Just giving people money turns out to be the most effective way to end poverty.

[Essence]

No, I am arguing that it is impossible to increase everyone's purchasing power.

And you're absolutely right! It's impossible to increase everyone's purchasing power -- but because the wealthy have already peaked out their purchasing power (but still have mad income beyond that) and the poor have not, you can increase overall purchasing power by moving money from the wealthy to the poor.

Wealth redistribution does not introduce additional wealth into a system, so the increase in a person's purchasing power must be balanced by an equivalent decrease in someone else's purchasing power.

Not at all.  Let's say I'm Bill Gates.  My purchasing power is limited by the amount of stuff that I can consume per second, which is finite and significantly less in value than my income. So for every second that passes by, the amount of money that I bring in overflows my purchasing power. There's nothing I can do about that, because I don't need or want anything that I don't already have. If I gave some of my income to someone who needs and wants things that they don't already have, I'm increasing the total purchasing power of the system.

It's not a zero-sum game, because you have players in the game who are actively removing wealth from the economy.  By moving the wealth from those players to the players who move wealth into and through the economy, you're changing the amount of functional wealth en toto.

Possession of wealth does not 'remove wealth from the economy'. One does not literally 'sit on a pile of cash'; The money must be re-invested to have any value. When a person puts money into his bank, for example, the money does not exit the economic system. Rather, the bank reinvests the money on the person's behalf.

This is simply wrong. Read the PDF I linked to above -- there is an absolute limit on the amount of money that banks can lend out, based on the amount of risk that they're willing to take on and on the willingness of the borrowers to borrow.  When the People are risk-averse, as we've all been since the economy crashed, the banks literally cannot lend out as much money as they have sitting in the accounts of their richest patrons. That money is, for every purpose, removed from the economy, because there's no way for it to be reinvested. There's no borrowers because there's no one willing to risk going into business, and there's no one willing to risk entrepreneurship because there's no demand, and there's no demand because the lower and middle classes don't have enough money to create demand.

This is exactly the situation that redistribution of wealth is designed to resolve -- by moving money directly into the hands of the poor, demand increases, thus entrepreneurship increases, thus the banks are able to invest their money again, and your naive theory once again holds true until the next time that too much money piles into the hands of the very wealthy.

By definition, wealth redistribution is a zero-sum game. In order for someone to gain wealth, someone else has to lose wealth. Therefore, it is impossible for everyone to gain wealth.

Again, true, but irrelevant. The point is not for everyone to gain wealth in the short-term, single-exchange sense. The point is for the system as a whole to become more active -- for the GDP to rise. The rich absolutely will lose some of their net worth -- but when the top 400 people in the US make as much as the bottom 50% of people in the US, you have to ask yourself at what point do you put the economy of your country above your personal desire to add another zero (that you'll never in your lifetime be able to use) to your bank account?

[cometbah]

Wealth redistribution does not introduce additional wealth into a system, so the increase in a person's purchasing power must be balanced by an equivalent decrease in someone else's purchasing power.

Actually, that statement is totally wrong. There is no such thing as 'a person's purchasing power'. Please ignore that - sorry.

What I meant was:  because wealth redistribution does not introduce additional wealth into a system, the increase in a person's wealth must be balanced by an equivalent decrease in someone else's wealth.

The purchasing power of money stays constant as long as the amount of money in circulation and the amount of goods available for purchase stay constant.

Possession of wealth does not 'remove wealth from the economy'. One does not literally 'sit on a pile of cash'; The money must be re-invested to have any value. When a person puts money into his bank, for example, the money does not exit the economic system. Rather, the bank reinvests the money on the person's behalf.

This is simply wrong. Read the PDF I linked to above -- there is an absolute limit on the amount of money that banks can lend out, based on the amount of risk that they're willing to take on and on the willingness of the borrowers to borrow.  When the People are risk-averse, as we've all been since the economy crashed, the banks literally cannot lend out as much money as they have sitting in the accounts of their richest patrons. That money is, for every purpose, removed from the economy, because there's no way for it to be reinvested.

The PDF document describes how new money is created. It does not imply that whatever money goes into banks exits the economic system.

The main argument of the document is exactly that banks do not use existing savings when lending out money; they create duplicate, new money.

So when banks are unable to lend, they simply fail to create new money to put into the system. That which is already in the system is still in the system.

In any case, even if the rich were actually removing money from the system by sitting on them, burning them, etc. (which they really aren't doing), it is good news for the poor, because removing money from a system results in an increase in the purchasing power of money. The rich would just be rather idiotic for sitting on/burning their money.

[Essence]

There is no such thing as 'a person's purchasing power'. Please ignore that - sorry.

This statement totally baffles me. A person's purchasing power is equal to their spendable income times the purchasing power the dollar.  If a dollar has a purchasing power of n, and I have $500 that I can spend, my purchasing power is 500n.  The statement that there's no such thing as an individual's purchasing power is literally mathematically disprovable. If you can assign purchasing power to a dollar, you can assign it to a person based on the number of dollars they are able to spend.  That amount is limited by exactly two things: how many dollars they have, and how many dollars worth of goods they are willing to purchase.

All of the money that doesn't go into the "goods I'm willing to purchase" pile goes into other piles, and contrary to your repeated ill-informed arguments, several of those other piles don't contribute to the economy. The "money I've put into offshore investments" pile is often massive. The "money that's being stored in offshore bank accounts" pile doesn't contribute to the US economy, and it's a big goddamn pile, especially if you're very wealthy. The "money that is being stored in offshore trusts for my grandchildren" pile would startle you, and it doesn't contribute to the US economy, either. 

What I meant was:  because wealth redistribution does not introduce additional wealth into a system, the increase in a person's wealth must be balanced by an equivalent decrease in someone else's wealth.

Already acknowledged, but still irrelevant. Wealth redistribution doesn't introduce additional wealth to a system, but that's not the point. The point is to introduce additional economic activity into a system that has stopped (or dramatically slowed) growing.  But there's actually another point to be made here: when the economy grows, everyone benefits. Even the wealthy. They might have less absolute wealth in the short-term, but when the economy is growing, they benefit more than anyone else from all of the new inventions and services that an active capitalist market comes up with.  So there's actual incentive for wealthy people to want to redistribute wealth: it will give them fun new things to spend their money on. The wealthy in the US are simply too short-term oriented to think that far ahead. Literally, for them, it's better to have an extra never-to-be-used zero on their bank account than it is to have cool shit. And that's a problem.

The PDF document describes how new money is created. It does not imply that whatever money goes into banks exits the economic system.

Dude, are you brain-dead? If money is sitting somewhere and it's not being used for anything, what is it other than not participating in the economy? If nobody is borrowing the money from the banks, that money is, for all intents and purposes, nonexistent. It's not contributing to the GDP. It's not growing anyone any wealth anywhere. It's dead to the world.

In fact, the fact that banks create money by lending rather than relying on existing deposits takes that a step further and completely annihilates your argument that rich people's money that's sitting around in bank accounts is actually participating in the economy at all, ever.  If the banks don't need those deposits in order to lend, and lending is what stimulates growth, the banks don't need rich people to stimulate growth.

Money in the hands of rich people who can't spend all that they have is literally completely functionless. It's a waste. The banks don't invest it, so it's not helping anyone anywhere. It's sitting there being zeros on a screen and making some rich person feel rich.

[farscape]

One problem I see with your argument of wealthy people "sitting" on their money, or keeping it in a bank account that typically they just don't do that. Instead they are investing into various ventures. You brought up Bill Gates as an example, and indeed he is considered one of the wealthiest people in the world, however most of his wealth is tied up in various stocks and charity funds. This means it is still "contributing" to the economy even if he is not buying thousands of cars or spending it on other useless extremes.

[Essence]

Are you trying to tell me that Bill Gates doesn't have millions of dollars in various bank accounts?

[edit]In fact, I'm going to challenge you. Find a citation that backs up your argument. I don't doubt that it's out there, but I've actually never seen any hard evidence that rich people invest the majority of their money. It's an assumption we all make, but it's one that gets spouted by Fox News on a daily basis, which innately makes it something I'm inclined to doubt.[/edit]

[cometbah]

The PDF document describes how new money is created. It does not imply that whatever money goes into banks exits the economic system.

Dude, are you brain-dead? If money is sitting somewhere and it's not being used for anything, what is it other than not participating in the economy?

We don't use commodity money (e.g. gold).

The money you put into your bank account is not actually in the bank - it gets re-invested. It never exits the economic system. Your miunderstanding of how banking works is exactly the misconception the PDF document was trying to clear up.

Banks only retain enough money to satisfy a certain ratio (see: fractional reserve banking). That is the reason why banks can crash when their clients lose faith in them - too many clients try to withdraw money, but that money doesn't actually exist in the bank; they were re-invested into the economy.

That is also why banks can pay you interest. When you deposit money, the money doesn't 'sit in the bank' - they are immediately re-invested into the economy. The return of this investment for the banks is always greater than the interest you receive from them; it is one of the major sources of income for banks.

Currently, the reserve ratio required by U.S. law is 10% at most, and 0% for accounts with less than $13.3 million. For details, here is the government page: http://www.federalreserve.gov/monetarypolicy/reservereq.htm.

In other words, if there is less than 13.3 million dollars in your chequing account, the bank doesn't keep any of your money. Your money is immediately re-invested into the economy.

[Essence]

The money you put into your bank account is not actually in the bank - it gets re-invested.

You can't have it both ways, dude. Either the banks create money when they lend it out (which is the same thing as investing) -- which is that the Bank of England admitted to last week -- or they don't create money because the money they lend out is the money that someone else put in.  If they don't create money out of the money that gets deposited, that means that money in the bank is money that isn't being used for any purpose.

The Bank of England's paper doesn't destroy my understanding of the economy -- it destroys yours.

[cometbah]

See above for edit.

In the U.S., 10% of deposited money actually stays in the bank at most

[Essence]

The Fractional Reserve is a minimum required by law. It has nothing to do with how much banks actually decide to keep -- other than to provide a minimum floor for that amount.

But that's not really the point.  You clearly haven't read the PDF at all.  I'm going to quote you a single line out of it, and you're going to explain to me how your understanding of the economy makes sense of that line, OK?

The line is this:

This description of money creation contrasts with the notion
that banks can only lend out pre-existing money, outlined in
the previous section. Bank deposits are simply a record of how
much the bank itself owes its customers. So they are a liability
of the bank, not an asset that could be lent out. A related
misconception is that banks can lend out their reserves.
Reserves can only be lent between banks, since consumers do
not have access to reserves accounts

Go.

[cometbah]

The Fractional Reserve is a minimum required by law. It has nothing to do with how much banks actually decide to keep -- other than to provide a minimum floor for that amount.

A minimum is necessary because banks try to keep as little as possible and invest as much as possible. But you are right - it was incorrect to say that '10% of deposited money actually stays in the bank at most'. It should be 'at most, 10% of deposited money is required'.

But that's not really the point.  You clearly haven't read the PDF at all.  I'm going to quote you a single line out of it, and you're going to explain to me how your understanding of the economy makes sense of that line, OK?

The line is this:

This description of money creation contrasts with the notion
that banks can only lend out pre-existing money, outlined in
the previous section. Bank deposits are simply a record of how
much the bank itself owes its customers. So they are a liability
of the bank, not an asset that could be lent out. A related
misconception is that banks can lend out their reserves.
Reserves can only be lent between banks, since consumers do
not have access to reserves accounts

Go.

That line is exactly what I am trying to explain:

Your bank deposit is simply a record of how much the bank owes you. It's just a number; it's not backed by asset.

In other words: when you put 50 dollars into a bank, the bank simply writes '50' into your account, and immediately invests the actual $50 somewhere.

When the bank lends $50 dollars to someone else, the bank creates $50 instead of 'taking an existing $50 sitting around', because there is no $50 sitting around. The $50 in your account is just a record, not actual asset.

[Essence]

The Fractional Reserve is a minimum required by law. It has nothing to do with how much banks actually decide to keep -- other than to provide a minimum floor for that amount.

A minimum is necessary because banks try to keep as little as possible and invest as much as possible.

How are you failing to understand this? If banks create money by lending -- if deposits are IOUs and are not, in fact, cash that the bank uses -- which is exactly what the Bank of England is saying is the case -- then the entire concept of banks investing the money that is deposited is completely null and void!

Your bank deposit is simply a record of how much the bank owes you. It's just a number. It is not amongst the bank's assets.

In other words, when you put 50 dollars into a bank, the bank simply writes '50' into your account, and immediately invests the actual $50 somewhere.

No. When you put $50 into a bank, the bank simply writes '50' into your account, and they keep the actual bill until someone else requests a $50 bill in cash.  The bank never ever invests that bill.  The money that they invest (read: lend out) is created by writing '50' in someone's account. That '50' that's written into the lendee's account has nothing whatsoever to do with the $50 that you put into the bank. The two are utterly irrelevant to each other, because the bank doesn't rely on its deposits to do its lending.

 

When the bank lends $50 dollars to someone else, the bank creates $50 instead of 'taking an existing $50 sitting around', because there is no $50 sitting around - it has already been re-invested.

No. "lending $50" and "investing $50" are the same action. There is no 'we didn't lend it because it's been re-invested' -- the investment == the lending. That's how banks invest money -- by lending it. You're treating them like they're two different actions, and they're not.

[cometbah]

No. "lending $50" and "investing $50" are the same action. There is no 'we didn't lend it because it's been re-invested' -- the investment == the lending. That's how banks invest money -- by lending it. You're treating them like they're two different actions, and they're not.

You were correct.

I acknowledge my mistake.

The inability to lend seems to prevent funds from re-entering the economy.