[Truth To Power]

The high levels of inequality are an artefact of landowner privilege, as Henry George explained so clearly and irrefutably in "Progress and Poverty." Higher population, technological progress, and accumulation of capital all have the effect of pushing the no-land-rent margin outward, reducing wages while increasing land rents.

I envy those of you who have an overarching explanation of everything.

The Marxists, you mean. Yeah, I hear you.

Of course, the Law of Rent does not explain everything, but it does correctly explain many of the more important things that Marxism, socialism, capitalism, etc. explain incorrectly.

Similarly, pathogenic micro-organisms don't explain every disease, but they do explain most of the most important ones.

You are like a person in the mid-18th century who first hears a scientist say that all the diseases you fear most -- smallpox, pneumonia, cholera, bubonic plague, tooth decay, etc., etc. -- are caused by invisible micro-organisms: you simply refuse to know the relevant facts because they are too much at odds with your incorrect beliefs.

The sense of certainty must seem quite intoxicating. For me the cost of stilling that internal voice of dissent is too high.

Some people are willing to know facts that prove their beliefs are false. I am one of those people. You are not. Simple.

But that is just an admission that capitalism doesn't produce a desirable outcome, but an unjust and harmful one, which has to be continuously corrected by government intervention.

Not much of a system, if you ask me.

If by system you mean a set of a few theoretical rules that magically work, then no such thing is possible.

<yawn> Magic is not possible. So what?

If by system you mean a complex and tangled set of informal and evolving spaghetti relationships that actually work most of the time despite the formidable chaos that mankind is, then capitalism is certainly the backbone of a system that actually works.

<yawn> So was slavery.

We are discussing humanity, not Peano algebra.

<yawn>

You cannot take for granted that a significantly better outcome is possible, at least with the current technological levels.

Sure I can, because I can show exactly how to achieve it.

Systems' merits can only be evaluated comparatively.

And...?

Really? I've never encountered an apologist for capitalism yet who was prepared to see rich, greedy, privileged parasites reduced to a condition commensurate with their net contributions to society.

I thought you were desiring prosperity, liberty and justice, not true equality - whatever that means.

Who mentioned equality, let alone equality of condition? I was talking about justice: a condition commensurate with their net contributions to society. Remember? Does that sound like Procrustean egalitarianism to you? If so, I suggest a remedial reading course.

Of course justice also implies equality of rights and opportunities, but it pretty explicitly rules out equality of income, wealth, or condition.

I am not convinced that an economic system can be found at the present technological levels that can achieve all at the same time.

I can explain exactly how to achieve liberty, justice and prosperity -- and though not equality of outcome, at least a greatly reduced level of unjust inequality of outcome.

Now I admit that I am on the good end of the stick (I not always was) and I refuse to renounce it.

Bingo. Those who profit by injustice are almost always enemies of justice. Or as one tradition so astutely has it, greed (unfortunately mistranslated as "love of money") is the root of all manner of evil.

But what about you? I bet you are a westerner and most of this planet is dirty poor. Are you ready to divide your income by seven, which implies to drastically cut on your life quality and hygiene and security, maybe face starvation sometimes, and accept a greater mortality rate for yourself and your family? No, I am sure that you do not want that. By the way you can do it already, without waiting for a revolution. Are you doing it? No, of course not.

I'm not doing it because Procrustean equality is not justice.

Now in 2015 most of Africa uses capitalism to enjoy a 3% yearly growth, with many countries in the 5% - 10% range. There were and there are times when capitalism was/is a hindrance for Africa, but circumstances changed and both Africans and good-willing westerners derived lessons of the past and learned how to canalize capitalism for Africa's profit.

For Africa's profit?? Don't make me laugh. They are just taking the resources, and that requires some investment in extractive infrastructure. That's all those growth figures mean.

These days, demand deposits can be moved around so fast -- including into a bank's reserve account

This makes no sense whatsoever, given that a balance in a client's checking account is the bank's liability, while a balance in the reserve account at the central bank is the bank's asset.

The liability is balanced by an asset, which can be liquidated and converted into demand deposits the bank can then use as reserves.

Consider two banks with two customers, A and B, who both want to take out loans for $1M. The banks both write an additional $1M into the balance in the customers' demand deposit accounts, and write up the loans (which become their assets, balancing the liability of the loan proceeds). They then want to create reserves, so they sell the loans. By coincidence, A buys B's loan, and B buys A's loan, in both cases by writing a check on the demand deposit they have just received as loan proceeds (the numbers won't quite be equal, but they make up the difference out of their own resources). A's bank can then immediately use the money B's bank created as reserves (it is their asset), while B's bank can likewise use the money A's bank created as reserves. In this way, banks can create their own reserves simply by lending. Presto! Increased reserves, with no additional issuance of money by the central bank. They DO NOT rely on customer deposits for reserves, because anybody can buy the loan assets (obviously, it will never be the case that A and B buy each other's loans) with their own demand deposit money. And usually it will be other financial institutions or investors, not depositors.

And what, exactly, does it have in its central bank account? Could it be demand deposits, which it and other banks have created?

No, they can't, any more than I can go to Wells Fargo with a slip of paper saying "$100" and ask them to increase my account by that amount.

You can if the slip of paper is a loan from them to you.

These have to be actual US dollars, either vault cash or electronic (so-called Fed Funds - see here for a description from the New York Fed, or the Wikipedia articles on Fed funds, or just bank reserves).

Almost all are just demand deposits.

This makes sense, since when your depositors want to withdraw money they aren't going to be satisfied with an IOU from your bank or someone else's - they want cash.

They are almost always satisfied with what amounts to an IOU.

What is the difference between the money on deposit in a demand account that consists of loan proceeds the bank has just created, and money in a demand account that a customer has deposited using loan proceeds from another bank (which created it)? Both can be used as reserves, because there is no difference between them.

Demand deposits are not cash.

Irrelevant.

Also when you transfer funds between banks, it causes exactly that quantity of reserves (cash, usually electronically, via Fedwire) to be transferred between banks, not an IOU or "loan proceeds".

Wrong. You can easily move loan proceeds to another bank.

When you go to an ATM you don't get an IOU from your bank, you get cash;

Because that's what you go to an ATM for. Geez.

why would a bank get an IOU when it receives a check? No, it will settle in cash - that's its right, just as much as much as you do on your bank account when there's a transfer.

?? What do you even incorrectly imagine you think you might be talking about? Almost no bank transfers are in physical cash, they use electronic account balances.

I've warned you, and warned you not to double post. Now you've quadruple posted.

Congratulations, you have a card.



Keep double posting and see where that lands you.

I don't like having to edit every single thread you go into. Nobody likes the thread getting cluttered up like it does if someone is spamming. I've formatted your quadruple post into the correct format. As I have your previous posts.

Please post correctly from here on out.

-TIG Edit

[lucky]

Consider two banks with two customers, A and B, who both want to take out loans for $1M. The banks both write an additional $1M into the balance in the customers' demand deposit accounts, and write up the loans (which become their assets, balancing the liability of the loan proceeds). They then want to create reserves, so they sell the loans. By coincidence, A buys B's loan, and B buys A's loan, in both cases by writing a check on the demand deposit they have just received as loan proceeds (the numbers won't quite be equal, but they make up the difference out of their own resources). A's bank can then immediately use the money B's bank created as reserves (it is their asset), while B's bank can likewise use the money A's bank created as reserves. In this way, banks can create their own reserves simply by lending. Presto!

Each bank will need to first deplete $1M from its own reserves in order to honor the check that its customer wrote against the checking account. When a bank clears a check, they have to send money to the other bank. They can take it out of the vault and ship it in a truck, or they can instruct the central bank to transfer it between accounts. Either way, they are depleting their reserve.

Then, they can both add the $1M received from the other bank back to their own reserves.

The total amount of reserves hasn't changed.

[Truth To Power]

Consider two banks with two customers, A and B, who both want to take out loans for $1M. The banks both write an additional $1M into the balance in the customers' demand deposit accounts, and write up the loans (which become their assets, balancing the liability of the loan proceeds). They then want to create reserves, so they sell the loans. By coincidence, A buys B's loan, and B buys A's loan, in both cases by writing a check on the demand deposit they have just received as loan proceeds (the numbers won't quite be equal, but they make up the difference out of their own resources). A's bank can then immediately use the money B's bank created as reserves (it is their asset), while B's bank can likewise use the money A's bank created as reserves. In this way, banks can create their own reserves simply by lending. Presto!

Each bank will need to first deplete $1M from its own reserves in order to honor the check that its customer wrote against the checking account.

No, because that transfer zeroes out its liability to the depositor. The bank is transferring the money from the depositor's account, not its own account. It's own position is therefore unaltered.

When a bank clears a check, they have to send money to the other bank.

The money in the customer's account, not its own account.

They can take it out of the vault and ship it in a truck, or they can instruct the central bank to transfer it between accounts. Either way, they are depleting their reserve.

Nope. They are only depleting the customer's account. Not their own.

Then, they can both add the $1M received from the other bank back to their own reserves.

No, they then have $1M in reserves that they did not have before.

The total amount of reserves hasn't changed.

Yes, it has, because the money (loan proceeds) they created in the customers' accounts is now in THEIR accounts (they sold the loans for it).

[lucky]

Do you know about double-entry accounting? When I pay somebody by check, and the check gets cleared by my bank, my checking account at the bank gets debited. What account at the same bank does get credited?

Hint: it's the reserve account. That's exactly what bank reserves are for.

If you're still claiming your magic works, I will get back to you after you have written out balance sheet transactions at one of these banks, in detail, starting with $X in reserves, creating some accounts, liquidating those accounts, and somehow ending with $X+$1M in reserves, thus violating the accounting identity.

Also I am a bit curious about how you imagine the mechanics of this "electronic money transfer". What are the bits being sent? In what form does the extra reserve materialize?

[Truth To Power]

Do you know about double-entry accounting?

<yawn> Well, I once edited an accounting textbook, so yeah, you could say I know about it...

When I pay somebody by check, and the check gets cleared by my bank, my checking account at the bank gets debited. What account at the same bank does get credited?

Hint: it's the reserve account. That's exactly what bank reserves are for.

But in that case you are paying a third party (the money immediately gets moved out again, and the bank's position is unaffected), not the bank. In the case in question it is THE BANK that is being paid.

If you're still claiming your magic works,

It's not magic -- although it can seem like sleight-of-hand to those who think of money as pieces of paper issued by the government.

I will get back to you after you have written out balance sheet transactions at one of these banks, in detail, starting with $X in reserves, creating some accounts, liquidating those accounts, and somehow ending with $X+$1M in reserves, thus violating the accounting identity.

I don't have to do that, because that does not describe the process. The loan asset balances the bank-created loan proceeds liability, and the latter is newly created money. The bank gets reserves by selling the loan asset for another bank's newly created money. Of course in reality it is not that simple, but that is the essence of the process.

Very simply, let's even assume the bank has no reserves at all to start with, no assets, and no liabilities:
Assets ------------------------------------------------- Liabilities ------------------------------------------ Reserves
$0 ---------------------------------------------------- $0 ---------------------------------------------------- $0

Starting with zero reserves obviously isn't legal, but that doesn't affect the process.

Now the customer comes in and gets his loan. For simplicity, assume there is no interest (close to true, these days!):
Assets ------------------------------------------------- Liabilities ------------------------------------------------- Reserves
$1,000,000 Loan ------------------------------ $1,000,000 Demand deposit ------------------------------------ $0

At this point the bank's assets are all in the form of the loan, and so cannot be used as reserves.

Now the bank sells the loan for $1M (in this case, as we are only looking at this one bank, we don't have to assume the borrower spent the loan proceeds, so that remains a liability of the bank):
Assets ------------------------------------------------- Liabilities ------------------------------------------------- Reserves
$1,000,000 In bank's own cash account ---------- $1,000,000 Demand deposit -------------------------------- $0

But the $1M asset is now in the form of demand deposit money created by some other bank, not a loan, and so can be used as reserves, which of course remain as assets of the bank:
Assets ------------------------------------------------- Liabilities ------------------------------------------------- Reserves
$1,000,000 In bank's reserve account at Fed ----- $1,000,000 Demand deposit ---------------------------- $1,000,000

I am sure you will agree that demand deposit money in a bank's own cash account can be used as reserves.

See? The bank is uniquely privileged to create demand deposit money as a liability balancing its loan asset. But it can liquidate the loan asset to obtain money for reserves. You and I are prohibited from doing that: at the very least, we won't be able to clear checks drawn on our demand deposits through the Fed system.

Also I am a bit curious about how you imagine the mechanics of this "electronic money transfer". What are the bits being sent?

They are the bits that describe the demand deposit balance being transferred.

In what form does the extra reserve materialize?

It is in the form of the demand deposit money the bank gets from the other bank (which the latter created as loan proceeds) when it sells the loan asset.

[lucky]

The balance sheets look good.

Why don't you keep going and continue the process through the part where the customer writes the check? This way we will be able to look at the final balance sheet (this should be identical for both banks by symmetry) of the story that you had described, and we'll see if the total reserves of the two banks increased.

[Truth To Power]

The balance sheets look good.

So you agree that the bank has created its own reserves by lending, and DID NOT NEED a depositor, only a borrower, and an investor to buy the loan.

That's all I wanted to establish, and we have established it.

Why don't you keep going and continue the process through the part where the customer writes the check?

Because that was a red herring to help get you this far. The idea of modern banking is that you need borrowers, not depositors. But if the borrowers go away, you're stuck.

This way we will be able to look at the final balance sheet (this should be identical for both banks by symmetry) of the story that you had described, and we'll see if the total reserves of the two banks increased.

If the borrowers don't enable the bank's debt-money-creation privilege (e.g., if they effectively stop using its demand deposit facility), the bank can't do anything to stop them. In the case described, the two borrowers buy each other's notes, their erstwhile money disappears (they owe each other, but because their debts are not demand deposits, they're not money). The money the banks created by lending to them is therefore gone, and so are the reserves.

In reality, of course, debts do not all cancel each other out so neatly. The bank is going to charge interest, and sell the debt for more than the loan proceeds, gaining money -- which it can then use as reserves. More importantly, borrowers in the aggregate are going to maintain very substantial net demand deposit balances -- which as we have seen, even though they are liabilities of the bank, nevertheless balance ASSETS that can be converted into reserves.

[QatzelOk]

Because that was a red herring to help get you this far. The idea of modern banking is that you need borrowers, not depositors. But if the borrowers go away, you're stuck.

Not stuck. You just need to seed a war (by funding terrorism) and then sit back and lend money to the nations that are targeted.

This method of fund-raising was used in Europe twice in the last century, the second time, the debt was so great that the banks got to buy themselves a little Crusader Colony from which to seed more wars.

If Westerners weren't so distracted and TV-dumb, we would have resolved this by now.