Issue: Economic: Monetary Policy: Newbie Monetary Question

[tonyr1988]

I'll be the first to admit that I know little / nothing about our fiat currency, but I'm trying to learn gradually.

One question that I have that's been bugging me for quite a while that I'd love to get answered is: Since our money has no intrinsic value (the worth of the paper it's on, since there's nothing backing it), how can the value increase or decrease? Why would it be harmful to print up $2.whatever trillion and pay off our debt? I understand why it would be bad under a gold standard (if you print more money without increasing the gold, each bill is worth less), but it doesn't make since to me with fiat currency.

Could anyone explain it in a way I could understand? It may be a really simple answer, or it may be that I'm misunderstanding the entire concept of money. :P Any help is appreciated.

[Bradley in DC]

I'll be the first to admit that I know little / nothing about our fiat currency, but I'm trying to learn gradually.

One question that I have that's been bugging me for quite a while that I'd love to get answered is: Since our money has no intrinsic value (the worth of the paper it's on, since there's nothing backing it), how can the value increase or decrease? Why would it be harmful to print up $2.whatever trillion and pay off our debt? I understand why it would be bad under a gold standard (if you print more money without increasing the gold, each bill is worth less), but it doesn't make since to me with fiat currency.

Could anyone explain it in a way I could understand? It may be a really simple answer, or it may be that I'm misunderstanding the entire concept of money. :P Any help is appreciated.

Good questions. It would be harmful for the government to print money to pay off it's obligations ("monetizing the debt") since that is the cause of inflation (the loss of purchasing power of the monetary unit). It's simple supply, demand, price: increase the supply, the value falls (assuming demand is constant).

Unlike Milton Friedman's analogy to think of it as money falling evenly distributed throughout the economy from a helicopter, in reality, whoever gets the "new" money first (the government, Fed, Fed-member banks...) get the full "value" of the monetary increase before the price levels adjust.

As price levels adjust as a result of the government credit creation (inflation), those that get the "new" money later or not at all get no benefit but suffer the consequences of the inflation.

Even worse, these price distortions on the supply of money affect interest rates. These distortions are the main cause of the boom and bust cycles in the economy (see the Austrian Business Cycle theory).

[kimosabi]

I'll be the first to admit that I know little / nothing about our fiat currency, but I'm trying to learn gradually.

One question that I have that's been bugging me for quite a while that I'd love to get answered is: Since our money has no intrinsic value (the worth of the paper it's on, since there's nothing backing it), how can the value increase or decrease? Why would it be harmful to print up $2.whatever trillion and pay off our debt? I understand why it would be bad under a gold standard (if you print more money without increasing the gold, each bill is worth less), but it doesn't make since to me with fiat currency.

Could anyone explain it in a way I could understand? It may be a really simple answer, or it may be that I'm misunderstanding the entire concept of money. :P Any help is appreciated.

Watching these will help kick off your educational process:

Money Masters ==> http://video.google.com.au/videoplay...19560256183936

FIAT EMPIRE - Why the Federal Reserve Violates the U.S. Constitution ==> http://video.google.com.au/videoplay...39329002339531

America: Freedom to Fascism - Director's Authorized Version ==> http://video.google.com.au/videoplay...80303867390173

[angrydragon]

http://video.google.com/videoplay?do...07639261829691 Liberty and Economics

http://www.youtube.com/watch?v=iYZM58dulPE Money, Banking and the Federal Reserve

Both videos have Ron Paul.

[1000-points-of-fright]

Ever since I was a little kid, I've been asking why money is worth anything. It's just paper. My dad would say it's because it represents a certain amount of gold. Obviously, not any more. But even if we still maintained the gold standard, my question would still be "So what? Gold is just a rock." Some would say gold is valuable because it's rare. So are snow leopards, but we don't use them as money.

The only acceptable answer I've gotten is because it's shiny and someone a long time ago decided it was valuable and we can't trade goats and chickens anymore so we had to pick something.

It's still rocks and paper to me and not even brainy economists have been able to give me a rational, practical answer.

[Bradley in DC]

Money Masters ==> http://video.google.com.au/videoplay...19560256183936

The goals of the Money Masters video and Dr. Paul are incompatible, and there are serious factual errors in the video.

Edit: try this site (more than just this article http://mises.org/story/2623)

[David Merrill]

The goals of the Money Masters video and Dr. Paul are incompatible, and there are serious factual errors in the video.

Edit: try this site (more than just this article http://mises.org/story/2623)

Indeed; Money Masters is fascinating to watch but is not correct in foundation. There was no fiat currency while the nation's Constitution was in effect - between 1789 and 1861. Since March 28, 1861 we have been in an emergency, keeping the Southern States from seceding. It is only during emergency that we can print fiat currency and that began here in Colorado on the Territory.

What we really need to pay attention to is lawful money. In 1913 Congress went to the central bankers to furnish elastic currency. This is one step beyond fiat currency in that you become the bond - the Government bond that FDR was talking about twenty years later at the Bankers' Holiday.

“Recognized Government bonds are as safe as Government currency. They have the same credit back of them. And, therefore, if we can persuade people all through the country, when their salary checks come in, to deposit them in new accounts, which will be held in trust and kept in one of the new forms I have mentioned, we shall have made progress.” The Public Papers and Addresses of Franklin D. Roosevelt; 1933 The Year of Crisis; Random House 1938; page 19. Excerpt from the Address before the Governors’ Conference at the White House. March 6, 1933.

Indeed there is plenty of reason to think the objective is to abolish the Fed. However Ron Paul has Three Strikes at his attempts and considering him able to legislate as President is technically incorrect. The President does however have some sway with bills. But we are better off non-endorsing our paychecks and redeeming the national debt that way. We can start now as that remedy has been in place since 1913 and is supported by the courts.

http://friends-n-family-research.inf...ublicMoney.wmv
http://video.google.com/videoplay?do...06869308133588

We have always had the power to abolish the Federal Reserve ourselves. It has been conditioned out of us starting in 1933.


Regards,

David Merrill.

[Bradley in DC]

Great foundation how Dr. Paul and the rest of us "Austrians" understand money:

http://www.mises.org/etexts/menger/eight.asp

[SeanEdwards]

Ever since I was a little kid, I've been asking why money is worth anything. It's just paper. My dad would say it's because it represents a certain amount of gold. Obviously, not any more. But even if we still maintained the gold standard, my question would still be "So what? Gold is just a rock." Some would say gold is valuable because it's rare. So are snow leopards, but we don't use them as money.

The only acceptable answer I've gotten is because it's shiny and someone a long time ago decided it was valuable and we can't trade goats and chickens anymore so we had to pick something.

It's still rocks and paper to me and not even brainy economists have been able to give me a rational, practical answer.

Gold is esteemed for many reasons. It is relatively rare and the rate of increase of gold is usually consistent. It resists corrosion and maintains it's state as gold better than almost anything. Gold bars from shipwrecks will sit on the bottom of the ocean for hundereds of years and still look brand new. Gold has an intrinsic value to the makers of jewlery, and in some high tech applications, so it is assumed that there is a reliable market for the gold. Gold is also fungible, it can be divided and remelted together without losing its intrinsic value. Can't do that with a work of fine art, or a diamond.

So, it has intrinsic value, lasts forever in a stable form, and you can be guaranteed of finding a buyer if you need to sell it. These are reasons why it has been historically favored as a store of value.

[David Merrill]

Actually, we'd have another problem too. Our government doesn't actually print the money, they borrow it from the Federal reserve system. So, if they 'printed' up 2 trillion to pay off the debt, they'd be creating new debt just in the process of 'printing'.

They bond it through private credit by endorsement.

http://Friends-n-Family-Research.inf...y_of_Money.zip

[1000-points-of-fright]

Gold is esteemed for many reasons. It is relatively rare and the rate of increase of gold is usually consistent. It resists corrosion and maintains it's state as gold better than almost anything... ...Gold has an intrinsic value to the makers of jewlery, and in some high tech applications, so it is assumed that there is a reliable market for the gold. Gold is also fungible, it can be divided and remelted together without losing its intrinsic value.

So, it has intrinsic value, lasts forever in a stable form, and you can be guaranteed of finding a buyer if you need to sell it. These are reasons why it has been historically favored as a store of value.

OK, that helps a little. BUT previous to high technologies, all gold was good for was making jewelery, statues, and other aesthetically pleasing things. So besides its durability and fungibility, its value still seems to boil down to my thieving magpie theory... we're enthralled by pretty shiny things.

And another thing... supposedly economics is not a zero-sum game. Wealth can be created and economies expanded. However, let's assume that all the world is on a stable gold standard currency. It's also pretty safe to say that (unless I am way off base geologically and correct me if I am) there is a limited amount of gold on this planet and no new gold is being created. Once all existing gold is in circulation or national treasuries, it is a zero-sum game. Am I wrong?

[David Merrill]

However, let's assume that all the world is on a stable gold standard currency.

The secret Jamaica Rambouillet Accord was 1976 with the Amendments to the Bretton Woods Agreements. That is when the US went off the gold standard for a fixed exchange rate and adopted SDRs (Special Drawing Rights) for the new floating exchange rate.

http://www.ecclesia.org/forum/images.../SeizeGold.jpg

https://www.cia.gov/library/publicat...k/geos/ch.html

In July 2005, China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies.

China waited until 2005 and look where we compare debt-wise:

https://www.cia.gov/library/publicat.../2187rank.html

Since 1913 we have been on elastic currency - the Federal Reserve Act. That allows us to endorse ourselves the bond/chattel.



Regards,

David Merrill.

[RonPaulGetsIt]

I'll be the first to admit that I know little / nothing about our fiat currency, but I'm trying to learn gradually.

One question that I have that's been bugging me for quite a while that I'd love to get answered is: Since our money has no intrinsic value (the worth of the paper it's on, since there's nothing backing it), how can the value increase or decrease? Why would it be harmful to print up $2.whatever trillion and pay off our debt? I understand why it would be bad under a gold standard (if you print more money without increasing the gold, each bill is worth less), but it doesn't make since to me with fiat currency.

Could anyone explain it in a way I could understand? It may be a really simple answer, or it may be that I'm misunderstanding the entire concept of money. :P Any help is appreciated.

The money supply is composed of money and credit. For the sake of simplicity ignore the much larger credit part for a second. All other things being equal if the money in circulation doubled everything would simply cost twice as many dollars. So in answer to your question yes it would be harmful, immoral in fact, as it would punish savers who would have half as much purchasing power.

[Harald]

Also, inflation is not instantenuous. It is a process.
Eventually it will rise prices of everything.

However in the process there will be wealth redistribution from those who was late in getting freshly printed money (ie hasn't been able to spend them before price level has risen) to those who got them first, who got to spend the money by purchasing good and services at pre-inflated prices.

[MBA2008]

No one says that only gold can be used to back money. If we run out of gold, we can add silver. When we run out of silver we can add platinum. When we run out of that...

The point is, I wouldn't worry about running out of "stuff" to back currency.

Anything that is relatively rare, permanent, and easily divisible can be used to back currency.

[Bradley in DC]

No one says that only gold can be used to back money. If we run out of gold, we can add silver. When we run out of silver we can add platinum. When we run out of that...

The point is, I wouldn't worry about running out of "stuff" to back currency.

Anything that is relatively rare, permanent, and easily divisible can be used to back currency.

It's not that we run out of gold or any other commodity, the key is letting prices adjust. Prices should gently fall over time with new efficiencies, etc.

[Bradley in DC]

Also, inflation is not instantenuous. It is a process.
Eventually it will rise prices of everything.

Some prices may be inelastic, but the general price level (GDP deflator) will rise, yes.

[fsk]

Once all existing gold is in circulation or national treasuries, it is a zero-sum game. Am I wrong?

With a pure gold standard, if the economy grows faster than gold is mined, then prices will decrease. There will be deflation.

There is nothing intrinsically wrong with deflation. With a constant money supply, deflation is a natural result of a growing economy.

The reason the Federal Reserve thinks deflation is bad is that deflation is a disincentive to borrowing. Currently, the Federal Reserve is a price-fixing cartel. There is a massive subsidy to the financial industry in the form of inflation. Interest rates are 5.25%, but the money supply is growing at a rate of more than 6%. In other words, real interest rates are negative.

Under a pure gold standard, you can't have negative real interest rates (unless the economy is shrinking).

Suppose the Federal Reserve didn't fix interest rates. The cost of deflation will be included in the market interest rate. Obviously, interest rates can't be negative under a pure gold standard and a growing economy.

One problem with a pure gold standard is that workers don't like seeing their wages go down. A lot of contracts specify a fixed payout over time. Inflation allows partial defaults to occur.

Workers wouldn't mind decreasing wages provided prices were decreasing at the same rate.

One question that I have that's been bugging me for quite a while that I'd love to get answered is: Since our money has no intrinsic value (the worth of the paper it's on, since there's nothing backing it), how can the value increase or decrease? Why would it be harmful to print up $2.whatever trillion and pay off our debt?

The value of a dollar is, basically (size of economy)/(# of dollars). If you print more dollars, the value of the remaining dollars decreases.

Under a fractional reserve banking system, if the government directly printed and spend $2 trillion, banks would create another $20 trillion via fractional reserve banking.

The only value of a dollar is that the government demands them as payment for taxes. People cannot work without permission from the government. Whenever you work, you pay income taxes. A dollar is a receipt that allows you to perform a certain amount of work. The value of a dollar depends on the IRS's tax collection ability. The value of a dollar depends on the IRS's spying capability, to make sure every economic transaction is reported and taxed. The value of a dollar depends on the government's willingness to use violence to force people to pay income taxes.

[constituent]

good post fsk

[nullvalu]

https://www.cia.gov/library/publicat.../2187rank.html

Holy crap, thats an eye opener!

[Brandybuck]

Here's a good podcast on banking and money. It's by Joseph Salerno, from the Mises Institute. Very good. http://mises.org/multimedia/mp3/Sale...10-Salerno.mp3