The money and banking system - what are money ?
 

Hello all. When I was little I always wondered who makes the money, I heard that the state makes them, and because I heard that the state has a debt to pay I said "they are stupid, they can print all the money they want and pay the debt". I did not know much about money back then.
I found this documentary :

http://video.google.com/videoplay?do...686947&q=money
http://video.google.com/videoplay?do...500927&q=money

It has two parts, it is very well made, it explains the origins of money and banking from 2000 years ago until the present day. It is against the World Bank and it's system of loans that takes the money out of developing countries - yes, they have to pay more for the aid then the aid itself
I also found out that the Federal Reserve is a private institution, and that banks can give more money than they have in stock - creating money and inflation, trough the "fractional reserve system", they are the only bussines wich can do that legally.

Here is what Woodrow Wilson said in 1913:

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson, after signing the Federal Reserve into existence

Yes, our economy is basd on the *idea* that our money is worth something. Between ignorance and dependance, we really are in a pickle. So long as we continue to print money out of thin air, the dollar will lose value.

I stongly suggest that if you wish to invest, do so in gold or something that will keep it's value. I've recently started buying portions of gold and keeping them in this huge safe that almost killed me when I tried bringing it down the stairs into the basement. I figure if a theif can get it up the stairs, they've earned the gold.

As for fixing the problem, we'd need to balance the budget and get back in the black again, then invest in some sort of system to back the USD. I'm not sure if gold will work becuase there may not be enough gold to back every USD printed.

Back in the day our money was based on something. $1 meant you owned $1's worth of the gold in your country. (Silver Certificate bills and coins were based in silver).

When Nixon took us of the Gold Standard and money then became just based on trust and nothing solid, we saw the great inflation of the 70's, gold skyrocketed prices for everything went up. But it also allowed government to have massive deficits and not worry about truly paying them back.

Backing money with gold is not the solution, 2/3 of the world's gold is in the hands of private banks. The value of the gold is kept high by those banks, not by real value - as maufactured goods. The above documentary shows a solutin : no more fractional reserve banking. Money need not be backed by anything , as long as the volume of money is kept under check by the government and the government prints it's own money. Today that is not the case, the Federal Reserve prints as much money as it wants, money backed by nothing - and it is a private bussines

Nixon took us off Silver, but it was that traitor Rooseveldt who took us off Gold, way back in the 30s. Until the 70s, owning tradeable quantities of Gold was actually illegal in the US.

Printed money might be worthless, but on that note, so is gold.

Is it not just a pretty metal?

Gold has been used as currency for a very, very long time because of it's rarity, usefulness (great conductor), and beauty.

The real problem is "fractional reserve banking". Banks creating money out of nothing. Let's say I am the World Bank, is it fair that I give you 1 million $ - wich I create out of nothing, just a click and you have a credit card with 1 million $, then you have to work - for real to give me back my money + interest ? Also becouse I create money , I create inflation
Governments use tax money to pay the debt, then becouse they run out of money they borrow again, and so on, the bank just gets richer and the debt will never be payed - just what the bank wants : the more time you have the debt, the bigger the interest, and they have nothing to lose - the thin air from which the money appeared in the first place
Banks can do what I said above and they do it all the time ,it is legal.
Watch the documentary from my first post it explains very well how did it come to this, I am not inventing anything

Things are a bit more complex than that, Pai Mei. Banks can "create" money, but they cannot create too much money. Their outstanding loans have to be covered by a certain amount of cash. At least in my country, the national bank dictates the percentage cash vs. loans.

Suppose your world bank creates 1 million dollars for a loan, but the client wants it in cash? Or suppose all the people that put their money in said banks (loaned it to the bank, in fact) want their money back, in cash, because they don't trust them any more? It's happened before, and banks have gone bankrupt because of it. Whole economies have been driven into depression because of it...

Furthermore, inflation (created by a bank's excess money-making) is bad. Not only do the outstanding loans lose their value (compensated by high interest rates), but the actual cash they have to cover those loans also loses it's value. Besides, lots of inflation means people won't be able to repay their debts and/or interest; they need the money to buy food. This leads to lower profit; the profit the bank does make also goes down in value because of the inflation. In the end, high inflation can lead to a lower net income for the bank and it's owners.

As for the idea that governments can simply print money to get rid of their debts: look at Germany after world war one. They had massive debts (compensation for the war). The only way to repay the debts was to print large amounts of extra money (luckily the debts were in German Marks). The debts vanished, but there was massive inflation. This led to an economic nightmare, which in turn led to global recession and depression. Afterwards it also indirectly led to the second world war...

The Federal Reserve is a private business, I did not say to pay the debts by printing money , I said that is what I knew about money when I was little
Here you will find that president Kennedy issued an executive order against the Federal Reserve Bank, it is still valid but it's being ignored :
http://www.sweetliberty.org/issues/eo/eo2.htm
"A number of "Kennedy bills" were indeed issued - the author has a five dollar bill in his possession with the heading "United States Note" - but were quickly withdrawn after Kennedy's death. According to information from the Library of the Comptroller of the Currency, Executive Order 11,110 remains in effect today, although successive administrations beginning with that of President Lyndon Johnson apparently have simply ignored it and instead returned to the practice of paying interest on Federal Reserve notes. Today we continue to use Federal Reserve Notes, and the deficit is at an all-time high. "

So your problem with the banking system in general is that in the US it's run by the federal reserve, which is not a government entity?

IMO, as long as they do a good job of keeping the money supply in check (and therefore the interest rates and inflation and the economy), I don't see a problem.

Besides, I fail to see what the federal reserve has to do with the US budget deficit. The deficit is caused by the US government spending more money than they have. Disbanding the federal reserve, and printing your own US money isn't going to change that fact.

Hell, we in the Netherlands have a government-run national bank in the netherlands, and we also have a deficit. Of course, most of the monetary policy is dictated by the European central bank, but even when we had our own dutch currency we had deficits. The central bank did (and is still doing) a pretty good job at keeping the money supply stable, resulting in low inflation and low interest rates; that didn't (and doesn't) change a thing for the government budget, though.

Watch my documentary from the first post and you will see the problem - the money supply of the nation is in the hands of private people - The Federal Reserve is a private corporation, they can influence the economy, even cause a depression. The state borrows money from this corporation and has a debt to pay to it - artificial debt good only to that corporation, the people can have money with no debt - if state prints them, why borrow them ? I repeat the Federal Reserve is a private bank, why borrow from them when the government could print money ? Towards the end of the second part, the author proposes a solution - stop of the fractional reserve banking, and take control of the money printing - government job - today the Federal Reserve prints the money - a private corporation over which nobody has control. They finance both political parties, practicaly they control the economy
Why do the people need to pay debts trough the taxes ? We can have money with no debt linked to them

The reason that precious-metal standards are a good thing is that both gold and silver, but especially gold, have been extracted and preserved at a rate which has pretty closely matched the growth of the world's population. One good way to visualize this is by looking at a 1-ounce gold coin; a Krugerrand or a Liberty Dollar.

Both are worth somewhere around $500-$600 right now.

In ancient Rome, for example, that ounce of gold would buy you a nice suit of clothes, a toga, and a pair of sandals or shoes. You might have some left over for lunch on the way home. Today, that Krugerrand (once converted to Federal Reserve Dollars, that is) will buy you a pretty nice suit and pair of shoes. The buying power of the gold has, essentially, remained static because the supply of gold somewhat mirrors the world's population.

In an economic sense, this not only means that inflation is almost impossible, but also that fractional-reserve banking simply wouldn't work. If the bank was required to back their transactions with gold, there's no way that the fractional-reserve system could function. The Liberty Dollar folks are a working example of this.

As an aside, I'd rather have private, weight-based currency again, as we did before 1913. The problems start when one bank (or cartel of banks, aka the Federal Reserve) gets the Gov't to grant them a monopoly. At that point, they effectively gain near-total control over a nations economic life, which means they control the nation as well. Since the Gov't granting the monopoly must, of course, use the currency of the monopolist bank, that bank or group of banks can control the Gov't through the power of the purse. In return, they allow the Gov't to spend, spend, and spend some more...they get their pound of flesh in the end, after all.

Pai Mei, you say <I>"The state borrows money from this corporation and has a debt to pay to it - artificial debt good only to that corporation, ..."</I>

I'd say that the money the government borrows is good for the government and for the country; with that money, the government can pay for lots of useful things. I'd prefer a balanced budget, but c'est la vie. :)

Then you say <i>"the people can have money with no debt - if state prints them, why borrow them ?"</I>

The economy doesn't work that way. As I've already said before, if a government could simply print money to cover their deficits, you'd get inflation. If they do not want this, they *have* to loan money from someone, be it from their own citizens or from abroad. By doing this, the total amount of money available doesn't change, hence there won't be inflation.

I expect the US government to have more control over the money supply than you think. I can only assume that, like our government, they have rules concerning the percentage banks (including the federal reserve) can lend compared to their cash. If they do not set those limits, the market will probably set them instead; after all, if a bank has too little cash to cover the loans, it runs risks. Eventually, they wouldn't be able to pay out, and they'd go bankrupt. Given the relatively low inflation and interest rates the US has had in the past, I'd say the federal reserve and banks in general are doing a good job, even if they're private entities.

IMO, there are two issues here:
1) Governments spend more than they get, leading to deficits and debt.
2) private banks can lend more money than they have in cash.

I do not believe that these issues are directly related. The economy is way more complicated than that. Getting rid of "fractional-reserve banking" (as if it's a bad thing) won't magically make debts disappear. And neither will disbanding the federal reserve.

As for the gold/silver standard:

Linking a currency to a finite resource like gold or silver means that the amount of money could never go up. This is a serious problem in today's world, with all the international trade. Given that China gets more money from the US than the US from China, for example, you could simply run out of cash. It's simply not possible these days.

One note: I just watched a bit of that documentary... I'd say it's rather one-sided. I suggest you read some books on macro economics to check the facts.

So, lemme get this straight...you just admitted that a precious-metal standard would prevent the US from entering its' disastrous current situation with China; ie a massive trade deficit. How is this a bad thing?

As for preventing inflation, the US Gov't (through which the banks comprising the Federal Reserve act) is actively inflating the currency in order to have enough money (in raw, dollar-amount terms) to make payments on our National Debt and attempt to pay for, among other things, a welfare state and a hugely expensive military.

Compared to the buying power of $1 in 1906, the Federal Reserve Dollar is worth about six cents.

No, I just said that if the dollar were linked to a precious metal, you'd be out of cash.

So, now the US government *is* controlling the money supply, instead of the privately-owned federal reserve? ;)

FYI, the "hugely expensive military" takes up some 4% of the US GDP. That's not much higher than European countries, and lower than many other countries. Your welfare state gets pretty little cash, compared to European states. In absolute terms, it's a lot of money, but compared to the size of your economy (and potentially your tax income) the percentages are average, or lower than average.

Besides inflating the currency, another option to pay for things would be to increase taxes, just like they do in other countries. But I doubt anyone would get elected if they had such a message. I can see that there are a lot of problems with the US economy at the moment, but I don't think there's a quick fix.

And you have way more dollars to spend than you had in 1906. A quick google gave me <a href="http://www.chipublib.org/004chicago/1900/fam.html"> this link</A> showing the average income in 1900. People were earning 600 to 700 dollars a year in Chicago. <a href="http://en.wikipedia.org/wiki/Household_income_in_the_United_States">Wikipedia</a> says that the average (mean) income was over 60000 dollars a year in 2004.

So, your dollar was worth 16 or 17 times more in 1906, while you get almost 100 times as many dollars today. Hardly bad news.

Dragonlich, I've posted the following to share with you why I believe von Mises statement to be correct, and why I am opposed to the concept of a central bank, like the Federal Reserve:
I've also included ample evidence from articles, quotes, and testimony of former Fed Chairman, Alan Greenspan, which supports my position. I've included references and text of news articles that make a strong case, IMO for the idea that central banks around the world were engaged, for more than 20 years, at least since 1980 in selling gold from their respective national reserves at far lower prices than can be had in today's market, supplemented by leasing of gold to short sellers at rates commonly of 1% annually, in a co-ordinated effort to instill a public perception that gold was a weaker store of purchasing power, than fiat paper currency. This effort, as von Mises predicted, has failed, and much of the leased gold is reported to be still outstanding....owed by "investors" who leased it from the central banks and unwisely did not cover their short positions as gold more than doubled in price in the last four years.


<b>Additional Reading:</b>
RE: Your comments on US military spending vs. GDP.
As recently as the fiscal year ending 9/30/2001, combined annual spending on security and intelligence was less than $350 billion. Total federal treasury debt was $5.7 trillion, and the annual deficit at the end of that fiscal year was $32 billion, only because of the newly innaugurated Bush admin. tax rebate check mailing.

Contrast that description with current treasury debt of <a href="http://www.publicdebt.treas.gov/opd/opdpdodt.htm">$8.6 trillion</a>, an increase of $570 billion in just the last 12 months, $700 billion in annual spending for security and intelligence, factoring in supplemental war appropriations, debt service interest costs have risen from $359 billion in FY 2001, to <a href="http://www.publicdebt.treas.gov/opd/opdint.htm">$405 billion in FY 2006</a>, and will certainly rise if the dollar continues to diminish in value.
US 2001 GDP was $10,128 billion and in <a href="http://64.233.161.104/search?q=cache:KTiGa9z90XIJ:bea.gov/bea/dn/gdplev.xls+bea+us+gdp+2001&hl=en&gl=us&ct=clnk&cd=1">2005, was $12,455</a> The 5 year GDP increase is 22.9%.... $2,327 billion, while the increase in security/intelligence spending is 100% and the annual accumulation of new treasury debt is up from $32 billion annually, to $570 billion, or more than 17 times the 2001 level. Five years ago, $260 bought an ounce of gold or $312 Euros. Today, $260 buys .42 of an ounce of gold, or 198.4 Euros.

These trends and comparisons do not concern you, yet? When do you predict that they will?

Watch more, after 20 minutes it begins with the entire history of money and banking, from the Roman empire until today. It explains everything very well, fractional reserve banking is not good, it creates inflation and it's just wrong that I have to work for real to repay money created from nothing - to some private people - it should be illegal.
Money need not be backed by anything as long as banks do not create them out of nothing and the government prints them and is the only one in control over the money volume. Does the economy need more ? they print more, need less - then take some away. It's as simple as that , no need for gold standard, the government must do it's job and control the money volume, also the government must be the only one that creates money - printed and electronic, and no private banks that make money from nothing , they just lend what they have in reserves. That means real control over inflation

It is not natural for the economy to have ups and downs, that is only because "fractional reserve banking" - inflation, recession, economic growth - more borrow - more money from nothing, again inflation ,recession and so on

Fractional reserve banking IS good. It allows banks to make some profit, allows the economy to grow (more), and does not automatically lead to inflation.

Inflation is caused by many different variables, often interconnected. In the context of this discussion, inflation occurs when there's more money than the economy needs. Creating too much money with "fractional reserve banking" is bad (inflation), creating too little is bad too (slows down the economy), creating enough is good. And enough is not necessarily the amount dictated by a government's stack of gold/silver.

Total government control over the printing of money is simply not needed. You can control inflation by setting the total amount of money. One way to control "fractional reserve banking" is to set the percentage cash vs. loans, as I've explained. If a government or central bank dictates that banks can only loan, say, 10 times their amount of cash (= savings), you have effective control of the amount of money. I suggest you read some books about Keynesian economics, which should explain the principle.

Yes it is natural, and it's not only because of evil banks. Just look at the oil crisis of the 70's, which was caused by an essential commodity (oil) getting more expensive. It had NOTHING to do with "fractional reserve banking".

Or look at the hyper-inflation and depression in Germany in the 30's, which was caused by a government printing excess money to pay *external* debts. The cause there wasn't fractional banking, it was the external debt. It was either printing more money, or defaulting on the debt; that had led to France's occupation of German industrial areas in previous years, so was not an option.

Total government control of the money supply is not a solution to the US' economic problems. A sound fiscal policy and overall economic policy is.

(I have to admit I didn't have the time to read your quotes, nor watch the documentary. I'll see if I can do that today. But I doubt that would change much about my statements here. I do know what I'm talking about.)

You mean like the U.S. Gov't is doing right now, attempting to pay off our astronomical debts to the Chinese and various Euro-American banking and industrial combines?


This was a situation which would never have occurred if fractional-reserve banking hadn't permitted the drastic overprinting of the Mark. If the Mark had been held to a standard, it could not have been inflated by overprinting. That's the whole point behind actually backing your money with something finite, like precious metals: if the money is required to actually be redeemable in something, it cannot exceed the supply of that "something" and inflation is prevented or at very least radically slowed.

Fiat currencies, and the inflation they always bring, have been responsible for the downfall of more than one great ruler or empire. The Mongol rulers of China eventually went broke after they imposed the use of unbacked paper money, and the infamous Assignats which immidiately preceeded the French Revolution are thought by many to have been the final nail in the Bourbon coffin. Everything which came after was just sparks to the fuse; the Assignats became worthless after only a few years at best (weeks in some places) because they were hugely overprinted in an effort to raise money and pay down the debts France had incurred in wars abroad and splendour at home.

I'll attempt to explain von Mises theory briefly and simply. It boils down to the effect of expectations (psychology)....expectations which are distorted by the influences of credit availability that are a consequence of fractional reserve banking and fiat currency.....currency that is imposed by "fiat", i.e., government decree, rather than by the preference that a free market (the paychology of the free market) always chooses....gold and silver...

<b>Conclusion:</b> A free market evolves, by the collective experiences of all participants, to a point where the most easily exchanged items, easy to divide, to personally carry in your pocket, difficult to produce, or to duplicate, become the most LIQUID.

Wheat is more easily exchanged than a telescope, but gold and silver are much easier to exchange in quantities small enough to be carried, than wheat is, and are rare enough to command the exchange of a multitude of items.

In 1980, there was a week when an ounce of gold, at $800 was sufficient exchange value for purchase of one share of each of the 30 stocks in the Dow Jones Industrial Index (DJIA). Since that time, central banks have attempted to flood the market with gold, or short selling of gold, to create a psychology that values the DJIA at $12,500 and gold at $610.

This manipulated psychology has recently influenced a perception that an asset with high carrying, tax, and maintenance costs, and traditionally poor liquidity....real estate, is more liquid, more likely to appreciate in value, a sound investment at any price....until it isn't, and then the psychology will change. The change of psychology will result in the malinvestment, the waste evident in the resources that are expended in building an excess of real estate units temporarily demanded from the interest generated by the availability of credit produced by fractional reserve banking....and they are still at it:
If psychology of the expectations as to the value of the future purchasing power of the most liquid mediums of exchange, i.e., "money" are not influenced by central bank schemes like selling and leasing their gold stores, raising and lowering interest rates, or by issuance and printing in excess, fiat paper currency, sentiment would be much more constant, and malinvestment would have little incentive to occur.

Fractional reserve is bad , banks can make profits just from the interests
I did not say that a fixed volume of money is good, I said that volume needs to be controlled by the government
Fiat money are just as good as money backed by gold if their volume is controlled as I said above

"If the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Thomas Jefferson

Could you provide some information regarding this claim? I've looked at the historical US inflation levels, but don't see a large increase in the past years. If the US gov't is "printing money" to pay off those debts, I'd expect an increase in inflation (more money). I'd also expect an increase in interest rates on those loans (to compensate for potential inflation). Although the US interest rates have gone up over the past years (now some 4.5%), IMO the levels are not enough to compensate for a large amount of excess money printing.

Thus, even if the claim is correct, it doesn't appear to be working very well. Printing money to get rid of loans is only going to work if inflation levels are higher than the interest levels on those loans. Otherwise your extra money is only paying for a part of the interest rates, and not for the loans themselves.

True, the hyper-inflation would never have occured if the Mark had been held to a finite standard. However, given the political and military reality of the time, *not* printing money was simply not an option. Hence my claim that the cause of the recession wasn't the printing of money, but ultimately the external debt.

Please correct my if I'm wrong: you're basically saying that people started using money because (amongst other benefits) it's easier to use than other trade goods. Then you say (in the quote) that if the money supply is properly managed, there wouldn't be a lot of inflation.

If that is indeed what you're saying, I don't see what we're arguing about. I've already explained how a central bank (private or government controlled) can control the money supply, even if private banks give out more money than they have. The problem isn't fractional reserve banking, it's some schemes of a (private) central bank that cause inflation. To counter that, you could make it a not-for-profit organisation, like we have in Europe.

Yes, banks can make profits just from interests. They also run risks, and have large expenses. And they can make *more* money by giving out more loans, especially if only a fraction of the savings they have is ever going to be taken out in cash. Why waste the remainder when it's not necessary to do so?

Suppose for a moment that we make fractional reserve banking illegal. IMO, that would send the US economy into a massive depression. I think you'd see the following results:
- It'd be bloody hard getting a loan, given the current levels of loans vs. cash in the banks. From, say, a 10:1 ratio it needs to go down to 1:1.
- Because of this, interest rates would skyrocket.
- Capital investment (with US loans) would pretty much stop.
- House prices would plummet, because nobody can pay for them anymore.
- Banks would have waaaay less income, which will result in at least some going bankrupt.
- Lots of people would lose their life savings.
- Many people would lose their job and property.
- Savings would go down (to pay for those people's food), so the banks would be able to have even less outstanding loans.
...
-And to top it all off, tax income would go down, welfare spending would go up. The US government would need to borrow *more* money than ever before. And with no other options, foreign loans would be the only way to move forward. Hence, the US would have even more foreign debt.

In short, it's not going to happen, because it's NOT good for the economy.

IMO, governments directly controlling the money supply is a bad thing. Experience has shown that governments are notoriously bad at keeping the economy working, and are very good at using the money supply to compensate for their lack of knowledge. I'd rather have a central bank control the money supply, because they at least are impartial. As for the Federal reserve, if you don't trust a private bank, that's fine. Turn it into a proper not-for-profit and *independent* government agency, but please don't let the government control it directly!

And as shown before, a central bank, federal reserve or government *can* control the money volume, even with fractional reserve banking.

Dragonlich, what I am saying is that no fiat currency has ever existed that has not dramatically devalued. The only "free" market is one where the particiapnts determine what to use for money, and that is based on the experience of exchange.....gold and silver became popular because they won out in popularity in a competition among all other contenders. Wheat was too bulky to carry, telescopes were not in high enough demand to be very liquid, etc......

You make the same argument Greenspan attempted to make....and there is no history of that concept working to result in anything but devaluation of the medium of exchange, and surges and pullbacks in liquidity, i.e., credit availability, with all of the behavior that accompanies the waves of euphoria and despair of the surges. The euphoric times of easy credit always end with malinvestment....the false demand of house and condo "flippers" in the US for the past five years will result in an inventory excess that will take ten years to sell into actual demand....people needing a residence, as opposed to flippers who create demand that prompts the construction of unneeded housing units....

This speculation was initiated as the US central bank attempted to cushion the impact of the last bubble that it created with interest rate reductions, the stock market bubble. The reduction of the discount rate to one percent was in reality, a flood of liquidity, soaked up by speculators in a real estate market that had too little inventory to meet a sudden surge in artificial, liquidity induced demand. To keep it going, GSEs...Government sponered enterprises, Fannie Mae and Freddie Mac introduced even easier, lower interest terms for mortgages....low doc, no doc, (you didn't have to provide evidence of how much money you made, or of your existing debts and assets to qualify for a mortgage), they agreed to buy mortgages written under those new guidelines, as well as interest only mortgages, and "no down payment" mortgages that actually lent 103 percent of the appraised property value, to cover closing costs of penniless homebuyers.

In a market where the only borrowing would come from holders of gold or silver who would have to be paid a high enough interest rate to persuade them to risk lending their "money" to a prospective homebuyer, would any of the above ridiculously lax criteria be tolerated? The Fed and the GSEs worked together to eliminate any competition for borrowers to obtain funds. Everyone was instantly qualified to borrow, and the demand drove prices of the underlying assets....real estate parcels, to the stratosphere.

Now we sit back and watch the mess unwind.....

If only those with assets did the lending, there would be no periods of easy or hard to come by credit.....there would be near constant interest rates and no spikes and troughs in demand.

There isn't much inflation because central banks around the world trade the US currency that comes into their countries' exporters, for paper currency that they print up out of thin air. Toyota for example, has little use for the hundreds of millions of US dollars that arrive in it's accounts in Japan each year. The Japanese central bank obligingly prints yen up, trades them for Toyota's dollars, and buys US treasuries with the dollars. Japan attempts to create an inflation psychology among it's domestic consumer base with the constant flood of yen, and it keeps the yen low enough to make Japanese exports competitive. The Japanese are satisfied to buy US central bank paper at 4-1/2 percent, with US dollars that they obtained in trade for yen that they printed up out of thin air.

This is the "system" that you are supporting....it will work until it doesn't. Gold and petroleum will relentlessly creap up in price, if I am correct, and the dollar will eventually collapse. The Japanese and Chinese see a greater reward than a risk...even it the US defaults on it's outstanding treasury obligations, they are only "out" the yen and the yuan that they printed up out of thin air to acquire the dollars. The US treasury bonds that they owned were simply an entry on a balance sheet.....

Host, a system of fractional reserve, controlled by an impartial central bank does work. The economy will always naturally go up and down, but you can control it. Banning fractional reserve banking will NOT make things better, it will make things worse. Generally, going from one extreme to another isn't likely to help very much.

If you disagree, please feel free to disprove the "nightmare scenario" in my previous post. Do tell me what you think will happen.

By the way, I found an interesting article in the <a href="http://www.britannica.com/eb/article-234444/Great-Depression">Encyclopædia Britannica</a>, which suggests that the gold standard was to blame for America's depression being spread world-wide. It also suggests that (return to) the gold standard has led to large economic problems in other countries. I'd say it's not as great as some people here seem to think. :)

And another link (perhaps less reputable) about <a href="http://www.amatecon.com/gd/gdcandc.html">the great depression</a> has this to say about your "malinvestment":

I happen to be one of the economists that disagree. ;)

In the first minute of the first video the documentry creates several false premises upon which they argue that the banking system controls our economy.

For example - "goverment tells us inflation is low while the buying power of our pay checks is declining at an alarming rate". The buying power of American consumers is at the highest point in history. We purchase and consume more goods and services than at any point in history. Americans have more leisure time than ever, better medical than ever, better food than ever, better leisure activity choices than ever, better access to education than ever, safer products than ever, etc, etc, etc. It is not all financed with debt. In fact if you measure our national net worth (Assets - debt = networth) it is higher than ever. More people are retired than ever. People start working careers later than ever. Our standard of living is the envy of the world, and better than ever.

I will listen to the next minute of the video tomorrow.

aceventura3, do you live in the same country that I live in?

Three basic criteria.....affordable housing, the number of residents living below the poverty line, and the trend, and the numbers and percentage of people covered by private health insurance, and the trend:

In early 2003, qualifying income to purchase average priced house in the US was $40,320, and average income was $52,500 annually.

Less than 4 years later, in 2006, qualifying income to purchase average priced house was $52,512, an increase of 30.4 percent.

Annual income rose in the same period from $52,500 to $56,784, an increase of 8.16 percent.....the percentage increase of income that was required to purchase the average priced house increased nearly 4 times the amount that salary increased, in less than 4 years.

If you are a non-hispanic white American, your poverty rate as a percentage of your total number is declining. there are however, 37 million Americans living in poverty, including nearly 25 percent of blacks and 17.6 percent of all challenge. The total poverty percentage is up more than ten percent in just 5 years, from a low of 11.3 percent in 2000, to 12.6 percent in 2005.

In the area of private healthcare coverage, there are statistics that show a total of 8.3 percent of Americans not covered by an insurance plan for the entire 1997 year, By 2003, that number nearly doubled, to 15.6 percent were without health insurance for the entire year.

Your description of the economic condition of Americans seems inaccurate to the point of disconnection, in view of the numbers that I've presented, ace...

Good point. Here is a better one.

http://www.danter.com/STATISTICS/homeown.htm

Remember many factors other than income go into the home affordability issue. 25 years ago mortgage rates were about 15%, today they are about 6%.

That also is a good point. I can not reconcile those statistic with reality. I can say that there were four periods in my life when I was officially in poverty. As a child after my parents divorced, while in college, after getting laid-off once, and my first year of owning my own business. I always had food, shelter, and other basic necesities. I think there is a difference between real poverty and the government's definition. I was never in what I would consider real poverty.

First ther is a difference between being able to get healthcare and having healthcare insurance.

Most people without healthcare insurance choose not to purchase healthcare insurance. The coverage is available, and if more healthy people purchased coverage rates would go down. Many who choose not to purchase the coverage are taking a calculated risk.

I disagree. I think there is a disconnect between the way people actually live and their perception of the way others live.

Compare your lifestyle to that of your parents, grandparents. Do you live better or worse? In my case, I did not grow up in a "leave it to Beaver" world. My dad worked two jobs, minimum 60 hours per week in a factory and he would work overtime at his primary job at every opportunity my mother worked too. I have never worked as hard as my parents and I would bet that is true of most Americans when compared to their parents. Yet, I have more material things than they ever dreamed of having.

http://www.telegraph.co.uk/money/mai...8/cneuro18.xml
What do you have to say about this ? As you can see money are just a tool and that is what they should remain.

I think it means that underlying goods and services determine value not the medium of exchange. The medium of exchange can be dollars, Euros, Chiemgauers, PayPal credits, or whatever, as long as there is an orderly maket.

The difference is Ace, people live on far far more credit than your parents did.

There is something wrong in this country and with the system when you can pay the top 1% millions upon millions and the poor SOB that works hard for 40 hours a week can barely pay his bills, can't afford a new car, and if he has kids......

I work I guess in "public service" people I work with have Master's, doctorates, nursing degrees, initials at the back end of their name.

None of the people I work with on a daily basis makes more than $15/hour. That's $600 a week. The average person I work with makes $11.50 an hour. Roughly $450/week. And in this area that is a good wage.

So how do you expect someone to raise a family, buy durable goods like a house or car, save for emergencies, pay bills, feed money into the machine by spending "discretionary funds", basically live? And this area is one of the cheapest areas to live in.

You can't, even 1 person can barely do that, I know, I've been there.

Now the CEO of this "non profit" company and the directors each make over $400,000/year, not to mention bonuses and options.

It's not just our company, it is the vast majority of companies.... actually we're lucky, our CEO only makes 10 times what his average worker does. Most companies the CEO and top level people make 100+ times their average employee.

When the difference is that great there are serious problems in the system.

True capitalism is not feed the people at the top the most and let the crumbs trickle off the table for the rest.... that's Reaganomics.

True capitalism is to put enough money into the workers hands so that they can afford to buy houses, cars, pay bills, and have the necessary discretionary funds to buy goods that keep workers working.

Right now we are on a sinking ship and there is no land in swimming distance. Instead of working to save the ship the rich are swarming the life boats.

Here's how we are doing it: we ship jobs out for lower wages and taxes so that people can afford to buy product to keep the economy afloat.... however, we lay people off because they make too much and they can only find jobs with lower wages.... so they have less to spend.... so we need to ship more jobs out for lower wages so that those people can still buy things.... but we cut more jobs and those people make less..... so we give credit out..... but foreclosures, repos and bankruptcies skyrocket... well we can't have that so instead of being more strict on who gets credit... we just make it harder to file bankruptcy..... meanwhile, decent waged jobs are being lost, factories and business close down, local and state tax revenue falls, education suffers.

So we have people working for less, maxxed out on credit and the kids falling behind other countries...... all the while the rich sit back, never taking pay cuts, getting bonuses for laying people off coming up with ways to save money (i.e. lower wages, take away benefits, etc.).

The gap grows bigger and bigger.

The people buying into the "Reaganomics", this warped view and defend it by saying "find the jobs, work 2 or 3 jobs, blah blah blah" are the ones that live on the credit, have decent jobs and think they won't be hurt.

But then that's what most of the people who are already sinking thought. That's what the vast majority of college students who are berdened with HUGE student loan payments and can't find a job thought.

Most people want to be out of their parents homes by 30...... yet more and more can't afford to be.

The system needs to be overhauled and restructured, the wealth needs to be distributed more fairly.... or the rich will have their lifeboats while the rest of us kill each other trying to stay afloat.

I respect your position and understand the point of view presented in your post. There are some inequities in our system of compensating people. However, my view is simple. People should be compensated based on the value they add to marketable goods and services.

If a CEO or a person like Warren Buffet as the unique ability to manage and deploy capital and in the process make billions of dollars after taxes for his company and investors, he should be paid accordingly. If a guy is being paid to hold a traffic sign at a construction site, somthing that billions of people can easily learn and do well, he should be paid based on the value of the service he is providing based on market supply and demand. if millions of people want to pay hundres of dollars to see Shaq dunk a basketball, he should be paid according to the market demand for his skill.

I think the biggest weakness in our system is related to illegal discrimination, fraud, cronyism, and government interference (rather than appropriate regulation) in the market place. I am not sure how you can measure the extent of this problem.

CEO may have ability, but there are billions of people who will never get a chance to prove they have the same ability. Muhammad Ali said about golf :
"I'm the best. I just haven't played yet. "

I agree. This is another weakness in our sysytem. The only thing a person can do is to always do their best and make the most of their opportunities. At least in this country the children of the most impoverished can rise to the ranks of CEO

....and that ace, is the "cake".....that the peasants of pre-revolutionary France were told to "eat", and the "bread and circuses" that the Roman emporers provided to the masses.

shakran explained it here:

http://www.tfproject.org/tfp/showpos...32&postcount=3
The trouble is, ace...it's a bullshit myth intended to control the "have not" masses. In the inner cities, the dream of playing in the NBA helps keep a lid on the logical consequences of the economic and opportunity inequity that you seem so satisfied with.

It also keeps "most people" from using the power of the sheer numerical superiority of their votes to effect what that numerical advantage should give them.....a progressive income tax and checks and balances on the potenital of the wealthiest one percent to buy the political representation out from under the rest of us (and the courts.....the local zoning boards....regulatory agencies....etc...etc....etc.....etc.....etc....)!

Ace, we've been here before. I don't disagree that a CEO if he has the accumen to make billions for a company, should be reimbursed well. However, not at the workers cost (layoffs, benefits lost, outsourcing, etc.).

As Henry Ford said, "Pay your workers enough to buy your product and you will always have customers."

It's not class envy, like we have been brainwashed to believe. It's doing the right thing.

Eventually it comes down to this...... what is more valuable in the end? Money and the making of it, or working to better humanity and treating ALL people with dignity?

Right now, this country has chosen money and that will destroy the freedoms and all our forefathers worked hard to build.

We don't have to fear the communist China, the terrorist countries... we are already doing it from within because of our greed.

Plus, we are seeing it all over the place.... CEO's making millions and millions getting all these perks.... then the business goes down... they get fired but they still get millions and millions as a contract buyout.

Excuse me, when a normal worker can't live up to his end of the contract people view it as his fault, he gets fired and nothing, and life goes on.

If the CEO loses millions shouldn't he be held responsible and have to face the ax, a salary cut, loss of perks?????? Why do they have to give him a pass and blame the worker?

Yet on the other side of the coin, the company makes millions in profit, the CEO takes all the credit, gets raises, gets more perks and so on.... but again, the workers get nothing..... if they are lucky the company "won't have to layoff this quarter."

Does that sound like the America that our forefathers wanted?

I agree that CEO's should be held accountable for failure. The problem is CEO have to have long-term outlooks. It take the CEO of a company like GE years before the fruits or weeds of his labor blossom. If the cashier at Walmart fails to balance her cash register, the result are know today as are the consequences in some circumstances.

Again, I say life is not fair and will never be fair. People simply have to do the best they can. Capitalist systems allow anyone to become a CEO.

Name 1 fortune 500 company where the CEO started from a poor family and worked his way up through it.

If you do find 1, tell me this, does that CEO make 100x's the average employee of his company?

If you truly want strong product and a workforce that takes pride in what they do, you need to pay them fairly. Why do you think things don't last like they used to, even though technology is better?

To the original OP and the discussion it spawned (which we seem to have veered from a bit): I think your understanding of the banking system is a little confused.

The issuance of loans by banks is not the stage of the banking process during which money is created.

You are correct when you state elsewhere that it is the Federal Reserve, and only the Fed, that regulates the money supply; yes, the Fed is a private institution insofar as other financial institutions may hold its stock, but it was created by an act of government and, as the Central Bank of the US, remains a quasi-governmental organization (I would point you to www.federalreserve.gov). The Board of Governors is appointed by the President.

Private banks do not have carte blanche to loan out 'imaginary' money. If you get a loan from a bank, what you are receiving is real, accountable money, even if the physical transaction is only electronic.

Money creation is practiced only by the Federal Reserve, through the sale or purchase of (usually) Treasury securities. This step, yes, is a bit contrived, but it functions to steer the economy between inflation and stagnation by curbing or stimulating spending. You can read about the process here: http://en.wikipedia.org/wiki/Money_creation

There are various germane criticisms of the process and there's no problem with suggesting reforms, but it's not nearly so sinister as you seem to think, and the elimination of fractional reserve banking altogether is not the answer.

By the way, 'fractional reserve' banking simply means that the amount banks MUST (by law) hold 'in reserve' is only a fraction of what you deposit. This is what allows banks to function, because they can earn interest on your deposit (by lending or, more likely, investing it) instead of letting it rot in their vault. Despite this, if you go and ask to cash out your entire account, they will be able to do so; and if they cannot (if there's a run on the bank) and it goes under, the FDIC will bail you out for $100,000 per account (or $250k for an IRA). In practice the need for this is relatively rare.

How about Oprah Winfrey as an example.

I recently read a bio on Jack Welch former CEO of GE, he came from a working class family.

How about the gentleman Will smith is playing in his latest movie ( I have not seen it), I understand he was homeless and is now the CEO of his company.

Those come to mind as I type, I am sure if I took the time and actually gave it some thought, there would be many, many more examples. Agood book to read is "The Millionaire Next Door". Most millioaires in this country started middle-class or poor and earned their wealth through conservative values, of working hard, saving, and living within their means.

I'm Bob.

I say to Charlie "I want to buy a Tractor". Charlie says "sure, 10000$".

I say "I'm good for it -- but can I pay you 300$ per year (3%) for 10 years, then pay you the 10000$?"

Charlie says "sure, your credit is good with me!".

Charlie then goes to Alice. "Hey Alice. I need some spare parts. I have a note here from Bob that says he'll pay me 10000$ in 10 years -- can I swap for some parts?"

Alice says "sure, I'll give you 7000$ in Parts for that".

Alice then sells the Bob debt to Doug for 7000$ in metal to make Parts with.

Doug then sells the 7000$ Bob debt back to Charlie to buy a Truck.

Notice that Bob Debt(tm) is acting like cash. That 10000$ note says "this is a promise to pay 10000$ on the 1st of Janurary 2017 made by Bob".

If Bob is well enough known to make good on his debts, that promissary note is as good as cash. Now, imagine if Bob was a bank.

The Bob note would act as cash.

Working hard, without any other knowledge, isn't worth shit. You need to work hard at something useful to be worth it. How useful is it? Well, how much is he getting paid for doing it?

Those people clearly had the chance to be highly educated, right? So, they knew what they where getting into -- they chose a path that lead to 11.50$ per hour jobs. I'm guessing that they felt that the personal fullfillment from their job would make up for the poor wages.

If they chose, they could have gone off and gotten a marketable degree and made more money. But they chose to follow a path of self sacrafice. I believe in respecing people's choices.

Now, there are people who didn't have the opportunity to choose what to do with their lives. There you have a point -- but saying that people who had the chance to get a masters degree, and chose to enter a profession where they wouldn't get paid much?

I strongly suspect a good chunk of CEO pay comes from the "rockstar" effect. Ie:
1> If your CEO says "I quit", it hurts your company.
2> If your CEO chooses to embezzle, it really hurts your company.
3> If your CEO slacks off, it hurts your company.
4> If you pick someone without a history as your CEO, and they screw up, you are sued.
5> If you pick someone with a history as your CEO, and they screw up, you are much safer.
6> People will be willing to sacrafice alot to even look like a good CEO candidate.

There could be 50 people who would be perfectly competent at being CEO. But once someone is selected to be CEO, you can't go back. That person has now been dubbed "rockstar".

If you don't pay them that much, they can take their newly CEO'd CV and try to get a job somewhere else. Because they now have a CEO history, they are far more qualified to be a CEO than they where when you hired them. So you have to price your salary for CEO defensively. But so does everyone else. So you have a lovely war over CEO salaries.

By paying your CEO lots of cash, they have far less incentive to use their control to make themselves some money.

Lastly, by paying your CEO lots of cash, it acts as a very efficient motivator for your lower-level management. They feel "if I work really hard, harder than anyone else, I too can become CEO". For every 1$ of CEO salary, you can get more than 1$s worth of total motivation from the pleeb management.

It is like a Hollywood star. Almost everyone of them is a talented actor or really beautiful person. But for everyone of them, there are 100s of equally talented and beautiful people who slaved day and night trying to get that break and never did. Once they got their break their name and their face got value.

Not all pricing is because "that is what your skills are worth". Sometimes there are two jobs -- one counts the beans (and has to be paid enough to not steal beans), the other shovels dirt. It might not take much skill to count beans, but you need to pay that job more in order to make the bean counter more likely to be honest. And other times merely giving someone a job increases their value, regardless of their skills.

You would have to take the role of buyer at the moment of purchase to determine what someone's skill are worth. If my employer thinks my skills are worth $1 million, and signs a contract with me good for the million. That was the price, that was the worth, even if that is not what you would pay. If I add $1 million in value to my employer is another issue. At the end of the contract he may find my skills were worth $10 million, or $0. In a free market you get a true measure of worth. In a controlled market you don't. For example: If the government says I Have to use Union labor at an inflated wage, then you have a situation where not all pricing is what your skills are worth.

If you define X as X, yes then X is X. If you define "X is worth what would be paid in a free market", then yes free markets pay everyone exactly what they are worth, no more and no less.

Proof by defining terms so you are correct isn't interesting.

Second, note I mentioned "why your skills are worth".

Notice the use of "ability" in your post.

If it is Buffet's reputation that makes him worth the money, then his ability has nothing to do with it. If you pay a CEO a high salary with golden parachutes not because of the CEO's unique skills, but rather to ensure he doesn't go up and quit on you half way through the contract -- that isn't what the CEO's skills are worth, that a the cost of having a corperate structure with a CEO at the head.

Yes, if that is how you define the terms.

But what do you mean by a free market -- I notice you didn't mention "regulated free market". In a free market, any idiot can see the economic benefits of claiming, buying or forming a monopoly, especially a natural monopoly.

The labour laws don't force anyone to hire someone from a union -- they usually just prevent you from hiring a non-union employee for the reason. You won't hire another employee unless you expect them to make you more money than it costs you to hire them.

To the buyer (employer) at the moment of purchase (when they hire another union employee), the value of the employer is at least as high as the salary offered. That was the price, that was the worth.

So by "free market", do you mean a market with free competition? Monopolistic competition? Natural monopolies? Oligopolies? Cartels? Patents? Copyright? Trademarks?

I don't exactly count cult of personalities CEO's. Oprah just took over what Phil Donahue did, and because of her sex and perhaps race (oops did I go there) she became an entity made by her own PR... much like the Beatles. People looked to her for advice, a movement of some form in culture. She provided that.

I truly do not believe she is as powerful as people or the press portray her to be.

Once upon a time Michael Jackson had more money than God also.....

He also came from a generation where education was well funded and valued by the government and citizenry.

Have no idea, can't comment on it.

That was in the 80's.... look around today and tell me we have that going on now.

Look plain and simple.... say I own a widget company.... my widgets are better, last longer, are more reliable, easier to fix than my competition's. However, I have to pay higher wages for better workers, so my product costs more.

Now, people can afford my product, but they want to also make money last longer so even though my competitions widgets only last half as long, people buy them.

But my saving grace is my employees. I pay them enough to buy my widgets and they pass on to their friends the value of having my widget for twice as long, and how it is easier to maintain.

But, then I decide I need to cut prices, but in order to do so I need to layoff people and pay less..... well those I laid off are pissed and hurt and buy my competition 's product to get back at me, their friends do the same and I start losing even more business.

So I cut more jobs and lower wages again..... but as I'm doing that my competition went overseas for very cheap labor, upgraded their technology to equal mine.... and now there are no advantages. No matter what I pay my workers my competition can pay less.

The communities that needed my workers and my factories taxes to keep education up.... are now broke and education decreases to bare minimum.... and I can't upgrade my own company now because there isn't anyone truly able to keep up technologically with the competition.

My widgets start becoming obsolete and I have to go from being a great paying, good benefits employer to being someone who pays workers barely enough to survive....

But the saving grace for me is in the process of lowering wages, firing people, destroying the communities, destroying the educations, ruining area economies.... I get huge paychecks and raises and bonuses for "saving the company".

That's where America stands today...... and thus the richer will get richer and the poor will get poorer.


As for Yakk:

That's how it worked at one time.... but now Bob may not be in business for 10 years, so you really can't count on his credit.... if Bob defaults, then Charlie defaults, then Alice defaults and Doug.... till eventually everyone defaults....

And if "Bob" is a bank and someone defaults and he needs the money to pay the interests and CDs and honor his accounts and can't.... then you are truly fucked... cause he needs to find help fast.... if he forecloses and calls in the loans he gave, but still can't honor his own debt..... game over.

But in the above example you gave, I don't see how "Bob" could have been the bank.

What you are describing is a beautiful and intricate domino design.... unfortunately what you fail to show is the effect of the first domino falling will have on the last domino.

It's like saying ok, my widget company needs a loan, I am worth a million, so I borrow against my worth now from you. You go to Ace, tell him you need some cash.... Ace says "ok, you have Pan's note and your own so ok."

I default. the collaterol you had of mine that you used is now worthless... Ace comes to you, says, "um Yakk, I see Pan went under, I need to see more collaterol from you now."

You don't have enough to cover your loan.... Ace forecloses on you.

The person financing Ace, says, "Ace where's my money?" Ace can't raise it, he defaults.... and so on and so on.

Look at the rate of bankruptcies, foreclosures and credit writeoffs the past 10 years.... see which way the trend is going.

We're mortgaged out, no savings, creditally maxxed out and living on a bubble and someone has a needle waiting to pop it..... when that happens..... we're all done, rich, poor, capitalist, communist, EVERYONE, except the person or group holding the titles to everything.

Yes, that can happen. But people delt with it and factored the that into the cost of the debt.

Why not? He gives a note saying "In 1 year, I will pay you 1000$". He doesn't have the 1000$ now, but he believes he will have it in 1 year if you ask for it. You also believe the bank.

Anyone can make up bills of credit, and if they are creditworthy they will have some worth. If they are less creditworthy, then they have less worth, all the way down to junk bonds.

The top end banks are very creditworthy. They hedge their bets, they behave in regulated fashons that says the government will cover some of their deposits if they go under, and in general are pretty damn safe. Not perfectly safe, but safer than any banking institution the world has ever seen.

With enough fudge room, the loss from dominoes falling isn't that huge. Remember, only 1 person has the debt at any one time. Suppose they have 1000 different people's debts and 30% of them default -- so long as they factored in that default rate, everything is fine. If the default rate is higher, they can use their credit to pay off some of the extra.

The current currency system of the world is based off of this, except we get bills of credit from the government and/or from a central bank in the end.

Or you simply sell him, or a third-party loan buyer, Pan's note.

Or Ace factors in the chance that Pan goes under into his rates.

Ace, if smart, lent to more than 1 person, and charged interest rates high enough that even if some of them default he can pay off the loan.

Sure, credit is easy to get. At the same time, you still make lots of money by lending cash. So long as the banks don't have a large number of bad loans on the books (every foreclosure is a bad loan cleared off the books) -- and by large, I mean "larger than expected" -- things work.

I'm not morgaged out. I have savings. My credit is nowhere near maxxed out. My investments are relatively globally based (although I am not invested enough into developing countries).

So who is this "We"? There are people who are morgaged out, who have no savings, who live on credit. There are other people who make lots of money providing credit to those people.

And remember, a title is worthless. You need an orderly society to enforce your title, and you need your property to be able to produce something you actually need.

He did have to live in the subway system, and I'm sure that he would have appreciated some basic social services that would have treated him (and his son) as a human even during the poor years. But, it did give him the drive to get a job and make money. But a lot of people that get down have other problems that good basic medical services, rehab, consoling services and education could get them back on their feet.

As for other people that have become CEOs from nothing, I would say Bill Gates, Steve Jobs and the two Google guys plus a lot of tech and internet people have been able to turn ideas into their own companies. Yes, this is still a good country for doing that.

The problem is the second generation CEOs are usually the ivy league business school MBAs, with a few other upper management jobs for experience. They write these contracts that the shareholders basically have to approve (who else will they get?), and they get a golden parachute if the company fails or if they are fired. These are rarely the lower and middle class people getting these jobs (unless they started a huge business before).

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Back to the original topic, are you thinking that the problem is the Fed Reserve creates a billion dollars, and then pockets the interest? Doesn't the interest from that new money go towards paying the interest in people's bank accounts, plus the operation of banks? Inflation is a problem in my mind, and what most Americans are facing as their money is worth less and less. (though we don't care about that, most people would rather make 40k in 2007 dollars instead of 25k in 2001 dollars). They would instantly think 40k is more, it must be better. If you are buying electronics, shoes and cheap stuff at Wal-Mart, the 40k is better, those prices are down from 2001. If you are buying houses, health care, or traveling around the world, the 25k with 2001 prices would be the better choice.

I don't know, it's been a while since I learned about the banking system in the US.

http://video.google.com/videoplay?do...451279&q=money
Minute 13 - how banks work.
You will never see a banker saying "I cannot lend you anything I lended out all my money"

that video has many fundamental misunderstandings of the banking system.

*sigh* -- in case you didn't notice, they mentioned "at one point, people used feathers".

Also note that at 15 minutes, the creator of the video fails to divide by 9. 10,000$/9 is not 9,000, it is 1,111$.

...

So, let's note that the money lent out by the bank is also borrowed from someone -- be it the government or a depositor. The central bank of the state controls the interest rate of borrowing money by issuing governent-backed bonds.

That interest rate is set based on policy -- typically keeping inflation under control.

Next, note that when a borrower defaults, the bank is screwed. They have to make up the difference.

The supply of money is kept under control this way -- the price of new money is determined by the interest rate. This creates a supply-demand system, and those who want and can justify capital more than others get access to it.

If people stopped wanting to borrow money, they could just reduce the price of borrowing money. If you could borrow money for 0.1% annual interest, you would be pretty damn tempting.

Note that at minute 25, there are issues. It ignores the growth of the economy. The economy grows exponentially, just like debt. You'll notice at 26:30, they don't make the world "bigger" -- which is dishonest. The economy everything is working off is growing really damn fast.

And "natural resources" are not the fuel of the economy -- at least no fixed resource. The multiplier factors of "improving" natural resources is where economic growth comes from, together with increasing abilities to find and extract natural resources. As time goes on, more and more of the economy is service-based (ie, not resource based) -- and one could imagine a world in which nearly none of the economic activity exists in the "real world", it is all information services.

The monetary system is designed to facilitate exponential growth. Exponential growth means your standard of living gets better and better.

And it contains peak oil claims that it will happen right now. :) Considering this is about the 8th peak oil scare in the last 100 years... Could we be at the peak of the peak oil scare scare frequency?

I'll note rather cutely that the video contains a rather lot of medium-subtle jew-baiting. ;)

Gave up at 37 minutes. Tired of it.

oh thank you yakk. i wish i had time to pick it apart, i made it to minute 3 before the smell was unbearable.

It's "lent" not "lended" sorry for my english, I am from Romania. We have banks here too. Exponential growth means exponential destruction of the environment and exponential mining for resources. It means "better living" and now we are living in that golden age, just before we realize the planet has a finite surface

well thats half true, no resource is finite, all get replenished at a certain rate, this rate is extremely slow in some cases like oil. when trees are cut down, new trees are planted, we currently have the same level of forestation in the US today, as we did when European settlers first arrived. luckily for all of us, we have these really smart people called scientist, who are working on technology so that we can keep expanding .

If you want to be dirt poor and starving to death, you are allowed to. Right now. Nothing is stopping you.

Because that is what exponential wealth creation has done. Taken what used to be "well off" and made it "dirt poor" -- people who where in the top half of their societies wealth curve, even as recently as 1000 years ago, would be considered dirt poor and starving to death today.

Note that exponential growth of the economy doesn't mean you will extract and produce an exponential amount of goods.

We don't create horseshit anymore, industry isn't fueled by wood stoves, and transportation isn't bottlenecked by the supply of tall trees to build masts. Technology progressed, and better alternatives where found.

The power plants of today generate insanely more power than the ones 100 years ago, and generate ridiculously less pollution per unit of power produced. Smog in north american cities has plummitted when we noticed it was a problem, and starting making cleaner burning cars.

Exponential wealth creation is not exponential stuff -- it is exponentially better stuff. It does mean we get exponentially better at extracting resources, and rather than leaving the resources in the groud we do did them up and use them -- but that isn't why we are getting exponentially wealthier.

The planet earth has a finite surface -- but humankind has only touched a fraction of the resources earth can provide. Assuming improved technology, there is a ridiculous amount of resources that can be extracted from the earth -- I mean, our deepest mines are only a few miles deep, and the earth has a radius of 1000s of miles. We haven't even started deep ocean mining. And then there is asteroid mining.

We know how to get more resources than we currently extract, but the stuff we are grabbing is the easy stuff to get ahold of. Why are we grabbing the easy stuff? Because it is a waste to go after the hard stuff when there is easy stuff we can extract.

The fact of the matter is, when you talk about "sustainable development" you are talking about a moving target. As technology progresses, the level of development we can sustain grows. And we are consuming non-renewable resources to fuel the economy right now, because mankind has learnt that in 20 years we will have technologies that make large numbers of todays problems and key resources quaint.

London isn't buried under a mile of horseshit, dispite what people predicted. They stopped using horses.

The system is 2000 years old, that is why it's legal. I said legal, I do not talk about any conspiracy here.

People do not know because they never asked, most do not even know that the question exists
http://video.google.com/videoplay?do...451279&q=money

http://www.basicincome.com/basic_banks.htm


Solution : take away this power to create money from the banks. The state alone must have this power. We will borrow money from the state, then when we return them the state(we) will be richer, not some bankers, and the state will be able to use those money for something like tax cuts
Everytime a bank makes a loan, new money are created out of nothing, with a click of the mouse the money appear on some credit card. People will work to give back those money or they will lose their mortgage or something. The perfect theft.
Yes our society needs new money to grow, no the power to create them must no be in the hands of private people. The state must do this
Imagine me lending out money I do not have = jail
Bankers have done this for 2000 years, because it is so old , that is why this system is legal. Today it is called "fractional reserve banking" and they say it is useful for "flexilble money suply". Yes it is, no private people must not control it. The state must have control over it, and we will profit when we borrow and when we return the money

How do you decide how much money should be created and loaned out, on a second-by-second basis?

What happens when the government lends money to people who can't afford it, and too many of them default?

How does the government choose who gets to borrow the money from the government?

Do you want to make it a crime to create an "IOU" of any kind?

You can create your own money right now. Write up a bunch of IOUs that say "I will pay you 5$ on __DATE__." Figure out how much people will pay you for them. Use that money you get to make a profit -- maybe lend it out to people. If your credit is good enough, you can lend people IOUs instead of cash, because 3rd parties will accept your IOUs in exchange for goods and services.

To give an example of something like this happening in the real world, Canadian Tire corperation in Canada gives out "canadian tire money", which are paper bills that can be exchanged for goods from Canadian Tire.

There are businesses that accept this money at face value on some special occasions: a local burger joint chain that lets you pay for one particular kind of burger with canadian tire money, a drycleaners that accepts canadian tire money on tuesdays, etc.

Those IOUs from Canadian Tire can be exchanged for goods and services with 3rd parties. Canadian Tire sometimes objects to this, and sends cease and desist orders.

...

So, what do the banks do? They solve the second-by-second problem, and generate incentive for people to figure out who should have the newly created money. If they are wrong and they lend the newly created money to someone who can't pay it back, they lose money. Even though they created that cash, the debts that they don't collect on cut into their profits.

And if they find someone who is more creditworthy than other lenders think they are, they can make a good profit lending money to them.

If their profit is too large, the person borrowing can possibly find a better rate from some other bank: the banks compete over what rates they charge individuals. Doing so is profitable to the other bank -- because if the rate from bank #1 is too high, it means that bank #2 can make a profit by stealing the customer and charging the customer less interest.

These problems that the banks are solving are not easy problems. The profits the banks get from this process are, effectively, their incentive to solve these problems.

If you had a centrally regulated money creating and doling out process, you'd have to solve these problems in any case: to do so, you would have to provide an incentive for people to solve the problems.

It has been shown in history that when solving the microeconimic "pricing problem" in any reasonably complex situation, using the market works pretty damn good. You have to watch out for macroeconomic market failures and tweak the system, but trying to beat the market on the moment-by-moment and solution-by-solution level tends to be pretty damn inefficient.

roachboy, I think this is a good spot to break the "money" and fiat currency issues out of the "Bush is a Socialist" thread.

I posted this earlier on this thread:
I agree with your description of Ron Paul. I think it is revealing that a "flake" is the only representative with oversight responsibilities who even came close to challenging Greenspan's "nonsense", during his long tenure as Fed chairman....

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