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Akvod on 09 May 2010
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SamuelRSmith said:
Akvod said:
SamuelRSmith said:
And, yes, I forgot, deficit spending, indeed, all debt spending, requires an increase in the money supply to actually happen.

The Federal Reserve isn't the only body in the USA which can create money, you know. Every single bank in the USA has the ability to create money. When you take out a loan of, say, $20,000 the bank will "create" a large chunk of that money. The difference is that when you take out your loan, or a mortgage for $200,000 the amount of money created is infinitesimal, especially when compared to the amount of money created to fund the trillions required for the Government's debt.

The bank can only "create" money by lending out money from its bank reserves, thus increasing the money supply. It gets those money from the Fed. They don't have a damn printing machine, all they can do, is hold onto the real cash they have, and loan it out, which will be spent, saved, loaned out, on and on.

 

In short, the banks cannot increase the money BASE, only the money supply, and they only hold onto money for the sake of finding the best loan, not because they have an interest in monetary policy...

 

You're so fucking confusing me.

Banks don't just loan money from their reserves, and they don't need a printing machine. When you take out a loan, you don't get a wad of bills, the money is just accredited to your account. From the sounds of things, you're just considering actual physical currency in the money supply, which is wrong. The reasons why a run on a bank is so dangerous is because people have more money in their accounts than what the bank actually possesses.

An actual example:

Person A deposits £10,000 into a bank. Person B wishes to take out a loan of £2,000, this means that the bank now has £8,000. However, Person C comes along and wants to take out a £9,000 loan - the bank only has £8,000 in its reserves, but it has reasonable confidence in the fact that Person B will pay their £2,000 back - meaning that, in the future, the bank will be able to finance the £1,000 difference. So, the bank loans out £9,000 to Person C. £8,000 of it comes from the bank's reserves, the other £1,000 has been created in the hope that it will be financed back by Person B paying off their loan.

Now, when Person B and Person C finally pays off their loans, the bank will receive a total of £11,000 - £2,000 from Person B + £9,000 from Person C (plus whatever interest rates, but, that's not required for this example). The money supply has increased from £10,000 by £1,000 to £11,000. Does this mean the bank is 10% richer? No. Because, unless the demand for money has increased, the value of the money would have decreased, hence inflation.

Now, with this example, we're dealing with relatively infinitesimal amounts of money, and it won't have any major implications for inflation. But, when the banks are borrowing billions and trillions of pounds/dollars, the effect on inflation is profound.

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Now, I'm not denying that inflation doesn't come as a result of shifts in AD/AS - that's one of the basics of macroeconomics. What I am denying, however, is the longevity of this inflation. Look at the video I posted earlier in the thread, there was essentially zero inflation in the United States between when the British first settled there, and the early 1900s - are you telling me that there were no recessions during this time? Of course there were, but there was also very little debt, very little credit. The recessions did cause a small fall in the price level, which returned after the recession was over. Keynesian policies mean that not only does the price level get forced back up to pre-recession levels, but the price level continues to rise as inflation once the recession is over.

The link between inflation, Keynesian style economics, and the removal of the gold standard (which allows for Keynesian-style huge deficit spending) is so ridiculously strong, that you'd be a fool to deny it.

Bah, fucking fucked up. I didn't mean to say banks loan from their reserves, the reserves are what they have to keep as a minimum.

But now you're confusing me O.o banks aren't allowed to loan from their reserves. All you're describing is illegal action.

It shouldn't be infinite, but it should be approaching a limit.

http://en.wikipedia.org/wiki/Money_multiplier#Formula

So... I'm also confused why you're mixing money demand (and supply) with the logic of the money multiplier, they should be seperate, although they are closely related.

And maybe it's because I haven't taken economics for long, but according to the model, it denies inflation as a result of demand shock, and subsequently inflationary policy. I do see an inflating of interest rates in the long run, in conjunction with the increasing of national debt.

If there is lowered investment, then there will simply be a recesionary gap, which is deflation. If the government properly cuts back on spending, it shouldn't "keep going up"

What does the gold standard have to do with anything? In fact, it's a shot in the foot for a monetarist to want to go back to the gold standard... unless you're denouncing any discretionary policy, fiscal or monetary.

But the gold standard has nothing to do with government... the government doesn't engage in a large ammount of seniorage. It finances its defecit spending by borrowing, not printing.