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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (152)	4/7/1998 10:59:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

Fractional Reserves: > Fractional reserve banking, and >fractional reserve currencies, exist because the Market demands a way >of >facilitating commercial activity in which expenses precede revenues. The elimination of fractional reserves does not eliminate credit. It just limits it to the amount of savings in the system. In other words you cannot print money to lend it. Someone must save it first. There are other cases for it besides the obvious elimination of the printing press and the resultant limits on government. The other is that there is a free market interest rate at which savings and investment are closer to balance. Central bank induced credit expansion disrupts that balance by artificially lowering the "market" interest rate (no savings) which enables projects to be done that would otherwise be calculated in a "free market" as unprofitable. As a result they eventually collapse. (recession) It's a matter of definition here. I don't consider a printing press as part of a "free market". I consider it counterfeiting. >As in all cases where activity essential to markets is outlawed, >banning fractional reserve banking would shrink the market, except to >the extent an inevitable black market was unable to circumvent it. From our present position certainly. But we are in a credit mess at present because we have no limits. Debt to GDP ratios are at the highest level since the late 20's (actually higher) as I write. At a minimum this is highly risky. >In the case of the market for credit, the fact that a credit collapse >due to overexpansion pulls the rest of the economy down with it is >the measure of how vital credit is.. As discussed above, the economic theory against it is not so much overexpansion (although this is part) as it is miscalculation and free market distortions that are the result of the printing press. Once you build the credit bubble you can't contract it without major disruption. The point being you shouldn't build it beyond the savings levels which are plenty anyway. You may get to your destination a little later driving at 55 MPH but you will get there alive. Driving at 100MPH you will eventually crash! >It is amazing that advocates of free markets continue to advocate >this quasi-socialistic notion that markets can't be trusted with setting the amount of credit, because they will abuse it. We have a political disagreement here. I consider the printing press (which is what fractional reserve banking is) a socialist weapon. In fact it is their biggest one. >In summary, credit expansion cannot be unregulated, but it can't be >outlawed either. Therefore, there must be fractional reserve banking >and currencies and there must be a central bank to regulate them. It is the central bank that is providing the reserves which enable the expansion of credit to begin with. Far from being a source of stability and regulation (a widespread misunderstanding (lie) that is advanced at all our leading universities) central banks are the CAUSE of virtually every instability that occurs. When banks want to expand credit, the central bank provides the reserves and the bailout incentive to do the irresponsible. (Moral Hazard) It also distorts the free market rate of interest by providing credit based on a bunch of government appointee's analysis of the economic situation. It also uses an inflation number that simply cannot be calculated in such a complex system. FREE MARKET Interest rates can only be determined by the level of savings and not by the amount of ink in a pen and a handful of economist's judgements about the economy using inaccurate and incomplete data.

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