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Pragmatic Capitalism

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flexible money supply

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Our money supply can grow or shrink based on bank activity, but is this in reality, or only a theoretical? I have seen no evidence that the money supply shrinks, which makes sense, as a growing population should have more people buying cars and houses using bank loans over time. If the money supply does threaten to shrink, central bank actions will be taken to stop deflation and make sure the money supply doesn’t shrink.

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Posted by laskerfan12
Posted on 01/14/2017 8:22 AM
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There is no theory here. When banks make new loans they expand their balance sheets from thin air. When people pay back loans those balance sheets shrink. But, since there is always more issuance than repayment then you see the money supply expand in the long-term. That’s a good thing as it means there is new economic activity.

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Cullen Roche Posted by Cullen Roche
Answered on 01/15/2017 3:03 PM
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    Just a random thought… is that due to the fact that issuing loans is essentially a zero duration activity and relatively easy to do, but loan paybacks are typically amortized with a duration period substantially higher?

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    Posted by MachineGhost
    Answered on 01/16/2017 3:22 PM
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      laskerfan12: “I have seen no evidence that the money supply shrinks…” Well, I have. There is a second way the money supply can sink. When loans are in default and the underlying collateral “stinks” we have shrinkage of the money supply. It just goes up in smoke and disappears behind mirrors. Cullen has typed about this in general, many times. When this happens on a large scale, this is very difficult for the central banks or banks owned by sovereign countries. Deficit spending by the government can help to a degree getting production, profit margins, and market share (e.g. growth), going up again. But those stimulus funds should not be “borrowed” from other countries and should be used to make things the public needs (not lower taxes IMHO). A default at a national level would cause the underlying currency to likely go into a “death spiral”. We almost had this in 2009 worldwide. The central banks were able to fend off a collapse because they took the bad paper off the market. But, they were unable to jerk up the money supply and thus growth, via lower interest rates. It was slow and steady, however. I’m of the opinion that slow and steady economic growth, without the “business cycle” and it’s extreme ups and downs, is now possible……. But, people in charge have to understand where money comes from and where it goes. Thank you, Cullen. I think this is why Cullen is more optimistic than most about a Trump economy they will be managed by rich folks.

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      Posted by Dennis
      Answered on 01/16/2017 11:20 PM
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        I’m also hopeful that the new rules that have been put in place by our Fed will make these kinds issues no longer a problem. Banker VPs and their loan origination staffs should not fund loans that they know will likely have a low probability of being repaid, and sell them off for cold hard cash to unsuspecting honest investors. Nor should banker VPs and their account origination staff be allowed to sign up folks for multiple accounts without them even knowing about it. But, this can be fixed, and our Fed chairs have worked on this problem and now have lots of new regulations that can be enforced by the powers that be. Now we are protected from these scum bags.

        Oh sorry, these regulations are about to be canceled. Never mind.

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        Posted by Dennis
        Answered on 01/17/2017 12:04 AM
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