SERVING THE QUANTITATIVE FINANCE COMMUNITY

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Joined: September 20th, 2002, 8:30 pm

Re: Abolish the Fed ?

QuoteOriginally posted by: daveangelQuoteOriginally posted by: Traden4AlphaLooks like Iceland intends to end boom and bust cycles through MORE central bank power.that story ought to go in the Bad Reporting thread...How so?  This is the first I've heard of this story so if the reporting is wrong......
(the quotes,as in who said what, are off because of the change to the new system)

this is the way fractional reserve banking creates money.
In olden times when gold was money and people left their gold at a bank for safe keeping, the bank would give them a receipt. And then lend the customer's gold to someone else. If they lent the actual gold, they could only lend it once, until someone redeposited the gold. But if the borrower was given a receipt for the gold instead of the actual gold, the bank could lend that gold out a whole bunch of times. Until they got a run on the bank when everyone presented receipts at the same time and demanded the gold

With checkbook money, something similar happens. I deposit $1000 at a bank and the bank lends it out. Except they don't give the borrower$1000 in cash, they give them a check, or an electronic entry in their account, and no actual physical money changes hands. If the reserve requirement is 10%, then if I deposit $1000, the bank can create another$9000 in checkbook money and lend it to borrowers, so that they have $10,000 in people's accounts and$1,000 in reserves.
T4A used to tell a story about how the bank would lend out 90% of the $1000, which was then redeposited, and then the bank would lend out 90% of the 90%, and then 90% of the 90% of the 90% and so on, which would add up to$9000. But they would only needed to do that if they were giving out actual cash rather than checkbook money.

If commercial banks can no longer create money, you first need to decide how you define money. M0,M1,M2, or M3? or something else.
Definition of M0, M1, M2, M3, M4
Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country. M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.
If "money" is defined as M3 and includes both demand deposits (like a checking account or a passbook savings account that doesn't require notice) and time deposits, then the Icelandic banks would be unable to lend money, period, because to do so would create money.
If a narrower definition is used, such as M0/M1, then the banks could lend money in time deposits but not demand deposits, and could do so only once.

If Iceland is going down this road, they obviously believe that creating money leads to boom-bust cycles
No doubt some olden-times banks did what you said, lending the same gold or cash multiple times as paper IOUs but that's an example of non-reserve banking (and total illegal in modern countries these days). That's not fractional-reserve banking.

In fractional reserve banking, the total amount of loans is ALWAYS less than the total amount of deposits. The difference between loans-deposits is the reserve.

Fractional reserve does seem to make money out of thin air. Moreover, it can do so even in a true gold-standard, specie-money economy.

For example: If Joe deposits 100 physical gold coins in a bank, Joe still thinks he has 100 gold coins that he might be able to spend. Sure, he'll need to withdraw each coin he wants to spend before he can spend it but from his perspective he still owns 100 coins.

Next, if the bank lends 90 of those physical coins to Jane, Jane now has 90 coins that she might be able to spend.

Between the two of them it seems Joe has 100 coins and Jane has 90 coins so there's now 190 coins in the economy (M2 money). Meanwhile, the bank has 10 physical coins, an IOU from Jane in which she promises to repay 90 coins plus interest at a later date, and the bank has a liability of 100 coins that it owes to Joe.

Everything is fine, especially if Jane redeposits the 90 physical coins or if Jane buys something with the 90 physical coins and the customer deposits the coins for safe keeping.

It's only if Joe demands more than 10 coins before Jane (or Jane's customer) deposits the loaned coins that things get messy. That is, fluctuations in the consumer side of M0 relative to bank's reserves on M2 need to be small enough so there's never a transient in demands to withdraw specie that exceed the sum of recent deposits of specie and reserves of specie in the bank.

A more realistic model would have Joe keep 10 coins for daily spending, Joe deposits 90, the bank holds 9 of Joe's coins in reserve, the bank lends 81 coins to Jane, Jane holds 8 coins for daily spending, Jane redeposits 73 coins in the bank, the bank holds 7 of Jane's coins in reserve, the bank lens 66 coins to Jack, Jack keeps 7 coins fs for daily spending, Jack deposits ..... If you crank out the math, you find that about 50 of the original 100 coins are sitting in consumer pockets (about half of M0), the other 50 are sitting in the bank (reserves being other other half of M0). But if you ask consumers how much money they have the answer is 500 coins (M2 money).

At no time did the bank ever give out more than it had on hand. M0 remains fixed to the 100 physical gold coins but M2 grows in inverse proportion to the percentage of coins that both consumers and banks keep as reserves for daily needs.

To a first approximation it would seem that the bank's required fraction of reserves would depend on the level of risk. The greater the chance of borrower default, the greater the reserves the bank should keep to ensure it always can satisfy depositors demands. This seems to lead to a reserve fraction policy that decreases the fraction with low-risk borrowers (and stable times) and increases it with higher-risk borrowers (and unstable time). But the second order effects of reserve fraction on M2 (and higher forms of money) all but guarantee that this reserves-are-proportional-to-risk policy will drive booms and busts unless there is some other strongly countercyclical regulation of the money supply (i.e., a central bank).

ppauper
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Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

In fractional reserve banking, the total amount of loans is ALWAYS less than the total amount of deposits. The difference between loans-deposits is the reserve
as it was in the example I gave. Because the loan was in checkbook money not cash and was left in the bank

Let's go through that example your way.
0) Person X deposits $1000 in the bank 1) Person A borrows$900  and redeposits it
The bank can loan 90% of this with a reserve  ratio of 10%
2) Person B borrows $810 and redeposits it The bank can loan 90% of this with a reserve ratio of 10% 3) Person B borrows$729 in coins and redeposits it
The bank can loan 90% of this with a reserve  ratio of 10%
And so on.
The end result is that the bank has loaned $9000 and has$10,000 in deposits

If we do it the way I did it last time, the bank has loaned $9000 and has$10,000 in deposits

Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Re: Abolish the Fed ?

In fractional reserve banking, the total amount of loans is ALWAYS less than the total amount of deposits. The difference between loans-deposits is the reserve
as it was in the example I gave. Because the loan was in checkbook money not cash and was left in the bank

Let's go through that example your way.
0) Person X deposits $1000 in the bank 1) Person A borrows$900  and redeposits it
The bank can loan 90% of this with a reserve  ratio of 10%
2) Person B borrows $810 and redeposits it The bank can loan 90% of this with a reserve ratio of 10% 3) Person B borrows$729 in coins and redeposits it
The bank can loan 90% of this with a reserve  ratio of 10%
And so on.
The end result is that the bank has loaned $9000 and has$10,000 in deposits

If we do it the way I did it last time, the bank has loaned $9000 and has$10,000 in deposits
It does not matter if it's checkbook money, cash, or actual physical specie. The same amplification of M2 money occurs even if M0 is strictly set by physical coinage.

It's the counting of loans as assets that amplifies the money. The depositor thinks his deposit is an asset when he's actually loaning money to the bank. And the bank thinks it's loans are assets on it's balance sheet. And the borrower thinks of the borrowed cash as an asset. But the depositor's asset is counting the same physical coins as the borrower's asset.

In fact, you could abolish all banks entirely but if you let consumers lend directly to each other, you'd still get the money-from-thin-air phenomenon of a fractional reserve system. In consumer-to-consumer lending, the reserve fraction which sets the money amplification ratio is set by the consumer's own personal choice of percentage of wealth they lend.

ppauper
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Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Re: Abolish the Fed ?

He's got the pen and paper to define a dollar as a fixed weight of gold but does he have the money and gold to maintain it?

ppauper
Posts: 69410
Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

The Federal Reserve on Wednesday raised short-term interest rates for the third time this year.
The U.S. central bank’s Federal Open Market Committee (FOMC) increased its benchmark federal funds rate by a quarter-percentage point, setting a range of 2 percent to 2.25 percent, and continued to forecast one more rate hike in 2018.

Cuchulainn
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Re: Abolish the Fed ?

BTW, what is this agency? Safe as Fort Knox?

https://en.wikipedia.org/wiki/United_States_Gold_Bureau

ppauper
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Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

BTW, what is this agency? Safe as Fort Knox?

https://en.wikipedia.org/wiki/United_States_Gold_Bureau
the link doesn't find a page
google tells me that
United States Gold Bureau is a private distributor of Gold, Silver & Platinum coins from the U.S. Mint and is not affiliated with the U.S. Government. Information on this web site is intended for educational purpose only and is not to be used as investment advice or a recommendation to buy sell or trade any asset that requires a licensed broker.
as for "Safe as Fort Knox," one of the things people want is an audit of Fort Knox to make sure the gold is still there

Cuchulainn
Posts: 57307
Joined: July 16th, 2004, 7:38 am
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Re: Abolish the Fed ?

USGB was one of the sponsors of the Prepper reality show as was the German medical company Draeger..

ppauper
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Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

since President Trump took office, the Fed discontinued Quantitative Easing (QE) and is now pursuing quantitative tightening
Jim Rickards: The Fed Is “Triple Tightening” Into Crisis
And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).
When the Fed started QT last year, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.
It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes. Markets have already suffered two significant sell-offs this year, the most recent being October’s.
wow, "Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes"

the Fed continues to try to destroy the Trump recovery.
And bizarrely, Powell credits Fed policy for the US economy being 'in a good place'
lol
The only Fed chairman I've ever known take responsibility for anything was Bernanke who acknowledged (at a dinner to honor Milton Friedman) that the Fed caused the Great Depression, although he was somewhat confused as to how they caused it

bearish
Posts: 3920
Joined: February 3rd, 2011, 2:19 pm

Re: Abolish the Fed ?

since President Trump took office, the Fed discontinued Quantitative Easing (QE) and is now pursuing quantitative tightening
Jim Rickards: The Fed Is “Triple Tightening” Into Crisis
And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).
When the Fed started QT last year, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.
It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes. Markets have already suffered two significant sell-offs this year, the most recent being October’s.
wow, "Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes"

the Fed continues to try to destroy the Trump recovery.
And bizarrely, Powell credits Fed policy for the US economy being 'in a good place'
lol
The only Fed chairman I've ever known take responsibility for anything was Bernanke who acknowledged (at a dinner to honor Milton Friedman) that the Fed caused the Great Depression, although he was somewhat confused as to how they caused it
Yeah, let’s go by the analysis by the great novelist, Jim Richards. His writing can be entertaining at times.

ppauper
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Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

Yeah, let’s go by the analysis by the great novelist, Jim Richards. His writing can be entertaining at times.
you're thinking of the wrong person, this was Jim Rickards

From forbes:
The Biggest Economic Threat In 2018: Quantitative Tightening
Further, their quantitative tightening, which is what it really is, is going to reduce M2 money growth from its current 4% to less than 2%, as Lacy Hunt pointed out to me a few days ago.
That slowdown is likely to affect the velocity of money, exerting further deflationary pressure on the economy. It is monetary policy madness to raise rates and undertake quantitative tightening at the same time.
No doubt they quote M2 because the Fed long ago stopped releasing M3 data because "it wasn't useful," whatever that means, and I suspect it means that even though it's useful to us to have the data, it's not useful to the Fed for us to have the data

bearish
Posts: 3920
Joined: February 3rd, 2011, 2:19 pm

Re: Abolish the Fed ?

Sorry, autocorrect strikes again.

bearish
Posts: 3920
Joined: February 3rd, 2011, 2:19 pm

Re: Abolish the Fed ?

I have actually met Jim Rickards, and he is a nutcase in real life, too.

ppauper
Posts: 69410
Joined: November 15th, 2001, 1:29 pm

Re: Abolish the Fed ?

this from last month
Cramer says it almost seems like Fed Chair Powell by his actions wants ‘Trump to lose’
and today
Cramer: 'You'll wish you sold at these prices' if the Fed hikes rates in December
The “Mad Money” host has been critical of the Fed under Chairman Jerome Powell, saying central bankers need to recognize that the economy is slowing and they can't move rates to a preconceived notion of so-called neutral.
Late last month, Cramer said it almost seemed like Powell is being aggressive in his path to raise interest rates because the Fed chairman wants to throw a wrench in President Donald Trump’s agenda.