Tuesday, August 5, 2014

Economists confuse the issue of banking

They talk about fractional reserve banking as if it is some unique thing to fiat banking.  It is not, it is standard stock and flow queuing analysis and applies to everything from apples to bean bags. Why do they always want to talk about stock and flow as if they have some special knowledge.  Banking economists are no more clever then any manufacturing economist and use the same math.

What makes fiat banking unique is the fiat banker has extremely low cost of production, and the fiat banker is generally a monopoly. So he issues money, free and clear by paying interest on reserves, or printing it up for his capital owners.  The fiat banker removes money by loaning money out and earning interest, or selling shares in the bank.  Paper, moved in and out, free and clear; that is the essence.  Managing inventories along the banking network is what all sectors do, nothing unique.

Fiat bankers can lose or gain money on the open market or with loans and deposits, it really does not matter. That is what our own Fed is learning with the reverse option thing, it really does not matter.  Just call it loans or deposits, why complicate the mess.

Out federal reserve has a problem because it cannot sell shares and Congress will not run a surplus. So the only way our federal reserve can extract excess liquidity is to loan money out, lots of it, at miniscule interest rates. It will take years, if not centuries, for the Federal Reserve to extract money. So Janet is essentially screwed.


No comments: