There was still a lot of confusion regarding my previous article on fractional reserve banking. Nothing has changed with the argument, but I do want to expand on it a bit. I think part of the confusion comes down to a closely related topic. While fractional reserve banking does not create money, the creation and actual use of bank IOUs does. But that money is not the same money that went into the banks, or which comes out of the banks when you make a withdrawal.« Continue »
There is a long perpetuated myth that fractional reserve banking creates money. This is false. FRB increases the velocity of money. Before getting into the specifics of why fractional reserve banking does not create money, and how it works to increase the velocity of money, it might be reasonable to discuss what fractional reserve banking is.
In fractional reserve banking, a bank lends out part of the money it takes in. When taking into account how much is lent out, along with how much is supposedly in each person’s account, it appears that new money has been made. This can happen multiple times, as people continue to deposit money into different bank accounts and different banks. The appearance of more money is called the money multiplier. But there are issues with the idea.« Continue »
In “Holding Physical Bullion Really Is Investing,” I argued that holding physical bullion was actually investing. I pointed out that gold has grown in value at an average rate of 5.7% over the past half century or so. But I did not address why it increases in value. That was really beyond the scope of the article, and beyond what Seeking Alpha really is about. But it is important to explain why gold, and other precious metals, do increase in value over time.« Continue »
Back in 2014, Perianne Boring wrote an article for Forbes on inflation. It was a good start. In the article, Boring used the change in supply of money as an estimate for inflation. But inflation is not simply the change in quantity of money. It is the change in its value. In order to estimate the change in value, we need to look at demand, in addition to supply.« Continue »