The Myth of Money as the Mere Concept of an IOU

[johnyj]

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If all the people go to bank and withdraw their money, there will be a bank run. Just like FRB, FDIC is another level of insurance to calm down depositors. If all the banks facing withdraw pressure at the same time, even FDIC can not payout that much money. FDIC only have $100 billion at hand to insure about $10 trillion deposits

But what I argued was that IOU "all intents and purposes it's just as good as real money". Yes, there's a tiny risk of catastrophic failure if the bank fails and the deposit insurance fails, but people accept that risk in exchange for convenience and security of their money, compared to stashing them under their mattresses. People not are misinformed about what happens to their money when they are making a deposit, so I'm really having trouble seeing the issue here.

I'd rather believe it is unawareness of how bank operates instead of "accepting the risk in exchange for convenience". 1% of insurance capital means only 1% of depositors are insured, it only works psychologically. Of course the banks can always print more money to reduce the risk, but then the question become: Why exchange your work for some paper that can be printed at will (to save the banks)? When people start to understand how fiat money works and lose their trust in fiat money, the risk of a systematic failure is very high, none of the insurance can cover

Suppose that fiat money start to lose its purchase power 20% per year, and people start to withdraw all their savings to purchase value holding assets like gold and bitcoin, what can FDIC help?

[1715514433]

1715514433

[mirelo]

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If all the people go to bank and withdraw their money, there will be a bank run. Just like FRB, FDIC is another level of insurance to calm down depositors. If all the banks facing withdraw pressure at the same time, even FDIC can not payout that much money. FDIC only have $100 billion at hand to insure about $10 trillion deposits

But what I argued was that IOU "all intents and purposes it's just as good as real money". Yes, there's a tiny risk of catastrophic failure if the bank fails and the deposit insurance fails, but people accept that risk in exchange for convenience and security of their money, compared to stashing them under their mattresses. People not are misinformed about what happens to their money when they are making a deposit, so I'm really having trouble seeing the issue here.

Also,

For example, when a commercial bank loans money deposited with it, this bank does not withdraw that money from the borrowed account. So the loaned money must belong to both its borrower and its loaner

No, that's not true. In this case, the bank has a IOU to the depositor, and the lender has a IOU to the bank. The money belongs to one person only: the lender. The bank has a fraction of the deposits in cash for customer withdraws, hence why the bank can also fulfill the depositor's withdraw request at any time (to an extent).

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If you cannot see anything wrong with losing ownership of your money, then why don't you give it all to me?

Because:

• you don't have deposit insurance
• you can't give me my money at moment's notice
• i don't know or trust you
• you are not bound by any government regulation or audits

Why would I need all that, if I am asking you not just to trust your money to me, but rather to give its ownership to me? Do you know the meaning of the word "ownership"? If you don't: it means your being the owner of something. I am asking you to give me your money for good since you told me you wouldn't mind losing its ownership.

[mirelo]

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If all the people go to bank and withdraw their money, there will be a bank run. Just like FRB, FDIC is another level of insurance to calm down depositors. If all the banks facing withdraw pressure at the same time, even FDIC can not payout that much money. FDIC only have $100 billion at hand to insure about $10 trillion deposits

But what I argued was that IOU "all intents and purposes it's just as good as real money". Yes, there's a tiny risk of catastrophic failure if the bank fails and the deposit insurance fails, but people accept that risk in exchange for convenience and security of their money, compared to stashing them under their mattresses. People not are misinformed about what happens to their money when they are making a deposit, so I'm really having trouble seeing the issue here.

I'd rather believe it is unawareness of how bank operates instead of "accepting the risk in exchange for convenience". 1% of insurance capital means only 1% of depositors are insured, it only works psychologically. Of course the banks can always print more money to reduce the risk, but then the question become: Why exchange your work for some paper that can be printed at will (to save the banks)? When people start to understand how fiat money works and lose their trust in fiat money, the risk of a systematic failure is very high, none of the insurance can cover

Suppose that fiat money start to lose its purchase power 20% per year, and people start to withdraw all their savings to purchase value holding assets like gold and bitcoin, what can FDIC help?

Banks being too big to fail is one step in the direction of their being too big to give you money back, but even if you do get it back (less taxes), don't worry as it will not have all the buying power it had when you deposited it: no matter what, you lose ownership of at least part of your money (less taxes).

[benjamindees]

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If you cannot see anything wrong with losing ownership of your money, then why don't you give it all to me?

Because:

• you don't have deposit insurance
• you can't give me my money at moment's notice
• i don't know or trust you
• you are not bound by any government regulation or audits

Bitcointalk:  the forum of a revolutionary new cryptocurrency, where the moderators don't understand the downsides of fiat and fractional reserve, and argue that government regulation is a good thing.

I could've sworn this place was populated by relatively intelligent people at one point, but that memory is getting pretty fuzzy.

[mirelo]

What exactly is wrong with losing ownership of the money? Deposit insurance covers in case of a bank failure. It's technically a IOU, but the possibility of not being able to withdraw their is slim. What you're arguing over is semantics. Yes, the money deposited in a bank is an IOU, but for all intents and purposes it's just as good as real money.

If you cannot see anything wrong with losing ownership of your money, then why don't you give it all to me?

Because:

• you don't have deposit insurance
• you can't give me my money at moment's notice
• i don't know or trust you
• you are not bound by any government regulation or audits

Bitcointalk:  the forum of a revolutionary new cryptocurrency, where the moderators don't understand the downsides of fiat and fractional reserve, and argue that government regulation is a good thing.

I could've sworn this place was populated by relatively intelligent people at one point, but that memory is getting pretty fuzzy.

Government regulation is a good thing: no cartel survives much without it.

[grue]

I'd rather believe it is unawareness of how bank operates instead of "accepting the risk in exchange for convenience". 1% of insurance capital means only 1% of depositors are insured, it only works psychologically. Of course the banks can always print more money to reduce the risk, but then the question become: Why exchange your work for some paper that can be printed at will (to save the banks)? When people start to understand how fiat money works and lose their trust in fiat money, the risk of a systematic failure is very high, none of the insurance can cover

Suppose that fiat money start to lose its purchase power 20% per year, and people start to withdraw all their savings to purchase value holding assets like gold and bitcoin, what can FDIC help?

Really? So you believe that most people are unaware that banks operate on a fractional reserve system? I would argue that anyone coming out of highschool would know:

• banks lend/invest depositor's money
• as corollary, banks do not have enough "cash" on hand to cover every depositor's deposits (aka fractional reserve)
• in the case of bank failure, part or all their deposits may be lost

Bitcointalk:  the forum of a revolutionary new cryptocurrency, where the moderators don't understand the downsides of fiat and fractional reserve, and argue that government regulation is a good thing.

I could've sworn this place was populated by relatively intelligent people at one point, but that memory is getting pretty fuzzy.

Ad hominem
For the record, I am aware of the downsides of fiat currency and fractional reserve banking. Also, I never argued that "government regulation is a good thing". That is a strawman.

[Adrian-x]

Really? So you believe that most people are unaware that banks operate on a fractional reserve system? I would argue that anyone coming out of highschool would know:

• banks lend/invest depositor's money*

• as corollary, banks do not have enough "cash" on hand to cover every depositor's deposits (aka fractional reserve)**

• in the case of bank failure, part or all their deposits may be lost***

You over estimate 99% of high-school graduates. Even studying business economics I am lumped in with the 99%
* Agreed this is understood most believed banks "lend/invest depositor's money"  but @ 1:1, FRB is not understood.

** "Not having enough "cash" on hand" didn't defalt to FRB, it is understood that not all money is in cash (notes and coin) and it is never all stored at the bank.

*** Not so your deposit is understood to be insured by the government.

My money in the Bank is understood to be "my money"

When the Bank uses FRB the problem is understood if you imagine money as a commodity everyone uses, like wheat, it is a problem when the economy shrinks and you draw on your reserves only to find they are imaginary.  Now using FRB and dealing in the opposite of a commodity I.e. an IOU for a commodity or time value equivalent, just results in printing more IOU's. The net effect is way worse than a run on the Bank. It is immoral and results in the 99% partaking in voluntary slavery.

[johnyj]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

[mirelo]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

This is not quite so: the reason all this new money has not yet hit the market is because the FED is paying banks interest for them to park their new reserves with itself instead of loaning them to (purely) private entities. For this to work, the FED is paying those banks an interest rate above the market, which it can only afford as long as interest rates remain at record-low levels. When interest rates finally rise, it will no longer be able to pay those above-market rates on bank reserves: banks will again prefer to loan those reserves to (purely) private entities. Then, all that money will finally do what many analysts naively regret it not yet did - hit the market.

[johnyj]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

This is not quite so: the reason all this new money has not yet hit the market is because the FED is paying banks interest for them to park their new reserves with itself instead of loaning them to (purely) private entities. For this to work, the FED is paying those banks an interest rate above the market, which it can only afford as long as interest rates remain at record-low levels. When interest rates finally rise, it will no longer be able to pay those above-market rates on bank reserves: banks will again prefer to loan those reserves to (purely) private entities. Then, all that money will finally do what many analysts naively regret it not yet did - hit the market.

True, I read somewhere that more than 81.5% of those QE money are sitting in the bank reserve and collect interest from FED. But as long as FED keep the interest rate extremely low for a foreseeable future, those money will not be released. But the threat comes from those highly profitable businesses like APPLE, they have already stashed huge amount of cash reserve. And it is possible there are other savings that is hidden during these years

[mirelo]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

This is not quite so: the reason all this new money has not yet hit the market is because the FED is paying banks interest for them to park their new reserves with itself instead of loaning them to (purely) private entities. For this to work, the FED is paying those banks an interest rate above the market, which it can only afford as long as interest rates remain at record-low levels. When interest rates finally rise, it will no longer be able to pay those above-market rates on bank reserves: banks will again prefer to loan those reserves to (purely) private entities. Then, all that money will finally do what many analysts naively regret it not yet did - hit the market.

True, I read somewhere that more than 81.5% of those QE money are sitting in the bank reserve and collect interest from FED. But as long as FED keep the interest rate extremely low for a foreseeable future, those money will not be released. But the threat comes from those highly profitable businesses like APPLE, they have already stashed huge amount of cash reserve. And it is possible there are other savings that is hidden during these years

Apple is hoarding cash on the order of magnitude of the hundreds of billions while the banks' reserves are in the order of magnitude of the trillions. Additionally, when banks finally start reusing those reserves in fractional-reserve loaning, the "multiplier effect" will turn trillions into tens of trillions (assuming an already old-fashioned reserve requirement of 1/10).

[johnyj]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

This is not quite so: the reason all this new money has not yet hit the market is because the FED is paying banks interest for them to park their new reserves with itself instead of loaning them to (purely) private entities. For this to work, the FED is paying those banks an interest rate above the market, which it can only afford as long as interest rates remain at record-low levels. When interest rates finally rise, it will no longer be able to pay those above-market rates on bank reserves: banks will again prefer to loan those reserves to (purely) private entities. Then, all that money will finally do what many analysts naively regret it not yet did - hit the market.

True, I read somewhere that more than 81.5% of those QE money are sitting in the bank reserve and collect interest from FED. But as long as FED keep the interest rate extremely low for a foreseeable future, those money will not be released. But the threat comes from those highly profitable businesses like APPLE, they have already stashed huge amount of cash reserve. And it is possible there are other savings that is hidden during these years

Apple is hoarding cash on the order of magnitude of the hundreds of billions while the banks' reserves are in the order of magnitude of the trillions. Additionally, when banks finally start reusing those reserves in fractional-reserve loaning, the "multiplier effect" will turn trillions into tens of trillions (assuming an already old-fashioned reserve requirement of 1/10).

As long as FED is paying interest on those reserves, the multiplier effect is negated, there will not be inflation, but there will be high unemployment

[mirelo]

FED is playing with fire now, they have printed so much money and most of these money were hoarded (in bank accounts) when people were facing uncertain future

But when economy recovered and the future perspective improved, people will spend those stashed money and accelerate inflation. Then the only thing FED can do is to tighten the money supply by selling assets at hand. But this operation will reduce the liquidity for banks,  so people will find out that they can not spend their saved money since banks have ran out of money

In a loan driven economy, this is not a problem, since most of the spending coming from the loan, when FED tightens, they reduce the spending by reducing the available loan. But after financial crisis, people are returning to "Save first, spend later" type of consumption style

This is not quite so: the reason all this new money has not yet hit the market is because the FED is paying banks interest for them to park their new reserves with itself instead of loaning them to (purely) private entities. For this to work, the FED is paying those banks an interest rate above the market, which it can only afford as long as interest rates remain at record-low levels. When interest rates finally rise, it will no longer be able to pay those above-market rates on bank reserves: banks will again prefer to loan those reserves to (purely) private entities. Then, all that money will finally do what many analysts naively regret it not yet did - hit the market.

True, I read somewhere that more than 81.5% of those QE money are sitting in the bank reserve and collect interest from FED. But as long as FED keep the interest rate extremely low for a foreseeable future, those money will not be released. But the threat comes from those highly profitable businesses like APPLE, they have already stashed huge amount of cash reserve. And it is possible there are other savings that is hidden during these years

Apple is hoarding cash on the order of magnitude of the hundreds of billions while the banks' reserves are in the order of magnitude of the trillions. Additionally, when banks finally start reusing those reserves in fractional-reserve loaning, the "multiplier effect" will turn trillions into tens of trillions (assuming an already old-fashioned reserve requirement of 1/10).

As long as FED is paying interest on those reserves, the multiplier effect is negated, there will not be inflation, but there will be high unemployment

You said yourself that 81.5% of QE money are sitting on bank reserves at the FED. What about the other 18.5%? Remember: it is 18.5% of some trillions (more money than the amount Apple is hoarding, which you were so worried about). There is inflation already: the government cannot stop changing the way of calculating its index in an increasingly desperate attempt to hide it. What the current situation "negates" is neither the "multiplier effect" itself nor hence whichever inflation, but rather just hyperinflation.

[murraypaul]

I'd rather believe it is unawareness of how bank operates instead of "accepting the risk in exchange for convenience". 1% of insurance capital means only 1% of depositors are insured

No it doesn't.
You have completely misunderstood what the words capital and insurance mean.

, it only works psychologically. Of course the banks can always print more money to reduce the risk

No they can't.
Only the central bank can 'create' money.
Normal retail banks cannot just print more money.

but then the question become: Why exchange your work for some paper that can be printed at will (to save the banks)? When people start to understand how fiat money works and lose their trust in fiat money, the risk of a systematic failure is very high, none of the insurance can cover

And yet, money has survived in its current form for hundreds of years.
People know how money works.
It works, for the most part, just fine.

[mirelo]

Only the central bank can 'create' money.
Normal retail banks cannot just print more money.

Commercial banks create money just as the central bank does. The differences are:

1. The central bank loans money to the government while commercial banks loan it to private entities.

2. Commercial banks have reserve requirements, which the central bank does not.

Despite those differences, the two processes are essentially the same: historically, the first originates from the second.

but then the question become: Why exchange your work for some paper that can be printed at will (to save the banks)? When people start to understand how fiat money works and lose their trust in fiat money, the risk of a systematic failure is very high, none of the insurance can cover

And yet, money has survived in its current form for hundreds of years.

The current monetary system (with money not backed by any gold) now has 42 years.

People know how money works.

Most of them do not even bother to think about it, which is the stage just before not having a clue about it.

It works, for the most part, just fine.

It does for the banks, not for the rest of us - and soon it will not even do for the banks.

[johnyj]

You said yourself that 81.5% of QE money are sitting on bank reserves at the FED. What about the other 18.5%? Remember: it is 18.5% of some trillions (more money than the amount Apple is hoarding, which you were so worried about). There is inflation already: the government cannot stop changing the way of calculating its index in an increasingly desperate attempt to hide it. What the current situation "negates" is neither the "multiplier effect" itself nor hence whichever inflation, but rather just hyperinflation.

Yes the government part is more difficult to deal with, as I understand, they will keep raising the debt ceiling no matter what. But eventually they will be forced into default, or central banks write off their bond holdings (more likely)

http://www.washingtonsblog.com/2013/06/81-5-of-money-created-through-quantitative-easing-is-sitting-there-gathering-dust-instead-of-helping-the-economy.html

[mirelo]

You said yourself that 81.5% of QE money are sitting on bank reserves at the FED. What about the other 18.5%? Remember: it is 18.5% of some trillions (more money than the amount Apple is hoarding, which you were so worried about). There is inflation already: the government cannot stop changing the way of calculating its index in an increasingly desperate attempt to hide it. What the current situation "negates" is neither the "multiplier effect" itself nor hence whichever inflation, but rather just hyperinflation.

Yes the government part is more difficult to deal with, as I understand, they will keep raising the debt ceiling no matter what. But eventually they will be forced into default, or central banks write off their bond holdings (more likely)

http://www.washingtonsblog.com/2013/06/81-5-of-money-created-through-quantitative-easing-is-sitting-there-gathering-dust-instead-of-helping-the-economy.html

It is amazing to see how people still assume this money finding its way into the market would "help the economy": what a huge disappointment is "in reserve" for them.

[murraypaul]

Only the central bank can 'create' money.
Normal retail banks cannot just print more money.

Commercial banks create money just as the central bank does.

No, only the central bank can 'create' money, that is increase the total amount of X currency in existence.

[murraypaul]

It works, for the most part, just fine.

It does for the banks, not for the rest of us - and soon it will not even do for the banks.

The purpose of money is as a general purpose IOU or instrument of barter, which is trusted enough that people accept it.
It works fine for that.
People get paid, they pay rent, they buy gas and groceries.
That is what money is for, in everyday use.

[mirelo]

Only the central bank can 'create' money.
Normal retail banks cannot just print more money.

Commercial banks create money just as the central bank does.

No, only the central bank can 'create' money, that is increase the total amount of X currency in existence.

So when commercial banks make a reserve of $1,000.00 become $10,000.00 by loaning it, they are not creating money?