Thursday, April 18, 2013

Sometimes it Pays to Read the Comments

Ritholtz posted a clever but instructive skewering of gold mania. He got some of the predictable blowback.  In response to the blowback, Ritholtz said "Paper money is backed...  a collective belief system — so is gold — but the fiat currency also is backed by the ability to tax and have a standing army."  Responding to Barry, comes now a certain "Carchamp1," otherwise unknown to me:

Consider that, despite conventional wisdom, fiat currency, or paper money, is backed by far more than general collective belief. When you think about how a fractional reserve system works, a currency is backed by productive enterprise and work. In a fractional reserve system, money is, yes, created “out of thin air”, but it is loaned out with some confidence that it will be paid back.

Now, as we saw with the housing bubble, capital is sometimes employed very poorly. When that happens we ultimately get a contraction, sometimes a very powerful one. This is inherent in fractional reserve systems. That is, it is supposed to happen. It is part of the plan.

While I think the idea of having a few bankers at the Federal Reserve pull the switches on monetary policy should be looked at (could this be done in a market-based approach?), I tend to think the fractional reserve system is pure genius. Probably never heard that before.
 Okay, I grant this may not be Nobel quality, but how often do you here anybody mount any defense at all of "fractional reserve banking?"  [Still as a general rule--I'd venture that any comment thread including both "fiat money" and "fractional reserve banking" is probably not worth the eyeballs.]

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