Monday, November 22, 2010

Shaking the money tree Or The knowledge of Leprechauns

I’ve been getting a lot of email about printing money so I thought I would clear up a few things. You may remember this phrase from the Constitution under the powers of Congress, (Congress shall have the power)“To coin Money, regulate the Value thereof, and of foreign Coin”.  This does not mean as your libertarian friends claim that all money must be in gold coins. Congress wouldn’t really have a need to “regulate the value thereof” if that were true. The US has always issued script that amounted to issuing an IOU payable at a “regulated value”.

The founders didn’t like bankers issuing money or regulating the Value thereof so they kept that power to themselves. They had a good understanding of inflation and deflation and how bankers used this manipulation of the money supply to enrich themselves. That knowledge hasn’t kept bankers from doing just that as much as they could get away with ever since.

Currently our entire money supply is debt based on the fractional reserve system where the banks can in effect create 10 dollars in new Federal Reserve notes for every dollar on deposit or held as assets by its member banks. In theory our newly created money all has a tangible asset somewhere that in effect backs our currency. Of course much of our money is now based on those toxic assets you may have heard of.

The new QE2 or quantitative easing second edition, is supposedly backed by the debt instruments the Federal Reserve purchased two years ago. Never mind that those used to be called toxic assets and they already printed money to buy create them originally (before they were toxic) and again when the Fed bought them as worthless toxic assets.

There also seems to be some confusion about the stock market being a creator of money. It is not. When the market goes up it gives its so called “investors” an excuse to sucker money out of other people who think it will keep going up forever but not one dollar is created.

Where does money go when it disappears during deflation? Since it never really existed that isn’t a problem. When debt instruments default the money they created simply evaporates when it is taken off the balance sheet of the bank holding it. Of course now we have those toxic assets to consider again and much of the consumer debt is “securitized” so it exists entirely in the ether with no real accounting for its disappearance.

Inflation and deflation also used refer to prices and this makes it confusing as there isn’t really the direct link that you would suppose. Prices tend to go up and down with the money supply but it’s not the law or anything. A lack of money in circulation tends to drive down prices as business activity contracts and too much money in circulation tends to inflate prices but only if the money is actually spent. Here’s where the savings rate comes in to play as well as the willingness of banks to lend and big monopoly corporations to spend the cash in their money bins.

So we do have a lot of money in circulation yet we are standing on the edge of the deflation abyss because we really don’t have a first world economy anymore. With forty percent of corporate profits coming from “financial services” what you really have is that the feudal lords have contrived a way to “tax” the peasants without doing it out in the open. In the old days giving up a cow, a pig or a virgin child to the local baron was fairly straight forward.

The tea baggers think the government is taxing the crap out of them but much of what the government takes in comes right back to them again so it’s really a wash. It’s the corporate barons who steal their wealth by taking their cow so they have to buy milk on credit and before they know it they are landless serfs required to submit to austerity programs to maintain their feudal lord’s lifestyle. But hey, the dragon would get us without the nobility to protect us. Right?    PS to quote Allan Greenspan, “if you thought you understood that, you didn’t read it carefully enough”.


The Grey Tiger said...

Who would believe anything Alan Greenspan wrote . I read and I got it, so there Alan, inflate that...

Anonymous said...

I suspect that there is a technical difference between "coining" money and printing paper that lets the Federal Reserve Note get around the Constitution.

Anonymous said...

QUESTION: To rewrite one of your paragraphs in a way I can understand, is the following correct? >> When debt instruments default (i.e. when people stop paying on a car note, when their car gets repossessed, credit card cancelled, etc.) the expected income they would've generated for the lein-holder simply evaporates when it is taken off the balance sheet of the bank holding it.

prairie2 said...

yes, but not "income", income would be the interest or as consumer lending works today, fees and penalties. It's the remainder of the principle that is not recovered that is actual money lost from the system. Debt that is repaid also "destroys" money so a higher savings rate is not a good thing during an economic crisis. This is the fundamental fault with a debt based money system. Works good for the banks though.

prairie2 said...

to further explain why defaults contract the money supply: the system operates on "fractional reserve". Every dollar in bank assets taken off the books eliminates 10 dollars in potential "new" money. If enough of this goes on then no "new" money can be issued and "old" money continues to drain out of the system and this will cripple the economy in short order.

macnow said...

Just like Chase raising my fee for not having enough money in my savings account; from $5 dollars a month to $10. I need to have $500 now, (it used to be 250-300 under Washington Mutual, when it was Washington Mutual).

Now to have a free checking account you have to have a savings account. HOW is that exactly free?

At least I have a credit union acount to fall back on, need some place to put my unemployment checks that don't cover anything.

Guess when I close my Chase account I will... in my little way be doing the last thing us serfs can do...

10 F-ning bucks... bastards