The Mises Institute has a shockingly bad assessment as to how money is created. 
Please consider “Playing With Fire”
But before wasting 39 minutes, I advise first reading my take on the video. You may not wish to bother.
A Very Bad Start
At the 2:40 mark, Jonathan Newman, a Mises economist wrongly explains “Fractional reserve banking is the idea that banks keep a fraction of deposits in reserve so that somebody walks in and makes a deposit. What they [the banks] actually do is take that money and they use it to finance loans that they make to other people, business loans, mortgages.”
Continuing at the 2:58 mark, Joseph Salerno, Professor Emeritus at Pace University responds to Newman with “Let’s say they lend out 90 percent. They are comfortable keeping one dollar for every ten dollars that people will deposit. So you can write checks up to $1,000 on that checking deposit. At the same time there is 900 more dollars in circulation than there was before you made that deposit.”
No Reserves on Deposits
The above paragraphs are shockingly bad, and outright false.
For starters, there are no reserve requirements on deposits. None.
Fictional Reserve Lending Is the New Official Policy
With little fanfare or media coverage, the Fed made this Announcement on Reserves.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
I discussed the above on March 27, 2020 in Fictional Reserve Lending Is the New Official Policy
More fundamentally, neither Salerno nor Newman understands how money is created.
[I said banks never lent deposits. If you go back long enough they did.]
I commented:
Amusingly, a few days ago yet another article appeared explaining how the Money Multiplier works. The example goes like this: Someone deposits $10,000 and a bank lends out $9,000 and then the $9,000 gets redeposited and 90% of the gets lent out and so an and so forth.
The notion was potty. That is not remotely close to how loans get made.
What’s Changed Regarding Lending?
Essentially, nothing.
The announcement just officially admitted the denominator on reserves for lending is zero.
When Do Banks Make Loans?
- They meet capital requirements
- They believe they have a creditworthy borrower
- Creditworthy borrowers want to borrow
Point two is worthy of discussion.
Banks may not have a creditworthy borrower, they just have to believe it, or they have an alternate belief that applies. In 2007 banks knew full well they were making mortgage liar loans.
So why did banks make liar loans?
Because banks bought into the idea home prices would not go down. If home prices appreciated, banks were covered.
BIS Working Papers No 292 Unconventional Monetary
In 2009, I referred to BIS Working Papers No 292 Unconventional Monetary
The article addresses two fallacies
Proposition #1: an expansion of bank reserves endows banks with additional resources to extend loans
Proposition #2: There is something uniquely inflationary about bank reserves financing
From the BIS
The underlying premise of the first proposition is that bank reserves are needed for banks to make loans. An extreme version of this view is the text-book notion of a stable money multiplier.
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans.
The main exogenous constraint on the expansion of credit is minimum capital requirements.
Read those points over and over until they sink in. I discussed that article in 2009 and again in 2020.
Fictional Reserve Lending
The fact of the matter is loans create deposits not the other way around.
Yet here we are, with zero reserves on deposits (not that any were ever needed even when there were reserve requirements) discussing absurd money multiplier theory.
I started skipping around in the video and found some accurate statements by Jim Grant.
The rest is spotty. Ponder this amusing but false idea at the 9:30 mark: “In 1971 they [the Fed] might have done other things like raise the price of gold.”
The comment was in reference to Nixon ending gold redeemability.
The video authors somehow seems unaware that you cannot fix the price of gold. Rather money should represent a fixed quantity of gold, not gold valued in dollar terms.
At the 12:30 mark we see some intelligent comments on who the loser is. “The average working person pays the price during the cycle of boom and bust.”
But many of us have been making that comment for decades. Mises.Org has not offered anything new.
At the 27:00 mark the video has a reasonable discussion of the risks of central bank digital currencies.
Stop the Madness
At the 30:00 mark, Mises discusses how to stop the madness, supposedly. But for five minutes the video droned on with obvious why discussion as opposed to how.
At the 35:00 minute mark there’s a discussion on ending the Fed. Finally, at the 37:35 mark Ron Paul stated “Economically, you just get rid of the Fed if you want to have sound money and a healthy economy.”
That was it. There is no more.
Conclusion
For decades, I have been saying we need to end the Fed and let the market set interest rates. My fear is we end the Fed and let politicians control money supply.
Trump, who appointed Jerome Powell, now wants to fire him. Trump said he personally could do a better job.
Trump would be worse. Even if Trump wouldn’t be worse, what about the next president?
The idea that a group of central planners can manage the economy is proven false by the increasing amplitude of boom-bust cycles over time.
But the idea a politician or Congress whose main goal is to get reelected can do a better job is ridiculous.
We need to end the Fed but only if we replace the Fed with nothing instead of politicians. The free market can set rates nicely.
Not only was the video loaded with factual errors, it offered no discussion of how to end the Fed or what the consequences would be.
The Fed controls interest rates but politicians control deficit spending. There was no mention of that key idea in the video.
Now was there any discussion (other than false), on how banks create money. If we were to have a 100 percent gold-backed dollar, then many things have to change.
There was no discussion of this critical idea. Nor could there be. The authors have no idea how money is created.
Grade F.
Deposits are a liability of banks, not capital, not even an asset.
Bank Cash (e.g. retained profits) are an asset. Don’t confuse cash with deposits.
Banks need to have some capital to offset deposits.
Bank Capital: Meaning and Classifications
https://www.investopedia.com/terms/b/bank-capital.asp#:~:text=Bank%20capital%20is%20the%20difference,and%20inter%2Dbank%20loans).
BIS
https://www.bis.org/publ/work292.pdf?noframes=1
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly. The reason is simple: as explained in Section I, under scheme 1 – by far the most common – in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost of intermediation and that of loans, but does not constrain credit expansion quantitatively.
The main exogenous constraint on the expansion of credit is minimum capital requirements. By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions.
Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks
Mish,
I think you have some very important points to make on this topic, but a couple of factors may be impeding your ability to clearly/effectively communicate them to an audience with less specialized knowledge than you have (as reflected by some of the comments)…
1) Occasionally, you speedily whip through seemingly counter-intuitive points (the loan-deposit vs. Deposit-loan time sequence for instance) because you have a different/better perspective than your audience, who are coming to the issue with less specialized knowledge and therefore cannot make intuitive/counter-intuitive leaps as fast/easily as you can.
If you step through your thought process more slowly and in somewhat greater detail (how exactly do bank loans get made without deposits to fund them) I think more of your audience will fully grasp/believe the points you are trying to make.
2) On a related note, you sometimes lump some/many of these harder to grasp views into a single post, rapidly going through how they inter-relate/interplay. That just amplifies the audience-confusion issues raised in #1. Perhaps handling just 1 harder-to-grasp/counter-intuitive point per post (while maybe tying them together via post links) would help your audience to step through your reasoning and come to fully grasp your perspective and its implications.
I know you disagree with the premise of fractional reserve banking, Mish, but that same source you use here to explain to your readers the meaning and classification of bank capital also has information (in 2024 after the Fed change on reserve requirements) on how banks “can create loans from the money you deposit” and “by using funds held in reserve to issue loans to businesses and consumers”.
https://www.investopedia.com/terms/f/fractionalreservebanking.asp
This article is hard to follow. If I take the money from my paycheck and open a savings account, isn’t that creating a deposit?
Totally agree, but that’s what all the economists learned as undergraduates. I don’t know what the current undergraduates are taught.
The money multiplier is way too theoretical, in my opinion. In theory, it can obviously work like this. Banks with a 0% reserve requirement can create plenty of new dilutive money to create inflation. The free banking school of Austrian economics nailed the correct explanation, imo. In practice, banks are constrained by supply and demand. A weakening economy won’t offer as many opportunities for creditworthy loans. However, the Austrian school seems united in the belief that the interest rate signal the Fed puts out creates “malinvestment.” In a perfect Austrian world, they are creating loans for productive manufacturing and technology companies, not flimsy service and hospitality businesses or exorbitant mortgages that aren’t creating economic value. Banks may be inclined to create these poor-quality loans only to find out they will go belly-up when the business cycle turns south. In practice, we still end up with the deflationary collapse the Austrians predicted…
Reserves have nothing to do with lending.
I’m confused, Mish. Are you saying an individual bank can’t transfer funds out of its own reserve balances with the Fed, and make new profitable loans to paying, credit-worthy customers instead?
You’re confused. Banks aren’t intermediaries. Bank lending is a function of the velocity of deposits, not their volume. It is a system’s process, not an individual bank’s process.
Obviously, the individual banker can’t operate with a negative cash flow, it must maintain a positive balance of payments.
Reserves have nothing to do with lending as the BIS article explained.
Banks lend money into existence. The main constraint on lending is capital impairment or fear of it. Capital impaired banks won’t make loans.
A 100% reserve requirement would not stop lending – and I am in favor of that.
Thanks for responding, Mish.
Maybe we’re arguing semantics, but your statement that “Reserves have nothing to do with lending …” sounds very final and is not correct, according to the same BIS article you cited:
“To be clear: this is not to say that central banks are powerless to influence bank lending. In situations where lending is initially limited by significant funding constraints at the bank level – either because of illiquid assets or inability to borrow – interventions that alleviate this will facilitate lending. Thus, contrary to the popular assertion that injections of excess reserves into the banking system are ineffective when the bank lending channel or money multiplier is “broken”, it is precisely in such situations that the likelihood of their having any significant impact is greatest.”
So no, reserves (and deposits) are not guaranteed to yield more lending. But banks can and do use ‘excess’ reserves to make loans – per conventional economic/money & banking theory and the BIS article itself
So there’s no difference in lending between a 0% reserve requirement and a 100% reserve requirement?
Correct
Banks don’t lend from reserves and reserves can be borrowed.
There is no need to borrow reserves anymore since the Fed eliminated reserve requirements on deposits.
But even a 100% reserve requirement (which I favor) would not stop lending. All it would require is for banks to park all deposits overnight at the Fed. Lending would proceed as normal.
I viewed the video at the premiere, LVMI event (Our Enemy, The State) in SC. It was intended for less economically informed public. The thrust was the evil the Fed allows via “money printing”, and extension of credit for the state to proceed with its’ various evil policies. Policies of constant warfare, welfare, inflation, ad infinitum. I agree they point to the commercial bank money multiplier (Mystery of Banking, Rothbard) an outdated reference, but the real point is creation of fiat money from thin air and the damage it causes. They pointed out the discipline the gold standard placed on inflation and state largesse and eliminating the Cantillon effect. I paid an effective 50 – 65 % of my income in taxes during by employment years, watched my saving deplete due to inflation (a hidden tax). Yet the state now has a 36+ trillion deficit, thanks to the Fed. If we were to pay for the profligate state spending via taxes, they would have appropriated all our income for spending. That wouldn’t have washed with the citizens and enforced some discipline on the state. Mish your point is valid, but I think you did a disservice by attacking money multiplier so vigorously and thereby negated the entire video.
Besides the Money Multiplier error, Mish had these valid criticisms too:
Tangentially related was a good intro article on FEE today:
fee<dot>org/articles/the-top-5-most-misunderstood-economic-concepts/
The money multiplier was only valid between 1942 and 2008. It was dependent upon the banks minimizing their nonearning assets.
The money multiplier theory died long before 2008. I think one might have to go back to pre-FDR gold standard.
https://www.bis.org/publ/work292.pdf?noframes=1
BIS:
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived riskreturn trade-offs, and by the demand for those loans.31 The aggregate availability of bank reserves does not constrain the expansion directly. The reason is simple: as explained in Section I, under scheme 1 – by far the most common – in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost of intermediation and that of loans, but does not constrain credit expansion quantitatively.32 The main exogenous constraint on the expansion of credit is minimum capital requirements. By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter r
I am repeatedly irked by folks referring to creating “money out of thin air.” If that were true there would be a limit – the amount of air. There is no limit to fiat creation as there is no limit to natural numbers. Sometimes I am too easily irked. Thanks for listening.
I do not believe in eliminating the Federal Reserve Banks. They provide much useful analysis. Additionally there is grave risk to the economy and general public in turning loose hundred of PhD economists with no business world experience and marginal theories.
Interest rates MUST be established by borrowers in open markets, not by Governments with infinitely deep pockets full of fiat and no accountability.
DEMOCRACY WORKS FOR THE FIRST 2500 YEARS. dumpy and mamala are perfect reflections of the downright morons, who are the amerikan peoples. THE PRIVATE OWNED FEDRESNY is just taking advantage of the morons. it’s like they are begging to be clubbed, like baby seals.
“So why did banks make liar loans? Because banks bought into the idea home prices would not go down”
The smarter banks just relied on the fact that they could unload these bad loans to federal agencies and just collect risk-free fees.
Don’t confuse Liar Loan risk to the much greater, Interest Rate Risk. At its peak 60% of mortgage loans were high risk Adjustable Interest Rate loans. To improve
their bottom lines Banks would always benefit if they could barrow short-term at
low rates, regularly and lend (for 30 years) at high rates. They were able to cover that risk with adjustable rate loans.
This risk got passed on to the uneducated barrowers and off the shoulders of the
banks. If loan applicants asked, they were told by mortgage brokers that if
rates go up, just refinance to a fixed-rate loan. The economy slid down, home
values slid down, and rates went up. When loans went Under Water people just
walked away. The whole house of cards collapsed. The Mortgage Loan insurers
didn’t adjust their rates to cover this extra risk and went under. Then the disaster
rolled upward and took out Fanny May and Fredy Mack.
At its peak the cheap loans were so easy to resell that no one cared about the risks that could be passed on up to FM &FM. Liar Loans were accepted without a second glance and nobody was happier than the politicians that created the system and blamed everyone else when it crashed.
You create the credit with your signature. Banks lend NONE of their own deposits. They create the loan out of thin air with your signature. They have since they got rid of the gold standard. It’s not even a contract. You give them the credit to loan to yourself. Biggest scam evar.
correct. plus the fact that NY FED is privately owned. unlike the DC and us congress facing FED in DC which has a patina and dog and pony show to look like they work for the “people”. the mandate of unemployment and inflation is all rubbish. gruel for the middlebrows…….
First: I am neither a Fed critic or fanboy. I simply accept that they exist, and no one here will ever be able to change that.
Second: Were things any better before the creation of the Fed? No. In fact there was far more economic volatility including more recessions, and periods of high inflation as well as deflation than today.
Third: I believe that there is ONE good reason to have a Fed. Let me explain:
Inflation, Hyperinflation, Bubbles and human psychology
What drives bubbles such as Tulipmania in 1600s, the South Sea Bubble in the 1700s, Japan in the 1980s, Dot-com in 2000.
People’s expectations, psychology and FOMO.
Take tulipmania. At first, as prices of tulip bulbs rise, most people ignore this, saying things like “that’s crazy, those prices will come down”. But the longer prices keep rising, many start to say “okay, maybe I will put a bit of money into it. Then as prices keep rising, more and more folks join the party. Eventually it becomes a mania with far too many people throwing caution to the wind. Till it reaches the inevitable collapse.
It’s psychology. And expectations.
Remember the shortages of toilet paper, hand sanitizer, etc during the pandemic? Suddenly people were loading their pickup trucks with as much of these items as they could find. Never mind the price. If there’s a shortage of anything; people will stock up before it’s gone or too expensive.
The same goes for any item when there is a story about a shortage of coffee, chocolate, children’s tylenol etc. People rush out to buy up as much of these items as possible before everyone else does. FOMO. Psychology.
Same goes for hyperinflation. As inflation climbs to high single digits, people start demanding higher wages to keep up. Then, as they struggle to keep up, they start to turn their attention to things they “expect” to go up in price faster than their wages. Nonperishable basic necessities. Gold, crypto, houses, stocks.
If inflation climbs above 10%, they begin to lose faith in in their own fiat currency. They look for alternative currencies. Soon, it all becomes a self-fulfilling prophecy. Inflation of 1% a month climbs to 2% per month. Now everyone wants to get rid of their cash and savings before it goes down further in value. Which just feeds the frenzy. Expectations. Psychology.
Once this gets going, there is no way to stop it. Just like the tulip or south sea bubble, it has to play out to the logical conclusion. Eventually, hyperinflation takes hold (50% or more per month) and the currency becomes worthless.
These bubbles have taken place throughout human history. Long before the existence of central banks. Getting rid of central banks won’t prevent these things from happening. Because you can’t change psychology.
It is my own personal opinion that the primary reason for a central bank to exist is to interject themselves at a point where inflation expectations are beginning to get out of hand. Stop things before inflation gets out of control. That’s what happened in the early 80’s.
Of course, many will say that central banks do lots of bad things. And I agree. The less central banks do, the better.
They are in many ways like an expensive insurance policy. We begrudge paying the price for their very existence and complain about them a lot. But we want them there to prevent runaway hyperinflation.
Will they always be successful in preventing hyperinflation? Probably not. But they are the one institution that has a chance to prevent it.
you are half correct. what you miss is that there are privately owned central banks like the FEDRESNY. that’s a scam. might as well just let Facebook mouse click the currency and skim off the top for that monopoly. the real problem is this and the legal tender laws. it’s not if but only when states and banks will issue USD. like the old days. NOW there are central banks that are owned by the people of a state or nation. hell we have a state with a state bank already here. if the central bank was just another part of the UST to back stop bank runs and bail out manmade and nat catastrophes. etc…………that would be 100x better. it’s never different. history always repeats and rhymes. i think mish is confused about history of currency. and panics and how things can unwind. i was in russia in the 90s. after their government failed. quite a fun and exciting time to be alive……….i must say. i learned a lot about men. the geezers north of 35 or so cannot handle those big changes. THIS BOOK IS THE BEST …………https://www.abebooks.com/servlet/BookDetailsPL?bi=31832729184&dest=usa&ref_=ps_ggl_11147913055&cm_mmc=ggl-_-US_Shopp_Textbook-_-product_id=COM9780691142166USED-_-keyword=&gclid=CjwKCAjw3624BhBAEiwAkxgTOvY46fSpxp2INZmJO218GCZbEyFL7Ui9bm53FjwfmO2Uaiz3VlpR7xoCO1QQAvD_BwE
Agree with what you are saying. But I am also aware of what I can change and what I cannot change. I focus most of my attention on what I can do to improve my personal life. I am not one to tilt at windmills.
i don’t really care what you think about life. to be honest. you sound like a nihilist as your life’s philosophy. very common in modern amerika. also has been around for thousands of years……… be that as it may. you are a great mind for analyzing energy companies. so i’m improving my personal life by listening to you. thanks.
A strange interpretation. Nihilists REJECT generally accepted aspects of human existence. I am the opposite of that. I ACCEPT them. And then try to take advantage of them.
I accept that people will fall prey to manias, bubbles, FOMO, and inflation expectations. I accept that the FED exists and has a role to counter those inflation expectations.
I accept that we will continue to use more and more fossil fuels because we require them to enhance economic growth and living standards.
And I accept that using more fossil fuels will worsen global warming; which is an acceptance of the science.
Thanks for the compliment on analyzing energy companies.
read”ominous parallels”. there are many uses of the term nihilist. bismark turned the german empire into nihilists on purpose. and their stupidity for not giving a damn made the rise of a two bit corporal quite inevitable. we copied the german model 125 years ago………..and now have an empire of nihilists. don trump is a perfect example of this. democracy works. people elect themselves in our system. i do appreciate your insights. i remember mish had many more smart posters here 15 years ago. it’s degraded to a maga cult v anti maga cult chatter blog……..unfortunately. out of mike shedlock’s control. sign of the nihilist times.
You are confusing my “acceptance” of how the world works for “not caring” about how the world works.
I want a better world for my children and grandchildren. And I do what I can to help them make better lives for themselves. If I didn’t care, I wouldn’t be working my ass off to make my life and their lives better every single day.
I agree that certain “political leaders” will prey on folks and turn them in to nihilists. Just one more reason why I avoid politics as much as I can and focus on those around me.
I agree. There are no unicorns. Sadly, most people think their philosophy is the correct one that will usher in a time of peace, harmony, and abundance for all (or at least most) if only they could get the pesky rubes (anyone disagreeing or resisting) to go along with their ideology. The problem they have is always other people, never themselves. “If it wasn’t for those racist Republicans..blah blah blah,”; or “If it wasn’t for the those commie Democrats blah blah blah.”.
No one ever asks the questions; “Why don’t we have 100% free markets if they produce the best results for all?”; or “Why don’t we have a very small limited government if such a thing promotes the maximum amount of freedom for all?” We had close to both early on, but for some reason we’ve moved away from both. Why? PapaDave touched on some of the possible reasons, but the ultimate answer is quite simple. The masses simply don’t want either for one reason or another, at least not at the moment they don’t. I guess that could change, but I highly doubt it.
correct. democracy works perfectly. the people elect themselves and get what they want. including endless warfare and misery and charlatans stealing everything not nailed down. i figured this out as a teen. the rest is eyewash. i find it fascinating watching the rubes drone on and on about how it’s all not fair, or how many shekels they can personally pile up in their miserable mcmansions of nothingness………………..idiocracy is here. it’s entertaining
Inflation expectations don’t matter but that is a different subject.
The primary reason for bank failures prior to the Fed is banks lent out more gold than they had deposits.
But does it really? Does the market lead or does the Fed drag the market around.
Does the Fed merely stabilize the rate around certain points, but relents to market forces? The Fed pegs rates and influences them by selling/buying assets, but can it really push uphill or downhill when the markets are flowing the other way?
I’m surprised some people from the Mises Institute didn’t weigh in on the merit of the publishing this video. Thanks for your review.
Mish, if banks aren’t lending from deposits (in a circular system from fractional lending), where are they getting the funds to make loans? Because those loan funds are leaving the bank for customers to pay for cars, homes, etc., it has to come from somewhere.
I picked a bank at random (Fifth Third Bancorp). Its EOY balance sheet for 2023 says:
Total Assets: $214.5B
Gross Loans: $115B
Securities: $75.6B
Total Liabilities: $195.4B
Deposits: $168.9B
Total Equity: $19.1B
Invested Capital: $36.0B
With these capital and equity numbers, how did this bank make loans (write checks to others) for $115B that it holds (not selling to others)? Assuming they are not lending from deposits?
re: “ Because those loan funds are leaving the bank”
Savers never transfer their savings outside the banks unless they are hoarding currency. Funds never leave the payment’s system. They are just redeposited in another bank, etc.
Of course, savers can keep their money in a particular bank or not; that is their choice.
And I did not say funds leave the payment system; of course, loan checks for new homes or cars are redeposited (somewhere) by the receiver/seller.
But a bank has the legal approval by the Fed to use depositer/saver funds for loan-making. And by the accounting identity, assets must equal liabilities and equity for each individual firm. So Fifth Third Bancorp (from the example above) can create a new loan and asset for itself (if it finds a worthy borrower), but its own liabilities plus equity (not just the entire payment systems’) must equal its assets. So it must have either more owner equity, debt it borrows from other entities or deposits/liabilities to make that new loan/asset on its profit-making books
The lending capacity of the DFIs is reflected in the velocity of deposits, not in the volume of deposits. The DFIs could continue to lend even if the nonbank public ceased to save altogether.
Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).
Link Steve Keen: “Banks don’t “intermediate loans”, they “originate loans”.
http://bit.ly/2GXddnC
The Bank of England:
http://bit.ly/2sphBHD
Working Paper No. 529 “Banks are not intermediaries of loanable funds — and why this matters” –Zoltan Jakab and Michael Kumhof May 2015
BOE: “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank”
Thanks for posting the references again.
Too few folks have ever read them.
Thanks for the links; I appreciate academic economic text reading in the morning.
But I think I will stick with the proven intermediation of loanable funds (ILF) research that has been expanded upon for decades since the theories and research of Nobel laureate Tobin. Over a 2015 working paper (still not published?) of an ‘alternative’ way to examine FMC bank modeling (at the macro level BTW, not actual micro decisions by real bankers in local communities)
No reason for specifics. What was voted in, in 1913, put in motion what we are experiencing today. Then 1971 gave our drunk Uncle Sam an endless supply of credit at the liquor store.
Why not allow the free market find rates/appropriate capital lending.
We US citizens deserve better.
Oh well, add another zero!
it’s mouse click currency with no limits. covid year taught them it’s now easy to deposit directly in the middlebrows accounts for any future sign of distress. the money center banks in nyc would have to be extremely stupid now to have any fear of insolvency. the last little panic, in spring of 2008, bear stearns was sacrificied as they didn’t kick in for the 1998 LTCM bailout. we are on another level now. trillions of mouse click currency conjured up to prop up the banks that own the federal reserve of NY. and don’t forget israel and the MICC scam all in on the game. the middlebrows don’t stand a chance. but they seem to love the beatings. HL mencken was correct. downright morons.
Yes, and they deserve to get it good and hard.
They are behind the times. What they described was written in the Ron Paul Money Book in the 1990s. Their description of fractional reserve banking is practically word for word what is in that book. And of course fractional reserve banking was dishonest then but it’s flatly absurd now. So they’re giving the current state of our banking system far more credit than it merits.
correct.
What’s an enigma is that banks don’t lend deposits and savers never transfer their savings outside the banks. I.e., the NBFIs are the DFI’s customers.
The DIDMCA was a monumental mistake. It caused the Savings and Loan Association crisis (as predicted in May 1980) and the July 1990-Mar 1991 recession.
WSJ: “In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: ‘Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.’
As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits.”
Written by Louis Stone whom the movie “Wall Street” was dedicated to – Vice President Shearson/American Express
The money multiplier was predicated on the assumption that the commercial banks will immediately buy some type of earning asset with their “Manna from Heaven”, IBDDs. This they always did between 1942 and Oct. 6, 2008’s enactment.
By mid 1995 (a deliberate and misguided policy change by Alan Greenspan), legal (fractional) reserves ceased to be binding – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating “low-reserve tranche” & “reservable liabilities exemption amounts” c. 1982) & lower reserve ratios (requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.
This was the direct cause of the boom in real-estate.
link: Bank Reserves and Loans: The Fed Is Pushing On A String” – Charles Hugh Smith
Bank Reserves and Loans: The Fed is Pushing On a String – InvestingChannel
Help me out here. It is/was my understanding that banks could barrow money from the Fed based on how much the Bank had in deposits. This allows banks to loan out the $ from the Fed in addition to loaning out the customers deposits. This then creates a leverage on top of leverage. It also makes the Fed the one that is now responsible for providing the Fictional Reserves, not the banks?
None of my Profs mentioned this when is was getting my MBA.
The banks borrowed to satisfy their reserve requirements and to prevent bank runs, to stay liquid. Banks have to operate with a positive balance of payments in order to stay solvent.
From a system’s belvedere, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks, NBFIs): never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time “savings” deposits, or the owner’s equity, or any liability item.
When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially, the creation of an equal volume of new money (demand deposits) – somewhere in the payment’s System. I.e., commercial bank demand deposits are the result of lending, not the other way around.
The non-bank public includes every institution (including shadow-banks), the U.S. Treasury, the U.S. Government, State, and other Governmental Jurisdictions, and every person, etc., except the commercial and the Reserve banks.
re: “The free market can set rates nicely.”
Right. Interest is the price of credit. The price of money is the reciprocal of the price level.
William McChesney Martin let rates find their own level after the Treasury-Reserve Accord of 1951. The U.S. Golden Era in Capitalism was where net changes in Reserve Bank Credit were determined by the FOMC’s net free, or net borrowed, reserve targeting position approach.
I attempted to look up the difference between capital and reserves in banking. Is this correct?
“Capital requirements help soften the losses on loans and other assets while reserve requirements are meant to ensure banks are able to pay depositors and prevent a run on the bank.”
So reserves are in the vault today and Capital is salable assets you can unload in a month? It doesn’t seem like a firm distinction given the Fed pays interest on “excess reserves.” Why is that not capital?
My understanding is that the Fed now pays interest on all reserves. Since there’s no minimum requirement, there’s no longer a distinction between regular and Excess reserves.
There should be no interest on reserves at all. The Fed’s decision to pay interest on (Excess) Reserves was a bastardization of how short-term rates used to be managed.
Throughout the 20th century, short term rates were managed by tightening actual short term credit supply. By constraining supply, demand for credit drove rates up. That’s a main reason why “high interest rates” used to actually slow the economy – it was a hard credit constraint.
Nowadays with Interest on Reserves, the Fed manages short term rates independently of the supply of credit. Those who expected the same outcome from this “rate-hiking cycle” as from the ones before Interest on Reserves have been very surprised. In the absence of credit constraint, interest rates alone aren’t nearly so powerful as a policy tool.
Correct – Correct – and Correct
My understanding is that the Fed now pays interest on all reserves. Since there’s no minimum requirement, there’s no longer a distinction between regular and Excess reserves.
There should be no interest on reserves at all. The Fed’s decision to pay interest on (Excess) Reserves was a bastardization of how short-term rates used to be managed.
see: Reserve Requirements: History, Current Practice, and Potential Reform
0693lead.pdf (federalreserve.gov)
Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as a matter of principle favors payment of interest on all reserve balances” … “on rounds of equity”. [sic]
re: “bastardization of how short-term rates used to be managed”
The effect of the FED’s operations on interest rates (now largely via the remuneration rate), is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact.
The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the payment’s system.
True. “The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the payment’s system.”
So we have more and better volatility as folks try to figure out what the heck happens next. That includes the Board of Governors.
@Not Artificially Intelligent,
Don’t worry. We are reaching the end game. Things will start unravelling very quickly when the TCJA tax rates go up in 2026, and it will just get exponentially worse from there.
Ouch. Mises Institute needs to come up to speed.
Please correct me if I am wrong.
Most of those housing loans by banks are still sold off to Mr. Fred and Ms. Fan. There, most of the mortgages are (quickly) packaged and resold–the secondary market. Some are held by the Corps themselves. Which raises the obvious question… where do the depositors’ funds end up? Some is loaned to risky assets (commercial RE, home equity, lines of credit etc). The rest goes to Treasuries etc.
The problem in 2007-8 was the packaged risky mortgages (aka mortgage-backed securities) were sold as ‘diversified’ at a ‘hypothetical lower risk, luring in investors for supposed excess return.
The banks collected the processing fees as their ‘profit,’ with ‘nothing at stake.’ This fee income was the motivator to generate mass mortgages. There was no reason to worry about reasonable valuations, or borrower qualifications etc.
I ran out of edit time.
A bank is like a bucket. Money flows in. Money flows out. It’s all the same. If the bank needs a top-up, it borrows (from the Fed usually). Bucket overflowing, divert some to the Fed, or other banks. In that role, the Fed is the last resort. Is there a role for the Fed as financial planner? Given their track record, NO! What the Fed does is encourage poor decisions by banks, government, borrowers, and lenders.
The “problem” originated in the Depository Institutions Deregulation and Monetary Control Act of March 1980. In May 1980 the GFC was predicted, so was the phenomenal growth of the GSEs, so was the S&L crisis.
“The Act created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions.
Consequently, if this act is not revised so that the Fed can get a direct grip on the volume of legal reserves of all of these institutions, then this country will experience a truly disastrous inflation”
Then Greenspan dropped legal reserves by 40 percent.
China benefit from deflation. Iranian oil is selling at 20% discount. Iran’s oil reserves are large. Last year China “bought” $35B oil from Iran, bartering with them. Oil for Chinese goods. No hypo. Iran piled infrastructure debt to increase oil production. Next year Iran might export $50B, unless Bibi destroys Iran’s overextended oil infrastructure, to punish them for two rounds of ballistic missiles and a cauldron around Israel’s neck.
The Ayatollah promised to retaliate. Without oil, Iran might use gold accumulated from bartering with Turkey. Iran’s gold reserves aren’t large enough.Iran might attack Saudi oil fields, or close Hormuz straits…
After WII European countries deflated. They sent us gold in exchange for a
dollars to rejuvenate themselves. Austria and Hungary had no gold. Hungarian gov bonds became worthless. LBJ spent on vietnam, gov goodies, infrastructure and a flight to the moon. The US dollar deflated. France demanded gold back. Nixon divorced gold. Oil prices popped up. ARAMCO was confiscated. Inflation took off until the glut beat it. New oil fields in the North Sea, Alaska, Russia and the Gulf of Mexico deflated oil and 30Y bond. This time we will not be that lucky.
Two letters for our next round of luck (aka innovation): A.I
(sometimes I need AA instead)
The chicken crossed the road to get to the other side.
It’s unserious to even mention gold-backed currency as long as we have the most failed unworkable, never once in history worked, system in place: democracy. Politicians and their backer-cronies can’t steal and grift to infinity in a sound-money system, AND in a sound-money system people would have to suffer the full consequences of their actions. These things can only happen and have only happened historically, for a relatively short while, after full societal collapse / reset.
Efficient, or even semi-efficient markets require relative transparency. Not so sure that ‘letting the market” set rates in the absence of the Fed will include relative transparency. (Maybe in academic problems, as in “assume a relatively transparent market…”) When the rent to be sought is highly correlated with access to private/nonpublic information, exploiting that advantage leaves exactly who at a disadvantage? Not the big money center financial institutions, more likely schmucks like me…
… perhaps little difference from the status quo, but ” the devil you know” may apply.
The ‘market’ is not perfect, but it does do a reasonable job for pricing assets in the long term. The stock market is the best example. A similar approach could be used for the sale of debt. When Donald wants to borrow $1 billion for Trump City, he produces a prospectus. The market evaluates an interest rate, given risk, supply, demand etc) and anyone can lend, and sell that ‘debt’ as desired. More efficient than Deutsche Bank?
Interesting. Thanks. So before the Fed—apparently a central bank requirement for empires along with Gestapos and Politburos with 5 year military industrial corporate state planning etc.,— Treasury issued/printed money in amounts as determined by congress/treasury officials subject to an election process, unlike the Fed, when the value of money was indexed to gold. If 1 dollar bought 1 ounce of gold all was good, but if it took 30 dollars to buy 1 ounce of gold or a week’s groceries after five years of money printing/deposits congress and presidents got kicked to the curb during deflationary bank runs and bankruptcies until 1 dollar bought 1 ounce of gold again. Democracy in action before the 3rd way fascist state, when men were men, ships were wooden, and sheep were nervous in the Bear Flag State when grizzly bears still roamed the the Big Sur and Carmel by the sea before the dawn of the Meatheads. .
The creation of the Federal Reserve in 1913 was, and continues to be this countries biggest/worst mistake EVER! Nothing else comes close!
1913 we also saw the 16th and 17th amendments (income tax and populism to select Senators).
An interesting year overall including Model T introduction – women couldn’t vote yet so don’t blame them:
en.wikipedia.org/wiki/1913_in_the_United_States
Women activists were a force-driver on all you mentioned, even though the vote amendment wasn’t lead-off.
Oh, I don’t know. It is abominable, but it doesn’t come close to the Kansas-Nebraska Act (as mistakes go).
Joseph Salerno : there are 4 types of deflation. Three are good and one is bad.
Jasa and S.Lebanon destructions are bad. Jerry Seinfeld cell phone metamorphosys is good. Ford selling 1.5 millions car and trucks in 1920/1921 replacing R/R is good.
The Mises has posted on twitter … will Mish post his response?
(PS to MIsh – well done, succinct criticism. That said, the damage done by the Fed deserves attention but is hard to briefly explain and few people have the incentive to do so as Upton Sinclair proclaimed decades ago).
I cannot find any rebuttal by anyone on Twitter.
Have a link?
Agree. No rebuttals. Original video is pinned at the top of Mises (which you probably have). My suggestion is for you to reply and start some discussion. Maybe we’ll all get a better video someday.
https://x.com/mises/status/1843314226154123339
Not getting much traffic … only 11 replies and 250 likes. Nothing substantive.
The Trump administration created a tsunami of money. During covid – when the economy was comatose until we know what we don’t – the Fed raided (borrowed)
people’s bank account to cover unemployment, food, to keep small businesses
alive and pay shingle mums. The money was deposited in the banks, bc everything was closed. The banks “lended” the Fed again and the gov spent the money to support the comatose economy, piling IOU to the Fed. The Fed piled IOU to the banks and the banks piled IOU to u. That’s how the multiplier works. It became legal since
If we “end the fed”, who will be lender of last resort to the loser banks and especially the USG?
Of course, that’s the point!
Fed does not equal Treasury.
There does not need to be a lender of last resort.
That’s why we had a GD.
But it’s nice to have, for the banks.
Lending creates deposits: absolutely correct. Lending creates new money: absolutely correct. What I don’t see is how gold changes anything, because there is the concept of notional value. Bank lending creates an accounting liability to whichever bank that loan gets deposited to. And the lending bank itself gets deposits and therefore receivables assets from other banks. These are all just accounting entries. Banks can create hundreds of billions of new dollars every year this way (and they do). Where does gold rear its shiny head to change anything? It seems to me that the only value gold can add is that when scared banks call their loans and other assets in for gold, the notional value of dollars collapse along with the economy. Is that something we should aspire to?
The only way gold enters the picture is IF a dollar is redeemable in gold.
That means a dollar represents a fixed quantity of gold.
This is like the old silver certificates that could be exchanged for “One Silver Dollar”
This is the only way it can work without there being a run on the bank. That is what France did to the US before Nixon halted gold redeemability.
The Biden administration allocated $100B for natural disaster. Under the constitution
the states and private co should pay for hurricanes and flood damage, not the federal gov. GW, TR, Coolidge were federalists/ libertarians. It’s inhumane, but a $40T/$50T debt instead of $25T/$30Tdebt is more inhumane. Retired people are hooked on 2.5% COLA. SS minus [OER + food] = deep red < zero. SS – [rent + food] possibly above zero. If Putin cont his econ war against Ukraine poor people in Asia, the ME and Africa will starve.There are 40/50 military conflicts across the globe.
Dependency on government is a destructive precedent-setting plague. It will only get worse. A bad economic downturn will be a disaster that few people are prepared for.
The Fed, or at least the FOMC part of the Fed which sets overnight lending rates and attempts to impose it using open market operations, is nothing more or less than a 1930s style price setting board of the kind society has rid itself of over time. Little different than the old wheat price setting boards or others. I wont go into how price setting, a la the Soviets, simply does not work, and creates distortions the further the set prices deviate from the market clearing prices
So yes, it would be much better to do away with the FOMC and let markets set rates.
Adding to that is that for at least 30 or 40 years, the Fed does not even remotely set the money supply, the putative reason for its original existence, farmed out from the Treasury again putatively to insulate this function from political pressures. Central bankers have even acknowledged as much going all the way back to Greenspan, and even Volcker
The Eurodollar market, outside the control of monetary authorities creates most of the money. Money creation is almost entirely opaque. There are likely other sources of money creation as well.
In any event the Fed nor the Treasury, nor Congress, which is actually given this authority I believe in the Constitution, has much to do with money creation except when they do insane things like inserting Trillions into the real economy through massive overspending, and actually really thrrough the entire budgetary and spending process. Which makes it even more insane that we have not even HAD a budgetary process since 2008 blew up the world. ALL spending is now done through CRs and extra bills including the absolutely ludicrous 200 billion they created in the undeclared war on Russia
There will be a reckoning. When is the question, and what stepps to affect will be taken by the worthless, feckless, corrupt and purely evil “authorities”.
we already have the answer. more of the same. however in the future the states will mouse click their own currencies to be accepted in their payment schemes for taxes and most people and stores will accept this, too. just go study the 1800s in usa and dozens of examples in other lands…….over centuries and recent pasts. i think all the geezers on this site can remember when 100 USD bill was a great deal of money and would last a long time. now it’s technically bupkis.
i think it’s worse than is stated. the FED reserve of NY, home of the mouse click currency computer, pays interest to the borrowers we call the NYC money center owners of the aforementioned FED. imagine getting a loan where the bank pays you to borrow. it’s now even sweeter and more absurd than the old discount window access. i think the plauge year taught us all that clicking that computer mouse and “gifting” funds in tens of millions of personal and business accounts and calling it all sorts of crazy terms like PPP “forgiveable loans”. and bump ups in state unemployment mouse click payments, and countless other schemes to mouse click billions and trillions around the world for endless warfare and welfare……….what could go wrong. the folks who think that schemes in the 1800s and 800s and 800 BC cannot teach us a simple truth. go read “this time it’s different”. if for just the charts and tables of 800 year histroy of disasters………. of course it’s not different. don’t worry, donald from queens, the great huckster and movie star and cult hero will save us.
Honestly, a decade or more ago, I really enjoyed these posts and have been here ever since. About then came FOFOA 🙂
Even if it’s an academic exercise, I enjoy it.
Thank you, Mish!
Yes, I had a debate with FOFOA and Gonzillo Lira about hyperinflation.
I was on the right side.
Do you not mean Gonzalo?
The BIS says that “The main exogenous constraint on the expansion of credit is minimum capital requirements”.
But I thought that a great share of capital comes from deposits. Am I wrong?
Good Lord!
Deposits are a liability of banks – not an asset
Grade F indeed.
Grade F here though.
“ Deposits and reserves never played into lending decisions”.
That is totally false. Grade F. In the early to mid 1800s in the US banks did make lending decisions based on deposit levels. Farm credit was generally speaking locally community based.
Small point yes. But if we are going to be factually correct then let’s be factually correct.
Please be serious. We are discussing the way the economy works not how it worked in 1800.
But OK I fixed it
Great comment. “Never” and “Always” should, always, never be used, unless one is absolutely sure as a matter of logic or mathematics. For a matter of history, one can never be sure.
Mish, like your articles, but your explanation on this one begs more explanations.
explanation of what.
What are the capital requirements that a bank has to meet in order to lend money. Point 1 in the article
We’re wading in deep today!
So, depends if you’re large or small bank.
https://www.federalreserve.gov/supervisionreg/large-bank-capital-requirements.htm
International: See Basel lII.
These ain’t simple but do fit on a spreadsheet. Not as hard as steering a rocket into chopsticks as done earlier today.
Excerpt:
Second post (w/o links):
We’re wading in deep today!
So, depends if you’re large or small bank.
These ain’t simple but do fit on a spreadsheet. Not as hard as steering a rocket into chopsticks as done earlier today.
Excerpt:
a minimum CET1 capital ratio requirement of 4.5 percent, which is the same for each bank;the stress capital buffer (SCB) requirement, which is determined from the supervisory stress test results and is at least 2.5 percent;1 andif applicable, a capital surcharge for global systemically important banks (G-SIBs), which is at least 1.0 percent.more at:
federalreserve<dot>gov/supervisionreg/large-bank-capital-requirements.htm#fn1
So what do they consider capital? I assume it is deposits which then contradicts what the article states, ie deposits are irrelevant to lending.???
Deposits are a liability!
Could you maybe express that as # hours/minutes a bank will last during a bank run?
In the age of Flash Boys, the range is microseconds to milliseconds…or just pull the plug (aka lock the doors).
SVB was a run on a bank.
Banks don’t “lend” deposits but they can do stupid stuff with them.
SVB took deposits and “invested” them, not lent, in long dated treasuries.
The Fed is discussing all kinds of asinine ways to prevent this. The prevention is easy, all deposits should be parked overnight at the Fed, so there is never a duration mismatch.
Bad loans are a separate issue. But SVB was just plain bank greed and easy to spot in advance. The Fed still does not understand what happened.
If the commercial bankers are given the sovereign right to create legal tender, then the DFIs must be severely circumscribed in the management of both their assets and their liabilities.
How do you distinguish between capital requirements and reserves?
There are no reserve requirements. And where there were, banks could borrow reserves.
It was all so convoluted, the Fed ended the nonsense by ending reserve requirements.
Now, all reserves are excess reserves.
It does not even make sense to discuss reserves except for the fact the Fed like a pack of idiots gives banks free money on them.
I pinned a comment on capital requirements. It’s important to know that deposits are a liability, not an asset.
In the history of fractional “reserve” banking every bank that did not hold 20% of loaned money on hand did eventually fail. I have a textbook reference for that. Then came lender of last resort central banks. Call it capital or call it reserves. I don’t see the difference myself.
You did further down. Thx!
The idea that the market can reasonably set interest rates might be correct for our former gold based currency. However, in our current fiat currency regime, some govt. agency needs to maintain the quantity of base money. If the Fed targeted money supply (as under Volker) it would indirectly heavily influence interest rates, as more abundant/ scarcer money supply tends to result in lower/higher interest rates.
“some govt. agency needs to maintain the quantity of base money.”
Why?
That is how fiat currencies work. Perhaps you prefer that the Fed maintain money supply according to a formula, such as a fixed % of GDP, in which case the market could reasonably be said to set interest rates
I prefer no one attempt to manage money supply.
In his July 1995 Humphrey-Hawkins Act testimony to Congress, Alan Greenspan, former chairman of the Federal Reserve Bank, indicated retail sweep programs have substantially distorted the growth of M1, total reserves, and the monetary base.
Anderson and Rasch (2001) estimated that sweep programs from 1994-1999 reduced required reserves by $34.1 billion.
Banks were engaged in reserve avoidance, e.g., creating sweep accounts, etc. The answer as Milton Friedman stated in 1959 is to apply uniform reserve requirements on all deposits on all banks.
No money stock figure acting alone is adequate as a guidepost for monetary policy. As Authur Burns said:
“Money has a ‘second dimension’’, namely, velocity . . .. ” Arthur F. Burns in Congressional Testimony.
The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. Powell eliminated legal reserves in March 2020. And Powell also eliminated deposit classifications. Monetarism has never been tried.
As I said in response to Powell removing legal reserves: “The FED will obviously, sometime in the future, lose control of the money stock.” May 8, 2020. 10:38 AMLink
“The idea that the market can reasonably set interest rates might be correct for our former gold based currency.”
How long do you reckon a free market will have enough confidence in the so-called “money” some no-longer-government-privileged hack named Jerome can print up at will, before they move on to something they can have a bit more confidence in not being arbitrarily inflated?
The point being: Gold was never arbitrarily decreed by some “government” to be money. It became money because it has the properties required of good money. One of them being: Noone can just print himself a bunch, no matter how entitled and important he; along with well indoctrinated dupes falling for it; considers himself.
Q. Would it be feasible for the world to return to a gold based money system? What would be the implications of doing this?
A. Returning to a global gold-based monetary system would be extremely challenging and is generally considered infeasible by most economists for several reasons:
## Insufficient Gold Reserves
The current global money supply far exceeds the available gold reserves[1][4]. To back all existing currency with gold would require:
– A massive revaluation of gold to extremely high prices
– Acquiring vast amounts of additional gold, which is simply not available
Even during the Bretton Woods era, there wasn’t enough gold to fully back all currency[5]. Today, with exponentially more money in circulation, the gap is even larger.
……
https://www.perplexity.ai/search/would-it-be-feasible-for-the-w-3eSlAO9mThqmdtq3AvX.nA#0
There is plenty of gold.
The fact is: Any amount of gold is sufficient – Rothbard.
Alan Greenspan had an excellent article “Can the U.S. Return to the Gold Standard” in the WSJ on 9/1/1981.
Memejojo at it again
“Even during the Bretton Woods era, there wasn’t enough gold to fully back all currency[5].”
Yeah man! Pass the bong: Neither was there enough Gold to back the currency in Zimbabwe and Weimar! Now didn’t we just prove someth’n!!
Seriously: wtf!
IF there is not enough Gold to back all currency: Someone printed up too much currency. Period. There is NEVER “not enough Gold”. ALWAYS “too much currency”.
And furthermore: No matter who that someone was who printed too much, whether it was Kim or Jerome: The excess IS counterfeit.
The Dollar IS 1/20th of an ounce. For every ounce readily available on demand, there are 20 dollars in circulation which can be used to redeem it. Any random piece of paper can have $20 written on it. Those paper pieces are just monopoly money. Counterfeits.
If anyone can reliably find away to distinguish the real dollars from the counterfeit ones, great. If not, it would have to be done statistically: Count the number of ounces, multiply by 20, and print up a corresponding number of harder to counterfeit dollars. Then count the number of counterfeit currently-attempted-passed-off-as dollars floating around. Divide the two. Give people a week or month to bring in counterfeits, and exchange it for newly issued, harder-to-counterfeit,more explicitly convertible on demand, bills per that ratio.
Then: Enough Gold. Again: As in all of economics: By definition. No need for any weirdness about making up higher gold prices blah-blah. THE reason for why there are more dollars than 20x number of ounces: IS counterfeiting. Since printing dollars not backed by 1/20th of an ounce of Gold, IS; always and everywhere with no possible exception: COUNTERFEITING. By definition.
It’s never a “lack of Gold” problem. It is a COUNTERFEITING problem. Clean up the counterfeits, and there will, by definition, be enough Gold to back the dollar 20 to 1. By definition, just to emphasize that again.
Well, yeah. D’oh.
But the MONEYBAGS & VOTERS always want “mo’ money”. If you want to get elected/reelected then you need to deliver.
It’s easy to deliver Zimbabwe. Even the imbeciles at The Fed can pull that off.
Not really sure if that is what people want, though….
@Ed – In a fiat currency regime, money is merely credit. There is currently no single entity constraining the overall supply of credit. So it’s not true that “some government agency” needs to do anything.
O.M.G. And I thought that replacing DEI with academics would be a solution, but it turns out the academic curriculum is riddled with misconceptions and falsehoods, even by those such as the Austrians, who used to know better. It’s really hopeless now. This Titanic is going down, despite the fiddling on deck.
Youtube’s never been a great source of scholarly material … if the script isn’t perfect, the energy to make edits after the video is complete is too high.
YT rocks tho for home/car repair videos!