“the real bills view of this loan expansion process is that neither bank causes inflation, since both have adequately backed the money they have issued.”

What has that got to do with anything?

Nothing.

Its a strange ideology. It sounds like taking bridging credit and elevating it to the status of a major philosophy. If it adds to the money supply then its inflationary and since its fiduciary money supply its potentially deflationary. Because it can dissapear again in an unpredictable fashion.

To repeat….. the two concepts are unrelated. Just because you think a bank is ‘adequately backed’ after the creation of more fiduciary money, and hell it may well be. But just because its adequately backed it does not mean that what it is doing doesn’t add to the money supply. And if it adds to the money supply then its inflationary.

“…. as call options don’t affect the value of their base security…..”

Well that’s debatable too. They ought to affect it. Because the owner of those call options will obtain possesion of the base security if the price of that base security rises above the call price during the option period. And then he may sell these securities at the current price pocketing the difference and helping drive the price down.

“.. checking account dollars don’t affect the value of the paper dollars….”

This sounds like “As the potato grows on the highest branches, so too will the tomato roll up the sides of hills left unchecked.”

Hi Paul,

Thanks for your input earlier Paul – I have a question . I’ll paste your analysis below.

“Day 1) We’re good: depositor deposited $100 in checking account.
..ASSETS..|..LIABILITIES
——————————–
$100 cash.. | $100 checking deposit
Day 2) Already fraudulent $90 loan is created here (10% reserve maintained).
..ASSETS..|..LIABILITIES
———————————
$100 cash…|.$100 checking deposit
.$90 Loan…|..$90 checking deposit (thin air)

This may be what you call leveraging, but it is also FR lending and it increases the money supply by virtue of increasing checkbook deposits by the amount of that $90 loan.”

Where does the $100 that was deposited in the first instance come from ?

Surely its only source can be government spending or (gulp) money creation?

Try the analysis assuming no savings or deposits exist in the private sector, and the FED and government are unwilling to intervene or spend?

how will that effect the analysis?

Sorry for my poor writing style, its very difficult to understand. But I really think the orthodox view of the monetary financial sector is a FERP = Flat Earth Research Program.

Cheers.