Fickle Pickle, it doesn't work that way

The web site you refer to makes the same old mistake.

"In the FRIB monetary system, money created out of nothing is “loaned” into existence with interest due, thus creating an interest burden."

Here's the description of fractional banking provided by the Concise Encyclopedia of Economics.

"If the required reserve ratio is 10 percent, then starting with new reserves of, say, $1,000, the most a bank can lend is $900, since it must keep $100 as reserves against the deposit it simultaneously sets up."

http://www.econlib.org/library/Enc/MoneySupply.html

Notice that the loan is made from the deposit.

It is easy to prove this to yourself. Open a spreadsheet, and use the example that the article provides:

"When the borrower writes a check against this amount in his bank A, the payee deposits it in his bank B. Each new demand deposit that a bank receives creates an equal amount of new reserves. Bank B will now have additional reserves of $900, of which it must keep $90 in reserves, so it can lend out only $810. The total of new loans the banking system as a whole grants in this example will be ten times the initial amount of excess reserve, or $9,000: 900 + 810 + 729 + 656.1 + 590.5, and so on."

Put this calculation - deposit, reserve kept, money available to lend - into a spreadsheet, and repeat the transaction as many times as you want - I used ninety, because that's when the available loan amount reached $0.01c.

If you then add up each column, you will - not surprisingly - find that the aggregate deposits made totals $9,999.06, the "reserve" column adds up to $999.91, and the "money lent" column totals $8,999.15.

So while the loans themselves add up to ten times the original capital available - and ninety people have taken advantage of the loan facility - the deposits made do not themselves add to the capital stock.

They each come from the money deposited, each time.

Does that make it clearer?

Pericles,

I understand what you are saying and I agree 100% and the scheme I am proposing uses the same rules.

Now follow me through. I deposit $1000 in the bank at zero interest. The bank lends me $900 at zero interest. I deposit the $900 into the bank at zero interest. The bank lends me $810 at zero interest .....

At the end of the process I still have my initial $1000 on deposit. I have another $9000 on deposit with the bank at zero interest and a loan of $9000 at zero interest. There are a whole lot of conditions on the use of the $9000 some of which are, that I get no interest on the money, it must be spent on productive asset, and I must pay back the loan from the earnings on the new productive assets.

Here is a better description of the banking product for renewables.

http://stableproductivemoney.wordpress.com/2009/07/25/a-banking-product-to-fund-renewable-energy-infrastructure/

The real issue here is not so much banking as not getting any bang for your buck of stimulus spending. The govt has been talking about the homeless (most of whom were made that way by deliberate govt poverty creation schemes in the first place but that is another story) and spending some money on public housing but most of that money is going towards admin and social workers who will hand out tea, sympathy and actually do nothing. If there was more money being spent on actually building more public housing then builders would have more work and more people would be off the street.

fractelle, chazP, bobtwat, greenmaps, briar rose and their kind are more interested in jobs for the girls, than doing anything about homelessness.

So far the stimulus money has been spent on retail therapy, gambling, alcohol and drugs. Of course the loony, left, lesbian, feminazi paedophiles know this, but maintaining a dysfunctional welfare dependent underclass keeps the social talkers in jobs for the girls.

There is still one gigantic flaw in your proposition, Fickle Pickle.

At the end of your merry-go-round with the ninety Bankers, what exactly do you have left over from your original $1,000?

Think very carefully before you answer.

This is what you think you have:

>>At the end of the process I still have my initial $1000 on deposit. I have another $9000 on deposit with the bank at zero interest and a loan of $9000 at zero interest.<<

But...

While it is true that you have generated $9,000 of loan documentation, and have recorded deposits of $9,000 (plus the original $1,000, of course), you actually have no money left in your pocket at all.

Not a single brass razoo.

Think of it this way.

You deposit your $1,000 in bank A, and leave with $900, which you deposit in Bank B. At that precise moment, you have nothing in your pocket, so you borrow $810 from them which you take along to Bank C. When you deposit that, you have nothing left in your pocket, so you borrow...

Rinse. Lather. Repeat.

At the end of the trail you have left your entire $1,000 scattered across ninety Banks - which, as you agree, they have to do in order to maintain their prudential reserves - and have ninety pieces of paper showing deposits of $9,000, and ninety pieces of paper showing loans of $9,000.

But no cash.

With me?

Pericles,

I said I deposit the money in the same bank with the same conditions.I am not depositing the money across different banks. That was not part of the deal. I have NOT got the money scattered across a multitude of banks. I have $1000 in bank A, I have a loan with bank A for $9000 and I have an account with bank A with $9000 in it and which I can spend according to the rules of the loan.

This is what happens everyday of the week now except for the payments of interest and except that bank A has lien over an asset of mine that is theoretically worth $9000.

Think of what happens when a bank gives me a loan for a house. I promise to spend the money on a house and the bank gives me a loan of $9000 and provided it has $1000 on deposit it can do this. The bank does not take $9000 of other deposits to do this. It creates the loan and the money to cover the loan.

In the home loan scenario the banks put $9000 in my account, they will also pay me interest on the money until the money is paid for the house but they also charge me interest on the loan. These are only banking rules. They do not have to do that. They could put $9000 in my account and not pay interest on the money and they need not require me to pay interest on the $9000 loan.

In the house case the bank tells me that I have to spend the loan on buying the house.

In my scenario the bank tells me I have to invest the money buying a new productive asset.

Think it through. I have added some extra rules on the use of the loan but in terms of the mechanics of the loan the rules are the same and in my scenario the rules are more onerous - except for the payment of interest.

BTW what I am saying is one way Islamic banking works.

Makes no difference, Fickle Pickle.

>>I said I deposit the money in the same bank with the same conditions.I am not depositing the money across different banks...<<

If the loan comes from the deposit, less the amount retained as prudential reserves, you end up with nothing but pieces of paper.

>>I deposit $1000 in the bank at zero interest. The bank lends me $900 at zero interest. I deposit the $900 into the bank at zero interest. The bank lends me $810 at zero interest .....<<

The Bank ends up with your $1,000. You have pieces of paper describing $9,000 worth of loans and deposits, but no cash.

>>I have $1000 in bank A, I have a loan with bank A for $9000 and I have an account with bank A with $9000 in it and which I can spend according to the rules of the loan.<<

But quite simply, you do not. Follow the money trail. Each time you deposit, it will be a smaller amount, until it disappears to zero. You will have no cash at the end of these transactions.

It doesn't matter whether there is interest involved or not. It doesn't matter what the "loans" are intended for. You will not, in this series of transactions, be left with a single dollar.

This is where you go wrong, every time:

>>I promise to spend the money on a house and the bank gives me a loan of $9000 and provided it has $1000 on deposit it can do this. The bank does not take $9000 of other deposits to do this. It creates the loan and the money to cover the loan.<<

It cannot create money, it has to find it from somewhere else. You have only given them $1,000 - who is going to pay the builder?

Once more, with feeling:

>>They could put $9000 in my account and not pay interest on the money and they need not require me to pay interest on the $9000 loan.<<

But where do they find the $9,000 in the first place? You have only given them $1,000...