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Friday, March 21, 2014

The Bank of England explains money creation

This is from "Money creation in the modern economy", an article published in the Bank of England Quarterly Bulletin 2014. The bold text is in the original.
In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:
  • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
  • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

Monetary policy acts as the ultimate limit on money creation.

The Bank of England aims to make sure the amount of money creation in the economy is consistent with low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans.

In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the economy may still be too low to be consistent with the central bank’s monetary policy objectives. One possible response is to undertake a series of asset purchases, or ‘quantitative easing’ (QE).

QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies. QE initially increases the amount of bank deposits those companies hold (in place of the assets they sell). Those companies will then wish to rebalance their portfolios of assets by buying higher-yielding assets, raising the price of those assets and stimulating spending in the economy.
This proves that Paul Krugman and the Neo-Keynesians clinging to their textbook Samuelsonian  Econ 101 have it wrong. It also shows very clearly why credit is the vital issue and why the paper-printing of the past is not going to lead to hyperinflation, but the eventual collapse of total credit market debt is going to lead to deflation.

The BoE even spells it out; "money" can be destroyed by using it to repay existing debt... or defaulting on it. By money, of course, they mean "credit money", which is the only sort of money that matters in terms of the current global financial system.

Concerning which, Zerohedge quotes Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta:
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
And, as I have repeatedly stated over the last six years, the Fed cannot print borrowers. There is no "permanent money" in this particular monetary system, which is another way to say that this is a "credit money-substitute" system. This little fact explains why Congress and the Executive Branch agencies inexplicably permit the bankers to openly flout the law; they are collectively deemed too structurally important to fail or even be held legally accountable.

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179 Comments:

Anonymous Toby Temple March 21, 2014 5:19 AM  

So the economy is more dependent on the supply of credit money than actual money?

Blogger CostelloM March 21, 2014 5:33 AM  

I wish I had the power to create "money" out of thin air, loan it AT INTEREST, then take real tangible property off of people who can't afford to pay me back after I don't lend out enough. Nice deal if you can get it.

Anonymous Peter Garstig March 21, 2014 5:40 AM  

So the basic function of QE is to give non-financial institutions higher credit scores so they can continue loaning money from the banks? Or do I miss something?

Anonymous VD March 21, 2014 5:45 AM  

No, QE is intended to prop up asset prices and keep them from collapsing. Such as the stock market and the housing market. This is because if the asset prices fall, the loans for which they are held as collateral will go underwater, creating a vicious deflationary circle.

Blogger Ron March 21, 2014 5:52 AM  

When the banks make a loan, are they actually liable in any way shape or form to anybody if the creditor defaults.

For example. Lets say Bank of Bikini (Bob for short), loans Frank 5 million dollars. And lets say for whatever reason, Frank has zero assets, no dependents, etc. And lets say Frank blows all that money on cocaine, and jumps into shark infested waters with his 5 million bag of cocaine. Bye bye Frank, bye bye cocaine.

So the money is totally gone, the creditor is gone, he has no remaining assets or any associates for BoB to collect from.

Does Bob actually lose anything at all?

Anonymous PhillipGeorge(c)2014 March 21, 2014 6:02 AM  

Ergo the FRB and the Bank of International Settlements with their special drawing rights SDR's, are completely opaque institutions.

or the bedrock of existence is founded on a fairy's wing - and whose to say the fairies aren't some of the most malevolent schemers in creation.

One problem is that at a personal level people just don't like being in debt; thus, consumption, the real engine room of economics is impossible to guarantee.

Anonymous PhillipGeorge(c)2014 March 21, 2014 6:04 AM  

sorry, " who is"

Anonymous Peter Garstig March 21, 2014 6:17 AM  

No, QE is intended to prop up asset prices and keep them from collapsing. Such as the stock market and the housing market. This is because if the asset prices fall, the loans for which they are held as collateral will go underwater, creating a vicious deflationary circle.

So it's keeping existing loans afloat, not creating new ones? or a mix of both? (actual data suggest it's not creating new ones, as total credit didn't grow by much)

Anonymous VD March 21, 2014 6:24 AM  

Does Bob actually lose anything at all?

Yes, if he used the loan as collateral to borrow money himself. That's the root of the deflationary fear here. The banks don't just create the money and loan it out, they then slice up those loans and sell them in packaged deals or borrow money against them in order to purchase new assets.

So it's keeping existing loans afloat, not creating new ones?

It's a mix of both. Mostly the former, but it's also the basis of the credit growth in the Corporate and Federal sectors. QE is the only thing keeping that going and keeping Household flat. Otherwise, we wouldn't be in credit disinflation, we'd be in full-blown credit deflation.

Anonymous Rosalys March 21, 2014 6:33 AM  

Under "THE UNITED" on the face of the FRN it reads, "This note is legal tender for all debts, public and private." To every note that came his way, my Dad used to cross out "legal tender for" and "s, public and private" leaving it to read "This note is all debt"

Anonymous LeeS March 21, 2014 6:36 AM  

Mr. Hemphill wrote that in 1934. The end hasn't come yet. An entire generation, my Dad's, was born, lived and died without seeing any financial collapse. Dad didn't have to worry, or give it a second thought.

Anonymous VD March 21, 2014 6:38 AM  

Dad didn't have to worry, or give it a second thought.

Then I recommend you not worry or give it a second thought yourself.

Anonymous Anonymous March 21, 2014 7:36 AM  

Great....work hard, play by the rules and attain serfdom--er, no thanks.
So, we need to rebuild starting now.
A lesson learned from this is that we need competing currency systems and rope. Lots of rope.



Anonymous LeeS March 21, 2014 7:43 AM  

I've only got about 15 healthy years left. No kids. So I'm trying to guess when the crash will happen. If they can kick the can down the road a little longer, I'll be circling the drain by then, so no worries.

Blogger Nate March 21, 2014 7:51 AM  

"The BoE even spells it out; "money" can be destroyed by using it to repay existing debt... or defaulting on it"

I had 1000 dollars on my credit card... I paid off 500 of it.

OH NO!

I have destroyed 500 dollars!

oh well... I suppose I'l console myself by spending 500 bucks... I'll just put it on my credit card.

Blogger Nate March 21, 2014 8:10 AM  

Look... a bunch of Credit gods sit on high and dole out credit money to commercial banks as they see fit.

There is no limit on what they can dump into the commercial bank's accounts.

The only limit is the demand for the dollars they create. and even when the people at the end of the line stop borrowing because they literally can't borrow any more... or are just fed up with debt... the commercial banks can just go sell the money to other banks who then package it up and use it to invest directly into industry.

There is a reason so many big companies have massive stacks of cash on hand. Because banks had money... and rather than lending it... they "invested" it.

Anonymous zen0 March 21, 2014 8:11 AM  

I'll just put it on my credit card.

At what rate of interest?

You, sir, are a co-dependent enabler, aiding and abetting the destruction of civilization.

Anonymous Salt March 21, 2014 8:15 AM  

Those companies will then wish to rebalance their portfolios of assets by buying higher-yielding assets, raising the price of those assets and stimulating spending in the economy.

"... and start the bubble machine" - who would ever have thought Art Linkletter was prescient.

Blogger Nate March 21, 2014 8:18 AM  

'You, sir, are a co-dependent enabler, aiding and abetting the destruction of civilization."

indeed.

I'm still trying to hash out what's supposed to stop a federal reserve bank from dropping a trillion dollars into a few different accounts and calling it a day.

Fed gives a trillion to a couple commercial banks... commercial banks lend it to other banks who dump it straight into the stock market... some companies blow it... some spend it wisely... some horde it.

Either way... tons of money gets injected into the economy... the only loan that got made was to banks that used the money to jerk the stock market up.. If the stock market starts to go down... well its a problem... but then again the fed can always dump another trillion back into the commercial banks and the whole system starts again to shoot the stockmarket right back up.



Anonymous zen0 March 21, 2014 8:26 AM  

Sorry, Salt, but that was Lawrence Welk. I realize how It all sort of mushes together in the foggy mists of time.

Anonymous VD March 21, 2014 8:28 AM  

I'm still trying to hash out what's supposed to stop a federal reserve bank from dropping a trillion dollars into a few different accounts and calling it a day.

Fear of puncturing the illusion that the "dollar" is worth anything and thereby destroying the entire monetary system.

Blogger Outlaw X March 21, 2014 8:42 AM  

There is no "permanent money" in this particular monetary system, which is another way to say that this is a "credit money-substitute" system.

For the first time I understand until we get to the above quote. Taken to its limit, if everyone survived on existing income flow plus saved money from the past and never had borrow money then there would be no "permanent money" so my money would disappear? I test any theory by taking the theory to limits and boundaries. So while I understand money creation, I think, this falls apart at this point. Either that or one could say there would be no financial advantage to create a bank and they would all disappear?

If I am correct then I have some questions that I will go into if someone can't tell me what I am missing. I'm certainly wading deep water for my knowledge.

Anonymous Barnabas March 21, 2014 8:43 AM  

So Vox, how are you investing? If deflation is on the horizon do you just stay in cash?

Anonymous Salt March 21, 2014 8:44 AM  

Oops, you're right Zen0.

Anonymous VD March 21, 2014 8:47 AM  

So Vox, how are you investing? If deflation is on the horizon do you just stay in cash?

I do not answer such questions nor do I provide investment advice.

Blogger Crowhill March 21, 2014 8:54 AM  

Vox, I only have a cursory understanding of how money works in this economy, and half of what I think I know is probably wrong. Can you recommend a book that will explain the basics?

Anonymous Anonymous March 21, 2014 8:56 AM  

This makes a lot of sense, and did when I first ran across Steve Keen's explanation of it. But I'm wondering: how certain is it that they can't "create borrowers"? What if they, say, triple the mortgage tax deduction? Or how about, for every $5K you borrow, you get a free set of steak knives and an entry into a drawing for a new car?

It seems to me that they could create borrowers, especially among the less financially savvy elements of the population, if they want to badly enough.

However, it could be expensive, and then you run into the problem Nate's thinking about: if you just print a bunch of extra money to spend on creating borrowers (or giving it away), you lower the value of the money, making it less attractive to borrow. Seems like that could become a vicious spiral of currency inflation combined with credit deflation. Is that possible?

Anonymous Toby Temple March 21, 2014 8:58 AM  

BoE is actually saying that paying your debt is just as bad as not paying it.

Time to max out those cards and never bother about the bills!!!!

Anonymous Anonymous March 21, 2014 9:01 AM  

Outlaw X, I don't think the credit theory of money states that all money comes from credit. You could have a metals-backed currency in a credit-free economy, and you can also create fiat money through printing. We have some of each of those in the current system, but they're completely swamped by the amount of credit money that's been created, so it's the credit-based money that's driving everything.

Blogger Outlaw X March 21, 2014 9:10 AM  

We have some of each of those in the current system, but they're completely swamped by the amount of credit money that's been created, so it's the credit-based money that's driving everything.

So we are not just in "credit money system", just mostly? I'll accept that.

Anonymous Roundtine March 21, 2014 9:11 AM  

But I'm wondering: how certain is it that they can't "create borrowers"? What if they, say, triple the mortgage tax deduction? Or how about, for every $5K you borrow, you get a free set of steak knives and an entry into a drawing for a new car?

This is just restarting the system. What do you do when that trick is finished? Who is going to borrow next? The federal government was the borrower of last resort for about 3 of the past 5 years, but what happens when its debt gets to a point where no one wants to buy Treasuries? Everything has to end sometime.

Anonymous Roundtine March 21, 2014 9:15 AM  

So we are not just in "credit money system", just mostly? I'll accept that.

While the paper dollars you hold are technically also credit based, the reality is that the paper money will survive the destruction of debt. If I borrow $5,000 and buy a used car from you, and I go bust and the bank loses all $5,000, you still have it. But if the bank gives me $5,000 credit money (no different in effect from those paper FRNs) and I put it into your bank account, this is just a ledger entry. If I go bust, the bank loses all $5,000 and then when you go to the bank to take out your $5,000, they say sorry, we're bankrupt too, because the value of that $5,000 is based on my ability to repay the loan.

Anonymous Anonymous March 21, 2014 9:25 AM  

Monty Perelin links to a proposition that the Fed knows it has lost control while the china is positioning itself to replace the "poof its here" dollar with a global currency backed by "stuff".

Blogger JartStar March 21, 2014 9:25 AM  

Barnabas,

I recommend looking at the Permanent Portfolio by Harry Browne. This is an updated version of it.

Remember that it's a template not a straight jacket.

Blogger Serge_Tomiko March 21, 2014 9:25 AM  

Vox, I can't believe you are posting this. I have already told you to read the Positive Money site. This entire piece from the BoE is due to their work.

You're absolutely wrong. Money has always worked this way - going back to Knut Wicksell and his theory of the "One Bank". He wrote that in the 1890s!

The issue is money is and always has been created either by banks, with a future liability of interest, OR - and this is very important - by the sovereign creating the money from nothing and - this is really important - WITHOUT INTEREST.

It's very simple. The government creates money, and this pays down debt and DESTROYS FUTURE DEMAND FOR INTEREST PAYMENTS. This allows more money to be spent into circulation.

There will be NO deflation. Deflation is NOT POSSIBLE within a modern banking context. You can keep making this prediction until your debt, but at some point it's going to start looking ridiculous.

Read the positivemoney.org site. You're halfway there to abandoning your Austrian madness.

Anonymous John Regan March 21, 2014 9:26 AM  

Yes, as I have explained many times, such as here:

http://strikelawyer.wordpress.com/2012/02/22/liquidity-trap-explained/

all newly created "money" must be owed back into the system by someone, as it is borrowed into existence.

The only exception to this would be for the central banking authority to create money and buy stuff with it - bridges, buildings, cities, whatnot.

And even here, the newly created money would be a debt of the Federal Reserve. Just a meaningless one.

Other than that, you can't get any new money - that is, increase the money supply - without also increasing debt. If you have too much debt already, you're screwed.

The only way out is a jubilee - wholesale canceling of debt. This is highly problematic as well. But problematic or no, it's the only way.

Blogger James Dixon March 21, 2014 9:29 AM  

> But I'm wondering: how certain is it that they can't "create borrowers"?

You have to have enough income to pay the interest on the loan. People are reaching the limits of their ability to service their debt.

At a certain point the only way to keep increasing debt is to offer interest free debt, which is essentially what the Fed has been trying for the past several years. Strangely enough, those interest free loans never seem to make it down to our level though. What we get is always an "adjustable rate". And then they wonder why people won't borrow more.

Of course, George the Lesser realized this, which is why he went with directly giving the money back to people in their tax refunds.

Anonymous Will Best March 21, 2014 9:29 AM  

So the $5k that is sitting in my safe ceases to be worth anything if everybody pays back or defaults on their debt?

I am not exactly understanding this.

Blogger James Dixon March 21, 2014 9:32 AM  

> Deflation is NOT POSSIBLE within a modern banking context.

Keep saying that Serge. Maybe you'll convince yourself eventually.

Anonymous Toby Temple March 21, 2014 9:33 AM  

I think that the deflation scenario Vox is saying is due to the fact that those credit money is going to go bye bye and leave us with the ACTUAL money supply, which is much lower than the money supply that includes the credit money.

Blogger James Dixon March 21, 2014 9:35 AM  

> I recommend looking at the Permanent Portfolio by Harry Browne.

Seconded. And the original is here.

Blogger James Dixon March 21, 2014 9:36 AM  

> I think that the deflation scenario Vox is saying is due to the fact that those credit money is going to go bye bye...

Not all of it. Something on the order of 50% or better though.

Anonymous John Regan March 21, 2014 9:37 AM  

The Fed can't create borrowers, but then the government is the borrower of last resort. The problem then becomes that the government deficits explode. Then there's the pressure to get that under control. In the EU right now that means "austerity".

But it's all just delaying the inevitable. That said, delay can appear to be very effective, and I guess in some ways it IS effective, but the price really is properly termed a "depression". It's like a pall hanging over everyone and everything.

Blogger Outlaw X March 21, 2014 9:37 AM  

Monty Perelin links to a proposition that the Fed knows it has lost control while the china is positioning itself to replace the "poof its here" dollar with a global currency backed by "stuff".


With what? Empty cities?

Blogger JartStar March 21, 2014 9:45 AM  

Will Best,

In a deflationary cycle it would be worth much more than today as the supply of money shrinks the demand for each dollar increases, until the try to replace the dollar with a new one and the old may become nearly worthless in exchange.

Anonymous John Regan March 21, 2014 9:55 AM  

Will Best/Jart Star:

Think Japan. A gentle deflation for as long as it can be maintained. It's the path of least resistance for the powers that be.

The system could be preserved for a much longer time - and without the depression - with a baby boom. That's how you get new borrowers. But this is unthinkable to our rulers, and perhaps most everyone else too.

Nevertheless a baby boom would produce some inflation eventually, which is a kind of a reset for the system that preserves the system.

Not that I'm advocating that. I think the system is fundamentally sick. But of course I don't run things. Just guessing at what those who do might think of.

Blogger Nate March 21, 2014 10:02 AM  

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation"

This is such bullshit.

There is a cash economy out there. And on top of that... even without their precious dollars... people would use something else for money.

Blogger Salt March 21, 2014 10:04 AM  

Fiat money from thin air is money first loaned. Loaned means it has to be paid back to the originator loaner, essentially destroying it till re-created (loaned). Pay it all back, no money. When in circulation it spends.

Now, take gold. Go mine some. It's not been loaned (created) at first instance. No creation from thin air. There is no one to whom to pay it back to. It forever circulates. Spends too.

Blogger Nate March 21, 2014 10:08 AM  

"Deflation is NOT POSSIBLE within a modern banking context."

Shut up moron.

Anonymous John Regan March 21, 2014 10:08 AM  

@Nate:

Good to see you on this thread. Might be able to straighten you out some.

I suppose the quote is bullshit in the sense of an exaggeration; but it's fundamentally correct, and if you don't understand that then you don't understand the monetary system you are criticizing.

Blogger Nate March 21, 2014 10:09 AM  

"Loaned means it has to be paid back to the originator loaner, essentially destroying it till re-created (loaned). Pay it all back, no money. When in circulation it spends."

No.

Fiat money loaned by a federal reserve to the government that created that federal reserve is not a loan at all. its counterfeit and is exactly the same as the government just printing the money and spending it itself.

Blogger Salt March 21, 2014 10:10 AM  

The other thing about gold, at its first instance, is there is no interest attached. As money it cannot be viably destroyed. It's the enemy of bankers.

Blogger Salt March 21, 2014 10:13 AM  

Counterfeit or not Nate, it is money, and spendable, in the fiat sense. Also, such money "loaned by a federal reserve to the government" incurs interest.

Anonymous VD March 21, 2014 10:15 AM  

There will be NO deflation. Deflation is NOT POSSIBLE within a modern banking context.

You're a moron. It's already happening in multiple countries. And it happened in 2009. Of course, you're the guy who tried to argue against the data on the basis of a chart produced from that same data.

Idiot.

Anonymous Anonymous March 21, 2014 10:17 AM  

This is just restarting the system.

Right. I'm not saying it would be smart or sustainable, but it seems like one way they could kick the can down the road a bit farther. Zero-percent interest isn't necessarily the end of the road; if people won't borrow at that rate, they can offer other incentives to sweeten the deal. Furniture stores "create borrowers" all the time by offering "no payments for 6 months" and the like to convince people who otherwise wouldn't have borrowed to do so.

You have to have enough income to pay the interest on the loan.

Yeah, but that's in the future. I think we're reaching a point where they'll be glad if they can find a way to keep the system afloat for a couple more years. Then it'll be a couple months, then a couple weeks....

I'm fully convinced that it's all going to crash; I'm just trying to figure out how many more tricks they can use to put it off. I was convinced things were going to crash in the Clinton years. He immediately raised taxes on nearly everyone, following up on Bush's "read my lips" caving on tax increases. Bankruptcies were climbing at an impressive rate, and things were looking ugly. Then Congress turned the Internet over to private use (maybe the smarter thing they did in decades), and we got an explosion of innovation and the tech bubble that bailed things out (for a while). So ever since, I've been hesitant to declare the end is here.

Anonymous Roundtine March 21, 2014 10:18 AM  

So the $5k that is sitting in my safe ceases to be worth anything if everybody pays back or defaults on their debt?

No. Paper money exists apart from the debt. There is about 50 credit dollars for every 1 physical dollar; if everyone paid back or defaulted on their debt, that cash would be extremely valuable.

Anonymous John Regan March 21, 2014 10:20 AM  

@Nate: Salt is correct. And the fact that the government has to pay interest on its "debt" to the Fed is crucially important and refutes your idea that it's exactly the same as the government issuing the money itself.

Although your point that this is counterfeiting is well taken. But the perverse nature of the monetary system has more to do with the promise to pay that never has to be kept than conventional notions of counterfeiting.

Blogger Salt March 21, 2014 10:22 AM  

No. Paper money exists apart from the debt. There is about 50 credit dollars for every 1 physical dollar; if everyone paid back or defaulted on their debt, that cash would be extremely valuable.

Yes, its value would go up but there is still one problem. That cash was originally loaned out, it too created from thin air. It is incurring interest payable to the originator. Pay it all back and you will not have enough to cover the interest expense.

Anonymous Porky March 21, 2014 10:23 AM  

This is the Stockholm Syndrome. We don't want anything to happen to the criminals who rape us daily because...something bad might happen.

Anonymous John Regan March 21, 2014 10:24 AM  

You have to give the devil its due. Tying the creation of new money to new loans is at least a semi-rational method of regulating money issuance, in the sense that money creation can't be governed by nothing at all.

Blogger Salt March 21, 2014 10:25 AM  

This is why gold (or silver), as the only medium of exchange, is anathma to bankers. They don't get to create it.

Anonymous Porky March 21, 2014 10:27 AM  

Deflation is NOT POSSIBLE within a modern banking context.

Japan?

Anonymous John Regan March 21, 2014 10:28 AM  

@Roundtine: No. Paper money is also debt. It is a "note", which is a promise to pay. Although paper money is basically insignificant in all this. It's a drop in the bucket compared to money that is held "on account".

Anonymous John Regan March 21, 2014 10:32 AM  

@Salt: Well, actually, gold and silver really are never the "only media of exchange". The important thing is not that people carry around gold and silver and use it as money, but that no one's promise to pay can be irredeemable. And that includes the Federal Reserve or the government.

In other words, the important thing is that the monetary unit of account (e.g., dollar) be defined and that everyone be bound by the definition, including the government.

I agree that some specified quantity of gold and/or silver is the best method of defining the monetary unit of account.

Anonymous Roundtine March 21, 2014 10:33 AM  

That cash was originally loaned out, it too created from thin air. It is incurring interest payable to the originator.

No, the cash is printed apart from the loan. There is no identifying features on the bills to tie it to the original debt. It accrues no interest and exists apart from the debt that originally sprung it to life. No one will come looking for it, in fact the U.S. Treasury and Fed would be hard at work printing up more of them to give out.

Anonymous NorthernHamlet March 21, 2014 10:34 AM  

Vox, Nate, others,

I'm going to ask your something pragmatically, not morally or ethically.

Let's say myself or a family member has some debt, but also savings. Is the smarter thing to do in the situation we find ourselves in to keep the cash on hand (or as assets such as more gold, food, etc) and continue making minimum monthly payments or to pay off part of the existing debt with the savings?

This is probably a stupid question, but I'd like to hear some opinions. I know not to let them take out anymore debt at this point. So at least there's that.


Nate

Show tonight? I need to know if I should pick up some extra beer and invite the guys over.

Blogger Salt March 21, 2014 10:35 AM  

the government issuing the money itself.

Look in the Constitution. It's right there. Government issued (fixed weight and measure) coinage, even as to bills, non interest incurring money. That's for the betterment of society. That is what was originally intended. Such would circulate freely.

Then came the bankers...

Anonymous Porky March 21, 2014 10:38 AM  

Fiat money loaned by a federal reserve to the government that created that federal reserve is not a loan at all. its counterfeit and is exactly the same as the government just printing the money and spending it itself.

Not at all. Think of it as a new virtual currency. Call it the OMO.

It's legal. It's money. And what the hell are you going to do about it anyway?

If everybody abandons the dollar for, say, bitcoin... are you going to bitch about the fact that bitcoins were "counterfeited" out of thin air?

Anonymous John Regan March 21, 2014 10:39 AM  

@Roundtine:

Two things. First, the actual "cash" you are referring to should be properly called "currency". This is the "paper money" issued by the Fed in the US. While it is true that this money is not loaned into existence like almost every other circulating dollar, it is still a debt obligation of the Fed.

Second, the amount of currency is a tiny fraction of circulating money. It really doesn't matter very much.

Blogger Salt March 21, 2014 10:40 AM  

No, the cash is printed apart from the loan. There is no identifying features on the bills to tie it to the original debt. It accrues no interest and exists apart from the debt that originally sprung it to life.

No. There you are wrong. The cash is but representative of the debt owing, but owing it is. It doesn't matter that the cash came from printing at Treasury. Default on all obligations and surrender all cash to the Treasury. Now, will it have enough to pay it all back to the FED, plus the interest, as the cash originated by the FED's loan to Treasury which printed such as physical paper?

Blogger Nate March 21, 2014 10:42 AM  

"I suppose the quote is bullshit in the sense of an exaggeration; but it's fundamentally correct, and if you don't understand that then you don't understand the monetary system you are criticizing."

John... exactly how new are you around here?

I understand the monetary system completely. Serge is an idiot... and if you think money comes from governments... you're ignorant as a post on this stuff to.

how the current system works is almost entirely irrelevant. the laws of economics don't care what kind of system you build. They are what they are... and in the end... they have the only say that matters.

Blogger Salt March 21, 2014 10:43 AM  

This is the "paper money" issued by the Fed

That's right. It's originally theirs.

No, the cash is printed apart from the loan.

Who!! printed it, and on what authority?

Blogger Nate March 21, 2014 10:44 AM  

"If everybody abandons the dollar for, say, bitcoin... are you going to bitch about the fact that bitcoins were "counterfeited" out of thin air?"

You're missing the point. They are not counterfeited in the since that they are fake... they are just as real as any other fiat money. But the creation is entirely an inflationary process.

Blogger Salt March 21, 2014 10:46 AM  

Cash is but freely circulating debt, not tied to any one person but to its own existence as debt, payable to the originator. It is a Federal Reserve Note.

Anonymous John Regan March 21, 2014 10:49 AM  

@Nate: I've read a lot of your comments here and some posts on your blog. I don't think you understand the monetary system "completely", although you understand some things about it.

Your understanding could be improved, in other words.

When did I ever say that money "comes from governments"?

Anonymous Anonymous March 21, 2014 10:55 AM  

With what? Empty cities?

No, trust.

backed by resources and whatever will get the job done. The U.S. has lost the trust of its own people and from my reading, the world.

There comes a time when you know you are dealing with a scum-bag--and the U.S. is now that scum-bag--that a rational actor will do a couple of things. 1. develop new deals with different people. 2. inflict maximum pain on the scumbag. 3. inflict more pain on the scumbag.


I think we are at step 1.




Anonymous John Regan March 21, 2014 10:56 AM  

@Salt: Well, let's clarify a bit. Currency, such as Federal Reserve Notes, are issued by the central bank in various denominations of the unit of account. They are a note - that is, a promise to pay BY the Federal Reserve - that sum to whoever presents it to them for payment.

So a $1 federal reserve note is not a dollar. It is a promise to PAY a dollar by the Federal Reserve.

It is a promise that is not only never kept, it is never intended to be kept and is, in fact, unintelligible.

Anonymous Porky March 21, 2014 11:00 AM  

But the creation is entirely an inflationary process.

No it's not. It's just moving 1's and zero's around.

If a bank then decides to take the money to the casino, then that might be considered inflationary.

Blogger Nate March 21, 2014 11:02 AM  

"When did I ever say that money "comes from governments"?"

You didn't. Serge did. which is why I called him a moron.

Also... the fact that the fed is allowed to "charge interest" is largely irrelevant. The fed is a puppet created by a government and destroyed at the whim of the government.

and come on... what is the interest paid in? more dollars? that the fed created and gave to the government?

/facepalm.

its all jerking off.

Blogger Nate March 21, 2014 11:06 AM  

"No it's not. It's just moving 1's and zero's around. "

yep. I will splain.

Fed "loans" money to US Gov. US gov spends new money on Whatsits. New money is now in the system.

***POOF***

inflation.

Blogger Nate March 21, 2014 11:08 AM  

"Currency, such as Federal Reserve Notes, are issued by the central bank in various denominations of the unit of account. They are a note - that is, a promise to pay BY the Federal Reserve - that sum to whoever presents it to them for payment."

If you're going to tote your knowledge of the system you really shouldn't leave the Treasury Department out of the currency creation process.

Anonymous John Regan March 21, 2014 11:14 AM  

@Nate: I'm not sure what you're getting at. Currency in the US is in the form of Federal Reserve Notes, not Treasury notes. They are a debt obligation of the Fed, not the Treasury.

Of course, there's the idea of "seigniorage" in there somwhere.

Anonymous Dr. Kenneth Noisewater March 21, 2014 11:15 AM  

So the economy is more dependent on the supply of credit money than actual money?

That's a distinction with very little (if any) remaining difference.

I'm curious to see how this intersects with the petrodollar.

Blogger Salt March 21, 2014 11:19 AM  

They are a note - that is, a promise to pay BY the Federal Reserve - that sum to whoever presents it to them for payment.

Not anymore. Out of curiosity, what might they pay you with upon presentment? What would that Dollar be?

Anonymous Anonymous March 21, 2014 11:22 AM  

This post was a very clear explanation of the money creation issue. What I'm confused about is how the banks purchase more assets - assets being loans and stocks which are just money creations in themselves? If I understand that part right, then if these are just migrating from one bank to the next, how are overall assets (even on paper) increasing (especially with low or negative growth in production.) Or aren't they?

Not sure I'll ever really understand this. But my garden is 1/2 acre big now. And growing.

Anonymous John Regan March 21, 2014 11:22 AM  

@Salt: There was a case about that in the 1960's. Some guy, maybe Nate's father, took his FRN's down to the Federal Reserve bank to redeem them, because the legend to the left of the picture used to provide that they could be so redeemed.

They gave him another batch of FRN's. LOL.

He sued. And lost.

Blogger Salt March 21, 2014 11:22 AM  

Also... the fact that the fed is allowed to "charge interest" is largely irrelevant. The fed is a puppet created by a government and destroyed at the whim of the government.

Yes. But to whom does the USG (Treasury) pay the interest on the loan? Nate, I'm sure you are aware that the Federal Reserve Banks are privately owned, irrespective of their creation.

Blogger Nate March 21, 2014 11:26 AM  

"Nate, I'm sure you are aware that the Federal Reserve Banks are privately owned, irrespective of their creation."

of course I know they are privately owned... ***sigh***

As long as the interest is paid in dollars... its literally free for the government.

Anonymous John Regan March 21, 2014 11:27 AM  

@freeonus: In theory the Fed can purchase anything and create the "dollars" with which to make the purchase.

Here's something important to understand. The Fed does most of its purchasing of securities through a subsidiary known as the "open market committee", the idea being that they would purchase government securities (bonds) already issued to someone else, on the "open market". In QE, they have been purchasing newly issued government bonds directly from the government, or the government's "primary dealers".

Who are, in the main, the owners of the Fed.

That's a real circle jerk.

Anonymous Noah B. March 21, 2014 11:30 AM  

"Nate, I'm sure you are aware that the Federal Reserve Banks are privately owned, irrespective of their creation."

Yet the Fed turns its profits back over to the Treasury. The real benefit of owning shares in the Fed is the ability to influence policy.

Anonymous John Regan March 21, 2014 11:31 AM  

@Nate:

"As long as the interest is paid in dollars... its literally free for the government."

I think you're wrong here. The government must pay the interest either by borrowing more from the Fed and paying the interest with that - thereby increasing the deficit - or from its revenues (taxes).

It's not "free".

Blogger Nate March 21, 2014 11:33 AM  

"@Nate: I'm not sure what you're getting at. Currency in the US is in the form of Federal Reserve Notes, not Treasury notes. They are a debt obligation of the Fed, not the Treasury."

**sigh**

/facepalm

Look at the word currency. See it? currency. Do you know what it means? of course you do. Good now pull out some currency and look at it.

now do you realize what the Treasury Department had to do with its creation?

Anonymous Porky March 21, 2014 11:33 AM  

Fed "loans" money to US Gov. US gov spends new money on Whatsits. New money is now in the system.

In which Nate finally admits that debt is money.

It just took a year or so.


***POOF***

inflation.


Obviously not.

Anonymous Noah B. March 21, 2014 11:33 AM  

It's not "free".

Nate is 100% correct on this. Treasury pays interest to Fed on bonds outstanding. Fed books those payments as profits. Fed delivers said profits to Treasury at end of fiscal year.

Blogger Salt March 21, 2014 11:35 AM  

because the legend to the left of the picture used to provide that they could be so redeemed.

See this. You will note that the bill is a Certificate for Silver ON DEPOSIT, not a debt Note.

Anonymous Noah B. March 21, 2014 11:36 AM  

It's a classic shell game, yet as simple as it is, it's sufficient to baffle almost everyone.

Anonymous John Regan March 21, 2014 11:36 AM  

@Noah B:

"Yet the Fed turns its profits back over to the Treasury."

I think you're right about this. Not sure what constitutes the "profits" or who determines that, however. Thus I'm not sure of the impact. Good point, though.

Anonymous John Regan March 21, 2014 11:42 AM  

@Salt: Yes, silver certificates were an obligation of the Treasury. They don't issue them anymore, I don't think.

As an aside, how do you put a link in a comment around here? Sorry to be ignorant about it, but I guess I need the help.

Anonymous John Regan March 21, 2014 11:44 AM  

@Salt: I think the legend used to read: "This Note is Legal Tender for all debts, public and private, and is redeemable at any office of the Treasury or at any Federal Reserve Bank."

Blogger Salt March 21, 2014 11:59 AM  

@John. Lower demoninations (1,5,10) were @Treasury, in silver. Gold was through the FED. No matter, those bills were not NOTES, but certificates. Once the physical window was closed, that man could do no better than what he got.

Blogger James Dixon March 21, 2014 12:00 PM  

> Let's say myself or a family member has some debt, but also savings.

There are two aspects to this type of question. First, do they have an income stream that can continue to pay the loan? If yes, then it's entirely a question of convenience and piece of mind. If no, they need to pay the loan off asap. Second, what is the loan interest versus the interest on savings? If there's a considerable difference (which there often is, the loan interest almost always being higher) you're probably better off paying off the loan and then using the amount of the payments to rebuild the savings.

Blogger James Dixon March 21, 2014 12:04 PM  

This comment has been removed by the author.

Blogger Salt March 21, 2014 12:06 PM  

"Yet the Fed turns its profits back over to the Treasury."

Interesting, yes, but not really material as to Creditor and Debtor. Returning profits back to Treasury does not extinguish on the debt owed to the FED.

.

Blogger James Dixon March 21, 2014 12:07 PM  

> ... how do you put a link in a comment around here?

They're just standard html links. See here for the details.

Blogger James Dixon March 21, 2014 12:08 PM  

And then of course sometimes you mess them up, as in my deleted comment above. :)

Blogger James Dixon March 21, 2014 12:09 PM  

God, I'm pathetic today. Peace of mind.

Blogger Dos Voltz March 21, 2014 12:09 PM  

Vox, this is exasperating. I'm 50 now. College educated with a good background in physical sciences (where rules tend to stay in place and be respected). I'm fairly intelligent, but jeez,

I used to think I understood basic economics, but my sense is that the field has been hopelessly compromised by "experts" like Krugman and other snake oil salesmen and charlatans, and there are now just a thousand opinions about what-is-causing-what.

Like Nietzsche once said about certain German rationalists "they muddy the waters to make them appear deep."

What are us lay people to believe?

I have to admit that now I am confused. Trying to understand modern economics is like watching a soccer game on a circular pitch, ten teams are playing, and there are 17 goal posts in constant motion themselves.

I've lost track of the rules, I can't even identify what is SUPPOSED to be going on, though I have a sense that a return to simplicity might solve a lot of problems.

Can you render an opinion as to what ought to be done? What would you do if you were king of the world?

Outlaw Keynes and enforce Austrian principles in academia?

Scrap the system and start anew, abolish the Fed? Are there a number of fixes that would set us back upon the right path?

Not being cheeky, I am genuinely interested in seeing someone put together a clear solution to a fix.

Sadly, I think the problems extend way beyond just banking. Starting to feel like a government collapse will be REQUIRED for real changes in banking to be possible - because too many of the charlatans are currently at the controls.

Anonymous Noah B. March 21, 2014 12:10 PM  

"Returning profits back to Treasury does not extinguish on the debt owed to the FED."

You're correct that it doesn't extinguish the debt. But it does make the debt owed to the Fed entirely irrelevant, in the sense that it becomes effectively interest free, regardless of the yield rate on the outstanding bonds.

The Treasury just has to come up with the money for the interest payment in year one. Then, it gets that money returned to it by the Fed year after year.

Blogger RobertT March 21, 2014 12:19 PM  

" but the eventual collapse of total credit market debt is going to lead to deflation."

I have no trouble with the concept, it's the severity I'd like to get a handle on. Interest rates will go up and values will collapse because no one will be able to afford the interest rates, But will incomes follow values? To an extent I suppose. If they collapse as well, demand will collapse, markets will collapse, the food chain will collapse, our entire civilization will collapse and everyone will die, of disease or thirst or hunger. Total annihilation. If that's the expectation, trying to prepare for that is a waste of time.

Blogger Salt March 21, 2014 12:21 PM  

in the sense that it becomes effectively interest free

In that regard, yes. But only because of such Return. What's also noteworthy is that the Interest must be paid, returned or not. That is siphoned from us peasants.

Blogger Salt March 21, 2014 12:28 PM  

But it does make the debt owed to the Fed entirely irrelevant

Only in a stable or inflating (not hyper) economy I think. Deflation reduces the ability to service the debt, if even just the interest payment. Is it not possible that eventually that interest payment will itself be defaulted on?

Anonymous John Regan March 21, 2014 12:29 PM  

@frigger611:

"Can you render an opinion as to what ought to be done? What would you do if you were king of the world?"

If I may be so bold as to take a stab at it:

jubileeamendment

Anonymous Anonymous March 21, 2014 12:30 PM  

> Let's say myself or a family member has some debt, but also savings.

Something else to consider: The bank where you have your savings can default and make it impossible for you to get your money in time to make your loan payments. I don't know if it would help to have your savings and your loan in the same place so that they balance each other out or not. I'm guessing not because another bank would only purchase the assets (your loan) and not the debt (your savings). There are experts out here that can probably shed more light on this than I can.

Anonymous Porky March 21, 2014 12:35 PM  

Sadly, I think the problems extend way beyond just banking. Starting to feel like a government collapse will be REQUIRED for real changes in banking to be possible.

Jesus already showed us what to do with the moneychangers.

Anonymous civilServant March 21, 2014 12:44 PM  

And on top of that... even without their precious dollars... people would use something else for money.

Given the existing extreme dependence on FRN's the transition to anything not similar would be difficult if not impossible.

that cash would be extremely valuable.

Then it would be superceded by a new system and the remaining FRN's declared null and void. The point of the existing system is that the currency owners have money and that everyone else is indebted to them. For anyone else to have money while not being indebted to the present currency owners would be unacceptable to the present currency owners.

Anonymous civilServant March 21, 2014 12:50 PM  

If they collapse as well, demand will collapse, markets will collapse, the food chain will collapse, our entire civilization will collapse and everyone will die, of disease or thirst or hunger. Total annihilation.

Not immediately and not simultaneously everywhere. Some regions are already well-suited to deal with such an event. Some could be but need leadership. Some regions ... are best avoided.

If that's the expectation, trying to prepare for that is a waste of time.

Total immediate completed preparation is impossible yes. Try to think of it as an ongoing process. It always is.

Anonymous Noah B. March 21, 2014 1:02 PM  

"Only in a stable or inflating (not hyper) economy I think. Deflation reduces the ability to service the debt, if even just the interest payment."

Not really. What you're saying is true for you and me, but when you're having your interest payments returned to you dollar for dollar, your income isn't taxed, and you can always borrow more, the dynamic is a bit different. Servicing debt is no longer any big deal. Whether inflation or deflation is occurring, there is a circular flow of funds between the Treasury and Fed for the lifetime of an outstanding bond. The first year of required interest payments is tied up in this circular flow until the year the bond matures, at which point that money is returned to the Treasury.

Now, it's always possible that Congress spends the money it receives from the Fed on something other than its next required interest payments. But if Congress does that, it can "borrow" more money from the Fed.

Anonymous Noah B. March 21, 2014 1:04 PM  

Let me clarify that what I've said is true only for Treasury bonds held by the Fed.

Anonymous Stilicho March 21, 2014 1:22 PM  

Cheddarman: range tomorrow?

Anonymous Supernaut March 21, 2014 1:45 PM  

Of course the BoE money creation explanation jibes perfectly with the US Fed money creation description. Here's the Dallas Fed Reserves similar explanation on how banks create money:

Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

BoE and US Fed are part of the same system - privately owned central banks in most countries are all tied back to the Rothschilds international banking empire.

Interesting, yes, but not really material as to Creditor and Debtor. Returning profits back to Treasury does not extinguish on the debt owed to the FED.

This is true. And that debt is largely what the IRS exists for - to collect taxes from the US Sheeple to "service the debt." In this way, we all work for the bankers. That is the reality of the "American Dream." Usurious serfdom to our Bankster Overlords.

Porky's right. Jesus showed us what to do with the money changers.



Anonymous Supernaut March 21, 2014 1:50 PM  

"Servicing debt is no longer any big deal."

This is precisely what the Banksters want everyone to believe. It is the lynchpin to their agenda of gaining total control.

If you don't know where this quote comes from, then you really don't understand the modern day Central Banking system:

A loan is - an issue of government bills of exchange containing a percentage obligation commensurate to the sum of the loan capital. If the loan bears a charge of 5 per cent, then in twenty years the State vainly pays away in interest a sum equal to the loan borrowed, in forty years it is paying a double sum, in sixty - treble, and all the while the debt remains an unpaid debt.

From this calculation it is obvious that with any form of taxation per head the State is baling out the last coppers of the poor taxpayers in order to settle accounts with wealthy foreigners, from whom it has borrowed money instead of collecting these coppers for its own needs without the additional interest.


Anonymous Supernaut March 21, 2014 1:54 PM  

"Yet the Fed turns its profits back over to the Treasury."

I think you're right about this. Not sure what constitutes the "profits" or who determines that, however. Thus I'm not sure of the impact. Good point, though.


That's because the Fed is not a "profit making" enterprise.

It is a CARTEL, and they remit "profits" to the Treasury to maintain the illusion that they are a "quasi-Governmental" agency.

The power to create fiat currency and loan it to people is what they really care about, not making 'profits.'

Seriously, why would they care about "earning profits" when the entire system is predicated on their ability to create money out of thin air?

Anonymous civilServant March 21, 2014 2:04 PM  

they are collectively deemed too structurally important to fail or even be held legally accountable.

He who has the gold makes the rules.

Blogger Nate March 21, 2014 2:06 PM  

"In which Nate finally admits that debt is money."

Keep up Porky. I've always said the proceeds from loans were money. Its the other side that isn't... and its the other side that is disappearing.

Blogger Nate March 21, 2014 2:08 PM  

"
Given the existing extreme dependence on FRN's the transition to anything not similar would be difficult if not impossible."

The fact that you don't understand how something will happen really is of absolutely no consequence. It will happen.

Blogger Nate March 21, 2014 2:13 PM  

"Let's say myself or a family member has some debt, but also savings. Is the smarter thing to do in the situation we find ourselves in to keep the cash on hand (or as assets such as more gold, food, etc) and continue making minimum monthly payments or to pay off part of the existing debt with the savings?"

The answer is both. You absolutely MUST have some cash on hand. Cyrpus should've taught you that. Pay down your debts... but never reach into your emergency stash to do it.

As for the show...

Yes. Stock up. Light up.

Anonymous Supernaut March 21, 2014 2:20 PM  

The answer is both. You absolutely MUST have some cash on hand. Cyrpus should've taught you that.

Agreed. Too many sheeple have large bank account balances and run to the ATM on a near daily basis to get their spending cash for daily needs.

When the SHTF, and the banks all close down, those with cash on hand will still be able to buy necessities.

Like Cyprus, the same applied to Argentina in 2001. Here's the account of one man who went through that:

"Every single Argentine wishes he could go back in time, close his bank account, and put that money into gold. We would all do that if we had a time machine. Since you can’t guess the future, all you can do is estimate what can happen and play the odds in your favor. In the event of a full economic collapse, if you have 20% of your savings in physical gold and silver, that’s a percentage of your savings that is spared. It’s not an investment; don’t go crazy over gold and silver going up or down a few dollars, just be content that it’s not getting any lighter as it sits in your safe. If the economy collapses or even if there’s simply inflation (as there clearly will be), that percentage of your savings in precious metals is safe and will likely go up in price beyond its standard purchasing power as things get worse.


During the first stages of a severe economic crisis, you will see ATMs running out of money fast, and many stores won’t be accepting credit cards.

As the saying goes, “Cash is king” during those times. Your precious metal can be sold to a dealer, but you better keep that stored for now. When everyone is running around looking for an ATM with a few bucks in it, having a month’s worth of expenses in cash means you won’t be one of them. Why not more than a month´s worth of expenses? Because if the economy fully collapses, that paper money will lose its value within hours. It may drop 50%, 60%, or 75%, as happened in Argentina. Who knows? All you know is that as the currency loses value, the value of the precious metals you have stored goes up in proportion. Still, during those first days, a wad of cash gets you what you need."

Anonymous Rick Johnsmeyer March 21, 2014 2:27 PM  

But remember, in the United States, any police officer can simply seize your money by claiming it might be related to drug trafficking or other illegal activities. And it's an expensive court fight to get it back, if you do. Our "civil forfeiture" laws are among the most expansive in the developed world.

Anonymous Noah B. March 21, 2014 2:38 PM  

From this calculation it is obvious that with any form of taxation per head the State is baling out the last coppers of the poor taxpayers in order to settle accounts with wealthy foreigners...

You apparently missed the part where I stated that my explanation applies strictly to Treasury notes held by the Fed, which makes your quote completely irrelevant. Foreign holders of US bonds obviously aren't in the habit of returning their interest payments to the US government.

Anonymous Supernaut March 21, 2014 2:51 PM  

Foreign holders of US bonds obviously aren't in the habit of returning their interest payments to the US government.

You're right, I missed your strict application to Treasury notes.

But the point is hardly "completely" irrelevant. The entire point of the monetary system, is to create debts for which the principle can never be repaid, and the tax payers are forever on the hook to "service the debt" in perpetuity.

Here's a question for you, Noah...how many of those Foreign holders of US bonds, borrowed the money from their own Central Banking System to purchase those
US Bonds? They aren't returning their payments to the US Government, but instead are servicing the debt to their own Central Bank....

That is the real point of the entire International Central Banking Infrastructure.

To make everyone, everywhere, perpetual serfs working forever to "service their debts."

Anonymous civilServant March 21, 2014 2:55 PM  

Given the existing extreme dependence on FRN's the transition to anything not similar would be difficult if not impossible.

The fact that you don't understand how something will happen really is of absolutely no consequence. It will happen.


"It will happen! It will! It will! It will!"

All you know is that as the currency loses value, the value of the precious metals you have stored goes up in proportion.

In theory yes. In practice no. No money of any kind or amount is ever worth more than what is available for purchase. If the present currency loses utility rapidly then entire production systems will lock up and basic supplies will become unavailable. No gasoline distributor will distribute gasoline if it cannot be paid. No trucker will deliver food if he cannot be paid. And so on. It would be many years before production systems could re-develop to utilize precious metals as money again - but in the meantime much would deteriorate beyond repair.

Yes it could happen. But mind the step ....

Blogger Nate March 21, 2014 3:11 PM  

"But remember, in the United States, any police officer can simply seize your money by claiming it might be related to drug trafficking or other illegal activities."

1) he has to find it.

2) you can always shoot the son of a bitch

Anonymous Noah B. March 21, 2014 3:13 PM  

To make everyone, everywhere, perpetual serfs working forever to "service their debts."

Debt is a form of slavery -- we agree on that. But my point was that when there is a "debt" owed by the Treasury to the Fed, it is not a debt in the conventional sense at all. It is nothing more than thinly disguised money creation.

Blogger Nate March 21, 2014 3:14 PM  

"It will happen! It will! It will! It will!"

The fact that you're historically ignorant doesn't change history son. We know it will happen because it ALWAYS happens.

Blogger James Dixon March 21, 2014 3:15 PM  

> If the present currency loses utility rapidly then entire production systems will lock up and basic supplies will become unavailable. No gasoline distributor will distribute gasoline if it cannot be paid. No trucker will deliver food if he cannot be paid

Once again, you demonstrate your complete inability to understand how most people in this country operate in times of emergency.

It's been demonstrated numerous times in lots of emergencies. I was living the the DC metro area back in the late 80's early 90's. We had a large snow storm that caught people by surprise. In the mid sized towns back home, taxis were giving people who needed them free rides to shelters. In DC, the taxi authority authorized triple rates. Guess who'll have transportation when things break down and who won't.

Blogger James Dixon March 21, 2014 3:18 PM  

> But remember, in the United States, any police officer can simply seize your money by claiming it might be related to drug trafficking or other illegal activities.

In our area, that would have to be the sheriff's office or the feds. The feds may be stupid enough to try that. The sheriff's office isn't.

Anonymous VD March 21, 2014 3:32 PM  

"It will happen! It will! It will! It will!"

Always has before. Do you really want to throw in with the "this time it's different" crowd?

No money of any kind or amount is ever worth more than what is available for purchase.

This, on the other hand, is perspicacious.

Blogger Dos Voltz March 21, 2014 3:37 PM  

Thank you, John Regan, for taking a stab at it.

But I am back to where I started, unfortunately. No amount of reading and studying can disabuse me of the fact that the powers-that-be simply cannot be trusted.

I am a gold-standard sort of person (mostly) but it didn't stop Roosevelt and his cronies from outlawing the possession of gold and silver. The govt bought it back from the public at a fraction of its worth. People who tried to hide it were subject to prosecution and imprisonment.

In fact, the many "solutions" I have read about all depend on a central authority being reasonable, law-abiding, and virtuous. Not gonna happen in this modern culture, these "modern" societies.

The system we have now just means that the politicians and bankers will be safe and protected (they control the gold and the armed forces) while the rest of us fight over scraps.

Yes, only a reset of biblical proportions can make things right. Too many people do not believe in the old axiom "he who doesn't work doesn't eat" and there are too many who peddle in the myth of the exact opposite. Nothing good can come of it.

Anonymous patrick kelly March 21, 2014 3:39 PM  

@f611: "In fact, the many "solutions" I have read about all depend on a central authority being reasonable, law-abiding, and virtuous."

And me not being so much......... not that I'm usually a saint.....

Blogger The Deuce March 21, 2014 3:44 PM  

So why do banks even take deposits if they don't count as reserves and they're not allowed to loan that money back out? I thought that was the whole point of deposits from the bank's end.

Anonymous Porky March 21, 2014 3:44 PM  

I've always said the proceeds from loans were money.

Even when the proceeds from the loan is ... a debt?

Anonymous John Regan March 21, 2014 3:45 PM  

@Noah B: But the burden of this money creation falls upon the serfs. To get back to a different but still rather important point, the Fed remits its "profits" to the Treasury each year, but profits do not necessarily match the additional debt incurred by the Treasury due to borrowing from the Fed.

In addition, there's no reason to believe, and of course I do not believe, that the government earmarks these revenues for the debt it has incurred in the previous year to the Fed. The spendthrift treasury just spends it as it pleases as part of the general fund and US government debt continues to increase.

Also, since the sums we are talking about are enormous, it's not insignificant that the Fed has to remit the "profits" only once a year and keeps it the rest of the time. Lots of room for skimming and other hanky-panky there, right?

Blogger Dos Voltz March 21, 2014 3:45 PM  

My point being -

I believe that liberalism, progressivism, collectivism, the welfare state, etc, ALL have to be dismantled or destroyed, once and for all, in order for us to be able to return to sane systems of government and finance.

And we all know that can only happen if it collapses under its own weight - because the believers in statism and progressivism greatly outnumber us in all the institutions that matter.

Anonymous Stilicho March 21, 2014 3:46 PM  

Don't worry CS, you can keep on storing up treasures in Washington by narcing on everyone who won't despair.

Blogger James Dixon March 21, 2014 3:55 PM  

> ... because the believers in statism and progressivism greatly outnumber us in all the institutions that matter.

Not in the ones that finally matter, frigger611. They're beyond their control.

Anonymous Concerned Rabbit Hunter March 21, 2014 3:56 PM  

Mish seems to think the gold is still all there:

http://globaleconomicanalysis.blogspot.com/2014/03/gold-reserves-top-20-countries.html

Anonymous Noah B. March 21, 2014 4:02 PM  

But the burden of this money creation falls upon the serfs.

Which is the point, of course.

Also, since the sums we are talking about are enormous, it's not insignificant that the Fed has to remit the "profits" only once a year and keeps it the rest of the time.

This was what I meant when I said the the Treasury had to come up with the money to pay the first year of interest on new bonds issued, and after that, it just cycles back and forth between the Treasury and Fed. Yes, the Treasury can spend that money on something else. At which point they just borrow more from the Fed.

"Lots of room for skimming and other hanky-panky there, right?"

I feel certain that there's rampant fraud in the Federal Reserve and Treasury. These people have the money, they know the banking system better than anyone, and they're even in a position to make deals with foreign banks to help them hide what they steal.

Blogger Nate March 21, 2014 4:04 PM  

"Also, since the sums we are talking about are enormous, it's not insignificant that the Fed has to remit the "profits" only once a year and keeps it the rest of the time. Lots of room for skimming and other hanky-panky there, right?"

Sure.

Never the less at the end of the year the profit goes back to treasury.

The Fed is nothing more than another government run agency that does exactly what the fuck its told to do.

See Clinton's talk with Greenspan.

Anonymous John Regan March 21, 2014 4:15 PM  

Bottom line is that the fact that Fed profits are turned over to the Treasury is not terribly important. The dynamic is that the USG operates as the borrower of last resort, and as the economy sputters and falters under the debt load more people wind up out of work, on the dole, raising the debt even more.

Then the technocrats come in and impose "austerity".

Then at some point people revolt.

But that can take a long, long time, depending on (among other things) how comfortable or uncomfortable the austerity is. Think Japan.

Anonymous Noah B. March 21, 2014 4:18 PM  

This makes a lot of sense, and did when I first ran across Steve Keen's explanation of it.

I still haven't read any of his work, but this BoE statement meshes perfectly with some of they key synopses of it that were provided here awhile back.

Anonymous John Regan March 21, 2014 4:23 PM  

@Nate:

"The Fed is nothing more than another government run agency that does exactly what the fuck its told to do."

I don't really disagree with this. Basically, a central bank politicizes money itself, elevating political considerations over economic ones throughout the economy.

That doesn't sound as fundamentally destructive as it is.

Anonymous Anonymous March 21, 2014 4:39 PM  

Was the reason Roosevelt nationalized gold because the government could not control money if gold remained in private hands? I am assuming yes, but would like your take on it.

Anonymous John Regan March 21, 2014 5:05 PM  

@simplytimothy: I don't k now if you're asking me or VD or someone else, but I'll bite today.

Roosevelt (FDR) did many things to enhance federal government power and confiscating gold was only one of them. In the end, however, the central bank system will always wind up where we are in the process of winding up, whether the government confiscates gold or not.

The central bank monetary system is a denial of natural law, a refusal to be bound by it. It's one part of a very old and very big disagreement, but it's a very socially important and insidious one.

At least gold confiscation is done out in the open.

Anonymous kfg March 21, 2014 5:19 PM  

"Games concern electronic entertainment, nothing more and nothing less."

I have copies of Little Wars, Chainmail and I know how to use them.

Anonymous kfg March 21, 2014 5:25 PM  

But apparently I don't know how to post a comment to the correct article. We all have our weaknesses I guess.

Anonymous Anonymous March 21, 2014 5:26 PM  

@John Regan.

Thanks. What are the alternatives to the central bank monetary system--i.e. what did we have here in the u.s. back when the FedGov was maybe 5% of GDP and the value of the dollar increased with time? Can we get that back?

Anonymous civilServant March 21, 2014 5:47 PM  

It's been demonstrated numerous times in lots of emergencies.

Short term yes. I was speaking of long-term.

Anonymous John Regan March 21, 2014 5:56 PM  

@simplytimothy: Well, there was no central bank between 1836 and 1913. During that time paper money (i.e., notes) were issued by banks but they were not legal tender. Even so they were widely accepted.

One interesting little factoid is that Canada did not get a central bank until 1933. If you ever get up to a place called Parry Sound on the Georgian Bay there's a little restaurant (name escapes me) that has a display of Canadian and American money, a lot of it from that period between 1913 and 1933.

All the Canadian paper money from that time were notes from the major banks that are still around up there: Toronto-Dominion, Royal Bank of Canada, Canadian Imperial Bank of Commerce. They look pretty much like FRN's and I'm sure they were pretty much accepted everywhere up there at face value, which interestingly has been "dollars" all along. Not pounds and pence and that kind of thing.

The primary feature of a sane and sound monetary system is that the government defines its unit of account - say, a dollar - as some specific quantity of something or other, preferably gold or silver, by law. The "by law" part is important.

From there, the government can mint coins and print paper money and emit notes - or digits as the case may be - all it likes so long as it is as bound by its own law as everyone else. I don't think it's a big problem from there if the government has a monopoly on, say, coining money but I don't see any reason for that either. Seems needlessly imperious to me..

On the other hand, one way such a system (i.e., a gold standard system) can function really well, in my view, is when the government has a monopoly on coinage and charges a fee for doing that. Maybe even a large fee. This is called "seigniorage", and basically divides the profit from producing "new" money (that is, gold) between gold producers and the government.

But the truth is, almost no one so far as I know has thought this far. There's a guy named Edwin Vieira who is a lawyer in Virginia that has some interesting thoughts about all these things and has written quite a bit about it.

Personally I think lawyers should have a lot more to say about the monetary system. I think one of the problems is that lawyers, and through them the law itself, abdicated to "economists".

Blogger Nate March 21, 2014 6:06 PM  

"What are the alternatives to the central bank monetary system--i.e. what did we have here in the u.s. back when the FedGov was maybe 5% of GDP and the value of the dollar increased with time? Can we get that back?"

The alternative is the treasury prints the money up and the government is forced to borrow from other banks that it doesn't actually control.

Anonymous John Regan March 21, 2014 6:08 PM  

@Nate: huh?

Anonymous civilServant March 21, 2014 6:13 PM  

It will happen! It will! It will! It will!

Always has before. Do you really want to throw in with the "this time it's different" crowd?


A transition to FRN v2.0 would of course be technically simple (I presume). But I assumed Nate was referring to transition to precious metals as currency. Given that 1) only .03 of the american population has anything that can be described as precious metals and 2) the vast majority of the american economy consists of long distance electronic and physical transfers then such transition seems impossible without devolution down to a few remaining pockets of non-barter economy. Nate's statement that "people would use something else for money" would be true for 1) those who survived and 2) those who still had any need for money - but there would be little of either for quite some time.

Anonymous Noah B. March 21, 2014 6:32 PM  

There wouldn't be much point transitioning to some kind of nuevo-dollar. I mean, has that approach ever worked?

Anonymous Anonymous March 21, 2014 6:47 PM  

The primary feature of a sane and sound monetary system is that the government defines its unit of account - say, a dollar - as some specific quantity of something or other, preferably gold or silver, by law. The "by law" part is important.

I semi-agree. What the government is currently doing is diluting the dollar--Proverbs has quite a bit of woe stored up for those who mess with honest measures. I don't trust "the law" and I don't trust government. Why not market-based competing currencies?

btw, I like Nate's idea that the government be at the mercy of the people when it comes to these sorts of issues. That sort of arrangement is what our founders intended for us as a free people. Ya gotta ham-string them bastards or they will fuck you over--as they are currently doing.

I guess what I am getting at, is that it makes sense to start rolling in our own structures underneath the current system so we are up and running as the fall of the $ occurs. I am not an economist, or even literate in these matters, but it is important to develop the language we need to build this stuff going forward.

Anyway, that's my FRN.

Blogger Dos Voltz March 21, 2014 7:30 PM  

JR said: "The primary feature of a sane and sound monetary system is that the government defines its unit of account - say, a dollar - as some specific quantity of something or other, preferably gold or silver, by law. The "by law" part is important.

From there, the government can mint coins and print paper money and emit notes - or digits as the case may be - all it likes so long as it is as bound by its own law as everyone else."

Very well said, Mr. Regan, and this seems right to me, since it is based on an objective standard and remains simple and understandable.

Of course, this scheme requires that the people and their government be moral. Just as the founders emphasized.

What to do when those appointed to positions of power realize how easy it is to fleece the people through confusion, obfuscation, and by the creation of byzantine bureaucracies and agencies, all supported by a fellating press?

Just say the right words (see the entire history of progressivism) and people will delay their judgment and ire until it's far too late - the puppeteers have already erected impenetrable forces for themselves, built with wealth minted by the machine of the public's naiveté.

Blogger Dos Voltz March 21, 2014 7:31 PM  

Naiveté = willingness to trust

Blogger Nate March 21, 2014 7:40 PM  

"A transition to FRN v2.0 would of course be technically simple (I presume). But I assumed Nate was referring to transition to precious metals as currency."

You assumed wrong.

What happens is folks start trading in the currency of other governments. Euros and Pesos or Canadian dollars.

Anonymous John Regan March 21, 2014 7:51 PM  

Actually, a transition to a sound, gold based dollar would be very simple. Just define it anew.

That does not mean, however, that it would be easy. There are many issues that have to be addressed before picking a new definition.

By my reckoning, for what it is worth, the only kind of figure that would work without wholesale social disruption would be somewhere north of $30K per ounce.

Obviously, there would still likely be some social disruption, though you can do things to minimize that.

Anonymous Anonymous March 21, 2014 7:52 PM  

What happens is folks start trading in the currency of other governments. Euros and Pesos or Canadian dollars.

I remember when I had to sneak a Canadian dime into my pile of coins so I could by cigarettes--because the 7-eleven would not take them. Now, I am ready to start hording Canadian dollars.

Blogger Dos Voltz March 21, 2014 8:14 PM  

John, I don't think assigning gold's worth at $30K an ounce is workable.

It might be CORRECT. But unworkable.

Reason is that the few people who prepared for the collapse (myself included) by buying up gold will be demonized as hoarders or rich assholes who deserve to be taken down a notch. We'd be forced to give it up to the guys with the guns (the wise elders of government who know better how to redistribute the wealth). Our prudence would prove a liability. Left with nothing. (Ever see the videos of the Maoists executing their neighbors for owning too much stuff?)

And if gold is worth $30K an ounce, watch every hill, valley and stream be raped by corporate and government interests to extract the infinitesimal quantities of gold from the muck and clay, because it is now worthwhile to do so.

Of course, such a decree would make me a rich man, after nearly 40 years of work (started when I was 11). But I wouldn't want it to come about that way.

Only way I see society working is to allow private profiteering banks. Let's say I own $100 million in gold. I lend as only I see fit. I get a decent return because I researched my borrowers well. We each get what we want, the government stays out of it unless one of us defrauds the other. I issue notes redeemable in metals. I keep enough reserve to make good on claims.

Did Rand have it right all along?

Anonymous map March 21, 2014 8:49 PM  

This is exactly what fractional reserve banking is, although bank deposits do figure more prominently prominently. Both loans from deposits and loans from money borrowed at the fed fund rate are collateralized by the borrower who makes payments. The loan and the borrowers credit can then be repackaged and sold.

Blogger Dos Voltz March 21, 2014 9:31 PM  

Not liking the whole "repackaged and sold" dealio

Anonymous Tom White March 22, 2014 2:40 AM  

@ Barnabas: "So Vox, how are you investing?"

He is long on cat food and vibrators.

Anonymous Heaviside March 22, 2014 3:52 AM  

I would actually like to see more masculine female characters if they were cast in the Clytaemnestra/Lady MacBeth mold. That would be so hot.

Unfortunately that's probably not what feminists are looking for.

Anonymous Heaviside March 22, 2014 4:10 AM  

Whoops, wrong thread.

What I will say about this topic, is that all money is credit money, so there is no money without debt, there is no market without manipulation, and there is no manipulation without money. Most people will probably find this squeamish, which is because they find power itself objectionable: "money is power" isn't just a worn out aphorism, but a useful garnish for syllogisms.

Credit money used to bother me, but then I became a nazi.

Blogger Unknown March 22, 2014 8:07 AM  



"One possible response is to undertake a series of asset purchases, or ‘quantitative easing’ (QE)."

Purchase? Or steal and sell?

http://21stcenturywire.com/2014/03/21/the-latest-heist-us-quietly-snatches-the-ukraines-gold-reserves/

Anonymous Laguna Beach (Jew) Fogey March 22, 2014 9:53 AM  

"Reason is that the few people who prepared for the collapse (myself included) by buying up gold will be demonized as hoarders or rich assholes who deserve to be taken down a notch. "

The only problem with your scenario is making the assumption that the majority of people will continue to recognize gold as having value after the "collapse"--IF there is even one. Why should they given the fact that this mineral has been a scourge on humanity when nations pursue it?


"Yes, only a reset of biblical proportions can make things right."

Indeed, that's why citizens from every nation ought to work to outlaw the centralized banking system--after all, it has not assisted in the least in the explosion of capitalistic endeavors since the 1500's.

Blogger Serge_Tomiko March 22, 2014 1:58 PM  

"You're a moron. It's already happening in multiple countries. And it happened in 2009. Of course, you're the guy who tried to argue against the data on the basis of a chart produced from that same data.

Idiot."

Vox, are you even familiar with Positive Money? Do you not understand that they agitated to have the BoE produce this very document that you cite? That several of their economists CONTRIBUTED to this document? And they espouse an entirely different view as yourself? It makes you look incompetent.

Anonymous bob k. mando March 23, 2014 2:55 AM  

http://www.biblegateway.com/passage/?search=Deuteronomy+25%3A13-16&version=KJV
13 Thou shalt not have in thy bag divers weights, a great and a small.
14 Thou shalt not have in thine house divers measures, a great and a small.
15 But thou shalt have a perfect and just weight, a perfect and just measure shalt thou have: that thy days may be lengthened in the land which the Lord thy God giveth thee.
16 For all that do such things, and all that do unrighteously, are an abomination unto the Lord thy God.

when your society is not only on the gold standard, but actually uses gold for money ...
"honest weights" MEANS "honest money".


Vox, have you given any thought to what the design of a 'moral' monetary system would look like?




Outlaw X March 21, 2014 9:37 AM
With what? Empty cities?



China is stockpiling all sorts of commodities. that was the source of the spike in scrap metal prices a couple of years ago that cleared so many junk yards of their old cars.

that's also a large part of the reason for the fear that China is importing so much physical gold ( now largest importer in the world ).

China could unilaterally shift to a gold backed yuan at any time and stop accepting USD and we would be totally fucked.

all that need happen now to actualize that is for the Central Committee to decide that they will profit more from the destruction of the US than from further trade with us.




Salt March 21, 2014 11:19 AM
Not anymore. Out of curiosity, what might they pay you with upon presentment? What would that Dollar be?


he's conflating the old Treasury notes ( silver certificates and the like ) with modern Federal Reserve notes.

there is no such exchange statement on a FRN and there is no such exchange principle that applies to a FRN.

that he thinks it does demonstrates a distressing ignorance.



frigger611 March 21, 2014 12:09 PM
I've lost track of the rules, I can't even identify what is SUPPOSED to be going on



this is a feature, not a bug.

when the system is run by charlatans, it's most beneficial to them that the explanation be impossible to understand.

it is a 'shell game' run with all the characters that you would find on a street corner. complete with 'muscle'
http://en.wikipedia.org/wiki/Shell_game



Nate March 21, 2014 7:40 PM
What happens is folks start trading in the currency of other governments. Euros and Pesos or Canadian dollars.



this. there are nations in the world today which do not print ANY of their own money. they simply use USD.

there are many more who accept USD in addition to whatever money they print of their own as a matter of law.

http://en.wikipedia.org/wiki/International_use_of_the_US_dollar#Dollarization_and_fixed_exchange_rates


in the case of a USD collapse, there is nothing to prevent the situation from reversing and, say, having the renmimbi adopted ( officially or black market ) here in the States.

Anonymous Heaviside March 25, 2014 12:47 AM  

"Vox, are you even familiar with Positive Money? Do you not understand that they agitated to have the BoE produce this very document that you cite? That several of their economists CONTRIBUTED to this document? And they espouse an entirely different view as yourself? It makes you look incompetent."

Vox's Janus-faced position on monetary theory is as baffling to me as his apparent comprehension of the Jewish Question and simultaneous conception of fascism as leftist.

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