vert1276
vert1276
Joined: Apr 25, 2011
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January 11th, 2012 at 12:03:44 PM permalink
ya, that's a much easier way of putting it!
pacomartin
pacomartin
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January 11th, 2012 at 3:35:44 PM permalink
Quote: vert1276

Hmm I'm not quite sure what you are trying to get at...Monetary policy is controlling of the money supply....when you say "currency policy" are you referring to the money supply or protection of currency against counterfeiting.....because the later is not controlled by the Fed...but by the US treasury who prints the money and the Secret service..



I thought that monetary policy was any policy decisions concerned with money up to M2 (over $9 trillion dollars), not just M0 ($1.1 trillion). All I was saying was that you began your discussion on monetary policy, but all of your comments were concerned with M0.
vert1276
vert1276
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January 11th, 2012 at 4:25:45 PM permalink
Quote: pacomartin

I thought that monetary policy was any policy decisions concerned with money up to M2 (over $9 trillion dollars), not just M0 ($1.1 trillion). All I was saying was that you began your discussion on monetary policy, but all of your comments were concerned with M0.



yes but M2 is dictated by M0 and the reserve ratio.....If the Fed changed M0 to 3 trillion and the reserve ratio to 50% then M2 would eventually end up at around 6 trillion.....M2 increase or decrease really based on how closely banks can come to their reserve ratio. Of course only 2800 or the 9000 US banks are member banks of the Federal reserve....the rest are state banks and regulated by state banking laws...and some not not required to have a reserve ratio at all.....
AlanMendelson
AlanMendelson
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January 11th, 2012 at 5:24:15 PM permalink
There are a couple of different questions here. The original question is really not one of inflation but one of "money creation."

Government and banking policy can create money. Here is a simple example of how.

I deposit $100 into my savings account at Bank of Alan.

The government says Bank of Alan must keep on hand 20% of all deposits as its "reserve." That allows the bank to lend out 80% of my deposit as a loan.

My friend Bill needs to borrow $80, and he gets the loan from the bank.

I still have my $100 on deposit, and Bill now has $80 from a loan from the bank where I made the deposit. There is now $180.

Inflation simply means an increase in prices, but there are many different causes of inflation such as an increase in the money supply. One way to curb the money supply is to increase the reserves that banks must hold. In my example, instead of banks holding 20% they might be required to hold 80%.

So let's get back to the five companies on five floors each with $1,000,000. If floors A, B, C, and D, each deposited their $1-million with floor E, the total money supply would be:

Floor A $1-m on deposit with floor E
Floor B $1-m on deposit with floor E
Floor C $1-m on deposit with floor E
Floor D $1-m on deposit with floor E
Floor E $1-m of its own money plaus $4-mill from floors A, B, C and D = $5-m

Now add up all the floors: A + B + C + D + E = $9-million is the new money supply from the original $5-million
midwestgb
midwestgb
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January 11th, 2012 at 5:44:18 PM permalink
Banking.... A necessary, lawful Pyramid Scheme.
AlanMendelson
AlanMendelson
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January 11th, 2012 at 5:46:53 PM permalink
If you think about it, if banks were required to keep 100% of deposits on reserve, banks would not be able to make loans or have any income, unless they charged a fee for "holding" your money.

without the ability to lend there would be no growth.

the problem is not that the banks lend. the problem is that the loans are not repaid-- which could be the borrower's fault or the bank's fault.
vert1276
vert1276
Joined: Apr 25, 2011
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January 11th, 2012 at 5:51:00 PM permalink
Quote: AlanMendelson

There are a couple of different questions here. The original question is really not one of inflation but one of "money creation."

Government and banking policy can create money. Here is a simple example of how.

I deposit $100 into my savings account at Bank of Alan.

The government says Bank of Alan must keep on hand 20% of all deposits as its "reserve." That allows the bank to lend out 80% of my deposit as a loan.

My friend Bill needs to borrow $80, and he gets the loan from the bank.

I still have my $100 on deposit, and Bill now has $80 from a loan from the bank where I made the deposit. There is now $180.

Inflation simply means an increase in prices, but there are many different causes of inflation such as an increase in the money supply. One way to curb the money supply is to increase the reserves that banks must hold. In my example, instead of banks holding 20% they might be required to hold 80%.

So let's get back to the five companies on five floors each with $1,000,000. If floors A, B, C, and D, each deposited their $1-million with floor E, the total money supply would be:

Floor A $1-m on deposit with floor E
Floor B $1-m on deposit with floor E
Floor C $1-m on deposit with floor E
Floor D $1-m on deposit with floor E
Floor E $1-m of its own money plaus $4-mill from floors A, B, C and D = $5-m

Now add up all the floors: A + B + C + D + E = $9-million is the new money supply from the original $5-million



ya well the OP question was not how fractional reserve banking works....But what causes inflation. But fractional reserve banking in and of itself doesn't create inflation. If utility is created with the "money" created through the multiplier effect. Then no inflation should take place at all. In fact it can cause deflation. It really just depends how much utility is created.

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