>> ^SDGundamX:

I know it is being nitpicky, but the reason Padilla could challenge was because he was an American citizen who had been designated by the president as an enemy combatant. You're right, they don't have to try every enemy combatant. I'm trying to find the actual court decision, but I could have sworn that it wasn't just a one-off thing for Padilla--the courts decided that any American has the right to challenge being put on the list in court.

As a fellow nitpicker, I don't mind when someone picks a nit. I don't contest any of what you say here. I actually thought that it went without saying that it hinged on Padilla's citizenship, and wasn't some sort of one-off decision.

>> ^SDGundamX:
As the video notes, al-Awlaki's family was indeed in the process of challenging it when the killing took place. I think that places the President in an awkward position from a legal standpoint. It'll be interesting to see where this goes if the family pursues this (sues for wrongful death or something), though I agree with you it seems like the odds are stacked in favor of the courts supporting the Presidential powers.

I don't see how they thought they might win such a challenge. All Al-Alwaki had to do was provide aid and comfort to the enemy, and it's over. And, well, his big thing was putting Al Qaeda recruitment videos on YouTube, so I'm thinking the government just plays one of those, and the case is over.

But in any case, his status when he was killed was still that of an enemy combatant. Now that he's dead, I suspect his legal status is no longer that of an enemy combatant, so there's nothing to challenge. And I suspect there's some Latin name for this, but I don't think courts are allowed to render something a crime by retroactively changing the legal status of things.

For example, say two people are getting a divorce, and the husband takes some jointly owned property with him when he moves out. Now suppose that when the divorce gets finalized, the court awards that property to the wife. The courts can't say "and it always was hers to begin with, so now we're charging you with larceny for taking it when you moved out".

You'd need to do something like that in order to make this killing a criminal act.

A wrongful death suit might fly though. But that's a civil suit, not a criminal charge.

But seriously, all this stuff is wrong. The President shouldn't have unilateral authority to declare people combatants and non-combatants. It should be uniformed members of the military of the nation we've declared war on. Everything else should be law enforcement, including chasing after terrorists.

The courts aren't going to make all that happen by fiat. That has to be a legislative effort, or it's just going to keep on going like this.

Okay, explain how this magical fixed money system works? What would be used to fix the money supply? How could we ensure that people don't decide to keep their money in banks, where the banks can issue "bank notes" which people then use as surrogates for your fixed money supply? When we had a specie backed currency, these problems still existed.

Also, yes, the derivative securities market is the largest driver of inflation out there at the moment. Many estimates put the value of all these unregulated securities (that's right, poof, I have money, securities) at around $600 Trillion dollars. Makes our debt seem kinda trite doesn't it?

>> ^davidraine:

First, to my original point, a fixed money supply does not allow for fractional reserve banking -- By definition, fractional reserve banking varies the supply of money. Second, I don't remember massive inflation caused by the sale of unregulated securities, though I do remember a massive speculative bubble bursting and an economic crash.
>> ^bmacs27:

Fractional reserve banking has nothing to do with the medium of exchange. Banks have engaged in fractional reserve banking since long before the abolition of the gold standard. A better argument is that the securitization of debt (deregulation of finance) has caused massive inflation by encouraging the underwriting of bad debt by allowing the risk to be sold off.

First, I'm not proposing anything -- I was just pointing out that inflation and speculative bubbles could be largely mitigated making the supply of money fixed. Second, a fixed money supply does not presuppose (or require) price fixing, so you can still use various property as a value store.
>> ^bmacs27:
Further, the video doesn't seem to explain that in our current system I can use my wages to purchase gold at market, and can thus use it as a store of value (if I actually believed it to be fairly valued against e.g. wages or real estate). In the government price fixing system you are proposing that wouldn't be possible, and the value of my gold would be subject to systemic risk (bad policy) just like currency is today.
>> ^davidraine:
I don't think they're calling for anything -- Simply explaining. Also, the point is that everything they point out is not true for any medium of exchange. The hallmark of fiat currency that makes it true is banks' ability to conjure money out of nowhere, which starts the inflationary and speculative balls rolling. With a fixed money supply, this can't happen.

@mgittle okay, it sounds like we were mostly misunderstanding each other then. I pretty much agree with everything you said in the last post.

The only thing I'd point out is that the quote you cite from Modern Money Mechanics is right, but you're leaving out what happens after that in the process:

The lending banks, however, do not expect to retain the deposits they create through their loan operations. Borrowers write checks that probably will be deposited in other banks. As these checks move through the collection process, the Federal Reserve Banks debit the reserve accounts of the paying banks (Stage 1 banks) and credit those of the receiving banks.

Whether Stage 1 banks actually do lose the deposits to other banks or whether any or all of the borrowers' checks are redeposited in these same banks makes no difference in the expansion process. If the lending banks expect to lose these deposits - and an equal amount of reserves - as the borrowers' checks are paid, they will not lend more than their excess reserves.

Which is what I was getting at. A single bank that gets a $10,000 deposit, can't turn around and make $100,000 in loans itself. It loans out $9,000, and when that principal gets deposited in another bank, it can loan out $8,100, and so on and so forth.

With enough loan/deposit iterations, it can end up being as much as $100,000 in additional money in circulation, but like you said repaying the principal destroys that money again.

I'd also point out that all of the above would create money even if your currency is on a full gold standard.

But I guess before we go down that road, I probably should just ask you to elaborate a bit on your thoughts about the relationship between growth and fiat currency.

Like, what do you mean by "growth"? Increase in GDP? If GDP falls, how does that threaten the existence of fiat currency?

By my reading of economics, a shrinking economy is called a "recession", and that's exactly when modern economics says we should take advantage of the fact that we have fiat currency and use it to increase the money supply to spur growth.

@NetRunner

I think the difference in our concept of what's going on is that my understanding is that commercial banks can make a reserve deposit at any Fed branch and then make loans against that. From what I can tell, there isn't any math done like you're describing. Maybe if you want to make a new bank or long ago when some of these banks were created there was math like that, but there isn't anymore. There is simply a minimum number required to have on reserve deposit or in vault cash compared to how much you have loaned out. This is all not to mention that there are types of deposits which have exceptions to the reserve requirement. That alone makes sure banks are loaning more than they have (if they want to take the increased risk).

http://en.wikipedia.org/wiki/Reserve_requirement#United_States

I mean, if putting $100 in a Fed reserve bank and loaning out $900 based on someone's promise to pay isn't creating money, I don't know what is. You don't have to start out with $1000 to make the $900 loan once you're already a commercial bank. That's the point. If you make money on some investment, you can make loans and collect interest against your increased profits. You don't have to have the money and then hold 10% back. (Glass-Steagall, anyone?)

Plus, the money that comes in as interest is money that never existed in the money supply before the loan was created. Someone else has to borrow money to pay you in order for you to be able to pay your interest. This is why growth is required to pay interest and avoid foreclosure and default. If the money supply does not increase and more people aren't promising to pay interest, other people won't be able to fulfill their promises to repay. That's why the system requires growth to function well.

Legal tender law and fiat currency make sure that everyone must participate in the system at some point, or your contracts won't be protected by the courts and you won't be able to pay your taxes, since both only deal in dollars.

>> ^mgittle:

If the bank in your latest example can't satisfy withdrawal demands, it probably borrows money from a commercial bank, which can request money from the Fed to cover the difference.

Change the word "request" to the word "borrow" and that's correct.

>> ^mgittle:
So, yes, the bank is not literally creating the money on its own, but it seems to me that banks granting loans for more money than they possess at any given time is the most significant reason for the Fed to have the ability to increase the money supply.

Again, banks aren't granting loans for more money than they posses. In the example above, they have $1,000, they can loan out $900, because they're legally required to hold 10% reserves.

Now, their balance sheet shows the following:

+$100 cash on hand as reserves
-$1000 owed to depositor
+$900 in debt owed to them by borrower
+$X in interest on debt owed to them by borrower

Which nets out to +$X interest in net worth.

There are two big risks with this arrangement:

#1: The depositor wants to close his account before the loan matures. The bank doesn't have the money to cover the withdrawl, and will need to borrow funds from another bank. If the borrowing costs are higher than the expected return from its loan, the bank is insolvent, and is gonna die. On conventional banks, the government will step in and cover the depositor's accounts up to some arbitrary dollar amount (I think it's still $250k), but the bank owners will be fired, and they'll seek out someone else to buy the bank and take over future operations.

#2: The borrower defaults on his loan. Since we're talking about only 1 depositor and 1 borrower, this single failure is the equivalent of 100% of the bank's borrowers defaulting at once. This too will result in the government stepping in, covering depositor's accounts, and restructuring the bank and selling them off.

What happened with the US financial crash was that a big, non-insured bank (Lehman Brothers) got hit by scenario #2, and since it was not a traditional, FDIC-insured bank, they just let it go bankrupt, and let the investor accounts get wiped out.

That started a panic, and led to lots of people pulling money out of other similar banks, leading to widespread cases of #1 happening, which had the effect of making banks default on loans they'd taken out with other banks, starting a new wave of #2...

That's why this system is fragile, and none of this has anything to do with monetary policy yet. This is all fiscal and regulatory policy.

What happened was that even after TARP stopped that domino effect of #2 leading to #1 leading to #2 again, banks were worried that all debt was much risker than they'd formerly believed, and so they raised the costs of borrowing (the interest rate) to sky-high levels, which severely curtailed the amount of people borrowing money to invest in real-world business activity.

That drop in investment led to a drop in production, which led to a drop in employment, which led to a drop in consumer demand, which led to a drop in production...

So now, the Fed is stepping in with monetary policy, and trying every trick in the book to stuff the banks with reserves, so they'll lower interest rates. They've had some success, but it isn't really doing the whole job, because unemployment is already so high, and consumer spending is so low, nobody wants to invest in expanding their business, no matter how cheap borrowing costs are...

That's what monetary policy is really about, stabilizing the interest rates and the overall flow of goods and services in the economy. When the economy slows, the Fed pumps money into the economy to try to make it go again. When it starts overheating (and leading to inflation), it siphons money out of the system to slow it down a bit.

Fiat currency doesn't really depend on growth -- if anything, growth depends on fiat currency, and the application of good monetary policy.

>> ^NetRunner:

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth.
I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.
How is fiat currency reliant on growth?
Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?
That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.


Yeah, well put rearding the "fervent advocates". I did kind of mean it the other way around. Thank you for actually taking a second to understand my meaning rather than arguing literal points only (the literal-only thing being my definition for nerdiness).

It's not fiat currency alone that makes our economy reliant on growth. I should have been more specific, but such is life when you have to get to sleep...haha. Fiat currency just a part of the whole Fractional Reserve banking + legal tender law + fiat currency system. In my mind, the growth thing is probably tied most to the fractional reserve system. Hopefully none of this sounds condescending because I'm not sure how much of this you already know, but here's my understanding:

Because the money supply is variable and dependent on debt, an expanding economy is extremely good and a contracting one is extremely bad. Because banks are allowed to loan more money than they possess *and* charge interest, you run into a problem. Where do individuals get the money needed to pay the interest on their loan if it was created from nothing? You have to get it from the overall money supply, which is made up of money created by banks from other peoples' promises to pay.

Thus, with every new credit card swipe, mortgage signing, etc, more money is owed to banks than actually exists at any given time. It's only the time lag between borrowing and repayment that keeps the entire system from collapsing. This means that unless the total amount of debt continually increases at a sufficient rate, it's impossible for everyone to succeed in paying back their loans...there must be foreclosures. This is why people constantly get offers of new credit, *and* why recessions are such a bitch. It's very hard to get things growing again after the money supply decreases.

The system is also one in which individuals paying off debts have more money (less income goes to paying interest), but everyone paying off their debts leaves society with no money. Therefore, anyone who pays off their debt to increase their own personal financial security actually hurts the overall economy. It makes no sense for markets to rely on rational individuals' decisions if their individual decisions are bad for the economy in aggregate. For this reason alone, the system is extremely fragile.

Hope all that makes some sort of sense. Maybe I'm wrong in parts. I'm partially regurgitating the videos I linked earlier while adding in stuff I've learned from other sources. I've nor heard anyone refute the premise of the video, but I'm sure it's not infallible in its interpretation. I'd love to hear what other people think. It got sifted long ago but there was little discussion.

As for your comments about markets being a net positive, I don't disagree with you at all. It's when people rely on markets to solve every problem (including moral ones) and don't realize that there are some places markets ought not go that there becomes a problem. (Should courts enforce a custody contract between an infertile couple and a surrogate mother? ...and and endless list of other similar questions)

>> ^marbles:

>> ^crotchflame:
BUT this came at the cost of a more serious threat of deflation and bank runs, which you can easily argue is much worse.

That's a false argument. You can't have deflation without first having inflation. And your argument is well we have to suffer inflation otherwise we might suffer deflation. That's illogical. Deflation is mostly good for us and bad for banks. Deflation would mean lower food and commodity prices. When a bubble pops, it's essentially canceling out that bubble's expansion of the monetary base. The realized inflation in prices is caught in an imbalance. If left to a natural correction, prices would fall and reach an equilibrium. But the government and central bank usually step in with a monetary solution to "stabilize" the economy. This is just horseshit excuse to keep the inflation from the bubble and pass on the cost to the tax payers.


Netrunner's already pointed this out, but this is special pleading. You say that prices go up and down in the market with a fixed currency, but that's not inflation because inflation is expansion of the money supply. You're saying that inflation only happens under a fiat system, therefore a fiat system is the only way we can have inflation. It's not very interesting. Inflation can only be measured as an aggregate of general prices, like the billion prices project. If all the prices are going up, that's inflation; down, that's deflation. Arguing which came first is a chicken and egg question.

The rest of what you say doesn't address the link I gave to why deflation is worse.

>> ^mgittle:

The problem with fractional reserve systems using fiat currency is their reliance on growth.

I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.

How is fiat currency reliant on growth?

Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?

That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.

>> ^marbles:

And price changes from an increased "supply" of currency is called inflation.

Before I get into the rest of what you said, I want to just highlight this part because it's an example of the root problem with your entire reply.

You seem to have this habit of making tautological arguments that hinge on asserting that the premise you wish to prove is baked into the very definition of some word, and therefore you don't need to actually make an argument for said premise.

I've been here with you before, about a word whose definition is much fuzzier than inflation (liberty), but now you're doing it with a word whose definition is very specific, and clearly does not contain the premise you want it to contain.

This is also my answer to your disagreement about the meaning of fractional reserve banking.

This is also my answer to your disagreement about what modern-day Keynesian monetary theories say. I'll also add that your quote isn't a Keynes original, it's Keynes quoting Vladimir Lenin.

As to your very last bit, you have a funny idea of what "earned honestly" means. Supposedly you resent banks gambling with our savings. Did they honestly "earn" our savings?

@marbles

I agree with your assessment of fiat currency, I guess I think the problem runs deeper because I'd rather not just gamble and assume technology will save us from ourselves.

There are quite a few problems with going back to a fixed-supply currency. Maybe I'm not studied up on all the current real-world solutions for moving back to the gold standard or whatever other flavor one might advocate, but gold can be debased, bars can be shaved, currency can be hoarded...the list is fairly long.

That's why we need a value-based monetary system rather than a debt-based one.

>> ^NetRunner:
Well, prices are set by market forces. You know, supply and demand. It's not necessarily the case that the Fed expanding the monetary base will lead to inflation.

Again, look at the last few years. Bernanke expanded the monetary base radically, but inflation has stayed low, and is on a declining trend.

And price changes from an increased "supply" of currency is called inflation.

Bernanke expanded the monetary base of the US dollar (ie world reserve currency) and people all over the world are in the streets rioting over the increased cost of living. PPI in the US has gone up 7.2% the last 12 months. And if you're referring to QE, most of that money is either parked at a bank or was used to buy toxic debt (to counter deflation). But when those TRILLIONS do reach the marketplace, inflation will be realized. That's why precious metal prices have blown up. The US dollar has lost 98% of it's purchasing power against gold the last 40 years.
>> ^NetRunner:
Oy. Okay, so here's how a bank works. People like you and me have some money. The bank offers to "hold" that money for us in an account, and at least used to pay us some small amount of interest on that money as incentive for us to keep our money with them.

But the bank doesn't just take our money and stick it in some vault for safekeeping, they lend that money out to other people, at a higher rate of interest than they offered us.

Problem is, we're allowed to withdraw our money from the bank whenever we want, so the bank has to keep some cash on hand (aka in reserve). However it will only keep a fraction of the total deposits in reserve, because otherwise it wouldn't be able to loan out money. That's what fractional reserve banking means.

That's what one would presume fractional reserve banking means, but it's not.




>> ^NetRunner:
I agree. Provided by "our system" you mean laissez-faire capitalism.

The banks take our savings and gamble them on risky, potentially profitable investments. That's sorta key to the functioning of capitalism though. Without that, the whole system crashes almost instantly.
LOL. The state stepping in to reward and cover up fraud is not laissez-faire capitalism. I don't get it. You defend the system, then you try to shift blame on free market capitalism?

>> ^NetRunner:
Artificially. You keep using that word. I don't think it means what you think it means.

Prices are set by market forces, and according to free market advocates this is perfect/moral/only way they can or could ever be set, or else we'll go to hell be socialists.

There are plenty of unnatural "market forces" in our current system. Even inflation itself. Hence, prices are artificially set.


>> ^NetRunner:
Different economic models hypothesize different answers. I tend to think the Keynesian story is right -- it's aggregate supply and aggregate demand. When you have a shift in either one that would lead to a higher equilibrium price, then you see "aggregate price" (aka the CPI) rise.
Which is to say, you can get both inflation and deflation without the Fed doing anything. To stabilize inflation, you actually need the Fed constantly adjusting the monetary base so neither inflation or deflation get out of kilter. Look at pre-1913 interest rates if you don't believe me.

John Maynard Keynes on inflation: "By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

What you're talking about makes no sense. Prices in a market with sound money still go up and down. That's the way a market works. Calling it inflation and deflation doesn't make it so.

>> ^NetRunner:
I agree, if by "the ones that...extract value from that actually worked and earned their wealth" you mean any and all business owners, investors, and so on who have done nothing but collect interest on wealth they already own.

Maybe before you start going after people who are collecting interest on the wealth they presumably earned honestly, you will stop defending those who collect interest on money they created from nothing. Deal?

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.
The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. cough AynRandobjectivism cough Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.


You're talking about economic growth. I don't see the planet Earth being a limit like you're describing. That's more of a close-minded assumption. We've always been able to invent and innovate with the opportunity. Putting a limit on that, is denying ourselves that opportunity. Surely a 100 years ago, people never envisioned our present world. And a 100 years from now, I hope people can say the same about us.

The problem with fractional reserve systems using fiat currency is that it's fiat. Even if you could match inflation with economic growth (which you can't), you would still have an elite class collecting interest from loans of magically created cash.

>> ^crotchflame:
BUT this came at the cost of a more serious threat of deflation and bank runs, which you can easily argue is much worse.


That's a false argument. You can't have deflation without first having inflation. And your argument is well we have to suffer inflation otherwise we might suffer deflation. That's illogical. Deflation is mostly good for us and bad for banks. Deflation would mean lower food and commodity prices. When a bubble pops, it's essentially canceling out that bubble's expansion of the monetary base. The realized inflation in prices is caught in an imbalance. If left to a natural correction, prices would fall and reach an equilibrium. But the government and central bank usually step in with a monetary solution to "stabilize" the economy. This is just horseshit excuse to keep the inflation from the bubble and pass on the cost to the tax payers.

@davidraine @NetRunner @marbles

I think these videos explains it better:
http://www.youtube.com/watch?v=Dc3sKwwAaCU
http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

They're much longer and the animation is terrible, but they have better content, IMO.

As for banking without a fractional reserve system...you could have a system that utilized self-issued credit traded on an exchange. Money and credit could be based on the amount of valuable goods and services you (or a company) can provide rather than based on promises to pay back debt.

Yeah, it's the same guy's video, but you can learn about the idea here:
http://www.digitalcoin.info/

The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.

The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. *cough*AynRandobjectivism*cough* Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.

First, to my original point, a fixed money supply does not allow for fractional reserve banking -- By definition, fractional reserve banking varies the supply of money. Second, I don't remember massive inflation caused by the sale of unregulated securities, though I do remember a massive speculative bubble bursting and an economic crash.
>> ^bmacs27:


Fractional reserve banking has nothing to do with the medium of exchange. Banks have engaged in fractional reserve banking since long before the abolition of the gold standard. A better argument is that the securitization of debt (deregulation of finance) has caused massive inflation by encouraging the underwriting of bad debt by allowing the risk to be sold off.

First, I'm not proposing anything -- I was just pointing out that inflation and speculative bubbles could be largely mitigated making the supply of money fixed. Second, a fixed money supply does not presuppose (or require) price fixing, so you can still use various property as a value store.
>> ^bmacs27:

Further, the video doesn't seem to explain that in our current system I can use my wages to purchase gold at market, and can thus use it as a store of value (if I actually believed it to be fairly valued against e.g. wages or real estate). In the government price fixing system you are proposing that wouldn't be possible, and the value of my gold would be subject to systemic risk (bad policy) just like currency is today.
>> ^davidraine:
I don't think they're calling for anything -- Simply explaining. Also, the point is that everything they point out is not true for any medium of exchange. The hallmark of fiat currency that makes it true is banks' ability to conjure money out of nowhere, which starts the inflationary and speculative balls rolling. With a fixed money supply, this can't happen.