Is the inflation monster tamed?
Mike Shedlock reports that the Inflation Monster has been captured by the European Central Bank--or so their lastest cartoon release claims. Along with the announcement, the ECB has produced an information kit on inflation entitled "Price stability: why is it important for you?" It is targeted at young teenagers and teachers in all the official languages of the European Union. It is fraught with error. FULL ARTICLE
Comments (42)
Curt Howland
The problem is that those who have learned from prior failures are not in a position to do anything about it. Conspiracy theorists to the fore, could it be that the ones who benefit from inflation are rigging the game in their favor on all fronts?
The single most insipid aspect of this cartoon is that the cause of inflation, governments printing more worthless money, is never asked or even hinted. Inflation is accepted as a given. That may be the vested interests greatest success, instilling that meme at every opportunity in the world's (re-)education camps.
Published: January 1, 2006 10:24 PM
Keith G. Derrick
Nice practical article. The "Inflation Monster" video is hilarious and disheartening.
What's interesting is that the video portrays the "inflation monster" giving people money and shows how this increase in the money supply causes prices to rise. It then shows, without any irony, how the ECB controls the money supply to "bottle up" inflation. But, how can prices be stable if prices are rising at 2% every year? A question ECB leaves unanswered.
Hmm…hilarious and sad indeed. It is sad because this video will be used in classrooms to teach teens about inflation and monetary policy.
As Frank Smith said in Insult to Intelligence
As a side note, I grabbed the CPI data for the United States for the years 1800 to present. I set the base year to 1913 (the year the FED was created). The end result is quite amazing, yet not anything we don't already know. (Yes, I know that measuring the general price level is a ridiculous endeavor, but the graph does hammer home the point nicely.)
To view the graph go to my blog at:
http://www.mrderrick.com/blog/?p=30
Or...if you don't want to go to my blog just view the graph at:
http://www.mrderrick.com/blog/images/fed_and_the_cpi.gif
Published: January 1, 2006 11:10 PM
Jerry Kohn
The U.S. central bank (the Fed) produces similar videos.
http://www.stlouisfed.org/education/video_library.html
Like the EU video, the Fed videos are full of disinformation and self-promotion, and unfortunately they are used by many high school teachers.
The Mises Institute produces a much better video ("Money, Banking and the Federal Reserve"). I use it in my classes, and I highly recommend it for anyone who teaches economics.
http://mises.org/store/Money-Banking-and-the-Federal-Reserve-P269C0.aspx
Published: January 2, 2006 9:27 AM
Joel
Mr Derrick,
Those graphs are interesting. CPI, M3, Oil, etc all follow a similar path. A slow steady rise from 1913 and then it breaks out in 1973.
It seems like an extremely dangerous experiment, likely to result in monetary collapse and a period of chaos. Doom.
Published: January 2, 2006 11:01 AM
David White
Joel,
I'd say you're, um, right on the money.
Published: January 2, 2006 11:08 AM
billwald
First, using "inflation" in the same way under an electronic money system as it was used under a gold standard doesn't compute because the basic nature of money has changed.
Second, the working person cares about how much work is needed to supply his basic needs, not about theoretical losses to coupon clippers. The industrial city people have never worked less to obtain basic food and shelter. Some don't works at all.
Third, a stable situation is one in which one can logically make long term plans. If money inflation is stable at 3% then no one is harmed because interest rates will compensate for it.
Fourth, one would expect and demand that money supply increase as the population increases.
Published: January 2, 2006 11:27 AM
RogerM
We should talk about the no-down payment mortgages that have become popular lately. Probably because the Fed inflated money so much, banks began offering no-down payment loans, when previously, they required 20% down. I talked to a couple of banks about mortgages and they insisted I take the no-down option. In turn, this has affected the savings rate, since many people used to save for the 20% down in order to buy a house.
Published: January 2, 2006 11:27 AM
RogerM
What's a good measure for tracking credit expansion? Anyone have a favorite?
Published: January 2, 2006 11:28 AM
Jordi Franch
First of all, it's good (or not bad) to remember that in some european countries economics is taught at the level of secondary or post-secondary education. In this basic level in the human capital formation, it's vital to have this possibility in order to begin the grasping of economics for real people (I've just read this title by Gene Callahan).
For instance, in Spain, we are utterly concerned by the last law of education promulgated by RodrÃguez Zapatero socialist government. It almost edicts out Economics and Business from Post-Secondary Education and certainly bans it in the Secondary level. Instead, a sort of Governmental Creed (Educación para la CiudadanÃa) is imposed.
Then, the government can maintain that the CPI has only risen a 3.8% in 2005 without blushing.
Meanwhile, we suffer the most impressive "house bubble" across Europe. But we don't worry, because this word does never appear in the lips of our egregious governing politicians.
Greetings from Manresa (Catalonia), where Saint Ignatius from Loyola wrote his Spiritual Exercises in 1522.
Published: January 2, 2006 11:28 AM
billwald
A bank refused to take a down payment on a mortgage? Doesn't compute. The information provided is incomplete.
I should care about foolish people who take out upside down loans? I though the "Libertarian" was was "Sink or swim."
Published: January 2, 2006 11:31 AM
RogerM
Billwald, the bank didn't refuse a downpayment on a mortgage, they just strongly discouraged it. They even have higher closing costs if you want to make a down payment.
Published: January 2, 2006 11:46 AM
Keith G. Derrick
billwald,
"Third, a stable situation is one in which one can logically make long term plans. If money inflation is stable at 3% then no one is harmed because interest rates will compensate for it."
Ask someone who lives on a fixed income if they are not harmed by a "stable" increase of a 3% rise in prices.
"Fourth, one would expect and demand that money supply increase as the population increases."
Why?
Published: January 2, 2006 11:51 AM
Ben Parkinson
It is impossible for the Central Bank to determine the right interest rate. Let the free market do this, instead. Concerning deflation, hoarding cash is a good thing because subsequently my money is worth more and I have more buying power.
Published: January 2, 2006 12:59 PM
Keith G. Derrick
Joel,
The graph becomes even more interesting, yet not surprising, when you just look at the period before the FED was established (1800 - 1913).
When viewed in this way you can see the short upward "war spikes", followed by long downward "peacetime dips" in prices.
To view this time period of the graph go to:
http://www.mrderrick.com/blog/?p=33
Or...to just view the graph go to:
http://www.mrderrick.com/blog/images/war_and_inflation.gif
Published: January 2, 2006 1:22 PM
Thant Tessman
I am always slightly disturbed by articles like this one, written by obviously knowledgeable people and containing what appears on the surface to be rational, practical policy recommendations like "Central banks should refuse to monetize government spending and trade deficits."
The real reason central banks exist at all is exactly so they can monetize government spending. That's always been the real reason. In practice, it's a good way to define what a central bank is. It is no more likely that central banks will stop monetizing government spending than it is that they will be abolished. Anything a central bank does for the sake of the economy it does as a parasite reluctant to kill its host.
I'm still trying to work out what all this implies for the future. The only political solution I can envision is one where the State is robbed of its intellectual legitimacy enough to allow its institutions to be simply circumvented.
Published: January 2, 2006 1:32 PM
Marco Saba
There is an interesting alternative: refusing all bank mortgages. See:
Debt Free Sovereign Trust
A typical real estate purchase and sale goes down as described below after the buyer and the seller have signed the agreement of purchase and sale:
The buyer goes to Magic Bank in response to the bank’s claim that it is in the business of lending money in accordance to its corporate charter. The buyer went to the bank believing that Magic Bank had the asset (money) to lend. Magic Bank never tells its customers the truth that it does not have any money to lend, nor are they permitted to use their depositors’ money to lend to its borrowers.
Notwithstanding the fact that Magic Bank does not have any money to lend, Magic Bank makes the buyer/borrower to sign a mortgage loan application form which is essentially a promissory note that the buyer/borrower promises to pay Magic Bank for the money (what money?) he/she is supposed to receive from Magic Bank even before any value or consideration is received by the buyer/borrower from Magic Bank. This promissory note is a valuable consideration, a receivable and therefore an asset transferred from the buyer to the bank which Magic Bank enters into its own asset account as a cash deposit.
After making sure that the buyer has the ability to pay the required monthly payments (the buyer has credit), Magic Bank agrees to lend the buyer the money (cash) to pay the seller. Magic Bank has no money to lend but it gave the buyer a promise to lend money by way of a commitment letter, loan approval letter, loan authorization or loan confirmation letter, etc., signed by a bank official or loans/mortgage officer employed by Magic Bank.
Magic Bank’s acceptance of the buyer’s promissory note made the bank liable to the buyer/borrower for the full face value of the promissory note which is the agreed purchase price of the property, less any cash deposit or down payment money paid by the buyer directly to the seller.
It is important to note at this point that all real estate transaction requires that the property being sold must be conveyed by the seller to the buyer free of all liens and encumbrances which means that all liens such as existing mortgages, judgments, etc. must be paid before the property can be mortgaged by the seller as collateral to the mortgage loan which is yet to be received by the seller pursuant the promise made by Magic Bank. How can the seller obtain clear title if he has not yet received any money from the buyer? And how can the buyer mortgage a property that does not yet belong to him or her?
This dilemma is solved using Magic Bank’s magic tricks. Magic Bank in concert with other magicians – the lawyers or notaries causes all the liens and encumbrances to disappear by using a cheque drawn in the name of Magic Bank backed by the buyer’s promissory note and the agreement of purchase and sale. This cheque is deposited into the lawyer’s trust account. In essence, Magic Bank and its magicians, the lawyers and notaries used the buyer’s promissory note as the cash to enable the purchase agreement. It was the buyer’s promissory note that made the conveyancing possible. Magic Bank caused the property to be conveyed to buyer from the seller clear title, free and clear of all liens and encumbrances. The property now belongs to the buyer which makes it possible for the buyer to mortgage the property to Magic Bank. The buyer paid for it using his/her own promissory note.
At this point, the seller has not yet received any money or cash so Magic Bank and its magicians must perform another magic in order to satisfy the seller’s requirement that he/she must get paid or the whole deal is null and void. The seller does not even know that the property had been magically conveyed to the buyer’s name in order for the seller to receive any money.
The ensuing magic trick is accomplished this way. The buyer is made to sign another promissory note. The mortgage contract is attached to the bottom of the promissory note which makes the buyer liable to pay Magic Bank for the money or the loan which the buyer has not yet or will never receive for up to twenty five years or more depending on the amortization term of the mortgage contract. This note is linked to the collateral through the mortgage contract and as such, it is valuable to Magic Bank.
Magic Bank then goes to Bank of Canada or to another bank through its accomplice, the Canadian Payment Association to pledge the deal that they have just gotten from the buyer for credit. Bank of Canada then gives Magic Bank the “credit.� Remember, it is not Magic Bank’s credit, it was the buyer’s credit who promised to pay Magic Bank if and when the money is received by the buyer from Magic Bank, payable for up to 25 years or more.
Note: What happened above is basically a “swap�, a transaction all banks do to ‘monetize’ security. In this case, the second promissory note that is linked to the mortgage contract and signed by the buyer is a mortgage-backed security.
Magic Bank will then agree to pay Bank of Canada a certain percentage of interest over “prime�. Thus the buyer’s loan package goes to Bank of Canada which credits Magic Bank with the full amount of credit which is the total amount of the money Magic Bank is entitled to receive after 25 years which is the amount of the principal plus all the interest payments the buyer has promised to pay to Magic Bank for 25 years or more which is usually three times the amount of the money promised by Magic Bank to the buyer. By magic, Magic Bank just enriched itself and got paid in advance, without using or risking its own money.
Magic Bank’s magician, the lawyer who holds the cheque that is backed by the buyer’s original promissory note then cuts a cheque to the seller as payment for the property. In effect, The buyer paid the seller with his/her own money by virtue of the fact that it was the buyer’s own money (the promissory note) that made the purchase and sale possible. Magic Bank just made a cool 300% profit without using or risking any capital of its own. Neither was there any depositor’s money deducted from Magic Bank’s asset account in this transaction.
What really happened was pure deception that if we the people try to do this, we would end up in the calaboose and be found guilty of fraud and criminal conversion not to mention that the subject property would have been seized from us by the court.
This is only a crime if we the people do it to each other such as it would be an indictable crime if we issue a cheque with no funds. There would not be any deal, no purchase and sale agreement because there is no valuable consideration. In order to de-criminalize the transaction, we need Magic Bank and their cohorts to make the deal happen. It is really a conspiracy of sorts but these “persons�, the banks, the lawyers, the land title offices or even the courts do not consider the transaction as fraudulent transactions because these transactions happen all the time.
Such a contract is void ab-initio or void from the beginning which meant that the contract never took place in the first place. Moreover, the good faith and fair dealing requirement through full disclosure is non-existent which further voids the contract. Magic Bank failed to disclose to the buyer that it will not be giving the buyer any valuable consideration and taking interest back as additional benefit to unjustly enrich the corporation. Magic Bank also failed to disclose how much profit they are going to make on the deal.
Magic Bank led the buyer to believe that the money going to the seller would be coming from its own asset account. They lied because they knew or ought to have known that their own book or ledger would show that Magic Bank does not have any money to lend and that their records will show that no such loan transaction ever took place. Their own book will show that there would be no debits from Magic Bank’s asset account at all and all that would show up are the two entries made when the buyer gave Magic Bank the first collateral or the promissory note which enabled Magic Bank to cut a cheque which made it possible to convey the property from seller to the buyer free and clear of all liens or encumbrances as required by the agreement of purchase and sale entered into in writing between the buyer and the seller. What really happened was not magic; in reality, the buyer’s promissory note was used by Magic Bank and its magicians – the lawyers and land title clerks to convey free title to the buyer from the seller. So why do we need the mortgage contract for?
The other entry that would show up when we audit Magic Bank’s book is the other pledge of collateral including the buyer’s promissory note which was converted (unlawfully and without disclosure or permission from the buyer) into a mortgage-backed security which was “swapped� or deposited by Magic Bank to Bank of Canada and “cleared� through the Canadian Payment Association for which another deposit was entered into Magic Bank’s transaction account.
From the above, we can list all the criminal acts perpetrated by Magic Bank:
The mortgage contract was void ab-initio because Magic Bank lied and never intended to lend a single cent of their own asset or depositor’s money to the buyer. A valid contract must have lawful or valuable consideration. The contract failed for anticipated breach. Magic Bank never planned to give the buyer/borrower any valuable consideration.
Magic Bank breached all its fiduciary duties to the buyer and are therefore guilty of criminal breach of trust by failing in its good faith requirement.
Magic Bank concealed the fact from the buyer that it would be using the buyer’s promissory notes; first to clear all the liens and encumbrances in order to convey clear title to the buyer; then use the second promissory note to obtain more money from Bank of Canada or other institutions that buy and sell mortgage-backed security. Magic Bank received up to three times the amount of money required to purchase the property and kept the proceeds to itself without telling the buyer.
Magic Bank violated its corporate charter by loaning “credit� or nothing at all to the buyer and then charging interests on such make-believe loan. Banks are only licensed to loan their own money, not other people’s money. Magic Bank used the buyer’s promissory note to clear the title which essentially purchased the property from the seller. The transaction is an ultra vires transaction because Magic Bank has engaged in a contract outside of its lawful mandate. An ultra vires contract is void or voidable because it is non-existent in law.
Everyone involved in this undertaking with Magic Bank, starting with the loan or mortgage officer, the lawyers, the land title office and even the central bank are equally guilty by association by aiding and abetting Magic Bank in its commission of its crimes against the buyer and the people who would eventually have to absorb all of the loss through increased taxes, etc.
In the final analysis, Magic Bank and the others who profited from the ultra vires transaction are all guilty of unjust enrichment and fraud for deceiving the buyer and the people for acting in concert in this joint endeavor to deceive the buyer.
What can we do?
The above clearly demonstrate how Magic Bank deceives thousands if not millions of people by making us think we are getting a loan when the truth is there is no loan. Do the bank’s loan officers know what they are doing? Absolutely. Therefore they must be stopped. But who is going to stop them from deceiving thousands of people everyday? The SYSTEM – the banks, the lawyers and the courts will not. Stopping Magic Bank and others like it is entirely up to us. We allowed them to deceive us by becoming lethargically and knowingly ignorant.
This is where we come in. We have done extensive research and understand how the banks are stealing and plundering our wealth. We know what they do and how they do it. We also know that the banks have the money to buy the most expensive lawyers and pay the courts in order to receive a favorable outcome. The government knows that the banks consistently violate the law and their corporate charter and use their influence against the public servants who have sworn to serve and protect our best interest.
Only you can hold these banks and public officials to account. We need you to tell us that you want to become debt-free and that you want all of the money stolen from you by the banks returned to you with interest. We cannot help everybody but we can help you and those want our help.
This is how it’s done:
You assign all your debts to us. That’s right, we assume all your debts. Crazy eh? Who in the world would want to assume anyone else’s debt? Only we from Debt Free Sovereign Trust do this sort of thing because we know our process works. In essence, by assuming your debts, we become your payment agent. Our job is to help you pay for all your debts. We eliminate your debts by paying them off.
As your payment agent, we assume all your debts by transferring them all into a trust. Debt Free Sovereign Trust becomes your trustee. This is required in order to remove any excuse by Magic Bank and others like them to refuse to deal with us on your behalf. As your lawful payment agent, we become cloaked in law with a vested interest and a fiduciary duty with regards to your debt to do whatever is necessary to cause your creditors to discharge, settle or close your accounts permanently and to receive whatever amount of money has been stolen or converted by the banks from you without your knowledge or permission.
Upon transferring all your debts into Debt Free Sovereign Trust, we inform the bank of the fact and we ask to see what the pay off is for the supposed loan which you never received. We then create a Surety Bond backed by your personal exemption with a face value of up to double the pay off amount.
We then make a presentment to the bank with the attached bond. If fictional “persons� like corporations can create money out of thin air, so can you. This is because there is no money. Real money does not exist and therefore money must be created.
The presentment itself offers the bank the choice of whether to honor or dishonor the presentment. Should the bank decide to honor the presentment, all they have to do is accept the attached bond for value and discharge, settle or write off the account, no questions asked. You are now completely debt free. Our fee for this service is calculated at 40% of the loan balance. This amount may be shared between you and the bank who still stand to profit by way of a tax write off of up to 100% of the total unpaid balance.
Should the bank decide to dishonor the presentment by rejecting the bond as payment (which is usually the case), they are required by law (law merchant) to produce all the evidence required in order to prove they have a valid claim against you. This includes but not limited to the following:
The original contracts and loan application or promissory notes or mortgage documents they received from you.
In the absence of the original documents and promissory notes, the bank must compensate or indemnify you for the loss or non-return of your promissory notes.
Full accounting records, ledgers, bookkeeping entries signed and sworn by the person who made the entries under penalty of perjury and his/her full commercial liability.
Certified true copies of all audited statements of accounts sworn under penalty of perjury and full commercial liability of the person or persons who made and or audited the statements.
The bank must return the bond they received within 10 days of deciding it will not accept the bond in return for discharge and settlement of your account.
Upon the bank’s dishonoring the presentment, we make another presentment, a Notice of Fault/Opportunity to Cure. This gives the bank another opportunity to settle the account or produce all verifiable evidence to prove the existence or validity of the loan in question. The bank has ten days to make up its mind whether or not they will reconsider your good faith offer to discharge and settle the account in good faith.
Should the bank decide to dishonor or reject the offer, the Notice of Fault/Opportunity to Cure shall be the banks tacit admission and agreement that they do not have any valid claim against you. This would result in an automatic Notice of Default to be served to the bank. The Notice of Default is your notice that you have accepted the bank’s default under these terms and conditions: that your acceptance means that the bank must now pay you back the principal amount of the loan, plus compensatory damages up to four times the principal amount and punitive damages up to two hundred times the principal amount. The bank has further ten days to accept or dispute your original good faith offer to settle and discharge the loan amount or accept the terms and conditions contained in the Notice of Fault/Opportunity to Cure and the Notice of Default.
The banks non-response shall cause us to issue to the bank a Certificate of Dishonor which is a default judgment against the bank. We now have the option to either sue the bank in court, force them into involuntary bankruptcy or sell the judgment to other banks. The buyers of these judgments may do whatever they like with the judgments.
In return, as compensation for our work, we will charge you, the client 40% of the proceeds of any money we receive either from the bank directly, or from the proceeds of the judgments. In other words, you get 60% and we get 40%.
End of story
John-Ruiz: Dempsey
Debt Free Sovereign Trust
Published: January 2, 2006 2:19 PM
Curt Howland
Billwald, if 3% is to your liking why not 0%? Why is one good and the other bad, if it is constant?
Which of course brings up the nasty little detail that derails the idea entirely, it is never constant. Fiat currencies are always, ALWAYS manipulated by politicians and bureaucrats.
The reason the gold standard works is not because it's gold, it's because it is not under anyones control. No one can "print" a commodity currency, that is the entire point. It could be iron, sand, or any other commodity. Even paper money if paper money retained the same inability to be printed out of thin air.
The modern "electronic" economy would function just fine on a commodity standard money. The only change would be that the quantity of money in circulation would not be under government control. Everything else works exactly like it works now. See e-gold, GoldMoney, Pecunix, etc.
Published: January 2, 2006 2:35 PM
Sione
Marco
When did this scheme ever work? My suspicion is that you've not accomplished what you claim above. Am I correct?
Sione
Published: January 2, 2006 6:44 PM
Vedran Vuk
I think it's really funny that in the ECB cartoon the money appears to be gold coins.
Published: January 2, 2006 8:59 PM
Paul Edwards
I am confused with this article’s position on a bank credit-money supply dichotomy.
“… Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time. However, bank credit outstanding contracted for 60 months in a row. Clearly there was a credit contraction. How did money supply still manage to grow? Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetized all of it.�
What this suggests to me is that the central bank overwhelmed the Japanese economy with high powered central bank reserve money to such an extent that it countered 60 months of bank credit contraction such that there was a modest increase in the money supply overall.
I’m not saying the article is wrong, but this certainly strikes me as extraordinary. This implies that banking reserves were expanded by the central bank to monumental proportions. The banking industry must have had scads of reserves to burn. Do I understand what the author is saying correctly?
Published: January 3, 2006 12:55 AM
David Chaplin
Mike Shedlock said, in part:
....how about shooting for "money supply stability" instead?
Central banks should refuse to monetize government spending and trade deficits
Central banks should let the market set interest rates
Central banks should embark on a campaign of tightening reserves requirements over time to rein in fractional reserve lending
Life would be so much simpler if Central Banks everywhere would stop trying to micromanage both prices and economic cycles.'
To which I must reply:
I agree with most of this, except the part about a campaign 'tightening reserve requirements....to rein in fractional reserve lending'.
In the absence of a central bank, and hence in the absence of a 'guaranteed' lender of last resort (that inevitably distorts any private bank's risk appetite), the desire to continue to attract depositor funding, and hence to stay in business, is sufficient incentive for private banks to determine their own prudential reserving requirements, free of any legislative impediment.
The core problem inherent in such a reserve-tightening 'campaign' is the same as for any other form of economic coercion: there is no person or committee able to correctly determine what those requirements 'should' be for all banks - that is something that each bank must decide for itself.
I have no problem with fractional reserving and money-creation through the credit multiplier ( or divisor, if you prefer) in principle - after all, its the only real-time mechanism we have available to permit overall money supply to swiftly and automatically adjust to real changes in production levels. But this will only work efficiently if bank reserving levels ( and of course interest rates) are determined by the credit market ( which itself responds to activity in the real goods and services markets), and not by any agency prescribing arbitary ( or policy-driven) numbers to the participants in that market.
If there is to be a central bank,let it do nothing other than supply as much note and coin - mere stationery - as the private banks demand: just as long as they pay for its full face value upfront! Better still, let the private banks issue their own notes and coins - consumer choice will soon flush out any weak issuers.
David Chaplin
Published: January 3, 2006 4:55 AM
Peter
David: I can correctly determine what those requires 'should' be for all banks - 100%! Any bank "deciding" otherwise "for itself" is engaging in fraud, and the people responsible should be punished severely!
Published: January 3, 2006 7:10 AM
Thant Tessman
David Chaplin wrote: "I have no problem with fractional reserving and money-creation through the credit multiplier (or divisor, if you prefer) in principle - after all, its the only real-time mechanism we have available to permit overall money supply to swiftly and automatically adjust to real changes in production levels."
The idea that the "overall money supply" needs to be adjusted is a myth--and one created long after central banking was invented.
Interesting story: I haven't seen the movie "It's a Wonderful Life" in years, but I remember something strange in it catching my attention. George Bailey referred to people's deposits as "shares." I have an old financing and investment textbook from 1926 that specifically mentions how investment or loan banking shares are not redeemable upon demand. I also have a book "The Federal Reserve System: Purposes and Functions" from 1954 published by the Federal Reserve itself. It talks about the need for "elasticity" in the money supply. The way the story evolves through these sources to a modern-day economic text book makes it all too clear how frighteningly deliberate and systematic the construction of these myths in defense of central banking and fiat currency is.
Published: January 3, 2006 11:12 AM
David
Peter: 100% reserving implies that no bank will be allowed to lend depositor money out at all - which leaves millions of people holding cash surplus to their current spending needs and nowhere to deploy it until its needed. No bank will want to take in deposits and pay interest on them if they can't lend it on to others .
Reserving by banks is only needed in so far as it keeps adequate liquidity available to meet current depositor demands in cash without having to call in loans earlier than anticipated by their borrowers. Even with 0% reserving, a bank still can't lend out more more money than it has in depositor funds. That's where the fraud starts....
With the banks' own capital and the aggregating of deposits and borrowings respectively, and their credit expertise providing a risk cushion between individual borrower default and depositor recovery, private banks provide a hugely valuable service.
Published: January 3, 2006 1:02 PM
Paul Edwards
David,
Under a 100% reserve system, people would only leave in their checking accounts what they wished to use as immediate money. The banks would probably charge a checking account service fee rather than pay interest. People would then need to invest the rest of their funds expressly in term deposits or other vehicles according to their preferences. The contents of a checking deposit account would then be actually as advertised: immediately available on demand. The other actual investments would be lent out and put towards capital in an up-front and honest manner that was clear to all. That would put an end to bank credit expansion, and business cycles while at the same time, allowing people to lend and invest, using other vehicles, the funds they wished to use for such purposes.
Published: January 3, 2006 1:14 PM
Brian Drum
"100% reserving implies that no bank will be allowed to lend depositor money out at all..."
Well that's not really true. A bank couldn't loan out it's customers' demand deposits since the customer can claim their money at any time. Also why would interest be paid on demand deposits? More than likely the customer would be paying the bank a fee for its storage and security services. A bank that dealed only in demand deposits would be simply be a money warehouse.
In order to loan money the bank would need to use it's own capital or time deposits from it's customers. There is no issue with loaning customers' funds that are deposited as time deposits since a customer does not have a claim on his money until a certain period of time as elapsed. Interest is earned on time deposits precisely because they are meant to be, and are, loaned.
100% reserve means that the bank can not loan more than the total of its own capital + time deposits, not that it cannot loan money at all.
Published: January 3, 2006 1:16 PM
billwald
"Ask someone who lives on a fixed income if they are not harmed by a "stable" increase of a 3% rise in prices."
Correct. They are harmed. But who are they? Mostly people who depend 100% on Social Security, welfare, and/or a fixed pension. These are people who lived through the best working conditions in history and ended up with zero investments or appreciable property. There isn't a system in the world that can improve their lot except socialism/communism.
"Fourth, one would expect and demand that money supply increase as the population increases."
Why? Say in 1940 there was sufficient cash in circulation to provide the average family with a month's pay - less than $200/family. The population has doubled. If the money system was frozen there would now be less than $100/family due to population increase.
You say that the money supply could increase because gold is being dug out of the ground? For the $200/family to be maintained the gold supply of the issuing banks would have to be doubled. How would this asset be transferred to the issuing bank without the bank owners accumulating it? How would this help the average coal miner - or gold miner (not gold mine owner)?
Published: January 4, 2006 1:44 PM
Keith G. Derrick
billwald,
Hmm...where do I start?
Wow! You are missing the point completely.
Monetary inflation does not cause an increase in ALL prices at exactly the same rate. If it did there would be no reason to inflate. For example, if the government increased the money supply and all prices and wages went up by exactly 5% and at precisely the same time, then there would be no reason to inflate. Nothing has changed in the real economy. All input and output prices went up 5% and ALL wages went up 5%.
And this is why the government DOES inflate, because input and output prices NEVER go up exactly at the same rate. This allows some to benefit and others to lose from monetary inflation. Of course, the government is usually the one who gets the newly created money before prices start to rise for other people in the economy.
(I believe someone has already pointed this out earlier on this topic.)
Now as far as you next statement:
You say that the money supply could increase because gold is being dug out of the ground? For the $200/family to be maintained the gold supply of the issuing banks would have to be doubled. How would this asset be transferred to the issuing bank without the bank owners accumulating it? How would this help the average coal miner - or gold miner (not gold mine owner)?"
What you're missing here is that prices will naturally decline as productivity increases. With the money supply remaining "unchanged" prices will decline. So with the family that has their income decrease from $200 to $100, you are only thinking in "nominal" terms and not "real" terms. As prices naturally decrease this family will be able to purchase the same or more goods with less "nominal" dollars.
To see proof go to my blog at:
http://www.mrderrick.com/blog/?p=30
Or...if you don't want to go to my blog just view the graph at:
http://www.mrderrick.com/blog/images/fed_and_the_cpi.gif
This graph shows price levels through time. Notice how prices decreased before the FED was created (1913) and how prices "shoot" upward after the FED was instituted.
You should also notice that during 1800 to 1913 as prices naturally declined they did spike upwards during the War of 1812 and the War Between the States. Why because the government inflated!
Oh yeah...one more thing. I have not received a raise in the last three years. So clearly price inflation has hurt me. (And I'm NOT living off of Social Security, Welfare, or a fixed pension.)
Published: January 4, 2006 2:54 PM
Brian Drum
"If the money system was frozen there would now be less than $100/family due to population increase."
But so what? The nominal amount of cash received in wages is meaningless without reference to the prices of goods and services on the market. It would be expected that over time as population increases and the capital stock of the society increases that money prices for all goods and factors will tend to fall. There is no need to have prices remain within an arbitrary numerical range for eternity.
Published: January 4, 2006 2:57 PM
Curt Howland
Mr. Drum, don't forget that money is "fungable". If only "100" of these things are available, then "100" will be highly valued and we will be trading in thousanths and ten-thousanths of a unit.
It is instructive that the "mil", that is $1/1000, is still perfectly legal to denote your taxes in. That, and people have been complaining for years that pennies are meaningless, they should be phased out. So, one dollar would be denominated by a single place beyond the decimal point, $1.0
I saw a menu in Japan, preserved from some time in the past, where the money was called Yen, but it had two decimal places. Now, one Yen is roughly one American penny, and the Japanese use no decimal points in their monetary calculations.
Those people who argue for "arbitrary numerical range" are demonstrating limited scope of thinking. They cannot mentally "shift the decimal point" and realize that numeric values are arbitrary. Work-hours to supply a loaf of bread, that is a somewhat more reasonable measure and doesn't care what the hours or loaves are denominated in in terms of "money".
Published: January 4, 2006 4:30 PM
Alan Dunn
I might be a bit off track here but here goes.
If we are to resort back to a gold standard do we keep the floating exchange rate regime?
Most analysis, and indeed real examples of gold standards' operated under fixed exchange rate regimes of one type or another.
I don't think many people consider just how important the relationship between the exchange rate regime, the money supply , and the interest rate is to our analysis of "the inflation Monster".
Published: January 4, 2006 10:02 PM
Peter
What do you mean by "exchange rate"? 1 oz of gold exchanges for 1 oz of gold; it doesn't make sense to exchange 1 oz of gold for 0.73 oz of gold, or something.
Published: January 4, 2006 10:13 PM
Alan Dunn
Dear Peter,
Actually I had more in mind that 1 oz of gold would exchange for 0.74 oz of gold .... No seriously.
What I mean't is how do we actually determine the gold price in the first place?
I'm not completely sure, but I assume that the gold price is currently calculated exogenously rather than endogenously?
In simple, terms, a few people decide what golds value will be with no reference whatsovever to any market for gold - a bit like how Central Banks exogenously determine the cash rate.
Cheers.
Published: January 6, 2006 1:23 AM
David
Peter and Paul: The way I see it, in the absence of a central bank’s accommodation of private bank liquidity and intervention in the interest markets, any attempt by Peter or Paul to use the law to force 100% reserving ( and thus prevent private banks and their customers from freely choosing their risks and rewards for themselves) is just another form of ideologically-driven statist intervention - antithetical to the fundamental right of free choice.
Ignoring time deposits and term loans where we have no disagreement, I will focus on demand deposits and demand loans ( called overdrafts or call loans in South Africa and the UK), in the following attempt to sketch out why I think this is so.
Suppose we have 3 banks, various depositors and borrowers, no statutory reserving requirement, and, crucially, no central bank or government support for accommodation of private bank liquidity shortfalls. All participants know this and hence behave accordingly.
Bank A chooses to accept demand deposits and pay no interest, holds reserves at 100%, and makes no demand loans from this source of funding.
Bank B recognises that while all demand deposits can potentially be withdrawn at one time, it believes this is quite unlikely. It has carefully assessed the behaviour of its depositors and borrowers, and the associated probabilities, and has found that very few of its depositors withdraw at any one time, and fresh deposits also flow in all the time. Likewise, its borrowers don’t all repay at once, but repayments and further draws flow on an ongoing basis – but remember, these are demand facilities that can be called at any stage if the bank chooses to. Based on its analysis suggesting a minimum reserve requirement of 20%, bank B builds in a large comfort margin and reserves at 50%, and uses the other 50% to make demand loans to its borrowers at 5%, while paying 2% to the depositors.
Bank C does the same as bank B, and reaches the same probabilities that suggest a mimum reserve requirement of 20%, but builds in a smaller comfort margin, so reserves at 30%, pays 4% on deposits and lends at 6%.
You are a potential depositor. Knowing each bank’s reserving policy and being aware of the absence of a state bailout, you have the choice to make a low-risk deposit with bank A with no return, a medium risk deposit at bank B for some return, or a high-risk deposit at bank C for a yet higher return. I do not see how this can possibly be fraud by any standard – who’s being defrauded? If a bank declares a reserving policy of 100%, but really reserves at any lower figure, I agree that THAT would be fraudulent.
Far be it from me or anyone else to dictate your choice among the three banks, and far be it from the state to outlaw the practices of banks B and C, forcing all demand depositors into low-risk, no return deposits.
The problem is not fractional reserving per se at private bank level…the core problem is the State’s manipulation of the market using prescribed fractional reserving, dictating the interest rates, and accommodating liquidity shortfalls for overexposed banks which lend too aggressively because they are shielded from the consequences of loose credits ( indeed, in my country, through the combination of minimum statutory reserving, its own ‘open market operations’ and its determination of the repo ( = Fed in US) rate, the Central Bank carefully ensures that the banking sector is in a permanent state of shortfall, forcing at least some of the banks into accommodation at its ‘window’, which assures the central bank of permanently retaining its grip on market interest rates).
Market-driven monetary expansion through private bank lending without any central bank intervention will not inflate the currency by itself – it will tend to match real-sector growth, keeping the money supply balanced with real output levels, and if that activity declines or slows down, we would see borrowings ( and hence money supply) contract or slow down as the case may be, as borrowings are paid down and not redrawn, and deposits decline in tandem. No state intervention = no (price) inflation. (Or deflation for that matter….).
Outlawing any fraction less than 100% in an otherwise free credit market is no less a statist intervention than a central bank pumping over-cheap credit into the system, and results in no less a market distortion – Indeed, a 100% legally-enforced minimum presumes that depositors are too stupid to assess risk and reward for themselves.
Of course, there will inevitably be bank failures from time to time, but all economic activity carries risk, and the last thing I’d want to see is government attempting to legislate away commercial risk or to save failed businesses – and that goes for banks as much as for any other kind of venture – such attempts always destroy more value than they preserve.
Published: January 6, 2006 7:52 AM
Thant Tessman
Alan Dunn asks "What I mean't is how do we actually determine the gold price in the first place?"
The question is: Price in terms of what? Gold used to be the medium of exchange with which people compared the value of goods and services in the marketplace. The 'price' of gold was whatever one had to forego in exchange for it. The value of gold (as money) was whatever one could purchase with it. And a dollar used to be one twentieth of an ounce of gold. At one time it would have been just as silly to talk about 'setting' the price of gold to $20 an ounce as it would have been to talk about 'setting' the value of a dozen at 12.
Separating the notion of a dollar from gold (the 'tokenization' of money) was a long, gradual, and very artificial and deliberate process, because once money has been tokenized, the banks and the government are no longer restricted by physical supply.
If we go back to a gold standard by making dollars redeemable in gold, there is the problem of figuring out how much gold a dollar should be represent, but at that point the 'price' of a dollar is no different than the value in the marketplace of the gold it represents. Does that make any sense?
Published: January 6, 2006 8:47 AM
Thant Tessman
David writes "You are a potential depositor. Knowing each bank’s reserving policy and being aware of the absence of a state bailout, you have the choice to make a low-risk deposit with bank A with no return, a medium risk deposit at bank B for some return, or a high-risk deposit at bank C for a yet higher return. I do not see how this can possibly be fraud by any standard – who’s being defrauded? If a bank declares a reserving policy of 100%, but really reserves at any lower figure, I agree that THAT would be fraudulent."
I agree that fractional reserves is not fraud if the bank discloses their reserve policy, but the difference manifests itself when you try to use your deposit receipts as money. Notes from banks that didn't hold 100% reserves would trade at a discount from notes that did. And historically this is in fact what happened. A bank note's value in terms of gold would be discounted based on the inconvenience and risk associated with redeeming that note.
So in a market with genuinely free banking the discussion of whether or not there should be 100% reserves is almost moot.
Published: January 6, 2006 8:54 AM
Yancey Ward
David,
I am somewhat sympathetic to your arguments, but why can't a bank simply keep reserves for its demand deposits and loan out only that money that depositors choose to place in non-demand accounts? The bank can loan out those non-demand funds as callable loans and non-callable loans.
Published: January 6, 2006 9:37 AM
Alan Dunn
Thant Tessman,
Yes your comments make complete sense - thank you.
Published: January 7, 2006 10:17 PM
Alan Dunn
Thant Tessman,
Yes your comments make complete sense - thank you.
Published: January 7, 2006 10:17 PM
Paul Edwards
David and Trant,
According to Hoppe, “two individuals cannot be the exclusive owner of one and the same thing at the same time�. As further elaborated in “Against Fiduciary Media�, “This is an immutable principle; it is a law of action and nature that no contract can change or invalidate. Rather, any contractual agreement that involves presenting two different individuals as simultaneous owners of the same thing (or alternatively the same thing as simultaneously owned by more than one person) is objectively false and thus fraudulent. Yet this, precisely, is what a fractional-reserve agreement between bank and customer involves.
“In issuing and accepting a fiduciary note,…, both bank and customer have in fact, …, agreed to represent themselves – fraudulently – as the owner of one and the same object at the same time.�
Published: January 8, 2006 2:28 AM
Paul Edwards
Sorry, Thant.
Published: January 8, 2006 2:29 AM
Thant Tessman
Paul Edwards quotes Hoppe: "Two individuals cannot be the exclusive owner of one and the same thing at the same time."
Right. In the case of 100% reserves, the depositor would be a bailor, and in the case of (disclosed) fractional reserves, the depositor is a creditor, and any contracts should/would be written to reflect this.
Published: January 9, 2006 10:59 AM