Does the term "printing money" include digital?

renman95

I remember reading that <5% of all US money is physically printed. The rest is digital, for example, direct deposit.... So when we say the Feds are running the presses 24/7 do we not see the forest for the trees?

R95

ranshdow

As I understand it (and I could be very wrong), the Fed does not create money. It merely pushes on the levers (interest rates and reserving requirements) that change the rate at which money is created in a fractional reserve banking system (FRBS).

Money in a FRBS is created in the form of debt. Banks create money this way (though I am sure there are other entities that can as well).

1) Person X deposits $1000.
2) Bank W is allowed to loan out 90% of deposits. So they loan $900 to person Z.

Quiz: how much money is now in existence? A: $1900. Person X still owns a grand and person Z is holding 9 bills. If person Z now deposits their money in another bank and that bank loans out 90%, there is now $2710 in existence. And so on.

So by changing the reserve ratio the rate of this "exponential decay" can be modulated. By changing interest rates, well, maybe you change the velocity at which these transactions take place?

Does money get destroyed when person Z pays the bank back? I believe it does. I suspect this is the core reason that repayment of debt is fundamentally deflationary.

calleocho

You could destroy debt ..but money would have to be literally destroyed in order to leave the system.

In your example the the fist guy who deposited 1000 dollars still has his money, and the guy the bank lent 900 dollars must have bought something with his loan ... whoever he gave that money to still has it...

so even if the guy paid back his 900 dollars loan...there would still be 1900 dollars floating around.

1jester

<< <i>As I understand it (and I could be very wrong), the Fed does not create money. It merely pushes on the levers (interest rates and reserving requirements) that change the rate at which money is created in a fractional reserve banking system (FRBS).

Money in a FRBS is created in the form of debt. Banks create money this way (though I am sure there are other entities that can as well).

1) Person X deposits $1000.
2) Bank W is allowed to loan out 90% of deposits. So they loan $900 to person Z.

Quiz: how much money is now in existence? A: $1900. Person X still owns a grand and person Z is holding 9 bills. If person Z now deposits their money in another bank and that bank loans out 90%, there is now $2710 in existence. And so on.

So by changing the reserve ratio the rate of this "exponential decay" can be modulated. By changing interest rates, well, maybe you change the velocity at which these transactions take place?

Does money get destroyed when person Z pays the bank back? I believe it does. I suspect this is the core reason that repayment of debt is fundamentally deflationary. >>




The way I understand it is if person X deposits $1000, bank W then lends out $9000 for a total of $10,000 in circulation. That would represent a 10% fractional reserve banking system. Then if another person, person Q, takes a loan from bank W of $1000 and then deposits it in bank Y, bank Y can lend out another $9000, and so on down the line. The amount of currency in circulation rises exponentially. And from what I've read, banks don't limit themselves to a 10% fractional reserve system, but have been known to lend out up to 40 times their deposits. I do not know if this is true (as far as the reserve rate is concerned) but no doubt others more knowledgeable than I will chime in.

But to answer the original question, I feel that money doesn't need to be physically printed to fall under the category of "printing" money. The term today includes "keystroked" money.

gecko109

<< <i>As I understand it (and I could be very wrong), the Fed does not create money. It merely pushes on the levers (interest rates and reserving requirements) that change the rate at which money is created in a fractional reserve banking system (FRBS).

Money in a FRBS is created in the form of debt. Banks create money this way (though I am sure there are other entities that can as well).

1) Person X deposits $1000.
2) Bank W is allowed to loan out 90% of deposits. So they loan $900 to person Z.

Quiz: how much money is now in existence? A: $1900. Person X still owns a grand and person Z is holding 9 bills. If person Z now deposits their money in another bank and that bank loans out 90%, there is now $2710 in existence. And so on.

So by changing the reserve ratio the rate of this "exponential decay" can be modulated. By changing interest rates, well, maybe you change the velocity at which these transactions take place?

Does money get destroyed when person Z pays the bank back? I believe it does. I suspect this is the core reason that repayment of debt is fundamentally deflationary. >>





You have got the first part.....fractional reserve banking..... correct! But, the FED itself does make money out of thin air. I'll explain below:

Lets say Congress needs more money because of defecit spending. They go to the U.S. treasury for some money.
The U.S. treasury has very little cash on hand, so it prints treasury bonds.
Large banks, and even private individuals buy the bonds at face value, plus whatever interest they bear.
The money (already in circulation) that was used to buy those bonds, goes to Congress for the government spending.
When it comes time for those banks to redeem those T-bonds, the FED prints up the physical cash to pay them off.


That is how money is created out of thin air........it is also "loaned into existance" in part 1 as you outlined above in the fractional reserve banking system.



As far as your claim that money is destroyed upon repayment of debt to banks, you are correct. But because all dollars are loaned into existance, one of the byproducts of a system such as this is that there will always be more debt than money. Another interesting feature of our system is that because of this......each year, at a minimum, new loans and credit MUST be extended to service all the interest on previous debt. If the "growth" of new credit fails to at least cover the outstanding interest on previous debt, we get defaults on debts that are not serviced. That is a BIG part of why the FED has held the interest rates so low for so long. It is manipulation of the very highest order! Also, with a $14 trillion outstanding debt, our INTEREST payments alone on that are currently just under $400 billion per year. Could you imagine what that will rise to if interest rates rise? Total U.S. tax receipts are about $2.3 trillion per year. So currently, just the interest payments alone on just the CURRENT debt eats up 17% of total collections. What happens when that number rises to 50%? 75%? Can you say......

HYPERINFLATION?

ksammut

Great post gecko.

derryb

The simple answer: Yes, it appears out of thin air with no need for paper or ink.

57loaded

can you imagine if folks began getting away from direct deposit, online banking, debit cards and went back to cash?

this would be an actual failure in the trust of the money itself, true?