Fractional reserve banking

[Aught3]

Start with http://bilbo.economicoutlook.net/blog/?p=1623 as it specifically addresses your question.

Yes that looks good. I understand the money multiplier was not quite right since banks have obviously decoupled from any reserve requirement even if they had to abide by it at all. I also got the idea that the central bank is funded by IOUs.

I think there may be something to the distinction between these vertical and horizontal transactions. At the moment they don't seem all that different to me as in both cases money is created with a corresponding debt or IOU and the money and the debt can be extinguished upon repayment. SO I don't see a huge difference there but the author seems to be insisting there is one so I will keep reading and see what I find. It is pretty hard-going stuff.

If you are interested, under the heading of "Categories" on the right-hand side of any of the the blog pages you will find the "Debriefing 101" link. Go back to the very first article from February 2009 and work your way forward in time.

Thanks, this looks like a lot of fascinating discussion.

 

[Lukendog]

It is pretty hard-going stuff..

I would definitely agree with that statement. I started reading Bill Mitchell's blog about 2 years ago after a rather innocuous post on a forum discussion about Australia's National Broadband Network. Prior to this my interest in macroeconomics was zero - I would rather have spent my time watching paint dry

The post contained a link to one of Bill's blogs in which he explained why taxpayers do not fund a fiat currency issuing government's spending. In fact, taxation performs an altogether different function to what most people believe.

I don't recall ever having heard of the term 'fiat currency' prior to reading that blog post and in the succeeding 2 years I have not met anyone who was familiar with it either - not that it comes up in conversation very often. Maybe it's the company I keep :lol:

I hope you enjoy Bill's blog as much as I have.

 

[ArthurWilborn]

Correct, the money didn't come from nowhere, it came from the government borrowing the money in the wake of the GFC. There was no massive wealth redistribution, no special tax or enforced wealth confiscation. Nor did the government dip in to a trillion dollar reserve it happened to have sitting around from previous years. They borrowed that money into existence then gave it out to keep the economy going and the wealth being created.

Ugg. How is the government paying for that borrowing? Well, realistically, they'll probably pretend they don't have to until the roof falls on their head since that's US Government SOP, but in theory they're taking it from other people via taxes.

I think it is just a fact that 97-98% of the money in our economic systems is created by debt, it's even on Wikipedia. Where does the majority of the money supply come from if not loans and debt?

What the ? I already addressed this! The 2% figure represents the amount of physical bills and coinage, not the amount that's "not created by debt". You say you're not conflating the two, but you keep doing so over and over again. The majority of the money supply comes from three places: increased resources, greater efficiency, and population increase. Sure, debt can facilitate the first two by making them arrive faster, but that's not the source.

I think you will find the answers to your questions here: http://bilbo.economicoutlook.net/blog/

You may also be surprised by the answers you find.

Hmmm...

Mainstream economists are not the only group who demonstrate a misconception of the way the monetary system operates. Among so-called progressive economists there are many, who while recognising that we use a fiat currency (manifest as worthless tokens) rather than a “commodity money” (where the actual unit has intrinsic value)

Yeah, sure, nooooobody knows how the economy works except this guy. :roll: Some academic blowhard claiming he's right and everyone else is stupid? Nope, not surprised. This doesn't even address the points I'm making; strawman. Anyway, I already talked about this; we're well past the point where commodity money is feasible, there aren't enough commodities to cover the amount of money that's in circulation. Also, treating something as money when you also need to use it on a regular basis is a bad idea.

 

[Lukendog]

Yeah, sure, nooooobody knows how the economy works except this guy. Some academic blowhard claiming he's right and everyone else is stupid?

Oh dear...