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Thread: Printing Money

  1. #1

    Default Printing Money

    will someone plese explain what is "printing money"? i know that the fed doesnt just print a few more sheets of money....in simple terms please. i got a c in econ.

    thanks
    There would be no 1st without the 2nd!

    "Audemus Jura Nostra Defendere"
    -Alabama State Motto

    Barry Goldwater:

    “I would remind you that extremism in the defense of liberty is no vice! And let me remind you also that moderation in the pursuit of justice is no virtue.”

    "Remember that a government big enough to give you everything you want is also big enough to take away everything you have.”



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  3. #2

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    Quote Originally Posted by sfws09 View Post
    will someone plese explain what is "printing money"? i know that the fed doesnt just print a few more sheets of money....in simple terms please. i got a c in econ.

    thanks
    Banks need to have a certain ratio of money in their banks to the money that they loan out (so... say they need $35 actual money in their vaults for every $100 they loan out). Banks are not allowed to loan out more money then they have (beyond that ratio), so - they borrow what are called "Fed funds" so that they can loan out money to private entities to keep currency circulating (circulating currency is necessary for The State to operate/collect taxes).

    The Fed is a mystical private bank operating by whim and political objectives. They're allowed to loan out as much as needed (but the money doesn't actually exist... It's electronically "created".) to banks in need to maintain their funds:loan ratio.

    When the Fed cuts rates, they are reducing the amount of interest other banks must pay when they take out Fed funds.


    Not sure if that helps any.... It's terribly difficult to explain - and it doesn't help that I'm not entirely sure what I'm talking about half the time

  4. #3

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    I'm pretty sure they print a few more sheets of money.

    Or erase the checkbook balance and write it in bigger.

    Basically create money out of thin air.

  5. #4

  6. #5

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    ok...what happens to the "Fed funds"? what if a bank cant pay it back?
    There would be no 1st without the 2nd!

    "Audemus Jura Nostra Defendere"
    -Alabama State Motto

    Barry Goldwater:

    “I would remind you that extremism in the defense of liberty is no vice! And let me remind you also that moderation in the pursuit of justice is no virtue.”

    "Remember that a government big enough to give you everything you want is also big enough to take away everything you have.”

  7. #6

    Default

    Quote Originally Posted by sfws09 View Post
    ok...what happens to the "Fed funds"? what if a bank cant pay it back?
    The fed loans that bank more money, rolling over its debt into a new loan with a better interest rate.

  8. #7

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    Quote Originally Posted by sfws09 View Post
    ok...what happens to the "Fed funds"? what if a bank cant pay it back?
    Our competent gov't would NEVER allow such an event to happen. This would be when a bailout occurs. One of 3 things can happen in a gov't bailout.

    1. Their debts are forgiven. This would only happen if the bank were FDIC insured (meaning the depositor's deposits are federally insured [at taxpayers' expense] - up to $100,000 [or something like that... Maybe $250,000 now?]).

    2. They are subsidized. The government gives the bank money/tax breaks etc. to ensure that they stay in business.

    3. (Not a gov't bailout) The bank is bought out by a larger - more competent bank, in which case the loans/CDs would just transfer over or be sold to other banks.

  9. #8

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    Watch AceNZ's video, "How Money is Created and Destroyed." The Teasury actually prints money, not the Fed. And in fact, all the Fed needs to do to expand/contract the money supply is type in numbers on a computer.

  10. #9

  11. #10

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    Yeah, the system is actually more convoluted than one would think. It's not as simple as just clipping coins or creating paper dollars. Much of "money printing" comes from fractional reserve banking.

  12. #11

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    so a small little local bank can get in on one of thse "Fed funds"?
    There would be no 1st without the 2nd!

    "Audemus Jura Nostra Defendere"
    -Alabama State Motto

    Barry Goldwater:

    “I would remind you that extremism in the defense of liberty is no vice! And let me remind you also that moderation in the pursuit of justice is no virtue.”

    "Remember that a government big enough to give you everything you want is also big enough to take away everything you have.”

  13. #12

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    Yeah, this stuff is very confusing.

    This is a long video, but explains A LOT. It's very good.
    http://video.google.com/videoplay?do...JIr2rQLMuKnBAg

    I'm still confused how what exactly causes the economic bubble to burst.
    Last edited by bander87; 05-02-2008 at 11:14 PM.

  14. #13

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    It's important to note that the Fed can't just go creating money on a whim. That's a bit of a misnomer around here.

    Most of the "new money" that we have created comes from government deficits. When the government runs a deficit, they have to "borrow" from the Fed. At that point the Fed pays the treasury the printing costs to make some new money, gives it to the government, and creates treasury notes (or bonds) to either keep or sell to the market.

    When the Fed gives out money to private banks, they have to put up some collateral in return. Really only the federal government creates "money from nothing."

  15. #14

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    Quote Originally Posted by Paulitician View Post
    Watch AceNZ's video, "How Money is Created and Destroyed." The Teasury actually prints money, not the Fed. And in fact, all the Fed needs to do to expand/contract the money supply is type in numbers on a computer.
    By the way, I just watched this video and it has a major flaw. When you deposit your $1,000 at the bank, they can not make a loan for $9,000. The reserve rate is 10%, so that's what they keep of your deposit and loan the rest out. They can make a loan for $900 based on your $1,000 deposite. 10% reserves and 9x the deposits are two extremely different things.

    I also completely disagree with the assertion that banks are the cause of most inflation. Yes, when rates are low and there is a lot of lending activity, fractional reserves can tend towards the 9x of money supply, but most of the time this is not the case.

    Government deficits are by far the number one cause of new money. Not only is this the true "money for nothing," but it also gets deposited into a bank which is then reserves for new loans.

    You're fighting the wrong battle in my opinion by trying to villify the banking system. Government deficits are the number one issue.

  16. #15

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    Quote Originally Posted by scooter View Post
    Really only the federal government creates "money from nothing."
    How do you explain credit cards? Does the money exist before your signature?

  17. #16

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    Quote Originally Posted by Danke View Post
    How do you explain credit cards? Does the money exist before your signature?
    The bank pays the debt. You then owe a loan of the amount charged to the bank.

  18. #17

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    Quote Originally Posted by Kludge View Post
    The bank pays the debt. You then owe a loan of the amount charged to the bank.
    So you are saying the money already existed. I have a $100,000 credit line. That money is already at the bank?

  19. #18

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    Quote Originally Posted by Danke View Post
    So you are saying the money already existed. I have a $100,000 credit line. That money is already at the bank?
    A credit card loan is just like any other loan. The bank who issued you that credit line would need to have some reserves to back up the money they loan you. That comes from their other depositors or from their own assets.

    So if they have approximately $111,000 in deposits, they only need to keep 10% of that and they can loan you the $100,000. If they didn't happen to have the $111,000 on hand when you charged your card to the max, they would have to put some assets up as collateral and borrow their reserves from another bank or from the Fed.

  20. #19

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    Quote Originally Posted by scooter View Post
    A credit card loan is just like any other loan. The bank who issued you that credit line would need to have some reserves to back up the money they loan you. That comes from their other depositors or from their own assets.

    So if they have approximately $111,000 in deposits, they only need to keep 10% of that and they can loan you the $100,000. If they didn't happen to have the $111,000 on hand when you charged your card to the max, they would have to put some assets up as collateral and borrow their reserves from another bank or from the Fed.
    So they can issue many times in credit than what they have in deposits on hand?

    But if everyone chooses to use their credit to the max, they would need 90% of it on hand or the ability to borrow (access to credit) that amount?

  21. #20

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    Quote Originally Posted by scooter View Post
    By the way, I just watched this video and it has a major flaw. When you deposit your $1,000 at the bank, they can not make a loan for $9,000. The reserve rate is 10%, so that's what they keep of your deposit and loan the rest out. They can make a loan for $900 based on your $1,000 deposite. 10% reserves and 9x the deposits are two extremely different things.

    I also completely disagree with the assertion that banks are the cause of most inflation. Yes, when rates are low and there is a lot of lending activity, fractional reserves can tend towards the 9x of money supply, but most of the time this is not the case.

    Government deficits are by far the number one cause of new money. Not only is this the true "money for nothing," but it also gets deposited into a bank which is then reserves for new loans.

    You're fighting the wrong battle in my opinion by trying to villify the banking system. Government deficits are the number one issue.
    you may try to read this...paying special attention to the money multiplier, which is the inverse of the reserve requirement. (1/10 creates 10/1)

    http://en.wikipedia.org/wiki/Fractional-reserve_banking

    The U.S. has 10% reserve requirement, so the money multiplier that banks have, assuming they keep 10% reserve is 10 times the deposited money amount. So $1,000 ---> $10,000.

    That is why we risk having both inflation and deflation coming. If credit contracts too fast, the 'money' that banks created will go back into thin air as fast as they had originally created it. Probably one side or the other will play out much more, we just don't have the ability right now to know which is going to happen.

    (This is besides the derivatives mess and lack of banks actually determining the value of the loans they have out there - [mark to market] which is certainly less than they are valuing these loans. If banks have a bundle of loans with a face value at $10 billion, but no one else believes it's worth that much, they cannot sell it, so now they are giving it to the Fed as collateral (at the full $10 billion price), and getting treasuries which are marketable).
    "Inflation and deflation are about money supply and credit, the latter being more important." Mish Shedlock

  22. #21

    Default Printing Money -- OR the Double CON, FIAT game.

    Lots of misinfo out there.

    I agree with Scooter -- AceNZ's video is just rife with errors and false or misleading info (while I applaud the effort to simplify it all, this video, like several others, make multiple base-level mistakes that confuse people even more, and IMHO lead to a lot of misplaced anger and even WORSE socialistic political ideas than the ones that have already caused the current mess).



    Anyway... part of the problem in people understanding this is that the system was originally constructed with a degree OBFUSCATION in mind, there are several "layers" that were put there quite specifically (like some insane "shell game") to give the APPEARANCE of solidity and fiscal reliability (and thus reassure those "risk averse" people with "weak stomachs") ...instead of allowing it to be known for the house of cards that it truly is ...and like all bureaucratic endeavors, additional layers have been added over the years.

    The whole thing truly IS a "con-game: in the ORIGINAL meaning of that phrase, a "confidence game" -- think about that the next time you hear a media person use the phrase "Consumer-Confidence" -- that is "CONsumer CONfidence" -- it is in fact just a double CON-game.

    I will try my best to give you a quick SOLID summary as it was explained to me when I was in banking back in the early 1980's (and AFAIK the basics remain the same today):

    Depositing money in the bank...
    When you deposit money at the bank (say the $1,000 mentioned by many) the bank does NOT store all of your "dollar bills" in the safety deposit box. Nor do they keep all of the $1,000 on hand. (And unlike Jimmy Stewarts "Building & Loan" company in "It's a Wonderful Life" the bank does NOT just borrow it to your neighbor... there are LOTS of steps in between.)

    Banking Reserves
    Depending on the TYPE of account you deposited it into, the bank is required to keep a certain percentage of it "ON RESERVE" (typically between 10% to 20% -- more for "Demand Deposit Accounts (aka checking accounts) and less for term savings accounts -- {BTW, "CD's" so called "Money Market Accounts" and other things like "Repurchase Agreements" are slightly different creatures that are beyond basic discussions like this}.

    Now what that "RESERVE" actually means is also NOT that they have to keep that 10% (or 20%) in actual dollar bills (FRN's) in the safe either... nope. (Years ago, it DID simply mean that they kept a % of GOLD COIN in the vault... but that all changed when the Government confiscated the gold and then implemented the FDIC, etc).

    What that phrase "reserve" means TODAY is that the bank is required to keep (in aggregate) a percentage of that money in assets or more likely "securities" on deposit at one of the "Federal Reserve Banks" -- and this is typically done in the form of proportional ownership of "Treasury-Securities" (also called "T-Bills" or "T-Notes" or "T-Bonds" and other things as well). These are all essentially a form of debt-obligation -- similar to a "US Savings Bond" or a "Municipal Bond."

    So, what exactly is a "Bond"?
    In essence a "bond" it is a fancy form of a "post-dated check" -- a "promise to repay" or if you want it even simpler, an I.O.U. -- you hand over "cash" and the entity issuing the bond (say your local township) promises to pay the bondholder interest (either annually or in a lump sum at the end when it repays the balance). Now in the case of your local township -- let's say that they issued the bonds (les say 20 years bonds) to build a new courthouse. They "sell" the bonds to people who give them the money. Then they SPEND that money to build the courthouse. The over the 20 years, they pay people interest (and probably a portion of the principal) every year until it is paid off. Where does the township get the money? Where else... TAXES. (So in the end a municipal bond is just a way of spending FUTURE tax money NOW.)


    Back to Treasury Securities...
    OK, so "Treasury Securities" are similar to bonds... but BIGGER denominations, issued by the U.S. Government, and done on a pretty regular basis, and "bought" by your local banks (and others, including foreign governments) via the Federal Reserve Banking system from the U.S. Treasury department at "auctions" that are virtually continuously taking place.

    Now, each of those types of "Treasury Securities" is a distinct type. "Treasury Bills" aka T-Bills, mature in a year or less (i.e. they get "paid off" in 13, 26 or 52 weeks). "Treasury Notes" or T-Notes mature in 10 years or less, and "Treasury Bonds" mature within a timespan of 10 to 30 years. {There is actually a fourth type, called a TIPS, but again for the sake of simplicity we will ignore that one}. And since they all mature at different times, they have (or receive) different interest rates -- basically by being sold at a "discount" -- in other words, the Treasury will "sell" a 1 Million dollar 26-week T-Bill at auction, and will receive say $980,000 for it, which is a 4% interest rate.

    26 weeks (or 2 years or 20 years) from now, they will have to sell ANOTHER bond and use THAT cash to pay back the "guy" who bought the previous T-Bill... plus they will probably sell yet another one... etc, and 26 weeks later... an endless cycle, ad infinitum.

    What is important to note about these is that they are all DEBT of one type or another... and in practice they are virtually NEVER actually paid off. (Think of the average person who never actually pays off a car... just trading it in for a new one every few years, and rolling over the balance from one car loan to the next... Or the people who make "minimum payments" on credit cards, constantly getting NEW cards and rolling balances over to each new card in turn... that is {in essence} what the government does with Treasury "Securities" -- with the balance {and the the total interest due} growing larger and larger all the time).

    OK, got all of that?

    CONGRESS increases the debt... and creates inflation
    Now, let's say Congress authorizes the Government to increase this year's "deficit" by say another Billion dollars or some such... what happens is that the U.S. Treasury prints up a bunch of "Treasury Securities" that are then "auctioned" (as for example our 1 Million T-Bill that went for $980,000 -- the 4% interest job).

    Once "sold", the Treasury then "deposits" that $980K in the accounts of the Federal Government (in a Federal Reserve Bank) and proceeds to spend it, loan it, etc. In one way or another this money has been "spent" by the government, and has entered the economy.

    MOST of the time, this is all done (just as majority of your own banking) by "pushing numbers" around from one account to another inside computer systems, without ever actually having any "money" (in the form of dollar bills and such) ever exchange hands.

    T-Bills as ASSETS ! (?)
    But it is important to note that the "T-Bill" is STILL considered to be valuable -- it is NOT treated as some "worthless I.O.U." -- nope. It takes the PLACE of an "asset" in the banking system, and as an "asset" it gets borrowed against.

    Back to your local bank -- and remember that "reserve" that your bank is required to keep "on deposit" with the Federal Reserve Banking system? Remember that the PREFERRED for that is an "asset" in the form of a "Treasury Security"? That's right, though there are several steps in between that "aggregate" the money from lots of local banks, in essence your deposit has been "loaned" to the government and then "magically transformed" into a "T-Bill" and serves as the wonderful "reserve" that is used to "back" your deposits.

    But banks need FRN's... so where do they come from???
    Actually banks need a lot fewer of these on hand than you think (what % of your monthly transactions are done in actual cash?) -- but granted they DO need to keep a certain amount of what the public THINKS is "money" hanging around -- in part because local businesses NEED to have a movable currency for small-change transactions, but also to make certain the great mob of the riff-raff doesn't start to "panic" and then cause riots! (The people ARE "revolting" you know. )

    So what happens is that your local banks can then "borrow" against their reserve assets -- and get dollar bills and coins for their vault. And since the aggregate total of FRN's & coin that are kept in their local "vaults" are in fact qualified as still being part of their "reserves" -- so they get to have their "cake" AND "eat it" at essentially the same time. (And in practice, a lot of banks keep MORE than their "minimum required reserve" in the form of T-Bills, etc with their Fed branch.)

    In the meantime... the OTHER $800..$900
    Of course, in the meantime, the bank is free to lend out the other 80 to 90% of your "deposited" money -- and they do, just not in the way that you think. You see, as I said above unlike in the movie "It's a Wonderful Life" other than some brief "construction loans" your local bank does NOT really do residential mortgages anymore... (THAT is another whole subject!).

    Instead most of what your local bank does is a variety of short-term loans, commercial "construction" loans, initial "inventory loans" and a lot of "line-of-credit" stuff with local business-people. PLUS, they make a bunch of money on FEES and other things working as "middleman" in SELLING you a variety of things... including debt (Mortgages, VISA and MC Credit Cards & Debit Cards) and so called "assets" or "securities" (IRA's, CD's, Money Market Accounts, Repurchase Agreements, Bonds, etc).

    And YES, the money loaned out in this way DOES come "back" into the local banks and get "multiplied" several times over -- what is known as "money creation" via the "money multiplier" -- and in MANY senses this IS a form of "fraud" -- but that is the result of "Fractional Reserve Banking" and NOT merely a consequence of the Fed/Treasury and "fiat money" beyond the scope of what I'm describing here (and I've already written extensive posts on it, see here: http://www.ronpaulforums.com/showpos...98&postcount=3)

    So, do your little Checking and Savings Deposits matter?
    To the local branch of CitiBank... meh, not really... they do NOT make much money from people's personal savings anymore (how could they, most Americans DON'T HAVE "savings" accounts anymore) ...instead, they are viewed as "loss leader" services similar to the way stores use "on sale" items -- mainly as a way of creating "traffic" and getting you to come to them for things that they DO make money on. (Plus, if they can rip you for some check bouncing fees, get you to use their "brand" of credit cards, etc.)

    However, it IS likely that your checking and savings matter a bit more to the smaller state-charted "Community Banks", as well as to local state-chartered "Savings Banks" (used to be called Savings & Loans before the late 80's S&L fiasco), and of course local they matter to local "Credit Unions" (which are run more as a "cooperative" than a business -- cf http://en.wikipedia.org/wiki/Cooperative ).

    The BIG banks DO make money off of small folks, but only in "volume" -- hence they really don't treat you well, because there's always another one born a few minutes later... And beyond that the Bigger banks are mainly focused on the medium-term commercial services -- again businesses, etc. And handling a variety of larger-dollar accounts like union pensions, etc.

    Conclusion...
    The long and short of it is that "money is always in motion" -- if it "sits" somewhere then it is VERY likely that the money itself really is NOT sitting there -- instead there is some form of I.O.U. in it's place. (Heck, what most people THINK is money... those "Federal Reserve Notes" are really nothing more than an I.O.U. themselves.)

    In the end... all that exists are REAL ASSETS -- in the form of goods (foodstuffs, machinery, real estate, etc.) There are really only TWO ways the Government can POSSIBLY pay for anything:

    1) is via SALES of REAL ASSETS that it "owns" (land, buildings, stored grains, etc) or subsequently seizes. {Note: Nos 3 & 5 below play into this... our loss of factories and foreign ownership of US Assets are a direct consequence of "inflated" dollars coming home to roost).

    2) is via TAXATION (which means TAKING or SEIZING some portion of those REAL ASSETS -- foodstuffs, machinery, real estate, etc.) either now, gradually over time, or in some "distant" future. (What "Treasury Securities" are is just a way of pushing the day of that "TAXING" into the future, of {hopefully} doing the taxing gradually rather than all at once, and yet spending it HERE and NOW instead of waiting.)

    Oh, there ARE three other alternatives...

    3) Hyperinflation -- the government says: Here's a bunch of freshly printed paper currency -- bye bye! (Germany's Weimar Republic, Zimbabwe currently, etc.)

    4) Bankruptcy -- the government simply says "sorry, we can't pay you" to the people who hold the "securities" (T-bills, T-Notes, T-bonds). THIS DOES happen with local governments (cities, towns, etc -- mainly because they CANNOT do #3 above). But for the US Government... well, since the dollar is the reserve currency, if its done all at once, it would be an "Apocolypse" type scenario. We pretty much DID do this under Nixon back in 1971... but the world "blinked" and went into denial, and allowed #5 instead...

    5) More of the same -- "Hey, can't really pay you today, but tell you what, if you take this "new" I.O.U. we promise to pay you EVEN MORE next year." Repeat #5 ad infinitum. (Except, of course it cannot and will not last forever.)

    So, the phrase "Printing Money" is a "euphemism" or "colloquialism" that while technically incorrect gets the point across in simpler terms. The Federal Reserve itself does NOT actually print the paper bills (that is done by the US Mint, as a division of the Treasury).

    It would be more correct to say that the Federal Reserve does #5 above -- a very fancy form of "long-term check kiting" paying off one check with another larger check again and again...

    Or more formally the Fed "Debases the value of the currency by facilitating an increased amount of dollar-denominated credit." ...but that just doesn't roll off the tongue, and it doesn't make much sense to most people (who think dollar bills are "assets" instead of simply being I.O.U.'s based on future taxes).

    Because unless the REAL ASSETS (foodstuffs, machinery, real estate, etc.) have increased in quality... then the RELATIVE value of any "existing accounts" that are measured in dollars has decreased -- and people holding those "dollars" (rather than the actual assets) will lose a proportionate amount of their value.

    One metaphor for understanding what is going on -- let's say CONgress was CONstantly adding "inches" to the definition of a "foot" every year, but the physical rulers are NOT getting any longer. So while your literal foot may have been 8 inches long, 2 years ago NOW it might measure 16 "new" inches... but if your foot hasn't grown it's all just an illusion (or delusion)... a fraud.




    And my final PERSONAL FAVORITE "meme" for understanding our current "house of cards money system" and to NOT fall under the power of that "delusion" is the following:
    FIAT Money = Future Is Already Taxed
    While a "backronym" this is, IMHO a better metaphor than "printing money" for remembering what a "fiat" money system is all about, and what REALLY underlies any and all fiat money systems. (The "printing money" gives the FALSE impression that somehow the "printing" gives it value, when it does nothing of the kind.)

    Remember, it is ALL about taxes... the Future Is Already Taxed.)

  23. #22

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    Quote Originally Posted by scooter View Post
    It's important to note that the Fed can't just go creating money on a whim. That's a bit of a misnomer around here.

    Most of the "new money" that we have created comes from government deficits. When the government runs a deficit, they have to "borrow" from the Fed. At that point the Fed pays the treasury the printing costs to make some new money, gives it to the government, and creates treasury notes (or bonds) to either keep or sell to the market.

    When the Fed gives out money to private banks, they have to put up some collateral in return. Really only the federal government creates "money from nothing."
    And that is the real problem.....The government SHOULDNT HAVE TO BORROW MONEY FROM THE FED AND PAY IT BACK WITH INTEREST...

    But unfortunately congress gave that away to private corporations long before I was born.......

    I agree with Richard C Cook....the central bank should be allowed to exist, but as a public utility rather than a private entity....THIS IS THE ANSWER.......
    Last edited by buffalokid777; 05-04-2008 at 12:41 AM.

  24. #23

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    From the Chicago Federal Reserve:

    A Money Creation Function

    Debt does more than simply transfer idle funds to where they can be put to use -- merely reshuffling existing funds in the form of credit. It also provides a means of creating entirely new funds -- funds needed to finance the greater volume of new projects and spending that contribute to economic growth.

    Again, checkable deposits in commercial banks and savings institutions are debts -- liabilities of these depository institutions to their depositors.

    But checkable deposits are also the money used for most expenditures.

    How do these deposit liabilities arise?

    For an individual institution, they arise typically when a depositor brings in currency or checks drawn on other institutions. The depositor's balance rises, but the currency he or she holds or the deposits someone else holds are reduced a corresponding amount. The public's total money supply is not changed. But a depositor's balance also rises when the depository institution extends credit -- either by granting a loan to or buying securities from the depositor. In exchange for the note or security, the lending or investing institution credits the depositor's account or gives a check that can be deposited at yet another depository institution. In this case, no one else
    loses a deposit. The total of currency and checkable deposits -- the money supply -- is increased. New money has been brought into existence by expansion of depository institution credit. Such newly created funds are in addition to funds that all financial institutions provide in their operations as intermediaries between savers and users of savings.

    But individual depository institutions cannot expand credit and create deposits without limit. Furthermore, most of the deposits they create are soon transferred to other institutions. A deposit created through lending is a debt that has to be paid on demand of the depositor, just the same as the debt arising from a customer's deposit of checks or currency in a bank. By writing checks, the borrower can spend the deposit acquired by borrowing.
    The recipients of these checks deposit them in their depository institutions. In turn, these checks are presented for payment to the institution on which
    they are drawn. As a result, the newly created deposit can be shifted out of the originating institution, but it remains part of the money supply until the
    debt is repaid.

    No effort is made here to give a detailed explanation of the creation of money through the expansion of deposits and depository institution credit.
    For present purposes, it is enough to point out that these institutions can make additional loans and investments, and thereby increase checkable deposit money, to the extent that they have the required amount of reserves against the increased deposits. The amount of reserves, in turn, is controlled by the Federal Reserve System -- the central bank of the United
    States.

    . . . a stimulus to growth

    The chart: Debt and Economic Activity in the U.S. shows the general relationship between long-term trends in total debt and the value of the nation's production of goods and services, as measured by gross domestic
    product. These measures generally have moved upward since the turn of the century, but neither has grown steadily. Both debt and production have made major upswings in wartime, but the only period in which there was significant liquidation of debt was in the depressed 1930s.

    People are generally more willing to incur debt -- to buy houses and other big-ticket consumer goods -- when incomes and employment are rising.



    The principal danger of overall growth in debt is that new money created through the expansion of depository institution credit will touch off price inflation by stimulating too much spending. Over time, a moderately rising money supply is usually consistent with a rising level of economic activity and full employment for a growing population. Some expansion in debt and money is necessary for the full use of resources and satisfactory
    economic growth. But when the economy is already working at capacity, or near that, additional money injected into the spending stream may simply drive prices up, setting the stage for subsequent recession and
    unemployment. The Federal Reserve System is responsible for providing enough reserves to support reasonable credit needs, but to avoid expansion
    at a rate that would cause price inflation and the subsequent economic problems.

    Cyclical variations in private expenditures and private debt are offset to some extent by concurrent changes in public debt -- especially federal debt. In recessions, when the growth of private debt slows or declines,U.S. government debt usually rises, due partly to increased expenditures connected with programs to combat the recession and partly to reduced tax collections. Under such circumstances, increased public debt is not usually
    an inflationary threat, but rather a reflection of the weakness of demand in the private sector. However, when the U.S. government is already borrowing to finance large deficits, any additional borrowing can raise
    interest rates and further restrain economic recovery.
    In periods of prosperity, private debt tends to grow more rapidly. At such times, higher incomes can be expected to bring tax receipts more in line with government spending, thus reducing the rate of growth of government debt or reducing the need for further borrowing completely.When personal and business credit demands are especially strong, with private debt increasing rapidly and prices tending to rise, the government should operate with a surplus and reduce federal debt.
    Potential inflation then, not insolvency, is the principal danger associated with public debt. Given its extensive powers to tax and create money, the federal government can always meet its interest obligations, refinance
    maturing securities, and even, when consistent with overall economic objectives as well as social and political choices, reduce its level of total indebtedness.

    The Burden of Debt

    The burden of debt has been given a lot of attention through the years. Yet the nature of the debt burden is still not clear. People can think of their indebtedness as a twofold burden -- the debt must be paid at maturity and
    interest charges must be paid on schedule. Repayment may turn out to be burdensome either because income falls short of expectations or because the product or service purchased with the borrowed funds is less rewarding than expected (which, of course, could be equally true of cash purchases). The uncertainty of whether the benefits will eventually outweigh the costs contributes heavily to the idea that debt involves a burden.

    What about the burden of the federal debt? As the economy grows, the total amount of public debt will probably continue to increase. Existing debt will be refinanced over and over again, and it will always be owned by those who want to hold government securities among their financial assets. The problem, therefore, centers largely on interest payments. But again, burden is hard to define.

  25. #24

    Default

    Quote Originally Posted by buffalokid777 View Post
    And that is the real problem.....The government SHOULDNT HAVE TO BORROW MONEY FROM THE FED AND PAY IT BACK WITH INTEREST...

    But unfortunately congress gave that away to private corporations long before I was born.......

    I agree with Richard C Cook....the central bank should be allowed to exist, but as a public utility rather than a private entity....THIS IS THE ANSWER.......
    BUFFALO KID... WE NEED YOUR SERVICES ONCE AGAIN.. PM

  26. #25

    Default

    Quote Originally Posted by buffalokid777 View Post
    And that is the real problem.....The government SHOULDNT HAVE TO BORROW MONEY FROM THE FED AND PAY IT BACK WITH INTEREST...

    But unfortunately congress gave that away to private corporations long before I was born.......

    I agree with Richard C Cook....the central bank should be allowed to exist, but as a public utility rather than a private entity....THIS IS THE ANSWER.......
    What you are advocating here has a name... it's called socialism. Nationalizing the bank as a public utility is a terrible idea.

    We're not really far from that anyway. Despite what the conspiracy theorists say, the Fed goes lock-step with the federal government. The majority of the FOMC committee members are appointed by the president, and the Fed's major dealings are with the treasury and US bonds. The US government is the prime driver of inflation and poor money policies, the Fed is just a facilitator.

    By the way, what I said earlier about the money multiplier being wrong in the video was just to clear up confusion that it causes people. If you deposit $1,000 in the bank, they can't just turn that into $10,000. They can loan out $900 of the money, which becomes a deposite in another bank, who can then lend $810. If it continued that way after several steps, you would approach the 9x number, but this is only after several people's collateral has been put up against several different loans. In theory there should now be 9x the assets attached to the "new money" as there originally was with the first deposit.

    The money multiplier is not all that bad. People get all up in arms about it, but it really isn't a big deal. All it does is allow people to spend money now that they will earn later on. I guess it sucks if you hate that everyone stays in debt forever, but that's how the world works. People want to get their house while they are young and haven't produced, then they will pay it off with real production as their lives progress.

    Nearly all of the new money from fractional reserve lending is erased as the loans are paid off. Even if they default, the bank assumes assets as collateral and most of the time they will get their principle back.

    However, hardly any of the new money the federal government creates ever gets paid back. They don't put up houses or anything as collateral, just the promise that their tax payers will pick up the bill down the road. But in the end, they just pay it by inflating the crap out of the money.

    Inflation is a government-driven facility. Fractional reserves, fiat money, the Federal Reserve... these are not the ones driving most of it. They just facilitate it or can make it slightly worse if they begin to malinvest. But in my opinion, we're all fighting these varying battles, when in reality we should just be arguing constantly about our government's inability to spend only what it takes in and not mortgage our futures.
    Last edited by scooter; 05-04-2008 at 03:40 PM.

  27. #26

    Default

    Quote Originally Posted by Danke View Post
    From the Chicago Federal Reserve:

    A Money Creation Function

    Debt does more than simply transfer idle funds to where they can be put to use -- merely reshuffling existing funds in the form of credit. It also provides a means of creating entirely new funds -- funds needed to finance the greater volume of new projects and spending that contribute to economic growth.

    Again, checkable deposits in commercial banks and savings institutions are debts -- liabilities of these depository institutions to their depositors.

    But checkable deposits are also the money used for most expenditures.

    How do these deposit liabilities arise?

    For an individual institution, they arise typically when a depositor brings in currency or checks drawn on other institutions. The depositor's balance rises, but the currency he or she holds or the deposits someone else holds are reduced a corresponding amount. The public's total money supply is not changed. But a depositor's balance also rises when the depository institution extends credit -- either by granting a loan to or buying securities from the depositor. In exchange for the note or security, the lending or investing institution credits the depositor's account or gives a check that can be deposited at yet another depository institution. In this case, no one else
    loses a deposit. The total of currency and checkable deposits -- the money supply -- is increased. New money has been brought into existence by expansion of depository institution credit. Such newly created funds are in addition to funds that all financial institutions provide in their operations as intermediaries between savers and users of savings.

    But individual depository institutions cannot expand credit and create deposits without limit. Furthermore, most of the deposits they create are soon transferred to other institutions. A deposit created through lending is a debt that has to be paid on demand of the depositor, just the same as the debt arising from a customer's deposit of checks or currency in a bank. By writing checks, the borrower can spend the deposit acquired by borrowing.
    The recipients of these checks deposit them in their depository institutions. In turn, these checks are presented for payment to the institution on which
    they are drawn. As a result, the newly created deposit can be shifted out of the originating institution, but it remains part of the money supply until the
    debt is repaid.

    No effort is made here to give a detailed explanation of the creation of money through the expansion of deposits and depository institution credit.
    For present purposes, it is enough to point out that these institutions can make additional loans and investments, and thereby increase checkable deposit money, to the extent that they have the required amount of reserves against the increased deposits. The amount of reserves, in turn, is controlled by the Federal Reserve System -- the central bank of the United
    States.

    . . . a stimulus to growth

    The chart: Debt and Economic Activity in the U.S. shows the general relationship between long-term trends in total debt and the value of the nation's production of goods and services, as measured by gross domestic
    product. These measures generally have moved upward since the turn of the century, but neither has grown steadily. Both debt and production have made major upswings in wartime, but the only period in which there was significant liquidation of debt was in the depressed 1930s.

    People are generally more willing to incur debt -- to buy houses and other big-ticket consumer goods -- when incomes and employment are rising.



    The principal danger of overall growth in debt is that new money created through the expansion of depository institution credit will touch off price inflation by stimulating too much spending. Over time, a moderately rising money supply is usually consistent with a rising level of economic activity and full employment for a growing population. Some expansion in debt and money is necessary for the full use of resources and satisfactory
    economic growth. But when the economy is already working at capacity, or near that, additional money injected into the spending stream may simply drive prices up, setting the stage for subsequent recession and
    unemployment. The Federal Reserve System is responsible for providing enough reserves to support reasonable credit needs, but to avoid expansion
    at a rate that would cause price inflation and the subsequent economic problems.

    Cyclical variations in private expenditures and private debt are offset to some extent by concurrent changes in public debt -- especially federal debt. In recessions, when the growth of private debt slows or declines,U.S. government debt usually rises, due partly to increased expenditures connected with programs to combat the recession and partly to reduced tax collections. Under such circumstances, increased public debt is not usually
    an inflationary threat, but rather a reflection of the weakness of demand in the private sector. However, when the U.S. government is already borrowing to finance large deficits, any additional borrowing can raise
    interest rates and further restrain economic recovery.
    In periods of prosperity, private debt tends to grow more rapidly. At such times, higher incomes can be expected to bring tax receipts more in line with government spending, thus reducing the rate of growth of government debt or reducing the need for further borrowing completely.When personal and business credit demands are especially strong, with private debt increasing rapidly and prices tending to rise, the government should operate with a surplus and reduce federal debt.
    Potential inflation then, not insolvency, is the principal danger associated with public debt. Given its extensive powers to tax and create money, the federal government can always meet its interest obligations, refinance
    maturing securities, and even, when consistent with overall economic objectives as well as social and political choices, reduce its level of total indebtedness.

    The Burden of Debt

    The burden of debt has been given a lot of attention through the years. Yet the nature of the debt burden is still not clear. People can think of their indebtedness as a twofold burden -- the debt must be paid at maturity and
    interest charges must be paid on schedule. Repayment may turn out to be burdensome either because income falls short of expectations or because the product or service purchased with the borrowed funds is less rewarding than expected (which, of course, could be equally true of cash purchases). The uncertainty of whether the benefits will eventually outweigh the costs contributes heavily to the idea that debt involves a burden.

    What about the burden of the federal debt? As the economy grows, the total amount of public debt will probably continue to increase. Existing debt will be refinanced over and over again, and it will always be owned by those who want to hold government securities among their financial assets. The problem, therefore, centers largely on interest payments. But again, burden is hard to define.
    I rule this confession admissable in the people's court. Judgement for the plaintiff (the people) and against the defendant (fractional reserve banking/federal reserve) for the counterfeiting of our currency. Sentence... abolish the FED and fractional reserve banking, return to gold and silver currency.

    Anyone further arguing against this judgement shall be labeled "troll" and be given a stern reprimand, second offense banishment for 1 week, third strike permanent exile to Muldovia. Court adjourned.

  28. #27

    Default

    Quote Originally Posted by scooter View Post
    What you are advocating here has a name... it's called socialism. Nationalizing the bank as a public utility is a terrible idea.

    We're not really far from that anyway. Despite what the conspiracy theorists say, the Fed goes lock-step with the federal government. The majority of the FOMC committee members are appointed by the president, and the Fed's major dealings are with the treasury and US bonds. The US government is the prime driver of inflation and poor money policies, the Fed is just a facilitator.

    By the way, what I said earlier about the money multiplier being wrong in the video was just to clear up confusion that it causes people. If you deposit $1,000 in the bank, they can't just turn that into $10,000. They can loan out $900 of the money, which becomes a deposite in another bank, who can then lend $810. If it continued that way after several steps, you would approach the 9x number, but this is only after several people's collateral has been put up against several different loans. In theory there should now be 9x the assets attached to the "new money" as there originally was with the first deposit.

    The money multiplier is not all that bad. People get all up in arms about it, but it really isn't a big deal. All it does is allow people to spend money now that they will earn later on. I guess it sucks if you hate that everyone stays in debt forever, but that's how the world works. People want to get their house while they are young and haven't produced, then they will pay it off with real production as their lives progress.

    Nearly all of the new money from fractional reserve lending is erased as the loans are paid off. Even if they default, the bank assumes assets as collateral and most of the time they will get their principle back.

    However, hardly any of the new money the federal government creates ever gets paid back. They don't put up houses or anything as collateral, just the promise that their tax payers will pick up the bill down the road. But in the end, they just pay it by inflating the crap out of the money.

    Inflation is a government-driven facility. Fractional reserves, fiat money, the Federal Reserve... these are not the ones driving most of it. They just facilitate it or can make it slightly worse if they begin to malinvest. But in my opinion, we're all fighting these varying battles, when in reality we should just be arguing constantly about our government's inability to spend only what it takes in and not mortgage our futures.
    Actually it's not socialism, or facism if left in the hands of private corporation......as long as commodities are legal Currency.......all metals could be some form of currency, not just gold and silver.....NO PAPER CURRENCY...when you start issuing paper currency....that is a central bank that is socialism when public, or facism when private....with commodity currency....all currency has value of some kind.....

    Credit in the hands of private corporations and fractional reserve banking is what causes the problems you refer to.......take the paper out of the equation....and things are different....because then fractional reserve banking can't exist, but credit can still be extended to grow the economy......so long as there are reserves to loan......when a commodity is a currency.....it can't be inflated....and then the central bank can't loan what it doesn't own......
    Last edited by buffalokid777; 05-04-2008 at 08:10 PM.

  29. #28

    Default

    Quote Originally Posted by scooter View Post
    You're fighting the wrong battle in my opinion by trying to villify the banking system. Government deficits are the number one issue.
    Well, I don't really disagree. I think the banking system manipulates the money, whilst the government outright ravages it. So yeah, I'd have to agree with you.

  30. #29

    Default

    WRellim,

    Great summary. It would probably be useful to include the role of 'sweeps' in allowing banks to maximize their leverage. As I understand it, this activity was illegal until banks lobied Greenspan to allow it on not only savings acounts but demand deposits (chequing accts) also. I believe this happened in '94. Perhaps you can word it better.

  31. #30

    Default

    Quote Originally Posted by sratiug View Post
    I rule this confession admissable in the people's court. Judgement for the plaintiff (the people) and against the defendant (fractional reserve banking/federal reserve) for the counterfeiting of our currency. Sentence... abolish the FED and fractional reserve banking, return to gold and silver currency.

    Anyone further arguing against this judgement shall be labeled "troll" and be given a stern reprimand, second offense banishment for 1 week, third strike permanent exile to Muldovia. Court adjourned.
    Well I would disagree with you....Fractional Reserve Banking and the Fed should be abolished, that I will agree...But I disgree only gold and silver should be currency....

    Because we have such a vast economy.....all commodities should be considered for currency especially metals. Using just gold and silver we would cause a spike in gold and silver....by considering ALL NON PERISHIBLE commodities for currency we could overcome this.....

    Based on current prices....an ounce of Platinum would be a $2000 coin...

    A 1/2 OZ a $1000 coin......

    there are many metals that are no perishable....

    The globalists argument is that if we went to a gold standard....there would not be enough Gold to have enough currency.....

    So to counter that argument I say commodity currency is the answer.....

    Platinum, Gold, Paladium, Silver, Copper, Zinc, Steel, Tin, Aluminum..etc.....If you use the full spectrum of commodities that weren't available to the founders....

    Then you can implement their principles in Modern Times....

    That is why commodity currency is the answer rather than just Gold and Silver can be legal currency.

    It upholds the founding fathers intent while countering the globalists argument....

    And if you think I should be banned for that.....prove me wrong.....

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