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RE: The Mathematics of Fractional Reserve Banking
To be fair, the economists are correcting me in my understanding of economic theory.
However, the argument that money multiplication is a myth only applies to this application of an infinite geometric series in that loans are made from deposits.
OK. But money multiplication still occurs since banks can loan any amount they want to (assuming credit-worthiness of the borrower) and if they don't have the reserves, borrow the appropriate amount from a central bank to meet reserve requirements.
The total amount of money that is lent out is still larger than the total amount that was originally borrowed from the central bank. Hence, money multiplication is not a myth.
Though i accept it (since i agreed to it), i should have corrected your earlier definitition of the money multiplication effect.
The conventional use of the term, like in old econ text books, is what you describe in your post... the notion that a fractional reserve allows for the creation of money through loans in the infinite geometric pattern you describe. This is false.
Yes, you could say that banks create money through loans. It isnt strictly accurate, because its really the fed thats creating it, just like they create all money.. but yeah, its being created. Think of it this way. Berniesansders upvoted my reply earlier itt, and that upvote made me $800 bucks (which, btw, thanks bernie). I didnt get the 800 from bernie, though. He wasn't giving me his money. You could argue that bernie created that money by voting... and i suppose you'd be partially right (as right as you are about banks creating money through lending). But really what created that money was the steem "central bank", a thing i call the Vault thats modeled off the federal reserve and i don't think anyone else has really noticed yet. Someone else created the money -- Bernie just decided who to give it to. (in that analogy SP holders are like commercial banks and the vault is like the fed, which doesnt completely work but you get the point)
But thats a good thing... Money has to be created somehow. And if its just the government pumping money into the system, the only people who will have money is government cronies. If youre talking about the types of countries that one would generally describe as "free capitalist nations" like the US, UK, western europe etc, this proccess is what does most of the work re: increasing the money supply.
The alternative -- the other way to increase the money supply that places like the soviet block and military juntas and such is political or military crony-ism. It means that most people will never have a chance to get the new money thats being put into the system... because the government gives it to politicos, then it just stays with them (instead of being used to fund loans which fund jobs, etc etc)
An economy where the money supply is not growing, is a dysfunctional economy. I know the term "inflation" and "monetary inflation" gets thrown around a lot (i dont really get it, but i know it. All these 20-somthing blockchain computer programming hashtag using github posting millennials have the economic sensibilities of 19th century austro-hungarian viscounts), but the fact is that if you live in a country with a non-growing money supply, its probably in a mud hut and you have flies landing on your eyeball every couple minutes.
My main point of contention with the article was the strongly implied notion that the creation of money in this manner was that this sort of money creation was a "hack" -- an unintended vulnerability in the economic system that banks were exploiting for their own ends, by creating infinite amounts of money, and to the detriment of others. When, in fact, it is an intended design point without which quality of life in the US would be significantly lower than it is today.
I understand that the conventional use of money multiplication is the manner in which I described it in the OP. However, I would think that the common person would agree that any amount of money that is more than the amount initially borrowed from a central bank that is in circulation would necessarily be money that had been multiplied.
I could care two hoots if MM happens through deposits being lent out in the scheme initially described or if loans are made with rational business / banking decisions and then banks borrow from the central bank (or do overnite lending from others) to meet RR. To me, MM happened, regardless.
Japan has had a deflationary monetary supply since after WWII. I don't think they are all living in huts.
So population has increased in japan since the end of WWII... but the money supply has decreased. are they all just getting poorer? Or has their economy been so closely linked to the US that much of their corporate infrastructure uses dollars instead of yen, and holds them in US banks instead of japanese banks. (its the second thing)
Japan is an interesting exception to a general rule, and it comes mostly from close ties to the US and the US economy. In reality their money supply has grown... its just that most of that supply is in dollars. China is actually moving toward the same problem with bitcoin right now, though itll be a long time before it gets that bad.
That said, the BOJ has a NIRP going for like 3 years now.... they understand its a problem. THe guy who runs the BOJ would probably kill his mom to get the kind of geometric progression youre talking about.
NIRP means negative interest reserve policy. It means that if a japanese bank has a reserve higher than the required reserve ratio, the bank actually has to pay a fee (theyre charged negative interest on the extra) The purpose is to try to encourage japanese banks to act more aggressively in the lending market, rather than let their money sit in reserve. The problem is japanese corporations keep borrowing from US banks, because everyone there takes dollars, and US banks offer more competitive terms. ...
And I never meant that money creation in and of itself is a hack or a vulnerability of the current economic system. In fact, MM / or MC still happens regardless (as mentioned in a different reply). I just wanted to discuss some math and how I understood it to relate to economics (even if I was wrong in the example, the math holds).
Which reminds me, no one ever made a guess on this.
I would have accepted payday loan stores like the money store or loansharks. Partial credit for venture capitalists, since theyre investments, not really loans.
Point being that yes, there are people that will take their very own money out of their pocket or bank account and do what banks won't -- lend it to you directly. But they're taking way more risk and, as a result, they charge 40,000% apr and have terrible terms and possibly cave your head in with a crowbar if you miss a payment.
The balance sheet of the bank always has to balance - remember the bank lends to the same people it borrows from (as for every lender there is a borrower) so that's impossible. The more money the bank makes, the more the equity holders and deposit holders get. It's a circle that balances out to 0.
https://steemit.com/finance/@gleepower/the-definition-of-a-bank