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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (49279)	1/9/2006 5:37:46 PM
From: Tommaso	Read Replies (2) \| Respond to of 110194

I would sure like to see an explicit quote from Shostak making clear that he understands that demand deposits in banks are not 100% backed by cash. I cannot find a clear statement of that in his paper, "The Mystery of the Money Supply Definition." Here is what I do find: "At any point in time part of the stock of cash is stored, that is, deposited in banks. Once an individual places his money in a bank’s warehouse he is in fact engaging in a claim transaction. In depositing his money, he never relinquishes his ownership. No one else is expected to make use of it. When Joe stores his money with a bank, he continues to have an unlimited claim against it and is entitled to take charge of it at any time. Consequently, these deposits, labeled demand deposits, are part of money. Thus, if in an economy people hold $10,000 in cash, we would say that the money supply of this economy is $10,000. But, if some individuals have stored $2,000 in demand deposits, the total money supply will remain $10,000: $8,000 cash and $2,000 in demand deposits—that is, $2,000 cash is stored in bank warehouses. Finally, if individuals deposit their entire stock of cash, the total money supply will remain $10,000, all of it in demand deposits." [pp. 71-71] If what he means is that these deposits are the only legitimate demand deposits, perhaps he might explain how one tells these apart from all the other deposits in the bank that are classified as demand deposits. Either he is very confused, or else he is incapable of stating clearly what he does think. Why didn't he say, "This is not in fact what is going on. In fact, the cash reserves of the banks are only a fraction of the deposits on their books. They ought to have 100% of their deposits covered by cash reserves." I think I know why he does not say this. He does not say this because banking is impossible on a 100% cash basis. Banks make their money by lending out their surplus reserves. That is what banking is. The implication of what you say is that all banking should cease. That would be rather hard on the world of business, don't you think?