Regulating inflation.

Credit money would not be all money but more about a financial instrument like IOU's or bonds, something that cannot be paid immediately but will attempt to do so at some time in the future. Maybe you can assume money is credit since it's no longer backed by gold but cash is cash...not cash is credit...

 

My point was money should not simply disappear. One day there was $1 trillion and the next day there was $250K. Even if the bank spent it somewhere there must be a way for the bank to get that money back, over time, with interest, so if the bank can get the money back then why not the depositor?

 

Quote;

The legal lending limit for national banks is 15% of combined capital and reserves on an unsecured loan and 25% for a loan that is fully collateralized. Bank holding companies can lend a bank affiliate either 10% of the capital plus the surplus of the affiliate, or else 20% of the capital of all affiliates, provided that they are all owned by the same holding company. Of course, most loans that would approach these limits are made to institutional borrowers only.

Read more: Legal Lending Limit http://www.investopedia.com/terms/l/legal-lending-limit.asp#ixzz4hl7jRCu0

 

yes, a sales tax that the customer pays. Perfect!

 

What he means is, for cash to exist it must be an equal offset on a balance sheet somewhere.

Think about the game of Monopoly (hopefully you've played). Imagine that all the rules are the same except, the bank starts out with no "cash". Now the rules state that every player gets's $1500 to start the game. In order for players to have $1500, the government bank must create a negative ledger entry for the same amount. So, when the bank gives you $1500, the government bank creates an accounting entry of -$1500. So you are +$1500 and the government would be equal and opposite, -$1500 (netting to zero). Thus the term "credit" is used because the money was "borrowed" from thin air. Now we utilize the Fed as a semi-autonomous non-political central bank to create a layer of abstraction between the government and private sector. This confuses the hell out of most people and the lack of understanding leads to all sorts of wild conspiracies. So yes, you could argue that government money is "credit", but the government is "borrowing" money from thin air, or itself depending on how you want to look at it, so I think it's silly to call it credit as it confuses private sector credit wich has different rules and terms. "Thin air" won't get pissed if you carry your "debt" indefinitely.

 

It's always been a pet peeve of mine that in the USA we don't really have a 100% safe place to store cash. FDIC says we're safe up to $250K but in many cases that's mouse nuts money. Many of us of a certain age find a security in having cash, versus bonds or money markets or stocks, etc. and it was always the bank we could trust. I know this is not about inflation but it's bothersome that actual cash we place in other's hands to watch for us can simply disappear...

 

The thing that makes "lending limits" so hard to digest mentally is that Roon is correct, banks must maintain their reserve requirements, what he's not saying is that when a person borrows from a bank, the money they borrow finds it's way back into the banking system as a deposit and since deposits are held by the banks as reserves. This means that lending actually creates deposits (reserves). This the only real lending limit is customers that qualify to borrow AND are willing to borrow (at the prevailing rate). The secondary limit is based on capital a bank holds. But if a bank makes a loan that it does not have the capital to cover, the bank would sell off the loan to a bank with adequate capital...

Reserves requirements do not in any way prevent banks from making loans.

 

Why not purchase US treasuries? They are 100% safe, at least relative to dollars. If there ever came a time when treasuries weren't redeemable or had no value, neither would dollars. This is why US Treasuries will always be in demand.

 

I understand that money does not grow on trees and that it must be 'created' or loaned to society thereby being considered credit money. However, at the consumer level, it's no longer 'credit' money but hard cash. At the bank level they can have the asset and offset it with a liability and call it credit money. I was thinking if I allowed the asset to happen as a depositor, then if the bank screwed up, then the liability should be payable to me the depositor...instead of the money just disappearing...it's a stupid scenario but thanks for yours and others comments...

 

That's where most all of our cash is but in my antiquated old-fashioned way of thinking it bothers me that no matter how much cash I deposit with a bank they will never guarantee me that they will give back more than the FDIC insurance...

 

What difference does it make who pays it? For that matter, make bodily injury income taxable.

 

the bank made a $1 trillion loan to a guy so he could build a new factory. The contractors who built the factory have the $1 trillion. It did not disappear. When the factory went bust, the guy who borrowed the money did not repay the $1 trillion loan; the contractors kept the $1 trillion and have no legal obligation to give it back.

 

you can open multiple accounts.

 

You mean it gets exactly where it's going every day to within a few feet anywhere on the globe 99.99 % of the time? I agree that is what the Fed does with the money supply thus making the banks insignificant in terms of aggregate money supply. So much for your 1930's Austrian theory about roaring inflation always coming on thanks to fractional reserve banking or whatever!!

 

That's not at all the scenario he laid out.

 

Oh, I completely agree, calling the government's money "credit" is, imo, just an attempt to conflate private sector credit and the consequences and responsibilities of it with that of government which are completely different.

It doesn't just vanish though....

Let's say a bank has $1,500,000 in assets and $1,000,000 in liabilties

The liabilities are all made off of people that borrowed for cars or homes. So a loan for $600k would make both a liability of $600k and an asset of $600k They are equal and offset (the interest is what the bank get's to keep and adds to its assets). But what happens if the borrower defaults? The asset side of the offset disappears and becomes just a liability.

So in my hypothetical, someone takes a loan for $600k and defaults, now the bank would have $900k in assets ($1,500,000 - $600,000=$900k) and $1 million in liabilities. A trustee would then sell off the banks assets and repay its liabilities but as James said, the $600k would be in circulation so the money didn't vanish it's circulating through the economy. The problem is that the $600k can't be left in the economy it has to be removed. The problem is that it's taken from those that hold capital and shares in the bank (assuming the $600k can't be recovered by selling the asset the borrower purchased with the $600k), In my hypothetical, there would be $100k missing, not $1 million (the original amount of the liability). The money would be repaid at .90 cents on the dollar (on average).

 

that's exactly the scenario: the bank loans out money and it does not get paid back.

 

He said he had $1 trillion and deposited it in a bank and the bank went bust.

You said:

"the bank made a $1 trillion loan to a guy so he could build a new factory. The contractors who built the factory have the $1 trillion. It did not disappear. When the factory went bust, the guy who borrowed the money did not repay the $1 trillion loan; the contractors kept the $1 trillion and have no legal obligation to give it back."

He never said anything about a "loan". he said:

"This is a hypothetical and somewhat off-topic question; Let's pretend I have $1 trillion and all of it is in a savings account at my local bank. The bank goes bankrupt and FDIC pays me $250K. What happens to the other $999,999,750,000?"

If anything OldMan is the contractor that built the factory and has been paid the $1 trillion, he didn't say he borrowed it or spent it to anyone. Are you creating "alternative facts"?

 

banks make loans so when they go bust it is usually because of bad loans. If you want to understand banking that is where to focus Here is first google:

The banking industry is unstable. Banks are regularly going bankrupt. Crises in the banking industry have occurred in three distinct time periods during the twentieth century—during the Great Depression of the 1930s, during the Savings and Loan crisis of the 1980s and 1990s, and during the Great Recession from 2007 to present.https://fee.org/articles/why-do-banks-keep-going-bankrupt/

 

James, you are still trying to avoid the fact that your answer had nothing to do with his question, nor did your follow-up.

 

cool make the recipients of the care pay the tax, separate from the insurance reimbursement.

 

If you spill a cup of coffee on yourself and take McDonald's for $1M, it is 100% tax free money for you. Why shouldn't you even have to pay income tax on it?

 

Did you ever read the paper I posted from the Chicago Federal Reserve?

Suggesting that banks are insignificant in terms of aggregate money supply is just ignorant.

 

Then it must be just a great great coincidence that the Fed in the private banks all want the money supply to stay at a level to produce 1 to 2% inflationaccording to your Austrian lunacy the banks should be happily creating runaway inflation every day

 

I guess that really depends upon which measure of "inflation" you are currently using. Do you want to use the 1970 measure? How about 1980? 1990? How we measure inflation has changed many many times. What is counted in the "basket of goods" seems to change when it is convenient to meet that "target number".

Either way - let me help you understand how banks create money outside the control of the Federal Reserve.

Lets say you deposit $1000 into your local bank, and that said bank has a 10% reserve requirement. The bank needs to hold $100 of that money and it is free to lend the other $900 to anyone it deems worthy of the risk. The bank decides to make that $900 loan to Econ4Every1. Now in making this loan the bank does not actually loan the $900 it has in deposits - instead (As MMM points out) it simply creates a fresh $900 to loan out by entering some numbers into Econ4Every1's account. Now like most people in this country Econ4Every1 also has a bank account and then deposits said $900 into his personal account and the process starts all over again. Every time this process happens the money supply is expanded by the new loan amount as the physical funds never actually get lent out...new money that did not before exist is created each time a loan is made. It is this process that The Fed does not directly have any control over...and the private banks can expand to their hearts content. Now The Fed may see fit to adjust the incentives...and banks(always looking to improve the bottom line) may choose to respond to said incentives...but it is by no means a guarantee.

So I repeat and maintain that no The Fed does not have direct control over the money supply. They simply influence it.