US Default

[Loki]

http://www.nytimes.com/2011/08/06/bu...-by-sp.html?hp

http://www.washingtonpost.com/busine...IxI_story.html

Compare the dismissive tone by the NY Times with the straightforward analysis by the Washington Post.

[CitizenCain]

Eh no, deficit is expressed as percentage of GDP. It's simple calculus.

Eh, no, I was using actual numbers. As in the agreed 100bn/yr spending "cuts" is less than a 3% reduction from the proposed budget, and actually increases spending from last year. And even if they were actual cuts, cutting 3% of a budget that reads like an exponential curve is completely useless anyway. We'd have to slash the budget in half, just to get us back the good old days of reckless Bush (Jr.) spending.

Yes, but you don't start the renovation of your house by setting it on fire.

If your mortgage is under water, you have home owner's insurance, and you're smart... you do. S&P's downgrade report came right out an said it - our long term debt (SS + medicare) will need to be "restructured" at some point. Financial-speak for saying we're going to have to reduce that debt by not paying out as much as some or all of those people are owed. I think this is also known as a "default" in financial circles.

Better to do it sooner than later, not least of all because if we do it sooner, I might live to reap some of the benefits, instead of just bearing all the costs of the previous generations' mistakes.

Yes, I am still taking that position. The effect on the debt is negative, clearly. But the effect of a new recession would have been pretty horrendous too.

What the hell are you talking about? We've been in a recession for all intents and purposes since 2008. The stimulus hasn't changed that in the least, and increased our long term debt. Long term debt, which according to S&P, is the reason US sovereign debt has been downgraded to AA+.

In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

If I look at the reasons for the downgrade it's less about the amount owed or the ability to pay it back than about doubt about the willingness to pay back.

How about you link to or quote the report you're reading, because it's clearly not the same one I'm reading, or the same one S&P issued.

Excessive job security is not really socialist, and that's the problem the EU countries that are in trouble have to deal with. Countries like Holland are doing just fine under a relatively harsh capitalism, Germany doesn't even have a minimum wage.

Citing Germany as an example of capitalism? Normally, you have to go back to the late 1800's for that. But seriously, perhaps part of the problem is that you don't even see the bureaucratic clusterfuck that is the modern regulatory state as socialist, but it is. High taxes, large social entitlement networks and regulatory rules on everything imaginable (and then some) - if that's not socialism, what is?

[RandBlade]

Saw this on a Facebook status, puts it well

‎"If the US Government was a family, they would be making $58,000 a year, spending $75,000 a year, and $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand." ~ Dave Ramsey

[CitizenCain]

It's actually not quite accurate - it would be more accurate to say they spent $75,000 last year, budgeted for $80,000 this year, and then decided to "reduce" spending to only $78,000 instead. And, given that the government pays ~3.2% interest on their debt, it should probably be a $327,000 mortgage, not credit card debt, since it's impossible to get single digit APRs on credit cards anymore.

But otherwise, I rather like that guy's little twit tweet.

[GGT]

Saw this on a Facebook status, puts it well

Ha, I saw that in the user-comment section of an article I read today.

There's a big difference between government and family income-spending-credit-debt, though.

[RandBlade]

Yes, the government can legally attempt to take money by force.

[Hazir]

It's easier to simply print it.

[CitizenCain]

Maybe. But they generally choose to take it by force, as that option results in less inflation and more stability.

[GGT]

Yes, the government can legally attempt to take money by force.

It's easier to simply print it.

Maybe. But they generally choose to take it by force, as that option results in less inflation and more stability.

But central banks can "print money" or "inject capital" at their own discretion. Right?

I'm not sure how the ECB does things, or who's monitoring them, but the US Federal Reserve (and their regional Board of Governors) makes plenty of "independent" decisions, like buying assets or treasury bonds. Even if they consult with Treasury on some things, or need congressional approval for others (like TARP), our fed can do all sorts of things independently. They can change short-term, over-night lending, or commercial paper interest rates. They can meet with certain banks or bank-holding corporations (who are 'required' to participate in the buying/selling of Treasurys) and change things in a flash.

I'm not sure their Beige Papers tell the public much of anything, other than what they've already done (after the fact) and how it might impact John Q. Public, the consumer. I've gotten rather tired of the fed's cheap money for banks, banks hiding under Federal Reserve wings, "bank-holding company" status....practically 0% interest for CD's, LESS than 0% interest for treasurys, or banks like Mellon charging fees for large cash deposits.

Yeah, yeah, there are professionals paid millions of bucks to keep up with this shit, analyze it, pass it on. It's just all crazy backward and upside down. Alice is NOT happy.

[CitizenCain]

But central banks can "print money" or "inject capital" at their own discretion. Right?

Depends on whether the currency is fiat currency or not, and what (if any) legislative controls there are on the central bank in question. But, as you're clearly talking about the US, which uses fiat currency, and has a central bank which is effectively unaccountable to any government agency... yes, the Federal Reserve Bank can print as much or as little money as it wants to for practically any (or no) reason at all.

It's also a for-profit organization, by the way. Fuck, what I'd do for a piece of that racket...

[GGT]

So what's with the ECB, or the IMF? The euro is also a fiat currency. Hell, isn't that what Bretton Woods I and II decided? And isn't China (coincidentally the largest holder of US Treasurys aka Debt) calling for a new reserve currency, with some kind of global "oversight"?

Oh, but what a tangled web we weave, when at first we practice to deceive. (Or however that quote goes.) Pay no attention to that man behind the curtain...he IS the wonderful wizard of Oz! And he can tell you what an ounce (oz) of gold means in value today, but not tomorrow. Come back tomorrow.

[CitizenCain]

Well, the IMF doesn't issue any currency... it really is, just what the title says - a very large, international monetary fund, that won't even loan me a lousy 40 mil.

As to the rest, I don't know enough about the relationship between their central banks and their legislative bodies to say. If someone is holding the reigns, then the central bank has to follow their direction regarding printing currency, if not, then the central bank can basically do whatever the hell it damn well pleases. So, like I said - it depends on "what (if any) legislative controls there are on the central bank in question."

[GGT]

But who "prints" the euro dollars? Can the ECB create new capital by simply injecting new euros onto certain balance sheets, with nothing more than adding some (agreed upon) zeros? Maybe I'm being Ameri-stupid by comparing Europe's central bank to the US central bank.



I've read plenty of articles the last few years, and finally landed on one (from NPR, I think) that illustrated just how our Federal Reserve creates those "helicopter dollars".....it was depressingly simple. They decide that the economy needs more dollars to reflect expansion and growth, or want to control inflation, and "deposit" fiat money into certain accounts, using computerized zeros. That's what printing money means. That's what priming the pump means.

They don't direct the comptroller of currency to do anything, they don't direct the Treasury to mint new dollar bills or coins....they just add computer zeros to certain balance sheets, particularly to those banks or bank-holding companies who are required to "participate" in buying/selling treasury bonds on the open market, in order to have their special status with the Fed.

Those banks, in turn, are allowed to park their cash with the Fed, borrow from the Fed, and gain a bit of interest or at least hold even, so the Fed can turn around and hold Treasurys, trying to make interest profit on our national debt by selling it to others. Currently, those piling into Treasurys are actually paying the Fed to guarantee their risk, because the yield is negative.

To complicate matters even more, at least one commercial bank is now charging large depositors for parking their cash in savings accounts. The cost of buying FDIC insurance? The price of guaranteeing loans? Their inability to have enough cash reserve on hand, in case there's a run on withdrawals? I haven't figured this out yet.

I was rather astounded, and quite confused, to be honest.

[Hazir]

The ECB is an EU instution with more independence than most central banks, that became glaringly clear in this crisis when it flat out refused to take up the role people expect from a central bank like the Fed. They have a limited mandate which basically charges them with the duty to limit inlation. They report to the European Parliament but are not accountable. The governing council consists of 17 presidents of central banks, 6 appointees council members and an appointed president (who has to be have been president of a national central bank) The last 7 can't be re-appointed afaik.

The ECB can create money at will, but they are reluctant to do so just to cover the asses of politicians who spend too much. They are willing it seems like to step in though now that the EFSF has been decided on.

[CitizenCain]

I've read plenty of articles the last few years, and finally landed on one (from NPR, I think) that illustrated just how our Federal Reserve creates those "helicopter dollars".....it was depressingly simple. They decide that the economy needs more dollars to reflect expansion and growth, or want to control inflation, and "deposit" fiat money into certain accounts, using computerized zeros. That's what printing money means. That's what priming the pump means.

If you don't like that, do yourself a favor, and avoid reading up on our system of fractional reserve banking. Depositing money into a bank causes money to magiked into existence... another ability I feel it's unfair to grant to others, and deny to me.

[RandBlade]

Depends on whether the currency is fiat currency or not

Please can you point me to the nearest non-fiat currency?

[GGT]

If you don't like that, do yourself a favor, and avoid reading up on our system of fractional reserve banking. Depositing money into a bank causes money to magiked into existence... another ability I feel it's unfair to grant to others, and deny to me.

Fractional reserves and fiat currency are those Austrian theories I've read about. They don't hold much favor in traditional academic circles. Neither does the gold standard. I'm not the sharpest tool in the shed, and some call me downright retarded, but the whole thing sounds too orchestrated and manipulated to make "sense" in any logical way.

The "basket of goods" valuation sounds better, something most anyone can understand, things people can see/feel/hold/visualize. "Money" should be something everyone can understand.

I tried to explain what a dollar meant to my kids when they were little, and even in their youth they'd ask things like....okay so one dollar is one hundred pennies, but what is a penny? Besides a brown coin with some copper and printed images, I really couldn't say. It was just a penny. But if we collect enough pennies it turns into a pieces of paper, and becomes dollars? But that changes as we go around the world, and one dollar can become tens of dollars, but won't buy a pack of gum? Huh?



Now that we have debit cards, kids aren't handling coins and bills very often, let alone doing math in their heads. Seems kinda creepy when money becomes just an abstraction, or nothing more than numbers on a computer screen. Maybe that's for the best, I dunno. I just hope bills and coins aren't refused as legal tender while I'm still alive. There's something comforting about hiding a tin box stuffed with cash, just in case.

[CitizenCain]

Please can you point me to the nearest non-fiat currency?

Sure. Go to your nearest bank, and head into the vault.

Should you survive the trip, I'm confident you'll find many examples of commodity currency, in the form of gold and silver coins [other precious metals too, but gold and silver are the most common by far]. The most famous example is the South African Krugerrand, but many (most?) other industrial countries also mint coins out of silver and/or gold, and those coins are, in fact, commodity currency. For obvious reasons, I'm most familiar with the Canadian Maple Leaf bullion coins, which (like the Krugerrand, and presumably other government-minted bullion coins) are officially issued government currency. Oh, and if you're thinking of giving me a gift for answering your question so quickly and thoroughly, I'd really like a palladium one. Value on face, only $50...

Should you happen to actually posses any [gold or silver] commodity currency, particularly if you purchased it in the 90's, you're probably doing a happy dance these days, as its value has (at least) quintupled since then, and is still going up.



Three cheers for fiat currency. By the way, what's the current value of your fiat coins and bills, compared to the 90's?

Fractional reserves and fiat currency are those Austrian theories I've read about.

Oh, dear mother-of-God no. "Austrian theories" refers to the Austrian school of economics, and the Austrian school is pretty explicitly opposed to both fiat currency and fractional reserve banking. Fiat currency and fractional reserve banking are what we use now (and to be fair, what most countries do as well).

[RandBlade]

Last I checked, the SA currency is the Rand (no relation) and it is most definitely fiat.

[CitizenCain]

Well, check again. The Krugerrand has "legal tender" status in South Africa. It was intended to circulate as currency, and thus, is actually a gold/copper alloy of 11 parts gold to 1 part copper, which increases the durability substantially (though, obviously, makes it a less valuable coin than any of the "pure" 1oz gold coins).

Not that you asked for examples of non-fiat, legal tender currency, but you got one anyway. And, of course, the dozens of actual "non-fiat currenc[ies]," minted and issued by national governments that aren't necessarily "legal tender." But they're still currency, and they're still non-fiat.

And, looking on the web, I discovered that your government issues bullion coins as well (Britannias), which carry a face value, and are also "legal tender." Of course, one would have to be insane (or a very clever tax dodger) to insist on the legal tender aspect of the coin, given that 1oz of gold is worth ~$1500 currently, and the face value of the coin is £100. Gee, almost as if the face value is set deliberately below its bullion value.

[LittleFuzzy]

If you don't like that, do yourself a favor, and avoid reading up on our system of fractional reserve banking. Depositing money into a bank causes money to magiked into existence... another ability I feel it's unfair to grant to others, and deny to me.

Uh, Kane? "Fractional reserve" isn't our system of banking. It's been a basic part of banking and finances since the financial system still consisted of money-lending merchants or longer. Money being in more than one place at once, and hence having been magiked into existence, has been with us since the first person accepted an IOU. All fractional reserve banking does is forbid banks from lending out all their money based on a simple mathematical formula that describes all lending since that first IOU.

[CitizenCain]

Uh, Kane? "Fractional reserve" isn't our system of banking.

Not how I meant it. "Our iteration of fractional reserve banking" or "our implementation of fractional reserve banking" might have been more clear.

It's been a basic part of banking and finances since the financial system still consisted of money-lending merchants or longer. Money being in more than one place at once, and hence having been magiked into existence, has been with us since the first person accepted an IOU.

Well, now, that's just completely inaccurate. The promissory notes and credit offered by merchant-bankers were most definitely what we'd think of as full reserve banking, because those were based on their actual profits and existing capital. They would not issue more promissory notes than they could pay off in short order, as the notes weren't circulated like currency, and were generally expected to be redeemable for "real" currency almost on demand... but it was easier and safer to carry a piece of paper across Europe than lug around heavy chunks of precious metal, so the notes issued by merchant bankers were seen as a service, and generally redeemed for less than they were issued for. Essentially, a fee for the convenience of having the Medici protect your gold and arrange for it to meet you at your destination.

The first historical records of fractional reserve banking are in the 1600's, and surround the goldsmiths in the low countries, and the Bank of Amsterdam. In short, people would often put their gold on deposit in exchange for notes (IOUs)... but people quickly noticed it was much more convenient to use the notes in trade, and that the notes were "good as gold," so they began circulating as currency. The goldsmiths and banks (not merchant-bankers, actual banks) caught onto this trend quickly, and realized they were sitting on a lot more bullion reserves than they needed to satisfy the rate of notes being redeemed, and began loaning out some of these deposits on activities than earned interest - making money off the same deposits twice.

However, these early fractional reserve lenders did not engage in the absurd practice of magiking money into existence like we do now. They just used math to figure out how of their money they could promise to more than one person at once.

All fractional reserve banking does is forbid banks from lending out all their money based on a simple mathematical formula that describes all lending since that first IOU.

No, what modern fractional reserve banking does is multiply deposits, not forbid them from lending out all their money. Quite the opposite of limiting the banks to lend out only a certain fraction of their deposits, modern fractional reserve banking allows banks to lend out a certain multiple of their deposits.*

I have no problem with a system that says my bank can only lend out $90 from my $100 deposit (for example). But that's not how it works in the real world. In the real world, a 10% fractional reserve requirement [as in the US] means that when I deposit $100 into a bank... it poofs as much as $1000 into existence.... and loans that out. Ri-ducking-ficulous. (Achieved by recursively loaning those deposited dollars to itself, essentially. Neat trick, let's see you recursively loan yourself a gold coin, though. )

[*The money multiplier, m, is the inverse of the reserve requirement, R
m=1/R
And it's a theoretical maximum. Real world multipliers are a little lower.]

[LittleFuzzy]

Not how I meant it. "Our iteration of fractional reserve banking" or "our implementation of fractional reserve banking" might have been more clear.



Well, now, that's just completely inaccurate. The promissory notes and credit offered by merchant-bankers were most definitely what we'd think of as full reserve banking, because those were based on their actual profits and existing capital. They would not issue more promissory notes than they could pay off in short order, as the notes weren't circulated like currency, and were generally expected to be redeemable for "real" currency almost on demand... but it was easier and safer to carry a piece of paper across Europe than lug around heavy chunks of precious metal, so the notes issued by merchant bankers were seen as a service, and generally redeemed for less than they were issued for. Essentially, a fee for the convenience of having the Medici protect your gold and arrange for it to meet you at your destination.

The first historical records of fractional reserve banking are in the 1600's, and surround the goldsmiths in the low countries, and the Bank of Amsterdam. In short, people would often put their gold on deposit in exchange for notes (IOUs)... but people quickly noticed it was much more convenient to use the notes in trade, and that the notes were "good as gold," so they began circulating as currency. The goldsmiths and banks (not merchant-bankers, actual banks) caught onto this trend quickly, and realized they were sitting on a lot more bullion reserves than they needed to satisfy the rate of notes being redeemed, and began loaning out some of these deposits on activities than earned interest - making money off the same deposits twice.

However, these early fractional reserve lenders did not engage in the absurd practice of magiking money into existence like we do now. They just used math to figure out how of their money they could promise to more than one person at once.



No, what modern fractional reserve banking does is multiply deposits, not forbid them from lending out all their money. Quite the opposite of limiting the banks to lend out only a certain fraction of their deposits, modern fractional reserve banking allows banks to lend out a certain multiple of their deposits.*

I have no problem with a system that says my bank can only lend out $90 from my $100 deposit (for example). But that's not how it works in the real world. In the real world, a 10% fractional reserve requirement [as in the US] means that when I deposit $100 into a bank... it poofs as much as $1000 into existence.... and loans that out. Ri-ducking-ficulous. (Achieved by recursively loaning those deposited dollars to itself, essentially. Neat trick, let's see you recursively loan yourself a gold coin, though. )

[*The money multiplier, m, is the inverse of the reserve requirement, R
m=1/R
And it's a theoretical maximum. Real world multipliers are a little lower.]

The essence of fractional reserve banking is money being in more than one location, and with more than one owner, at a time.

And when you desposit 100 dollars in a bank, it does not instantly become 1000. That bank can't lend out more than 90 dollars. But the 90 dollars it does lend out gets around. When that loaned money gets deposited in another bank, 90% is loaned out again, and you get the recursive loaning out to ~1000. And that poof is inherent in the concept that money can be in more than one place at once, and has existed since the first merchant extended a loan.

[Loki]

Well, now, that's just completely inaccurate. The promissory notes and credit offered by merchant-bankers were most definitely what we'd think of as full reserve banking, because those were based on their actual profits and existing capital. They would not issue more promissory notes than they could pay off in short order, as the notes weren't circulated like currency, and were generally expected to be redeemable for "real" currency almost on demand... but it was easier and safer to carry a piece of paper across Europe than lug around heavy chunks of precious metal, so the notes issued by merchant bankers were seen as a service, and generally redeemed for less than they were issued for. Essentially, a fee for the convenience of having the Medici protect your gold and arrange for it to meet you at your destination.

Goldsmiths who kept the gold of people in the village regularly lent out more money than they had in gold reserves. I have no idea what they thought an appropriate reserve ratio should be, but there could and were runs on the "bank" that resulted in people losing their gold. No banking system can rely on lending out only as much money as it has (not if it wants to make a profit anyway).

[CitizenCain]

The essence of fractional reserve banking is money being in more than one location, and with more than one owner, at a time.

No, the essence of fractional reserve banking is money being promised to more than one person at once.
Money, like everything else above the realm of quantum mechanics, can only exist in one location at any point in time.

And yes, it's actually an important distinction when dealing with currencies that have inherent value, and aren't essentially worthless paper pictures of dead people.

And when you desposit 100 dollars in a bank, it does not instantly become 1000. That bank can't lend out more than 90 dollars. But the 90 dollars it does lend out gets around. When that loaned money gets deposited in another bank, 90% is loaned out again, and you get the recursive loaning out to ~1000. And that poof is inherent in the concept that money can be in more than one place at once, and has existed since the first merchant extended a loan.

No, not quite right.

1) The velocity with which money changes hands in our current economies means that it might as well "instantly" poof into $1000. (Actually, an adjusted value below that which accounts for currency churn and bank liquidity variable. Same difference for the purposes of this discussion, as far as I'm concerned.)

2) No, this is not inherent in the idea of money being promised to multiple owners at once, nor is it a result of the first loan ever made. It's an inherent quality of combining recursive loaning with fiat currency. When you have commodity-based, or commodity currency, like you did at the advent of fractional reserve banking, there is no magiking of money into existence - you either have the money, or you don't. If you're in possession of the gold/silver/etc, you have the money. If you have a note saying you're entitled to some amount of money, you don't have the money. You have the promise of whomever issued the note that you'll be able to collect some amount of money from them. And, as is, the nature of promises, this note, this promise has no inherent value in and of itself.

The money multiplier effect only arises when people make promises based on nothing but someone else's promise. When, instead of having notes issued only on the backing of some quantity of actual value, you have notes of no inherent value issued based on... other notes of no inherent value. More commonly known as... fiat currency.

Goldsmiths who kept the gold of people in the village regularly lent out more money than they had in gold reserves.

Right, and thus fractional reserve banking was created. By these goldsmiths. Not by the merchant-bankers like the Medici and the Junkers and... well, the other not so famous ones. Isn't that what I said?

[Loki]

Why do you think a commodity like gold has significant inherent value? Surely you realize it's expensive only because people (mostly Europeans) decided it's a good store of value, not because it's shiny (there's a very large supply, and it's not particularly useful). What's to prevent people in the future from deciding that the value of gold should be contingent purely on its actual uses? If you're going to monetize a commodity, why not do it to wheat or rice? At least they have some real utility, particularly during times of crisis.

[Hazir]

Goldsmiths who kept the gold of people in the village regularly lent out more money than they had in gold reserves. I have no idea what they thought an appropriate reserve ratio should be, but there could and were runs on the "bank" that resulted in people losing their gold. No banking system can rely on lending out only as much money as it has (not if it wants to make a profit anyway).

The difference was of course that in those times, the banker who miscalculated got thrown into prison and lost the shirt of his back. In present times bankers who miscalculate risk get a bail out and a bonus for not being kicked out of their jobs.

[CitizenCain]

Why do you think a commodity like gold has significant inherent value? Surely you realize it's expensive only because people (mostly Europeans) decided it's a good store of value, not because it's shiny (there's a very large supply, and it's not particularly useful). What's to prevent people in the future from deciding that the value of gold should be contingent purely on its actual uses? If you're going to monetize a commodity, why not do it to wheat or rice? At least they have some real utility, particularly during times of crisis.

Well, actually, gold's physical properties do make it unusually well-suited for use as a currency, which is something of an answer to your question. Though, I suspect the point you're trying to make is that gold has value only because people think it has value, not because it's inherently valuable. I know that. And just to be an ass, I'm going to point out that it's also accurate to say people think gold has value only because it actually does have value.

Also, contrary to your assertion that it's not particularly useful, it is extremely, and in some cases, uniquely useful, most notably in the medical and "high tech" sectors. Perhaps you meant to point out that it had no industrial uses prior to the 1900's, and current uses only require minute amounts of it?

Just to be clear, I'm speaking of gold because that's the historical example, (and the current one too - no nations stamp bullion coins out of wheat) and the one I'm most familiar with, not for any other reason. The salient point (from my previous post, at least) was that it's the difference between fiat and commodity currency that allows money to be magiked into existence, not the particulars of what commodity is used as backing. If the historical example was potato-smiths issuing multiple notes for each potato they had on deposit, I'd have used that, but it wasn't, so I didn't.

The difference was of course that in those times, the banker who miscalculated got thrown into prison and lost the shirt of his back. In present times bankers who miscalculate risk get a bail out and a bonus for not being kicked out of their jobs.

Be fair.

The root miscalculation of risk in this scenario was the banks accepting the guarantee of the federal government as "risk-free," when, in fact, the government exempted itself from its own laws (as always), failed to make good on its guarantees, and then blamed the people they lied to for the whole mess.

In other words, politics as usual, and the entire history of the world.

[Hazir]

So you're saying that people should be forgiven for being overly dependent on the government? Who are you and what have you done to CK?

[LittleFuzzy]

No, the essence of fractional reserve banking is money being promised to more than one person at once.
Money, like everything else above the realm of quantum mechanics, can only exist in one location at any point in time.

And yes, it's actually an important distinction when dealing with currencies that have inherent value, and aren't essentially worthless paper pictures of dead people.

No currency really has inherent value. You think the price reflects the real value of gold? Or diamonds? The closest an item can come to having a real value is the value of the functional *note that decorative is non-functional* use it can be put to. Everything else is transitory.

No, not quite right.

1) The velocity with which money changes hands in our current economies means that it might as well "instantly" poof into $1000. (Actually, an adjusted value below that which accounts for currency churn and bank liquidity variable. Same difference for the purposes of this discussion, as far as I'm concerned.)

2) No, this is not inherent in the idea of money being promised to multiple owners at once, nor is it a result of the first loan ever made. It's an inherent quality of combining recursive loaning with fiat currency. When you have commodity-based, or commodity currency, like you did at the advent of fractional reserve banking, there is no magiking of money into existence - you either have the money, or you don't. If you're in possession of the gold/silver/etc, you have the money. If you have a note saying you're entitled to some amount of money, you don't have the money. You have the promise of whomever issued the note that you'll be able to collect some amount of money from them. And, as is, the nature of promises, this note, this promise has no inherent value in and of itself.

The money multiplier effect only arises when people make promises based on nothing but someone else's promise. When, instead of having notes issued only on the backing of some quantity of actual value, you have notes of no inherent value issued based on... other notes of no inherent value. More commonly known as... fiat currency.

Your objection is that fiat currency is imaginary. See what I wrote above, all currency is imaginary. The only non-imaginary system of exchange is a direct barter of immediately-useful goods and services for the two (or more) bartering agents. Which is cumbersome and inefficient which is why we have agreed to the shared cultural delusion that is assigning value beyond the functional to an item so it can be used in lieu of that direct exchange. You suggest to Loki that gold has value in that it can be used in medical or high-tech applications. But that's not true, it only has such value if you're bartering with someone who makes use of that. Otherwise you're pretending it has a value you might *or might not* be able to derive at some later date, if such an agent has something useful to you. There are no effective middle-men in a real barter economy, making no use of imaginary value.

Right, and thus fractional reserve banking was created. By these goldsmiths. Not by the merchant-bankers like the Medici and the Junkers and... well, the other not so famous ones. Isn't that what I said?

I said money-lending merchants or longer and went on to suggest it exists with all borrowing of a non-functional good i.e. currency.