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Money Reform I

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Pasha99
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Zuhal
Post: #1
Money Reform I

Pretty straightforward, what is Money Reform I's effects on your nation, both short term, and long term?

02.02.2016 08:07
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Helsworth
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Post: #2
RE: Money Reform I

Pasha99 Wrote:
Pretty straightforward, what is Money Reform I's effects on your nation, both short term, and long term?

They're not really traceable, except that it slightly increases your revenue. I don't really bother with it. In real life, if Governments control the money supply (keep the quantity fixed) - then they'll no longer be able to control the price of money (i.e. interest rates). Rates would fluctuate up & down willy nilly. To my knowledge, no central bank in the world does supply targeting anymore. They used to do that in the past - & they saw that they couldn't have price stability that way. So they decided to let the quantity fluctuate in order to keep the interest rate stable.
The money supply is endogenously determined by private sector behavior (endogenous money creation & destruction) - people leveraging & deleveraging.
The vast majority of the money supply is bank credit; the rest of it represents government debt or HPM (high powered money). Government debt takes 3 forms: - cash & coins, reserve accounts at the Central Bank, saving accounts at the Central Bank (treasuries).


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02.02.2016 09:08
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Lord Alexander
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Post: #3
RE: Money Reform I

I heard that in the game the Money reform I may slightly reduce the fluctuations of Nominal interest and Money supply that happen due to the drastic changes in the economy, but this effect is definitely not very strong.

I do not think that its description is actually saying that the money quantity necessarily will be staying fixed through the year, only that the government will have more means to regulate the fluctuations of money supply.

02.02.2016 11:47
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Helsworth
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Post: #4
RE: Money Reform I

The reform's description is based off of loanable funds theory (fractional reserve banking), which is a myth.
http://www.debtdeflation.com/blogs/2012/...e-banking/
In real life, banks don't loan their deposits to customers, nor do they loan reserves to customers. Banks are the originators of loans, they are NOT intermediaries. So even if you'd enact MR1, given its description, banks could acquire retail deposits only if the CB would approve it - but in no way would it prevent banks from creating deposits via lending (loans create deposits). And in no way would it prevent banks from buying wholesale deposits from the money market - a cheaper alternative than going to the CB's discount window, which that too is cheap also.
As for the last line in the reform's description, it doesn't say anything that isn't true pre-reform. Gov spending adds financial assets to the nongovernment sector. If Gov is spending more than it's taxing, the net in the nongovernment sector is going to be positive. Net fiscal deficit funds enter the economy as an excess of bank reserves, upon which the banks compete to turn into loans & deposits. (They leverage off of HPM)
Excess reserves put downward pressure on the interest rate, which could hit zero if the Central Bank isn't paying any interest on reserves. As such, given the legal framework - in most countries, Gov has to match every unit of currency deficit spent with interest bearing securities to match - the Central Bank defends its overnight interest rate by draining those excess reserves with interest bearing securities. It's a SWAP operation. Banks lose one type of asset (reserves, which may or may not earn IOR) in exchange with another (treasuries). The Central Bank changes one liability on its balance sheet with another. All that happens is some nrs are transferred from a checking account to a savings account.

What I would do is regulate endogenous money on the asset side; i.e. define what type of assets banks can hold & for what purposes they may lend. Then, I'd just nationalize the banking system & have the profits distributed evenly to the local governments, which could use the money. Additionally, since the inter-bank market serves no public purpose, I'd replace it with the CB simply lending unsecured & in unlimited quantities at its target funds rate to the banks.
To quote Mosler"

Quote:
The Fed also tends to set quantity limits when it lends to its member banks, when there is every reason to instead lend in unlimited quantities. Bank lending is not reserve constrained, so constraining lending to the banks by quantity does not alter lending. What constraining reserves does is alter the fed funds rate, which is the rate banks pay for reserves as well as the Fed's target rate. So the only way the Fed can fully stabilize the fed funds rate at its target rate is to simply offer to provide unlimited funds at that rate as well as offer to accept fed funds deposits at that same target rate. And with no monetary risk or adverse economic consequences for lending unlimited quantities at its target rate there is no reason not to do this. Another benefit of this policy would be to entirely eliminate the inter bank fed funds market. There is no public purpose served by banks trading fed funds with each other when they can do it with the Fed, and transactions costs are reduced as well. And to eliminate the inter bank markets entirely the Fed has the further option to provide funding with an entire term structure of rates to its banks to both target those rates and also eliminate the need for any inter bank trading.

http://www.huffingtonpost.com/warren-mos...32105.html


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This post was last modified: 02.02.2016 16:30 by Helsworth.

02.02.2016 15:59
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Lord Alexander
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Post: #5
RE: Money Reform I

Nothing in the reform description suggests that the wholesale deposits will be excluded from the new rules.

And even though you are right that the “Money Reform I” does not affect the ability of banks to take and lend credits, it does not mean that the state does not already possess the means to somewhat regulate this process by obligating the banks to maintain some level of reserves and by rigorously enforcing this constraint. Together with such regulation the provisions of the “Money Reform I” theoretically should noticeably increase the government's ability to regulate the banking system, interest rates and money supply.

03.02.2016 12:34
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Helsworth
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Post: #6
RE: Money Reform I

Lord Alexander Wrote:
Nothing in the reform description suggests that the wholesale deposits will be excluded from the new rules.

For such a thing to be true, MR1 should increase the statism index by a huge amount. The reform doesn't do that. MR1 is just an attempt to discipline banks on the liabilities side (an exercise in folly), because the way to discipline them is on the asset side (what loans they can issue, for what purposes & in what conditions). Banks are already regulated well on the liabilities side via government deposit insurance. The reform's description tells nothing about how the Gov would "control" endogenous money. The rest of the reform's description is already present within the system. Those banks who are below the reserve minimum & who can't settle it via the interbank market - then the Central Bank treats it as an automatic overdraft. In the end, the bank in question will have to settle that overdraft with the CB. Any profits the CB makes from its operations it sends to the Treasury & to its member banks.
For example, the US FED.

http://www.federalreserve.gov/newsevents...50109a.htm

Banks are not reserve-constrained in their lending. Even if my bank is below its minimum, and a customer comes in who qualifies, I will not turn him down for a loan. Trying to constrain banks on the liabilities side (what amount of deposits they can have or what ratio of deposits they must have between retail & wholesale) is born out of orthodox theory. It's the money multiplier myth. They think, oh, banks loan people's deposits - so if you constrain them on the liabilities side, banks will lend less. That is a fantasy. It won't stop endogenous money creation/destruction. However, it might increase the cost of banking for everyone & it might benefit the large banks - since they can easily attract retail deposits because of their huge budget dedicated to advertising - while smaller banks don't have that luxury & notoriety. Rules that say - banks must keep a certain % of deposits as retail deposits is just there to benefit the too big to fail guys & punish the smaller banks. Hence why proper asset side rules are necessary, whether you're talking about a private or nationalized banking system. In both cases the system is dangerous if it's not regulated.


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This post was last modified: 03.02.2016 18:38 by Helsworth.

03.02.2016 18:18
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Lord Alexander
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Post: #7
RE: Money Reform I

Helsworth Wrote:

Lord Alexander Wrote:
Nothing in the reform description suggests that the wholesale deposits will be excluded from the new rules.

For such a thing to be true, MR1 should increase the statism index by a huge amount. The reform doesn't do that.

In this game neither the Bank Reform I nor the Planned Economy reform increase the Statism index, so this argument is simply not valid.

Quote:
The rest of the reform's description is already present within the system. Those banks who are below the reserve minimum & who can't settle it via the interbank market - then the Central Bank treats it as an automatic overdraft.

One of the comments to the Steve Kleen’s article “The Myth of Fractional Reserve Banking” correctly points out that not all Central Banks in the world are as tolerant as US FED toward the banks that break the rules about neccessary levels of bank reserves:
http://www.debtdeflation.com/blogs/2012/...ment-39937

This post was last modified: 03.02.2016 19:57 by Lord Alexander.

03.02.2016 19:36
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Helsworth
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Post: #8
RE: Money Reform I

All Central Banks have the overdraft *discount* facility. The overdraft means that the bank who is below its minimum gets a loan from the CB, which it must clear in the near future. If it can't clear it; then it gets into trouble & it will no longer be able to settle payments.
Yes, you're right - the statism index in AR has issues. I haven't experimented with Planned Economy, only once long ago...
As for that comment regarding Bulgaria - Bulgaria worked under a fixed exchange rate system & it had a currency board. (talk about neocolonialism)
Few places have fractional reserve banking, like Hong Kong. However, none of the major countries have it. Like: Australia, Russia, Turkey, Israel, US, UK, Canada, the EZ countries etc. I would include Romania as well, albeit it's not a major country. Big Grin


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This post was last modified: 03.02.2016 20:00 by Helsworth.

03.02.2016 19:48
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Lord Alexander
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Post: #9
RE: Money Reform I

The fact that most of modern governments have the tendency to allow banks to de-facto exceed the limits dictated by the obligation to maintain the necessary levels of bank reserves does not mean that the same should be the case in the player's state. If the government is strict with banks, then the provisions of the Money Reform I will help the government to regulate the banking system, interest rates and money supply, and if it is lax toward them, then the Money Reform I will be quite useless.

Money Reform I only provides the government with some tools to discipline banks, but not forces it to actually use them. This is why in the game it only causes mild consequences, not strong ones.

03.02.2016 20:38
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Helsworth
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Post: #10
RE: Money Reform I

Well, since the player has to "manually" increase the money supply in order to keep up with GDP growth is evidence enough that the game is not realistic. Because in reality, the vast majority of the money supply is represented by bank debt. All the CB does is add & drain reserves in order to reach its overnight rate.
Banks can fail & they do. Just not the big ones, because they cause a domino effect. The smaller ones the establishment allows to fail because they don't create so much waves in the economy or in the press. It's not just at all.
Bank reserves are used for accounting & settlement purposes. With reserves, banks settles transactions with themselves & with the Treasury & the CB. The fact that we have a smooth system of payments & that 1$ bank IOU is worth 1$ bill is a testament to the government's institutions & legal framework. If it weren't for government deposit insurance - we would have seen the biggest bank runs in recorded history. We would have seen local governments filing for bankruptcy & ceasing activities & huge social unrest. The problem was that the banks were bailed out without the bad bankers being prosecuted & without a careful sorting between the lawful claims & the fraudulent ones - and that the public at large had to take cuts to social spending & tax increases. It would be the easiest thin in the world for a bank to force its customers to take a haircut when the value of its loans shrinks vis-a-vis the value of its liabilities (i.e. deposits, the value of which stays fixed). There's nothing worse, I'd imagine, for the average working citizen to wake up that his salary card no longer works. That his checking & savings account is blocked. That he can't obtain bills from the ATM, because his bank is in the gutter. Why? Because it issued dodgy loans, trying to speculate on market prices. So you see, the corresponding deposits to those loans are NOT the problem - the problem lies with the loan which originated them. That's why rules on the liability side DON'T prevent bad banking practices.

Returning to MR1's specific in game effects. I wouldn't catalog them as "mild" but rather "almost non-existent."


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This post was last modified: 03.02.2016 22:37 by Helsworth.

03.02.2016 22:36
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