The Real Differences Between Fractional Reserve in Fiat, Gold, and Bitcoin.

[mirelo]

Why, exactly, not? People here seem to be acting like spendable debt is money 'created.' If you make a specific debt spendable, how are you not creating debt any less or more than the central bank?

When I exchange my credit for your money, I am just transferring that credit to you while you transfer your money to me. I am not monetizing credit. When the central bank becomes the creditor of the government, it does that by creating money that did not exist before that moment. For that money not to steal its value from already existing money (which it eventually will), the same value must come from the liability just created.

Ok, ok. I concede that a central bank is the only person who has the power to create M0.

But what about fractional reserve banking? You agree that they're "creating money", right? But they're not creating any M0, correct? So what are they doing? They're taking normal debt, and making it spendable. Thats the extent of them creating money, they exchange money for an IOU, and say "go spend this IOU as if it were money", while keeping your actual money. So now 2 people have the money.

Commercial banks do not make previously existing debt spendable: they create new debt, just as the central bank does. The only difference is each one's debtor: private entities for commercial banks, the government for the central bank. The process is essentially the same, although historically commercial banking comes first.

[Etlase2]

Just what the heck. I don't even know what you're talking about. You seem to be under the impression that the easier something to get, the more likely it'll be used as money, when its really the opposite way around.

Riiight, that whole progression from gold to paper money apparently just went right over your head.

[theonewhowaskazu]

Why, exactly, not? People here seem to be acting like spendable debt is money 'created.' If you make a specific debt spendable, how are you not creating debt any less or more than the central bank?

When I exchange my credit for your money, I am just transferring that credit to you while you transfer your money to me. I am not monetizing credit. When the central bank becomes the creditor of the government, it does that by creating money that did not exist before that moment. For that money not to steal its value from already existing money (which it eventually will), the same value must come from the liability just created.

Ok, ok. I concede that a central bank is the only person who has the power to create M0.

But what about fractional reserve banking? You agree that they're "creating money", right? But they're not creating any M0, correct? So what are they doing? They're taking normal debt, and making it spendable. Thats the extent of them creating money, they exchange money for an IOU, and say "go spend this IOU as if it were money", while keeping your actual money. So now 2 people have the money.

Commercial banks do not make previously existing debt spendable: they create new debt, just as the central bank does

Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM). Changing old debt into MZM has the same real effect as creating new debt which is MZM.

. The only difference is each one's debtor: private entities for commercial banks, the government for the central bank.

The difference that matters, is the size of each credit line. Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).

[mirelo]

How are altcoins the perfect proxy? They float against BTC and therefore aren't a good proxy at all. If anything, the 'perfect' proxy would be coloured coins.

Because they completely invalidate the notion that bitcoin is some special butterfly with reserved status like gold. I guess a more accurate way to say it is that the cryptocurrency market aggregate as a whole is a proxy for money. If bitcoin's price is rising it is unappealing to borrow, so some will borrow in LTC or whatever else, reducing the necessity for FRB. It is far more agreeable to borrow real LTC than proxy-BTC, don't you think? Homerism aside, of course.

What exactly do you mean by "reserved status"?

Monetary proxies are used instead of money, not in parallel with it. The use of money and its proxies in parallel constitutes fraud.

[theonewhowaskazu]

Just what the heck. I don't even know what you're talking about. You seem to be under the impression that the easier something to get, the more likely it'll be used as money, when its really the opposite way around.

Riiight, that whole progression from gold to paper money apparently just went right over your head.

People don't use paper money in place of gold because paper money is easier to get. They use it in place of gold because they owe paper money, not gold.

[Etlase2]

People don't use paper money in place of gold because paper money is easier to get. They use it in place of gold because they owe paper money, not gold.

And why do they owe paper money and not gold?

[mirelo]

Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM).

Debt becomes money when banks create new money in exchange for new debt. The process of monetizing debt is first and foremost a process of money creation.

The difference that matters, is the size of each credit line.

What really matters is whether new money gets its value from new debt.

Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).

It is borrowers, not loaners that have a credit line, and the credit line of the government is certainly not infinite (as the debt-ceiling soup opera shows). Additionally, for each dollar of reserve money commercial banks can create nine more, so their impact on the money supply is far larger than that of the central bank. The current situation, in which reserves sit at the central bank earning interest is a complete aberration (it is the system starting to eat its own tail).

[theonewhowaskazu]

Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM).

Debt becomes money when banks create new money in exchange for new debt. The process of monetizing debt is first and foremost a process of money creation.

Except thats not the only way in which debt becomes money.

~.~

Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created". No Federal Reserve involvement was needed. When one person defaults, the trickle-down effect works as if that money was destroyed TWICE, rather than just once.

The problem comes when that money becomes spendable, rather than just an asset. If you deposit into a CD/Bond, you know perfectly well you don't have that money, because you can't spend it. Thus, you might lose your investment, because its just that, an investment. When somebody accepts debt as payment, which is pretty much whats going on behind all MZM, is when the doubling effect actually matters. So, the money supply is increased only when newly-issued debt is treated as transferable payment. The act of issuing the debt didn't create the money, the act of making it spendable leveraged it up.

The difference that matters, is the size of each credit line.

What really matters is whether new money gets its value from new debt.

Exactly. A borrower with a fixed credit line can't ponzi forever, because eventually new debtors will say "your credit line has been consumed, now you have to start paying money back and can't borrow any more."

Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).

It is borrowers, not loaners that have a credit line, and the credit line of the government is certainly not infinite (as the debt-ceiling soup opera shows). Additionally, for each dollar of reserve money commercial banks can create nine more, so their impact on the money supply is far larger than that of the central bank. The current situation, in which reserves sit at the central bank earning interest is a complete aberration (it is the system starting to eat its own tail).

Its borrowers (or issuers of their own credit) that have credit lines. The currency we use are Federal Reserve Notes, which are effectively unsecured, 0% interest debt. As long as we continue to use Federal Reserve Notes as our currency despite inflation, then we are giving the Federal Reserve an infinite line of credit. The Federal Reserve uses this infinite line of credit to provide infinite demand for US Debt, which in turn provides the government with an infinite line of credit, in return for an ever-increasing share of their own debt to spend into the economy as they please.

The debt ceiling isn't a limit on the USG's credit line, but an artificial construct created to make it look like the USG can be trusted with an infinite credit line because they won't actually run it up infinitely. It is entirely self-imposed. The fact that the existence of the debt ceiling actually causes creditors to further DOUBT the united states, is just so ass-backward its not even funny.

[mirelo]

Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM).

Debt becomes money when banks create new money in exchange for new debt. The process of monetizing debt is first and foremost a process of money creation.

Except thats not the only way in which debt becomes money.

Then show me another way.

~.~

Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".

Why the quotes?

No Federal Reserve involvement was needed.

I would like to know from where you got the idea that fractional-reserve banking cannot happen without the involvement of a central bank. As I said several times, fractional reserve banking originated before central banking, which should be enough to prove the opposite.

When one person defaults, the trickle-down effect works as if that money was destroyed TWICE, rather than just once.

We have an agreement.

The problem comes when that money becomes spendable, rather than just an asset.

If money were "just an asset," then it would no longer be money, hence indeed also not "spendable."

If you deposit into a CD/Bond, you know perfectly well you don't have that money, because you can't spend it. Thus, you might lose your investment, because its just that, an investment. When somebody accepts debt as payment, which is pretty much whats going on behind all MZM, is when the doubling effect actually matters. So, the money supply is increased only when newly-issued debt is treated as transferable payment. The act of issuing the debt didn't create the money, the act of making it spendable leveraged it up.

Debt only becomes money when the promise to repay a loan gives the borrowed money its value. Exchanging already existing debt for already existing money could not possibly turn money into debt.

The difference that matters, is the size of each credit line.

What really matters is whether new money gets its value from new debt.

Exactly. A borrower with a fixed credit line can't ponzi forever, because eventually new debtors will say "your credit line has been consumed, now you have to start paying money back and can't borrow any more."

Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).

It is borrowers, not loaners that have a credit line, and the credit line of the government is certainly not infinite (as the debt-ceiling soup opera shows). Additionally, for each dollar of reserve money commercial banks can create nine more, so their impact on the money supply is far larger than that of the central bank. The current situation, in which reserves sit at the central bank earning interest is a complete aberration (it is the system starting to eat its own tail).

Its borrowers (or issuers of their own credit) that have credit lines. The currency we use are Federal Reserve Notes, which are effectively unsecured, 0% interest debt. As long as we continue to use Federal Reserve Notes as our currency despite inflation, then we are giving the Federal Reserve an infinite line of credit.

It is the central bank that gives us (via the government) a line of credit, not conversely. Likewise, it is your bank that gives you a line of credit, not conversely. What we gave the central bank was the power to create money valued solely by our promise to repay that money after borrowing it from the same central bank. Only then, having received that power from us, can the central bank in turn give us a "line of credit."

The Federal Reserve uses this infinite line of credit to provide infinite demand for US Debt, which in turn provides the government with an infinite line of credit, in return for an ever-increasing share of their own debt to spend into the economy as they please.

How could demand be provided?

Nobody (including the government) gets indebted in exchange for the resulting debt (whatever that possibly means): they get indebted in exchange for money. It is the central bank that ends up holding government bonds, not the government, which in turn gets money to spend.

The debt ceiling isn't a limit on the USG's credit line, but an artificial construct created to make it look like the USG can be trusted with an infinite credit line because they won't actually run it up infinitely. It is entirely self-imposed. The fact that the existence of the debt ceiling actually causes creditors to further DOUBT the united states, is just so ass-backward its not even funny.

The only reason to self-impose a borrowing limit is the awareness that no credit line is "infinite."

[theonewhowaskazu]

Sure, only not all debt is 'created money'; only spendable debt is (otherwise known as MZM).

Debt becomes money when banks create new money in exchange for new debt. The process of monetizing debt is first and foremost a process of money creation.

Except thats not the only way in which debt becomes money.

Then show me another way.

The way I just explained in the next bit. :\

~.~

Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".

Why the quotes?

Because its not real money thats being created. Its an IOU, that people think is money. The moment that IOU touches money, it'll explode and disappear. Real M0 doesn't do that.

No Federal Reserve involvement was needed.

I would like to know from where you got the idea that fractional-reserve banking cannot happen without the involvement of a central bank. As I said several times, fractional reserve banking originated before central banking, which should be enough to prove the opposite.

Uh, actually I said the exact opposite, that NO central bank involvement was needed. What exactly are you saying? Fractional Reserve banking is completely independent of a central bank. Thus, a free-floating unbacked currency has 0 to do with fractional reserve banking.

When one person defaults, the trickle-down effect works as if that money was destroyed TWICE, rather than just once.

We have an agreement.

The problem comes when that money becomes spendable, rather than just an asset.

If money were "just an asset," then it would no longer be money, hence indeed also not "spendable."

I meant to say debt, not money. Sorry.

If you deposit into a CD/Bond, you know perfectly well you don't have that money, because you can't spend it. Thus, you might lose your investment, because its just that, an investment. When somebody accepts debt as payment, which is pretty much whats going on behind all MZM, is when the doubling effect actually matters. So, the money supply is increased only when newly-issued debt is treated as transferable payment. The act of issuing the debt didn't create the money, the act of making it spendable leveraged it up.

Debt only becomes money when the promise to repay a loan gives the borrowed money its value. Exchanging already existing debt for already existing money could not possibly turn money into debt.

No. I can lend you gold, and still turn your debt into money if somebody will accept your debt as payment. The borrowed money wasn't given its value by the fact that you borrowed it, no, it was valuable because it was gold. So what the heck.

The difference that matters, is the size of each credit line.

What really matters is whether new money gets its value from new debt.

Exactly. A borrower with a fixed credit line can't ponzi forever, because eventually new debtors will say "your credit line has been consumed, now you have to start paying money back and can't borrow any more."

Central banks can issue notes, so their credit line is basically infinite. Commercial banks have a finite credit line (unless they're being lent to by a central bank).

It is borrowers, not loaners that have a credit line, and the credit line of the government is certainly not infinite (as the debt-ceiling soup opera shows). Additionally, for each dollar of reserve money commercial banks can create nine more, so their impact on the money supply is far larger than that of the central bank. The current situation, in which reserves sit at the central bank earning interest is a complete aberration (it is the system starting to eat its own tail).

Its borrowers (or issuers of their own credit) that have credit lines. The currency we use are Federal Reserve Notes, which are effectively unsecured, 0% interest debt. As long as we continue to use Federal Reserve Notes as our currency despite inflation, then we are giving the Federal Reserve an infinite line of credit.

It is the central bank that gives us (via the government) a line of credit, not conversely. Likewise, it is your bank that gives you a line of credit, not conversely. What we gave the central bank was the power to create money valued solely by our promise to repay that money after borrowing it from the same central bank. Only then, having received that power from us, can the central bank in turn give us a "line of credit."

The Federal Reserve uses this infinite line of credit to provide infinite demand for US Debt, which in turn provides the government with an infinite line of credit, in return for an ever-increasing share of their own debt to spend into the economy as they please.

How could demand be provided?

Nobody (including the government) gets indebted in exchange for the resulting debt (whatever that possibly means): they get indebted in exchange for money. It is the central bank that ends up holding government bonds, not the government, which in turn gets money to spend.

Except people DO indebt themselves in exchange for debt. We do it all the time. The currency we use is Federal Reserve Notes, which is a debt of the Federal Reserve. The US Government borrows these Federal Reserve Notes from the Federal Reserve. That's debt. They indebted themselves, in exchange for the debt, and their debt is only repayable payable in the resulting debt.

The debt ceiling isn't a limit on the USG's credit line, but an artificial construct created to make it look like the USG can be trusted with an infinite credit line because they won't actually run it up infinitely. It is entirely self-imposed. The fact that the existence of the debt ceiling actually causes creditors to further DOUBT the united states, is just so ass-backward its not even funny.

The only reason to self-impose a borrowing limit is the awareness that no credit line is "infinite."

The only reason to self-impose a borrowing limit is the awareness that people won't continue to lend to you once they realize that your true credit line, under the current system, is indeed infinite.

[mirelo]

Look, fractional reserve creates money because you deposit money into a money market fund, and YOU supposedly have that money, then someone borrows some of that money, and spends it, and the person they gave it to deposits that money into a money market fund, and now THEY also have the same money. Thus, money was "created".

Why the quotes?

Because its not real money thats being created. Its an IOU, that people think is money. The moment that IOU touches money, it'll explode and disappear. Real M0 doesn't do that.

Of course it is real money, otherwise people would not be able to buy anything with it, nor could it cause inflation, housing bubbles, etc. Despite being money mistaken by debt, it is as real as that mistake.

No Federal Reserve involvement was needed.

I would like to know from where you got the idea that fractional-reserve banking cannot happen without the involvement of a central bank. As I said several times, fractional reserve banking originated before central banking, which should be enough to prove the opposite.

Uh, actually I said the exact opposite, that NO central bank involvement was needed. What exactly are you saying? Fractional Reserve banking is completely independent of a central bank. Thus, a free-floating unbacked currency has 0 to do with fractional reserve banking.

That is also what I have been saying. Hence my finding it strange your telling me so as if I had been saying the opposite.

I can lend you gold, and still turn your debt into money if somebody will accept your debt as payment.

By doing that, you are just transferring my debt to someone else in exchange for their money: debt remains debt, and money remains money. You are not monetizing my debt.

The borrowed money wasn't given its value by the fact that you borrowed it, no, it was valuable because it was gold. So what the heck.

Neither the money for which you exchanged my debt got its value from that same debt, which is the reason why this is not debt monetization.

Except people DO indebt themselves in exchange for debt. We do it all the time. The currency we use is Federal Reserve Notes, which is a debt of the Federal Reserve. The US Government borrows these Federal Reserve Notes from the Federal Reserve. That's debt. They indebted themselves, in exchange for the debt, and their debt is only repayable payable in the resulting debt.

Federal Reserve notes are not "a debt of the Federal Reserve": the central bank is a creditor, not a debtor. Additionally, Federal Reserve notes are money valuable as debt, not merely debt.

The central bank issues money by buying debt instruments from the government. Before buying those instruments, there are neither money nor debt. Once bought, the same debt instruments become debt, which then gives value to the money buying them. The operation creates both money and debt.

The only reason to self-impose a borrowing limit is the awareness that people won't continue to lend to you once they realize that your true credit line, under the current system, is indeed infinite.

Once again, it is the borrower who has a "credit line," not the loaner: your credit line is always limited by how much can people lend you. Therefore, it is never "infinite."