Thursday, August 27, 2009

This theory drives the fed

Epaminondas asked a question. Here is the answer. Stay with it, skip the first minute and get to the heart of the matter. It's a layman's guide. Every dollar deposited in a bank is expanded into a house of cards by a factor of nine. yes, the banks turn a dollar into nine dollars of 'make believe' money.

24 comments:

SamenoKami said...

This sort of explains why the FED is so upset that loans are defaulting and no one is borrowing money. No debt means we have no money, so the FED is running the presses 24/7 to keep money in the system that is not there because debt is being destroyed by defaulting/not borrowing. The design of the FED is to yr by yr increase the money supply and thereby inflate prices, otherwise the whole house of cards falls down. This is why inflation was about flat, up until 1971 when Nixon repudiated the Bretton Wood agreement and took the US officially off the gold standard. Inflation is now in the 600-700% range vs 1971 dollar. A good read is "The Creature from Jekyll Island " which gives details about how the FED was formed and in depth on how it works. It's available again after being out of print for a while. No country has ever survived a fiat/fractional monetary system. They all eventually crash and the country burns. The looters flee to another country and start all over.

Reliapundit said...

utter nonsense. trash. a joke. garbage.

if the fed is scam then why has the usa fucntioned so well, grown so much with it!?

why does the boe and the ecm work well?!?

wealth is not created by the fed. or any central bank.

it is created by entrepreneurs, and fisherman, farmers, miners and manufacturers.

this is leftist nonsense.

a melange of teenage leftwing crap.

loans andmoney supply don;t create wealth.

those who borrow money and start enterprises and compete to sell goods and services to free people using their assets as they please are the people who create wealth and determine the value of things.

this video is the kind of crap people who have never really worked for a living produce.

the kind of dumb crap only pseudo-intellectuals could believe.

even the value of the dollar is determined by the marketplace.

gawd...

SamenoKami said...

I'm taking it that your comments are not sarcasm. If what you say is what you believe you know less than nothing about the way 'money' works and is created in this country. What was in the vid is the truth in a nutshell. It's really worse than portrayed. The FED is stealing from the citizens of the US via intentional inflation. A $100 bill costs the FED ~4cents and our gov't gives them $100 in debt for it. Tidy profit. The argument is not what creates wealth, of course work creates wealth. The argument is whether or not the US$ is in fact worth anything. The $ is only colored ink on rag paper that the gov't has declared by fiat to be for payment of all debts public or private. It is worth nothing intrinsically and is un-constitutional since the $ is to be backed by gold/silver, ergo the value of constitutional money is not determined by the marketplace but by the actual intrinsic value of a gold backed $. The value of things is what is determined by the market not the value of money. Money's perceived value fluctuates because of inflation in the supply and things rise in price to meet the increased supply of money. Greenspan himself said "What is a $20 bill worth? Another one just like it." Wiemar Germany's hyper-inflation money did not follow your outline, though it should have if money is money. It was exactly the same as our money minus the confidence.
Money supply doesn't create wealth? Try to amass wealth with no money supply and you'll see the fault in that comment. Try to create wealth with too much money supply and you'll see zero wealth also.
Read some good websites maybe Mike Shedlock, Ken Denninger, read "Creature from Jekyll" then come back with a better knowledge and let smarter people than me tell you the truth.

SamenoKami said...

KARL Denninger not Ken.
Here are two Shedlock posts that are relevant. I'm too lazy to hyper-link them. The second one is pretty good.

http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html



http://globaleconomicanalysis.blogspot.com/2007/06/why-does-fiat-money-seemingly-work.html

Pastorius said...

SamenoKami,
China and other countries buy the dollar because it has, traditionally, been a stable and strong investment.

That's how bonds are funded.

If there is no market for our bonds/debt, then the value of the dollar will go down.

If the value of the dollar goes down, the we have inflation.

If we have inflation, then the cost of our debt goes down.

It's a Catch 22 situation for those who invest in America.

What country out there is more stable than America?

If there is one, then you really ought to not only invest in that country, but you ought to move there, my friend.

Pastorius said...

Buy the way, Sameno and Ray,

If you borrow 100,000 dollars from the bank, the bank owns you.

If you borrow 10 billion dollars from the bank, you own the bank.

As I said, it's a Catch 22 situation for those who own our debt.

What are they going to do, repossess America?

Good luck with that one.

I don't know why British people bother knocking on America. It's such a second-city attitude. it's really lame. We're partners. That's the way it should be.

Get off the stupid conspiracy theories. They're bad for your brain, and they're bad for your soul.

Ray Boyd said...

I'm not "Knocking on America", it's the banking system, ours as well. I wouldn't regard it as a "stupid conspiracy theory" but then I'm no an expert on the world financial system. Having said that it seems to me that the bankers have a lot to answer for recently.

Only someone who is rightwing wealthy would would disagree with that.

Me? I'm neither from the right or the left although I concur with a lot of rightwing stuff at the moment. When it comes to other matters I may lean a little to the left from the centre.

SamenoKami said...

Pastorius, your comments only tell me you don't understand the FED either. I see why you didn't read the Shedlock stuff. My attempt at hyperlink on this post didn't work. Go to Mike Shedlock's site and read the 27 June '07 article on 'Why fiat money seemingly works' and it will answer every one of your comments. I love the "US dollar - Love it or Leave it" comment. Priceless! Not one of my comments were conspiratorial. They consisted of info gleaned from economics and investing sites. "Creature..." is semi-conspiratorial but minus that, the same facts are still facts. Griffin presents a believable conspiracy, just to give him credit.
All this thread is about is the FED. The FED is unconstitutional. It is intentionally creating inflation. It is a fractional reserve system. It is screwing the American people.
If you 'know' that what I say is wrong, put it up there. Post what is right along side what I say is wrong. Prove the FED is not fractional. Prove they don't intentionally create inflation. Prove the US$ will never be worthless (it's already lost 96% of its value from 1913.) Prove the FED isn't robbing us via inflation (adjusted for inflation the median income should be ~$300K not the ~50K it is.) Document the wonders of fiat currency from the past.
I'll know when you've read the article because you will retract what you've said (unless you want to be intellectually dishonest.)

Epaminondas said...

A low level of inflation is good.
The upper level is what Carter had.

We need the Fed but not to continuously run the presses. Oversupply results in lower prices for the dollar.

PHYSICS

Creation of capital by creation of that which is new REQUIRES some level of new dollars or everything becomes a zero sum game.

However, growth in the money supply WITHOUT creation of that which is new and based on COMMODITY values (i.e. real estate) increasing ..is always a bubble.

Fixing on the gold standard is a zero sum game.

Self control is required to be off it.. and can be likened to the self control needed to avoid nuclear war.

We are better off without the gold std IF WE CAN CONTROL OURSELVES.

SamenoKami said...

**Creation of capital by creation of that which is new REQUIRES some level of new dollars or everything becomes a zero sum game.

>>Not true. In a fixed money society, interest rates and prices will adjust to reflect fewer $$ per person.

Pastorius said...

SamenoKami,
What is it that I said that's not true?

I don't believe in a fixed dollar system. It makes sense in a commodity based world (perhaps it makes sense, but even then, I don't really know why).

Anything in the entire world is only worth as much as people are willing to pay for it.

Our economic world is not commodity-based anymore. Commodities only make up a portion of economic activity. And, that portion is ever-decreasing. Money is made based upon ideas about how to use commodities. How to yield more of them. How to use them in new and creative ways which make them more valuable to people, etc.

So, worth is not directly tied to commodities anymore. The worth of a thing, as I said, is how much people will pay for it.

There is no doubt that we are in bad economic times right now. I have little doubt that many of our problems are being created by people who are behaving in an imprudent manner, people at the Fed, people in the Obama Administration, the Bush Administration, etc.

But, I will read your links anyway. Not this morning. I simply do not have the time.

But, do tell me what in my statements are wrong.

Epaminondas said...

Fixed money IS ipso facto ZERO SUM.
All that can be achieved is different allocation of fixed resources.
If gain can only be made at the expense of someone or something else the only hope for average people BECOMES COMMUNISM or socialism. Real or not.

Greed is then a 'crime' rather than unpleasant. After all, whatever you got you 'took' from others. Perhaps your 'methods' bear scrutiny. Mass votes would equate enforced equal outcome with egalitarianism as the only solution.

Marxists LOVE the zero sum situation.

Socialism becomes the antidote to greed instead of the poison to progress.

SamenoKami said...

All of my comments are a reflection of the facts that I presented being called 'conspiracy' (Get off the stupid conspiracy theories) in your comment. I think I also melded Reliapundit's comments into the mix.
For you to say that you don't believe in a fixed commodity monetary system (ie constitutional money) is to say that you are happy with the direction that the FED has taken the US since 1913 because those are the only two choices - money backed by something or money that is pretty ink on rag paper and 100% worthless. If the US gov't owes you 10B$ and doesn't have it, they can print it and give it to you. It may only buy a loaf of bread but you'll have your bond money.
China and the others buy our bonds because Nixon told the world when he repudiated Bretton Woods in 1971 that the US would make things all better by buying all of the world's goods (and by implication the US no longer making those goods.) China now has a butt-load of cash that we spent on their worthless crap and the only place to use that money is to buy something US ie bonds. And yes the US is stable right now but stable or not those $$ have to come back to the US one way or another. China is semi-trapped like the rest of the world because everything in the world is first priced in $$ and we are the world's lender of last resort. China is buying everything (with US$$) that isn't red-hot and nailed down for one of two reasons - to get rid of what is about to become worthless $$ or to prepare for war. They are stopping exports of rare-earth metals. My vote is - dump those worthless $$. The Chinese tho' late in the game of central banking have learned quickly and know crappy FED policy when they see it.
And as for repossessing the US, they could require at the point of a MIRV'd ICBM that we pay off on our inflated defaulted debt with commodities along the lines of Germany's WWI debt.
The whole world revolves around commodities, thus the CBOT. They have not and will not disappear. Worth of a monetary unit is not commodity based, but commodities are a vast source of wealth. Would you rather own a 10K barrel/day oil (commodity) well or a stack of pretty paper?
I realize that this is all just a mental exercise. The game clock is running out and there is not one single thing that anyone can do. The die was cast in 1913 and we await the outcome.

SamenoKami said...

**Fixed money IS ipso facto ZERO SUM.

>>From the afore-mentioned Mike Shedlock article:

Another commonly heard argument is: "If the economy is to grow, so must the supply of money", as if that were immediately obvious. In fact, most people who hear this sentence do believe it to be a truism. In reality, increasing the supply of money confers no benefit whatsoever on society at large. It is not important how much money one has in terms of number entries in one’s bank account, it is important what this money can buy. Didn't John Law's experiment prove this beyond a shadow of a doubt?

You're probably wrong in your assessment.

Pastorius said...

Yes, Epa. I want to note that this video is peddling a "Economics is Determinative" ideology which is very close to what Karl Marx taught.

Do you realize that Ray?

Have you read Karl Marx?

Your a smart guy, I know that. But, I don't what your field of study was. Mine was Philosophy and Literature. So, I have read Marx. Economic Determinism is at the center of his Philosophy. In fact, you could say it is the foundation of Marxism.

Pastorius said...

Sameno Kami,
You said: everything in the world is first priced in $$ and we are the world's lender of last resort


I say, that's an absurd statement. We are clearly the source of the wealth of nations. We are often criticized for using 50% of the world's resources when we only make up for 5% of the world's population.

But, in essence, what that means is we BUY 50% of the world's resources in any given year. Which means, half the wealth in the world comes through American consumerism.

Is that a bad thing in your book?

Pastorius said...

You said: For you to say that you don't believe in a fixed commodity monetary system (ie constitutional money) is to say that you are happy with the direction that the FED has taken the US since 1913 because those are the only two choices - money backed by something or money that is pretty ink on rag paper and 100% worthless.


I say: That is not a logical choice. The logical fallacy you committed is called the False Dilemna:

Either claim X is true or claim Y is true (when X and Y could both be false).
Claim Y is false.
Therefore claim X is true.

Ah, you say, but you Pastorius are the one who said you do not believe in a fixed-commodity monetary system. Yes, I did. Because, I don't believe it exists in reality. It is a false idea.

Money is always only worth what it is worth, whether it is tied to a commodity or not. Worth is determined by supply vs. demand.

So, I am saying, you present me with a false dilemna. I don't have to approve of the way the Fed is running the system. I can disagree with them when I believe they are going overboard, and creating dangerous inflation levels.

Inflation levels are ok when they are in moderation. The only people they are not ok with are people who lives are made stationary by having fixed-income.

For those of us who are working to grow businesses, buying houses, taking out business loans, college tuition loans etc., inflation is actually a positive.

Why you hate it so much is your business, but I'd love to hear.

And, I imagine you are going to come back at me and say, well then Pastorius is proposing a economic system based upon debt.

Debt means loaning money based upon a kind of commodity. The commodity is called potential, and that potential carries risk along with it. Every human being on the face of the Earth has potential, and they face risks. Investing in human potential is a good idea in my opinion.

SamenoKami said...

**Pastorius I say: That is not a logical choice. The logical fallacy you committed is called the False Dilemna...

>>So list the other alternatives. There can't be but one more and that's a hybrid of the two, which would be better than fiat but worse than commodity backed. And granted you don't have to believe in either of the three (false dilemma) but you criticize me for my belief, implying you have a belief, so if you have none how is mine wrong?
The point of this is that with no control ($$ tied to some set asset) the gov't is free to do whatever it wants whether it has the money or not, which is our problem now.

"I don't believe it exists in reality. It is a false idea." It's worked every time it's tried. Look at the inflation rates for the US. They are pretty flat all things considered up until 1971. And "not going overboard w/inflation?" I would consider ~600% inflation since 1971 overboard. Inflation only benefits the bankers, the FED and the gov't. It is stealing from every US citizen, which is probably why I hate inflation. This deflationary period we are in now is a benefit to us, and a detriment to the FED, which is why they are trying to re-blow the burst bubble. No one has to propose a system based on debt, we already have it. Don't get me wrong they can work well for awhile, but they always collapse. Ours just hasn't. Yet.
"For those of us who are working to grow businesses, buying houses, taking out business loans, college tuition loans etc., inflation is actually a positive." It didn't work real well for Wiemar Germany or Zimbabwe (I have one of their $100 TRillion bills.)
So you would rather buy a 2500sqft house for $500K than for $150K? Go to college for $2K/semester vs $500/semester? I don't think so (or is this another false dilemma?) Granted after I borrow the money I would rather pay it back w/inflated $$, but to say you would rather things be inflated rather than realistic? Can I be your broker? I'll inflate every price on every thing you buy so you'll get a better deal. :)

Pastorius said...

You said: So list the other alternatives. There can't be but one more and that's a hybrid of the two ...


I said: I should have made my answer more explicit. So, here goes, ALL THINGS ARE WORTH AS MUCH AS PEOPLE, AS AN AGGREGATE, DECIDE THEY ARE WORTH BASED UPON THE LAW OF SUPPLY AND DEMAND. In other words, while I may or not agree with the Fed policy, I basically believe in the system we have. If the Fed floods the market with too much cash, as it would seem they are doing, then we will all be punished for it through hyperinflation. That's what I call a market force at work, and I'm ok with that. What I am not ok with is the way we got into this mess in the first place, which was the socialization of the mortgage industry, which cause the banks to fall apart. Socialism is a pyramid scheme. It will always crumble eventually, and this crumbling of our mortgage industry has had worldwide implications. And, to top it off, our President is trying to solve the problem with MORE SOCIALISM.

That's my answer. If that does not answer your question, then please rephrase your question, as I am apparently not understanding your point.


You said: It's worked every time it's tried. Look at the inflation rates for the US.


I say: Prove to me that moderate inflation is a bad thing.

It seems to me the reality is this. You say we have gone to hell in a handbasket since the Fed took over in 1913. I say, I and almost everyone I know lives a life of more abundance and choice than anyone did 20-30-40-50-60-70-80-90 years ago.

Do you disagree with that?

SamenoKami said...

Mistake by me - "Look at the inflation rates for the US. They are pretty flat all things considered up until 1971." Should have been 'money supply' not 'inflation rates.'

**If the Fed floods the market with too much cash, as it would seem they are doing, then we will all be punished for it through hyperinflation. That's what I call a market force at work,

>> Therein lies the problem. The FED does not answer to anyone and market forces are not involved. Congress has almost zero control over them (if they have control they have yet to exercise it.) The FED prints the amount of money they want to no matter what Congress says. The FED sets the interest rate to whatever they want no matter what the pure market would do. By Congress having no control, we have no control. If there were a braking mechanism via gold/silver, money could not be hyperinflated no matter what someone wanted to do. You talk as if hyperinflation is just some calamity that strikes unsuspecting countries out of nowhere. Hyperinflation is a central bank on-purpose event because all they have to do is not print so much fake money. The market has no control over h.i. because it has no say-so in the printing of $$. That is all at the discretion of the FED. If the FED wants to throw out $12Trillion this yr. (which it has) no one can stop them. We have lost control of our own destiny. We will be punished so the FED can rape the nation for cash.
**Prove to me that moderate inflation is a bad thing.

>>So if every time you buy gas I moderately inflate the price by few tenths, you'll be OK with that? I used that to illustrate inflation within a time frame you can readily see. The problem is we don't see inflation over time. The people entering the market now think prices are normal and will see them slowly rise over time and it's hard to grasp. All inflation has to have a reference year, so using that, $.04 dollars in 1913 will buy what $100 buy in 2008. The site "Measuring Worth" will let you calculate that. The $ has lost 96% of its value in less than 100yrs but we're OK with that because our reference is our lifetime and it hasn't seemed that bad, but it looks like hell in a hand basket to me.

**I and almost everyone I know lives a life of more abundance and choice than anyone did 20-30-40-50-60-70-80-90 years ago.
>>This puts me in a false dilemma situation. I don't get the choice of how it would have turned out w/o the FED. The FED's stated purpose is to stop the boom/bust cycle. It hasn't. It can't. It won't. Ever.

Forty years ago I made $2.05/hr. I owned a new house. My wife didn't work. I bought every hotrod I wanted. I went to every movie and car race I wanted to. We took 2 vacations a year. The wife bought all the clothes and shoes she felt she needed (OK, that part's a lie.)
I now make over 10X that amount. The wife works. We are just getting by. No/few toys. No vacations. We watch every penny.
Was I better off 40yrs ago? You tell me.

SamenoKami said...

Pastorius - I need to shutup. I've made too many mistakes and if I had any credibility in this discussion, I've lost it.
The $ has lost 96% of it's value since 1913. That should be $4.4 not 4cents buys the same in 1913 as $100 does today. Crap! Sorry. The "Measuring Worth" site shows $2242 in 2008 equals $100 in 1913. A calculator can be a dangerous instrument in my hands.
Thanks for the posts.

Pastorius said...

SamenoKami,

You said: You talk as if hyperinflation is just some calamity that strikes unsuspecting countries out of nowhere. Hyperinflation is a central bank on-purpose event because all they have to do is not print so much fake money. The market has no control over h.i. because it has no say-so in the printing of $$. That is all at the discretion of the FED. If the FED wants to throw out $12Trillion this yr. (which it has) no one can stop them. We have lost control of our own destiny. We will be punished so the FED can rape the nation for cash.


I say; That is a good point.

If there is no Legislative or Executive oversight of the Fed then that is a problem.

Pastorius said...

Sameno Kami,
I will tell you the truth. I don't know if your last comment is sarcasm, or confession.

And, I feel your pain. My wife is working now too. And, she had not had to work for most of our married life. We are overextended, and we are just getting by.

I remember my parents going through the same thing during the Carter years.

I am not happy about it, but I accept it as part of the ebb and flow of things.

Between 1996-2003 I made huge money. More than my father could have dreamed of. Then I went off on my own in entrepreneurial adventures, and I have lost a lot of money.

Who do I have to blame?

Well, partially myself, and partially the economy.

I'll choose the Clint Eastwood thing. I'll just get up, dust myself off, and move on. I'm not going to blame anyone.

Blaming others for one's failings is NOT the American way.

If Obama really continues to take over the American economy (a la GM and Crysler) then we really have something to complain about.

If not, then we have an aberration in American history.

Even during the Reagan years (as I recalll) Chevy got a government handout, to reshape their business (under Lee Iacocca).

I think that kind of stuff is bullshit, and an interference in the Capitalistic process, but if it works, from time to time, I am not going to complain.

But, if it becomes the rule, then we know we have a real problem.

Let's see where things go from here.

SamenoKami said...

No sarcasm. I do appreciate IBA and check it everyday. The discussions on IBA often force me outside my comfort and knowledge zone. Thanks for making the sacrifice to make IBA happen.Hang in there.