Very nice story about John Law

[vokain]

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin.....

I'm very glad you guys do though and that we have at least some of this  discourse

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[johnyj]

Today thinking of money being a fixed unit of measure for value is akin to thinking of electricity as magic.

The sticky value of money in the marketplace is a measure of ignorance to how money works nothing else; my 5 year old has a concept of Money, and over 99% of the population thinks of it the same way.  

I want to analyze a little bit deeper following this good observation

Mathematically, added money supply will correspond to added price level, (GDP increase by 2% per year but money supply increase by 100% per year, in principle there should be a 50x increase in price of everything),  but in reality it does not work like this, because people are all adaptive and short sighted

Even they know that FED has printed 4x more money, they still tends to believe that the value of money is a constant. As a result, when they see more money, they will work more and produce more products, instead of raising the price of their product. More products will increase the demand for transaction thus reduce the inflation pressure, so that added money supply indeed can generate some stimulative effect and create more wealth without causing heavy inflation, this is especially true in a recession

But there are 3 flaws in this approach

1. Efficiency problem
The effect of the money printing is dependant on who get those money and how do they spend it, if they just hoard all the newly added money, there will be no stimulus effect. Currently banks successfully unloaded their cheap MBS in exchange for money from FED, but their spending is heavily cut and they don't loan out much, so only banks' balance sheet were improved, not average people. For each 10 dollar banks receive, there might be only 1 dollar actually reached out to average people. If banks are cunning, they will limit the number of money flow into the market to artificially extend recession in order to receive more money from FED

2. Adaptive problem
As people adapt to the newly added fictive demand from money printing, their business will expand and reach a new balance. Once the stimulus is removed, they will fall back into an even deeper trouble. Because the original problem is caused by over invest, and now the problem become even worse. Once started, people become addicted to stimulus

3. Ownership problem
FED rightfully claimed the ownership of newly created money, bought countless assets and bonds, now federal reserve banks becomes the biggest owner of the country, but people do not own federal reserve banks, they belong to a small group of private person, that unfairness created a huge gap in personal wealth (If everyone can own FED through buying their shares, I'm sure the same thing as John Law's Mississippi company will happen again, because every dollar FED printed would become their profit, they would made a fortune in the process)

[kjj]

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

This question is impossible to answer in any meaningful way.

Money, as it is really used in daily life, is hard to define.  If you walk in to a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it.  Which of those is money?  Was anything really created?  What was it, and when?

If you withdraw that $1000, that could be the moment that new money is created, because that is when the books no longer balance, and that $1000 is now in circulation.  On the other hand, the bank just physically moved ten $100 bills from their cash drawer into your hand.  Does this suggest that the actual money that was created is the debt?  Still, hard to say.

If your bank was previously at their reserve limit, they now need to borrow more reserves.  The fed can snap their fingers and add $100 to your bank's account (and a corresponding negative $100 loan).  Is that money?  Which one?  Is that the moment of creation?

How about when your bank orders physical banknotes to replenish their stock?  How about when the paper is actually printed?

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

[Adrian-x]

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin to have my words understood without flippant responses or hyperbole is just beyond my attention span, nor do you show any kind of intellectual humility necessary to learn as demonstrated by your trotting out of a "masters degree in economics" a claim I find unbelievable and or a tragic inditement of our educational system.  I reiterate my recommendation that you do basic research rather then consume Austrian propaganda.

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

[johnyj]

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

This question is impossible to answer in any meaningful way.

Money, as it is really used in daily life, is hard to define.  If you walk in to a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it.  Which of those is money?  Was anything really created?  What was it, and when?

If you withdraw that $1000, that could be the moment that new money is created, because that is when the books no longer balance, and that $1000 is now in circulation.  On the other hand, the bank just physically moved ten $100 bills from their cash drawer into your hand.  Does this suggest that the actual money that was created is the debt?  Still, hard to say.

If your bank was previously at their reserve limit, they now need to borrow more reserves.  The fed can snap their fingers and add $100 to your bank's account (and a corresponding negative $100 loan).  Is that money?  Which one?  Is that the moment of creation?

How about when your bank orders physical banknotes to replenish their stock?  How about when the paper is actually printed?

300 years ago, if you go to a goldsmith and borrow 1000 gold coin, he can't just write you some numbers and record your debt in his book, he must physically deliver the gold coins to your hand, it means he must OWN those coins at the first place

Although banking has evolved a lot, same principle still holds when you borrow from a commercial bank today. Commercial banks can not lend you some money they don't OWN. They can not just create some numbers and credit it to your account, that will be crime (counterfeiting), be it paper notes or digital numbers, since only central bank has the right to create money. Commercial banks only have the right to move money. If a commercial bank can lend you $1000, it means they must OWN that $1000, and after they lend it to you, they lose the ownership of these money, and you take over the ownership

If they could lend you some money that they do not OWN, then any people on the street could open a bank and start to loan out digital money that they don't have

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property

[kjj]

300 years ago, if you go to a goldsmith and borrow 1000 gold coin, he can't just write you some numbers and record your debt in his book, he must physically deliver the gold coins to your hand, it means he must OWN those coins at the first place

Although banking has evolved a lot, same principle still holds when you borrow from a commercial bank today. Commercial banks can not lend you some money they don't OWN. They can not just create some numbers and credit it to your account, that will be crime (counterfeiting), be it paper notes or digital numbers, since only central bank has the right to create money. Commercial banks only have the right to move money. If a commercial bank can lend you $1000, it means they must OWN that $1000, and after they lend it to you, they lose the ownership of these money, and you take over the ownership

If they could lend you some money that they do not OWN, then any people on the street could open a bank and start to loan out digital money that they don't have

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property

Just out of curiosity, what makes you think this?

If the act of loaning happens at the point when you walk out the door with a wad of cash, then I would say that the bank does indeed need to own that much paper to make the loan.  But in reality, loans don't work that way.  Most loans never ever see physical paper.  They credit your account, you write a check, you deposit a check, you pay back the loan.  All done with numbers, no paper money at all.  Banks make loans first, and then seek reserves to cover afterwards. 

It sounds like you want to define money strictly as paper and coin.  You may choose to do so, but that is just masturbation, you might learn about the system that you made up, but you won't learn about reality.

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

[Adrian-x]

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property
 

Money is not property as such it is an IOU for property, to be produced in the future, you are confusing Hard Money for Fiat.

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

Welcome to the evil that is banking.
The riddle wasn't solved with the gold smith so it was allowed to persist. RFB is the method of creating new money, and instead of deflating when called apon, the FED is the lender of last resort they "hold the Gold Fiat"

There is a problem with the FED system in that it needs to hold hard money to maintain a balance of payments ... or does it? well not after 1971, If, as has been illustrated before you can get the public to use an IOU as money, then you can manage the whole thing without having to produce any wealth, and yes you are correct fiat doesn't come to you as property, it comes to you as trust that everything will be backed by the government and managed by the CB.  

While it is in God we trust, that trust is actually in people who earn huge bonuses and think of themselves as gods, but they're just people with the legal power to abuse.

[johnyj]

Just out of curiosity, what makes you think this?

If the act of loaning happens at the point when you walk out the door with a wad of cash, then I would say that the bank does indeed need to own that much paper to make the loan.  But in reality, loans don't work that way.  Most loans never ever see physical paper.  They credit your account, you write a check, you deposit a check, you pay back the loan.  All done with numbers, no paper money at all.  Banks make loans first, and then seek reserves to cover afterwards.  

Ownership is always the most important character for any property. It does not matter the money is in digital form or paper form, their ownership won't change with their form, this is simple accounting

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

True, FRB added some complexity into the picture, but the basic principle still holds

Gold smith must physically deliver 1000 gold coin to the borrower, so he must have the ownership of those coin at the first place. If he don't have those coin, he can steal some other customer's saving, as long as other customer did not withdraw

This is FRB, but the maximum number of coin he can steal at any time will not exceed all the coins he have at hand, the same 1000 gold coin might be again and again saved into gold smith's bank, and he recorded many savings from different customer, but that is just a checkbook count, the gold coin number is always 1000 at any time, if one customer take out 1000 coin and disappear, then rest of the customer will lose all their savings

FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

[johnyj]

The key point here is the property rights: Money is a property, you can not lend a property to someone else if you do not have the ownership of this property
 

Money is not property as such it is an IOU for property, to be produced in the future, you are confusing Hard Money for Fiat.

Maybe property is not the right term, but what I mean is that money is something of value, as long as it has value, the ownership will become an important character

[Impaler]

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

[kjj]

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money

I'm sorry, but you are just plain wrong about this.  There is no such thing as "digital money reserve".

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

Money is not gold coins.  Modern fiat money is not a token representing something.  It really does get created out of thin air by your local bank down the street.

[johnyj]

Impaler I can't tell if you are trolling or serious?

While I have read many of your debates with a few die hard Austrians, you have not yet provided a coherent argument to back up your position.

Are there any threads on this forum you can point me to where you feel you have presented your argument in clear and understandable way?

While I don't seem to see eye to eye with some die hard libertarians in this collective, I like to think of myself as open, and to be honest,  I have to say the loosely defined "Austrian" economic argument, is by far the most logically convincing and a far cry from propaganda.

No I am not trolling, I have seen how johnyj posts and it's just not worth trying to debate him, I have had debates with people who were far more capable of providing a lively debate (that guy with the kitten holding a rifle comes to mind, though I forget his name).

Finding an economic theory 'Logical' is about the lowest possible bar, people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate.  And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

Indeed, if anything reached a complex level as today's banking system, the debate of the underlying fundamentals becomes more difficult, each party will have enough theories, books and professors to support their opinion. That's the reason economics in recent centuries are closely related to politics

In order to avoid pointless politics debate, I prefer to study the early days of economics and a money system under a gold standard, things were much easier to understand that way. Even better, on an island with only a few people, I think 4 people is enough to represent any macro economy concept (Money creator, merchant, producer and consumer)

Just like a computer, if you look at it from an operative system point of view, you get endless confusion and many politics debate, but if you look at it from early days of computer, it's just a wire, a bubble, a switch and a relay. Although there are many layers of complexity up to OS level, each step is simple and clear, no debate required

[johnyj]

I save some bank notes to my bank and there is some numbers added to my account, it changed from paper form into digital form, but the ownership of those money don't change, they are still mine. From banks point of view, they just did an exchange service for me, their paper money reserve increased but digital money reserve decreased by the same amount

Commercial banks can not loan out the money they don't have, it does not matter it is digital money or paper money

I'm sorry, but you are just plain wrong about this.  There is no such thing as "digital money reserve".

By the way, the goldsmith could, and did, loan 1000 gold coins without actually having them.  That is how "fractional reserve banking" was invented.

FRB has nothing to do with money creation, it is just a trick of stealing from customer, it does not creat more gold coins, gold coins only increase because of mining. Same, modern fiat money only increase because of central bank's operation

Money is not gold coins.  Modern fiat money is not a token representing something.  It really does get created out of thin air by your local bank down the street.

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

[Carlton Banks]

No I am not trolling,

The classic stealth-trolling comeback!

people have been producing internally consistent aka 'logical' theories for ages that crash and burn the moment they are tested empirically, Austrian economic suffers the same fate. 

All of recorded economic history was one long crash and burn? Not sure, but...

And their is a quite clear and active propaganda effort underway to spread these theories, even if its a grass-roots effort its still propaganda, and I'm frankly I'm convinced that conservatives in our banking, financial and business sectors actively promote Austrian economics because they would hugely benefit from hard money practices.

They do, seems that you don't get exposed to the output of these types, or that they do not meet your definition of "conservative"?


Similar sentiments as yours to jonnyj, I see you talking alot, but the substance is very thin.

[kjj]

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday

Nice strawman.  Good job ignoring banking regulations, fraud statutes, capitalization, etc.  A+

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

/sigh

You must've missed these before:

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

If you choose to define virtually everything used as money by real people as being not-money, then you are absolutely right.  The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

You may choose to do so, but that is just masturbation, you might learn about the system that you made up, but you won't learn about reality.

At first, I thought that you were interested in figuring out how the system that actually exists in the world today works.  Now it is clear that you just want an audience for your academic masturbation.  I'll leave you to it.

[lonelyminer (Peter Šurda)]

If so, anyone will raise 20 million dollar open a bank and immediately loan out 1 billion dollar to himself, spend them and declare bankrupt. You will see thousands of bank opening applications everyday

In order to spend them, they need to be accepted by the market as close substitutes to extant money. Most likely the transfers will not be accepted at all, because the clearing bank won't let them through, and they will be unspendable. This is in addition to the regulation issues mentioned by kjj.

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

The article is nonsense. That granting credit must have a corresponding debit entry in accounting in no way addresses the changes in the money supply. The debit record of a bank loan does not affect the money supply, but the credit entry does. It's kind of like saying that refrigerators or airconditioning can't really cool down anything because they just transport heat. It also confuses the velocity of circulation and the money supply, which are two different variables. Since the 2007- crisis, the money supply (in the US) has grown immensely, but the velocity has decreased, for example.

[johnyj]

Nice strawman.  Good job ignoring banking regulations, fraud statutes, capitalization, etc.  A+

Let's follow your reasoning that bank can just create a digital loan and give it to you without having any money: "If you walk into a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it."

You might get this impression with your side of double entry book keeping. For this single transaction the debit side on your current account will be increased by $1000, while the debit side on your loan account will have a -1000

But this is only what you see as a customer, what happened behind the scene is, the debit side of bank's liability account decreases by $1000 and the credit side on banks liability account increases by same amount. At the same time, the debit side on bank's current account should decrease by $1000 and the credit side of bank's current account should increase by $1000

In one word, your loan becomes bank's asset and your money becomes their liability, the loan is facilitated with current account. When their current account reaches zero, they won't be able to issue any more loans, that will be a liquidity problem

Actually loan is a bad example here since it involves several operations, a single debit action to your current account is better to understand how backoffice works in banks

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

I don't follow you, why all of those things are money? In my opinion, there is only one kind of money: Those created by central bank. This is simple enough. If you regard all these different concept as money, then you won't be able to spot what is really happening, since what you see is just an illusion

The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

Deposits in the FED is only a small part of the created money. For every 10 dollar that banks get from FED, they only need to keep 1 dollar at FED as reserve, they are free to loan out the rest 9 dollar

At first, I thought that you were interested in figuring out how the system that actually exists in the world today works.  Now it is clear that you just want an audience for your academic masturbation.  I'll leave you to it.

I can simply throw this statement back to you or anybody with a different opinion, so it is universally working thus useless in proving anything  

[johnyj]

Here is a deep analyze of this topic
http://www.ied.info/articles/an-honest-bank-is-so-simple-you-can-run-it/logical-reasons-proving-private-banks-do-not-create-money

The article is nonsense. That granting credit must have a corresponding debit entry in accounting in no way addresses the changes in the money supply. The debit record of a bank loan does not affect the money supply, but the credit entry does. It's kind of like saying that refrigerators or airconditioning can't really cool down anything because they just transport heat. It also confuses the velocity of circulation and the money supply, which are two different variables. Since the 2007- crisis, the money supply (in the US) has grown immensely, but the velocity has decreased, for example.

Have you read the article carefully? The author clearly distinguished the velocity of circulation and the money supply, saying that commercial banks can only affect velocity of circulation but not money supply. Since 2008, FED increased money supply a lot while commercial banks did not loan out enough money, causing velocity of circulation decreased, therefore no inflation, totally logical

[kjj]

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

I don't follow you, why all of those things are money? In my opinion, there is only one kind of money: Those created by central bank. This is simple enough. If you regard all these different concept as money, then you won't be able to spot what is really happening, since what you see is just an illusion

If you desire to study the stuff that does not circulate and that no one uses as money, I've already given my blessing.

I would strongly disagree though on which of us is interested in what really happens.  We all live in the illusion.  The illusion is how the world really works.  By restricting your view to only the part that doesn't matter*, you miss out on the show.

The central bank does indeed hold the monopoly on creating the stuff that you call money: deposits in the federal reserve system, the stuff that does not circulate, the stuff that no one uses as money.

Deposits in the FED is only a small part of the created money. For every 10 dollar that banks get from FED, they only need to keep 1 dollar at FED as reserve, they are free to loan out the rest 9 dollar

Sigh.  No, you have this backwards and inside-out.  The bank lends 10 dollars out of thin air, and then borrows one FED-dollar from the federal reserve.  That FED-dollar sits in an account at the federal reserve.

You keep mixing up cause and effect because you refuse to learn how the system actually works.  The "reserve" in "federal reserve" is a metaphor.  It isn't actually a stockpile of something that people dip into.  It is an accounting fiction that tracks what has already happened.

*  The exact degree to which central bank money is unimportant in reality can be seen here

[Impaler]

Similar sentiments as yours to jonnyj, I see you talking alot, but the substance is very thin.

That's cause I'm not putting out my substance on this thread.  I'm leaving it to kjj to beat his head against this one.  And the bleeding forehead his is developing, and the lack of cracks in the brick-wall that is johnyj prove to me at least that I picked the right debate to avoid.