No, im not saying that math is absurd. I'm saying that the "money multiplier effect" is an absurd misinterpretation of mathemtatics. And economics. and banking. And pretty much everything. Similar to the absurd misinterpretation of mathematics that lead the poster above to pose that the sum of all positive integers is -1/12.
The model is simply flawed. You make a whole bunch of assumptions that aren't true (an infinite credit market being the most grievous). This is a popular gong to bang for the occupy wallstreet set, so numerous detailed explanations of why this model is bunk have been written time and again.
If you google "money multiplier effect idiotic sophistry" or "money multiplier effect myth" youll find quite a few of them
Being that my -1/12 comment is thrown in here, I would like to (for the sake of respectful argument) ask why is it that you think you know the correct interpretation of mathematics? Zero divided by zero is equal to what? Explain how Euler's identity (e^iπ=-1) makes sense. Hell, I even read the article you mentioned from Scientific American and it doesn't really dismiss the importance of the -1/12 answer to the sum of positive integer problem. It's kind of like Bill Clinton debating the definition of "is" is. If somehow that answer is popping up in quantum mechaics or the Casimir force, then it isn't something you should just throw out as being nonsense. Maybe it's incorrect to say that it "equals" -1/12, but it does seem to be interesting. I'm not a banker, but my argument of investing $500 vs. sitting on it is valid, and that $500 could have a ripple effect through the economy.
I think I ran into my limit of replying to replies on this thread, but I would like to add @sigmajin that yes I am still defending that solutions to infinite series are not nonsense. We all learn math like we learn science. You probably learned that atoms were the smallest thing, maybe then you learned that those were made up of smaller things, then possibly you learned about quarks and the rest of the known subatomic particles. Did you tell your science teacher that they were wrong because you previously learned that atoms were the smallest thing? Or did you accept that maybe you were given the best way to understand what you needed at the time you were learning it and now you were going a little deeper in the way the world works? The same with infinite series. How could you pass calculus without being at least a little humbled by what you think makes sense and what the numbers show don't always line up? You're basically adding an infinite number of rectangles with zero width when you integrate, but you get the right answer. Fractional reserve banking means that banks can loan out more money than deposits they take in. When the economy grows, then the bankers are happy. When people spend money, it has a positive effect on the economy. But, when people (or businesses or governments) are unable to pay their bills because they don't have enough savings and there isn't enough new money coming in, then you have a collapse. People and businesses may file for bankruptcy. Governments may try to print their way out of it, but it ultimately can make the damage much worse. Pretend I'm a bank. I loan money to my friends. I only loan the amount of money that I have in savings. I charge them 10% interest on my loans. I can only get back my $100 plus the $10 interest. Say I'm a fractional reserve Bank. I have $100. I can loan $1,000 to my friends because I can have IOU's. Money comes in different forms. There is not nearly the amount of paper (or coins) that there is in debt and 1's and 0's in the economy. Some wouldn't even call the dollar money anymore because it isn't backed by a physical commodity like gold, silver, oil, etc. It's fiat currency because the US government says that it has value.
Im actually not a huge math guy.... I took business calc and have some specialized stat knowledge from my years as a poker player, but its not like im good will hunting or anything.
But i think a good place to start is understanding that its not a matter of interpretation.
Another good place to start is not using quotes around the word equals like its subject to multiple meanings or interpretations.
OMG youre not really defending that still are you?
Yes. Its exactly like that. Thats why bill clinton looked so silly and evasive. Because he was posing that there were multiple interpretations to word with such a clear cut and obvious meaning.
So for example, if i say "The some of a series of positive rational integers is always going to be a positive rational integer"
ANd you say "that might be true, it all depends on what your definition of is is. WIth the right definition of is, the sum might be a negative fraction" then yeah total absurdity follows.
I duck duck go'ed the money multiplier effect myth. From mises.org :
This is the type of misdirection that keeps the public ignorant in understanding that any money multiplication effect, as it occurs from lending without usury, makes no difference if the reserve requirement is met a priori or a posteriori.
In other words, the effective mathematical difference is zilch, if a loan is made from deposits (as in my example) or from bankers making rational banking decisions as to creating loans and then loaning from a Central Bank to meet reserve requirements.
The money multiplier effect still exists in either scenario and is based on the mathematically sound principles of convergent series whose elements in the sequence are finite partial sums.
Now even if this is not a perfect infinite geometric ratio in the real world, the implications of how this model can be easily seen with how money is created, regardless if loans are done via rational business decisions vs. loaning of new deposits, are readily seen by any casual observer.
Well, it can't be a fringe theory, it comes from the mises institute...
The mises article is actually supporting the MM effect as a real thing... I posted a list of links that included that one for the sake of fairness, as its the best one that actually supports the money multiplier theory.
The Mises article quote is a characterization of the claims of what those who advocate the myth of MM ... my apologies for not making that abundantly clear.
Regardless, the fact of the matter is that you did not adequately address my concerns of money multiplication, due to a posteriori or a priori meeting of reserve requirements, and how this relates to a limiting value in an infinite sequence, in which there are an infinite elements of the sequence, each of which is a finite partial sum.
Let us define money multiplication to be any increase in the monetary supply that is beyond the initial amount borrowed from the Federal Reserve.
Can you agree to that definition?