Central Banks get their act together

[Richard]

I, however, MADE it the discussion.

$10 in 1780: $10
$10 in 1916: $16
$10 in 2006: over $1,900

Your precious federal reserve steals more money from Americans than any other organization, even the government.

1) Name one currency that has not experienced inflation. 

2) You claim that money is being stolen from Americans by the federal reserve...but where is this pile of "stolen money" being held?

Price fluctuations due to supply and demand are normal.  However, a systematic devaluation of money by the government is corruption.  Your currency between 1780 and 1916 experienced very little inflation, and those that it experienced are due to temporary mistakes like temporarily ignoring the gold standard.  However, since the Feds were created, a $10 bill from 1916 cannot even buy a small fraction of what it purchased in 1916.

[Richard]

For those interested in Fractional Reserve Banking and how it corrupts the money supply, go here:

http://en.wikipedia.org/wiki/Money_multiplier

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Corruption, corruption, corruption, beyond belief.  We allow private individuals to create money and charge interest on it.  We, the people, pay interest, get fake worthless fiat money in return.  And just watch when YOU, the private individual, starts printing your own money.  The government and federal reserve gets their panties all tied in a knot.  For some reason THEY are allowed to print money, devalue EVERYONE ELSE's money, but you're not to.

[Richard]

2) You claim that money is being stolen from Americans by the federal reserve...but where is this pile of "stolen money" being held?

It doesn't have to be in the form of a pile of money.  For a minute, lets assume your brain is captable of firing a second neuron.  Bear with me.

I was born in say, 1900.  In 1910, I saved $10.  In 1915, I still had $10 and the same purchasing power.  However, now in 2006, I require over $1,800 to buy the same.  Why did this happen?  Why did my $10 devalue so much?  The reason is: Federal Reserve stealing.

The Federal Reserve and Government steals from YOU, the Americans, and you're too dumb to notice.  Get a bloody education!

By devaluing your current assets, the government gains at your expense.  That is stealing.  Perhaps not like a bank heist, but stealing nonetheless, because I'm sure most of you didn't consent to your assets and money being devalued in this manner.

Please don't come with a half-wit reason "well all countries experience inflation" because just because "all countries" experience inflation doesn't make it right.  Your country experienced very little inflation between 1776 and 1916, and that was only due to Lincoln's stupidity.  (And some other presidents who wanted to fight wars they couldn't afford.)  An increase in the money supply must be offset by an increase in production.  That way, no devaluation.

However, today the government decides we want $x, and simply prints it off.  With the 10% fractional reserve rate, $1 billion printed by the government turns into $10 billion, and people wonder why inflation happens.

Idiots.  Morons.  And then you have bankers telling of the merit of this system.  NO sh**t SHERLOCK!!!  It benefits those that gain from devaluing others' money!  We have a term for that: thieves.  Most bankers are nothing more than a common thief, and people are too blind to see that.  It also happens they are legally unable to do something about it.

And THAT, ladies and gentlemen, is corruption.

[Swing low, sweet chariot. Comin' for to carry me home.]

For those interested in Fractional Reserve Banking and how it corrupts the money supply...
Corruption, corruption, corruption, beyond belief.  We allow private individuals to create money and charge interest on it.  We, the people, pay interest, get fake worthless fiat money in return.  And just watch when YOU, the private individual, starts printing your own money.  The government and federal reserve gets their panties all tied in a knot.  For some reason THEY are allowed to print money, devalue EVERYONE ELSE's money, but you're not to.

A Fractional-Reverse-Banking is exactly what I described – banks are required to keep a fraction (10%) of demand deposits in reserve.

The creation of money you are attempting to describe is NOT corruption; rather it is an increase in the amount of oil needed to lubricate an increasingly bigger engine.

In simple terms, if one quart of oil is needed to lubricate a 100cc engine, then more oil is needed to lubricate the engine as the engine gets bigger.  If an economy requires x% of liquidity, then the amount of liquid (currency) will have to increase grow along with the economy.

If I mine iron ore to make hammers at a profit, then I have created wealth because I have produced something of value.  Currency is the mechanism that allows me to exchange the hammers I made for cash so that I can turn around and buy other goods with the profit I earned.  If the money supply doesn’t grow with the economy, then we would be left with a barter system.

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Now back to the fractional system using a real-world example:

1) PersonA deposits $10k in BankA…PersonA leaves the picture and is earning interest from BankA.
2)  BankA takes 10% ($1k) and places it in reserve and lends out $9k to PersonB who wants to buy a car. .BankA, who still owes PersonA $10k, is now out of the picture and is receiving payments from PersonB and holds the title of the car as collateral guaranteeing repayment.
3) PersonB goes to a DealershipA and EXCHANGES his liquid asset ($9k) for a nonliquid asset (a car) and goes home owing $9k to BankA….at this point in time PersonB is out of the picture.
4) DealershipA deposits the $9k he EXCHANGED for the car he sold to PersonB in BankC…DealershipA earns interest on his deposited $9k and is now out of the picture.
5) BackC take 10% ($0.9k) and places it in reserve and lends out $8.1k to PersonC who wants to buy a spa.  BankC, who still owes DealershipA $9k, is now out of the picture and is receiving payments from PersonC and holds something as collateral guaranteeing repayment.
6) PersonC goes to PersonD and EXCHANGES his liquid asset ($9k) for a nonliquid asset (a spa) and goes home owing $8.1k to BankC….at this point in time PersonC is out of the picture.
7) PersonD deposits the $8.1k into a BankD…and the process repeats again and again.

So, even though the money supply has increased, it increased as a result of goods being produced and sold (in this case, a car and a spa).  That is NOT creating money out of thin air; rather that is creating money by exchanging it with the PRODUCTION of goods (a car and a spa).  The money that was “created” is actually represented by the car and the spa that was produced.

The inflationary aspect is NOT that money was created to accommodate a growing economy, rather the inflationary side is that lending creates demand for goods and services by allowing people to purchase items on credit.  If PersonB and PersonC in our example were not able to borrow, then they would be subtracted from the demand side of the equation and would lower the demand for cars and spas to be produced….hence, by lending money, you are creating demand (which, in turn, encourages more supply).

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Now, lets take the case where the money supply does NOT increase:

An economy’s GDP at Time0 is $10B and its money supply is $1B and there is NO lending and no debt.  The citizens multiply and become more productive, increasing GDP to $100B at Time1 which allows them to increase their standard of living by buying more and better goods and services PROVIDED they still have a currency to trade goods and services.

Now, in order for the $100B of goods and services to be exchanged then $100B in money has to exchange hands.  So, if we are stuck with the original money supply of $1B, then the VELOCITY (the rate at which the money changes hands) of the $1B money supply has to increase 10 fold…OR the money supply has to increase…the only other choice is for the citizens to resort to a barter system which is difficult and very inefficient.

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So, how on earth would you grow the money supply if you didn’t allow people to borrow in order to exchange the borrowed money for goods….As you can see, for a growing economy to continue to exchange goods efficiently, the currency (money) supply has to grow.

If you set a Gold Standard, they you are limiting the growth of the economy by forcing gold production to increase at the same clip as the economy.  If growth of production of gold (which in not exactly abundant, hence the title precious metal) does not keep pace with the growth of the economy, then the value of gold in relation to goods will increase, which decreases the value of goods in relation to the dollar since the dollar is tied to a Gold Standard. 

So, if the value of a goods and services is decreasing in relation to the dollar, why in the world would anyone invest dollars to produce goods and services if they services are depreciating in relation to the dollar?!

This causes people to hoard currency, which destroys the purpose of having a currency.  If the oil of the engine is hoarded, then it can not be used to lube the engine…if the engine can not be lubed, it grinds to a halt (e.g. The Great Depression).

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Think of it in terms of physics:  mass times velocity equals momentum.  Money is the currency used to transfer momentum throughout the economy.  But a certain amount of money can only transfer a certain amount of momentum.  So for money to be able to transfer the growing momentum of an expanding economy, you have to increase the mass of money (increase the money supply) OR increase the velocity of money (the speed at which money is exchanged).

There are many ways to increase the velocity of money:  increase efficiency of delivery of goods to market, increase efficiency of check clearing, increase accessibility to money through the use of ATMs, etc…but these efforts have their limits and the velocity of money doesn’t increase as fast as the economy grows.

So, if the velocity increases at a slower rate than the growth of the momentum of the economy, the mass (supply) of money has to increase.

Example:

If the momentum (GDP) increases 3%, and if the velocity only increased (1%), then the mass has to increase by 1.98% (1.03/1.01).  So, if the GDP grows by 3% and the velocity of money grows by only 1%, then the money supply has to grow by 1.98% in order to accommodate the selling of the increased goods and services.

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Putting it all together:

Using the equation: mass (money supply) times velocity (rate at which money changes hands) equals momentum (GDP)…we can see that the lending of money helps grow the economy.  The Federal Reserve can either encourage (lower rates) or discourage (raise rates) borrowing to influence the growth of money supply which will then impact the growth of the economy.

Of course, there are drawbacks to this approach, the Fed can guess wrong and a) over stimulate the economy causing increase inflation and a unsustainable boom followed by a bust, or b) under stimulate the economy causing it to not perform up to its potential.

[○∙◄☻¥tπ[╪AV┼cVê└]

HOLY CRUNCHIES!  jmfcst, I've never met someone so uneducated about economics.

The fed in conjunction with all banks create money out of nothing by making loans with money they don't have.

What?...wrong

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If the banks get $1000 in deposits they can make about $10,000 in loans.

wrong

Banks can loan up to 90% of deposits sitting in transaction accounts, not 1000% of deposits as you claim.  In time deposit accounts (e.g. CDs), the bank can loan up to 100% of the deposits, but NOT over 100%.

Ever heard of fractional reserve banking?  Yes, the loan out 90%, but of that 90% another 90% can be loaned out, and of that another 90%.

$1,000 deposited by A
Bank loans $900 to B
$900 deposited by B
Bank loans $810 to C
etc.

In fact, with a 0.1 fractional reserve rate, $1 blow up to $1/0.1 = $10.  $9 created out of thin air, and banks charge interest on this.  How is it that you do not know this?  Did you get an American government education per chance?

But those are different banks, the point is only 90% of the money gets lent out. It's irrelevant whether some of that gets re-lent out.

[Richard]

But those are different banks, the point is only 90% of the money gets lent out. It's irrelevant whether some of that gets re-lent out.

No it is not fernboy.  Banks create money this way, inflating the money supply, creating inflation.

[Richard]

A Fractional-Reverse-Banking is exactly what I described – banks are required to keep a fraction (10%) of demand deposits in reserve.

No it is not.  David S clearly said

If the banks get $1000 in deposits they can make about $10,000 in loans.

And you opposed that, proving how uneducated you are.  I proved that with fractional reserve banking, a $1,000 deposit is turned into $10,000.

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Thats great.  Also quite irrelevant.  The money supply will naturally increase.  There's no need to do so with fractional reserve banking.

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*yawn*  Please be more verbose.

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You are very wrong.  If you count the total money in circulation due to the initial $1,000, it now equals $10,000, albeit some in goods and services.  That is inflationary.  Increasing money supply, while holding velocity and national income constant, increases inflation.  There is no difference between banks lending out an extra $9,000 that came out of thin air and the government printing an $9,000.

[○∙◄☻¥tπ[╪AV┼cVê└]

Richard is being very unclear in his argument. A bank can't loan out more money than it has in deposits. The thing is that money loaned out can go through the economy multiple times. For example, spending on one California bus system that had its budget cut by Arnold helps the economy by $8 per $1 spent. This is really nothing new. Richard is extreme right-wing on economic issues, and opposes such increases in the economy.

[Swing low, sweet chariot. Comin' for to carry me home.]

But those are different banks, the point is only 90% of the money gets lent out. It's irrelevant whether some of that gets re-lent out.

No it is not fernboy.  Banks create money this way, inflating the money supply, creating inflation.

But jfern's point, mirroring the point of my spa/car loan example, is only 90% of the money is being used in the economy at any given point in time.

If PersonA had $100 and lent it to a BankA, and BankA turns around puts 10% into reserves and lends $90 to BankB who then lends it to another and another and another who then lends it to PersonB, there is still only $90 that can be put into service at a given point of time and it is in the possession of ONLY PersonB.

If PersonA comes back to BankA to demand his $100, then BankA has to find other assets or deposits totaling $100, or borrow overnight from another bank with EXCESS reserves, or face being forced to close its doors.

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Here is an example from the web page you cited at http://en.wikipedia.org/wiki/Money_multiplier

“For example, let's assume that a primary deposit of $1000 is made into bank A. If the cash reserve ratio is 12%, then $120 must be kept on hand by the bank and $880 is available to be lent to someone else (called the excess reserve). Now if bank A uses its $880 in excess reserve by lending it out, and that is deposited in bank B, it represents a primary deposit to the second bank. Bank B must keep 12% of $880 on hand but can lend out $774.40. If that $774.40 is eventually deposited in bank C, the third bank must keep $92.93 on hand but can lend out $681.47. The process continues until there is no excess reserve left (For simplicity we will ignore safety reserves.). By adding all the derivative deposits we can calculate the amount of money created… The initial change in deposit of $1000 will increase total deposits by $8333.33 given a reserve ratio of 12% (1000/.12=8333.33)”

Even though it may be counted across this various accounts as an increase in the money supply, what is really going on is the borrowing has increased the VELOCITY of the money, not the amount of money – and the money, as it changes hands, can only be used once at any given point in time.

The actual result of the example above is that the entire $1000 went into reserve and the resulting $8333.33 of "increased" money supply is NOT liquid.  If any attempt is made to withdraw any portion of the $8333.33 held across the accounts, the banks are going to have to come up with additional deposits to cover the additional reserves and we wind up back at the beginning:  $1000 dollars initially deposited with $120 in reserve and $880 of liquidity to loan.

[Richard]

However, that extra $7,333.33 decreased the value of the rest of the money supply.  And each time the government increases the money supply artificially, your month becomes worth less.  As I said,

1776: $10
1916: $16
2006: $1,800+

Criminal.

[○∙◄☻¥tπ[╪AV┼cVê└]

However, that extra $7,333.33 decreased the value of the rest of the money supply.  And each time the government increases the money supply artificially, your month becomes worth less.  As I said,

1776: $10
1916: $16
2006: $1,800+

Criminal.

Quick, someone tell Richard about the Hungarian Pengo so he'll quit obsessing about a factor of 180 inflation in 230 years.

[Swing low, sweet chariot. Comin' for to carry me home.]

A Fractional-Reverse-Banking is exactly what I described – banks are required to keep a fraction (10%) of demand deposits in reserve.

No it is not.  David S clearly said

If the banks get $1000 in deposits they can make about $10,000 in loans.

And you opposed that, proving how uneducated you are.  I proved that with fractional reserve banking, a $1,000 deposit is turned into $10,000.

You are missing the point that of that $10k only $1k of liquidity is available to the system.  The entire $10k can NOT be liquidated until the bank finds other deposits totally $10k.

[Swing low, sweet chariot. Comin' for to carry me home.]

Defining success...Huge one day drop (13-Jun-2006):

Gold (CMX) August 06 ($US per Troy oz.) 566.80 -44.50
Silver (CMX) July 06 ($US per Troy oz.) 9.63 -1.44
Platinum (NYM) July 06 ($US per Troy oz.) 1,118.50 -52.90
Copper (CMX) July 06 ($US per lb.) 3.01 -0.22