Could Someone Please Explain the Money Supply?
 

How is our currency created (not physically)? In all of the discussion on economics, I have not yet seen anyone clearly explain how our money supply works. A few things I do know is that:

1) Our currency is not backed by anything; it's just paper
2) Is inflation a byproduct of printing too much money?
3) The Federal Reserve controls a lot of this process

Do we:

1) Consistently print more money than we destroy (on a federal level)
2) If so, who gets the benefit of this extra money printed?
3) How do we keep track of the amount of digital money since most money now is not kept in hard currency?
4) How do we find out how much money was created, either through printing or other creation, in the past year? Further, how do we know how much has been destroyed?
5) Why is our money not backed by something of value? Why did we decide to get off gold and silver standards? Doesn't this make more sense?
6) What is it that is currently backing our currency?

I feel completely ignorant as an American citizen as I know none of this. It really struck me because last night because I went to sleep watching CSPAN coverage of Bernake's testimony. Paul's opening comments were disturbing...every fiat currency system in history is failed. Why is he wrong? If he's not, why is this not a major political issue. I'm not trying to push Paul in 2008, I just really figured out that I have no idea what I'm talking about when I talk about economics, which is sad because I have a post-graduate degree from a business school.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
2) If so, who gets the benefit of this extra money printed?

[/ QUOTE ]

People who receive loans.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
1) Consistently print more money than we destroy (on a federal level)

[/ QUOTE ]
Yes

[ QUOTE ]
2) If so, who gets the benefit of this extra money printed?

[/ QUOTE ]
The first users who receive the money before prices increase

[ QUOTE ]
3) How do we keep track of the amount of digital money since most money now is not kept in hard currency?

[/ QUOTE ]
Not sure

[ QUOTE ]
4) How do we find out how much money was created, either through printing or other creation, in the past year? Further, how do we know how much has been destroyed?

[/ QUOTE ]
Not sure. Mints might know.

[ QUOTE ]
5) Why is our money not backed by something of value? Why did we decide to get off gold and silver standards? Doesn't this make more sense?

[/ QUOTE ]
This is going to get you a variety of answers. Many believe that a fiat currency facilitates government spending, since they are not limited to a fixed amount of money. A video from the Austrian perspective on the topic.

[ QUOTE ]
6) What is it that is currently backing our currency?

[/ QUOTE ]
The government's word that "we're good for it".

Re: Could Someone Please Explain the Money Supply?
 

I think it has something to do with the federal gold reserve - Fort Knox. That and the government's word that they're good for it.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
2) If so, who gets the benefit of this extra money printed?

[/ QUOTE ]

People who receive loans.

[/ QUOTE ]

What do you mean? If I could print money and you needed to borrow $10,000 to enter the WSOP ME, I could give you the $10,000 loan at little risk (actually, just the cost of my time and materials used to print the money) and it wouldn't effectively matter if you paid me back. If you pay me back the $10,000 with interest, then I, the lender, end up gaining. Sure, you get the benefit of capital financing (dictated by the time value of money), but I get the principal and it's time value, so, once I'm repaid, I get to spend the principal and the juice and every bit of what I get is gain (save the materials and time of printing).

Better stated, you ask me for $10,000, and you agree to pay me $10,000 in one year's time plus 20% juice. Let's say it costs me $200 in labor/supplies/equipment to print the $10,000.

My risk is only $200. When you repay me in full, I gain $11,800. If I threaten to start breaking things and only am able to suck $1,500 out of you, I still gain $1,300. If this "business" was legally sanctioned, why wouldn't I want to be in this line of work. It's still free money...for the lender. I was more than willing to give a gambler a below-market interest rate because my risk is almost nil and, effectively, my EV is extremely high on every such loan I make. Even if 80% of my customers never pay me a dime, I get filthy rich just by getting business. Don't you mean to say, then, that the lender gets the benefit?

Sure, maybe the borrower gets a below-market interest rate, but that's only a very small part of the benefit. Most of it goes to the lender in this situation.

It's entirely possible that I've completely misinterpreted your reply, though and that it has to do with some other effect.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
1) Consistently print more money than we destroy (on a federal level)

[/ QUOTE ]
Yes

[ QUOTE ]
2) If so, who gets the benefit of this extra money printed?

[/ QUOTE ]
The first users who receive the money before prices increase

[/ QUOTE ]

Wouldn't this dilute the money supply? Isn't money a relative instrument since, if I could go back in time with all of my cash, I could be one of the wealthier people in the my area? Since this would dilute the money supply, wouldn't it be akin to a hidden tax since it eventually increases the price of things? Is the government the one that is getting the benefit of this?

[ QUOTE ]
[ QUOTE ]
3) How do we keep track of the amount of digital money since most money now is not kept in hard currency?

[/ QUOTE ]
Not sure

[/ QUOTE ]

This would be nice to know, though.

[ QUOTE ]
[ QUOTE ]
4) How do we find out how much money was created, either through printing or other creation, in the past year? Further, how do we know how much has been destroyed?

[/ QUOTE ]
Not sure. Mints might know.

[/ QUOTE ]

I would think this would be in a financial report somewhere but I have never found it when scouring the federal financial statements audited by the GAO.

EDIT: I must add that i find it deeply disturbing that we can talk about taxes and spending without an understanding of what money actually is.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
Sure, maybe the borrower gets a below-market interest rate, but that's only a very small part of the benefit. Most of it goes to the lender in this situation.

It's entirely possible that I've completely misinterpreted your reply, though and that it has to do with some other effect.

[/ QUOTE ]

You've got a pretty good handle on it; one thing you're missing, though, is that as the new money circulates, it devalues all other money (by dillution). The guy getting the loan gets to spend the money first, before it gets devalued.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
It's still free money...for the lender.

[/ QUOTE ]

Its not risk free for the lender as your money only has value if someone else wants it. I can print up $10,000 in tolbiny dollars and try to buy my way into the ME but they aren't going to take it, so no one is going to come and borrow the $10,000t from me (and i have lost whatever it took to print it up). On a larger scale, lets say Zimbabwe since there is a thread going on them right now, if i print to much money no one will accept it and it becomes devalued heavily. When you try to pay people with it they rebel, go on strike, refuse to accept it, use other mediums of exchange (if you travel to zimbabwe everyone there will accept US $ or South African Rand (sp?), but no one wants the Zimbabwe dollar. So now the government (supplier of Z$) is losing power/influence and gerneally sucking all around. The supplier does not benefit without risk, but the wider the power he has (ie the more in demand his currency is) the more he can print without exposing himself to these risks.

[ QUOTE ]
Even if 80% of my customers never pay me a dime, I get filthy rich just by getting business.

[/ QUOTE ]

If you are just printing money whenever someone asks then why would they ever accept it as payment? YOur dollars are worthless

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
It's still free money...for the lender.

[/ QUOTE ]

Its not risk free for the lender as your money only has value if someone else wants it. I can print up $10,000 in tolbiny dollars and try to buy my way into the ME but they aren't going to take it, so no one is going to come and borrow the $10,000t from me (and i have lost whatever it took to print it up). On a larger scale, lets say Zimbabwe since there is a thread going on them right now, if i print to much money no one will accept it and it becomes devalued heavily. When you try to pay people with it they rebel, go on strike, refuse to accept it, use other mediums of exchange (if you travel to zimbabwe everyone there will accept US $ or South African Rand (sp?), but no one wants the Zimbabwe dollar. So now the government (supplier of Z$) is losing power/influence and gerneally sucking all around. The supplier does not benefit without risk, but the wider the power he has (ie the more in demand his currency is) the more he can print without exposing himself to these risks.

[ QUOTE ]
Even if 80% of my customers never pay me a dime, I get filthy rich just by getting business.

[/ QUOTE ]

If you are just printing money whenever someone asks then why would they ever accept it as payment? YOur dollars are worthless

[/ QUOTE ]

I was talking about American dollars, of course. I was just making an example (as if I were the mint). That said, shouldn't we know exactly how much dilution is occuring on a daily basis? Would that not affect our beliefs in regards to rate of return on investments and such. After all, if inflation is 3% and your savings account is a no-fee 2.5%, aren't you going in the hole by having the money there?

Also, if our money is getting diluted at the benefit of others, isn't that a type of theft from people that are holding American currency? I mean, everything is subject to supply and demand, even supposed inflation hedges, like gold. If a company finds a new gold mine that will increase the world gold supply by 10%, then, in a vacuum, that 10% should eventually be reflected in gold prices (relative to the dollar, of course).

Money is, of course, the same way. I would think that it would be far better to benchmark the currency against something of relatively constant value, however. For instance, if all science indicates that 95% of the world's platinum has been found, why not back the currency with platinum since it figures to be a better benchmark than a fiat system.

However, if we're going to have a fiat system, is it not better to have a constant amount of currency (or a constant amount per capita) in the system rather than a fluctuating amount?

I had heard on a talk radio show just a few days ago that there was an $800B difference between money created and money destroyed over the past two years. I have absolutely zero idea of the source of that information or if it is factually correct, but I do realize that this would be the equivalent of $2,666.67 for every man, woman, and child in America. That would be a heck of a lot of dilution for just two years.

Re: Could Someone Please Explain the Money Supply?
 

If the money supply grows by more than real GDP growth, inflation is likely (taken from wiki). Inflation almost naturally occurs with the interaction of money and interest rates. Prices and wages always tend to rise, not fall, in a healthy economy. Workers usually demand more pay, and businesses usually increase the price of their goods, both for profit and for paying their workers. The money supply has to be adjusted to compensate for this...otherwise, there won't be any money to pay for additional goods and services that come from GDP growth. However, as you said, inflation is like a "hidden tax" because it diminishes the purchasing power of the money you have now. But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

The Fed tracks M0 (all hard currency in circulation) and M1 (M0 + highly liquid electronic accounts that consumers use, like checking accounts) as well as other liquidity classes of money that make up the total money supply. They try to keep it on pace with GDP growth. I'm pretty sure that banks are required to report their total deposits and electronic deposits to the Fed on a regular basis. The Fed controls the money supply by adjusting interest rates and buying/selling government securities on the open market. They don't just give money away to banks. Lower rates make borrowing more attractive, and loans increase the money supply. Banks can "create" money because of fractional reserve requirements. They can effectively loan out more than what they have in hard currency deposits. When the government buys securities, it pumps money into the economy for lending, and this increases the money supply.

If the money supply is growing too fast (which could lead to inflation), the Fed increases the prime rate and the federal funds rate, and borrowing slows down. When the govt. sells securities, they take money out of the economy that could be loaned out by banks. They can also print money, either to put new money into the economy (via buying securities) or to replace old currency. The Fed can also mess around with the depository requirements, but that's a heavy-handed measure that isn't used too often.

Wiki has a pretty good article on it:

http://en.wikipedia.org/wiki/Money_supply

WRT business school....one of my econ professors said that the business school just takes economics and keeps all the sexy parts, so they can make money doing it. My business school alma mater did away with some of its econ requirements not too long ago, which is very sad IMO. Lucky for me, I took enough econ credits to unofficially minor in it....FWIW.

ScottieK

Re: Could Someone Please Explain the Money Supply?
 

How is our currency created (not physically)? In all of the discussion on economics, I have not yet seen anyone clearly explain how our money supply works. A few things I do know is that:

[ QUOTE ]
1) Our currency is not backed by anything; it's just paper

[/ QUOTE ]
I see what you mean, but it is backed by something, it is backed by people's perception of it and also that it will i.e. be accepted for paying your taxes etc. to the government. A diamond or a share in a company that will go bankrupt tomorrow has a value today mainly due to people's perception of its value, and this perception is real. It is however important that it is dependant upon this perception, when people stop trusting the money as happens in different economies from time to time the consequences are very negative.
[ QUOTE ]
2) Is inflation a byproduct of printing too much money?

[/ QUOTE ]
Yes, it can be put that way. Although too much is a disputable term, less would have to be printed in order to stabilize prices. But as above also part of inflation is due to people's expetance of inflation, prices rise partly due to the fact that you expect something to be more expensive than yesterday. But much of this expectancy is due to the constant norm of printing "too much" money, so at the basis of it all is the constant inflating of the money supply.
[ QUOTE ]
3) The Federal Reserve controls a lot of this process

[/ QUOTE ]
In the US it is very powerful and can influence it a lot. However it is very hard to predict the exact effects of an action, so it could i.e. decide that it want inflation in 2 years time to be 20% and it would end up somewhere between 15% and 25%.

Do we:

[ QUOTE ]
1) Consistently print more money than we destroy (on a federal level)

[/ QUOTE ]
Not consistently, sometimes the demand for money drops, so that the Federal Reserve will destroy more money than it prints, however the underlying trend is toward a constantly rising money supply.
[ QUOTE ]
2) If so, who gets the benefit of this extra money printed?

[/ QUOTE ]
This is very complex, since the market can factor in a lot of this effects and thus minimize/eliminate them. I.e. if you borrow money in a time of high expected inflation you will be charged a high interest rate for that (in which the expected inflation is part of your interest rate). If the increase is unexpected everyone who has a loan benefits, so the government could print a lot of money to make it's own loans smaller in terms of real value. Also there are a lot of others who benefit, i.e. banks do it since a 50% increase in property value means the banks have 50% more security for its real estate loans in which the clients have mortgages.
[ QUOTE ]
3) How do we keep track of the amount of digital money since most money now is not kept in hard currency?

[/ QUOTE ]
By putting in a computer that bank A has $2 trillion deposited at the Federal Reserve, that bank B has a claim of $5 trillion towards the Federal Reserve in government bonds. It is very simple. The Federal Reserve can basically make money by hitting a button.
[ QUOTE ]
4) How do we find out how much money was created, either through printing or other creation, in the past year?
Further, how do we know how much has been destroyed?

[/ QUOTE ]
They keep detailed statistics of both, down to every cent.
[ QUOTE ]
5) Why is our money not backed by something of value? Why did we decide to get off gold and silver standards? Doesn't this make more sense?

[/ QUOTE ]
Why does it have to? There isn't any need for it other than protecting money owners against the government. And history has shown us that that really isn't necessary, hasn't it? [img]/images/graemlins/grin.gif[/img]. Seriously, it is very convenient for the government to get rid of it as it has much more opportunities to influence the economy, and in countries like the US where the population trusts the government in this regard and the government keeps it actions within some reasonable standard it works well. If we should move to it being backed by something? I think in reality this is not doable in i.e. the US now.
[ QUOTE ]
6) What is it that is currently backing our currency?

[/ QUOTE ]
See earlier answer.

[ QUOTE ]
I feel completely ignorant as an American citizen as I know none of this. It really struck me because last night because I went to sleep watching CSPAN coverage of Bernake's testimony. Paul's opening comments were disturbing...every fiat currency system in history is failed. Why is he wrong? If he's not, why is this not a major political issue. I'm not trying to push Paul in 2008, I just really figured out that I have no idea what I'm talking about when I talk about economics, which is sad because I have a post-graduate degree from a business school.

[/ QUOTE ]
Nobody benefits from you knowing. It is very convenient that people in general do not know, since then people do not start to question it, and if too many people question it too much it actually collapses.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

[/ QUOTE ]

No amount of inflation is ever a good thing. Inflation only doesn't affect you if you spend your wages immediately, or get paid with some other good (kinda the same thing).

If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

Re: Could Someone Please Explain the Money Supply?
 

To clarify on the loan part, let's say you borrow $20k of me to buy a car. The the government quickly push up inflation and the car suddenly gets worth $40k, then you have a $40k car with only $20k in loans. However, if I knew the government would make so much mess in one month I would simply charge you 100% montly interest for the first month.

So in political terms, let's say you become president and you see that your country has x$ in loans and the market hasn't factored in high inflation. Isn't it tempting to just print money and suddenly half of the national debt disappears? It is and it works, but then comes the next president who is responsible and tries to renew the government bonds that expire and says "Borrow us money for 5% interest, I promise to keep inflation stabile" to which the market responds "LOL @ your country, we want minimum 30%". So you gain short term but lose long term.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
Also, if our money is getting diluted at the benefit of others, isn't that a type of theft from people that are holding American currency?

[/ QUOTE ]
You are onto something, it is a sort of theft. Every note or coin you have in your pocket loses value all the time, but you are told this. If you ask Bernanke if he can promise you you will get the same for 1k as you get today in 5 years time he will tell you that his aim is to make it so that you get less. So nobody cheats you unless they do something to pump up inflation above what they have signalled.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

[/ QUOTE ]

No amount of inflation is ever a good thing. Inflation only doesn't affect you if you spend your wages immediately, or get paid with some other good (kinda the same thing).

If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

[/ QUOTE ]

Let me put it another way...inflation is a byproduct of a healthy economy where people are trading money for goods and services, and they are receiving interest payments for their deposits. It indicates that people are, on average, making more money, and businesses are getting more money for their goods. They have faith in the economy, and prices and wages rise accordingly. A credit-based economy (like the U.S.) should have an inflationary bias.

Contrast that to deflation. Businesses are getting less money for their goods. As a result, they have to pay their workers less. Those businesses and workers have less access to money because they cannot afford to take on additional debt. They know that their debt payments right now may be manageable, but may become unmanageable in the future when their income levels drop and their payments remain constant.

As for banks, the real cost of funds (difference between interest rate and inflation rate) increases during a deflationary period. If the interest rate was 8%, and the inflation rate was - 3% (deflationary) then the real cost of funds would be 11%. Interest rates can only drop so much to compensate, and they can't go below zero.

ScottieK

Re: Could Someone Please Explain the Money Supply?
 

Whether inflation is a good thing or not is debateable, it is also a value question wrt to whose needs are more important than whose. What is clear is that our current economies benefits from inflation in many ways, it makes the financial system more stable and also makes the clearing of the labor market more smooth (especially in many European countries where nominal wages are relatively static). Also that people spend and invest money instead of putting it in a cupboard is good for the economy as a whole and inflation contributes to triggering that. If the expected inflation however becomes very high the economy is damaged due to the inefficiencies it creates in transactions, note that expected high inflation is a problem even when the real inflation is low, so the government constantly tries to ensure the private sector that future inflation will not be high.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]


I was talking about American dollars, of course. I was just making an example (as if I were the mint).

[/ QUOTE ]

Recall though that at one point the US dollar was backed by something use full, ie. gold (or tangible if you want) and so there was a demand for it already. The process of separating the dollar from gold took ~60 years, so there was already a demand for dollars. This demand has maintained largely because oil is generally traded in dollars making it a very usable currency, hence the continued demand.
[ QUOTE ]
That said, shouldn't we know exactly how much dilution is occurring on a daily basis?

[/ QUOTE ]

Uhhh probably. I am not sure precisely how the fed works somedays. They can manipulate the money supply by printing money straight out or they can lower interest rates, encouraging more people to take out loans and its the banks that are "printing" the money via FRL. This is (my impression) how the fed generally manages the curency rates, which is less precise than literally printing the cash.
Secondly inflation is generally measured by the CPI which is not a direct measure of the money supply. The CPI adjusts because of the money supply, but also because of new technologies and better production methods. A 3% increase in the CPI could mean a 6% increase in the money supply but a 3% decrease in prices due to increased efficiency. Hard again to peg perfectly. (This is all assuming my minimal understanding of the CPI is correct).

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
A credit-based economy (like the U.S.) should have an inflationary bias

[/ QUOTE ]

This is bogus, there is no such thing as a "credit based" economy. All economies are production based as you can only consume what you produce. Terms like credit based are supposed to make people feel that its acceptable to pile on debt since as long as everyone does it (this includes the next generation) the growth will pay for their debt. In reality all that production has to be turned out in reality or else the economy comes crashing down.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
That said, shouldn't we know exactly how much dilution is occurring on a daily basis?

[/ QUOTE ]

Uhhh probably. I am not sure precisely how the fed works somedays.

[/ QUOTE ]

A lot of information about their activities they make public I assume (at least this is normal in modern economies in democracies). If you search through their website, publications etc. I assume you will find everything that is relevant. However, how much your money will dillute during i.e. the next month is a function of a lot of factors in which the Federal Reserve's influence is only a part, so nobody can tell you how much your money is going to dillute during the next month. Note again that how much your dollar will be worth in one month time depends on the perceived value of one dollar in one month time, it is not a simple mathematic formula in which the Federal Reserve puts something in and know what comes out.

Re: Could Someone Please Explain the Money Supply?
 

http://app.ny.frb.org/markets/omo/dm...?SHOWMORE=TRUE

Here's the link the FED Reserve open market operations.
The FED just created another $10B today.

Re: Could Someone Please Explain the Money Supply?
 

I am not so into where to find information in the US, but I give you a link to the Norwegian Federal Reserve which is quite good and actually more relevant to what you ask for than the US Federal Reserve as in Norway there is a stated inflation target (2,5% annually) which the Federal Reserve constantly tries to achieve but usually fails in one direction or another:

Link

EDIT:
Found one chart there:
http://www.norgesbank.no/english/pub.../34/chart1.jpg

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

[/ QUOTE ]

Not if you save by buying inflation-linked bonds.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
Could someone please explain the money supply?

[/ QUOTE ]


Bill Still - The Money Masters
http://video.google.com/videoplay?do...34454816686947
http://video.google.com/videoplay?do...15773877500927

Mises Institute - Money, Banking and the Federal Reserve
http://thefreedomchannel.blogspot.co...l-reserve.html

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

[/ QUOTE ]

No amount of inflation is ever a good thing. Inflation only doesn't affect you if you spend your wages immediately, or get paid with some other good (kinda the same thing).

If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

[/ QUOTE ]

Let me put it another way...inflation is a byproduct of a healthy economy where people are trading money for goods and services, and they are receiving interest payments for their deposits. It indicates that people are, on average, making more money which buys fewer goods, and businesses are getting more money for their goods. They have faith in the economy, and prices and wages rise accordingly. A credit-based economy (like the U.S.) should have an inflationary bias.

Contrast that to deflation. Businesses are getting less money for their goods. As a result, they have to pay their workers less money, but they can afford more goods. Those businesses and workers have less access to money because they cannot afford to take on additional debt. They know that their debt payments right now may be manageable, but may become unmanageable in the future when their income levels drop and their payments remain constant.

As for banks, the real cost of funds (difference between interest rate and inflation rate) increases during a deflationary period. If the interest rate was 8%, and the inflation rate was - 3% (deflationary) then the real cost of funds would be 11%. Interest rates can only drop so much to compensate, and they can't go below zero.

ScottieK

[/ QUOTE ]

I'd rather have more goods than more money.

"A little inflation is a sign of a healthy economy" and its corrolary, "When the economy is TOO good inflation gets too high" are misleading results of Fed policies which attempt to pass off money-supply related growth as real economic growth. Think about it for a second, with a static money supply, and a strong real economy, which means increasing productivity, and more goods to go around per capita, prices must fall, not rise. Inflation is a purely monetary phenomenon.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
It really struck me because last night because I went to sleep watching CSPAN coverage of Bernake's testimony. Paul's opening comments were disturbing...every fiat currency system in history is failed.

[/ QUOTE ]

Could you expand on this a bit more? Is there somewhere were I could a transcript, or could you give a cliff notes version?

I recently read some of a book by bernanke about how countries that got off gold and onto fiat during the great depression recovered faster. I always thought he would be a supporter of fiat monies.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
Also, if our money is getting diluted at the benefit of others, isn't that a type of theft from people that are holding American currency?

[/ QUOTE ]
You are onto something, it is a sort of theft. Every note or coin you have in your pocket loses value all the time, but you are told this. If you ask Bernanke if he can promise you you will get the same for 1k as you get today in 5 years time he will tell you that his aim is to make it so that you get less. So nobody cheats you unless they do something to pump up inflation above what they have signalled.

[/ QUOTE ]

So as long as I tell you in advance that I'm going to steal your stuff, it's OK?

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
So as long as I tell you in advance that I'm going to steal your stuff, it's OK?

[/ QUOTE ]

That would be stealing but not fraud [img]/images/graemlins/wink.gif[/img].

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
Could someone please explain the money supply?

[/ QUOTE ]


Bill Still - The Money Masters
http://video.google.com/videoplay?do...34454816686947
http://video.google.com/videoplay?do...15773877500927

Mises Institute - Money, Banking and the Federal Reserve
http://thefreedomchannel.blogspot.co...l-reserve.html

[/ QUOTE ]

Thanks for the link Nelsio, I watched the money masters this morning. It really goes to show that the other thread going on in this forum about capitalism is pretty pointless. It seems like the majority of poverty is caused by world banks and the sick thing is, is that nobody understands whats going on.

However, in that documentary he actually made a good arguement for not going back onto the gold standard like many ACists make. The documentary claimed that 2/3 of all the worlds gold was in the hands of the world banks, so that a change to the gold standard wouldnt change much. The documentary then goes on to talk about interest free money printed by the american government. Is there no money in the american economy that isnt backed by debt? I'm having a little trouble understanding this point. When the american government issues money through bonds what exactly are they issuing?

Also what might be interesting to this thread was the talk in that documentary about the Island of Guernsey, which has no privately owned central bank. From wikipedia

[ QUOTE ]
Unlike many countries Guernsey has not delegated money-creation to the central bank and has instead issued interest-free money since 1816. As a result the government has not had to use increasing amounts of tax revenue to repay debt to the central bank, which has led to low income tax rates, no goods and services tax and no capital gains tax.



[/ QUOTE ]

Can anyone make a good arguement for the existance of a privately owned monopolistic bank that controls our money supply? I'm coming up real short on this one.

Re: Could Someone Please Explain the Money Supply?
 

There is nothing that stops you from starting printing your own money, you can do it in many ways, you can i.e. issue bonds and connect them to gold or another currency or whatever you want. Many companies and banks do this. There isn't a legal government monopoly on it, just a practical one.

Re: Could Someone Please Explain the Money Supply?
 

The Federal Reserve is the only corporation that is allowed to print american dollar bills though, right?

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
The Federal Reserve is the only corporation that is allowed to print american dollar bills though, right?

[/ QUOTE ]

Yeah, since it is a bill that tells you that you have a claim vs. the Federal Reserve [img]/images/graemlins/smile.gif[/img], a claim for ehhhh nothing [img]/images/graemlins/smile.gif[/img] (I am not completely sure if the Federal Reserve has given the authority to any other institutions or companies btw). Btw, several banks are allowed to print Euro and British Pound but that doesn't really change anything in this regard since there is still a central body that controls the money supply.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

[/ QUOTE ]

No amount of inflation is ever a good thing. Inflation only doesn't affect you if you spend your wages immediately, or get paid with some other good (kinda the same thing).

If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

[/ QUOTE ]

How do you think your savings grow? They grow because a large part of them will be loaned out at a profit by the bank. Part of this profit is returned to you as interest on your savings. Whilst these loans lead to inflation, they also lead to an actual increase in the numerical value of your savings, which normally outstrips any devaluation due to inflation. If there was inflation of 0% you would only get about close to 0% interest on any savings.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
If there was inflation of 0% you would only get about close to 0% interest on any savings.

[/ QUOTE ]

Ugh, you would still get interest, inflation is only a component of the interest, even with small deflation you can get interest. This is founded in human psychology and the value of capital, and do not need inflation to exist.

Re: Could Someone Please Explain the Money Supply?
 

I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

IIUC (if i understand correctly) the fed essentially buy government bonds via banks. The gov produces the bonds, the bank then sells them to the fed. The fed deposits the money in the bank, which can then loan out 10x (or whatever the ratio is now) the money thanks to FRB.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

IIUC (if i understand correctly) the fed essentially buy government bonds via banks. The gov produces the bonds, the bank then sells them to the fed. The fed deposits the money in the bank, which can then loan out 10x (or whatever the ratio is now) the money thanks to FRB.

[/ QUOTE ]

Still not clear to me. Are you saying that the gov't gets its seigniorage money via bonds sold to various banks which then 'sell' these bonds to the FED itself?

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

IIUC (if i understand correctly) the fed essentially buy government bonds via banks. The gov produces the bonds, the bank then sells them to the fed. The fed deposits the money in the bank, which can then loan out 10x (or whatever the ratio is now) the money thanks to FRB.

[/ QUOTE ]

Still not clear to me. Are you saying that the gov't gets its seigniorage money via bonds sold to various banks which then 'sell' these bonds to the FED itself?

[/ QUOTE ]

I would suggest watching the last video linked by Neilso. Its 40 mins long, but you can skip the first ~17 min to get to the creation of the fed.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

Shorter term money supply changes are controlled by repurchase agreements, which are overnight or longer term (up to 2 months or so) loans that use Treasury issues as collateral.

Those deals are with banks (or other "primary dealers"), though, not directly with the Government.

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

Shorter term money supply changes are controlled by repurchase agreements, which are overnight or longer term (up to 2 months or so) loans that use Treasury issues as collateral.

Those deals are with banks (or other "primary dealers"), though, not directly with the Government.

[/ QUOTE ]

Ok. So, when the Fed increases the money supply by buying Treasury bonds with newly created money, what has it given as consideration for those bonds? anything?

Re: Could Someone Please Explain the Money Supply?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I've been trying to get a better understanding of this myself.

What are the specifics of the transfer of money from the FED to the US gov't? Is this what open market operations are? As I understand it, the FED gives the US gov't currency in exchange for some kind of gov't security like a bond... is this correct? am I way off?

[/ QUOTE ]

the Fed doesnt "transfer money" to the government. The government either gets its money from taxation or by selling Treasury bonds/bills/notes etc (just call them bonds).

The Fed controls money supply by buying Treasury bonds with newly created money (increasing the money supply) or selling bonds it already owns (decreasing the money supply because the cash used to buy them reduces the buyers cash reserves and the fed holds the cash back).

Shorter term money supply changes are controlled by repurchase agreements, which are overnight or longer term (up to 2 months or so) loans that use Treasury issues as collateral.

Those deals are with banks (or other "primary dealers"), though, not directly with the Government.

[/ QUOTE ]

Ok. So, when the Fed increases the money supply by buying Treasury bonds with newly created money, what has it given as consideration for those bonds? anything?

[/ QUOTE ]

Im not sure what your question is. The consideration is the newly created money, which has the full backing of the US and the same value as any other dollars.