Bitcoin Forum

John Law's Real Bills Doctrine says that banks can create fiat money backed by his assets

Originally, if a bank have one ounce of gold, then they are able to issue fiat money of corresponding value. The fiat money have the same purchase power as one ounce of gold, since they can redeem the gold at bank anytime

However, John Law went one step further, saying that if the bank have one acre of land, then they can issue fiat money of corresponding value, since they are backed by the value of that land

Adam Smith pointed out, this increased money supply will cause large inflation and will not help economy. However, his view is too academical, since the money creator will not be so foolish to use their new money to buy goods for daily consumption to trigger inflation, they will use those money to buy assets


Consider such a scenario:

The bank would start with a small amount of asset, say one acre land. They issue the money worth of one acre land, then bank can use those money to buy one more acre land. After they get the new land, they could issue money worth one acre land again, and use those money to buy another acre land...

After a while they have bought so much land and now the price of the land has increased, they can issue more money based on higher worth of their lands. They could keep doing this until they bought up most of the land in the country

And since the land price is not showing up in inflation statistics, they can keep buying like this for many years

To make it more aggressive, now they purchase not only land, but also debt, which is in fact future products and services. And purchasing debt is even better than purchasing land, since a high level of debt will put a downward pressure on consumption, so inflation will not be a problem no matter how much land they purchase


What does this mean?

If the money creation is based on the backing of assets, then money creator can acquire almost all assets if he just scale up his operation, without doing any meaningful work or giving anything valuable in return



On the contrary, gold or bitcoin is totally different, you can not issue money based on backing of anything, you must put real valuable resource to get it, this created an equal ground for value creation

Bitcoin is made by Chinese computer farms.

Yeah this sure is more real than govt bonds.  Let's see who I'd trust more the ENTIRE tax base of the USA or some crappy Chinese business.  Him difficult choice

It only works if the value of the land rises. If the value falls then the bank will fail if there is a run.

Also, it will cause inflation even if the money is used to buy assets.

At least bitcoin miners put real resources in making bitcoin, while fiat money is just a promise

The entire tax base of the nation won't give you anything in return, that promise is not payable, e.g. you can not get your money to FED to exchange the bond that backing them. Only FED will decide when should they sell assets, and it seems that they will never sell assets, only buy

And the government's tax income is not enough to pay back their old debt + interest

In modern fiat money system, the fiat money holder do not have the right to redeem the land, so banks will keep buying land using this trick and the available land will get less and less, thus the price will rise forever. The land price only drops if there is no new money inflow, but just look at what FED did, they printed 5x more money to buy those lands to support the price of them, actually the best time for them to buy the land is during an economy crisis

And it will not cause inflation if they purchase equal amount of national debt at the same time. A high ratio of debt will cause austerity, which reduce the consumption on daily goods, counter the inflation tendency of money printing

It's amazing that on one hand, they keep buying properties using printed money, on the other hand they keep buying debts using printed money and charge interest. The inflation effect of property purchase is negated by the deflation effect of more debt for the whole nation, how genius  ;D

http://photo.mystisland.org/m0.png

Please cite source where the FED is buying land.  I call mythbusters in this claim

http://pages.stern.nyu.edu/~JStroebe/research/pdf/EstimatedImpactFederalReservesMortgage-BackedSecuritiesPurchaseProgram.pdf

Thats not buying land or real estate.  They're called securities.  As in Mortgage Backed Securities.  LOL

Problem is when they issue more money, the general common people's wealth get diluted. So in effect, indirectly we are working to pay off the land purchase but the difference here is that we don't own any share of the land.

Poor logic.  It dilutes anything denominated in USD including banks assets.

What is this land crap you are talking about.  If land belongs to the state then it belongs to the people of that state collectively.  As in PUBLIC. 

Stop being a whiny selfish prick and think somehow you are owed anything.  Or your share of taxes contribute more than the next guy

As usual, banks will never tell you what they are actually doing, but you can get the concept step by step

From a higher level of abstraction, MBS is some kind of asset that has value, it does not matter it is gold or land or debt, they are all something with value. Issuing money backed by valuable asset is the spirit of Real Bill's Doctrine, MBS is the Real Bill here

From the name, MBS is a kind of security: A tradable financial asset, similar to bond. Bond is debt, backed by the promise of repay in future. So MBS is also backed by the promise of repay in future, but with one exception: It has a mortgaged house behind it. If the borrower defaults, bond becomes worthless, but when that mortgage defaults, MBS owner would take over the property as a compensation

So MBS is not only debt, but also a debt backed by the land. During a financial crisis this debt have a high rate of default (foreclosure), as a result the property will belong to MBS owner

FED purchased huge amount of MBS, because when house price crashed, many of these securities get defaulted and leave the banks with house. If banks sell these house on open market, they will crash the house price further and trigger a total melt-down of everything

So FED was actually buying these houses to prevent a house sell-off, but FED greatly benefited from this move and now all those houses are listed on the asset side of FED's balance sheet

What is this "land belongs to people of that state collectively" you are talking about, is it a communist country?  :D

As I know, some western state governments are selling their property little by little to those bankers, due to that they can not afford to repay the loan

So bitcoin needs a "made in China" stamp?  ha, makes sense

Strange logic, how did you reach this conclusion? Chinese miners are not cheap anymore

I'm only talking about public land.  It belongs to the state.  The state is an entity that is comprised of the people belonging to that state.  The govt is elected by the people.  It's not communism.

If you think it's communism then you need to review junior high school civics class.

If the state auctions public property (like airwaves) to private enterprise then the money goes to the public coffers.  That money gets spent on public works which is to benefit all constituents of the state.

Gaawd why is it you don't know this?  If you don't like it vote for different representative or move out.  It's that simple

The state is not "the people" but a select group of people (politicians and high public office holders: aristocrats) that live good lives on the production of the rest of the people.

Elections is the joke that has been invented to make the rest of the people think they have something to say.  They do, in fact.  They can now choose, every so many years, WHO will be the clan that will be extorting you.   Elective aristocracy instead of hereditary aristocracy.
And yes, that does have positive effects: the elective aristocracy uses lies instead of violence to stay in power, and sometimes it even happens that it is simpler for them to do really something good instead of making it up.  But these are rare occasions.

Indeed.  That's the trick of ANY form of fiat money.  Seigniorage.  It goes somewhere.  It is even the case with bitcoin.  It isn't the case any more with gold (except for a few gold mines).

Seigniorage is the fundamental problem of any issuing of money, other than a genuine asset which has a large "usage" value: the one issuing it, gets buying power in return for nothing.  That is then taken on the back of those acquiring the new money.

The one who can issue money, can of course buy up the whole economy in the end.  Whether this is by "backed" money, or "thin air" money doesn't really matter.  The only advantage of "backed" money is that there will always be some finite supply of it, if the backing asset is a collectible, such as land or gold.

The one issuing money can use his seigniorage to make assets rise and fall and go against speculation and investment at will.  If the central bank buys up gold with newly printed money, it increases the gold price and makes in fact the seigniorage go partly to those already holding gold.  Later, they can dump that gold (they don't mind losing money as they can print it).  If the central bank buys X or Y asset, they make rich those holding those X or Y assets before.  

In this way, central banking (and some phone calls) is the perfect way to make "the friends of the state" hugely rich on the back of the people producing value.  Central banking is the ultimate state theft of value and production.

The only "fair" forms of seigniorage are:
- the seigniorage that has been historically diluted (gold has had its seigniorage already millennia ago)
- the seigniorage that is in one or other way equally distributed (everybody can print his own amount of money)
- the seigniorage that is randomly distributed (like in bitcoin with very high volatility, long inflation period, and so on).

This theory is bunk.  I'd like to see just one historical example where this has happened. 

On the contrary.  Central Banks (FED) sell gold when it is cheap, and buy gold when it is expensive, which makes them make "losses" which don't matter as they print the money.

As such, they amplify the prices in the markets, to go against the speculators/investors gains (except for those in the knowing).

Gold exchange funds buying gold:
1997 0
1998 0
1999 0
2000 0
2001 0
2002 3
2003 39
2004 133
2005 208
2006 260
2007 253
2008 321 <- buying at low prices
2009 617 <- buying at low prices
2010 367.7 <- buying less at somewhat higher prices
2011 154.0 <- even more
2012 279.1 <- again somewhat more
2013 -880 <- selling
2014Q12 -42.5 <- selling at even higher prices


FED:

1997 $330.98 326 selling at low prices
1998 $294.24 363 selling at low prices
1999 $278.88 477
2000 $279.11 479
2001 $271.04 520
2002 $309.73 547
2003 $363.38 620
2004 $409.72 47
2005 $444.74 663
2006 $603.46 365
2007 $695.39 484 selling at low prices
2008 $871.96 235 speculators try to buy, so let's sell less too to counter them
2009 $972.35 34
2010 $1224.53 -77 higher prices, so let's buy instead of selling.
2011 $1571.52 -455  even higher prices, so let's buy even more.
2012 $1668.98 -544.1 peak buying
2013 $1411.23 -409.3 speculators start selling, so we shouldn't buy: lowering buying.
2014Q12  $1294.64 -242.1 counter the speculators trying to sell by buying less.

FED does identical movement as speculators and hence counter-acts them, increasing prices when they try to buy, and lowering prices when they try to sell.

Gold in metric tons.

Thanks, I don't even know that I collectively own some airwaves  :D

I pay tax to government, like an expensive insurance, and then what they do with that money is their business, but just don't say that their properties are owned partially by me, I don't even get a dividend on those returns (if there is any)

My analysis shows that backed money is indeed "out of thin air": As long as you have some spare asset, you can always issue money backed by them to buy more asset, and once you get more asset, you can issue more money, so the quantity of money that you can issue is only limited by the total available asset that you can buy in the whole world

To stop this kind of madness, it should be illegal to issue money backed by assets. If money can only be created by work or paying equal amount of valuables (for example exchange electricity for mining bitcoin), then that money will not create seigniorage

I agree with you 100%.  "Backed" is a word which simply means "I am lying to you".  Even if well intentioned, it is an unverifiable, unstable, and a sure-to-fail situation.  Perhaps we should look to various alt-coin producers who are showing us the truth about this kind of language. 

The root of the problem is you don't understand what a state is.  So you don't understand public vs private.  And you don't know what a govt is designed to do.

Who do you think capitalised the iinternet infrastructure and where that capital came from?

Why is this considered buying up the entire economy?

This trick can even be practiced on gold and I believe that is how those banks accumulated huge amount of gold during a century. But since the amount of gold is limited, once they have bought most of the gold available on market, they could not create more fiat. So they eventually shifted the target to assets, then they could continue with their wealth accumulation at a much faster pace

You don't find it useful that if some asshole down the street uses a spark gap generator to disrupt communications over your wi-fi or cell phone won't face some consequences?

 

If you've discovered this secret why aren't you out there rasing venture capital to start a bank?

This is not a secret, John Law practiced this 300 years ago. Commercial bank do not have right to create money, only central banks can. Just look how FED and other central banks' balance sheet exploded while they acquire large amount of assets since 2008

U should try to read the whole thread again and also understand it.
all you posts display alot of non understanding of this topic

Nope.  Sorry bud I've yet to see any evidence that the Fed buys land or real estate.  And who cares if they do? 

Oh yes they do, Commercial banks create credit money. 

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

So what if their balance sheet expanded?  Still has nothing to do with them "buying the economy"

This is not "buying up the entire economy", this is "distributing seigniorage to friends" and causing volatility in the gold market (so that it can serve less as a safe store of value).

There is absolutely no good reason for a central bank to *increase* asset volatility, if it isn't to have "friends" profit from it, an to render the asset less secure as a store of value.

EVERY issuing of money causes seigniorage, it is unavoidable. 

In fact, at first sight, the asset-backed method isn't so bad.  It is when analysed deeper that there is a serious problem with it.

What happens actually with an asset-backed fiat, is that the asset is taken out of the economy, and stored in some safe, and that the corresponding value is issued in fiat.  The trick of "buying more and more" can only happen if the asset against which the money is backed, is confiscated in some way, and then, the taking actually happens at that moment, and not at the moment of issuing the money.

What this procedure tries to establish, is a seigniorage-less monetizing of an asset.  It isn't (at first sight) as stupid as it is presented here.

Suppose that people possess gold.   Some have a lot of gold, other have less gold.  Now suppose that the fiat-issuer (call it "the state") wants to monetize that gold, by issuing fiat backed by gold.

The state can now print a certain amount of fiat money, and BUY the gold from different people (giving them the money in return).  As such, the gold that was in the hands of the people, is now in the central bank, and the fiat money that was printed by the central bank, is now in the hand of the people.  The state cannot spend it a second time.  The state now has gold, which serves as "backing" of the fiat money, and has taken that gold out of the economy.

At first sight, the state just monetized gold, and nobody got any seigniorage.  People who got the fiat bills, gave their gold in place.

The state now has the gold, but doesn't have the fiat any more.    There has just been an exchange of gold against fiat money.

However where this goes wrong is that the very fact of buying up the gold has increased enormously the price of gold.  People who had gold before, had less buying power, than when they sold their gold for fiat, because the demand for gold, with this buying up by the state, has increased enormously over the normal demand of gold.  So there HAS been a lot of seigniorage, and it went in the hands of those that possessed gold (which they acquired at a lower price than when they sold it at the state).

I took gold as an example, but you can take any valuable asset.  You can take land, you can take shares in companies, just anything that has some value.  By "buying up the asset with fiat" you *apparently* avoid generating seigniorage.  In reality that's not true, because the increased demand (by the state) of the asset increases its price, and the seigniorage hence goes into the hands of those holding the asset when the state decides to buy it up.

Suppose that the state suddenly buys up Beanie Babies for freshly issued fiat.  Beanie Babies which were at $ 50.-, will, due to this increased demand, go to, say, $ 300.- and people that had spend $ 50 on it, will make a 6x benefit which is the seigniorage.  If the price would remain at $ 50.-, there wouldn't be any seigniorage, because for every $50.- fiat issued, $50.- of Beanie Baby will have been taken out of the economy.

The problem with asset-backed fiat is that the asset that is taken, increases in price.  This is a disaster for the USE of the asset - so you better have an asset that has no use (but then, has no value!).

What the state does with that action, is to force a certain asset indirectly to become a monetary asset, but transfers the monetary value to its fiat counterpart.

The focus is not on the price rise and fall of the asset, let's suppose the price never changes. For example, under a gold standard the gold price is fixed at $35 per ounce, you can always redeem one ounce of gold with $35 at FED

It is a double spending problem. When you spend your gold coin, when coin is gone, the ownership of the coin is also gone, you have nothing left. But when you issue fiat money that is backed by your gold coin, after you spend the paper money, the ownership of the fiat money is gone, but you still have the ownership of the gold, until someone redeem it. In fact if no one redeem it, you can spend that gold coin again, this makes it a double spending

In fact, by simply limit the possibility to redeem the gold, you can double the amount of your purchasing power by issuing fiat money. This double spending practice violates the very basic principle of fair trade

When Nixson officially ended the convertibility of gold and USD, all the outstanding USD should have lost their backing and became worthless. The reason they did not crash to zero is just because there is a consensus on USD's value in transaction. So the successful of a double spending really depend on the consensus of fiat money's value

In a game, if you discovered a bug that let you spend the same money twice, you will quickly buy everything you want by simply repeat the process. But in reality, this bug is utilized by central banks world around and it seems no one cares

Commercial bank create large amount of checkbook numbers in their database, but they are not real money, when they run out of real money, they went down, together with your numbers in your accounts, which has never existed in reality until you do a full withdraw. Just like your bitcoin count on bitcoin exchanges, they are numbers in a database, not on blockchain

Strictly speaking, no, because that's fractional backing.  In full backing, you have to hold exactly the quantity of gold that you bought by issuing the fiat.  In other words: when you issue $35, you give those printed $35 to someone holding an ounce of gold, who hands over that ounce of gold in return for the $35.

Now, you (as a state, or central bank) have to hold that ounce of gold as long as these $35 are not returned (which comes down to redeeming it).  As such, the fiat is then just a "Mirror" of the gold in the safe of the central bank.

If applied strictly, that system is not entirely stupid.  The real problem with it, as I said, is the fact that this demand for gold will of course make the price of gold go up (there will be less in circulation because a big chunk of it has now been stored in the central bank vaults after it being bought with fiat).


Yes, but that is then not "gold backed" fiat, but only partially backed fiat.

Of course it's real money.  The entire global economy is built on this. 

They can't run out of money if they create it ex nihilo.  They can only run out of borrowers

Indeed, it is real money.  Money is "real money" if enough people think of it as "real money".
A bank account with a big number on it is seen, by most people, as "real money" so it IS real money.

You are willing to hand me over your house if I give you my bank account with a very big number on it.
That is what proves that it is "real" money.

The funny property of money is that money is money because enough people say/think so.

However, it is not because something is "real money" that it is WORTH A LOT.  The "price" of money depends essentially on how it is issued, how much is circulating, how much is (expected) to be circulating, and how confident people are in its ability to be a store of value (and are storing value in it for that reason).

If "real money" is too volatile, it will stop being considered as money by many, and hence it will stop being money.
(that's called hyperinflation).

It is interesting to discuss what is REAL money

Many people thought that their bitcoins on MTGOX are real, since they could sell them for fiat and use fiat to buy them on MTGOX. But as long as they don't withdraw, those bitcoins are just numbers on MTGOX's database

In fact those coins might have disappeared as early as 2011, and MTGOX were just playing a game of mixed FRB and using new customers deposit to cover the old customer's withdraw

This is very similar to what banks are doing. Bank's settlement network can be regarded as a giant exchange similar to MTGOX, where every people put their fiat in and trading against each other (in fact their goods are not listed on this exchange, banks purely exchange numbers between different accounts)

When you withdraw fiat money on an ATM, you get real money (cash notes and coins). In a system of 100% backing, numbers on your bank account is backed by real money, but in reality, banks all run FRB. And when they are running out of money, they go to FED asking for new money to pay the old customer

Banks will never run out of borrowers, they borrow from each other, and that is their daily business. But since the aggregate real money is limited, no matter what kind of borrowing activity they carry out, they will run out of real money as a whole in a liquidity crisis (liquidity means real money's liquidity), without real money, they go bankrupt

I modify the dinofelis's word a bit here: Bitcoin is "real bitcoin" if enough people think of it as "real bitcoin". You will clearly see this is not true, bictoin is real bitcoin if you can see them on blockchain

Unfortunately, in today's fiat money system, there is no tools like blockchain to let people inspect the flow of real money, they can only believe what banks tell them, only exchange owners (e.g. banks) know how much real money they have.

That is the reason when the banks all had a liquidity problem, they will create a large shock in economy, just like MTGOX did. Unlike MTGOX, their scale is millions of times larger, if they failed, every one on this giant exchange will lose shirt, thus they must be bailed out by FED using real money, and FED's real money as discussed in RBD theory above are in fact created out of nothing, to make the whole scheme even more unreal

Real money is what many people accept as real money in exchange for goods and services.
It doesn't matter what is its form, who created it, how many there is of it.  As long as enough people believe it is real money, it IS real money.


It was real money until it wasn't any more :)

There's no guarantee that anything that is "real money" at moment t0, is still real money at moment t1.

Real money is a kind of "speculative lock-in", a kind of meta-stable situation, which can last for centuries, or just for a week.

Well put Dinofelis!

"Real's gonna change" was already true long before bitcoin came around. 

Indeed, this back to the question of prefer to live in a dream world or real world. Most of the people live in a world that they believe it is

I think it is all related to the perspective: From personal and short term perspective, it does not really matter. But from a nation's or long term perspective, removing the parasite and cancer will definitely help to improve the financial health of everyone

But it is not easy to escape, people were deeply trapped in this cancer from the day when they were born. The removal of it will likely kill everyone's financial life that is dependent on it

The point is that the funny thing with money is that money is money when enough people think it is money.  And when that happens, it is real, and the "dream world" becomes the real world, and the "real world" where "this is not money" becomes, eventually a dream.

There is no "objective", ontological reality to money: money is exactly a thing that is pure belief, but when it is pure belief, it is real.  If enough people accept sea shells as money, then sea shells are REALLY money, and the few people finding that ridiculous (which was the reality before) are now the ones deluding themselves, and living in a dream.

Even more: if deposit accounts telling you that you have sea shells are generally accepted as means of payment (even if there are no "real sea shells" behind it), then those deposit accounts have become real money, and those denying that are deluding themselves.  Even if there are no "real sea shells".

Credit money creation with deposit accounts is in fact unavoidable from the moment you allow for borrowing. 

Look at these scenario's.  Let us assume that sea shells are money.

1) We pay with sea shells.  The money is only base money.  The only way to borrow money is to find someone to lend them to you, and to write out a contract.   That's the financial equivalent of barter.

2) We use banks as vaults.  That is, we go to a bank, give them 100 sea shells, and we get a deposit account with 100 sea shells on it. The bank keeps the shells, and we pay one another with the deposit accounts.

This is in fact exactly the principle of John Law's central bank.  The fiat is now the deposit accounts, and every bank acts as a central bank, having 100% coverage of their deposits.  But


3) Banks can borrow money.  If someone comes to a bank, and borrows 80 sea shells (against a contract with the bank to pay back in due time 85 sea shells), then the bank will CREATE him a deposit account with 80 sea shells on it.
But the bank cannot remove 80 of the 100 shells from my account, because that deposit account tells exactly that the bank owes me 100 shells, which is still right.

But now there is 180 shells equivalent in deposit accounts (which was the de facto money now).

If a bank borrows money, credit money is created, and if the money is in fact deposit money (credit money) then that money creation is unavoidable and is part of the principle of borrowing money.

What in fact happened is that the contract "I will pay you back 85 shells" against the bank's IOU 80 shells, is in a way indistinguishable from the bank's IOU 100 shells of my deposit account.

When people consider IOU from a bank as money (that is, deposit accounts) money creation through borrowing is unavoidable.

You cannot stop people having confidence enough in banks to consider deposit accounts money.  Even if you (in your "dream world" ) are screaming that it is "not real".

It became real money, the day that people considered deposits as money.

No doubt, it is this logic makes bitcoin a money: If there are enough people who think bitcoin is money, then it is money. So to the end, to make something money is trying to make as many people as possible to believe it is money




If banks strictly follow 100% reserve ratio, they can not borrow you any shell and create deposit numbers, since all those shells would be reserved at central bank, they have no single one shell at hand to lend (In fact that is the liquidity squeeze we have seen in a banking crisis, even they had 10% reserve ratio, banks would still loan out as much as possible and deplete their shell reserve)

But this is FRB, still a small trick comparing with the fact that they could create deposit numbers backed by shell, which is a double spending of shell's purchasing power. Without double spending, the banks ability to create credit money is limited by their shell reserve and multiply ratio, but with double spending, the banks can literally create as much money as they wish. With maybe only one ounce of gold they could acquire the whole world by repeating the process, no FRB needed

Speaking strictly, this is not exactly double spending. Some times when customer withdraw their shell, corresponding deposit numbers on their account must be destroyed, so some of those purchasing power is not duplicated, just like in a FRB system

But banks can prevent this withdraw from happening using many strategies. For example, make the fiat money the only transaction medium, so that when economy expands, the demand for fiat money increases. Another way is to increase the debt of the nation by buying more government bonds, when the debt increases, so increases the amount of money needed to repay the debt. And after removal of gold standard, they have removed the redeem possibility of issued fiat money, means once issued, only central bank have the right to destroy those fiat money by selling assets. This, together with a forever expanding economy, makes the double spending almost a sure thing

If you understand the implication of this double spending practice, then you would easily understand the following quote

"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits." Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain.

Indeed.


Indeed, but then:

1) banks don't serve any purpose.  The central bank can just as well issue "deposits" directly to citizens then, and a bank cannot do anything.  There wouldn't be a way to pay the salaries of bank employees.

2) no-one could borrow money, except directly from other individuals willing to lend them directly the money.



This, I don't understand.  Their ability to do what you call double spending, is exactly the fractional reserve ratio.
They are not really double-spending it.  They are issuing IOU, which are deposits.  It is the fact that people consider deposits to be money, that makes that banks create money.
Deposits are nothing else but an IOU from a bank.  If the bank owes me 100 shells, and the bank lends out 80 shells to Joe against a promise (a contract) signed by Joe that he'll pay back the 80 shells, then I have an IOU from the bank of 100 shells, and visibly, Joe is content with an IOU from the bank mentioning 80 shells worth.  That's what deposits are.  IOU from the bank.  
But people accept them as means of payment, so it becomes money.

If any IOU of a credit is accepted as money, then you cannot avoid money being created each time there is someone borrowing from someone else.

Look at it this way, and forget banking.

Suppose we have a bitcoin economy.  I have 100 bitcoins on an address.  Now you want to borrow 80 bitcoins from me.  I transfer 80 bitcoins to your address (irreversibly), but you sign me a contract that is registered on the block chain, that you will pay me 85 coins next year.  I now still have 20 bitcoins on my address, and you have 80 bitcoins on your address.  But I have also a blockchain registered contract where you engage in giving me 85 bitcoins next year.

Now, suppose that I want to buy a small car, that costs 100 bitcoin.  If the car salesman has enough confidence in your paying back your 85 coins next year, which he values 80 coins today, then I can transfer him my 20 "real" bitcoins, and the contract on the blockchain.  If he accepts your IOU as money then I can buy my car, even though the 80 "real" coins are on your address and not on mine.

Because the IOU where you promise me to pay me 85 coins next year, registered (and transferable) on the chain, is considered money.

Now, for an individual IOU, there are chances that people don't accept it as money.  But if institutional IOU such as bank deposits are used that way, and people accept it as a means of payment, then it IS money, and there's nothing you can do to stop it from being considered money.  And if that's the case, money creation by credit is unavoidable.

You cannot avoid people accepting certain things as means of payment.  And from the moment people do, there is money creation.


That's what I also said.  But then you need to have ANOTHER IOU from the bank.

If I have 100 shells on the bank, and the bank lends out 80 of those to Joe, it may eventually take those 80 from my account, but now the bank has to give me ANOTHER IOU worth 80 shells, because the bank really owes me 100 shells.  But what's the use ?  A deposit was already an IOU from the bank !  What's the point in destroying this IOU and replace it by another one ?

The point is not that.  The point is that people ACCEPT as money, IOU's from a bank.  When people accept that, they turn these IOU (Deposits) into money.

Lending is another topic, since it involves the risk of default. In your example, the car salesman would not trust a promise from a third party which he has no idea of credibility. Those 80 coins are not considered as money but a debt. Of course you could rely on large institutions, but risk of the failure of those institutions is still high, just look at how many bank failures during the financial crisis. Maybe the risk is very low under normal time, but when it fails the impact is enormous, so the average risk could be higher, you can not minimize the risk by moving them around, actually you increase the risk when you move all of them to a single point of failure

But let's put it aside and start with basics without involving lending. What RBD theory indicated has nothing to do with FRB, it is this part I am most interested in this thread

FRB is a practice similar to insurance, as long as there are not so many people withdraw the money at the same time, banks can lend out some of the money to other clients, that is perfectly fine and has been statistically working very well. (Although a little bit cunning) But FRB does not solve a basic problem: Where is the money originally come from

You can open a bank and practice FRB, but with an empty bank you can not do anything, you must first have some customer deposit (real money) before you start to do FRB

Suppose a bitcoin banker have 100 bitcoin, then under a 10% reserve ratio, by lending the same coin out again and again, the maximum checkbook numbers he could create will never exceed 1000 bitcoin, anything beyond that is impossible. In another word, he can not issue IOU endlessly without increasing the base money supply

The only way for him to generate more checkbook money is to get more real bitcoin. If he get another 100 coins, then his check book money could reach 2000 bitcoin maximum, and these extra 100 coins must be mined by the miners with real cost

But in today's financial system, those extra 100 bitcoins are not mined, they are created as base money by using Real Bills Dorctrine principle that I described in detail throughout this thread. With RBD, there is no limitation on how much money that you can create, because it is effectively a double spending, creating purchasing power out of nothing

The difference here: FRB have a limit of 10x more money creation under a 10% reserve ratio, but RBD has no limit



If you look at the M0 money supply of US, it has been increasing very slowly following GDP until 2008, and it suddenly exploded following the start of QE, now it is 5x more than pre-crisis level

If you look at M2 (which measures chekbook money plus base money), the change is quite consistant, thus many people think that the QE works well. But under the hood, the components of M2 has changed: The increase of checkbook money has mostly been stopped following the deleveraging effort from the banks, now their reserve ratio might be as high as 60%. On the other hand, the number of base money increased by more than 3 trillion, if you consider the M2 increased only 4 trillion during this years, that means most of those increase comes from the increase in M0, and when that 3 trillion base money when muliplied later on, can become 30 trillion M2

Well, the point is that it is one or other policy that determines how much base money there should be.  But even with a RBD, the amount of money that can be issued is not unlimited: it is limited by the amount of value that is available as the stuff that is to be bought by the base money issuer (the central bank).  If it is gold for instance, then the central bank cannot issue more money than there is gold available to be bought (of course, the more the central bank issues money, the lower the value of the money is due to inflation, and the more the bank can print to buy yet another oz of gold - but this is a finite effect).
Once the central bank has bought up all the gold, there is no way anymore to issue money, and the amount of base money is fixed.  Until one changes the rules, and the central bank will now buy up, I don't know, land, or real estate.  Until it has bought up all the real estate that is for sale.  Then it cannot issue bank notes any more, again.  Until something else is allowed to be purchased.

That said, some central banks have "automatic" targets.  The ECB for instance has a CPI inflation target of 2%.  It should in principle issue money such that that target is reached.  They are panicking right now, because they cannot reach it.


Yes, but at the same time, the reserve ratio has been pulled up, so that the actual money creation is actually quite small.


Indeed.  But the idea is to keep higher reserve fractions (Baal III agreement).

So this QE is in part to compensate for this contraction of the leverage.

Exactly, this put everything purchasable in the current society under the radar of FED, they could buy all the most valuable assets in the whole country. And this is especially effective during a crisis, where everyone want money


CPI does not include assets, central bank could just buy assets without changing CPI. Even better, they are mostly buying debt nowadays, and purchasing debt will create a deflative pressure on the society. It seems a debt financing can raise the consumption for a while, but in the long run, that debt must be paid back by adding interest of almost equal amount of value. The deflative pressure following the debt financing is much harder to deal with, the only way to out is get more debt exponentially or a total default

Use 100 dollar to create 900 dollar debt by FRB, and create base money to buy these 900 dollar debt during a crisis, then you get 1000 dollar base money. Then create 9000 dollar debt using FRB, and then create base money to buy 9000 dollar debt during the next crisis, then create 100K dollar debt using FRB...

The whole scheme is just rooted from a simple practice of issuing base money backed by assets/debts, and use those money to buy more assets/debts.  It seems each step is reasonable, but the result is huge debt and huge wealth gap between banking class and normal people

No. I owe you, or anyone else nothing. My life and my work for my  own survival is mine alone. There is no ethical/moral base that says if i am more agile, or working harder, learning faster than you, than i HAVE to help you. There is absolutely no moral justification for that. Or the other way around. Please give me half of your income, even though i do not work, just because i am poor ( because i do not give a fack about improving my own situation).  Also the state never equals the people. Never. Not even, and especially not in the commie USSR, where the head of the state official's is practically a god, a new age sun king to do as he wishes (stalin, mao, hruschev, pol pot, etc).

There is no alternative to private property which upon a complex society can be organized. None.

Barbarians believe in private property also. What you cannot hold by force is theirs. Your only choice is flavor of barbarians. Capitalism, communism, feudalism, it matters not.

That is true, but it is not linked to any RBD specifically.  It is related to any fiat issuing system.  The one issuing fiat can issue in principle so much that he can buy up anything, as long as that fiat is imposed as legal tender.

And then we come to the second part: the state potentially owns anything anyways, if the state has no limits on taxation.  Even without fiat, even with gold as money, the state can confiscate anything.  Directly, or through taxation.

That is true, but that comes about because of the concept of property itself: property only has a meaning if it is backed up by force capable of imposing the rights that go with property.

Property without force is a meaningless concept.

Great insight to infer mbs program to a tend towards owning all land.. However as all suuply is dried up and becomes unaffordable the whole country will default.. Why would the govt have incentive to do this? Or is it judt s byproduct of a malfunctioning system nearing its end? Its like askmg miners to collude so they can double spend.. Theres no incentive to break the network?

Is buying the mbs somehow a way to foot the bill for the interest on the outstanding loans via printing paper through selling treasury notes?

You are right, these are two different subjects.  

I think the RBD is a system that is slightly better than "just printing money", for two reasons.  The first reason is that "just printing money" is too openly evident.  People wouldn't trust the ministery of finance that prints *directly* dollar bills.  It wouldn't seem fair.  The seigniorage is too evident and visible.

In the RBD, actually, money isn't printed "just like that", but an asset is chosen to be "monetized".  Be it land, stock, gold, whatever.  If the RBD is applied honestly, it just looks like as if that asset is taken out of the economy and "destroyed"  (stored irreversibly in vaults) in a way, and REPLACED by fiat money.  It is as if the asset itself were now enforced to be "money", but that for practical purposes, we use paper instead of physically that asset.

The state could, for instance, just declare that land is legal tender.  But it isn't practical to go to the grocery and buy vegetables with 20 cm^2 of land.  So in order to make that more practical, the central bank buys up the actual land, and issues paper instead, that is "good for so much land".

It could have been gold: suppose the state declares gold to be legal tender.  Now, it is entirely possible to carry around gold and buy your vegetables with gold, but it could indeed be more practical that a central bank buys up the gold, and issues equivalent paper for that.

It could have been just anything.  The state could have declared sea shells as legal tender, and buy up sea shells and issue paper for that.

What the state simply does, is to enforce the choice of an asset to become money, instead of having the market choose it.  Whatever assets the state decides to be bought and issue paper for it, the state implies that the bought-up assets become money (but are exchanged for paper which "stands for" it).

And now exactly the same problems happen with that, as when the market "monetizes" an asset:
1) there is seigniorage due to the *increase in value* of the asset
2) the usage of the asset becomes very expensive, which leads to economic losses, if the asset was useful.

Indeed, if the asset is massively bought up by the central bank to issue paper money, its demand will rise, and the asset (land, gold, sea shells) will increase in price (it will be the monetary part of its value).  People who were holding the asset before, and can sell it to the central bank, enjoy the seigniorage and can become rich.

But there is in fact no big difference between the state using a RBD, and the asset that serves as backing, becoming actual money through the market.  The only thing a RBD does, is to enforce this choice.

And because of the rise in price of the asset, and the taking the asset out of circulation, everybody using the asset for production or consumption, will suffer (and pay the seigniorage).

So it would be most terrible if the state were to use land, because land is very useful.  It would be terrible to increase land prices, and to set land apart "in a vault" so as not to use it any more.

I think you overestimated the power of state. State is not an abstracted super power, it consists of different actors who run vital part of it, and the relation between these people usually are quite complex, it is all politics, violence is seldom involved

John Law's failure is not due to those poor farmers on the street that wish to become millionaire with his Mississippi stocks, but those nobles against his plan. Those nobles organized large scale of redeem at the beginning of his plan to test if his bank indeed has enough gold
backing his paper money. And when the Mississippi stocks reached the top, they bought lots of lands and other assets with his paper money, and that crashed the value of his paper money

Back to today, it seems that governments around the world have lots of power against their citizen, but they don't have much power against banks, in fact they all owe banks money

I think this inevitably leads to more and more assets get defaulted and bought up by the banks, and they might rent those house to you later and become the land lord of the whole country

Treasury note is just another name of debt, banks only buy debts nowadays (with money out of thin air), and eventually the whole country will be the debt slave of banks

Yes, with the world "backed by assets xxx", people will not question the credibility of those fiat money

I think all of these strange problem is rooted from this "issuing money" action. There is only one way to stop any kind of seigniorage, e.g. no one is allowed to issue money backed by anything, money must be produced just like any other commodities and goods/services

Comparing two cases:
1. you use gold coin to buy a beer, and after you drink it, you have nothing left
2. you use gold coin as collateral and issue a paper note, and use that paper note to buy a beer, after your drink it, you still have the gold coin, especially when economy is expanding and there is a lack of paper note, you might never receive a redeem request and you can even issue another paper note to spend again

So, when you issue paper notes backed by gold, you can issue much more money to spend due to not all of the people will redeem the gold with paper note (In fact, in today's system, only FED have the right to take back paper notes and sell assets). Now this is back to the practice of fractional reserve banking, so FRB and RBD infact are closely related practices, once you follow the RBD theory to issue money, the next step will be FRB

This is not what happens.  If you default your mortgage the bank takes possesion of your house but if the market is down they eat the loss.  Banks don't want to sit in an inventory of houses nobody wants to buy.  Often they'll sell it at auction at loss.

Banks don't want debt slaves they want a booming economy where they can create more loans

Banks don't want anything, as they are not actors or living beings.  People who hide behind the names of banks do whatever they want to and use the structure of the banks to help them for whatever purposes they have in mind.

you should read up some more about the 2008 housing bubble, i think it will clear up a lot of things for you!

This did happen in the time period leading up to 2008.   The fed kept interest rates low, to the point where they didn't pay for inflation.  Homeowners got home equity loans (converting land to government fiat demand deposits)   With all that free-to-borrow money, a bubble formed in the real-estate market, to the point where garbage loans were backed by unrealistic bubble-inflated assets.   When the whole thing collapsed, the fed ended up "printing" nearly $4 trillion USD to prop it up.

John Law is also responsible for the infamous South Sea Bubble (sometimes called the Mississippi Bubble). Look it up.

Please point out where I'm wrong.  My friend is a house flipper and he routinely buys short sales. A lot of subprime borrowers just abandon their property if the mortgage becomes underwater.

Banks don't go around buying foreclosures, they are selling foreclosures at auction.  Usually at a loss

There seems to be a confusion of what an MBS is.  Mortgage Backed Security is a SECURITY.  Its a pool of mortgages that is securitized so it can be traded by investors.  

Has nothing to do with the Fed buying property.  MBS is a way for banks to get the (illiquid) mortgages off their books and sell to an investment bank, who in turn sell it to investors.  The Fed isn't buying MBS to own property, they are buying it to lower lending rates.  You don't own any property if you buy MBS you are buying the interest stream.  Its a type of bond

http://www.investopedia.com/video/play/what-are-mortgage-backed-securities

Also, borrowers aren't in debt because of the Fed.  They are in debt simply because they borrowed money.  Nobody forces you to borrow money

This is correct.  However, by buying up these securities, the FED makes the price of these securities go up (which comes down to making the effective interest rate lower).  If securities are in a high demand, getting a loan becomes easy (there's a high demand for the interest rate on the loan).  As such, it makes banks holding securities rich, because they can now sell those securities on a market where there are higher prices for it.  It is then also tempting to write out loans to people who cannot pay them necessarily back (I'm not 100% sure, but I think that the risk of default goes with the security).  That's blowing bubbles in the mortgage market, and increasing indirectly the price of housing and land.

Now, I think the FED is doing the operation post-bubble, to avoid the collapse.  The bubble came for another reason, should now have collapsed, and the FED is buying up probably rather worthless securities to limit the bank's losses instead of having them make huge benefits (they thought they made them in the past).

I'm not 100% sure about what I write here, because it is somewhat opaque to me, but that's how I understand the MBS buying campaign. (also called QE).

In fact, the subprime mortgages were a smart move for the borrowers even though they seemed to be the culprit.  The subprime borrowers are in fact the people who consumed a lot what they didn't produce, and got the rest of the world in difficulty.  What was great for them with the mortgage system, was that their debt was limited to their real estate.  As such, they could borrow like crazy (the bubble value of their real estate), and consume all that, and they were not exposed to the full amount of their loan, but only to the limit of their real estate.   This was in fact a great cause of moral hazard !  You could make a debt that was going to be limited in any case to a part of your possessions, and the rest was not going to be affected.
Ok, you loose your (worthless) house, but you've been living and consuming like a prince, and nobody can do anything about it.

AIG, considered "too big to fail" sold them default insurance that they weren't "big enough to honor" without the fed bailing them out.  Remember, they gave themselves bonuses for pulling off that scam after 2008.

   

Exactly, MBS are just securitised houses, just like monetized assets, different way to make things trad-able, they are essentially some kind of certificate of value. Since the house value crashed due to large amount of default, FED came out to support the price, the only one benefited is the one borrowed heavily and stayed in the same boat as banks

Back to the topic of RBD. As this thread explained, if you can issue money backed by assets, then you could eventually buy out the whole country by repeating the money issuing process again and again

This bring some questions:

1. If this power is so huge, why government gave it to FED, which is a privately owned organization? Is it because this power just realized since the removal of gold standard and the power was not there under a gold standard?

2. Why there is no large scale of political/military fight over this power, or a supervisor regulating this power? Is it because not one in a million understand it, like Keynes said?

That's not how it works.  When a bank creates a mortgage holding the lien on deed as collateral.  IF in the event the borrower defaults, the bank can sell the house.

It is not your house until the mortage is paid. 

If they want to own the house they would but it in the first place.  Take off your tinfoil hat.

If a corporation sells a bond the bondholders lay claim to the assets.  They don't own the company.  If Apple went bankrupt, the bondholders don't own Apple. 

Same as Treasury bonds that back money creation.

You are confusing asset and property.  If you buy 1 share of AAPL stock.  Thats what you own.  Doesn't mean you can walk into their HQ and remove some desks and chair and claim your portion of ownership

The MBS the FED holds on its balance sheets are securities.  They don't have any claims to the houses that are under those MBS

If Apple went bankrupt, the bond holder have the right to sell everything valuable in Apple and divide the return, bond holders have higher priority than stock holders in that case, even the stock holders are the owners of the company

Of course FED would not buy house directly, that will expose the scheme directly under sun light, so they usually use complex terms like securities/lending etc... to mask the truth, if you failed to see the truth behind those masks, then it works. Banks don't even need that house, they need your debt. Debt is a much better form of asset than tangible assets, since it generates continuous return year over year, without maintenance

Again these are technical details, the main problem is: If I could issue money backed by securities, I would buy out all the securities in this country by repeating the process, it is the same double spending behavior, which is strictly forbidden in bitcoin monetary system, but widely practiced by the central banks around the world

Because they are the same club of course !

The state is the machinery that has as a main purpose to extort the production of the productive and to give it to a certain unproductive club that lives in great wealth.  Long ago, that club was the king and the aristocracy, who lived rich lives on the production of the productive people, and played their games of power and wars with it while enjoying the good things of life.  Now, this is somewhat more diffuse, and is a club of politicians, bureaucrats, state-financed agents, financials and certain other "friends of the state" ; also, the pseudo democratic process (which I call an elective aristocracy instead of a hereditary aristocracy - a real democracy would be direct democracy where the people are the law makers directly and not their appointed representatives) makes that that club has now and then to do something so that the electors think that they care for the general good.  Sometimes, they even do something really for the general good.  This is then also the big excuse to make people cheer for the state, and avoid the guillotine.  The main purpose of representative democracy is to make the people believe that they are themselves responsible for all the mess their electives make and as such, avoid all forms of retaliation from the productive.  This works so good that people now in general cheer for this elective aristocracy.


BTW, I pointed this out already: the backing by assets is not necessary to buy up everything.  If you can issue money (whether backed or not) the seigniorage can buy up everything if you print enough.

No that's not how it works.  The Fed is like the blockchain.  They are the ledger that's between the public and private sector.  Also they control money supply. 

I don't think you understand how FOMC works and you confuse securities with property.

I think it is necessary to have something valuable to back the fiat money. Since banks have to persuade the rich and powerful people to accept it. And usually these people can shake the money's credibility, like those nobles who crashed John Law's paper money 300 years ago

You see that happening when Swiss central bank suddenly removed the currency peg against Euro without a notice, since they don't want to be attacked by large speculators. Unfortunately we seldom see those inside fights unless during a financial crisis

If you do not understand who get the ownership of every newly created dollar, then all your knowledge from books are helpless

"The study of money, above all other fields in economics, is one in which complexity is used to disguise or to evade truth, not to reveal it."

Face it, modern fiat money is NOT backed up by anything.  Backup up means: you can go to the bank and get your backup in place.  You cannot go to the FED and get stuff for your money.   So no, it is NOT backed up by the assets the FED bought. 

The reason why the FED buys stuff to issue money, is not to have those assets as "backing" (which would mean you could get those assets against any amount of money if you wanted to) ; but rather to avoid the blunt visible seigniorage to be too evident.  The trick of buying up stuff against freshly printed money instead of just issuing it makes it look like "a fair deal" and a bit less like a "counterfeiter", and in fact, its economic effects are also less severe by doing so: the seigniorage is more indirectly distributed instead of being concentrated to those receiving the freshly printed bills without counter value.

If the FED were to print truckloads of bills and just send them off by mail to "their friends", it would be too obvious.

Now, "their friends" have to exchange stuff against bills, so it looks like it's a fair deal.  And in reality, it is somewhat fairer too. 
But the stuff that is bought is no "backing" for the money printed.  It is not like as if it were backed by, say, gold, so that you can redeem your bills when you want against gold.

A mortgage is backed by the house you've bought with it, because the bank can come and take your house if you don't pay your mortgage.  But that's not possible with the stuff the FED has bought up.