E-money is the ultimate form of Fiat if you ask me. All fiat has a history of corruption and collapse (the american dollar and other world currencies are heading that way as well). Fiat money is the money of the statist, since it allows those in charge of the press to create as much money as they need, while dilluting what the rest of us hold.
The question isn't "what form will money be in", the question should be "what assets will back our money". I don't care if its in the form of rice crispies, as long as it is backed by an asset (gold, food, land, space rocks) and has real value.
"How is this different from a gold-backed currency like the old American Dollar. Well, since the old dollar did not actually come attached to a piece of gold and in fact was not even exchangable for gold it's last 40 years."
I'm going to ignore the insult to my intelligence in the title to your reply, and just say you made my point for me. In 1933 the ownership of gold by you and I was made illegal to keep banks and the Fed solvent. Since then we have moved toward a fully Fiat system, and under Nixon we achieved full Fiat status. We are allowed to own gold again, but its not the legal currency of the US. Inflation like we have now didn't exist before going Fiat, and depressions usually lasted less than a year. We are very likely entering a new one now, as we are at the end of a K-wave cycle and debt accumulation is strangling growth. This is the result of central control of money supply, as the roaring 20s and the great depression that followed were as well.
"If you cannot trust the US to back the current dollar, why could you trust them to back the old one, in the absence of proof that it is equivalent to gold?"
The US didn't back the old dollar, the US never has backed the dollar. Banks have always been and still are private in the US. Even now, the Fed is a private institution. Our money now is Fiat, that means there IS NO BACKING, even if the US claims otherwise. All the FDIC promises is to print more money if banks get in trouble, which dilutes everyones money.
Before 1933 gold was money. When you carried a note, you could physically walk to a bank and trade it for gold. Money was an asset, and notes were titles to that asset. Now all that makes money valuable is the trust (and law) that others will accept it as payment. If that trust is broken, the dollar collapses. Switching to an electronic dollar only makes it easier for banks to recklessly create money. Without sound policy behind them, all we gain is a loss of privacy, and the banks save a few pennies per dollar on printing costs.
Before you go insulting someone with a statement such as "you have a shallow understanding of the issues", maybe ask them a few questions to make sure you can verify that.
You seem sharp on these issues so I hope this is my chance to get some free education:D
How does one simply print money? Especially if money is a bank owned thing. I had the idea that Money was like stock in the US Government and the US could print more, but that devalued the existing.
1. Exactly how does new money make it into the market? They cant just give it away right?
2. If the banks are private, and the gov't is not 'backing' the money, again, how can the gov't print more and how do they distribute it?
1. Exactly how does new money make it into the market? They cant just give it away right?
The easiest way to learn about all of this is just do a google search on Federal Reserve System. All money enters the economy as a loan, which is why we call it debt money. Its not based on an asset, so the control of its creation and destruction is interest rates. Low interest rates encourage borrowing, and high rates discourage it. All money put into the economy has to be returned though. When you borrow money from the bank, they create it, and you pay it back and it is removed from the economy. The Fed (private central bank) buys printed money from the US Treasury for pennies on the dollar (to offset printing costs). Through a process thats kind of complex and beyond this question they distribute that to banks for use in extending loans. The US government goes to the Fed to satisfy its budget needs, and the Fed sells securities on the open market. If they can't find enough buyers I believe they would printing in what is called "monetizing the debt". I'm a bit fuzzy on that part of the process, but the end result is...
The government makes its budget, and the Fed funds it, regardless how much it is. Our tax money that is collected every year goes to the Federal Reserve (private bank) to pay interest to those holding the securities they bought, and the remainder is used to pay some securities.
An oversimplified way to look at it I think is that the Government has a credit card with the bank of Federal Reserve, and we (taxpayers) get the bill. The federal government doesn't actually care if there is enough tax revenue to pay for their budget, since on their end it looks the same either way. The only thing that keeps the system in check as far as I can tell is the realization that if they push it too far, investors in securities will pull out and invest in Euros or Yen or other currencies that aren't being inflated as quickly.
2. If the banks are private, and the gov't is not 'backing' the money, again, how can the gov't print more and how do they distribute it?
Same deal, they are allowed to run up as much of a tab with the Federal reserve as congress sees fit. The only limitation being you can only dilute money so much before investors abandon your currency, or start demanding higher interest rates for the increased risk in investing in your money.
Its a fun subject to read up on. One of my favorite guys to read is Senator Ron Paul, who is on the banking committee I think. Just put his name into google with federal reserve and enjoy.
Wish I knew, I'm a multimedia developer, so while I know how things work, I don't have any theories on anything better. I just know that our money system has only a finite life span now that it is Fiat. I'll just keep a partion of my wealth in the form of durables.
Banks trade treasury notes as the currency of the highest levels of banking. The Fed can redeem those notes by creating a cash account out of nothing. They can do this by law. This is how money is "created". The fractional reserve system of lending provides the appearance of money being created at the lower levels of the lending tree, presuming there is not a run on the bank.
First you have to understand that most of the money doesn't have to be printed. It doesn't exist in any real sense.
We tend to assume that because we have $5000 in the bank that somewhere there is $5000 in 20's stacked away somewhere. There isn't. Only a very small percentage (too lazy to search for accurate figures right now) exists as tangible money.
So in answer to 1) How does new money make it into the market? Money is created when someone borrows money. Debt creates money. Make sense? Bear with me. If you have $5000 in the bank the bank can lend out a certain amount. They only set aside a percentage of the money they actually have, the rest is loaned out. So you have $5000, I borrow $2000, a some others borrows $1000. Pretty soon $50000 exists for that $5000. And some of that gets deposited and more is loaned out. New money is born.
But wait, this creates inflation. What to do? No problem, just raise interest rates. People don't borrow for that new car, businesses don't expand, people concentrate on paying off that debt and new money isn't created. In fact the opposite happens.
When you pay off your student loans or your mortgage where does that money go? It just disappears. Poof.
But now businesses aren't expanding, capitol investment is down. Just to keep up with costs they have to cut back. Jobs are lost, the economy starts to slide. Now what? Raise those interst rates back up.
Who makes these decisions, giving our economies a daily dose of fiber to stay regular? The government I hear you say. No.. the banks do. But thats ok, because the banks have our best interest at heart. Oh and OPEC exists to help us with a healthy supply of oil too.
In answere to number 2, how can the gov't print more and how do they distribute it? They don't. That would be bad and cause inflation. So instead they borrow it. The central bank prints it for them. This is good because while it still has the same effect, it means it costs them more and creates debt. And since the only way to pay off this debt is by taxing the people more, no sane government would want to do this.
It's not that it doesn't work. All Fiats work fine until they bite the dust, and that usually happens quickly once they start to crumble.
Also, the enourmous wealth growth of the past 70 years isn't as obvious as you think. Those who lived through the depression, and my mother and grandmother who just lost their retirement funds might disagree with you. All of those living on credit cards might also take your view of the sucess of Fiat money into dispute. We have also seen an increase in the gap between wealthy and poor, as well as an increase in the total number of people in poverty. The US is now a socialist government, and it has Fiat money to thank for that. Even Alan Greenspan is a believer in asset based money, and recognizes that Fiat is the money of the statist and works counter to freedom.
"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
Alan Greenspan
The US was creating enourmous wealth before Fiat money. Be careful not to confuse the wealth of the industrial revolution (cars, planes, electronics, rockets, physics, medicine, etc) as a success of fiat money. All of those industries would have existed with or without Fiat money.
You also seem to keep attacking me as if im some extremist you need to beat down. I'm simply stating that our money is Fiat, and being such, it has a finite lifespan now. It will continue to funnel an increasing % of our national product to the financial sector, and will continue to fund government expansion. That has nothing to do with isolation or whatever you are accusing me of. It's just a statement.
It's not that it doesn't work. All Fiats work fine until they bite the dust, and that usually happens quickly once they start to crumble.
What makes them bite the dust? Is it that the feds (whoever the "Feds" are for your particular currency) panic over some crisis and print too much money?
It always seemed to me that our system worked pretty well, and that gold-based money was problematic because it meant the money supply (literally!) was in the hands of caprice... that is, did somebody find a new gold mine or not. Fiat money can be used to manage the economy ("Say Alan, the economy seems a little sluggish. Let's lower interest rates and kick things up a little") in a way that gold-backed money can't.
Or am I missing something? I am certainly not an expert on these things, and would love to hear a spirited defense of Gold.
In most of the cases I am familiar with its been out of control government spending. Banks haven't been in charge of fiat in the past as far as I know, they usually we gold or other asset bankers who would engage in fractional banking.
The only reason anyone would chose to use Fiat money over an asset money is if they are forced to by law, or if an asset like gold isnt available. The US couldn't just go back to gold now for example, since very few people own it. I'm not actually encouraging moving to gold as money, I'm only saying that money always goes back to assets when Fiat runs its course.
And yeah, that is the theory (ability to smooth out the economy) but it comes at a cost under our current system. That cost is debt accumulation to a degree you would never see w/o fiat, and some REALLY painful corrections. Judging by ratios the Dow should be at 5000 right now, so there is a lot of pain left from this last money supply bubble. Low interest rates when debt is already high only makes the problem worse. Right now for example, low interest rates are less effective since noone is in a position to borrow. The debt problem has to work itself out before things can resume.
Meanwhile my gold has been rising in value as people catch on to the fact the market isnt going anywhere until our currency corrects itself.
Gold is not the perfect container of wealth, but it has been proven to be more durable than central management, unless you think the last ten years (absurd creation of fake wealth followed by rapid evisceration of the entire economy) is a glowing endorsement for central management. For further examples, see the Russian default, the Peso crisis, the Bhat devaluation, LTCM..etc etc. The era of fiat currencies and central meddling has created a major crisis nearly once every two years!
For five thousand years gold has been used to represent value between cultures, civilizations, and even history itself. Satisfactorily pure gold left dormant for two thousand years still has value today. How about the currency of the nation where the original owner held it? Maybe useful as a museum piece! It is because we do not/should not trust central meddling that we place value in precious metals to this day.
Our money has problems are two-fold, one is the lack of backing, the other is the debt system that creates a debt trap. The two problems keep each other in check to some degree, but its not stable (as our current debt ratios hilite) and slowly moves increasing %s of wealth to the financial sector.
Alright, this conversation has ended. When you title your initial reply "you have a shallow understanding" no further argument is needed. Was nice doing business with you Anonymous Coward.
I'm sorry, the modern financial system is based upon trust any many levels. There is no more risk in accepting a fiat Dollar than there is in accepting a check, or delivering goods with an invoice for 90 days payment.
The economy grew more before the fiat currency than after it. The economy grew more before their was a Fed than after it. These are not opinions, they are facts.
I'm sorry, the modern financial system is based upon trust any many levels. There is no more risk in accepting a fiat Dollar than there is in accepting a check, or delivering goods with an invoice for 90 days payment.
Yes, but this risk isn't zero like you think it is. For example, Argentina. With almost no notice, depositors were prohibited from accessing accounts. Governments cannot succesfully manage currencies!! Over three hundred fiat currencies have been repudiated. By that, I mean, made worthless. Why do people think this can't happen here???
As to the "before the Fed" period, we had a Fed during most of the period you spoke of. The "Fed" was J.P. Morgan. He performed most of the functions of the Fed before there was a Fed. So I think your treatise that the period you speak of represents a period without a controlling force such as the Fed is incorrect.
BZZZT! Nice try. No, the economy grew more in the nineteenth century than in the twentieth, pre-Morgan (who only bailed out the govt once, and in no way acted as the "Fed" if you knew the history of his actions). Once again, not opinion, fact.
Your comments about the failure of fiat currencies are misleading. It isn't as if backed currencies were never repudiated. If you use currency issued by a government, you lose that money if the government fails, whether the currency was backed or not. At the moment the backing government fails, it becomes a fiat currency. And thus your argument is circular.
The point is that gold-backed currencies fail much more rarely, and technically you could have redeemed the currency for gold to wait through the crisis. In no way is this circular.
The idea of a gold backed currency is not that people go to the bank and come home with a sliver of glod - its about value stability. Each nation backing their currency with gold is required to hold said amount securely, providing a basis for currency trade.
Since movng from the gold standard the dollar has lost, what, 75% of its value? What has followed is one crisis after another. LTCM. Russia. Peso Crisis. Thailand. Argentina. Actually the crises have been happening about every twenty four months. How many similar crises occurred under the gold standard??
The premise of a gold-backed currency is that some things have more lasting value than nation states. Gold is one of them - for five thousand years it has represented wealth and traded as such across cultures.
1) the old promise was changed while lots of people held dollars. The fact that it happened slowly over a period time starting 70 years ago doesn't change the magnitude of the theft. So, no I don't trust the US to back either the old or new dollar. And If I buy gold I get taxed on the 'profit' that I make for simply holding it while more money is printed out of thin air.
2) The new promise isn't that the dollar is 'worth something'. The new promise is that you need it to pay taxes, so I promise, you better figure out how to get some, or we are going to send guys with guns out to take all your stuff. I guess that is worth something, but I'd sure rather have a currency based on voluntary behavior than one based on extortion.
All fiat has a history of corruption and collapse (the american dollar and other world currencies are heading that way as well).
Could you explain that concept? Seriously? If the US had not gone to fiat money in the 70s, then the exchange rates on the market would probably have killed the economy entirely instead of simply causing a recession. There were too many dollars compared to how much gold we had in the Reserve, and the gold stock we had was draining fast. Our money supply simply could not grow at the rate that the economy was growing. Fiat money was the only logical solution, and we are hardly alone in that endeavor. The Euro is fiat, as were the Deutschmark and the franc before it. (Honestly don't remember whether the pound is still backed, but I do not think it is.) Japan, too, was a fiat currency, and not fixed to anything. All of those countries did fine.
The only times that fiat money has been a problem, in general, is in third-world countries, and fixing the currencies against the dollar (Argentina) or going to a dollar economy (Ecuador) doesn't seem to have helped them much anyway. Printing money with the purpose of "diluting" cash (raising the real rate of inflation) is not inherently evil, either; in fact, a large number of economists are currently arguing that the Japanese need to print a whole lot of money, intentionally generating inflation and therefore discouraging savings, in order to revitalize their economy and end their ten-year-long recession/depression. (I.e., if your savings start being worth less, then you will have an incentive to spend, which would probably help end Japan's deflation and revitalize the economy. The other thing that's killing them is subsidizing companies that really should be allowed to die, but that's another issue entirely.)
If you're that wrapped up about having your money backed, rent a space in a vault and convert all your money to gold. It's gone up recenty anyway in the uncertainties of the war, and likely will continue to do so until this situation has blown over, so it's probably a decent investment. No one's stopping you. But for the rest of the world, I think fiat courrency is fine.
You have to have inflation under debt currency, otherwise you find yourself struggling under deflationary pressure. Our money is created in the form of loans, so when you get 100K to buy a house it is created into the economy, but has to be returned over time plus interest. So every loan adds money to the economy, and then returns back to nothingness. To pay the interest though, someone else needs to go into debt to keep to make up the difference. There is a natural debt creation/destruction cycle in fractional banking, Fiat money doesn't stop it, it just magnifies the timeframe and magnitude.
Printing money with the purpose of "diluting" cash (raising the real rate of inflation) is not inherently evil
Inflation isnt "good" for an economy, just in ours it is better than the alternative, which is crushing deflation. There is only about 1T in M1 money supply in the US, and there is in the ballpark of 8T in outstanding debt. Paying off debt very quickly contracts the money supply. We have to keep borrowing money to keep from contracting. If you really trust politicians and bankers to do the right thing with your money, more power to you. We'll ignore for now that on the watch of these two groups we have seen:
Massive bubble of the roaring 20s
Bust of the 1930s
Depression
Great Depression
Confiscation of gold and illegalization of its ownership
grinding periods of inflation and recession over the last decades
Increase of debt to GDP to a ratio of 3/1
Uncontrolled government deficit spending
The bubble we just went through, wiping many peoples retirement funds out
I'm not ready to pat these people on the back just yet. They have yet to solve the problem inherent in fractional banking and the creation of debt.
Could you explain that concept? Seriously?
You seem to be saying that Fiat money doesn't collapse, because ours hasn't yet. Name the oldest Fiat currency on earth, and what is the longest time a Fiat currency has ever lasted in History? Not one Fiat currency has ever stood the test of time. The US has already gone through a couple Fiat currencies that have collapsed before the federal reserve note was created.
This is the kind of crap governments pull with money... "The printing of such large sums created a major problem. Paper, engravers and printers were hard to find. In desperation, the Secretary of the Treasury recommended that counterfeit money be utilized. Anyone holding a counterfeit bill was supposed to exchange it for a government bond and the government would stamp it "valid" and spend it." That was the confederacy did to their Fiat money.
Fiat money almost always dies the same death, uncontrolled inflation due to state spending. It also usually results is some very socialist measures as governments try to stop people from running from it. If you get a chance, read up on what happened to Rome when its Fiat money hyperinflated, its pretty funny how they attempted to control prices. I can't name any good links off the top of my head, but this one looks like it has some good examples [sjsu.edu].
The only times that fiat money has been a problem, in general, is in third-world countries...
I think the people of Russia, Germany, Yugoslavia and the Roman Empire might disagree with you there. I don't think those empires would have appreciated being called "third world".
They were empires, not third worlds. That's like saying because the US is in a mature phase of its lifecycle that it is a third world. The Roman Empire certainly wasn't a third world.
What amazes me is the ferosity of some of the people arguing with me. Its not like I am saying "switch back to gold", I'm just saying Fiat always implodes, and an electronic fiat will be no different. They can turn paper into anything they want, but as long as it isn't asset backed, it will not last.
The question isn't "what form will money be in", the question should be "what assets will back our money". I don't care if its in the form of rice crispies, as long as it is backed by an asset (gold, food, land, space rocks) and has real value.
Tying it to a hard asset doesn't help you. The reason it doesn't help you is that the asset itself is fluid just like the money that represents it: more of the asset can be acquired if need be in order to make the country in question appear "richer", and indeed that was commonly done back when gold was the standard. Acquisition of more of the backing asset is usually a matter of expending sufficient labor (sometimes in the form of the use of the military). Print money simply has a much lower expenditure rate per dollar produced. And as described below, it's highly advantageous to have your exchange mechanism be as fluid as possible.
Money itself is just a means of representing the value of something relative to the value of something else. Usually one of the things whose value is being measured is your labor (when you get paid and then spend the resulting money on something, the price of the something in question is just an indicator of the value of your labor relative to the value of the object you just purchased, and the value of the object is ultimately, more or less, the sum total of the value of the labor used to produce it). Ultimately, since the value of an object is essentially the value of the labor used to make it (which includes all the labor used to generate the raw materials, to process those materials, to assemble the object, and to manage all of that), money simply represents the value of your labor versus the value of someone else's.
In a perfect world, a change in the overall wealth of a country (as measured by the ability of the country to do work) would be instantly reflected in the price of goods relative to the price of labor. Unfortunately, the world is not perfect and there is a delay. And this is the reason for printing more money: so that the price of goods and services does not need to change significantly as the country is able to do more work. Print too much and the society has to adjust the prices to reflect the larger supply of tokens, just as it does if the country does't print enough.
Where things get complicated isn't really within a country's economic system: the currency for that is reasonably well-defined. The complication comes when dealing with other countries with their own currencies, particularly when those currencies are not managed the same way.
The cost of labor in India is lower than it is in the United States. It's lower because the cost of living is lower. But the lower cost of living isn't necessarily a consequence of the lower amount of total work it takes to supply someone with the goods and services needed to live, even when the person in question is living at the same standard of living as someone in the U.S. Nor is it necessarily a consequence of one country being more desirable to live in than another, though that probably factors into it some. Most of the difference is the result of the fact that markets require time to adjust themselves properly relative to other markets.
That's why programmers in India will eventually be paid roughly the same as programmers in the U.S.: the value of their labor isn't really much (if any) less than the value of the labor of programmers in the U.S. -- the hysteresis between the two labor markets just makes it appear that way temporarily. Corporations are now attempting to use that hysteresis to their own advantage, by shifting the demand for work towards markets which have not equalized themselves with the others. And the reason the markets themselves don't adjust on their own is that the labor in those markets isn't as fluid as the Corporate demand for labor, thanks primarily to immigration laws. That means that the labor cannot move to where the demand is. And even if it could, it would take time for the labor to move, and thus for the market to adjust. That time is the very thing which causes hysteresis between the markets.
I understand the theory behind our Fiat money, but the problem remains. A massive buildup of debt is still created due to the debt nature of our system. If people stop going further into debt, then the economy shrinks and deflationary pressures kick in as money is sucked out of the economy from loan payments on existing debt. All the talk about how fiat lets our money supply remain fluid are nice, but the debt creation/destruction cycles are catastrophic under fiat. Fiat doesn't work, it can in the short run, but reality always catches up with it.
Noone has given me an example yet of a Fiat money that has stood the test of time, or that didn't expire in a massive failure.
Asset money doesn't collapse, it never has, it never will. Gold, silver, land, grain, gems, etc all have value today. The only thing that fails under asset systems are the banks who over-extend themselves in fractional banking (printing unbacked notes). The money never collapsed, the institutions did.
Yes, it does. It creates stability and mitigates human meddling.
In a perfect world, a change in the overall wealth of a country (as measured by the ability of the country to do work) would be instantly reflected in the price of goods relative to the price of labor. Unfortunately, the world is not perfect and there is a delay. And this is the reason for printing more money: so that the price of goods and services does not need to change significantly as the country is able to do more work
Oh man, you are soooo off course here as to why money is printed, it probably isn't worth it to go into it at this point. Suffice to say the "printing presses" of money are used as a political and fiscal tool at this point, not having anything to do with anything you have described.
Someone on/. with a decent understanding of the complexity of international economics.
The thing I love about fiat currency is it seperates the wheat from the chaff, since it takes a certain subtlety of mind to understand how it really works.
"Be there. Aloha."
-- Steve McGarret, _Hawaii Five-Oh_
What is BEHIND that money... that is the question. (Score:5, Interesting)
E-money is the ultimate form of Fiat if you ask me. All fiat has a history of corruption and collapse (the american dollar and other world currencies are heading that way as well). Fiat money is the money of the statist, since it allows those in charge of the press to create as much money as they need, while dilluting what the rest of us hold.
The question isn't "what form will money be in", the question should be "what assets will back our money". I don't care if its in the form of rice crispies, as long as it is backed by an asset (gold, food, land, space rocks) and has real value.
Re:you have a shallow understanding of the issues (Score:1)
Where to start...
I'm going to ignore the insult to my intelligence in the title to your reply, and just say you made my point for me. In 1933 the ownership of gold by you and I was made illegal to keep banks and the Fed solvent. Since then we have moved toward a fully Fiat system, and under Nixon we achieved full Fiat status. We are allowed to own gold again, but its not the legal currency of the US. Inflation like we have now didn't exist before going Fiat, and depressions usually lasted less than a year. We are very likely entering a new one now, as we are at the end of a K-wave cycle and debt accumulation is strangling growth. This is the result of central control of money supply, as the roaring 20s and the great depression that followed were as well.
The US didn't back the old dollar, the US never has backed the dollar. Banks have always been and still are private in the US. Even now, the Fed is a private institution. Our money now is Fiat, that means there IS NO BACKING, even if the US claims otherwise. All the FDIC promises is to print more money if banks get in trouble, which dilutes everyones money.
Before 1933 gold was money. When you carried a note, you could physically walk to a bank and trade it for gold. Money was an asset, and notes were titles to that asset. Now all that makes money valuable is the trust (and law) that others will accept it as payment. If that trust is broken, the dollar collapses. Switching to an electronic dollar only makes it easier for banks to recklessly create money. Without sound policy behind them, all we gain is a loss of privacy, and the banks save a few pennies per dollar on printing costs.
Before you go insulting someone with a statement such as "you have a shallow understanding of the issues", maybe ask them a few questions to make sure you can verify that.
Re:you have a shallow understanding of the issues (Score:2)
How does one simply print money? Especially if money is a bank owned thing. I had the idea that Money was like stock in the US Government and the US could print more, but that devalued the existing.
1. Exactly how does new money make it into the market? They cant just give it away right?
2. If the banks are private, and the gov't is not 'backing' the money, again, how can the gov't print more and how do they distribute it?
lost...
Re:you have a shallow understanding of the issues (Score:1)
The easiest way to learn about all of this is just do a google search on Federal Reserve System. All money enters the economy as a loan, which is why we call it debt money. Its not based on an asset, so the control of its creation and destruction is interest rates. Low interest rates encourage borrowing, and high rates discourage it. All money put into the economy has to be returned though. When you borrow money from the bank, they create it, and you pay it back and it is removed from the economy. The Fed (private central bank) buys printed money from the US Treasury for pennies on the dollar (to offset printing costs). Through a process thats kind of complex and beyond this question they distribute that to banks for use in extending loans. The US government goes to the Fed to satisfy its budget needs, and the Fed sells securities on the open market. If they can't find enough buyers I believe they would printing in what is called "monetizing the debt". I'm a bit fuzzy on that part of the process, but the end result is...
The government makes its budget, and the Fed funds it, regardless how much it is. Our tax money that is collected every year goes to the Federal Reserve (private bank) to pay interest to those holding the securities they bought, and the remainder is used to pay some securities.
An oversimplified way to look at it I think is that the Government has a credit card with the bank of Federal Reserve, and we (taxpayers) get the bill. The federal government doesn't actually care if there is enough tax revenue to pay for their budget, since on their end it looks the same either way. The only thing that keeps the system in check as far as I can tell is the realization that if they push it too far, investors in securities will pull out and invest in Euros or Yen or other currencies that aren't being inflated as quickly.
Same deal, they are allowed to run up as much of a tab with the Federal reserve as congress sees fit. The only limitation being you can only dilute money so much before investors abandon your currency, or start demanding higher interest rates for the increased risk in investing in your money.
Its a fun subject to read up on. One of my favorite guys to read is Senator Ron Paul, who is on the banking committee I think. Just put his name into google with federal reserve and enjoy.
Re:you have a shallow understanding of the issues (Score:2)
Re:you have a shallow understanding of the issues (Score:1)
Re:you have a shallow understanding of the issues (Score:1)
HOW MONEY IS MADE 101 (Score:2)
Re:you have a shallow understanding of the issues (Score:1)
First you have to understand that most of the money doesn't have to be printed. It doesn't exist in any real sense.
We tend to assume that because we have $5000 in the bank that somewhere there is $5000 in 20's stacked away somewhere. There isn't. Only a very small percentage (too lazy to search for accurate figures right now) exists as tangible money.
So in answer to 1) How does new money make it into the market? Money is created when someone borrows money. Debt creates money. Make sense? Bear with me. If you have $5000 in the bank the bank can lend out a certain amount. They only set aside a percentage of the money they actually have, the rest is loaned out. So you have $5000, I borrow $2000, a some others borrows $1000. Pretty soon $50000 exists for that $5000. And some of that gets deposited and more is loaned out. New money is born.
But wait, this creates inflation. What to do? No problem, just raise interest rates. People don't borrow for that new car, businesses don't expand, people concentrate on paying off that debt and new money isn't created. In fact the opposite happens.
When you pay off your student loans or your mortgage where does that money go? It just disappears. Poof.
But now businesses aren't expanding, capitol investment is down. Just to keep up with costs they have to cut back. Jobs are lost, the economy starts to slide. Now what? Raise those interst rates back up.
Who makes these decisions, giving our economies a daily dose of fiber to stay regular? The government I hear you say. No.. the banks do. But thats ok, because the banks have our best interest at heart. Oh and OPEC exists to help us with a healthy supply of oil too.
In answere to number 2, how can the gov't print more and how do they distribute it? They don't. That would be bad and cause inflation. So instead they borrow it. The central bank prints it for them. This is good because while it still has the same effect, it means it costs them more and creates debt. And since the only way to pay off this debt is by taxing the people more, no sane government would want to do this.
Re:you have a shallow understanding of the issues (Score:2)
Re:your conclusions are unsupported by your facts (Score:1)
It's not that it doesn't work. All Fiats work fine until they bite the dust, and that usually happens quickly once they start to crumble.
Also, the enourmous wealth growth of the past 70 years isn't as obvious as you think. Those who lived through the depression, and my mother and grandmother who just lost their retirement funds might disagree with you. All of those living on credit cards might also take your view of the sucess of Fiat money into dispute. We have also seen an increase in the gap between wealthy and poor, as well as an increase in the total number of people in poverty. The US is now a socialist government, and it has Fiat money to thank for that. Even Alan Greenspan is a believer in asset based money, and recognizes that Fiat is the money of the statist and works counter to freedom.
The US was creating enourmous wealth before Fiat money. Be careful not to confuse the wealth of the industrial revolution (cars, planes, electronics, rockets, physics, medicine, etc) as a success of fiat money. All of those industries would have existed with or without Fiat money.
You also seem to keep attacking me as if im some extremist you need to beat down. I'm simply stating that our money is Fiat, and being such, it has a finite lifespan now. It will continue to funnel an increasing % of our national product to the financial sector, and will continue to fund government expansion. That has nothing to do with isolation or whatever you are accusing me of. It's just a statement.
More Details Please (Score:2)
It always seemed to me that our system worked pretty well, and that gold-based money was problematic because it meant the money supply (literally!) was in the hands of caprice
Or am I missing something? I am certainly not an expert on these things, and would love to hear a spirited defense of Gold.
Re:More Details Please (Score:1)
In most of the cases I am familiar with its been out of control government spending. Banks haven't been in charge of fiat in the past as far as I know, they usually we gold or other asset bankers who would engage in fractional banking.
The only reason anyone would chose to use Fiat money over an asset money is if they are forced to by law, or if an asset like gold isnt available. The US couldn't just go back to gold now for example, since very few people own it. I'm not actually encouraging moving to gold as money, I'm only saying that money always goes back to assets when Fiat runs its course.
And yeah, that is the theory (ability to smooth out the economy) but it comes at a cost under our current system. That cost is debt accumulation to a degree you would never see w/o fiat, and some REALLY painful corrections. Judging by ratios the Dow should be at 5000 right now, so there is a lot of pain left from this last money supply bubble. Low interest rates when debt is already high only makes the problem worse. Right now for example, low interest rates are less effective since noone is in a position to borrow. The debt problem has to work itself out before things can resume.
Meanwhile my gold has been rising in value as people catch on to the fact the market isnt going anywhere until our currency corrects itself.
Re:More Details Please (Score:2)
For five thousand years gold has been used to represent value between cultures, civilizations, and even history itself. Satisfactorily pure gold left dormant for two thousand years still has value today. How about the currency of the nation where the original owner held it? Maybe useful as a museum piece! It is because we do not/should not trust central meddling that we place value in precious metals to this day.
Re:More Details Please (Score:1)
Agreed.
Our money has problems are two-fold, one is the lack of backing, the other is the debt system that creates a debt trap. The two problems keep each other in check to some degree, but its not stable (as our current debt ratios hilite) and slowly moves increasing %s of wealth to the financial sector.
Re:don't pump yourself up (Score:1)
Wrong again (Score:2)
The economy grew more before the fiat currency than after it. The economy grew more before their was a Fed than after it. These are not opinions, they are facts.
I'm sorry, the modern financial system is based upon trust any many levels. There is no more risk in accepting a fiat Dollar than there is in accepting a check, or delivering goods with an invoice for 90 days payment.
Yes, but this risk isn't zero like you think it is. For example, Argentina. With almost no notice, depositors were prohibited from accessing accounts. Governments cannot succesfully manage currencies!! Over three hundred fiat currencies have been repudiated. By that, I mean, made worthless. Why do people think this can't happen here???
Re:Risk zero? (Score:1)
BZZZT! Nice try. No, the economy grew more in the nineteenth century than in the twentieth, pre-Morgan (who only bailed out the govt once, and in no way acted as the "Fed" if you knew the history of his actions). Once again, not opinion, fact.
Your comments about the failure of fiat currencies are misleading. It isn't as if backed currencies were never repudiated. If you use currency issued by a government, you lose that money if the government fails, whether the currency was backed or not. At the moment the backing government fails, it becomes a fiat currency. And thus your argument is circular.
The point is that gold-backed currencies fail much more rarely, and technically you could have redeemed the currency for gold to wait through the crisis. In no way is this circular.
WRONG! That is not how gold back currencies work (Score:2)
Since movng from the gold standard the dollar has lost, what, 75% of its value? What has followed is one crisis after another. LTCM. Russia. Peso Crisis. Thailand. Argentina. Actually the crises have been happening about every twenty four months. How many similar crises occurred under the gold standard??
The premise of a gold-backed currency is that some things have more lasting value than nation states. Gold is one of them - for five thousand years it has represented wealth and traded as such across cultures.
Re:you have a shallow understanding of the issues (Score:1)
but
1) the old promise was changed while lots of people held dollars. The fact that it happened slowly over a period time starting 70 years ago doesn't change the magnitude of the theft. So, no I don't trust the US to back either the old or new dollar. And If I buy gold I get taxed on the 'profit' that I make for simply holding it while more money is printed out of thin air.
2) The new promise isn't that the dollar is 'worth something'. The new promise is that you need it to pay taxes, so I promise, you better figure out how to get some, or we are going to send guys with guns out to take all your stuff. I guess that is worth something, but I'd sure rather have a currency based on voluntary behavior than one based on extortion.
Re:What is BEHIND that money... that is the questi (Score:2)
The only times that fiat money has been a problem, in general, is in third-world countries, and fixing the currencies against the dollar (Argentina) or going to a dollar economy (Ecuador) doesn't seem to have helped them much anyway. Printing money with the purpose of "diluting" cash (raising the real rate of inflation) is not inherently evil, either; in fact, a large number of economists are currently arguing that the Japanese need to print a whole lot of money, intentionally generating inflation and therefore discouraging savings, in order to revitalize their economy and end their ten-year-long recession/depression. (I.e., if your savings start being worth less, then you will have an incentive to spend, which would probably help end Japan's deflation and revitalize the economy. The other thing that's killing them is subsidizing companies that really should be allowed to die, but that's another issue entirely.)
If you're that wrapped up about having your money backed, rent a space in a vault and convert all your money to gold. It's gone up recenty anyway in the uncertainties of the war, and likely will continue to do so until this situation has blown over, so it's probably a decent investment. No one's stopping you. But for the rest of the world, I think fiat courrency is fine.
Re:What is BEHIND that money... that is the questi (Score:1)
You have to have inflation under debt currency, otherwise you find yourself struggling under deflationary pressure. Our money is created in the form of loans, so when you get 100K to buy a house it is created into the economy, but has to be returned over time plus interest. So every loan adds money to the economy, and then returns back to nothingness. To pay the interest though, someone else needs to go into debt to keep to make up the difference. There is a natural debt creation/destruction cycle in fractional banking, Fiat money doesn't stop it, it just magnifies the timeframe and magnitude.
Inflation isnt "good" for an economy, just in ours it is better than the alternative, which is crushing deflation. There is only about 1T in M1 money supply in the US, and there is in the ballpark of 8T in outstanding debt. Paying off debt very quickly contracts the money supply. We have to keep borrowing money to keep from contracting. If you really trust politicians and bankers to do the right thing with your money, more power to you. We'll ignore for now that on the watch of these two groups we have seen:
I'm not ready to pat these people on the back just yet. They have yet to solve the problem inherent in fractional banking and the creation of debt.
You seem to be saying that Fiat money doesn't collapse, because ours hasn't yet. Name the oldest Fiat currency on earth, and what is the longest time a Fiat currency has ever lasted in History? Not one Fiat currency has ever stood the test of time. The US has already gone through a couple Fiat currencies that have collapsed before the federal reserve note was created.
This is the kind of crap governments pull with money... "The printing of such large sums created a major problem. Paper, engravers and printers were hard to find. In desperation, the Secretary of the Treasury recommended that counterfeit money be utilized. Anyone holding a counterfeit bill was supposed to exchange it for a government bond and the government would stamp it "valid" and spend it." That was the confederacy did to their Fiat money.
Fiat money almost always dies the same death, uncontrolled inflation due to state spending. It also usually results is some very socialist measures as governments try to stop people from running from it. If you get a chance, read up on what happened to Rome when its Fiat money hyperinflated, its pretty funny how they attempted to control prices. I can't name any good links off the top of my head, but this one looks like it has some good examples [sjsu.edu].
Re:What is BEHIND that money... that is the questi (Score:1)
Re:if the shoe fits (Score:1)
YES, Exactly (Score:2)
Re:YES, Exactly (Score:1)
What amazes me is the ferosity of some of the people arguing with me. Its not like I am saying "switch back to gold", I'm just saying Fiat always implodes, and an electronic fiat will be no different. They can turn paper into anything they want, but as long as it isn't asset backed, it will not last.
Re:YES, Exactly (Score:1)
Re:What is BEHIND that money... that is the questi (Score:1)
Tying it to a hard asset doesn't help you. The reason it doesn't help you is that the asset itself is fluid just like the money that represents it: more of the asset can be acquired if need be in order to make the country in question appear "richer", and indeed that was commonly done back when gold was the standard. Acquisition of more of the backing asset is usually a matter of expending sufficient labor (sometimes in the form of the use of the military). Print money simply has a much lower expenditure rate per dollar produced. And as described below, it's highly advantageous to have your exchange mechanism be as fluid as possible.
Money itself is just a means of representing the value of something relative to the value of something else. Usually one of the things whose value is being measured is your labor (when you get paid and then spend the resulting money on something, the price of the something in question is just an indicator of the value of your labor relative to the value of the object you just purchased, and the value of the object is ultimately, more or less, the sum total of the value of the labor used to produce it). Ultimately, since the value of an object is essentially the value of the labor used to make it (which includes all the labor used to generate the raw materials, to process those materials, to assemble the object, and to manage all of that), money simply represents the value of your labor versus the value of someone else's.
In a perfect world, a change in the overall wealth of a country (as measured by the ability of the country to do work) would be instantly reflected in the price of goods relative to the price of labor. Unfortunately, the world is not perfect and there is a delay. And this is the reason for printing more money: so that the price of goods and services does not need to change significantly as the country is able to do more work. Print too much and the society has to adjust the prices to reflect the larger supply of tokens, just as it does if the country does't print enough.
Where things get complicated isn't really within a country's economic system: the currency for that is reasonably well-defined. The complication comes when dealing with other countries with their own currencies, particularly when those currencies are not managed the same way.
The cost of labor in India is lower than it is in the United States. It's lower because the cost of living is lower. But the lower cost of living isn't necessarily a consequence of the lower amount of total work it takes to supply someone with the goods and services needed to live, even when the person in question is living at the same standard of living as someone in the U.S. Nor is it necessarily a consequence of one country being more desirable to live in than another, though that probably factors into it some. Most of the difference is the result of the fact that markets require time to adjust themselves properly relative to other markets.
That's why programmers in India will eventually be paid roughly the same as programmers in the U.S.: the value of their labor isn't really much (if any) less than the value of the labor of programmers in the U.S. -- the hysteresis between the two labor markets just makes it appear that way temporarily. Corporations are now attempting to use that hysteresis to their own advantage, by shifting the demand for work towards markets which have not equalized themselves with the others. And the reason the markets themselves don't adjust on their own is that the labor in those markets isn't as fluid as the Corporate demand for labor, thanks primarily to immigration laws. That means that the labor cannot move to where the demand is. And even if it could, it would take time for the labor to move, and thus for the market to adjust. That time is the very thing which causes hysteresis between the markets.
Re:What is BEHIND that money... that is the questi (Score:1)
I understand the theory behind our Fiat money, but the problem remains. A massive buildup of debt is still created due to the debt nature of our system. If people stop going further into debt, then the economy shrinks and deflationary pressures kick in as money is sucked out of the economy from loan payments on existing debt. All the talk about how fiat lets our money supply remain fluid are nice, but the debt creation/destruction cycles are catastrophic under fiat. Fiat doesn't work, it can in the short run, but reality always catches up with it.
Noone has given me an example yet of a Fiat money that has stood the test of time, or that didn't expire in a massive failure.
Re:What is BEHIND that money... that is the questi (Score:1)
Re:What is BEHIND that money... that is the questi (Score:1)
Yes, it does. It creates stability and mitigates human meddling.
In a perfect world, a change in the overall wealth of a country (as measured by the ability of the country to do work) would be instantly reflected in the price of goods relative to the price of labor. Unfortunately, the world is not perfect and there is a delay. And this is the reason for printing more money: so that the price of goods and services does not need to change significantly as the country is able to do more work
Oh man, you are soooo off course here as to why money is printed, it probably isn't worth it to go into it at this point. Suffice to say the "printing presses" of money are used as a political and fiscal tool at this point, not having anything to do with anything you have described.
Thank god (Score:1)
The thing I love about fiat currency is it seperates the wheat from the chaff, since it takes a certain subtlety of mind to understand how it really works.