Central Banking Monetary Intermediation Cost - WebPost
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Central Banking Monetary Intermediation Cost
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Monetary Intermediation Cost Background
Central Banks control the money stocks of the world's major currencies and supply liquidity to the banks operating in their countries based on fractional reserve deposit banking systems. This site has analyzed three of the world's major central banks; 1) The Bank of Japan, 2) The European Central Bank and 3) The Federal Reserve Bank of the United States and determined that the monetary intermediation cost of these banks is 90% to 99% inefficient (1 - deposit reserve requirement) and on the order of 2½% (Fed) to 3¼% (BOJ) of national GDP per year that could be more efficiently handled by a full reserve credit banking system, development of depositor owned institutions to exclusively hold demand deposits and direct issuance of new money creation , known as Seigniorage, to citizens using their currency based on a GDP index monetary standard.

The analysis below will show that the fractional reserve deposit banking system currently in use has been confounded with true credit intermediation resulting in unearned wealth transfer to the fractional reserve lending source and that there would be no monetary or credit intermediation loss with a full reserve system reducing and/or eliminating the current wealth transfer disparity caused by the fractional reserve system.

It is believed that with the discovery of the Modigliani-Miller Financial Theorem in 1958 of the irrelevance of capital structure that proof of the superiority of the full reserve monetary system has existed because of its lower monetary intermediation cost.


CHART 1 DATA SOURCE: Fractional Reserve Monetary Intermediation Cost Impact Chart. The chart above shows the impact of fractional reserve credit intermediation. As the deposit reserve requirement is reduced, progressively less real credit is lent and repayment becomes progressively more unearned wealth transfer until with a 0% reserve requirement, repayment is entirely wealth transfer to lender since nothing real was actually lent.


CHART 2 DATA SOURCE: Chart data extrapolated from sample loan using ECB 1% reserve requirement to 100% full reserve requirement. Increasing return to fractional reserve credit intermediation as reserve requirement reduced comes from Capital (Tractor) and Labor (Farmer) since it is known from M&M Theorem that leverage does not change system value the increased financial intermediary return as reserve requirement reduced must come from other parts of the system to keep the same value.


CHART 3 DATA SOURCE: Business cycle with leverage and monetary intermediation cost added using Excel Sine wave graph. The chart above shows the impact of fractional reserve leverage, which adds risk to the system in the form of increased variability of returns but does not change returns to the system, shown above as increased amplitudes of the business cycle. The compounding monetary intermediation cost of a central bank is also shown gradually increasing in size that is actually a reduction to system returns.


CHART 4 DATA SOURCE: Business cycle with compounding monetary intermediation cost added using Excel Sine wave on negative parabola graph. The chart above shows the impact of the compounding monetary debt intermediation cost, which mis-allocates system resources to the money creation source and reduces economic growth at a progressively faster rate as the monetary debt compounds.

A banking business model based on full reserve credit intermediation, time matched funding spread lending, is not a new concept. It has had historical support from at least five previous Nobel Prize winners, Milton Friedman, 1976, James Tobin, 1981, Maurice Allais, 1988, Merton Miller, 1990 and Frederick Soddy, 1921, a former Secretary of Agriculture and Vice President of the United States, Henry Wallace, at least one prominent European central banker, Mervyn King, retiring governor of the Bank of England and numerous distinguished economists and financial writers including Irving Fisher, one of the foremost economists of the first half of the 20th Century.

About the Author William Haugen
I have a Masters degree in Finance from Carnegie Mellon University, Pittsburgh, PA in 1983 and a Bachelors degree in Business from the University of Washington, Seattle, WA in 1981. I live in Dallas, Texas. If you have comments or suggestions, please email me at whaugen@flash.net.

 

Central Bank Summaries
A summary of the monetary intermediation cost of three of the world's major central banks is included below with a link to a more detailed summary and the complete paper for the respective bank at the end of each section:
Bank of Japan
European Central Bank
Federal Reserve Bank

Bank of Japan
The Bank of Japan has a 1.3% deposit reserve requirement and a 98.7% monetary intermediation cost (1 - deposit reserve requirement). Conversion to a full reserve monetary system is expected to improve the Japanese economy by the approximate amount of the reduced monetary intermediation cost, on the order of 3¼% of GDP per year, improve the balance sheet of the Japanese government on the order of ¥742.8 trillion as of fiscal year 2011 and restore on the order of seven million jobs as shown below.

CHART 5 DATA SOURCE: BOJ Annual Monetary Intermediation Cost to Japanese Economy 1984 to 2011. The chart above shows the annual monetary intermediation cost of the BOJ to the Japanese economy that could be saved by replacing the BOJ's fractional reserve system with a direct issue full reserve system.


CHART 6 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply. The chart above shows the impact of the BOJ creating debt based money faster than economic growth, transferring wealth from the other sectors of the economy to the banking/financial sector by virtue of its first use and control of the new money created.


TABLE 1 DATA SOURCE: Bank of Japan Monetary Intermediation Cost Impact on Economy and Jobs. The table above shows the expected impact of conversion to a direct issue full reserve monetary system for the Japanese economy.

A more detailed summary and the complete paper is available at Bank of Japan Monetary Intermediation Cost.

European Central Bank
The European Central Bank has a 1% deposit reserve requirement and a 99% monetary intermediation cost (1 - deposit reserve requirement). Conversion to a full reserve monetary system is expected to improve the seventeen nation Eurozone economy by the approximate amount of the reduced monetary intermediation cost, on the order of 2¾% of Eurozone GDP per year, improve the balance sheet of the Eurozone governments on the order of €13.9 trillion as of fiscal year 2011 and restore on the order of ten to twelve million jobs as shown below. Also listed by European Union country in the Eurozone and non-eurozone.

CHART 7 DATA SOURCE: ECB Annual Monetary Intermediation Cost to Economy 1999 to 2011. The chart above shows the annual monetary intermediation cost of the ECB to the Eurpzone economy that could be saved by replacing the ECB's fractional reserve system with a direct issue full reserve system.


CHART 8 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply. The chart above shows the impact of the ECB creating debt based money faster than economic growth, transferring wealth from the other sectors of the economy to the banking/financial sector by virtue of its first use and control of the new money created.


TABLE 2 DATA SOURCE: European Central Bank Monetary Intermediation Cost Impact on Economy and Jobs. The table above shows the expected impact of conversion to a direct issue full reserve monetary system for the Eurozone economy.

A more detailed summary and the complete paper is available at European Central Bank Monetary Intermediation Cost.

United States Federal Reserve Bank
The Federal Reserve has a 10% deposit reserve requirement and a 90% monetary intermediation cost (1 - deposit reserve requirement). Conversion to a full reserve monetary system is expected to improve the American economy by the approximate amount of the reduced monetary intermediation cost, on the order of 2½% of GDP per year, improve the balance sheet of the United States on the order of $8.5 trillion as of fiscal year 2012 and restore on the order of thirteen to fifteen million jobs as shown below.

CHART 9 DATA SOURCE: Fed Annual Monetary Intermediation Cost to Economy 1984 to 2012. The chart above shows the annual monetary intermediation cost of the Fed to the American economy that could be saved by replacing the Fed's fractional reserve system with a direct issue full reserve system.


CHART 10 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply. The chart above shows the impact of the Fed creating debt based money faster than economic growth, transferring wealth from the other sectors of the American economy to the banking/financial sector by virtue of its first use and control of the new money created.


TABLE 3 DATA SOURCE: Federal Reserve Bank Monetary Intermediation Cost Impact on Economy and Jobs. The table above shows the expected impact of conversion to a direct issue full reserve monetary system for the American economy.

A more detailed summary and the complete paper is available at Federal Reserve Monetary Intermediation Cost.



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Version 1.0 © 2013 William A. Haugen
Last Modified: August 11, 2013.
Origination date of page January 27, 2013.
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