Alternative minimum tax

[taxedout]

Last I checked, my CC company charging me interest was perfectly legal.

You have your definition of "usury" wrong. Usury is not interest on a non-asset (whatever that means) but an interest rate charged above a limit set by law.

I said FORMERLY illegal. Formerly the limit was 100% of assets on hand.
Non- asset. Loan made with no backing.

What? How can a bank loan me money if it doesn't have the money?

I thought you told me you understood fractional reserve banking.

I thought you were talking about whether a bank that lends out money has the money in its vault.

We were. It does not.

If you mean the reserve requirement, I think it is 10%.

So then it uses this method all the time, not just on seldom occasions ? Actually the rate has been much lower.

Are you trying to say there is no difference from the Fed and any other private bank? Or do you agree that whether or not you want to call it a private bank, it is in fact a completely different thing than a private bank.

Yes that is what I am saying. And it is indeed a private bank with very special priveledges. It is privately owned with unlisted stock holders.
Decisions are for the good of the stockholders, as are all privately owned corporations.

Under the right setup, of course.

Yes it's just those other nasty privately owned busniesses with greedy stockholders that are bad.
Right set up ? Are you saying that the congress has means to control the FED.

Not sure your point here. Are you disagreeing with why I said?

Yes, it does not publish the M3 data anymore.
Any guess as to why that is ?

[/QUOTE]

 

[Iriemon]

I said FORMERLY illegal. Formerly the limit was 100% of assets on hand. Non- asset. Loan made with no backing.

There have always been non asset loans. E.g. Lines of credit, credit cards. When were they illegal.

Originally Posted by Iriemon
What? How can a bank loan me money if it doesn't have the money?

I thought you told me you understood fractional reserve banking.

That is not an answer, either directly or indirectly.

Fractional reserve doesn't mean that a bank can lend money it doesn't have. It refers to how much of its assets (deposits) it can loan out. A 10% fractional reserve means that a bank can lend out 90% of the assets (deposits) it has. If a bank has $1000 is deposits, it can lend out $900. But it cannot lend money it doesn't have, and doesn't create money, though it can multiple the effects of newly created money.

Fractional reserve multiplies the effect of created money by multiplying money originally loaned by the Fed. The Fed lends $1000 to a member bank, which lends out $900 which is deposited in another bank. Thaat bank lends out $810, and so on. The only money created is money lent out by the Fed, the effect of which is multiplied though the fractional reserve.

We were. It does not.

When I get a loan from my local bank for a mortgage, where do you think the money come from?

So then it uses this method all the time, not just on seldom occasions ? Actually the rate has been much lower.

No seldom occassions. It has been lower.

Originally Posted by Iriemon
Are you trying to say there is no difference from the Fed and any other private bank? Or do you agree that whether or not you want to call it a private bank, it is in fact a completely different thing than a private bank.

Yes that is what I am saying. And it is indeed a private bank with very special priveledges.

Priveleges, powers, obligations, systems of governance, and ownership.

So we agree that the Fed is different from any other "private" bank. If you understand that, then don't refer to the Fed as a bank when you are discussing how the Fed operates, as it makes your statements inaccurate.

Yes it's just those other nasty privately owned busniesses with greedy stockholders that are bad. Right set up ? Are you saying that the congress has means to control the FED.

The feder reserve bank shareholders do not receive a profit and cannot vote for the board members, which is completely different than any other private bank.

Congress can control the Fed, since the Fed is a government institution created by statute, which can be modified.

Yes, it does not publish the M3 data anymore.
Any guess as to why that is ?

OK, why?

But I'm really waiting to hear what it has to do with my statement:

"We have seen stable financial growth over the past 25 years with this system. Since the Fed changed policy and started focusing on inflation as opposed to employment in 1979, inflation has been under control, usually a couple points a year. We have so far managed to avoide the huge cycles of boom and depression that were far more prevalent, culminating in the Great Depression"

and what about that statement you are contending is incorrect.

 

[taxedout]

the Fed is a government institution

No, it is not.

 

[Iriemon]

No, it is not.

Fair enough -- I used the word "government" in a broad sense, ie the Fed is the part of the government responsible for the money supply. I agree it is not part of what is usually referred to as the the U.S. government (president, congress and courts) and is not included when I refer to the US Govt. The Fed is independent of the US government by design. However, it functions including governing the money supply, and its board members are appointed by the President.

More info:
FRB: FAQs: Federal Reserve System

 

[Kandahar]

Taxedout, are you going to answer my question? In your little utopia, would banks be prohibited from creating any money (that is, not keeping 100% of their assets in a vault)? If so, how would they make any money? And why would banks even exist under such a system?

I fail to see what is the big problem with banks doing this anyway...you keep complaining about it, but you've never really explained what's wrong with it.

 

[Iriemon]

Taxedout, are you going to answer my question? In your little utopia, would banks be prohibited from creating any money (that is, not keeping 100% of their assets in a vault)? If so, how would they make any money? And why would banks even exist under such a system?

I'm still not sure how he things a bank can just create money, his answers get vague, cryptic and non-responsive when I try to pin him down on details. I think he is confusing the way the creation of money by the Fed is multiplied thru the fractional reserve system with the notion that a bank can lend money it doesn't have by just creating it.

Banks would be creating money by the trillions if they could do that. Open a bank, and get rich by lending out billions you don't have. That would be neat.

 

[Kandahar]

I'm still not sure how he things a bank can just create money, his answers get vague, cryptic and non-responsive when I try to pin him down on details. I think he is confusing the way the creation of money by the Fed is multiplied thru the fractional reserve system with the notion that a bank can lend money it doesn't have by just creating it.

I think you're right. What Taxedout fails to realize is that the government, not the banks, can control the money supply through reserve requirements.

 

[teacher]

Kandahar abuse, and why di I asgree with him for the first time ever?

Lettuce get to the bottom of this.

Sens. Max Baucus (D-MT) and Chuck Grassley (R-IA) have called for the repeal of the alternative minimum tax. The AMT is basically designed to prevent wealthy people from taking excessive deductions, by making them pay some minimum amount if their regular tax bill would be less than that. However, in recent years, more and more people have been affected by the AMT, some of whom are merely upper-middle class and not wealthy. Since it is not adjusted for inflation, the AMT affects more and more people every year.

On the other hand, repealing the AMT would cost our government about $100 billion per year at a time when we're already running an enormous deficit.

What do you think should be done?

Looks good on paper. But I now rufuse to dicuss taxes until the consumption tax idea is proven to be flawed.

The Nazi's don't like it because it gives the rich a way to be taxed fairly and then they wont contribute to the Nazi party for special favours.

The bedwetters don't like it cause it gives the rich a way to be taxed fairly and the poor can't claim the rich are getting over thus taking away a large part of the bedwetters voting base garnered from jelousy and hatred of the rich of those that work harder/smarter.

I'm just on a whole different level than you retards, ain't I?

Yes Caine, I have derailed another thread.

But ask yourself Caine, why is it I can do this at will?

Wouldn't you think that no matter what I say, one from the left or right would have a rebuttal?

Nah. Cause I am the perfect Libertarian and I take ALL of you retards to task and NONE of you is prepared to fight common sence.

Look around. How many threads have "teacher" as the most recent poster?

Sure, I'm a dick, but dicks get bucked up to.

Winners stay.

Look around. Told you morons I was gonna kick it up a notch.

Wanna see this site shut down with logic, then me, Gunny and Akyron can spend all our time going..."sup, wanna go grab a brew"?


I'm just gettin warmed up.

 

[taxedout]

I think the concept of taxation as a form of social engineering has been discussed.

 

[taxedout]

It is always followed by a "the rich need to pay their fair share" argument.

 

[taxedout]

Fractional reserve doesn't mean that a bank can lend money it doesn't have. It refers to how much of its assets (deposits) it can loan out. A 10% fractional reserve means that a bank can lend out 90% of the assets (deposits) it has.

One little catch.
Much of the reserves are composed of the newly created money from the FED, and then pyramided.

Heres' how it works.
The FED purchases a $100 bond from Seller A, through its open market operations.. The FED writes Seller A a check for $100 in newly created money. The FED now has a new $100 asset(the bond) evenly balanced by a $100 liability in demand deposits(a check upon itself) to Seller A.

Seller A takes the $100 to bank A and deposits it. Bank A has now increased its money supply(demand deposits) by $100. It send the check to the FED for deposit and receives a $100 reserve(asset), balancing its liability( demand deposit/money supply). The banking system now pyramids the money by the multiplier.

You are correct. Bank A can loan an multiple of 1 minus the multiplier.
If the multiplier is .10, then Bank A can loan $100(1-.10) or $9O to debtor A.
Debtor A deposits his loan check in bank B. Bank B's assets increase by $90, perfectly matched by it's liability (demand deposit/money supply) of $90.

Bank B now loans out $90(1-.10), or $81 to debtor B.
Debtor B deposits the check in Bank C.
Bank C's assets increase by $81, balanced by its liability (demand deposit/money supply) of $81.
Bank C now loans out $81(1-.10), or $72.90

And so on it goes until the expansion in the money supply equals $100 + 90 + 81+ 72.90 + 65.61 +59.50 which asymptotically approaches $1000,
an aggregate mutiplication ratio of (1/reserve ratio) :1, or 10:1. The same as if bank A had lent out $1000 dollars from it's original $100 asset.
If the reserve ratio approaches 2% as it has historically done, the ratio approaches 50:1, a $5000 increase in the money supply from a single counterfeit $100 bond purchase.

Also, it matters not where the bank gets the initial demand deposit. It will be multiplied in the same fashion. (1/reserve ratio) : 1

For instance, if there were 14 banks and 14 clients, an initial deposit of $100 by one individual can be turned into $900 in new demand deposits/ money supply by the same mechanism, with a .10 existing reserve ratio. The banks are not loaning you their money. It is being created for you, and the FED is always on call as the lender of last resorts to issue new fiat money to prevent a run on the bank.

Yes you are correct, an individual bank lends 1-ratio of its reserves.
You have not taken into account the aggregate effect of a multi bank system, essentially multiplying money, not fractioning it as the name implies.

Also, add to this the fact that a large portion of the reserves come through the FED's purchase of existing bonds with 100% fiat money on the open market, with the subsequent purchase of treasury bonds by the private banks with the new influx of money. These bonds, now held by the private banks are used as assets for further lending.
Because the bonds are government(taxpayer) guaranteed, they can be used as assets for further lending, by the multiplier of course.

 

[Kandahar]

So how do you propose banks make money if they aren't allowed to lend out money? What possible reason do they have for existing? Stop avoiding the question.

 

[Iriemon]

One little catch.
Much of the reserves are composed of the newly created money from the FED, and then pyramided.

What reserves? The Fed's reserves? In one sense, all money in use results from newly created money.

ow it works.
The FED purchases a $100 bond from Seller A, through its open market operations.. The FED writes Seller A a check for $100 in newly created money. The FED now has a new $100 asset(the bond) evenly balanced by a $100 liability in demand deposits(a check upon itself) to Seller A.

Seller A takes the $100 to bank A and deposits it. Bank A has now increased its money supply(demand deposits) by $100. It send the check to the FED for deposit and receives a $100 reserve(asset), balancing its liability( demand deposit/money supply). The banking system now pyramids the money by the multiplier.

You are correct. Bank A can loan an multiple of 1 minus the multiplier.
If the multiplier is .10, then Bank A can loan $100(1-.10) or $9O to debtor A.
Debtor A deposits his loan check in bank B. Bank B's assets increase by $90, perfectly matched by it's liability (demand deposit/money supply) of $90.

Bank B now loans out $90(1-.10), or $81 to debtor B.
Debtor B deposits the check in Bank C.
Bank C's assets increase by $81, balanced by its liability (demand deposit/money supply) of $81.
Bank C now loans out $81(1-.10), or $72.90

And so on it goes until the expansion in the money supply equals $100 + 90 + 81+ 72.90 + 65.61 +59.50 which asymptotically approaches $1000,
an aggregate mutiplication ratio of (1/reserve ratio) :1, or 10:1.

Making progress! So far so good. This is one way the Fed creates money, and how the multiplier effect multiplies the depository value of the currency created.

The same as if bank A had lent out $1000 dollars from it's original $100 asset.

No, because there are multiple depositors and lenders that use different banks.

I think in the aggregate, with a 10% reserve, with a $100 loan from the Fed you end up with a $100 loan payabe to the Fed, $900 in deposits, $900 in loans, and $100 in cash reserves, and (though the actual numbers are some portion of this because not every cent is deposited).

Even if all persons in the chain deposited at the same bank, you'd end up with $900 in deposits, $900 in loans, $100 in cash reserves, and the $100 loan payable to the fed.

If the reserve ratio approaches 2% as it has historically done, the ratio approaches 50:1, a $5000 increase in the money supply from a single counterfeit $100 bond purchase.

True, the smaller the reserve the greater the multiplier.

Also, it matters not where the bank gets the initial demand deposit. It will be multiplied in the same fashion. (1/reserve ratio) : 1

It matters a great deal. The first bank does not get an initial demand deposit, it get cash and a loan payable to the Fed. That creates the new money. The rest of the chain just multiplies the effect, but doesn't create new money.

For instance, if there were 14 banks and 14 clients, an initial deposit of $100 by one individual can be turned into $900 in new demand deposits/ money supply by the same mechanism, with a .10 existing reserve ratio.

No, because that initial deposit of $100 was in turn the proceeds from a loan from a previous bank in the mulitplier chain -- it is not newly created money that starts a new multiplier. Your illustration is just a continuation of an existing mulitplier, not a new one. Only the first loan from the Fed starts a new multiplier affect because only that is actually newly created money.

The banks are not loaning you their money. It is being created for you, and the FED is always on call as the lender of last resorts to issue new fiat money to prevent a run on the bank.

No, each bank is lending its money based on deposits it received. Each bank is not independently creating money, even though by loaning it out it is extending the multiplier effect. You are confusing the multiplier effect with the actual creation of money.

Yes you are correct, an individual bank lends 1-ratio of its reserves.
You have not taken into account the aggregate effect of a multi bank system, essentially multiplying money, not fractioning it as the name implies.

I have, that is one way the money supply is controlled. But again, each bank is not creating new money but multiplying it.

Also, add to this the fact that a large portion of the reserves come through the FED's purchase of existing bonds with 100% fiat money on the open market, with the subsequent purchase of treasury bonds by the private banks with the new influx of money.

Yes when the Fed purchases Govt bonds (or anything else) it can do it with fiat or new money, and that will cause an expansion of the money supply. However, purchases of Govt bonds by private banks does not create new money like when the Fed purchases it. The Fed is creating money. The private bank may be multiplying the effect, but it is not creating new money.

The $100 initially loaned by the Fed multiplies to $1000 new money. Money loaned by a private bank (to whomever) is only part of that $100 initially loaned by the Fed and part of that $1000 multiplied effect. Money loaned by a private bank doesn't create a new $1000 so that now there is a total of $2000. See the difference?

These bonds, now held by the private banks are used as assets for further lending. Because the bonds are government(taxpayer) guaranteed, they can be used as assets for further lending, by the multiplier of course.[/

The bonds represent loans receivable to the bank from the Govt. I'm not sure your contention is correct, and it doesn't make sense. If that were the case, a bank could take all its capital (say $1000) and loan it to the Govt. It then has a loan receivable from the Govt of $1000. How can it loan cash when its asset is a loan receivable? If it could, why wouldn't it re-loan the loan receivable to the Govt over and over, earning mulitples of interest without having to loan cash?

I'm pretty sure banks can't do this.

 

[taxedout]

What reserves? The Fed's reserves? In one sense, all money in use results from newly created money.

The reserve at the private banks. The FED buys existing bonds and writes the seller a check. The checks get deposited in the bank. The bank sends the check to the FED, which credits the bank a reserve. The bank now has an additional reserve and a demand deposit of equal value. It is this reserve from which the multiplication takes place.

No, because there are multiple depositors and lenders that use different banks.

I think in the aggregate, with a 10% reserve, with a $100 loan from the Fed you end up with a $100 loan payabe to the Fed, $900 in deposits, $900 in loans, and $100 in cash reserves, and (though the actual numbers are some portion of this because not every cent is deposited).

Even if all persons in the chain deposited at the same bank, you'd end up with $900 in deposits, $900 in loans, $100 in cash reserves, and the $100 loan payable to the fed.

My example showed what happens with multiple banks. There is nothing payable to the FED. The FED bought the bond on the open market with fiat money, ie wrote a check. The bond seller deposited the check. The bank returns it to the FED, which credits the banks reserves.

This is exactly what happens if I write you a check. You deposit it in your bank, which sends it to my bank. My bank credits yours, but only with cash form it's reserves. In the FED's case however, its "reserve" is created at that instant, 100% fiat. There is no loan payable by the bank to the FED. The FED paid the seller of the loan, seller A.

HERE IS THE SAME EXAMPLE WITH ONLY ONE BANK IN THE SCENARIO
Once Bank A loans out the $90, it can loan no more. It is loaned up to the reserve ratio.
But if if debtor A pays all $90 to Creditor A(Joe the carpenter), and Creditor A deposits it back into Bank A, the bank now has the original remaining $10 reserve and the new $90 deposit for a total of $100 in reserve from which to draw. As a liability it has the original $100 demand deposit to Seller A and the new $90 demand deposit to Creditor A, for a total of $190 in demand deposits.( the actual money supply). The reserve is now 100 and the demand deposits are 190, for a ratio of 1.9:1. This process can repeat until the demand deposits(money supply) to reserve ratio equals 10:1, for a reserve of .10. At that point the bank is again loaned up.
It will have the original $100 reserve and $1000 in demand deposits.

This is the multiplication. The end numbers are the same as in the case for multiple competing banks.

It matters a great deal. The first bank does not get an initial demand deposit, it get cash and a loan payable to the Fed. That creates the new money. The rest of the chain just multiplies the effect, but doesn't create new money.

A reserve is a reserve.
If I deposit $100(loan it to the bank), it will be multiplied in the manner outlined above, and the demand deposit will be payable to me.
If the FED deposits $100(loans it to the bank), it will be multiplied in the manner outlined above, and the demand deposit will be payable to the FED. Either way, the additional new demand deposits created
(new money supply) will be the "multiple" [original deposit X 1/reserve ratio]. This is the multiplication.

No, because that initial deposit of $100 was in turn the proceeds from a loan from a previous bank in the mulitplier chain -- it is not newly created money that starts a new multiplier. Your illustration is just a continuation of an existing mulitplier, not a new one. Only the first loan from the Fed starts a new multiplier affect because only that is actually newly created money.

Each bank sees only deposits. It doesn't care where each new one comes from . It simply loans up to its reserve ratio. There is never a new multiplier. Simply new loaning up to the ratio. $100 in new fiat money from the FED turns into $1000(or more depending on the ratio) of loaned fiat money, every time. This is how the multiplication takes place. You have spoken about the multiplication, but have not shown where or how it takes place. This is it.

The money supply only expands at the point of each new loan.
The banks receive $100 in fake money, each bank loans up to the reserve ratio, and the multiplication takes place. The multiplication only takes place when new loans are made.

No, each bank is lending its money based on deposits it received. Each bank is not independently creating money, even though by loaning it out it is extending the multiplier effect. You are confusing the multiplier effect with the actual creation of money.

Review the process above. Construct your own scenario. Put $100 in a bank.
Loan it up to its reserve. Check your reserve and demand deposit amounts.
Redeposit it. What is your new reserve and new demand deposit ammount ?

Work through it one step at a time.
See what you come up with.

The same process happened before the FED, only there was no FED to create fiat money as the lender of last resort, preventing runs on the banks.

I have, that is one way the money supply is controlled. But again, each bank is not creating new money but multiplying it.

Not creating new, just multiplying it ?
Think about that for a minute.

Yes when the Fed purchases Govt bonds (or anything else) it can do it with fiat or new money, and that will cause an expansion of the money supply.

..... and the expansion takes place through multiplication at the banking level, through loans, as described above. This is the only way. The multiplication is the expansion. It takes place through lending.

Also, when the FED purchases government bonds, it does so indirectly. It first purchases existing bonds through the open market system with FED checks. The sellers deposit the checks in the banks. The banks send the check to the FED which credits their accounts with the reserves to buy the new treasury bonds.

However, purchases of Govt bonds by private banks does not create new money like when the Fed purchases it. The Fed is creating money. The private bank may be multiplying the effect, but it is not creating new money.

Actually, government(taxpayer) backed bonds are guaranteed payment by the government. As such they may be considered as reserves. The government has allowed this. The bank is then free to lend up to it's reserve ratio.
You know the rest of the story.

The $100 initially loaned by the Fed multiplies to $1000 new money. Money loaned by a private bank (to whomever) is only part of that $100 initially loaned by the Fed and part of that $1000 multiplied effect. Money loaned by a private bank doesn't create a new $1000 so that now there is a total of $2000. See the difference?

Please show me where and how the multiplication takes place ?
That is the trick. I have showed you the steps.

I didn't say that the money is multiplied to 1000 and then the banks add a new 1000. Go back and re read. hopefully you have done your own math and have already figured it out how the multiplication takes place.

The $100 new money loaned by the FED multiplies to $1000 new money.
You are correct.
However, you are confused as to how and where the multiplication takes place. It only takes place when each bank loans up to its reserve and the cycle plays out as described above. It simply does not multiply without the lending cycles.

The bonds represent loans receivable to the bank from the Govt. I'm not sure your contention is correct, and it doesn't make sense. If that were the case, a bank could take all its capital (say $1000) and loan it to the Govt. It then has a loan receivable from the Govt of $1000. How can it loan cash when its asset is a loan receivable? If it could, why wouldn't it re-loan the loan receivable to the Govt over and over, earning mulitples of interest without having to loan cash?

I'm pretty sure banks can't do this.

If it loaned a $1000 of its reserves to the treasury, it would have a $1000 bond usable as a reserve in exchange, but it would be a wash. No net gain.

However if the FED purchases $1000 of existing bonds on the open market, the banks end up with $1000 from bond seller deposits. The banks use these as the reserves to buy the bonds. The treasury gets it's money and the banks have the $1000 guaranteed bond as a reserve, with which to loan up to their reserve ratio. The government gets its cash and the money supply expands by the multiplier. Check it out, your bank uses government bonds as reserves for lending, and the reserve ratio does not change.

 

[Iriemon]

The reserve at the private banks. The FED buys existing bonds and writes the seller a check. The checks get deposited in the bank. The bank sends the check to the FED, which credits the bank a reserve. The bank now has an additional reserve and a demand deposit of equal value. It is this reserve from which the multiplication takes place.

OK

My example showed what happens with multiple banks. There is nothing payable to the FED. The FED bought the bond on the open market with fiat money, ie wrote a check. The bond seller deposited the check. The bank returns it to the FED, which credits the banks reserves.

The first bank (a member bank) in the creation of money cycle borrows money from the Fed (thru a bond, in your example, or via a fed fund loan). In that first transaction, the borrow has a cash (reserves) of $100 and an offsetting loan payable (bond) to the Fed of $100.

This is exactly what happens if I write you a check. You deposit it in your bank, which sends it to my bank. My bank credits yours, but only with cash form it's reserves. In the FED's case however, its "reserve" is created at that instant, 100% fiat. There is no loan payable by the bank to the FED. The FED paid the seller of the loan, seller A.

No. The Fed does not give out money for free. It lends it via fend funds or lends it thru purchasing debt (bonds). In either case, the initial entity receiving the new fiat funds from the Fed has an offsetting loan or bond payable to the Fed.

HERE IS THE SAME EXAMPLE WITH ONLY ONE BANK IN THE SCENARIO
Once Bank A loans out the $90, it can loan no more. It is loaned up to the reserve ratio.
But if if debtor A pays all $90 to Creditor A(Joe the carpenter), and Creditor A deposits it back into Bank A, the bank now has the original remaining $10 reserve and the new $90 deposit for a total of $100 in reserve from which to draw. As a liability it has the original $100 demand deposit to Seller A and the new $90 demand deposit to Creditor A, for a total of $190 in demand deposits.( the actual money supply). The reserve is now 100 and the demand deposits are 190, for a ratio of 1.9:1. This process can repeat until the demand deposits(money supply) to reserve ratio equals 10:1, for a reserve of .10. At that point the bank is again loaned up.
It will have the original $100 reserve and $1000 in demand deposits.

This is the multiplication. The end numbers are the same as in the case for multiple competing banks. [/quote]

OK -- but that is a little different from saying "The same as if bank A had lent out $1000 dollars from it's original $100 asset."

A reserve is a reserve.
If I deposit $100(loan it to the bank), it will be multiplied in the manner outlined above, and the demand deposit will be payable to me.
If the FED deposits $100(loans it to the bank), it will be multiplied in the manner outlined above, and the demand deposit will be payable to the FED. Either way, the additional new demand deposits created
(new money supply) will be the "multiple" [original deposit X 1/reserve ratio]. This is the multiplication.

No. The difference is that when the Fed lends money, it is new money that creates a brand new multiplier.

When you deposit money, it is from (at some source) a loan - it is not new money (because you cannot create money) but multiplying money already created.

It is the difference between being part of a muliplier and new money.

Take the example. Fed lends $100 to member bank A, which lends out 90$ to Mr. Z, who deposits it in bank B. Bank B lends $81 to Mr. Y and so on, and we have agreed that what is created from that initial $100 is $1000 in money, constituting $900 in deposits and $100 in cash.

Now, when Mr. Z deposits $90 into Bank B, that does not creat a new multiplier effect of $900 independant of the inital Fed loan. It does not make the money created a total of $1900. Mr. Z is not creating money. The money he deposits is already created, and his act of depositing it does not create a new muliplier but continues an existing one.

Each bank sees only deposits. It doesn't care where each new one comes from . It simply loans up to its reserve ratio. There is never a new multiplier. Simply new loaning up to the ratio. $100 in new fiat money from the FED turns into $1000(or more depending on the ratio) of loaned fiat money, every time. This is how the multiplication takes place. You have spoken about the multiplication, but have not shown where or how it takes place. This is it.

Correct. Which is why in your example, when you deposit $100, it is not creating a new muliplier of money, but continuing the existing one. Your act of depositing $100 does not create new monehy.

The money supply only expands at the point of each new loan.

As measured by the total amount of deposits and loans, true.

Review the process above. Construct your own scenario. Put $100 in a bank.
Loan it up to its reserve. Check your reserve and demand deposit amounts.
Redeposit it. What is your new reserve and new demand deposit ammount ?

Work through it one step at a time.
See what you come up with.

1/9th at each step.

The same process happened before the FED, only there was no FED to create fiat money as the lender of last resort, preventing runs on the banks.

Sure.

Not creating new, just multiplying it ?
Think about that for a minute.

Correct. The initial $100 cash lent by the Fed is the the new or fiat money. Even after going all the way thru the multiple process, how much cash (reserves) is there?

..... and the expansion takes place through multiplication at the banking level, through loans, as described above. This is the only way. The multiplication is the expansion. It takes place through lending.

Correct.

Also, when the FED purchases government bonds, it does so indirectly. It first purchases existing bonds through the open market system with FED checks. The sellers deposit the checks in the banks. The banks send the check to the FED which credits their accounts with the reserves to buy the new treasury bonds.

Whether it purchases them directly or indirectly doesn't matter. If the Fed uses new (fiat) money for the purchase, new money is created which is multiplied thru the system thru loans.

Actually, government(taxpayer) backed bonds are guaranteed payment by the government. As such they may be considered as reserves. The government has allowed this. The bank is then free to lend up to it's reserve ratio. You know the rest of the story.

I'd have to see where banks can lend loans recievable, for the reasons explained in my previous post.

Please show me where and how the multiplication takes place ?
That is the trick. I have showed you the steps.

I didn't say that the money is multiplied to 1000 and then the banks add a new 1000. Go back and re read. hopefully you have done your own math and have already figured it out how the multiplication takes place.

Then you acknowledge that it is incorrect to say that money loaned by a private bank creates new money. It is multiplying arleady created money.

The $100 new money loaned by the FED multiplies to $1000 new money.
You are correct.
However, you are confused as to how and where the multiplication takes place. It only takes place when each bank loans up to its reserve and the cycle plays out as described above. It simply does not multiply without the lending cycles.

I'm not confused. I understand when multiplication takes place. You are correct that it is part of the lending cycle. But where I disagree is your contention that whenever a bank makes a loan, it is creating new money. It is not, it is simply multiplying money already created.

If it loaned a $1000 of its reserves to the treasury, it would have a $1000 bond usable as a reserve in exchange, but it would be a wash. No net gain.

I'm not sure that US Govt securities can't count as cash for reserve purposes. But I don't see how a bank can lend a t-bill.

However if the FED purchases $1000 of existing bonds on the open market, the banks end up with $1000 from bond seller deposits. The banks use these as the reserves to buy the bonds

.

Make no sense. Fed purchases a $1000 bond from seller. Seller gets $1000 check (cash). Seller deposits cash in account in Bank A. Bank A of course can use cash as reserves. But what do you mean "The banks use these as the reserves to buy the bonds"? Bank A can use the cash deposited by Seller to lend or whatever it wants.

The treasury gets it's money and the banks have the $1000 guaranteed bond as a reserve, with which to loan up to their reserve ratio.

How exactly does the Treasury get any money from the sale of an existing bond by a seller to the Fed? The Treasury gets no money from this transaction. The Treasury gets money when the bond is first issued.

The government gets its cash and the money supply expands by the multiplier.

The Government has gotten no cash. The Govt only gets cash when the bond is issued. Money was created an multiplied if the Fed used fiat money to by the bond.

If you are trying to say that the Fed buying an existing Govt bond on the open market is an indirect way of the Fed buying a Govt bond directly from the Treasury, sure. Either way the same transaction occurs. The Fed has the loan receivable from the Govt, and the money supply is exapanded by the amount the Fed paid for the Govt bond.

Check it out, your bank uses government bonds as reserves for lending, and the reserve ratio does not change.

I'll research it later. It may very well be so, since Govt securities are viewed as safe as cash. Still, however, Govt bonds do not represent cash that can be lent, even if they are valid for a reserve balance. As a practical matter, banks make more money lending than they earn on Govt loans, so they normally would not be holding large amounts of Govt securities.

 

[taxedout]

The first bank (a member bank) in the creation of money cycle borrows money from the Fed (thru a bond, in your example, or via a fed fund loan). In that first transaction, the borrow has a cash (reserves) of $100 and an offsetting loan payable (bond) to the Fed of $100.

The Bank does not borrow the bond. The FED purchases it from a private seller and the seller deposits it in the bank. The bank owes the FED nothing. It has a demand deposit payable to the seller only.

No. The Fed does not give out money for free. It lends it via fend funds or lends it thru purchasing debt (bonds). In either case, the initial entity receiving the new fiat funds from the Fed has an offsetting loan or bond payable to the Fed.

THE FED purchases an existing bond from a private seller.The FED holds the bond, the selller gets the check and leaves. Monitary Control act of 1980.
FED buys bonds from private sellers with fiat money.

OK -- but that is a little different from saying "The same as if bank A had lent out $1000 dollars from it's original $100 asset."

That's exactly what happens. Previously non-existing money, generated from the initial deposit in the amount of (deposit/reserve ratio), all in the form of demand deposits, which are payable on demand.
The new demand deposits created are the new money supply.

No. The difference is that when the Fed lends money, it is new money that creates a brand new multiplier.

There is no "new" multiplier. There is simply a reserve ratio.
The ratio applies to all reserves, including the pre-existing reserves.

When you deposit money, it is from (at some source) a loan - it is not new money (because you cannot create money) but multiplying money already created.

Bank B gets the $90 deposit. It knows and cares not from where it came. It came from a depositor. It is now an asset(reserve) balanced by a demand deposit(liability).As such it can be lent to the reserve limit.

The $100 deposit became a $90 loan, and then a $81 dollar loan for a total of $171 dollars lent from the original deposit, in only two cycles. The loan will become smaller with each consecutive cycle, and the total loaned from the initial $100 will be $900.

This is how fractional reserve banking works.

Now, when Mr. Z deposits $90 into Bank B, that does not creat a new multiplier effect of $900 independant of the inital Fed loan. It does not make the money created a total of $1900. Mr. Z is not creating money. The money he deposits is already created, and his act of depositing it does not create a new muliplier but continues an existing one.

There is NEVER a "new" multiplier. There is just a reserve ratio that applies to all reserves.

This is the part you are having trouble with. The reserve ration simply means that all banks must keep a certain portion of their entire demand deposits on hand.

It does not mean that only $90 of my original $100 can be lent one time.

Correct. Which is why in your example, when you deposit $100, it is not creating a new muliplier of money, but continuing the existing one. Your act of depositing $100 does not create new monehy.

There is never a new multiplier, just a reserve ratio, that applies to all reserves.

The lending of my demand deposit to someone else does create new money. The bank owes me my demand deposit, and gave out 90% to someone else.
There is now 190% of the original in circulation.
When the cycle is complete there will be 1000% in circulation.

It is the demand deposits that are the money supply.

I'd have to see where banks can lend loans recievable, for the reasons explained in my previous post.

The bank can use all reserves for lending, up to the reserve ratio.

I'm not confused. I understand when multiplication takes place. You are correct that it is part of the lending cycle. But where I disagree is your contention that whenever a bank makes a loan, it is creating new money. It is not, it is simply multiplying money already created.

What is multiplication ?

I'm not sure that US Govt securities can't count as cash for reserve purposes. But I don't see how a bank can lend a t-bill.

It doesn't lend a t-bill. It holds the t-bill. The ammount of the t-bill is added to its reserve. All reserves can be lent up to the reserve ratio.
It lends checkbook money.

Make no sense. Fed purchases a $1000 bond from seller. Seller gets $1000 check (cash). Seller deposits cash in account in Bank A. Bank A of course can use cash as reserves. But what do you mean "The banks use these as the reserves to buy the bonds"? Bank A can use the cash deposited by Seller to lend or whatever it wants.

The FED makes a decision for the private banks to buy new treasury bonds.
It creates the money for them by purchasing existing bonds on the open market.
The deposits from the sellers are designated for the purchasing of new treasury bonds. The banks buy the bonds. The maturity value of the bonds are now the private bank's reserve. The banks is free to lend against its reserve. The banks owe the sellers the demand deposit if demanded. They owe the FED nothing. The sellers have exchanged a bond for a demand deposit in the bank.

How exactly does the Treasury get any money from the sale of an existing bond by a seller to the Fed? The Treasury gets no money from this transaction. The Treasury gets money when the bond is first issued.

The private banks buy new treasury bonds.
The treasury gets the money.
The FED holds the existing bonds, paid for by fiat.
The sellers get demand deposits.

If you are trying to say that the Fed buying an existing Govt bond on the open market is an indirect way of the Fed buying a Govt bond directly from the Treasury, sure. Either way the same transaction occurs. The Fed has the loan receivable from the Govt, and the money supply is exapanded by the amount the Fed paid for the Govt bond.

The money supply is expanded by the amount the FED paid for the existing bonds, and by the multiplication of this new money through the fractional reserve banking system, which will be in the ammount of (new reserve/reserve ratio).

Still, however, Govt bonds do not represent cash that can be lent, even if they are valid for a reserve balance.

Yes, they do.
Bonds are not lent. Checkbook money is lent based upon the reserves and the reserve ratio.

 

[Iriemon]

There is NEVER a "new" multiplier. There is just a reserve ratio that applies to all reserves.

This is the part you are having trouble with. The reserve ration simply means that all banks must keep a certain portion of their entire demand deposits on hand.

It does not mean that only $90 of my original $100 can be lent one time.

I think you are having the trouble with this part.

It is only when the Fed lends new "fiat" money that a new muliplier is created. If it lends $100 of new money, a new multiplier is created, and with a 10% reserve, the money supply (including deposits) is expanded by $1000.

When private bank lends $100, it is part of the existing multiplier already in existance. When a bank lends $100, it does not create another $1000 of expansion in the money supply. It is part of the $1000 muliplied expansion of the original $100 the Fed created. The Fed creates money. Banks muliply the effect through deposits and lending. The banks do not create money.

 

[ARealConservative]

I think you are having the trouble with this part.

It is only when the Fed lends new "fiat" money that a new muliplier is created. If it lends $100 of new money, a new multiplier is created, and with a 10% reserve, the money supply (including deposits) is expanded by $1000.

When private bank lends $100, it is part of the existing multiplier already in existance. When a bank lends $100, it does not create another $1000 of expansion in the money supply. It is part of the $1000 muliplied expansion of the original $100 the Fed created. The Fed creates money. Banks muliply the effect through deposits and lending. The banks do not create money.

How can he be having trouble. He has been far more patient then I would be in explaining why you are wrong.

 

[oldreliable67]

Actually, government(taxpayer) backed bonds are guaranteed payment by the government. As such they may be considered as reserves. The government has allowed this. The bank is then free to lend up to it's reserve ratio.

U.S. Gov't securities owned by a bank are not reserves: reserves are currency held in bank vaults and deposits (reserve balances) at the Federal Reserve Banks. Like loans, U.S. Gov't securities owned by a bank are assets. The unrealized gains and losses on certain securities accounts are used in the calcualtion of risk-adjusted assets and in the determination of capital adequacy. Typically (but considerably less so today than historically), bank investments in gov't securities are a residual: the investment portfolio increases when load demand is slack and decreases when loan demand is robust.

On occassion, Treasury securities are used as collateral for loans (e.g., discount window borrowings) and the proceeds of those loans are then lent to borrowers or used to satisfy depositors claims, but this often runs afoul of various permissible captial ratios and is likely to signal an institution having some financial difficulty. Can be a death knell.

However, the expansion process works regardless of whether the newly-added excess reserves resulting from a Fed purchase of securities result in additional loans or investments. The process is still the same: the bank with excess reserves purchases securities and credits the sellers account with cash, and the cycle continues.

One of the simplest and clearest explanations of the process of creating money was an old pamphlet from the Chicago Fed. It is long out of print, but can still be found here.

 

[oldreliable67]

The banks do not create money.

Yes, they do. As the old Chicago Fed pamphlet notes:

Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank.

There are many other sources for such, but this pamphlet has an excellent explanation and description of the process of money creation and the role of the fractional reserve system and has always been my favorite.

 

[Iriemon]

Yes, they do. As the old Chicago Fed pamphlet notes:

Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank.

There are many other sources for such, but this pamphlet has an excellent explanation and description of the process of money creation and the role of the fractional reserve system and has always been my favorite.

LOL! How come no one every told me about this? How can I create money for myself? A couple million will do fine, but heck, if I can create it, why no 10 mil? Where's the form I need to fill out?

 

[Iriemon]

How can he be having trouble. He has been far more patient then I would be in explaining why you are wrong.

He's having trouble because he doesn't see the difference between the Fed creating money and a bank lending money.

When the Fed lends $100, it (can) creates money which is multiplied so that the money supply expands by $1000.

When a bank lends money, it may be part of that $1000, but it does not create new money which is multiplied again.,

If the Fed lends Bank A $100, the money supply ultimately expands to $1000. When Bank A lends $90 of that $100, it is part of the $1000. It is not new money that creates a new muliplier of $900. In other words, when Bank A lends the $90, the total money supply will still only be expanded by $1000 (from the $100 the fecd created), not $1900.

Only the Fed can create money by fiat. A bank cannot create money.

 

[oldreliable67]

LOL! How come no one every told me about this? How can I create money for myself? A couple million will do fine, but heck, if I can create it, why no 10 mil? Where's the form I need to fill out?

What, you didn't get the memo?

The public influences reserve balances thru changes in preferences for holding cash (e.g., remember what it was like before interest bearing demand deposit accounts?) and other "independent" actions. The Chicago Fed pamphlet describes it this way:

It is apparent that bank reserves are affected in several ways that are independent of the control of the central bank. Most of these "independent" elements are changing more or less continually. Sometimes their effects may last only a day or two before being reversed automatically. This happens, for instance, when bad weather slows up the check collection process, giving rise to an automatic increase in Federal Reserve credit in the form of "float." Other influences, such as changes in the public's currency holdings, may persist for longer periods of time.

I don't know about you, but when I filled out the form, I thought, "Why settle for a measly mill or two?"

 

[Iriemon]

What, you didn't get the memo?

The public influences reserve balances thru changes in preferences for holding cash (e.g., remember what it was like before interest bearing demand deposit accounts?) and other "independent" actions. The Chicago Fed pamphlet describes it this way:

I admit I haven't had time to read the article, but the difference, I should think, is between creating money and changing the quantity of the money supply, which are different things.

I don't know about you, but when I filled out the form, I thought, "Why settle for a measly mill or two?"

Thou art much wiser than I.

 

[oldreliable67]

Only the Fed can create money by fiat. A bank cannot create money.

Not exactly true. Only the Fed can create reserves. Banks can add to the money stock, simply by creating book entries crediting deposits of borrowers, which the borrowers in turn can "spend" by writing checks, thereby "printing" their own money. Each individual bank is limited as to how much they can expand loans (crediting deposits of borrowers) by capital ratios, reserve ratios, etc. As noted above, when reserves are scarce (i.e., loan demand high), the investment portfolio has often been reduced as a way of funding loans (i.e., proceeds of sales increase reserve balances when are then available to expand loans).

Put simply, and in the context of the earlier examples of the central bank purchase of securities, consider the T-accounts at a point in time when a bank has excess reserves - but not necessarily from a Fed securities purchase. The bank can initiate the process by simply expanding loans, up to the point where it's excess reserves are depleted. Thus, the money creation process doesn't necessarily have to begin with a Fed purchase.

The amounts by which banks in the aggregate can do this is, of course, limited by the amount of reserves available to them, as determined by the reserve ratio requirement. Individual banks can bid reserves away from other banks via the Fed Funds market, but reserves as whole are determined by only the Fed.