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Post by oliver on Sept 27, 2017 6:42:57 GMT
Oliver, Did the total number of dollars go 0 to 100 in your example? Or did it stay at 0? Or are dollars like Schrodinger's cat where they can both exist and not exist simultaneously? I'll start a new thread for your questions about bitcoin. The gross amount of (positive) entries went to 100, the net amount of (positive - negative) entries remained at 0. No magic, no cat, just arithmetics. What's important is that something real that both parties (+ the bank) agreed upon was worth $100 changed hands. Without that, it would indeed be fraudulent.
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Post by Alex on Sept 30, 2017 12:14:40 GMT
You both seem to be saying banks don't create more credits than debits, but this article en.wikipedia.org/wiki/Reserve_requirement implies otherwise, unless I'm reading it wrong. implies a bank can create "deposit liabilities" to its customers at many multiples of its "reserves." Banks in the Eurozone have a reserve requirement of 1%, meaning if they have reserves of 1000 euros, they can create 100,000 euros in new credits, for free. (or maybe 99,000 for free and 1,000 for a corresponding debit.) According to this article en.wikipedia.org/wiki/Capital_requirementCanada uses a different system that limits its banks' credit creativity to a multiple of their "capital," for which the authorities have a technical definition, but is basically the same thing as "reserves," but includes more assets that are less liquid. How you reconcile these informations?
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Post by JP (admin) on Oct 1, 2017 14:33:10 GMT
If Bank of JP lends Alex some new deposits, Alex in turn is providing a promise of his own to return that money with interest. And this promise is in turn founded on Alex's estimate of his future earnings potential. Thus Bank of JP has created a new debit while also bringing a solid credit into its vaults.
The reserve question comes after. Bank of JP estimates it will have a certain flow of deposit redemption requests over the course of a typical day, and to meet this flow it would be a good idea to have some reserves, say banknotes, on hand. Bank of JP estimates that if 1% of the assets in the vaults are banknotes, this will suffice to meet redemption requests. Bank of JP can get its hands on this 1% by selling a small portion of the credits held in its vaults for cash.
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Post by Alex on Oct 2, 2017 14:50:31 GMT
Ok, let's put some numbers in to make it more real:
Bank of JP creates and lends Alex 100 "credits." Then sells 1 of those credits to someone (who? the central bank?) for 1 "banknote." Then Bank of JP creates and lends Bob 100,000 credits. Then sells 10 of those credits to someone (who? the central bank?) for 1000 banknotes. Now, Bank of JP has 1100 (plus interest) owed to it by Alex and Bob, and everything is legit because it has 1% in reserve.
After Alex and Bob pay back their loans, Bank of JP has 100,100 dollars (plus interest- minus expenses), despite having done nothing of value. (Maybe you will argue that the value the bank has added is convincing Alex and Bob to working for "credits.")
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Post by JP (admin) on Oct 2, 2017 19:23:17 GMT
Ok, let's put some numbers in to make it more real: Bank of JP creates and lends Alex 100 "credits." Then sells 1 of those credits to someone (who? the central bank?) for 1 "banknote." Then Bank of JP creates and lends Bob 100,000 credits. Then sells 10 of those credits to someone (who? the central bank?) for 1000 banknotes. Now, Bank of JP has 1100 (plus interest) owed to it by Alex and Bob, and everything is legit because it has 1% in reserve. After Alex and Bob pay back their loans, Bank of JP has 100,100 dollars (plus interest- minus expenses), despite having done nothing of value. (Maybe you will argue that the value the bank has added is convincing Alex and Bob to working for "credits.") I'd modify the process to look like this. Bank of JP creates and lends Alex 100 "credits." Alex in turn provides Bank of JP with a 100 credit IOU.Then sells 1 of those credits to someone (who? the central bank?) for 1 "banknote."Then Bank of JP sells 1% of Alex's IOU off to the central bank for 1 banknote. (They could also sell part of the IOU to another private bank.)Then Bank of JP creates and lends Bob 100,000 credits. Bob in turn provides a 100,000 credit IOUThen sells 10 1000 of those credits to someone (who? the central bank?) for 1000 banknotes.Then Bank of JP sells 1% of Bob's 100,000 IOU to the central bank for 1000 banknotes.Now, Bank of JP has 1100 (plus interest) 99,099 owed to it by Alex and Bob (remember, it sold off a small part of each loan to get banknotes)
Is everything legit because BoJP has 1% in reserve? That depends on how good the bank is at forecasting incoming requests for deposit redemptions. In Canada, the big banks generally choose a reserve ratio of maybe 1-2%, and they've never had problems meeting their promises.
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Post by Alex on Oct 4, 2017 6:51:14 GMT
Yes, the Bank of JP ends up with 1001 banknotes plus 99,099 credits owed to it by Alex and Bob, for a total of 100,100 dollars of assets. The BoJP has gone from 0 to 100,100, without doing any work. On the other hand, Alex and Bob have taken on large debts, which in order for them to repay and get back to 0, they will have to do a LOT of work. It seems to me that these 100,100 new dollars benefitted the BoJP to the same extent that they caused Alex and Bob to suffer. Would you agree JP?
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Post by JP (admin) on Oct 4, 2017 17:53:58 GMT
On the other hand, Alex and Bob have taken on large debts, which in order for them to repay and get back to 0, they will have to do a LOT of work. It seems to me that these 100,100 new dollars benefitted the BoJP to the same extent that they caused Alex and Bob to suffer. You make it sound as if the BoJP held a gun to their heads and forced them to take the loan. Why would Alex and Bob willingly take on these debts if they didn't think it was worthwhile? Presumably the project they want to finance is going to make them enough money to justify getting a loan. Alex and Bob could have also issued bonds to investors in order to raise the 100,100. Are you against bond issuance too because it causes Alex and Bob to suffer? "The BoJP has gone from 0 to 100,100, without doing any work." Banks have to maintain branch networks, take care of paperwork, settle payments, hire employees, do credit checks, and most importantly pay enough interest on deposits to ensure that the 100,100 in new deposits does not boomerang back to them.
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Post by Alex on Oct 5, 2017 4:10:12 GMT
You are right about Alex and Bob; taking out loans should not cause them to suffer. (I wrote that last post in a hurry.)
But I refuse to believe that the Bank of JP does not accrue extraordinary profits with their license to create money out of thin air. I believe the benefits accrued by the banks are balanced by a loss of wealth to everyone who holds dollars. Not only is this idea logical, but there is empirical evidence that backs it up in the form of devaluation of the dollar, which can be seen in the price inflation of land, housing, and corporate shares.
The rich and powerful benefit from the creation of new dollars.
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Post by JP (admin) on Oct 5, 2017 12:56:44 GMT
But I refuse to believe that the Bank of JP does not accrue extraordinary profits with their license to create money out of thin air. I believe the benefits accrued by the banks are balanced by a loss of wealth to everyone who holds dollars. Not only is this idea logical, but there is empirical evidence that backs it up in the form of devaluation of the dollar, which can be seen in the price inflation of land, housing, and corporate shares. The rich and powerful benefit from the creation of new dollars. Well it certainly makes a profit, like any business. If it accrues an extraordinary profit, that's only because licenses are rationed by the government. In a competitive market, excess profits would be competed away. As for your claim that this causes a loss of wealth to everyone who holds dollars, lets start where we ended off... 1. Now, Bank of JP has 1100 (plus interest) 99,099 owed to it by Alex and Bob. 2. Alex and Bob spend the 100,100 in credits to fund their respective projects 3. There is an excess supply of credits (deposits) because the suppliers do not want these deposits. This excess supply has to be removed from the system if the loss of wealth you are worried about is to be prevented. 4. Luckily, there is a mechanism for this. The suppliers bring excess deposits back to the BoJP for redemption 5. The BoJP offers to pay the suppliers a competitive interest rate on deposits if they put the funds in a savings or term account. 6. This freezes the dollars, removing the excess supply. There is an alternative mechanism but I will only go into if it if you're interested.
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Post by JP (admin) on Oct 5, 2017 13:09:57 GMT
Not only is this idea logical, but there is empirical evidence that backs it up in the form of devaluation of the dollar, which can be seen in the price inflation of land, housing, and corporate shares. A quick comment on this. In the 1800s and early 1900s, Canadian prices were quite stable. It is only in the 1940s and 50s that steady increases in consumer goods prices, shares and housing began. You seem to believe that banks cause inflation. But banking in Canada first emerged in the early 1800s, far before the broad and steady rise in prices became the norm. So it is evident that something other than banking has caused prices to steadily rise.
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Post by Alex on Oct 10, 2017 15:25:23 GMT
1. You said: "there is an excess supply of credits (deposits) because the suppliers do not want these deposits. [...]The suppliers bring excess deposits back to the BoJP for redemption 5. The BoJP offers to pay the suppliers a competitive interest rate on deposits if they put the funds in a savings or term account. 6. This freezes the dollars, removing the excess supply."
"Removing supply" is an interesting phrase. Is that a euphemism for "reducing supply?" If the dollars were destroyed I'd agree with you, but you're spinning. The total number of dollars does not change when someone puts them in a bank.
2. Are you claiming that the Bank of JP regulates the number (and thus value of) dollars in the economy (which it creates, btw) by moving interest rates?!? I.e. if it judges there are too many dollars out there, it will pay people to spend later (by raising interest rates and incentivizing saving)?!?
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Post by JP (admin) on Oct 11, 2017 3:44:45 GMT
"Are you claiming that the Bank of JP regulates the number (and thus value of) dollars in the economy (which it creates, btw) by moving interest rates?!? I.e. if it judges there are too many dollars out there, it will pay people to spend later (by raising interest rates and incentivizing saving)?!?"
Yes, that's exactly what I'm claiming. The Bank of JP is of course just one of many commercial banks, like the Royal Bank is one of a handful of Canadian commercial banks. If it overissues by lending too many dollar deposits, a flood of its own deposits will come back to it for redemption into banknotes. Maybe the bank will passively meet these requests, banknotes flowing out of its vaults and unwanted deposits being destroyed (at a click of the button). Alternatively, the BoJ/Royal Bank may try to slow redemption requests by raising rates on GICs i.e. term deposits. The reason for doing this is to freeze unwanted chequing deposits in the form of term deposits, thus nullifying the threat posed by too many dollars in circulation.
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