18
I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.
Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make ...
13
There is a long standing problem in most discussions of Fractional Reserve Banking (FRB), around the precise definition of money. Cash money (that is M0) is an asset on the banking system balance sheet, while deposit money (the liability) is the money that is created by lending.
Ever since the introduction of cheques specifically, and in general the ...
13
Stocks are not money.
The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.
The share price is the price people are willing to trade at right now. It does NOT mean all the shares have been traded at that price.
If a company issues 1 million shares, at a starting price of £10, the market cap is £10 ...
12
I recommend a careful read of the Wikipedia page for Fractional-reserve banking because it seems you are confused about how fractional reserve banking works.
Banks only lend out money they have under fractional reserve banking and, in fact, strictly less than they have. Those funds are a mix of deposits, funds from other debt issuance, and bank equity. They ...
12
Normative questions require a standard of fairness in order to then be analyzed and answered with some degree of "objectiveness" so that the answer is not just a declaration of philosophical-ideological positions.
The OP starts by writing
"Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be ...
9
The Fed introduces money in the economy through the banks via the mechanism of fractional-reserve banking, as you mentioned in your article.
This means the Fed is then allowing the banks to provide credit to anyone who they find adequate. The reason to do so is that banks will favor investment opportunities which lead to long term growth, such as build a ...
8
The problematic part of the statement, is the "because of other reasons not important here" part . In other words: "ignore general equilibrium" -which is an unacceptable statement to make when discussing government policy and actions.
Consider the naive quantity theory of money:
$$PQ = VM \tag{1}$$
$P$ is the price level, $Q$ is output produced (measured ...
7
When the USD is highly valued, it allows people from the home country, the United States in this case, to purchase goods relatively cheaply from abroad and put pressure on domestic firms to have low prices. From a consumption standpoint, this may be advantageous.
A high value USD may also make goods from the United States more expensive relative to goods ...
7
"Why I don't hear nobody speaking about such idea?"
Because historical experience says it won't work.
By printing money instead of collecting taxes, what increases is the nominal disposable income. The "value of work" is certainly not increased. And the important question is, does this increased nominal income lead to higher consumption?
Consider a ...
7
In 2013 researchers at the Federal Reserve Board published a paper {link} considering the costs and benefits of replacing \$1 bills with \$ coins.
Here are the takeaways from their executive summary: compared to notes, coins offer
Less payment system efficiency. Using \$1 coins instead of \$1 notes for transactions is inherently inefficient, requiring a ...
6
This is meant to add to @BKay's answer. Here are some examples that might help to see what's happening when a bank makes a loan.
A bank's balance sheet
The image below is text taken from Greg Mankiw's textbook Macroeconomics (7th edition, p. 555). This is a simplified version of a typical bank's balance sheet. Notice that reserves, loans, and securities ...
6
Double entry book keeping.
If we take the example given here, of the Greek Central Bank (bank nerd trivia - interestingly the GCB is a commercial bank, listed on the Greek Stock Exchange), arbitrarily adding 000's to its deposit account.
This cannot be done as stated. The double entry book keeping accounting system on which all banking is based, requires ...
6
The Federal Reserve is a system, consisting of the reserve banks, which are "owned" (in a limited fashion) by their member banks (members select the leadership of the reserve banks), and the Federal Reserve Board of Governors, which oversees the member banks and is independent within the government (that is, the Governors are nominated by the President and ...
6
A bank selling mortgages does not, by itself, increase the money supply.
To see this, work through the balance sheet implications step-by-step:
A bank makes a mortgage loan, swapping cash assets on its balance sheet for a mortgage asset. The customer receives cash. At this stage, the money supply has been increased.
2a. A bank sells a mortgage to another ...
5
What is value? Ultimately, value flows from the utility people get from consuming goods and services.
Now, suppose, in your example world, I am a farmer and it is Autumn so I have the product of a large harvest. Here are three things I could do with it:
Consume (and thereby enjoy the value of) my entire harvest immediately. But this would leave me hungry ...
5
I'm adding this as a separate answer because it's quite independent of my other answer.
We've agreed that if there are X dollars existing and you counterfeit Y dollars, then you've stolen Y/(X+Y) of the value of those X dollars.
This assumes you do your counterfeiting all at once, and without warning.
If instead you do your counterfeiting slowly over ...
5
The minimum required capital matters, but in the opposite direction: the more capital you have, the more likely you can challenge big banks. Because the costs of a new bank look like this:
(http://www2.deloitte.com/content/dam/Deloitte/pt/Documents/financial-services/dttl-fsi-uk-Banking-Disrupted-2014-06.pdf)
You need $15 mn just to keep it alive. Recall ...
5
It would seem logical that this would result in reverse-inflation or lower prices, but this is actually not the case (at least over time).
The banking system has a "supply and demand" market for reserves. When say 1 million dollar is withdrawn and not redeposited, the banking system in the aggregate will bid more for current reserves to replace the ones ...
5
The current answers correctly point out that financing the government via the printing press would generate inflation. Since inflation is bad, this would be a bad policy.
However, these answers miss out on several advantages of an inflation tax. Firstly, there would be substantial productivity gains since the entire government revenue system, tax advisors, ...
5
Here are three types of money:
Commodity money: goods of value are used as money (e.g. gold in your example, or cigarettes in a prison),
Representitive money: money is still based on a commodity but, instead of actually using that commodity in exchange, they use pieces of paper that can be exchanged for the commodity (e.g. the gold standard),
Fiat money: ...
5
No, because monetary policy is known to increase inequality.
In effect, evidence indicates that monetary policy has contributed toward higher inequality. Therefore, the Fed is not being very supportive of fairness, from this point of view.
Reasons are several. Some examples:
Booming Stock Markets: low interest rates generate booming stock markets. Because ...
4
I think Ms Vallejo's argument is based on (a) a slightly idiosyncratic definition of the term "inflation" and (b) a disregard for the difference between short run and long run phenomena.
She is correct in mentioning that in the short run, various cost shocks -- e.g., a devaluation that leads to imported inflation, or excessive wage demands that are ...
4
The consensus appears to be that the effect was large and positive. The IGM Forum asked a panel of economists to assess the statement
"Informed postmortems of Ben Bernanke’s Fed chairmanship will judge favorably the Fed's creative and aggressive policy initiatives from autumn 2008 through early 2009."
Not one disagreed. Weighted by their confidence, 90% of ...
4
I think the answer should be more complicated, and this won't be a complete answer at all.
You are assuming that counterfeit money is forever passed along? Counterfeit money is eventually taken out of circulation, so prices shouldn't move as perfectly as you suggest. But, given this fact, we might want to think about the costs of forcing counterfeit bills ...
4
The money is removed when the loan principal is repaid. The actual point in the loan this occurs depends on the loan terms. For a typical compound interest rate loan, this means a small portion of the principal is repaid every month, and a matching liability deposit (money in the customers account) is removed.
For an interest only loan, this occurs at the ...
4
When the retail bank in country B multiplies the money supply, it does so by creating an asset (money owed by the borrowers) and a liability (the obligation to honor the loan it gave to the borrowers) on its books, and an asset (money to spend) and a liability (the loan to pay back) on the books of each of the borrowers.
Now, if these borrowers are all ...
4
Suppose I define "net appliances" as dishwashers plus appliances lent to others minus appliances borrowed from others.
Suppose I build a refrigerator and lend it to you. Then your "net appliances" have been reduced by one, my "net appliances" have increased by one, and the total of the world's "net appliances" has not changed.
On the other hand, the ...
4
A bill with an expiration date does not become worthless suddenly. Clearly its value would decrease over time until, just before the expiration date, it was next to worthless. Think about it: how much would you pay for a $1 bill that expires in 5 minutes? Certainly a lot less than you would for one that expires in 6 months.
This constantly changing value ...
4
Repayment of interest does require an expansion of the money supply, but not in a way that is inflationary.
Consider first the way that commercial banks make loans. The whole purpose of loans is to borrow against future output— so if you imagine a firm that wants to purchase a machine that will allow it to produce more stuff— and thus have greater future ...
4
The key thing to note is that the interest paid does not simply accumulate at the bank. Nobody runs a business in order to just make a big pile of money to keep in a safe. The banks spend the money back into the economy through staff wages, running costs and dividend payments to shareholders. All these outflows of money will ultimately be spent on real goods ...
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