KD wrote: "The false premise that all of these people adopt and defend against overwhelming proof that they're wrong is that "the monetary base" is some sort of currency, whether fiat or specie. "

Exactly. This is why "black markets" exist which trade in hard goods (assets) or labor (in-kind or under the table).

It happens effortlessly, every time you use your credit card you increase the money supply...

Absolutely brilliant. That missive should be required reading for every 11th grader in the country. That info, plus the exponential function are all one needs to make their way in world of finance and business.

No, you increase the credit supply.

The only way to increase the MONEY supply is to get off your ass and grow, mine or manufacture something.

Currency (and credit) are abstractions. Gold is "money" but so does a tree that I cut down and turn into lumber - the lumber is, in fact, "money", in that it is the product of an actual endeavor.

We abstract this into currency for convenience but the abstract is NOT "money", irrespective of claimed conversion rights, particularly when that claimed conversion right is only to ONE thing that is actual money. Indeed, such a conversion limitation is in and of itself a further act of fraud.

From the government, and regulatory aspect- you increase the money supply.

And while we may debate (forever!) the creation and destruction of either/both- the fungibility of credit and money (at any level, not necessarily 1 to 1) reduces the argument to semantics. At least in practice, and UNTIL the big reset. The point being, at that time, credit becomes non-fungible (i.e. worthless) but money retains value.

Mish talks about lending over and over again, with only 10% reserves, on the same asset (ie "money").... not what your post tackles.

So as long as the sum of all currency and credit is less than the amount of money in the system, everything works.

However, once there is more currency and credit than the amount of money, then fraud has been committed?

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Mish talks about lending over and over again, with only 10% reserves, on the same asset (ie "money").... not what your post tackles.

No.

Mish claims that the "money" is the currency.

This is where he's wrong because his definition is incorrect.

The money is in fact the asset pledged as collateral. That which is mined, manufactured or grown is the money.

Mish is full of **** because he gets the BASIS wrong and from there everything else is wrong.

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So as long as the sum of all currency and credit is less than the amount of money in the system, everything works.

So long as NO PERSON lends more than is SECURED (unsecured lending must be 100% backed by actual excess reserve, that is, cash) everything works.

As soon as you allow people to lend UNSECURED with nothing behind it you have committed fraud as the deposited funds are instantly gone and their recovery is speculative based on the FUTURE creation of money (that has not yet happened.)

Normally, we do not so much look at things as overlook them....Zen Quote by Alan Watts.

I, too, had a higher opinion of Mish. It's not so much that he's willfully trying to mislead, it's the ignorance of understanding of the fundamental thing in question.

This ticker, is so obviously true, not because of the higher reasoning required to understand it, but because to understand it, one only has to disregard previously held childlike beliefs.

I now understand why you keep such a short fuse for the hard money crowd. If this ticker doesn't educate them, it's because of pure stubbornness, and not an honest difference of opinion. It's time to put aside the childish things of their youth, and start to open their minds to the truth.

I want to abolish the Fed, not because of it's inherent design, but because of it's malicious dishonesty and questionable motives. I think it's necessary to start with a new system, in order to root out the corruptness of the players.

While I could be wrong about this, I see no better alternatives. Policing the current system has demonstrably failed.

Let's go one step further (or maybe you are already there) that all non-backed currency is an obligation of a government. And that government debt issuance is merely a swap of one debt for another (albeit interest-bearing one). At which point, in a fiat system, one unit of (government) debt represents one unit of asset, or currency, or deposit...

Pat,

From what I can gather, it's the velocity of money which is the problem. Keep hearing over and over again of cases of trades people wanting payment in kind. Now that's not a sign of a healthy, well-functioning monetary system.

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However, once there is more currency and credit than the amount of money, then fraud has been committed?

It seems to me that credit extended is valuable insomuch as the potential for complete repayment of the credit extended has been exercised. Due diligence is done mostly post mortem in Amerika today.

Alex, can you give an example or two of these cases? Thanks,

Genesis,

My view on this is that we need to separate currency that's guaranteed by the Treasury from "credit money". The Government should only be in the currency business, not the credit business. Therefore, the govt should not participate in fractional reserve lending programs. That is, any banks who distribute govt guaranteed notes (today they'd be FRNs) should not be fractional reserve lending. In a fiat currency world where Govt controls the currency supply, it makes no sense for fractional reserve banking to be tied to the Govt's currency. You would just need to issue more FRNs to cover the credit while raising the reserve requirement. (This implies that the Govt. should get the profit from its own money creation)

However, banks that issue paper other than FRNs SHOULD be allowed to fractional reserve lend without any FDIC guarantee out of respect for the free market. This seems safest as there is still inherent risk for all parties involved, but the Govt's debt isn't tied to a bank's unsafe lending schemes.

If people want to participate in fractional reserve credit markets, they should do so knowing there is NO backstop or intervention from the Govt possible.

That's my 2 cents. Do you think conceptually this would work?

Alex: The current problem... Some view it as a lack of credit availability, others view it as a lack of demand. Truth somewhere in the middle? ONE way to view the massive credit expansion in Treasuries, is that the Treasury is trying to supplant the contraction of credit in the private sector with Government-created debt-spending. It was Bernanke's thesis. In the Keynsian view this is the "correct" answer. BUT Keynes never imagine velocities at these levels, and the sheer numbers that the private-sector created are far too large for the (this) Government to absorb.

Velocity of money? It's probably more accurate to say that credit is leverage on money

Gen,

An excellent ticker. You should write the sane individual's guide to economics. Like that lady in the UK that's forcing banks to use simple English, you are doing the same.

One comment:

You said:

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The only way to increase the MONEY supply is to get off your ass and grow, mine or manufacture something.

There's one more way, the American political and banking way....the "MBA Way"....stealing it! But alas, unless you steal it from the Chinese or Arabs it won't grow the US money supply.

It's important to note that services do not create any money. All those companies that everyone in Wall Street lauds like IBM, etc. that have moved into services are not increasing the money supply, just churning it.

Stealing it doesn't increase the amount of money - it just steals it from someone else.

BTW "services" in the general sense can in fact create money. If I program a computer that is called a "service" yet that programming has created something and that something has value - that is the creation of money.

Dividing things up (e.g. securitization, etc) however, creates nothing - it simply distributes.

I have a client who views the entire gross income of the IBs as a tax on private industry. Think about that for a minute....

For the most part he's right Pat.

I did some programming work for an IB a number of years ago however, and that was in fact creation of money (in that the output of my effort was something of value), but what they did with that output was effectively tax (they were arbitraging between markets with it.)

I don't disagree... :)

Anti,

You'll have to trust me on that. I have my ear to the ground.

Another story is of a large commercial real estate company wanting its tenant's to retrain their shop staff in how to treat customers properly in exchange for a reduction in rent. Credit conditions returning to normal, yeah right.

Great Post Karl! You need to write a Econ 101 book. I took 30 units of econ in college and never heard this explanation of money once. Now I need to re-think everything! I am also thankful to Mish for challenged you on this subject.

Ya, I completely agree.. Accountants and lawyers can be viewed in a similar way (thanks to an arguably overcomplex tax code and legal system). They don't "create" anything, but merely are facilitators in a sense..

While we're on the topic of money "creation," I think it's also very important to comment on the "destruction" of money as well. Despite what some people (morons) think, money can be destroyed just as easily as it was created (house burnt down). Destroying money is never a "smart" move imo, which is why logically cash for clunkers was downright idiotic.