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View Diary: China Cuts US Credit Rating. Obama Cuts Hawaii Vacation Short. (171 comments)

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  •  Reserves are essential for clearing and payments- (1+ / 0-)
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    Canada has no reserve requirement because reserves are not the basis of lending, it is bank capitalization that matters. The "money" created by banks is not real in that credit money and the real assets that back it are confined to the private sector. It cannot be used to discharge obligations to the government. Only the net financial assets of the private sector (real money) can do that. The reason is the the government spends by increasing reserves and taxes by removing reserves. In monetary parlance these are vertical transactions whereas as bank lending and credit money constitute horizontal transactions. It is only base money that can move vertically.

    US Banks are only constrained by their capital requirements, not by reserve requirements. Reserves are made up after the fact, and they are essentially guaranteed by the fed as the lender of last resort. Since the fed will currently loan reserves for 50bp and pays 25bp on existing reserves, banks know exactly what their cost of funds and their cost of funds storage are. They never have to see if there are loanable funds available - that concept is a myth.

    You are correct that the elimination of taxes would make the money useless. That is one of the primary tenets of MMT, that taxes drive the value money. However, your impression of the reserve system is quite distorted from the system's actual implementation.

    •  Never said "reserves are the basis" (2+ / 0-)
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      Raggedy Ann, ozsea1

      The Deposits are.

      The reserves are there to reassure the public that they can withdraw their money on demand. That's about public relations.

      The Bankers lend from their own profits, and from their deposits. Mainly the deposits.

      Just in the past two weeks, Europe has moved to supervise all banks (or at least the biggest ones) and part of that supervision is to make certain they are holding sufficient reserves. Why, if it's not an issue?

      Banks are also highly leveraged—most of them have liabilities that are at least 10 times their bank capital, so even small losses can wipe out the bank's capital. Furthermore, the use of leverage is achieved by using other people's money—deposits, loans, and stockholders' equity—which creates the moral hazard inherent in risking other people's money for one's own profit.
      Like I say, economists have invented all sorts of nits and nuances to justify the existing practices (and the illusion economics is a science), but in the real world bankers control the economy, and economy controls politics, and politics is about how, and in what conditions, people live.

      In the current situation, the banks' actions have resulted in a Depression which extends through most of the world, and nobody is seeing improvement, nor will they, as long as we let Central Banks drive everything.

      And their main tool for driving things is declaring money to exist through issuing debt-instruments. That is, fiat money.

      The Internet is just the tail of the Corporate Media dog.

      by Jim P on Wed Dec 26, 2012 at 10:29:45 AM PST

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      •  Thank you, Jim P. (1+ / 0-)
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        You got it right and with the correct words.  I appreciate your clarification.  I was just trying to bring up the fact we are on fiat money and didn't know the people here would attribute it to Ron Paul. Good grief!

        being mindful and keepin' it real

        by Raggedy Ann on Wed Dec 26, 2012 at 11:30:38 AM PST

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      •  If (1+ / 0-)
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        The reserves are there to reassure the public that they can withdraw their money on demand. That's about public relations.
        Then why have the FDIC and how does Canada, for example, get by on zero reserves? Are Canadians are so civilized that they refrain from bank runs in the absence of reserves, or do they perceive things differently?
        The Bankers lend from their own profits, and from their deposits. Mainly the deposits.
        That's not correct; they lend by double-entry bookkeeping, by entering a loan and a deposit simultaneously on their books. The Fed will make up the reserve requirement later if the bank doesn't bring it about through other transactions. Banks can average over a 14day window. They are only constrained by risk weighted capital. Simple explanation here

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