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The money supply is inflated when people make loans. Well, when people loan more than they have, which banks in the US are allowed to do. Loans in and of them

The money supply is inflated when people make loans. Well, when people loan more than they have, which banks in the US are allowed to do. Loans in and of themselves promote deflation, since people get loans to build wealth, and wealth increase in a static money supply is deflation.

gte910h 16y ago
Loans are inflation. By definition. Here is a movie about this: http://www.youtube.com/watch?v=P_Ydp7-ApdA http://www.youtube.com/watch?v=P_Ydp7-ApdA Deflation occurs when the loan is paid down or written down.
- randallsquared 16y ago
  Loans are inflation. By definition. The youtube video isn't working for me, right now, but that's clearly not correct. In a loan from A to B, the money B now has the use of is money that A does not have the use of. If there is interest on the loan, B can't make up the money for the interest from nowhere (unless B is a government controlling the supply for the money in question), so while the interest represents the additional wealth generated by the loan, it's not inflationary in and of itself. If no one is creating more money, the interest has to come out of a fixed pool of money in the economy, and now that there's more wealth (assuming the loan was successful), each unit of money is worth a little bit more, which is deflationary. This might or might not be a problem, depending on who you ask. I think it probably is, but the only way to solve it permanently (rather than in a stopgap manner like creating money at a rate you hope matches the actual growth of the economy) is to make actual wealth the basis of the money. This is, uh, very difficult, to understate the problem.
  - deleted 16y ago
    [deleted]
  - gte910h 16y ago
    I'm referring to fractional reserve banking, and those loans, which are the primary source of money creation in the modern world. Not person to person loans as you are talking about.
    - randallsquared 16y ago
      In my original reply to you, I agreed that loans in fractional reserve banking are inflation: Well, when people loan more than they have, which banks in the US are allowed to do. But loans aren't the problem, or the source of the inflation. The inflation happens separately from the loan; the loan is just a shell game to hide what's going on.
      - gte910h 16y ago
        No, the loan is the actual source of inflation. When more loans are made than there is actual economic growth, inflation occurs.
        randallsquared 16y ago
        I feel like we're going round and round, here. You said, "Not person to person loans as you are talking about". This is the same as saying it's not the loan, since the loan is the same in these cases. The difference is that when the bank loans money (at least in the US), they don't loan money they have most of the time, but money they're allowed to create to loan. I don't remember what the multiplier is offhand.
        dedward 16y ago
        for the next poster (randallsquared) - banks don't loan money they don't have - or at least we have to be very careful with the terminology here. They cannot create money out of nothing - they can only loan out a percentage of hte money they have on deposit. The key is they have to have it on deposit in the first place. This effect compounds itself across multiple accounts and banks and does end up inflating the money supply by a factor of about 10 (assuming the reserve percentage is 10%) - but this is subtly but importnatly different than the bank being magically able to create money it doesn't have. (the bank can't lend me $90 if it does't have $100 on deposit - it will have to keep the $10 in reserve. OTOH - if someone simply deposits $10, the bank can't possibly lend me $90, because they just don't have it.)

gte910h 16y ago

Loans are inflation. By definition. Here is a movie about this: http://www.youtube.com/watch?v=P_Ydp7-ApdA http://www.youtube.com/watch?v=P_Ydp7-ApdA Deflation occurs when the loan is paid down or written down.

randallsquared 16y ago
Loans are inflation. By definition. The youtube video isn't working for me, right now, but that's clearly not correct. In a loan from A to B, the money B now has the use of is money that A does not have the use of. If there is interest on the loan, B can't make up the money for the interest from nowhere (unless B is a government controlling the supply for the money in question), so while the interest represents the additional wealth generated by the loan, it's not inflationary in and of itself. If no one is creating more money, the interest has to come out of a fixed pool of money in the economy, and now that there's more wealth (assuming the loan was successful), each unit of money is worth a little bit more, which is deflationary. This might or might not be a problem, depending on who you ask. I think it probably is, but the only way to solve it permanently (rather than in a stopgap manner like creating money at a rate you hope matches the actual growth of the economy) is to make actual wealth the basis of the money. This is, uh, very difficult, to understate the problem.
- deleted 16y ago
  [deleted]
- gte910h 16y ago
  I'm referring to fractional reserve banking, and those loans, which are the primary source of money creation in the modern world. Not person to person loans as you are talking about.
  - randallsquared 16y ago
    In my original reply to you, I agreed that loans in fractional reserve banking are inflation: Well, when people loan more than they have, which banks in the US are allowed to do. But loans aren't the problem, or the source of the inflation. The inflation happens separately from the loan; the loan is just a shell game to hide what's going on.
    - gte910h 16y ago
      No, the loan is the actual source of inflation. When more loans are made than there is actual economic growth, inflation occurs.
      - randallsquared 16y ago
        I feel like we're going round and round, here. You said, "Not person to person loans as you are talking about". This is the same as saying it's not the loan, since the loan is the same in these cases. The difference is that when the bank loans money (at least in the US), they don't loan money they have most of the time, but money they're allowed to create to loan. I don't remember what the multiplier is offhand.
      - dedward 16y ago
        for the next poster (randallsquared) - banks don't loan money they don't have - or at least we have to be very careful with the terminology here. They cannot create money out of nothing - they can only loan out a percentage of hte money they have on deposit. The key is they have to have it on deposit in the first place. This effect compounds itself across multiple accounts and banks and does end up inflating the money supply by a factor of about 10 (assuming the reserve percentage is 10%) - but this is subtly but importnatly different than the bank being magically able to create money it doesn't have. (the bank can't lend me $90 if it does't have $100 on deposit - it will have to keep the $10 in reserve. OTOH - if someone simply deposits $10, the bank can't possibly lend me $90, because they just don't have it.)