Fed’s Ability to Create Money From Thin Air
QUESTION: Thank you for the explanation about what fractional banking is. It clarifies the real intent and impact of this issue on the economy. Would you please then explain what quantitative easing is? It appears as if this is indeed the creation of money out of thin air.
cs
ANSWER: This is a different animal altogether. The Federal Reserve was created with the power to create an ELASTIC money supply – this is not a power of individual banks. The theory was that when a economic contraction takes place, the Fed should be able toTEMPORARILY increase the money supply. They have the ability to increase the supply of money to offset the contraction, which is the moment where markets seek to reach equilibrium. TheLEVERAGED money created by lending allows the economic growth and that accelerates the value of assets. When the recession/depression comes, people sell the assets reversing the leverage in pursuit of cash.
This is the boom and bust cycle and it is the human nature aspect that drives it back and forth. So the theory was that the Fed should have the ability to CREATE MONEY FROM THIN AIR with anELASTIC money supply. Increasing the money supply would in theory raise that equilibrium point and stop the contraction.
While the theory is logical as its objective, it is still based on a limited old world view of a domestic economy. The Fed used thisELASTIC power to create money by electron book entries buying 30 year bonds. They assumed the holders were domestic so your would thereby increase the local money supply and thus offset the deflationary contraction. This failed to stimulate long-term lending because there was no CONFIDENCE in the future and we still see that liquidity has shrunk.
Consequently, QE1-3 failed to produce inflation because about 40% of the debt was held by foreign sources and that holding has decreased as central banks have diversified into equities. China and others reduced their long-term holdings and flipped to short-term. So the increase in money supply was not confined to the domestic economy. Emerging markets have increased dollar denominated debt by $7 trillion against the Fed increase of $3 trillion.
The contraction is assets was still greater than the increase by the Fed even taking just a domestic view. When we look at the world, it was a drop in the bucket. However, that will flip the other way for interest expenditures will exceed defense by 2020 and with a uptick in interest rates, then you will see inflation.
Obamacare Postponed until 2018 After Elections
Obama’s Cadillac Tax was due to hit January 2016. As always, the politicians KNOW this will be devastating. So what do they do? They push it off into 2018. This crazy law is all about raising taxes so your benefits will become taxable income. They already tax corporate profits three times (1) corporate tax, (2) dividend tax, (3) personal income tax, so they would love to connive a way to double tax a vacation. So you get a paid vacation without work? Sounds like a benefit that should taxes somehow to these people.
Bribing Bankers to Pay Tax – Bliss
COMMENT: I got it. Banks do not create money out of thin air it is lending multiples of the same money. I wish it was the thin air for as you say just bribe a banker to pay your taxes.
HT
REPLY: Yes that is the whole issue. We can regulate the reserve requirement increasing that reserve ratio and that will reduce the creation of money and leverage within the system. But handing that power to make credit decisions to government? I cannot imagine that eliminating corruption. I will stop writing and just go to some remote island and use clam shells for money as they use to do during the Great Depression during a period of reverse leverage and economic contraction which the purchasing power of money rises.
It would be nice to just bribe some banker to pay your taxes. Life would be much easier. When you travel to a lot of places, police pull you over and you just give them cash and they go away. No court, points on your license, and no pretend excuses to raise your insurance. It’s all about money at the end of the day anyhow. Just be honest about it – How Much?
Thin Air v Leverage
QUESTION: So your argument is that there is some base line for deposits and that is the difference between thin air and leverage. Correct?
Joe
ANSWER: Yes. Thin air to me implies anyone could then lend non-existing money. That is totally different from taking $1,000 and lending it out multiple times so that the amount of money on the books is 10 times relative to actual original deposit. If there was no deposit, then why would the government accept paying taxes with money that was created only by a bank? The logic does not follow for it is confusing LEVERAGE with thin air.
The “thin air” claims are really exaggerated for you make money from leveraged deposits and then have to pay taxes to government on that same bank entry. But there has to be a banking license, capitalization, and deposits with reserves against those deposits placed at the Fed. You cannot just lend people book entries without being part of the clearing system. That is impossible.
This is LEVERAGE, it is not creating money from nothing as some rogue bank out of the system. We must be specific in this issue forLEVERAGE can be regulated by increasing the reserve to deposit ratio that will reduce the LEVERAGE (creation of money) whereas the argument for thin air means FRAUD and you hang the bankers handing all power to government. Taxes would be irrelevant if banks created money by themselves. You should be able to bribe some banker to then pay your taxes for you for 50%.
Understanding we are really talking about LEVERAGE, which is the creating of money rather than FRAUD, means we simply reduce theLEVERAGE, we do not hand government the decision who gets a loan or not.
The entire mortgage crisis was set in motion by government. Politicians told the banks to lend because they wanted to make the lower class home owners. That was to win elections. And you really want to hand these people more power?
Come on. Let’s look carefully at the issue. Reduce the LEVERAGEand you reduce the creation of money and impact the volatility as people are talking about. You do not close down banking and hand more power to government.
Maybe I am not explaining this as clear as it is in my mind.
It Wont Be The First Time They Hang Bankers
QUESTION: Marty, thank you for explaining the banking problem. It is leverage but they cannot create money without a basic deposit. The way these people spin this you would think you just open a bank and create money by loans without any deposits at all. Why are these people so bent on destroying banks? This is the very same logic that use to be here in the former Soviet Union. We were taught the very same thing that capitalists and their banks were evil and government was our protector. You are correct. Bad ideas just keep haunting us forever.
JF
ANSWER: Yes, this is a very concerning topic for it reflects the brainwashing that is underway right now that leads to authoritarianism once again. It is a serious problem for you can see in Iceland they do not understand that the crisis was caused by transactional banking not by fractional banking that pre-existed 2007. I really do not know but if anything makes me more concerned about the type of government we will end up with it is this very same line of socialistic thinking that all banks are evil and must be stopped.
These people who adopt socialistic thinking without understanding their argument and where it leads, only argue that eliminating banks and you somehow eliminate inflation and the world will be wonderful and gold will be $50,000. They are arguing for a barter system on the one hand and communism on the other wanting to hand more power to the State for only it should create money. They are confusing relationship banking with the new development of transactional banking where banks just try to make whatever they can on that transaction and could care less about the harm to the client. This is our major problem and this has led to their market manipulations. This all began with the takeover of Solomon Brothers by Philips Brothers in 1981 when the commodity world consumed Wall Street.
Banking crises have taken place NOT because of the fractional banking per se, but because the banks traditionally made money from the yield curve in the good old days BEFORE transactional banking. The deposit is on DEMAND and they would lend long such as a mortgage. When the crisis hits in the economy, theLEVERAGE reverses and then people want cash. The assets reflect a value far in excess of the actual money supply and then the assets must fall in value until an equilibrium is found. This varies greatly depending upon the asset class involved. Real Estate is the worst for there is no central exchange market as in stocks, bonds, and commodities. Real Estate fell to 10 cents on the dollar in the Great Depression primarily due to the Dust Bowl for the land became worthless.
It is absolutely absurd to claim banks do not need deposits first to create loans. From what? They leverage the deposits multiple times and that can be reduced, but if you eliminate the entire process that is insane. That is precisely the argument of the communists.
When Andrew Jackson destroyed the central bank, the Bank of the United States, you ended up with Wildcat Banking. Every bank began issuing paper money. There were banks who had no deposits and just printed money selling their paper money to dealers in New York at deep discounts. This was all FRAUD. It was not the way banking functions.
I really do not know why people distort this issue. What are they gaining other than laying the ground work for a new authoritarian government? They just need an enemy to hate and blame why they have been wrong in their expectations of inflation and whatever. This is not helpful. This reasoning will ONLY lead us down the path of eliminating banks and hand everything to government and then what? There goes all freedom.
The bulk of the “money supply” is electronic – not even paper. This is book entries in banks. Moving entirely toward electronic money is the goal of government for then you cannot escape taxes. But at the same time, you will eliminate bank runs. If paper money vanishes, how can you run to the bank and demand a withdraw? These same people who claim banks create money from thin air distorting the leverage for they cannot just create money without (1) capitalization to obtain a banking license, and (2) taking in deposits. Goldman Sachs is not a real bank. They became a bank to save their ass but they do not have branches taking deposits from little old ladies. They are a transactional operation out to trade and make money. They do not make money from lending. They will raise money for companies, but they do not lend them money from any deposit base of the general public. They should not even be a bank. They are an “investment bank” with a line of credit at the Fed.
While this nonsense is going on about banks, REAL money is buying assets for cash to get OFF THE GRID. But if these people think the solution is like Iceland and government should now be in charge of everything, you might as well embrace communism for that is the final step. This exaggeration about banks was the very same argument that started the whole communist movement that is absolutely true. They blamed the bankers in Germany, then said they were Jews, and then that turned into get the Jewish merchants, and then finally, what the hell – get all the Jews.
This entire line of reasoning is a highly dangerous path to take and one I suspect is really a socialist agenda to brainwash a lot of people just like the Global Warming nonsense. It has emerged countless times and it is pure sophistry that has never ended well. It is cyclical on schedule and the people promoting this historically call for blood.
This is NOT our problem. Our problem is government. It is their debt creation that will blow up very soon. TheLEVERAGE in bank loans will add amplitude to the cycle. It is not the cause of the cycle. This voice is growing and this will be the source of violence and civil unrest. It will not be the first time they dragged bankers from their offices on Wall Street and hang them. War of Wealth was a play on this subject in general. It was the selling of the “Progressive Era” in the late 1890s that manifested in the income tax by 1913. It led to the creation of the Fed to control banking, and then the New Deal.
My fear – these same people will turn to government and ask them to take more control. This is not a world I want to live in.