Swiss vote to end fractional reserve banking

[BRUTE]

hyperinflation/deflation are not the only problems created by FRB. according to Austrian Business Cycle Theory (ABCT), FRB leads to a misallocation of resources and therefore a constant boom/bust cycle when the bubbles burst. https://en.wikipedia.org/wiki/Austrian_ ... cle_theory

the Austrian theory is relatively unique amongst economics because it does not abstract everything away into numbers, and therefore "over investment" or "under investment". Austrian economics puts a high value on the structure of production, and this is what really uniquely explains the boom/bust cycle.

the classical example that Von Mises uses in Human Action is that of a house builder. FRB and/or a low interested central bank policy create the illusion of wealth by pumping money into the economy. money is a measure of the value of real goods and services. expanding the money supply therefore distorts the signal to participants as to how much is really available in terms of goods and services.

our house builder thus gets the impression that there are enough resources and labor to build, say, a 5 bedroom house. he has the architect draw up plans for such a house and starts building the foundation. then he builds out the structure for a 5br house. halfway through, he discovers that there are actually only enough resources and labor for a 3br house.

it is not that he built "too much" house. he built the wrong house. he spent too much money on the architecture and some of the basic resources and services, and there is now no money left to complete the house. a house, like most capital goods, cannot simply be put together with ANY combination of resources and labor, the inputs are very specific.

in short, distortions in the money supply (like from FRB) trick participants in the economy to make the wrong stuff, not too much stuff. the oversimplification of many economic schools glosses over this fact because they think they can just cancel "over investment" out by "under investment" later. but it is really a misallocation in the structure of production. there are now many empty houses in places no humans want to live. it is complete lack of investment in other areas of the economy, where they would've been needed. it is not possible to "re-invest" the overproduction of shoes into the housing sector, for example. shoe making machines and shoe stores and laborers trained in shoe making all have to switch over, which is costly.

thus FRB leads to a constant waste in the economy, where capital structure has to be re-arranged, reducing efficiency.

[trfie]

If an individual bank could loan out however much money it wanted - 2x,3x, 100x its reserves, then it is literally creating money. Giving printing press ability to banks would lead to chaos, as the money supply would wantonly increase and the federal government could do nothing to stop it.

No. Individual banks do create money. This knowledge has only been incorporated into economic orthodoxy recently, but it is true that private banks create money through issuing credit. The Bank of England's note on this is very accessible and informative, it may have been linked already: https://www.bankofengland.co.uk/quarter ... rn-economy. Private banks creating money has not lead to chaos.

@Solvent, I think you came in at the end and missed most of the discussion. I know individual banks create money. The question regarded FRB and what would happen if it were eliminated, but money was NOT treated as a bailment by the bank, and thus there was no limit to individual bank money creation. Obviously if a bank had a total of $200 million in deposits, it doesn't make sense for it to loan out $10 billion.

Eh. As.near as. I can tell, this ending frb would just centralize decisions currently handled by distributed, individual banks. As such, it seems like a bad idea. But life is busy, and I haven't looked into this much lately.

The statement above does not make sense. FRB IS centralized. If it were removed, then how could decisions become even more centralized? The profit motive of banks, in a FRB system with FDIC-type insurance, leads them to loan out to the limit that FRB allows. In a system without FRB and FDIC-type insurance, bank failures suddenly become much more likely, and hence reserve amounts vary dramatically by bank, at their individual discretion.

I think Riggerjack has the right of it, and this was also one of my concern's about the Swiss vote. Instituting vollgeld would dramatically centralise credit creation. It would remove a lot of the discretion from private banks regarding credit (and hence money) creation and push that power back to the central bank. I think it would look somewhat like credit rationing. Under the current system, yes, the central bank does have a strong influence on money creation, but it is not the only influence - private banks decide how many loans to issue, although the environment they operate in is influenced by variables controlled to a certain extent by the central bank. Vollgeld would move more of this control to the central bank - it would be a centralisation.

You realize that in a system without FRB, each bank could loan out up to 100% of its reserves? How do you consider that centralized, when one bank might loan out 20% and another might loan out 80%? You did not respond to my point above. Decisions coalesce in a FRB system with FDIC type insurance.

I think we're splitting hairs here. I'll accept the wikipedia definition "Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities."

this isn't splitting hairs, this is the entire difference. all of brute's (and the Austrians') criticism of FRB is based in the fact that commercial banks can lend out more than they have in deposits - which is the Wikipedia definition BlueNote has quoted here.

Fractional reserve banking is where a bank is compelled to keep a certain fraction of deposits and can lend out the rest.

As BRUTE pointed out, this is flat out wrong.

err, no. in such a system, even if the "fraction" was 100%, it would only lend out the money that had been deposited.

Fractional Reserve Banking describes a system where the bank can lend out MORE than has been deposited.

That is exactly what FRB is. Allowing banks to lend out more hard cash than they keep in the safe. If you don't agree with this practice, it looks like you have been arguing the wrong side all this time.

@BlueNote, if you do not believe that a bank should be able to loan out more cash than it has in deposits, then you are against FRB. It's as simple as that. What you said, that if FRB was eliminated, it would mean that banks could no longer loan out deposits, is also flat out wrong. I recommend you read a book on the subject of FRB. The other beliefs you have, including downstream deflation, all stem from these initial erroneous beliefs.

I agree with brute in that I am not against FRB per se, but believe in competing private currencies. This position was argued by Nobel-prize winning economist Hayek.

[BRUTE]

does trfie have a favorite book by Hayek? brute has been thinking about getting into Hayek for a while, but isn't sure where to start.

[Chris]

The Road to Serfdom (condensed) is an intro to Hayek in about 100 pages.

[Riggerjack]

The road to serfdom is brilliant. I haven't read any others.

I am a big fan of Austrian economics. It's a very actionable model, that explains how people make decisions and markets work. This is my default framework.

I also liked reading Keynes. He was working with a model very similar to Austrian. But he looked at the system, and saw aspects of financialization. His writing is brilliant, and again, very much worth the read.

The Chicago school, was Austrian, modified to account for financialization. With a bit of physics envy. Mainly written as an answer to Keynsians. Father Milton was brilliant, and funny. Anyone who has an issue with the bubble creation possibilities of the Fed, should read his book, "money mischief". It's certainly not a choice between a pure money system, and an inflationary one.

Look to the centuries before the Fed for how a post fed system would work.

I don't think deflation is inherently worse than inflation. However, due to the Fed, all of our expectations are inflationary. Because a change to expectations is necessary to go back to other systems, it would create havoc to suddenly change. That being said, a change could be announced a decade in advance, with a date of conversion. Then markets could build the change into contracts, and we could do it easily.

Which is not the same as we SHOULD do it.

Currently, there is an overhead the Fed makes, doing as it does. I am not sure the uncertainty of alternate currency systems is worth the savings.

In BRUTE'S home builder model, the mispricing of currency results in misallocations. But on a gold standard, a new gold find is inflationary, and a mine drying up, is deflationary. How is that not subject to the same mispricing of currency?

Other systems seem to have the same problems.

We are used to inflation. It's baked in. I haven't heard of any system that is actually preferable in practice, just different.

We know there are worse systems, but I don't want to throw out the baby with the bathwater, only to have a different set of problems.

So, I watch the Fed, worried about inflation. I don't know how watching some other system, for some other failure, is an improvement.

[Mister Imperceptible]

Except that the Fed “watching for inflation” is a ruse. The Fed is perpetrating inflation slowly over time while maintaining a negative real interest rate to steal wealth from the masses (what little wealth they have). The inflation mandate and the low unemployment mandate are absurd ruses that distract from the real goal of Central Banks: wealth redistribution.

[Riggerjack]

I didn't say I trusted the Fed to watch for inflation. I am saying the devil we know, at least has known tricks. And the other is what I was describing as overhead. All systems have it.

So I watch for inflation.

[BRUTE]

But on a gold standard, a new gold find is inflationary, and a mine drying up, is deflationary. How is that not subject to the same mispricing of currency?

gold evolved as a free market currency exactly because of its non-inflationary qualities (among some others). the amount of gold on the planet is growing very, very slowly.

[Mister Imperceptible]

So I watch for inflation.

The most cost-effective way to combat long-term inflation being enacted by a central bank that has inflation as part of their mandate, is by leveraging real estate. That’s why we have massive housing boom/busts, with people alternately being crushed/foreclosed upon, and then being locked out of the market due to lack of affordability.

Which is ok, I guess, if the goal is to create an aristocracy, or reduce population by demoralizing an entire generation and disincentivizing having families, or both.

[Riggerjack]

@ BRUTE read money mischief. Gold ain't the gold standard you seem to think it is.

@ MI, yes, there is a cost to the Fed. And there are costs to all other systems. If you have a preferred system, we can compare costs. But merely expressing that the Fed has costs, is no reason to think some other system is better.

[Mister Imperceptible]

Well, it’s obvious my preferred system is the gold standard, and the *nominal* deflation that goes with it. *Real* deflation is not avoided by having an ever-increasing fiat money supply, *real* losses in *real* deflation is merely papered over by fiat supply increases to redistribute *real* wealth, and it disrupts the natural investing process by making winners lose and losers win.

Malinvestment abounds, we have more irresponsible debt than ever. If we have less financing available because the money supply is less flexible, all the better. It assures that only the best projects are financed.

[Jean]

I don't know the cost, but to me it's like saying a mafia protection racket is affordable, and that the alternative might be worse. It's unfair that private entities are able to create à gouvernement backed money, and it's enough to make it stop. It toi much of à privilege to be given to anyone, and they démonstrated their willingness to abusé it.

[Mister Imperceptible]

Consider the chain: Jerome Powell pulls money out of his rear end. This money is sent to China. In return China sends back ceramic Halloween pumpkins, artificial flowers, and plastic American flags. In short order, these things become garbage and go back to China. Jerome Powell produces some more money to pay for the "recycling" of the garbage. Unlike bull's stuff these items can not be used as manure.

[Riggerjack]

So, your theory is the Fed causes inflation, inflation causes malinvestment, so we should use gold?

Using gold, or any other commodity, means instead of a relatively stable, unidirectional inflationary currency, to use a commodity that fluctuates without a regulating mechanism.

It's hard to figure in inflation, expotential change is very hard to internalize. Look at how we plan for retirement uncertainty.

How much harder would it be, if inflation we're unbounded, and deflation as well?

To get an idea of what this can look like, look at a historical graph of the S&P500, denominated in gold. Or any fund, by any commodity. How would that lead to better investment?

[Riggerjack]

And I am assuming you aren't thinking of gold ingots, but maybe gold coins? So now you have seniorage to pay for. And each coin will vary in value against other nation's currency just as the dollar does.

Currently, we have some serious tech going into counterfeit prevention of the dollar bills. How are you going to prevent tungsten filled coins, or ingots? Not a huge problem at present, because gold transactions are rare and thus careful. You would like to change that. How much overhead would go into counterfeit prevention?

[Riggerjack]

I don't know the cost, but to me it's like saying a mafia protection racket is affordable, and that the alternative might be worse

No, I'm saying mafia protection seems to be better than the alternative. The alternative has all, already been tried, as far as I know. I am no fan of the Fed, or QE, but that doesn't make me pine away, longing for a perfect system. It makes me look at the drawbacks, and look for a better system to endorse.

I just haven't found one. Let me know if you have.

[Mister Imperceptible]

If the Fed perpetrates currency devaluation induced bubble and bust cycles, I’m not sure you can give them too much credit for bouncing us out of another bust by blowing another bubble. That’s like someone forcing you a dose of heroin, hitting you with some Narcan, and you then thanking that person for the Narcan.

I tell my irresponsible 100%-of-his-money in FAANG stocks friend about the perils of the current market valuations, inverting yield curve, long-term slowing GDP growth, national debt overhang, entitlement bloat, etc. His answer?

“If all else fails, we can print more money. That will reinflate the value of my stocks.” Classic Greenspan/Bernanke/Yellen put.

Absurd, printing money doesn’t create wealth, it just redistributes it from someone who had saved, say, $500k in cash, whose money is now worth less, to someone who has tangible assets or nominal debts (or both), or someone who receives the new printed money first in the wake of a recession with deflated asset prices (Cantillon effect).

If I have a gold coin, for the most part, it buys me a fine suit, regardless of what year it is. So would paper money, were the money backed by said gold. If there are uncomfortable fluctuations in the S&P 500 historical graph denominated in gold, it’s because of debt-fueled booms that both artificially inflated the stock market valuations. If gold itself is volatile, it’s because it becomes elastic in the face of a world where the price of everything is denominated in dollars.

The Fed’s policies make honest retail stock market investing a dubious proposition, and highly encourages rent-seeking and asset-inflating behaviors. I don’t know how buying 4 or 5 rental properties with leverage is going to grow the economy, but per the Fed, that’s what someone smart is going to do if they want to invest with a tailwind. The surest thing to bet on is not that any given company will do well, rather, it’s that the dollar will be worth far less in 30 years than it is today. So we have rent-seeking, and bubbles, with all the concomitant collateral damage. Yay.

But still, everyone repeats the economy grows by “consumption,” an absurdity that could only become known as fact because inflation is mandated. So next month we will buy a bunch of ceramic pumpkins from China and according to the “metrics,” that is “growth.”

[BRUTE]

brute isn't proposing to enshrine in law a gold standard, but to let the market choose the money.

[Mister Imperceptible]

brute has a vested interest in the market choosing other monies

Would brute be more willing to “encrypt” in law in a new money standard?

[Riggerjack]

it just redistributes it from someone who had saved, say, $500k in cash, whose money is now worth less, to someone who has tangible assets or nominal debts (or both),

The evil Fed is encouraging capital to be used in the economy, instead of hoarded in Scrooge McDuck's vault? The horrors!

“If all else fails, we can print more money. That will reinflate the value of my stocks.” Classic Greenspan/Bernanke/Yellen put.

And now you would hold them responsible for Mt Stupid? Overconfidence is an investor trait we all have to overcome.

If there are uncomfortable fluctuations in the S&P 500 historical graph denominated in gold, it’s because of debt-fueled booms that both artificially inflated the stock market valuations. If gold itself is volatile, it’s because it becomes elastic in the face of a world where the price of everything is denominated in dollars.

Because the recessions and depressions before the Fed, (1874 and 1929 come to mind) didn't really happen?

Yes, debt causes volitility. The Fed makes debt easier to aquire. Neither of these are bad things. That anyone thinks the Fed CAN stop things from getting out of control is just silly. People will people. And when I can borrow a buck, and turn it into a buck and a nickel, I am going to do that. That's not fed policy, that's human nature.

And it's also human nature to be comforted by other people doing what I am doing. Mmmm ... comfy herd behaviors.....

So smart people figure out how to make money. Other people watch and immitate. Then smart people find something else to do, because herds blunder into disasters.

That's not the Fed. That's people. And they would do the same thing in any system.

What you are proposing, seems to be a policy favoring savers, because savers are somehow better people, and should have their interests looked after, first. A sentiment shared by aristocrats the world over.

But I propose that you are a saver, as a result of the economic gains made over the last few centuries, and much of those gains we're created with debt. Just saying.