Quote from: johnyj on February 13, 2015, 05:29:28 PM

You can open a bank and practice FRB, but with an empty bank you can not do anything, you must first have some customer deposit (real money) before you start to do FRB

Suppose a bitcoin banker have 100 bitcoin, then under a 10% reserve ratio, by lending the same coin out again and again, the maximum checkbook numbers he could create will never exceed 1000 bitcoin, anything beyond that is impossible. In another word, he can not issue IOU endlessly without increasing the base money supply

The only way for him to generate more checkbook money is to get more real bitcoin. If he get another 100 coins, then his check book money could reach 2000 bitcoin maximum, and these extra 100 coins must be mined by the miners with real cost

But in today's financial system, those extra 100 bitcoins are not mined, they are created as base money by using Real Bills Dorctrine principle that I described in detail throughout this thread. With RBD, there is no limitation on how much money that you can create, because it is effectively a double spending, creating purchasing power out of nothing

Well, the point is that it is one or other policy that determines how much base money there should be. But even with a RBD, the amount of money that can be issued is not unlimited: it is limited by the amount of value that is available as the stuff that is to be bought by the base money issuer (the central bank). If it is gold for instance, then the central bank cannot issue more money than there is gold available to be bought (of course, the more the central bank issues money, the lower the value of the money is due to inflation, and the more the bank can print to buy yet another oz of gold - but this is a finite effect).
Once the central bank has bought up all the gold, there is no way anymore to issue money, and the amount of base money is fixed. Until one changes the rules, and the central bank will now buy up, I don't know, land, or real estate. Until it has bought up all the real estate that is for sale. Then it cannot issue bank notes any more, again. Until something else is allowed to be purchased.

That said, some central banks have "automatic" targets. The ECB for instance has a CPI inflation target of 2%. It should in principle issue money such that that target is reached. They are panicking right now, because they cannot reach it.

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If you look at the M0 money supply of US, it has been increasing very slowly following GDP until 2008, and it suddenly exploded following the start of QE, now it is 5x more than pre-crisis level

Yes, but at the same time, the reserve ratio has been pulled up, so that the actual money creation is actually quite small.

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If you look at M2 (which measures chekbook money plus base money), the change is quite consistant, thus many people think that the QE works well. But under the hood, the components of M2 has changed: The increase of checkbook money has mostly been stopped following the deleveraging effort from the banks, now their reserve ratio might be as high as 60%. On the other hand, the number of base money increased by more than 3 trillion, if you consider the M2 increased only 4 trillion during this years, that means most of those increase comes from the increase in M0, and when that 3 trillion base money when muliplied later on, can become 30 trillion M2

Indeed. But the idea is to keep higher reserve fractions (Baal III agreement).

So this QE is in part to compensate for this contraction of the leverage.