tag:blogger.com,1999:blog-2277215496195926573.post1050997189873025617..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Fractional reserve causes artificially low interest rates.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-2277215496195926573.post-80363233039329437492012-01-27T15:35:47.832-08:002012-01-27T15:35:47.832-08:00Read Mish Shedlock on this whole subject. Here is...Read Mish Shedlock on this whole subject. Here is the link - http://globaleconomicanalysis.blogspot.com/. Mish is a money manager not an academic, but he is very well read and quite entertaining. Anyone of his his primal screeds lambasting fractional reserve is well worth the read!alternative investmentshttp://www.greenworldbvi.com/alternative-investments-options/noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-11734678810038560992012-01-27T09:09:16.546-08:002012-01-27T09:09:16.546-08:00Lord Keynes,
First – for the benefit of those who...Lord Keynes,<br /><br />First – for the benefit of those who don’t know who “Lord Keynes” is, he runs a high quality blog. It is good (amongst other things) at demolishing various aspects of Austrian economics and at demolishing some of the sillier anti fractional reserve arguments. See:<br /><br />http://socialdemocracy21stcentury.blogspot.com/<br /><br />Re my full employment assumption, I meant this in what I think is the normal sense, in other words an economy with as high a level of employment as is feasible before inflation becomes serious. I certainly didn’t mean “no unemployment”. As to other resources, I’m well aware of those charts which show plant capacity utilisation never rising much above 80% even when unemployment is unusually low.<br /><br />Re equilibrium, I didn’t mean to suggest that absolutely everything at the micro economic level is at equilibrium. Even at the full employment “equilibrium” there are, for example, obviously hundreds of firms going bust every week and hundreds of others starting up. <br /><br />In other words I meant equilibrium at the macro level. Obviously that is unrealistic in that economies never are at equilibrium even at the macro level, but it’s common practice to make simplifying assumptions in economics and other subjects.<br /><br />Re international trade, I should have made the closed economy assumption to keep things simple. But even if an economy is open, I suggest that the availability of imported stuff does not ameliorate inflation. Reason is that if more is imported, the currency declines, which in turn raises the cost of imports, which is inflationary.<br /><br />It’s true that if a close economy is opened up to international trade FOR THE FIRST TIME, THAT CERTAINLY WILL improve the inflation / unemployment relationship. Reason is that the above balance of payments deterioration probably won’t occur because increased imports are likely to be matched by increased exports. But that’s a different point entirely. <br /><br />Re your “(1)”, I don’t understand.<br /><br />Re (2), I didn’t mean to suggest that fractional reserve is fraudulent, and I don’t think I said that. In fact under the heading “Huerto do Soto” above, I point out that I think the first three chapters of his book (which argue that fractional reserve is fraudulent) are hot air. Incidentally I also think the standard Austrian “lengthening the production process” idea to which de Soto devotes thousands of words is hot air as well. Obviously production processes do tend to lengthen given low interest rates, but this is just one example of the blindingly obvious point that the lower are interest rates, the more firms will invest all else equal.<br /><br />Re the idea that growing economies require a growing money supply – agreed. I should have mentioned that. But under full reserve, that is easily arranged by having the monetary base expand a small amount annually.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-4449493149879697632012-01-27T04:59:23.006-08:002012-01-27T04:59:23.006-08:00While I appreciate the general aims you want to ac...While I appreciate the general aims you want to achieve (full employment, etc.), I am afraid the flaw that runs through the first part of your post is the assumption of the economy running at full capacity (no unemployment, no idle resources, no unused stocks/inventories of goods, no unused capacity at plants). In reality, capitalism generally has many idle resources and is far from an equilibrium state.<br /><br />Equilibrium states are pure fiction.<br /><br /><i>"Next, when the borrower spends what they have borrowed, the effect is inflationary (given the above full employment assumption)"</i><br /><br />What about international trade? If inflationary pressures build up this is how in real life they get reduced.<br /><br /><i>"But no one needs to forgo consumption for a bank to lend, or so it would seem! Thus the bank will be happy to lend at a lower rate than those who forgo consumption in order to lend. A bank takes the title deeds of someone’s property, creates money out of thin air, and lends it to the person concerned. "</i><br /><br />(1) You appear to be subscribing to the pure time preference theory of interest rates - this is an erroneous idea. Interest is merely the price of borrowing money. Whether actual real resources exist is a totally different question.<br /><br />(2) FRB is not fraud, although you say you don't follow the Austrian view of this.<br /><br />Anyway, the monetary production economy with growth requires a growing money supply:<br /><br />http://socialdemocracy21stcentury.blogspot.com/2011/12/monetary-production-economy-and.htmlLord Keyneshttps://www.blogger.com/profile/06556863604205200159noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-60864969425522841532012-01-27T02:38:10.819-08:002012-01-27T02:38:10.819-08:00Neil, OK – you could tighten up the credit licen...Neil, OK – you could tighten up the credit licences. But they’d need to be tightened up to the extent of not allowing commercial banks to create credit / money and lend it out – which is exactly what full reserve consists of.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-11561436901472526402012-01-27T01:56:42.568-08:002012-01-27T01:56:42.568-08:00"Next, when the borrower spends what they hav..."Next, when the borrower spends what they have borrowed, the effect is inflationary"<br /><br />Why are the credit licences in your economy allowing this?<br /><br />The money supply as a whole (credit money + fiat money) must not generate a flow greater than the capacity of the economy. If you have 100% fiat money in the system, then you need to have 100% reserve requirement and a closed discount window.<br /><br />So the fault is in the licences issued to the commercial banks to print money. You need to tighten them upNeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.com