Really? How many times will I have to prove this wrong? I get tired of typing the same thing over and over. You aren't understanding what Fractional reserve banking is, or how the money creation process works at all bro. here maybe this will help:
http://en.wikipedia.org/wiki/Money_creation
Banks and the Fed CREATE MONEY from nothing, there is no way 100% of
all transactions are backed by cash. JUST the Derivatives market is 1.2 QUADRILLION Dollars worth, for someone to buy all those they must have had the money to do it correct? Is the USA the largest economy in the world? YES!! how much is M3? 10 trillion$. So lets just say that EVERY country in the world had the same size economy as the USA, just for brevity's sake. so 192 countries multiplied by $10 trillion gives us 1.92 trillion. do you see the problem? For someone to buy a derivative they had to pay for it somehow, and in your error they could not possibly do that, there isn't enough money in the world, where would you get the money to buy anything else?
All bank transactions can only take place if they have the deposits to allow it. They cannot lend out more money than they have. The people that take out a loan though are putting up their collateral and future wages to back that loan. If they didn't they would not get the money. Those loans are backed up with the person who obtained it and their assets.
Now if they deposit that money into another bank, that is where the money creation comes from, the person who took out the loan and deposited it.
We have about what 120,000,000 homes in the united states, if those homes average only $80,000 a piece you have $9,600,000,000,000 right there that is not counted in M3, How about every building in america, what do you think the worth of all that is? How about stupid things like art, or cars, that is all wealth. What about the future earnings of every American? All these things can be collateral for a loan.
That is how you can have x amount of dollars and far more out there being traded in the markets.
Lets see If I can explain it another way.To understand the process of how the printing press works to create money out of thin air, the nature of money itself must be understood. The real money of the United States is not the Federal Reserve Notes that circulate in the economy, but the Treasury bills and bonds secured by the "full faith and credit" of the U.S. government. Only the holder of a U.S. Treasury has the promise of payment from the government out of future taxes collected from U.S. citizens, and this promise to pay is essentially the only value behind what passes as "money."
Like you said, the market for U.S. Treasuries is one of the largest and most liquid in the world. To create new dollars, the Federal Reserve monetizes the government's debt. That is, it simply buys Treasuries on the open market and credits the seller's account for the transaction. This is the "electronic equivalent" Bernanke mentioned in 2002. The value added to the seller's account does not actually exist except on the digital balance of the bank's reserves.
And what happens when the Fed sells treasuries, they withdraw currency from the banks reserves. The electronic equivilent is just efficient, the money is in the Fed's vault (bank reserves) why would they want to constantly move piles of cash inside of the same building just to do it?
You are correct when the Fed makes a open market purchase of those treasuries they are indeed adding to the banks reserves (at the cost of the bank having the exact same amount lost in the asset they turn over for it) in order to stimulate the economy. Just like when they sell them back to the banks they are withdrawing from the banks reserves.
With the Fed's purchase of Treasuries, money has in effect been created out of nothing, but the process doesn't necessarily end there. The Fed buys in volumes that can only be met by large financial institutions, who, once the value has been added to their reserves, can then invest or lend these funds, which in itself is part of the creation of new money. All modern banks work on a system of fractional reserve lending where more can be lent than is actually held in reserve. There are some restrictions, however. In general, banks can lend $10 for every $1 on reserve, and in doing so, they represent the final step in the process of the creating new money.
Yes, but you miss the point that the bank has already used the money from their excess reserves to purchase that treasury. When the Fed purchases the treasury security they are stopping the treasury from paying interest back to that bank (instead it goes to the Fed (Who at the end of the year sends its excess funds back to the treasury)). So it is not like the bank is getting an extra million dollars that it did not have before, it just exchanged the treasury security (that it had already purchased with their own money) for currency to be added to their reserves.
And yes they loan off of that, but that money was already there it was just tied up in that treasury security. The Fed is just trying to regulate how much money is in the system as a way to increase or decrease interest rates in the bank.
Here is the chain of events of an Open market purchase:
1. At some point the bank has 1 million worth of deposits free (nobody to lend it to) and buys a treasury security to get some interest instead of just allowing that 1 million to sit and lose value due to inflation.
2. The economy needs some stimulating and so the Fed does an open market operation in order to increase business investment.
3. Fed buys 1 million in treasuries from bank.
4. That bank now has that money free up to lend (minus the 10% they need to hold right).
5. So to entice people it lowers its interest rates. That brings in a business that needs 900k to expand their operations, the bank lends it to them at 5% interest rate vs the 7% it was the month before.
6. That business spends the money and expands their business which adds to GDP (business investment).
7. They hire new employees who add to GDP with expanded consumption. There is the reason why the Fed does this, in bad times they buy treasuries to put more currency in the market in order to increase investment and lower unemployment.
8. Assuming all of the money spent from that loan ends up in peoples savings accounts, the banks now have 900k more in their excess reserves and can now lend out 90% of that.
The money creation is only due to people putting the money back into banks. Without that the banks would not be able to lend.
Here is some good reading, you even get to see the Fed President totally agree that they create money out of nothing and his response is " So what, we live well don't we"?
http://www.silverbearcafe.com/privat...ingthefed.html its a great read and fairly simple to understand, he doesn't use any of the bank jargon to explain it.
I will read that and get back to you on it. I am guessing that is a pre depression era Fed president, because macro economics wasn't around then and most people did not understand what the Fed was supposed to do.
Anyway bro, I sure hope you get it.
BTW if you can prove your theory that banks hold 100% of cash to back 100% of loans I sure welcome you to try.
Appreciate it, I too have hope that one day something here will click for you that the Fed does not willy nilly create money, and the only way to have money creation is if people are willing to put up some collateral and take out a loan. Without that there would never be any creation of money.
And 100% cash remark you know is something that I have never said. A bank can only lend up to 90% of it deposits, they cannot lend out more. No bank would ever except a deposit in form of a check if that was the case, because they would know the money was not there.
But that doesn't stop the person getting the loan from taking their loan and going to a different bank and putting it into a deposit account and that bank lending off of the persons account (with the understanding that they have to hold 10% for reserves).
What I am saying is that the banks have 90% of their deposits covering 100% of their loans (Deposits are greater than their loans). And the ones that fail to do this and lend more than 90% of their loans get bankrupted.
ps:
How many times will I have to prove this wrong?
Once would be enough, but you can't, because it is correct.
