mix of economics and psychology. I notice some of these sort of tendencies in myself. To take a non-economic example, I'm far more likely to read online the same amount of material split up over multiple smaller pages than presented on a single lengthy page. A friend told me that this is "irrational" behaviour, but I think that it depends on your definition of rationality: all other things being equal, if one option feels psychologically better than another option, isn't it rational to choose the first option over the second?

I noticed sometimes when I'm reading a book I will flip through the pages to see when the chapter ends and the next one starts. On the occasion the book is illustrated I might also anticipate the illustrations. Although when I read The Illustrated A Brief History of Time and The Universe In A Nutshell I didn't pay much attention to the illustrations. Perhaps too many illustrations isn't something I'm fond of either. Anyway, I've noticed some odd phenomena when reading a book, like reading several paragraphs and not understanding a word of it. It could be a simple story with common language, but I just won't have any awareness of the result of all that reading, I'll be thinking about something else. Or I very often misread a word and occasionally an entire sentence.

I don't think you can have a situation where "all else is equal" between something that feels good in an emotional way and feels good in a cognitive way. If something feels good cognitively, its as if you have a strong understanding, the phenomena in question has the quality of cognitive clarity. If it feels bad cognitively its as if you are totally ignorant and none of it makes any sense, it can feel like confinement. I suppose this is just an activation of the emotional system though, based on the grasp one has over any subject. I guess the question is, are emotions rational? They are the sort of thing usually illustrated in opposition to rationality. Rationality seems to depend on some desired future state. So if I sold my NeuroNarc self pleasuring implant to people, they might not do anything else, and this would be irrational on their part because they would eventually kill themselves. It is the consequence of an act that makes it rational or irrational in terms of our desired goals. Even if that goal is ultimate truth. If our goal is truth then whatever thinking is not based in logical axioms could be deemed unjustified. I suppose something could be rational and unjustified or irrational and unjustified but not irrational and justified. To be honest, I don't think I can think straight about this at the moment.

[guest_of_logic]

I have thought about writing. I haven't really planned anything though.

I think you'd do a good job. You have a clear, balanced and unemotional style.

I noticed sometimes when I'm reading a book I will flip through the pages to see when the chapter ends and the next one starts.

I do that too sometimes. That or check how many pages the book is and calculate how many I have yet to read. It's a feeling of wanting to have achieved one's goal: to have read the next chapter in one's book; to have visited the next town in one's journey; to have reached the next stage of one's career. "Are we there yet?" Perhaps it's related to the consumerism of our society: constantly looking forward to the next hit.

Anyway, I've noticed some odd phenomena when reading a book, like reading several paragraphs and not understanding a word of it. It could be a simple story with common language, but I just won't have any awareness of the result of all that reading, I'll be thinking about something else. Or I very often misread a word and occasionally an entire sentence.

That happens to me as well. Often I'll become aware that it's happening, try to reread those paragraphs with the awareness that last time I didn't concentrate enough to understand them, and yet again fail to comprehend them. It gives me an inkling of what it must be like to have a learning disability.

I guess the question is, are emotions rational? They are the sort of thing usually illustrated in opposition to rationality. Rationality seems to depend on some desired future state.

Yes, so I say that emotions are neither rational nor irrational; they simply encourage and entice or dissuade and deter one from actions that are one or the other (rational or irrational) with respect to one's goals. I don't have a major problem with someone saying that an emotion can be classified as rational or irrational based on the action that it encourages or discourages though.

I suppose something could be rational and unjustified

Example?

[1456200423]

I've explained more than once in this thread that money isn't being created, just moved around,

What childish nonsense! Not when there are banks involved. New money is being created all the time. Even when the gold was used as money, the mining of new gold created more *money*. Do you even know what inflation is?

A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase <guess how the increase of something comes about?> in available currency and credit beyond the proportion of available goods and services.

The bank's liability <- is what it owes to its depositors, who are the source (caveat: there can be other sources <such as>) of the "new" (loaned) money.

[/quote]

Let me simplify your sentence. <my inserts>

The bank <owes > (you can't *owe* a *liability* FYI guest of logic ) to its depositors, who are the source of the "new" (loaned) money <to the perspective *future* depositors.>

What does the bank use as a collateral to its depositors?

This money that has been created, and that is backed by your signature, is your money.
So you are paying your own money back to the banks WITH INTEREST!

[guest_of_logic]

guest_of_logic: I've explained more than once in this thread that money isn't being created, just moved around,

1456200423: What childish nonsense! Not when there are banks involved. New money is being created all the time. Even when the gold was used as money, the mining of new gold created more *money*. Do you even know what inflation is?

We were talking specifically about the mechanism of fractional reserve banking. Under that mechanism, money isn't created, just moved around, and I've explained the issue that might be leading you to believe otherwise (the continued availability of the original deposit on-demand), as well as the reason that that issue is a red herring (when the on-demand deposit is accessed, the money comes from reserves, which have to be replaced, and the amount that the bank has available to lend out is reduced by 90% - or whatever the figure happens to be - of the amount withdrawn). There's not much point in having this conversation if you're not going to respond to my explanation and if you're instead going to just keep on repeating the same claim that I've refuted several times.

(you can't *owe* a *liability* FYI guest of logic )

A liability is a debt, and what I wrote implied that. What's the problem?

What does the bank use as a collateral to its depositors?

This money that has been created, and that is backed by your signature, is your money.
So you are paying your own money back to the banks WITH INTEREST!

I don't quite understand what you're trying to get at here. You seem to still be of the notion that fractional reserve banking creates money out of thin air, and you seem in the above quote to have concluded that the newly created money belongs to the borrower. So would you say that if they were honest, banks would just hand out money, no strings attached; no requirement to repay the principle, let alone any interest?

[1456200423]

We were talking specifically about the mechanism of fractional reserve banking. Under that mechanism, money isn't created, just moved around.

That is exactly how it is created.

There's not much point in having this conversation if you're not going to respond to my explanation and if you're instead going to just keep on repeating the same claim that I've refuted several times.

I agree.

A liability is a debt, and what I wrote implied that. What's the problem?

You can't owe... debt, guest of logic.

What does the bank use as a collateral to its depositors?

I don't quite understand what you're trying to get at here.

What don't you get? What is the collateral that the bank offers to the depositors?
Example: If you want to borrow a screwdriver from me, for your personal use, I will ask you for a collateral. (such as hat or a promise of service) ie. Property acceptable as security for a loan or other obligation.

So... What is the collateral that the bank offers to the depositor?

So would you say that if they were honest, banks would just hand out money, no strings attached; no requirement to repay the principle, let alone any interest?

Not that my opinion has to do with the issue, but since you ask.. I object the banks using depositors money to earn interest.

BTW, do you work, or have you worked for a bank before Laird?

[guest_of_logic]

guest_of_logic: We were talking specifically about the mechanism of fractional reserve banking. Under that mechanism, money isn't created, just moved around.

1456200423: That is exactly how it is created.

You can't have both: it's one or the other.

guest_of_logic: A liability is a debt, and what I wrote implied that. What's the problem?

1456200423: You can't owe... debt, guest of logic.

I didn't write that you could.

So... What is the collateral that the bank offers to the depositor?

Generally, none. It doesn't need to offer collateral as there are legislated systems in place to ensure that the deposit will be available even in the event of a run on the bank.

I object the banks using depositors money to earn interest.

Do you also object to employers using employees' labour to earn a profit, and to landlords using tenants' rent to gain equity in a home?

BTW, do you work, or have you worked for a bank before Laird?

I don't and haven't.

[1456200423]

We were talking specifically about the mechanism of fractional reserve banking. Under that mechanism, money isn't created, just moved around.

That is exactly how it is created.

You can't have both: it's one or the other.

You have to be more specific. It's one or the other... what? (You are not implying that you can't have money being created and moved around? :-S )

A liability is a debt, and what I wrote implied that. What's the problem?

You can't owe... debt, guest of logic.

I didn't write that you could.

Yes, you did, right here:
http://www.theabsolute.net/phpBB/viewto ... 86#p105186
Posted: Wed Dec 02, 2009 6:41 pm

The bank's liability <- is what it owes to its depositors, who are the source (caveat: there can be other sources) of the "new" (loaned) money.

So... What is the collateral that the bank offers to the depositor?

Generally, none. It doesn't need to offer collateral as there are legislated systems in place to ensure that the deposit will be available even in the event of a run on the bank.

Where will this (deposit money) will be available from?

I object the banks using depositors money to earn interest.

Do you also object to employers using employees' labour to earn a profit,
and to landlords using tenants' rent to gain equity in a home?

I do not object to that.

Edit: Anyway... carry on.

https://ijtihadtoday.org/wiki/Why_the_U ... Fully_Paid

[guest_of_logic]

guest_of_logic: We were talking specifically about the mechanism of fractional reserve banking. Under that mechanism, money isn't created, just moved around.

1456200423: That is exactly how it is created.

guest_of_logic: You can't have both: it's one or the other.

1456200423: You have to be more specific. It's one or the other... what? (You are not implying that you can't have money being created and moved around? :-S )

Let me put it another way then: you can't create money by moving it around. That doesn't make any sense. When I move my fingers as I type this post to you, do I create new fingers?

guest_of_logic: A liability is a debt, and what I wrote implied that. What's the problem?

1456200423: You can't owe... debt, guest of logic.

guest_of_logic: I didn't write that you could.

1456200423: Yes, you did, right here:
http://www.theabsolute.net/phpBB/viewto ... 86#p105186
Posted: Wed Dec 02, 2009 6:41 pm

The bank's liability <- is what it owes to its depositors, who are the source (caveat: there can be other sources) of the "new" (loaned) money.

The phrasing and meaning of my sentence are not what you're claiming they are. I wrote that the liability is what is owed, not that the liability is owed.

1456200423: So... What is the collateral that the bank offers to the depositor?

guest_of_logic: Generally, none. It doesn't need to offer collateral as there are legislated systems in place to ensure that the deposit will be available even in the event of a run on the bank.

1456200423: Where will this (deposit money) will be available from?

From the bank's reserves, or, in the event of a run on the bank, from the central bank in the form of a short-term loan to the bank.

1456200423: I object the banks using depositors money to earn interest.

guest_of_logic: Do you also object to employers using employees' labour to earn a profit, and to landlords using tenants' rent to gain equity in a home?

1456200423: I do not object to that.

How do you see the two schemes I listed as different to the bank's scheme?

https://ijtihadtoday.org/wiki/Why_the_U ... Fully_Paid

That article makes the same mistake that you make: it confuses the motion of money with the creation of money.

[Diebert van Rhijn]

On the confusion of "the motion of money with the creation of money".

One of the most useful ways to regard money is as pure conduit. It has no content (value, worth) apart from the degree it facilitates economic activity. The most basic form being: spending it on some product which creates the illusion of "exchange value" this money would have. What happens actually is that the money allows you to exchange one thing for another, in other words: "economic activity", movements of good, services, time and energy as to obtain a more "economical" distribution, meaning a distribution that doesn't cause stagnation, which means in most practical cases: growth.

Seen this way the idea of "printing money out of nowhere" to allow for more activity to occur makes sense. There's no reason to fear inflation as long as the money is not used only for unrealistic exchanges, for example with unrealistic loans, unwise investments or any other way where the money "warps" the value of the commodity or goods being exchanged.

Lets print 500 billion dollar backed by nothing. Give $1000 to every citizen. If they'd all spend it on paying bills or consumption it would hardly do anything sustainable. However if people would unite in groups of 1000 they could start business with it, creating ideas, jobs and find with this new business through profit a self-sustaining situation. Since this cannot be expected to happen spontaneously, for example investment bankers facilitate this and provide financing to serious credible entrepreneurs with a good business plan. At least ideally.

If the total GDP of a country would increase, the 500 billion doesn't need to be taken back again. The conduit, the pipe (the nation's supply of money) just got bigger to fit all the sewerage of increased economical activity.

It's when people are not being able anymore to create value through work, innovation, labor, improvement: then real economical activity declines and the large conduits will attract just more bullshit to fill it up: the pretense of economical exchanges like paying shit-loads of money I got by doing hardly anything, receiving something with a pure fictive value like rarity or pleasure. But when the real economical activity dries up, jobs disappear, the social cohesion falls apart, competition gets stiffened, bureaucracy and other structures arise as parasites to feast on the decay; self-survival. The amount of money on the longer term doesn't mean a thing here. It's about vision, will, adaptability and change which cause economics, not money. Money doesn't make happy and it surely doesn't make the economy.

[Animus]

Last night I was reading a book about the history of the Canadian dollar, the multiple transitions of the monetary system from gold standard to unbacked fiat currency and back again to gold standard. Eventually Canada established the Bank of Canada and issued fiat currency not backed by anything. Currently the Bank of Canada manages the money supply through flexible interest rate adjustments. Whereas the Fed adjusts the money supply through the buying and selling of securities.

The initial move from the gold standard occurred at the onset of WWI when the efflux of gold to other countries impacted the value of dominion notes (promissory notes) relative to gold. This affected the relative value of Canadian currency worldwide. Compared to the US dollar the Canadian dominions were valued at 0.90, whereas previously the two currencies were 1:1.

After WWI Canada eventually went back to the gold standard, but by this time the gold reserves had shrunk and the value of the dominion notes decreased to 0.70 relative to the US dollar. Finally Canada decided it didn't need any real wealth to back any of its currency and eliminated the gold standard indefinitely. The new adjustable rate system allowed the Bank of Canada to buffer losses, essentially borrowing wealth from the future through some monetary sleight of hand.

From what I understand, a major problem with this system is not in price stability or the relative value on the global market. The problem is that there is no tangible value backing the fiat currency, if the currency became devalued for whatever reason, the country would have nothing in its treasury. The value of the currency is dependent on the trust people have in it, if they expect Canadians to uphold their end of the bargain, then the currency is valuable, but if Canadian currency loses trust with the global market it could plummet into extinction and topple the entire economy with it. Under a gold standard this shouldn't happen because gold has tangible value, even if the fiat currency crashed the gold would still be available for emergency transactions. Under a gold standard people immediately feel the impact of global markets. When gold is exported the wealth of the nation decreases and this is reflected in the local market place. The adjustable rate system allows economists to buffer these losses, off-setting them with future gains. But this is risky business.

I also learned that Canada has 0% fractional reserve requirement and the US reserve requirement is graded, low-finance banks have no reserve requirement while high-finance banks have 10% reserve requirement. Generally, however, banks keep a 3% reserve to buffer potential losses and in the event of a bank run the bank is legally obligated to close its doors.

[Nick]

The gold standard is limiting and unnecessary when you have a highly developed industrialized country, because industry and it's products essentially become the backer of a currency. Besides, like Diebert said, currency is just a facilitator, and as long as you have intelligent oversight and proper controls over the flow of currency and how it is allocated that's all that matters.

[Ryan Rudolph]

I agree with Nick and Diebert here, there is no rational reason why people should need to believe that money has value in and of itself. As long as there are an abundant amount of goods and services in society, then money should be considered valuable and useful...

[Cory Duchesne]

another way of looking at the danger of an inflated money supply is if you introduce a gigantic amount of currency into a country with very little economic activity, the result is hyper inflation. Actually, it is funny that such tactics have never been used in warfare. For instance: if the developed world really wanted to topple the North Korean regime, for fear of them selling nuclear weapons to rogue groups, instead of sending in ground troops, why not try to perfectly counterfeit their currency, and introduce trillions of dollars into their economy as a one time surge? could be enough to cause disorder in the nation long enough to take control over their government.

Neat idea, but I'm having a difficult time visualizing the chain reactions themselves.

If you were introduce the trillions of counterfeit money, have you given thought about the most effective way to distribute it? For instance, should it go straight to existing business owners? Should it go only to entrepreneurs? Or should you try to distribute it to the masses? What exactly is the scenario you want to result from the lending of money?

Wouldn't the recipients of the money wonder about the interest rates of this new money? When making the counterfeit money, would you have to also present yourself as some new bank in town in order to give the person who takes the money on a sense of debt?

[Nick]

I think the most destructive way to do it would be to give it to individuals. Imagine if you gave each individual a million dollars. All of a sudden everyone's going to storm businesses and stores with an insatiable demand for their goods and services, inevitably driving up the price of these things to astronomical levels, essentially making that million dollars, and thus the currency worthless.

If this were to happen though, I'd imagine the government would declare a state of emergency and put a halt to all financial transactions and shut down all business until the mess could be sorted out. It might throw off the economy for a day or two, but I don't think it would do any long term damage.

[Nick]

Plus the government could always declare marshal law and take direct control over the means of production and have whatever needs to be done happen on command.

[Cory Duchesne]

I think the most destructive way to do it would be to give it to individuals. Imagine if you gave each individual a million dollars. All of a sudden everyone's going to storm businesses and stores with an insatiable demand for their goods and services,

The demand (at least for certain things) would suddenly grow out of proportion with the current supply, no doubt. How many people would suddenly want a new house? But how difficult would it be to sell the modest house (or dump) they currently have when everyone else has a million dollars to? There are certain products that are geared for lower incomes, so these parts of the economy would be paralyzed, because everyone would be focusing on items reserved for the higher classes.

Companies would naturally want to replenish stocks quickly, but I'm not at all sure if they would try to do more than merely replenish the same amount of goods they had on the shelves prior. Would they make the assumption that the latest surge in consumption would justify raising the quantity of stocks a quarter, a third, by half, or even double?

So there's that issue, but I'm also not convinced that prices would be marked up very quickly. I remember not too long ago when the Nintendo Wii was selling so much that it was often out of stock, but it's price remained fixed, even when they had their competition Playstation 3 priced at double the amount. Nintendo couldn't keep enough units on the shelves, but the price of the unit never went up.

So in light of this, I have difficulty imagining inflation. To be honest, I never entirely understood it. All that I feel confident about is that inflation is about the price of things going up.

It's easier to imagine inflation when you start with the most fundamental of all purchases: the raw commodities needed for manufacturing. When these materials are scarce to some degree, it is natural to think that there is some kind of bidding war for the raw goods, a "driving up" of the prices of basic things like metals, oil, and laborers, so naturally the actual products that end up on the public market will be priced higher, only because these products cost more to make at a root level.

That's why I was wondering who you want to target, the masses, or do you want to go to the roots of the economy (e.g., the people purchasing/bidding for the most basic raw commodities that make all products possible). If you can figure out how to drive up the price of the crude materials and labor needed to make all the final products, then the actual products that end up on the shelves, and thus the currency, will inflate.