Various macromancers around here, for a year now, have been dishonestly claiming that there are efficiency gains via fractional reserve.
This is totally ridiculous.
I simply don’t know why the fractional-reserve-at-any-cost crowd try this on.
But look at this introduction to this modelling study based on statistical realities.
These guys are trying to model the damage that oscillating demand does.
And its pretty clear that it leads to a higher optimal inventory level. As do higher rates of monetary growth.
This is powerfully inefficient as the IDEAL!!!!!, where it can be acheived, is Just In Time management.
Most of the time you’d have to compromise and settle for something short of JIT but one should always at least be moving in the DIRECTION of JIT where you can.
Just in time management is very hard to acheive along the supply chain because no one firm is likely to be able to do it unless everyone else is working on a similiar basis.
People who have studied accounting will know just how surprisingly profits can be increased by attention to inventories and attempting to bring these inventories down to low levels.
There is therefore massive social costs to this oscillating and high-growth-rates in money supply and velocity. Since it buggers everyones abilities to reduce their inventory levels down the entire supply chain.
It does this in such a way that few individual firms would have the willingness, incentive or ability to overcome the inherent problems involved with getting closer-to-JIT.
Of course its a marvellous thing when a lucky-smart company manages to get to a stage where they can employ near-Just-In-Time management.
We see the powerful successes with Walmart, Dell and Aldi.
But if we want this powerful improvement in productivity to be ubiquitous than we clearly need to combat this constant lying that there are efficiency gains to fractional reserve.
You know throughout the threads of doom, this constant refrain that there were efficiency arguments for fractional reserve kept coming up. But only ever in a mean-spirited jack-in-the-box way.
The dogmatic unproven assertion was made without explanation and than the monetary-crank would dart away and take refuge behind lying accusations of the other guy being a socialist…
So the lying bastards would never sit still for an answer.
This hateful shitrain of faux-falsification-Popper-mockery would be going round the clock where the fractional-reserve-since-I’m-really-a-mindless-Keynesian-crowd would jump from foot to foot…
…..at one minute putting on the anarcho-capitalist hat in the most mendacious way even though the proponent was really for rampant government involvement in money.
Ask the macromancer about efficiency….. they jump to anarcho-capitalism….. Like remove all regulations at once or give me a matyrs death…..
But than ask the macromancer about total deregulation and why they didn’t support it… or why they did support it…….
… And its about this time that the jerks doing this crazed foot-hopping evasion would come out with the ripping yarn that there were efficiency gains from fractional reserve.
But of course they were typing cheques that their brain could not cash. And no efficiency gains were found to be part of fractional reserve save the largely irrelevant matter of conserving a little bit on metals.
Now look at this study abstract:
“This paper develops an open-economy macroeconomic model which can be used to interpret the observed fluctuations in output, inventories,prices,and exchange rates in the medium-sized economies of the world.
The model is consistent with the major empirical regularities that have been discovered in studies of business cycles as closed-economy phenomena and in empirical studies of prices and exchange rates.
The empirical regularities are:
(i) changes in the nominal money supply cause real output fluctuations,
(ii) deviations of output from a “natural rate” show persistence,
(iii)exchange rates are more volatile than nominal prices of goods, and
(iv) depreciations of the currency coincide with deteriorations of the terms of trade.
A controversial aspect of the model is that only unperceived money has real effects.
(GMB sez: Not true in reality but acceptable for a simple computer model)
The channel through which these effects arise involves a misperception by rational maximizing firms of the true demand that they will face after having set prices.
The firms learn about their environment from equilibrium asset prices, and the dynamics of the model reflect the optimal response of inventory-holding firms rather than ad hoc price dynamics.”
That last paragraph is the take home story.
And we know what the effect will be without having to model it.
All firms will have a tendency to be forced into holding more inventories than they otherwise would.
Or perhaps to put it better they will be less vigilante in keeping their inventories lower.
And since this is an effect on all firms at all times it means the entire economy is massively hampered.
The firms will be getting about with higher inventories than would be natural under 100% backed growth-deflation because of:
1. High monetary growth.
2. Oscillating monetary growth.
3. Consequent oscillating demand-for-money-for-holding.
4. The company tax also will water-down the pursuit of near-JIT-behaviour since the company tax dulls the cost-cutting vigilance of company decision-makers.
Getting closer to JIT is HARD WORK. Its a hassle. It doesn’t come naturally and the understanding that massive potential profits can be gained by making the effort to get closer to JIT amounts to a form of esoteric knowledge.
When we’d do case studies in university this came as a major surprise.
And once I was asked by a factory hand studying part-time to help him with a case study and the shocking nature of profit improvements possible attendant upon better inventory management was brought back to me again.
Over the years I’ve wanted to push for a project to Get-Closer-To-JIT in the places I’ve worked in.
I tell you the truth. Unless we get to 100% backed growth-deflation we will take a lot longer getting such projects off the ground.
It involves a shitload of effort and would also involve annoying your suppliers and the people you supply.
But what I want to know is where these macromancers think the efficiency gains from fractional reserve come from?
Its just ignorance, crazy-talk, confessions of ineptitude, and appalling Popper-mockery in epistemology.
I think we have to face it that people turn completely nutty when they start talking money.
It appears that most economists out there are monetary cranks.