[jollybean]

I think you are misunderstanding fractional lending and collateral.

Fractional lending seems a bit odd, but it's not like there is 'no collateral' - rather, there ends up being 'partial collateral'.

As it turns out, that 'partial collateral' is enough - it's actually reasonable thing to do, because the vast majority of loans are repaid, it's not necessary to fully collateralize everything on the whole.

Banks have to have some capital requirements, which means, if they 'screw up' too badly, then they go bankrupt! So they are acting in a capitalist manner and have to be careful about how they lend, and at what rates. If random bank acts irresponsibly, then random bank will go kaput by regular market forces.

Instead of thinking of fractional lending as 'missing money' think of it more like leverage.

Basically - the effect of fractional lending is that it's a 'multiplier' to whatever the Central Bank decides to do.

So it exacerbates effects in one direction or the other but on the whole, it doesn't change the real nature of the system.

The way we manage money is sound.

We need money to expand and contract, and we have good ways to measure that.

The 'danger' of fiat of course is political intervention, or a failure of controls.

We had a broad intervention in 2008 that favoured home owners over others, and there are attempts to use the Central Bank to do 'Social Justice' type things, which I think is very risky.

It's a bit like Nuclear Energy: it's very potent, you just have to watch it responsibly.

Finally - currency should be a 'current' asset, not a store of value. We just want it as a medium of exchange. So as long as it's not shifting too much one way or another, then it should work.

For 'stores of value' there are other things, like real estate etc..

"Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation. "

This is misleading.

The 'government' does not print money, the Central Bank does. And as you indicate, the bank ultimately creates credit via fractional lending.

'Inflation' happens when the cost of goods rise faster than the money in circulation.

Thus 'inflation' can happen because 'stuff is more costly to make'. Like gas in Europe, is more expensive, not because 'money printing' but 'Russia'.

Also, inflation can feasibly happen without money printing or even a rise in inherent cost of goods, if the economy shifts in a way that ends up in excess cash.

But ultimately, if during normal course of 'growth' if there is no expansion in the monetary base, then you'll have deflation, which has bad externalizes.

So the goal then is to adjust interest rates / print or extract money from the economy so that prices stay roughly flat, with just a tiny bit of inflation. That is a dynamic process, not a static process.

[WalterBright]

Rather bluntly, a central bank is central economic planning. Central economic planning always falls short of what free markets do. The idea that a central bank is able to control the financial markets better than free market forces is shown to be false (with actual data) by Friedman in "Monetary History of the United States".

> The 'government' does not print money, the Central Bank does.

I said "print money" as a euphemism for what the Fed actually does, which is the same thing, it just doesn't involve doing the old fashioned way. They do it by issuing debt with no collateral.

[stopping]

So why is it that essentially every developed country in the world today has a central bank? How can they all be wrong? If a 100% "free market" solution was more effective than central banking, I would expect at least one of them to have given it a shot and succeeded in doing so.

Also, "A Monetary History of the United States" argues that the Federal Reserve should have done more to combat the Great Depression, not less. How can you think that the book advocates against central economic policy?

[andrekandre]

  > The idea that a central bank is able to control the financial markets better than free market forces is shown to be false

thats probably true in many cases, but that got me thinking: was the great depression a failure of central banking or financial markets?

[jollybean]

Rather bluntly, this is just not true.

I think there is an erroneous understanding/implication in your statement, which is likely leading you to erroneous conclusion.

The Fed is not 'Central Planning' so much as it is actually trying to make the market more 'neutral' in normal cases.

We'll get to the 'crisis' cases in a bit.

If we just had a hard currency, like Gold (which 'feels' neutral) we'd get into trouble, because of deflationary issues. People would treat it like Bitcoin, and as prices fell slightly would be oriented a bit towards 'store of value' as opposed to currency.

The Fed 'targets' just a 'bit above zero' inflation by policy. That is basically 'neutral'.

That is not really 'central planning', it's more like 'central neutralization'.

As for 'crisis' situations, i.e. when the Fed does start to 'intervene' and does things which you might argue are 'central planning' - well - the government in many cases can absolutely do it 'better than free markets' because only the government has the scale to do it.

For example, 'free markets' could have not have created and executed the Highway road system of the 1950s. It was of a scale and scope far, far beyond any economic actor. That required 'strategic vision' on behalf of the government. Now - private contractors actually did the 'building' - which is how we want it because the government doesn't need to hire individual workers. But it's a government project by virtue of scale and other things.

The meltdown of 2008 was a very scary time - if the government did not intervene, the banks would have collapsed, and it would have taken down the entire economy.

It would be like a human having a 'heart attack' - the heart stops - everything stops.

So the government put together a plan and intervened. A lot of it had to do with 'confidence signals' and other things, extra regulation, but it worked.

There is of course the 'Too Big To Fail' argument i.e. moral hazard i.e. banks take on more risk knowing the 'gov will save' us - that said, the worst actors did definitely lose a ton of money. Also - the problem was not just the banks, it was a systemic failure in a number of sectors.

Basically - the US had an economic cancer and no individual organization was going to be able to contend with it.

So -> intervention. Much like a war, or pandemic.

Having a fiat currency allows that opportunity. If it were a 'Gold Based Economy' it would have fallen down like a house of cards.

Like a brick building during a rare earhtquake: brick 'feels' strong like Gold, but an earthquake will ravage it, which is why you need steel reinforcement - the steel can bend and absorb different kind of tensions.

Milton Friedman is wrong.

Yes, when there is hyperinflation, it's probably because some stupid government is printing too much money, but inflation is not just a function of money printing.