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Austrian & Keynesian Theories Vs. Mathematical Facts

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  • Tue, Apr 20, 2010 - 07:32am

    #71
    Peak Prosperity Admin

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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

Despite the rhetoric that banks make up money to lend, that is not accurate.

Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they

do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Modern Money Mechanics page Bank Deposits How then Expand or Contract. http://www.rayservers.com/images/ModernMoneyMechanics.pdf

Seems to me the Federal Reserve agrees with me and not you.  And it’s impossible to create new money by loaning the depositors money.  You can create more debt by loaning deposits….If 1 dollar gets loaned 15 times there would be 15 dollars of debt, but only 1 dollar in circulation.  It’s clear if they were doing that there would be no new creation of money.

Have you ever ever heard of a bank drawing down on someone’s checking account to loan it out to someone else and make it unavailable for the account holder to spend?  It doesn’t happen.

 

People say on these forums alot that “banks create money”, while somewhat true due to FRB, it is far too simplistic a statement.

Banks are the only creators of money today.  It’s not simplistic, it’s just a plain and simple fact. 

 

It also can circulate many many times, be relent over and over, but does not get extinguished when paid back to the bank.

“Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid” John B. Henderson.  Senior Specialist in macroeconomics – Congressional research Service.

When someone pays back the principle part of a loan that brings that loan account back to zero destroying that money.

Here is a two part video series on exactly how all money is created and destroyed in this system.

http://www.youtube.com/watch?v=FxiTbrlGJGs part 1

http://www.youtube.com/watch?v=h22UjKwI7rI part 2

 

I also believe you can have a FRB system and still have it work.

Where is the money going to come from to pay all the interest when all money is created as an interest bearing loan in a fractional reserve lending system?

Just if you have too many people try to withdraw their money, beyond what the reserves that bank is holding, you have to say sorry, not at this time, you will have to wait until loans are repayed or more money is deposited.

Can you please explain to me how a number backs up a number?  All their reserves consist of is more numbers.  Where is this new money going to be created to increase deposits?

Nothing inherrently wrong with FRB

Are you trying to tell me that there is nothing wrong with creating money as a promise to pay that the creator of the money never has to pay on and then by simple mathematical law eventually in time they will get to transfer all of the property to the people over to the banking system when they never loaned anything in the first place? 

This is like saying I don’t care that my neighbor is stealing from everyone in town, because he is allowing me to stay in my house for now, all I have to do is keep going deeper and deeper in debt to him all the time. 

Where do you come up with the crazy idea that its ok to steal?

 

Just one more question

They must take in a deposit and have it on their balance sheet before they can lend it out.

Where is this original deposit going to come from since all money is created as an interest bearing loan?  There is no money out there until someone goes into debt first.

 

Have you done any real independent study on how banking really functions or are you just repeating what you’ve heard from people who have not one clue on how the system really works?

  • Tue, Apr 20, 2010 - 07:47am

    #72
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

how do you explain bank runs?

Basically, they can’t really happen anymore because you cannot force the bank to pay on its obligations because our corruput court system will not make the banks pay on their obligations.

 

Dale and Soderberg vs Federal Reserve Bank of Minneapolis. Modern Money Secrets Page 161 – 172.

You cannot force the bank to pay in Dollars because when Byron Dale took the banking system to court to pay the court ruled against him.  Why?

The court granted the federal reserve’s motion to dismiss because Byron had failed to state a claim for which relief could be granted.

Hence, the banks do not have to pay, so even if you did try and do a run on the banks they have nothing to pay you with other than another promise to pay, and you cannot force them to pay because they don’t have anything to pay you with.

 

It’s all a big giant fraud.

  • Tue, Apr 20, 2010 - 08:15am

    #73
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

You are clearly being paid for your labor.

If all these people are so called being “paid” then why does the debt constantly grow?

What exactly are they being paid with?

  • Tue, Apr 20, 2010 - 08:24am

    #74
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

Carl,

Shortage of reserves?

Truth be known, banks have no reserves unless you can explain to me how a number can backup a number?

Banks got out of having any court enforceable obligations they had to perform on a long time ago.

  • Tue, Apr 20, 2010 - 11:08am

    #75
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

Thomas,

Fractional banking is the practice in which banks keep only a portion their deposits (as cash and ghighly liquid assets) and llend out the remainder.  (from wikipedia)

Question:      Do banks lend out their deposits?

 

Bank runs  happen because banks mismatch their assets (loans which are longer in duration) against their liabilities (demand deposits which are due upon withrawal).   

The legal framework un deposit accounts allows the banks to replace  cash as physical payments.

I will post  the “reaserves” later if you can answer my question above.

  • Tue, Apr 20, 2010 - 03:47pm

    #76
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=goes211]I am not 100% certain of this but I think in this case Thomas might be right.  My curent understanding is that commercial banks are the creators of almost all of the money in the system through loans.  They are not directly constrained by only loaning out deposits.  There is even a recent study ( I might have read about it on Steve Keen’s website but I am sure others can point you to it ) that showed that banks first create loans and then the required deposts follow some months later.[/quote]

I searched around for a paper, and perhaps you are referring to this paper.   I believe if you look at his examples you could get “loans create deposits” from the examples.  However, that is not what I get out of this paper. I believe he uses the starting point of loan creation to make the example simple.  What I get is that loans can create permanent “value”.  That is a loan that is used for productive use will result in more “value” in the system.  That value can be considered money because it could be encumbered for a future “loan”.

[quote=goes211 from Modern Money Mechanics]The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.[/quote]

I don’t disagree that FRB creates money, what I said is that an individual bank does not.  A bank can loan out up to the reserve requirements what it has previously had deposited.  What a bank cannot do is just give out a loan with no backing deposits.  However, on that note, a bank can borrow money from the Fed or trade assets to the Fed, those would be the same as deposits.

Thomas Hedin, I have no idea where to even begin with all your comments.  I believe you are not recognizing money as an abstract concept.  I believe you are intermingly many different concepts together.  Perhaps the best I can do is ask you to think about a few questions  related to your comments and hope it helps:

  1. What was the first dollar?  What did it represent?
  2. When the Federal Reserve was created, what happened to all the existing “dollars” in use?  Did they all just disappear?  What about the value they represented?
  3. Many of your assumptions are based on some starting point.  You talk about there being no money that is not debt.  Where is that starting point?

As far as FRB.  I don’t believe it is stealing as long as all players involved understand the rules of the game, and that participants are free to leave or change games.   Unfortunately those are not true as we changed from a system where the currency was backed by gold to one that was not with most participants unaware or not-educated enough to understand the change occured.  We also have the US populace forced to use the system, and the Fed changing the rules (reserves, increasing base money via asset purchases) for political reasons.

 

  • Tue, Apr 20, 2010 - 05:00pm

    #77
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=rhare]

[quote=goes211]I am not 100% certain of this but I think in this case Thomas might be right.  My curent understanding is that commercial banks are the creators of almost all of the money in the system through loans.  They are not directly constrained by only loaning out deposits.  There is even a recent study ( I might have read about it on Steve Keen’s website but I am sure others can point you to it ) that showed that banks first create loans and then the required deposts follow some months later.[/quote]

I searched around for a paper, and perhaps you are referring to this paper.   I believe if you look at his examples you could get “loans create deposits” from the examples.  However, that is not what I get out of this paper. I believe he uses the starting point of loan creation to make the example simple.  What I get is that loans can create permanent “value”.  That is a loan that is used for productive use will result in more “value” in the system.  That value can be considered money because it could be encumbered for a future “loan”.

[/quote]

The point of that paper is that money is endogenously created in a debt-based money system, the majority of it is NOT created by the Fed. Private banks can issue as much credit as individuals and companies demand, and then go looking for reserves later from central banks or other banks/investors (in theory; in practice they don’t even do this sometimes). The reason why we are experiencing a recession right now is because of a debt deflation – when debt is destroyed, so is money – and that’s why prices fall, unemployment increases and consumer demand drops off.

  • Tue, Apr 20, 2010 - 05:00pm

    #78
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=rhare]

[quote=goes211 from Modern Money Mechanics]The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.[/quote]

I don’t disagree that FRB creates money, what I said is that an individual bank does not.  A bank can loan out up to the reserve requirements what it has previously had deposited.  What a bank cannot do is just give out a loan with no backing deposits.  However, on that note, a bank can borrow money from the Fed or trade assets to the Fed, those would be the same as deposits.

[/quote]

I don’t believe that quote from Modern Money Mechanics is refering to how the FRB creates money.  I think it is refering to commercial banks creating money through fractional lending.

ps.  I think this paper http://www.debunkingeconomics.com/Talks/KeenMoneyCreation_NewMatilda_policy_463.pdf refers to what I was talking about and might also be helpful for our discussion here and in the other thread.

  • Tue, Apr 20, 2010 - 05:09pm

    #79
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    Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=Thomas Hedin]

Ashvinp,

Rhare misses the whole point that nobody is actually paid for their labor, we are only loaned our paychecks.  There is no final payment within a debt money system because there is no such thing as permanant money.

If final payment exsisted, then we would be able to pay away this debt, and be without debt, and become prosperous beyond precident.

[/quote]

I think I know what you’re saying, but it’s misleading to say we are loaned our paychecks (we don’t have any obligation to pay that money back). The problem with a debt money system is that credit creation is unrestrained while our labor value is limited by the productive capacity of the economy, so it does not allow us to pay off the debt and grow the economy at the same time.

  • Wed, May 12, 2010 - 05:25pm

    #80
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    The New Austrian School of Economics

“In place of math, we are offered beliefs such as the “quantity theory of money.””

Thought this article might interest you, Larry

“The Quantity Theory of Money

 It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money, and has never during his long life been able to extricate himself from its clutches. For this reason he was alienated from Adam Smith’s Real Bills Doctrine, the latter being an implicit refutation of the former. In spite of this flaw I still consider him the greatest economist of the 20th century. But the mortmain of Mises cannot be allowed to guide us in the 21st century when the Quantity Theory of Money is so spectacularly self-destructing, as witnessed by the Second Great Depression that started 80 years after the first, in 2009.”

http://www.24hgold.com/english/news-gold-silver-the-new-austrian-school-of-economics.aspx?article=2883627998G10020&redirect=false&contributor=Antal+E.+Fekete

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