Are you watching Greece implode?

[werepossum]

Inflation would exist without FRB.

How does FRB, on its own, cause inflation?

That one's pretty easy. Fractional reserve banking allows a bank to lend out a multiple of its actual reserves, thus creating money. Increasing the supply of money without proportionally increasing the supply of goods (which will at best lag behind the new money which allows it to be created) causes inflation - this is in fact the textbook cause of inflation, increasing the supply of money more quickly than the supply of goods to be purchased with that money is always going to cause prices to rise.

That said, I am of course a proponent of FRB myself. The increase in wealth we've experienced in modern times is I think due in large part to FRB, as it partially decouples creation of wealth (and wealth-creating infrastructure itself) from the existing available capital and by decreasing the potential risks increases the number of viable projects as well as the rate at which those projects can be undertaken. Full reserve banking would effectively end interest payments on deposits, severely limit the number of projects which could be undertaken, and greatly increase the damage of any one project should it fail and its loan not be repaid. Thus the inflation is to me quite acceptable for the wealth production achieved and as noted can be healthy - but that inflation does exist.

 

[lsquare]

There's no reason we can't speculate.. We have a good history of countries trying to print their way out of a fiscal mess. The result is usually terrible inflation and social chaos.

There is no proof at the moment that the money needed to bail out Greece and stabilize this crisis will be printed. Perhaps some will be printed, but I doubt they'll print the $1 trillion needed to stabilize the EU.

 

[lsquare]

Weimar bitch. That's one end of the spectrum. A fiscally sane government with balanced budgets and 1% inflation is on the other. The welfare states of the world who think they can print their way into prosperity are likely going to end up somewhere in the middle like Venezuela. - http://news.yahoo.com/s/ap/20100508...lYwN5bl90b3Bfc3RvcmllcwRzbGsDdmVuZXp1ZWxhYW5u

That's a terrible example. The Weimar Republic was not facing situations similar to what Greece is facing. Also, Greece is not facing hyperinflation the way Germany did in the 1920s. The causes of the crisis then is not the same reasons why Greece is facing problems today. You need to get your facts straight here.

 

[lsquare]

The fiscal problems we face in the future have less to do with economics than they have to do with basic political science and fundamental accounting principles.

There are two basic facts:

1. The U.S. and many European countries have unsustainable welfare states, with future liabilities dwarfing potential future government tax revenue (short of an extremely unlikely huge increase in GDP in these countries).

True, but neither the US or any of the major European companies are at a breaking point yet. These liabilities will not manifest itself until the 2020s at the earliest, but you're right that it is unsustainable, which is why I've said before that something has to give here. Either taxes will go up or benefits will decrease.

2. The political class refuses to acknowledge the facts of part 1, causing them to do nothing about it. Why? Because of the way the political system is set up. Anyone who talks about either massive reductions in welfare benefits or massive tax increases faces political suicide.

Take 1 and 2, put them together and it is quite easy to predict that there are stormy waters ahead. Right now it is a game of Hot Potato. The politicians of the past made promises that the politicians of the future can't possibly keep. A good example was Bush's prescription drug bill, which was passed at a time when it was clear to anyone who cared to check that Social Security and Medicare were (and still are) in big trouble.

Fortunately for Bush, he is now out of office. Woe to any politician who tries to reverse the promise he made to the old folks. Hence, politicians just keep passing the buck along, hoping they can make political gains at the expense of future politicians who actually have to face the music.

That's the problem with democracy. You'll always have polticians making populist promises in hopes of getting votes. Not a lot of parties think in the national interest, but rather party interest.

Obama is stuck in a tough situation. He not only has 2 wars to tackle, but the recession as well. He doesn't have a lot of room to maneuver. I'd imagine that Obama will not only have to raise taxes, but also cut spending. He can't afford to raise taxes or cut spending significantly because it'll hurt a lot of people. Any changes that will be made will be incremental at best.

The Republicans don't have a spotless record as well. It's ironic for the Republicans to be calling for massive spending cuts when they were also the ones that escalated spending in the previous decade. Not to mention the $1 trillion in tax cuts. So it's hypocritical to call the Democrats big spenders.

 

[lsquare]

Right after you show me how the Fed had anything to do with promoting economic stability.

You haven't even gave them the time to prove that their work is indeed working. These financial crisis can't be tackle in a span of 24 hours.

 

[lsquare]

I didn't use Weimar as an example. But now that you bring it up...Weimar is basically what happens when governments can't pay what they owe because people are too stupid to figure out the source of hyperinflation. So please wax poetically again about how the U.S. doesn't really owe all that much.

You can also blame France for that hyperinflation mess as well. Having said that, it was a bad idea for the person to bring up the Weimar Republic. The two cases are totally not comparable.

 

[totalnoob]

The wealth needed for this bailout (or any of the bailouts over the past few years) simply does not exist. It is not sitting in a vault somewhere waiting to be deployed to needy nations. Every penny is being paid for by borrowing and printing, and this going to make it that much worse..

http://www.economicpolicyjournal.com/2010/05/trillion-dollar-madness.html

Trillion Dollar Madness
European policy makers have unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop the sovereign-debt crisis. The Federal Reserve will also play a role through currency swaps.

The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

There is nothing more to be said other than this is potentially the greatest inflationary plan ever designed. Although statements have been made in the past that the EU has failed to follow through on, the statements issued last night appear to have a sense of seriousness about them, especially the ECB announcement to buy government and private debt, and the Federal Reserve launching of currency swaps. Both these actions suggest spectacular inflation may not be far away. Although the ECB statement says the purchases will be sterilized, meaning they won’t increase the overall money supply in the system, one wonders how long this will go on. A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money. Draining from the potentially productive sectors of the EU economy to give to the PIIGS is almost as insane as printing the money without sterilization.

That no objection to this madness has come from any finance minister or central banker signals how far down the road we are from any real concern about inflation or the taking away from the productive sectors of the economy. Indeed some of the the statements coming out of the emergency meeting of EU finance ministers are simply absurd.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today. How opening up the printing presses defends the euro, she did not explain. The last I looked printing money destroyed a currency. It did not help the currency.

As for other parts of the plan that call for EU members to chip in with bailout funds, Venkatraman Anantha- Nageswaran of Bank Julius Baer & Co put it best, “It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation."

 

[Special K]

That one's pretty easy. Fractional reserve banking allows a bank to lend out a multiple of its actual reserves, thus creating money. Increasing the supply of money without proportionally increasing the supply of goods (which will at best lag behind the new money which allows it to be created) causes inflation - this is in fact the textbook cause of inflation, increasing the supply of money more quickly than the supply of goods to be purchased with that money is always going to cause prices to rise.

I'm not sure if FRB would be the cause of inflation. Sure, the bank is allowed to hold only 10% of its deposits as reserves and can lend out the rest, while simultaneously telling its depositors that they still have access to 100% of their deposited money. In reality, not more than 10% of deposits can be withdrawn and spent at any one time, because they have already been lent out. No new money has been created in this case.

It seems like The Fed's open market transactions would be the main cause of inflation, since they can create money out of thin air to buy Tbills.

I agree that inflation would occur when the supply of money grows faster than the supply of goods and services.

 

[Special K]

Inflation would exist without FRB.

How does FRB, on its own, cause inflation?

If the rate of growth of the money supply exceeds the rate of growth of goods and services, isn't the result inflation?

If The Fed creates too much money for the amount of goods and services in existence, won't prices have to rise?

I agree that inflation could still result even if we didn't have a central bank, but couldn't The Fed cause inflation simply by creating more money than is needed for the amount of goods and services in existence?

 

[StageLeft]

The wealth needed for this bailout (or any of the bailouts over the past few years) simply does not exist. It is not sitting in a vault somewhere waiting to be deployed to needy nations. Every penny is being paid for by borrowing and printing, and this going to make it that much worse..

http://www.economicpolicyjournal.com/2010/05/trillion-dollar-madness.html

Not a bad way to put it, really, when you have these big loans it is taking from productivity in one area to put to another proven comparatively unproductive.

 

[StageLeft]

Does this: http://www.telegraph.co.uk/finance/...in-event-of-crisis-French-official-warns.html

Mean that the US gave money in a situation where England did not with the goal of this being to save European countries' economies, England being (and the US not) within Europe?

 

[ElFenix]

That one's pretty easy. Fractional reserve banking allows a bank to lend out a multiple of its actual reserves, thus creating money. Increasing the supply of money without proportionally increasing the supply of goods (which will at best lag behind the new money which allows it to be created) causes inflation - this is in fact the textbook cause of inflation, increasing the supply of money more quickly than the supply of goods to be purchased with that money is always going to cause prices to rise.

That said, I am of course a proponent of FRB myself. The increase in wealth we've experienced in modern times is I think due in large part to FRB, as it partially decouples creation of wealth (and wealth-creating infrastructure itself) from the existing available capital and by decreasing the potential risks increases the number of viable projects as well as the rate at which those projects can be undertaken. Full reserve banking would effectively end interest payments on deposits, severely limit the number of projects which could be undertaken, and greatly increase the damage of any one project should it fail and its loan not be repaid. Thus the inflation is to me quite acceptable for the wealth production achieved and as noted can be healthy - but that inflation does exist.

changing the fraction has an affect on the money supply but a steady state FRB system doesn't increase the money supply alone. the FRB system injects money into the system at a rate of the inverse of the fraction when the fed injects money into the banking system. but that's not anything the fed can't control.

If the rate of growth of the money supply exceeds the rate of growth of goods and services, isn't the result inflation?

If The Fed creates too much money for the amount of goods and services in existence, won't prices have to rise?

I agree that inflation could still result even if we didn't have a central bank, but couldn't The Fed cause inflation simply by creating more money than is needed for the amount of goods and services in existence?

yes, but that doesn't have anything to do with whether an FRB system is used or not.


if V increases inflation could increase. and with electronic banking i find it hard to believe that V has been constant since friedman wrote out his theories on the money supply.

 

[Munky]

You haven't even gave them the time to prove that their work is indeed working. These financial crisis can't be tackle in a span of 24 hours.

The so-called financial crisis isn't an accident, rather its the result of reckless behavior by major banking institutions, and the reluctance of authorities to make these insolvent banks eat their own sh!t.

 

[Darwin333]

You haven't even gave them the time to prove that their work is indeed working. These financial crisis can't be tackle in a span of 24 hours.

Funny, I assumed that "promoting economic stability" meant preventing financial crisis from happening in the first place not fixing them after they happened.

 

[EightySix Four]

Funny, I assumed that "promoting economic stability" meant preventing financial crisis from happening in the first place not fixing them after they happened.

It was politics that screwed this one over, not the FRB.

 

[lsquare]

The so-called financial crisis isn't an accident, rather its the result of reckless behavior by major banking institutions, and the reluctance of authorities to make these insolvent banks eat their own sh!t.

And I never said it was an accident nor did I ever said it wasn't caused by reckless behavior by major banking institution. Don't put words in my mouth man!

 

[lsquare]

Funny, I assumed that "promoting economic stability" meant preventing financial crisis from happening in the first place not fixing them after they happened.

Like what Crazysob297 said, it's politics that screwed this one over. Yea, I do find this funny because this economic crisis wouldn't have happened if these safeguards were put into place a long time ago. Of course, it always take a disaster to push us make these improvements.

 

[werepossum]

changing the fraction has an affect on the money supply but a steady state FRB system doesn't increase the money supply alone. the FRB system injects money into the system at a rate of the inverse of the fraction when the fed injects money into the banking system. but that's not anything the fed can't control.

SNIP

The proponent of abolishing FRB was proposing ending the ability of banks (including the Fed) to create money at all, not changing the fraction or the rate at which money is created. Thus banks would be able to lend only a fraction of their true reserves rather than retaining a reserve of a fraction of their loans. I think it's arguable whether this would end inflation, but it would certainly be deflationary in and of itself as at least the banks' reserves would have to be locked up out of circulation (to protect the bank in case a loan payment is delayed) and the chances of repayment (and interest on) a loan would have to be much, much higher to make it worthwhile. Frankly I doubt a modern society could exist without fractional banking so the point is probably moot.

I agree that the Fed are pretty good at fighting inflation, although they get a big boost by eliminating energy and food, which are big parts of many budgets. And they certainly failed in the 70s, you'd have to admit. Who remembers the misery index?

 

[LegendKiller]

The proponent of abolishing FRB was proposing ending the ability of banks (including the Fed) to create money at all, not changing the fraction or the rate at which money is created. Thus banks would be able to lend only a fraction of their true reserves rather than retaining a reserve of a fraction of their loans. I think it's arguable whether this would end inflation, but it would certainly be deflationary in and of itself as at least the banks' reserves would have to be locked up out of circulation (to protect the bank in case a loan payment is delayed) and the chances of repayment (and interest on) a loan would have to be much, much higher to make it worthwhile. Frankly I doubt a modern society could exist without fractional banking so the point is probably moot.

I agree that the Fed are pretty good at fighting inflation, although they get a big boost by eliminating energy and food, which are big parts of many budgets. And they certainly failed in the 70s, you'd have to admit. Who remembers the misery index?

I'll respond to this tomorrow when I get home. However, I wanted to clear up your last part.

The Fed doesn't "eliminate" anything from inflation. Inflation has been, is, and always will be released in two components, headline and core. Headline includes *ALL* items in a basket of goods, core does not.

The Fed had *nothing* to do with the inflation of the 1970s as the rates kept at the time were enough to deal with the inflation of that period. The inflation of that period was solely caused by the misguided policies of the political administrations and the geopolitical spectrum well outside of the Fed's control. Had the Fed responded to the eventual inflationary tidal wave pent up by those misguided policies there would have been enormous amounts of deflation followed by inevitable inflation once the tidal wave was unleashed by the elimination of the price controls and the geopolitical events.

This whiplash of economic turmoil would have destroyed the economy quickly.

As a result, the Fed was effectively powerless to prevent the inevitable inflation once the policies were eliminated.

 

[QuantumPion]

Does anyone else think the strike planned in Greece is highly reminiscent of that episode of South Park where Canada goes on strike?

"What is it exactly that you want?"
"We want more MONEH!"

 

[EightySix Four]

I'll respond to this tomorrow when I get home. However, I wanted to clear up your last part.

The Fed doesn't "eliminate" anything from inflation. Inflation has been, is, and always will be released in two components, headline and core. Headline includes *ALL* items in a basket of goods, core does not.

The Fed had *nothing* to do with the inflation of the 1970s as the rates kept at the time were enough to deal with the inflation of that period. The inflation of that period was solely caused by the misguided policies of the political administrations and the geopolitical spectrum well outside of the Fed's control. Had the Fed responded to the eventual inflationary tidal wave pent up by those misguided policies there would have been enormous amounts of deflation followed by inevitable inflation once the tidal wave was unleashed by the elimination of the price controls and the geopolitical events.

This whiplash of economic turmoil would have destroyed the economy quickly.

As a result, the Fed was effectively powerless to prevent the inevitable inflation once the policies were eliminated.

And then to kill the high levels of inflation left over from the 70's in the early 80's we exchanged a recession for lowered inflation rates. (Okun's law)

 

[ElFenix]

The proponent of abolishing FRB was proposing ending the ability of banks (including the Fed) to create money at all, not changing the fraction or the rate at which money is created. Thus banks would be able to lend only a fraction of their true reserves rather than retaining a reserve of a fraction of their loans. I think it's arguable whether this would end inflation, but it would certainly be deflationary in and of itself as at least the banks' reserves would have to be locked up out of circulation (to protect the bank in case a loan payment is delayed) and the chances of repayment (and interest on) a loan would have to be much, much higher to make it worthwhile. Frankly I doubt a modern society could exist without fractional banking so the point is probably moot.

I agree that the Fed are pretty good at fighting inflation, although they get a big boost by eliminating energy and food, which are big parts of many budgets. And they certainly failed in the 70s, you'd have to admit. Who remembers the misery index?

the fed had nothing to do with the vietnam war and the decision to float currencies rather than continue the bretton woods accord. it also had nothing to do with OPEC exerting control on oil supplies.

milton friedman wanted to reform the banking system not to keep the money supply constant but to precisely control the size of the money supply so that the MV side of the equation can keep up with the Q on the other side and thereby maintain P at a constant level. doing so is probably impossible in any economy except the most rudimentary.

and of course talking about this in nominal terms ignores the fact that sometimes and for whatever reason real inflation does happen (though in man-hour terms the trend of history is real deflation).

 

[totalnoob]

repeat after me: FRB does not create money.

Orly?

http://www.youtube.com/watch?v=CtvHAqK8P14&fmt=18

note the nods of agreement from Bernanke @ :30-45

 

[Special K]

Can you elaborate on this section? Where are most savings put these days, if not deposit accounts? Tbills?

Why don't bank runs have anything to do with deposits? I thought the definition of a bank run was a mass withdrawal of deposits.

Finally, where does the majority of bank funding come from nowdays if not from deposits?

Prior to the collapse, the marginal propensity to save was 0. Which meant that the average American was spending more than their entire income, thus there was no saving.

The majority of savings now are structured such as 401(k)'s, since most individuals just utilize what their company provides them. These aren't "deposits" in the way that you say it. The cost to withdraw from these savings makes it not worth it in most situations. Bank runs are based on deposits, but as was posted, very little of a banks income comes from these kinds of accounts anymore.

Banks are funded from a multitude of sources, but much of it is done from the bank's investment divisions.

This is shifting as the MPS is shifting back to a more sustainable level.

edit: on another note, has anyone actually tried to look through a major banks balance sheets? They're absolutely insane, keeping track of something that size is a massive undertaking.

LegendKiller, can you comment on the questions I posted above that are quoted in this message? I'd be curious to hear your take on these questions.

 

[Special K]

Orly?

http://www.youtube.com/watch?v=CtvHAqK8P14&fmt=18

note the nods of agreement from Bernanke @ :30-45

In that video, Ron Paul is referring to the Fed creating money by buying treasuries with money that it creates out of nothing.

Open market operations are distinct from FRB. The Fed could perform open market operations even if we didn't have a FRB system.

As I said in my previous post, FRB doesn't actually create new money in and of itself because it's based on a sort of deception. The bank takes in deposits, loans 90% of them out, but simultaneously tells its depositors they have access to 100% of their deposits at any time. This deception works as long as no more than 10% of the bank's reserves are withdrawn at any given time.

EDIT: wait, did you mean FRB = Federal Reserve Bank, or FRB = Fractional Reserve Banking? I've seen FRB refer to both terms in this thread. In this post I assumed you meant FRB = Fractional Reserve Banking. If you meant Federal Reserve Bank, then I agree with you and disregard what I wrote above.