[economics 101] eazy peazy if explained simply

There is a logical problem with economics.

The Tim Worstalls, Chris Dillows, Cityunslickers, Karl Denningers and Sackersons who actually understand this guff are fond of either graphs, esoteric references or eco-speak [Sackers is at least partly understandable] and tend to mutter to each other in their communities.

But it must be obvious to even Blind Freddy and his dog [wait for the PCers on this one] that the average person, e.g. me, is so awestruck by this fractional reserve banking and so on that he hurriedly shuffles to one corner and lets the big boys get on with it.

Well this blog thinks it's time economics is explained in words of one syllable or less to non-afficianados and this humble blogger is going to start the ball rolling. Today I'd like to look at:

Fractional Reserve Banking

Before that, it's bona fides time. As a non-economist, one has to start somewhere, so Lew Rockwell seems pretty good to me, as he was at World Net Daily and this is Vox's hideout and I trust Vox [even in intergalactic mode].

Rockwell seems to be in awe of Murray N. Rothbard who in turn is in awe of the Austrian School:

Austrian economists reject statistical methods and artificially constructed experiments as tools applicable to economics, saying that while it is appropriate in the natural sciences where factors can be isolated in laboratory conditions, acting human beings are too complex for this treatment. Instead one should isolate the logical processes of human action ...

Now that seems like a damned good model as it eliminates all those pesky graphs and projections and seems pretty libertarian to boot.

So, on that basis, I'd like to quote Rothbard on FRB. This is a long article for a blog [though short by eco-standards and no more than a synopsis for them]. I put only a brief portion here and please follow the link for the full thing:

Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here).

Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones.

Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.)

Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

This is one small reason [another being the global sub-prime scandal] why this blog is so vehemently down on banks and cartels. Now if you are lost by this or you've simply lost interest, then it is my fault for not cranking it down to more understandable and bite-size terms.

I'll hopefully do better next time. I'm working on it.