Correct. The money supply can go down for other reasons, bank failures, taxation + destruction (i.e. revenues come in to the government, but the government doesn't spend them, but rather destroys them; as you can imagine, this rarely happens), etc.

Yes.

It's actually your problem because

correct

incorrect

This video is good. Over simplifies but is generally good and amusing in parts.
"Dont step on the carrots."

MONEY IS DEBT

I read somewhere that the US Treasury creates bonds which the banks buy, and then the Fed buys these same bonds back from the banks with 'new' money.

Is this true?

Calling it incorrect doesn't make it so. The money supply is going up. Hence they are creating it. It is created from electronic bookkeeping entries. Get over it. Read a book. Stop arguing on the intarwebs about things you don't comprehend.

can you recommend a book?

I can

also

It could off course be increasing because their is more stuff (goods and services) in the world and banks, the fed, the government and the people they borrow from put a value in an individuals future ability to add product to the world. But maybe your right, your arguments are so compelling.

Here is the problem, the banks don't just magically print money. They are acting as the middlemen between depositors(lenders) and borrowers. For example, I posted this in another thread:

The money is not created. If we start out with say 1B, and it is all deposited and then 10B is loaned out, the personal balance sheets of parties involved: 1) the original depositor of the 1B, 2) the bank and 3) the receivers of the 10B dollars; will all sum to a grand total of still $1B.

The parties involved know this and are willing to accept it, as should be allowed in a free society, free exchange of goods and sevices.

this is how the total of 10B is created.
1. 1B deposited
2. the bank is then allowed at a 10% reserve ratio to lend of $.9B
3. Eventually that .9B is deposited back
4. now the bank can lend 90% of the .9B, so .81B
5. The process continues until a total of .9+.81+.729 ... is lent out our equal to {1/(reserve ratio) - 1}.

at the first step of 1B deposited and then .9B lent out, this is perfectly acceptable, as the bank is simply acting as a mediator between the depositor and a borrower. The depositor is in effect investing his money as a lender into the borrower, but the bank is acting as a go between mediator. This process is then repeated as indicated above until the total is lent out.

Please show me where I am either a) incorrect, or b) showing a moral or legal fallacy in the process.

Why would this cause money supply to go up as opposed to prices to fall?

It could. The Fed could make this happen. They just make interest rates unprofitably high. They understand tho that if prices fall people tend to put of purchases which are going to be cheaper next month. Investors decide their mattress is better than investing. After all their money is worth more every minute it sits their doing nothing, why risk it. This doesn't help the economy it paralizes it.

I don't think it's that simple leeds. If investors really did stop investing and consumer did stop spending (I doubt they would), then output would start to fall causing prices to rise. So then investors and consumers would start investing and consuming again.

However, I still think that people would invest and consume. People would invest because, even if their money is worth more, it could be worth even more if they're earning interest. People would consume because of their time preferences which are "biased" (whatever that means) towards the present. After all, people consume now even though they could consume more in the future if they put their money in the bank and withdrew it in a year.

There are several problems here. First, the bank as you describe it is inherently insolvent. There is a mismatch between the time structure of their "assets" (the loans) and their deposits. The former have a maturity, the latter are demand deposits. Hence, depositors can show up at the same time and demand their deposits, which the bank does not have, and the bank is revealed in its insolvent glory.

Second, the bank is definitely inflationary. Just claiming that the newly created money balances the loan debt does not change this. To see this, imagine that person A deposits 100 oz of gold in an FRB bank and recieves a checkbook with which he can write checks off of his account. Then the bank makes a loan of 90 oz of gold to person B, and gives him a checkbook to write checks with as well. There are now 190oz of checks that can be written where there are only 100oz in existence. Without the creation of the additional 90oz of checkbook money, only 100oz could have been spent. Now, 190oz can be.

Let's say that, in the absence of the loan made to B, person A would purchase a flat screen TV for 1oz. Person B could not afford the TV. But after the loan, person B is willing to pay 1.5oz to bid the TV away from A. A must either give up the TV, or increase his bid until B gives up. In either case, A has been made poorer by the loan to B. Hence monetary inflation via fractional reserve banking not only tends to increase prices but it redistributes wealth.

All of this is trivially avoided by a 100% reserve system. You pay the bank a small fee to house and protect your demand deposits, and they pay you interest to loan out your time deposits. If you write a check for 1oz on your demand deposits, it cannot be loaned out to expand the supply of fiduciary media. If you have your 100oz on time deposit, then you cannot write a check on it. The consumer/saver is free to choose what proportion of funds to keep on demand and what proportion to loan at interest.

I understand the point of the free bankers with competitive note issuance, but in my opinion, without the government supports, 100% reserve banks would drive FR banks out of business via competition. But I'm willing to let the market sort it out.

No. I'm not sure how this is not obvious, but I'll try one more time. In 1975 there was about $1T in existence, according to M2. In 2007 there were about $7T. That's roughly a 600% increase in the number of dollars in existence in 32 years. Making goods and services does not create dollars. Making goods and services creates . . . goods and services. Making dollars creates dollars.

If you bother to read them, they are.

This seems a bit silly if we're talking about "natural" deflation. I can understand how this might be the case if the deflation experienced is abrupt and rapid, but I don't think it can be said that this scenario is the only likely one or even the most likely. IIRC, the U.S. economy experienced deflation for much of the industrial revolution era and I don't think "paralyzed" is the right verb for that economy.

(I think that) The 10% reserve also means that if a bank deposits $1000 with the federal reserve, it can then lend out $9000 more that don't exist. That gives you a total of $10.000, of which $1000 is kept in reserve (at the Federal Reserve Bank).

The $9000 were just created out of nowhere. If the $9000 is redeposited at the bank, the bank can now lend out $8100 to another person, and so on, but you know this.

Eventually, if all the lenders would withdraw all the money that originated from this one loan at the same time from their account, it would be for an amount of ~$100.000, all backed by the original $1000.

Now you may say that the personal balance sheets all make sense, but you cannot disprove the fact that at first, there was $1000 in the economy to spend, and after, there was $100.000 to spend, and this has nothing to do with growth of the economy, monetary policy or whatever. It's not backed by any fysical commodity. The only value that it has, is that the lenders promised to pay it back eventually. But that's not a reason for the money to exist. The wish for people to have more money, and the wish for the bank to write more loans have absolutely nothing to do with the amount of money that should be floating around in the economy.

And this $1000 -> $100.000 is without even counting the derivatives that are traded and that are based on these loans, because there's a lot of leverage in those constructions as well.

Please correct me if I got this wrong somewhere, until two weeks ago, I didn't even know what fiat currency was.

Falling prices bad!! Everyone will sit around homeless, naked, and starving while waiting for better bargains!!

Hint: how's the consumer electronics industry doing?

It's not like prices plummet from day to day. I could apply your argument to something like computers - that is already an example of a good whose priced drops fairly dramatically from year to year. And yet every year, people buy computers rather than wait a little longer. Certainly there is a push in the direction of sitting on your money, but is this a bad thing? Currently we have a negative savings rate and over half the people in this country are in debt. Perhaps sitting on our money a little bit would be a good thing?

The problem with this is that if the 190oz is spent before B has increased his wealth by 90oz the bank can't honor the checks pouring thru the door. So it takes 90oz worth of B's stuff (or whatever he has left to pay) and gives it to A. A has his 100oz. The Bank has 0oz and B has 0oz. This is what happens. Even if B doesn't have any stuff they can take because he'd eaten it or whatever he still has an obligation to pay back 90oz. If he never does A loses real gold. What doesn't happen is the bank shrugs it shoulders because their is magically another 90oz of gold.

Off course because the demand has risen for TV's and they are rare resources so supply would never increase also.

Yes but is it the most efficient way to manage money. Computer says no.

All FR banks are keeping your gold safe for free and not restricting how much of it you can spend at any time.

100% reserve banks are selling 0% risk.

I'd be interested in their ad campaigns.

WHGDTOM? (full text for free)

Irrelevant

And then the new money ... what? It magically appears? The "more stuff" gets converted into dollar bills? What happens?

This

Clearly any Austrian will say no, of course not.

No. What if B's stuff isn't worth 90oz? Bank runs actually do occur, you know.

What you're describing is the collapse of the money supply after it is revealed that the bank is insolvent. This is separate from the inflation of the money supply before that fact. Also, you're now admitting that wealth was transfered from A to B, yes?

What?

How is a system that leads to cyclic systemic instability and the transfer and destruction of wealth more "efficient"?

They're not keeping your gold safe. That's the point. They don't have it. Bank runs happen.

They're not selling 0% risk. They only sell a very low risk on demand deposits. They sell higher risk on time deposits. They do the latter right now. They're called CDs.

Their ads would be great. "If you deposit your money at XYZ bank, they're inflate away its value, and if you want it back, they might not even have enough to cover your account. But we here at ABC bank offer 100% reserve demand deposit accounts, where your money is always safe and never goes down in value." You have fun banking at XYZ. I'll stick with ABC.

A+ Would read again.