Currency: An examination thereof

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  • Wed, Oct 29, 2008 - 05:03am



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    Currency: An examination thereof

Currency: An examination thereof

I write this with the intent of both exploring, for myself, the
nature of currency, and to help inform others. I don’t require that
anyone here agrees with me, but believe that anyone and everyone
should follow these examinations and use them to further their
understanding of currency in general, and what it means for the
financial system as a whole.

Standards of this discussion:

This discussion shall proceed in three parts: First an explanation
and definition of currency itself, with illuminating examples to aid
in understanding. Second an examination of the direct implications
of the nature of currency. Third, an examination as to how this
applies to the US dollar today with direct regard to the Federal

Within this document multiple definitions will be offered. These
terms may or may not reflect existing economic terminology.
However, for most intents and purposes, I will attempt to avoid the
use existing economic terms. The goal of evasion is to eliminate
potential confusion and tedious semantic debate. These definitions
are not up for discussion. Their derivation — if offered —
and real world relevance, however, is.

will be provided in
format. A pre-appended

means that the term attempts to describe something in the ‘external
world’. A pre-appended
– means it the term is only intended to simplify the conveyance of
ideas within this document.

is currency?

After having read a wide swath of commentary, blogs, and various
other economic resources I have come to regard discussion on the
nature of currency as horrible distorted. Often the explanations
seem simplistic, and lacking deeper analysis. Others are
disturbingly abstract. Confusion on this subject has long struck me
as a little odd, given that currency was developed way back when
where inventions like: "The Wheel" were considered rather

Yet, as a pondered this issue I found some of my ideas also lacked
full depth. Being my typical analytical self, I couldn’t leave this
unchecked and mentally ran the knowledge through my head until it
just clicked.

Perhaps, by following this, it will do the same for you. Mayhap not
in the same way as it did for me, but to each their own. I’ll be
glad enough if understanding is merely increased.

So, to lend this understanding I’ll start from the beginning. The
very beginning. The barter system.

The Barter System

Economic Unit –
item, idea, service, or set thereof — physical or abstract — that
is producible by human labor, or can otherwise be owned/controlled by
humans. In essence, anything no matter how abstract, that can be
traded or exchanged for. [/quote]

[quote][e] Barter – the exchange of one economic unit
for any other economic unit. [/quote]

These two definitions basically sum up barter. There isn’t a lot to
be said here yet, so we’ll move onto an example.

(Simple Barter Exchange)

Say Bob is an apple farmer.

Bob has lots of apples, but Bob is tired of eating apples and
wants apple pie.

Sally is a cook. She also wants apple pie, but has no apples.

Bob gives Sally apples, she bakes a pie, both get half.

The above is a very simple barter exchange. Bob gives apples, he
gets half an apple pie. One economic unit for another
economic unit.

The barter system itself is simple enough. However, the simplicity
of the system hides its failings. The barter system is inefficient,
opaque, and resistant to division. Consider, for
instance, what happens in the above example if Sally has no need for
apples? Then Bob, obviously can’t get his pie.

To render this difficulty visible, I’ll provide a more complex

(Complex Barter System):

Bob has infinite apples, he wants apple pie.

Sally makes apple pie, but she wants a bag of soybeans.

George has soybeans, but he wants a new horse to pull his plow.

Amy has horses, but she needs needs a new barn to hold them in.

Louise is willing to build a barn, if given enough apples.

In this example Bob must go to Louise and give him apples so that he
will build a barn for Amy. Amy then gives Bob the horse, which he
trades to George for soybeans. With the soybeans, Bob then finally
gets his apple pie.

This example however, illuminates several difficulties.

The first, is that Bob cannot in this trade system get less soybeans
than the value of a horse can buy. Given the high labor cost of
raising horses, Bob had better like soybeans, or have a fine taste
for apple pie. This is the division problem I brought up.
Bob can easily get caught in situations where he can’t trade in small
sums, even if he wants to.

The second problem is one of inefficiency. In the above example we
can see that Bob has to make exchanges with each and every party.
In computer science, we’d thus, call this a big O of N. That
is, in the worst case scenario, Bob must make an
exchange with each and every party that provides a unique economic
In the above case this is ‘4’.

However, consider for a moment a more complex modern system. In
this, the worst case scenario may require Bob making more than
100,000 different exchanges. If we generously presume that each
averaged to a mere 5 minutes, accomplishing this trade would take
"only" ~350 days — presuming no time was spent
eating, sleeping, etc… In other words, in a complex economy a full
barter system can render some trading flat out impossible.

The third, is as I have said, opacity. With a currency it is rather
easy to compare the price of a flat screen TV at Walmart, Best Buy
and Circuit City. However, imagine doing so if Walmart wanted
apples, Best Buy wanted oranges, and Circuit City wanted pears…
when you are starting with only bananas. The barter system
is very opaque, that is, it is very difficult to be sure who is
offering a good deal or not. For that matter, it is difficult for a
merchant to know if he is doing the swindling or the one being

If that weren’t enough, every entity — which amounts to most of
— involved in the barter system has constantly shifting
desires. In other words, Sally might want soybeans on Tuesday, but
by Thursday, when Bob finally shows up, she might want something
entirely different.

To put it simply. Directly using the barter system sucks.

Enter Currency

Now let us consider a sightly different example:

(Modified Complex Barter System):

Bob has infinite apples, he wants apple pie.

Joe offers Bob a ‘magical note’ in exchange for some apples

Bob trades that ‘magical note’ to Sally for an apple pie.

Sally trades that ‘magical note’ to George for soybeans.

George trades that ‘magical note’ to Amy for a horse.

Amy trades that ‘magical note’ to Louise for a new barn

Louise gives Joe back the ‘magical note’ for the apples.

And what, pray tell, has Joe just invented? The name for that
‘magical note’ which was created from "thin air" is
currency. We can define this thing as such:

Currency –

Any symbolic — and usually physical — ‘thing’ that stands for
partially complete barter transaction

and is widely accepted throughout a society. [/quote]

The key words here are partially complete barter transaction.
We can see this in how Joe both starts with nothing and ends with
nothing. Joe, is in essence, a third party to the entire barter
chain. He has placed upon himself the duty of a ‘holder’ or
‘guaranteer’ who ensures that Bob meets implicit promise that apples
will be delivered in exchange for the ‘magical note’. If this
bothers you, Bob himself could instead offer the ‘magical note’.
The net result though, is the same.

However, before getting too far into this, lets take a moment to
examine the above example.

First, we can see that in the end the exact same set of exchanges
take place
. Therefore, we can conclude that a currency masks
the underlying barter system. It does NOT, and I repeat NOT,
eliminate barter.
This has very important implications, ones it
seems, that many of our esteemed political leaders cannot manage to

Second, we can see that the efficiency of the system from the
trader’s perspective has changed. No longer is Bob caught in
a Big O of N problem. Instead, he is limited to
making two, and only two, exchanges before obtaining
whatever he wants. Those exchanges are ‘buy’ and ‘sell’. As icing
on the cake, Bob no longer needs to track who wants what, or worry
that Sally might not want soybeans anymore.

Third, Bob can now trade as little, or as many ‘notes’ as he wants to
Sally to gain an exact number of apple pies. He can also freely
compare the ‘cost’ of Sally’s pies to say, Jerry’s pies, and
determine whose is a better deal. Bob is less likely to be cheated
(and so is Sally), and he won’t be stuck with enormous amounts of
apple pie or soybeans.

From this short analysis we can conclude, that a currency vastly
improves the barter system. We can also define a couple of useful
terms. These will help immensely in the next section: Implications
of a Currency.

Final Value

a currency)

– The value which is exactly equal to the value of the item first
traded for and from whence the currency was born.


[quote][i] Currency Expansion – Creating additional currency
by starting new barter chains, in such a manner that the Final
does not change. [/quote]

Currency Expansion is a bit hard to understand. In
this case, imagine that Joe issues one ‘Apple Note’ for every apple
he takes. If he starts with ‘100 apples notes’, and 100 apples.
Then he takes in 100 more apples and issues 100 more apple notes.
In this case we can see the final price is:

Original: 100 apples / 100 apple notes = 1 apple / apple

Expanded: 200 apples / 200 apple notes = 1 apple / apple note

In other words, currency expansion is a used in this document as a
special term. Which refers to increasing the amount of
without changing the final value of that

[quote] [i] Currency Printing – Expanding the amount of a
currency without modifying the number/value of the underlying
assets. [/quote]

Again. In a printing example: Joe has 100 apples and 100 apples
notes. He then issues 100 more apple notes out of thin air.

Original: 100 apples / 100 apple notes = 1 apple / apple

Post Printing: 100 apples / 200 apples notes = 0.5 apples /
apple note

Implications of Currency:

By considering the nature of a currency we can now begin to ask the
right sort of questions to really dive into the dangers we currently
face in our society. We can also start looking at what various
groups are doing, and examine whether or not these policies have a
hope of working. We’ll start with the most obvious.

A ceasing event:

A currency can be said to improve
the efficiency of the underlying barter system, as is drawn from the
discussion of a currency above. It is therefore pertinent to ask:
What happens if, for some reason, a currency
disappears or
stops functioning.

This is a decidedly horrible event, which, in this document, will be
known as a:

Cessation Event –

Any event that either causes a currency to disappear, or lose
functionality in such a manner that the efficiency improvements that
a currency offers outright cease or are significantly reduced.

use purpose, I’ll point out that a

can be immediately identified by the recognition of one or more
entities within a particular economic system being coerced into using
direct barter.
(If you look close…
find them!

But what does a cessation event mean? Well, this is
where the description of a currency comes in. Remember that one of
the features of a currency is that it causes the trade complexity to
reduce to a static number of exchanges: 2. Where as,
in a pure barter system, the number of exchanges in the worst case
scenario is N — where N is the number of
economic units being offered in the whole economy.

Also recall the example of how long it would take to complete, say,
100,000 exchanges. We can in thus conclude the following:

The destructive effects of a cessation event are
proportional to the complexity of the economy in which this
event occurs. Further, if that economy’s complexity is beyond a
threshold of viability then the economy will be destroyed
until such a time that the complexity is sufficiently low.

The alternative to this destruction, of course, being an end of the
cessation event.

To explain this further. In a very simple economy with, say, 10
different economic units direct barter can
resume without any real damage or penalty. If, however, the economy
is complex, or extremely complex, then a lot of direct barter may be

I’d note, however, this perhaps slightly overstates the danger
of a cessation event. It is important to recall that
humans are innovative creatures, and when deprived of a currency they
can be very quick to create their own provisional currencies
to mitigate the damage.


what, pray tell, can

Well there is the obvious:
or pretty much any other similar event that makes it so that

no longer
the currency.

important cause is a
currency shortage.

Now, I can almost hear some people going "Whoa! Don’t give me
that shit!"

stop that train of thought right there. Now, lets imagine that in
the whole wide world there was
only one
dollar bill. Do you think the
American economy could function on that one single bill?

Of course not. It’d take a single bill centuries to slowly
migrate from one trader to the next, to the next, to the next, before
finally ending up in your hands. In other words: In a currency
shortage, traders must wait for
complete their currency drive barter transactions before finally
receiving the
required to complete


alternative being:
direct barter.

There is an obvious solution to this problem: currency

Inflation, hyperinflation,

Inflation –

A general rise in price(s) within a specified economy, economic
sector, or for a specific item. [/quote]

Hyperinflation –

A very high level of inflation. In this document, an inflation rate
of 20% or more. [/quote]

Deflation –

A general fall in price(s) within a specified economy, economic
sector, or for a specific item. [/quote]

Now, here are some terms relating to experiences people reading this
may be familiar with. There are many causes of each of these.
Since there are so many, I’ll touch lightly on each, staring with the
most benign.

by scarcity

— In essence an item, a set of items, or even an entire economy
any or all of:
production, rising production costs, or increasing consumption.


become more desirable than the

of the currency, and thus rise in price.

This summer we experienced inflation by means of an oil shortage

by abundance

essence an item, a set of items, or even entire economy
an abundance of goods. This may because any or all of:
production, decreasing production costs, or decreasing consumption.


than the

of the currency, and thus decrease in price.

Over the past 30+ years
has provided a
continual decrease in the cost (deflation) for a set amount of
computing power.

I give the above example for a
reason. Many politicians (and economists!) talk about our
of houses as though it is a
. However, from
real economic
it means
that more people get to/ought to live in those houses. To allow
those houses to go
is the greatest economic sin of all.

Now onto some less pleasant and more complex cases.

Inflation by declining assets
— A fall in the
of a
currency. This may because the
no longer desirable:
in a post oil world, government bonds after a sovereign default,
apples after a huge apple harvest.

Or if assets backing the currency vanish:
apples rot, Fort Knox is robbed
This is one of the more common causes of

This is a more complex case, and to help understand it I’ll offer an
example. Imagine Joe again has 100 apples and 100 apple notes.
Now, Joe, being a jackass, eats fifty of those apples.

Original: 100 apples / 100 apple notes = 1 apple / apple

Asset Loss: 50 apples / 100 apples notes = 0.5 apples /
apple note

effect, Joe has produced a 100% inflation rate —
Also because nobody is likely to trust Joe’s currency anymore,
because Joe has
proved himself untrustworthy

by increasing assets

— The exact opposite of
by declining assets.

This is rather interesting from a historical perspective, because
while many claim Roosevelt
the monetary base

what he in reality did was: seize gold, insert it into the Fed (thus
deflating by
increasing assets
and then finally publicly acknowledge what was then the

of the currency.

Inflation by currency printing:
As clearly described
by the
This is probably the most common cause of

by currency destruction

The opposite of currency printing. The government seizes dollars
at less than their

— perhaps via taxes — and then destroys them without influencing
the assets backing those dollars.

Deflation by currency shortage
— This is a very complex case. In essence, as a
begins to
approach a
traders will
become increasingly willing to take a
to obtain the currency
rather than wait for
to complete
their trades, or engage in
direct barter.

In other words, traders are
more than the
final value
in order to obtain the currency

Inflation by currency glut
— The opposite of a currency shortage. In essence there is plenty
of currency, but insufficient things that the traders holding the
currency desire. As such, these traders take a
in order to rid themselves of the currency.

Note, that this type if inflation
is necessarily organizational. As, eventually, enough traders who
final value
of the currency will obtain the currency. At which point they’ll
trade for the backing asset causing the currency to

If there are not sufficient traders who want the final
of the currency, then this is not a Inflation by
currency glut
scenario, but rather a Inflation by declining

Currency Manipulation:

Looking at the above implications of currency, it is a good question
to ask: When should currency be manipulated?

First we must remind ourselves that currency masks the barter
That is, all a currency can do is improve the efficiency
of trade. Therefore, we can conclude that the only thing
currency manipulation can fix is a broken currency system.

As such, the only legitimate time to manipulate a currency is to
either stop or avoid a cessation event.

So how should they manipulate?

In overview I’d personally prefer two methods, and would strongly
discourage any other. Currency expansion is a valid
response in the face of a currency shortage. It does
however, hold the risks of creating a currency glut, but mild
reorganizational inflation is infinitely more preferable than a
cessation event. More concerning though, is that
currency expansion can be used to manipulate asset values, and
thus hide a inflation by declining assets or deflation
by increasing assets
scenario. As such, any currency
expansion, or contraction for that matter, should be watched like a

The second method should be reserved for a hyperinflationary
scenario. This technique being: direct asset injection. In this
case adding additional strong assets to the currency backing bank may
be able to prevent a full currency collapse. Unfortunately,
hyperinflation is often caused intentionally by a
government… and as such, intelligent response cannot be expected.

and the Federal Reserve:

Now onto the most important question of all? How does our
currency work. Well, exactly the same as with Joe.

The Fed starts by buying T-bonds*, just like Joe started by
buying Bob’s apples. The Fed then issues a note that stands
for X number of treasury bonds — plus a smidgen of gold,
silver, and a brick from one of the Federal Reserve Bank buildings.
These newly created ‘Federal Reserve Notes’ are now a currency
already in deployment. In this, they behave just like any other
currency as symbols standing for an incomplete barter
. This barter chain then propagates
through potentially thousands of American and non-American hands
until some entity decides they want that original T-bond. The
Fed then coughs up the T-bond, and gets the dollar back.
Whereupon the dollar goes poof and returns to thin air.

The Fed, is in essence, the third party holder that is
supposed to make sure the final transaction completes. They are the
guardian of the final value of our currency, for better or

Likewise, the Fed undergoes currency expansion
exactly the same way that Joe would. In this case, the Fed’s
favorite dish is the T-bond. It really likes T-bonds, because every
T-bond it holds is a bit less interest the US government pays on its
debt (97% of the Feds profits/interest go to the
Treasury). It doesn’t need to take T-bonds of course, the Fed
just like Joe, will eat anything if pressed.

It also prints currency just like Joe would. That is,
by shoveling out dollars without taking any assets in return…
probably with the help of Uncle Sam. The Fed absolutely
hates printing currency, and has avoided like the plague.

*Originally the Fed held gold — it and still
holds some, but as a result of the USA becoming a debtor nation, it
now primarily holds Treasury Bonds. Central banks of
creditor/non-indebted nations don’t generally hold the debt of their
own government. However, nothing stops them from doing so… it’d be
pretty darn silly for a creditor nation to issue debt just for this
sake though.

So what
should concern us?


There are several things that should concern us about what the Fed
is doing. The first and foremost is the pure unadulterated crap
that the Fed is allowing on its balance sheet. That is, the
Fed is letting banks post what amounts to financial nuclear
waste in exchange for dollars.

Now, to get this straight, this is not for the most part currency
. Rather, the Fed is temporarily taking
this crap on board with the promise the banks will, eventually, take
it back. The problem comes when these banks die
leaving their shit on the Fed’s balance sheet. At that
point, we’ll have a certain amount of ‘investment grade
as part of our currency’s final value. And
these securities make Treasury Bonds look shinier than gold.

In essence, the Fed’s overall assets will be smaller than they
were thought to be, driving: inflation by declining assets.

High Deficit:

the high deficit isn’t strictly the
problem, the world has a way of

problem. The danger here is that every dollar of additional debt the
US Treasury issues, the less each existing T-bond is worth.


yourself this: Given a choice of owning $1000 dollars of debt, of a
person with $100,000 of yearly income would you chose:
guy who owes $10,000 to other people? or
guy who owes $500,000 dollars to other people?

is the obvious answer. Because guy
is much more likely to pay you back. Same thing with the treasury.
Every dollar of bonds it issues, the chances of getting paid back get
until eventually that chance becomes zero — at which point all
T-bonds, no matter how many are printed, are worth jack.

other words, every dollar of debt the Treasury offers decreases the

of the dollar. Thus, causing:
by declining assets.

Default Risk:

Running a high deficit runs a double wammy. We run the risk of
running into a ceiling — being unable to borrow more. At
that point we’d either have to cut government expenditures, or print
Printing currency is the perhaps
dumbest financial decision a government can make. But given that
Bush Jr is still running the show, I wouldn’t put it past him.

Cutting government expenditures is nasty too. That will squeeze the
economy hard, causing it to shrink severely. Guess what? Lower
nation income equals, less ability to pay back debt, therefore
declining T-bond value, therefore:
inflation by declining

On top of that, running into a ceiling opens up the possibility of
the US government failing to pay interest on time. If it does so,
it makes all future interest payments on T-bonds questionable. Thus
the T-bond value would decline leading to… you guessed it:
inflation by declining assets.

Manipulation via Currency

The other big thing that should be watched with the eyes of a hawk,
is the Fed attempting to manipulate the value of T-bonds —
and hence its primary asset base — by means of currency
. Be careful there though, there are plenty
of signs that the dollar and many other currencies are actually
touching on a currency shortage even to the degree of inducing
a ceasing event. (Yikes!)

However, the Fed could well soak up T-bonds to prevent the
market for realizing its being saturated in government debt.
Because of this, the declining value of T-bonds (by virtue of there
being more T-bonds), could be disguised from the prying eyes
of the people. This may shuffle away inflation by declining
for a while, but reality has a way of setting in
eventually. It may take years to catch up though.

Basically, just remind yourself — the deeper the US debt, the worse
the dollar. Unless, of course, the Fed pulls an really
interesting card from out of its hat and either switches the
assets backing our dollar or pads existing assets with more
than the normally expected number of T-bonds. That is, it
counters: inflation by declining assets with deflation by
increasing assets.

And a final ado…

What about gold?

Gold, in short, is a commodity not a currency. Yes, it is sometimes
perceived as a currency, but until it is actually traded as
such, it is not a currency. Like any commodity, its value
should be evaluated by virtue of gold’s direct economic use to
society. If you detect a mismatch, it may be best to find a
different commodity to invest in.

If gold were to be used as a currency, then it’d be a special
kind of currency.
That is a commodity currency.
Unlike more typical currencies commodity currencies
have a final value that is exactly equal to the
commodity value of the commodity itself.

There are merits and flaws to all commodity currencies, however
I don’t intend to discuss them here.


  • Wed, Oct 29, 2008 - 06:54pm



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    Any one tried – Community Dollars?


United States Federation of Worker Cooperatives

and a great read on:

leaves me wondering if anyone has used community dollars, how they were set up and problems.

Since apparently anyone can initiate community currancy systems AND we end up with unlimited wealth, 100% employment, better communities and environment -why do we not see more examples?  Are these systems legal (where are taxes collected from?).


  • Wed, Oct 29, 2008 - 07:45pm



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    Re: Any one tried – Community Dollars?

Mendocino County in California has had good results with Mendo Moola


  • Wed, Oct 29, 2008 - 11:14pm



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    Re: Any one tried – Community Dollars?

Thank you, npeykani, that was a very interesting read.


  • Thu, Oct 30, 2008 - 04:36am



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    Re: Currency: An examination thereof


 I didn’t have the strength to concentrate on your long post, but I did skim it and have two comments:

1.  I really like what you say about each additional dollar that needs to be borrowed in the form of a gvt. bond slightly decreasing the liklihood that it will be paid back as promised, until the liklihood of payback eventually approaches zero.  That’s pretty good.  That kinda sums it up.

2.  Can’t say I agree with you about gold being a commodity and not a currency.  When I think of a commodity, I think of something that has actual use — something you can eat or burn or turn into clothes.  It is true that gold has some uses, but that pales in comparison to the real reason people want to own it, which is that it is rare, incapable of manufacture, and accepted the world over as money.  It is really just an alternative form of currency in the sense that it has all the characteristics of money and can be used as such no matter where you are and what should happen to the paper.


  • Sun, Nov 02, 2008 - 04:13pm



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    Re: Currency: an examination thereof


You were kind enough to share a though provoking post and have had little response from the forum.  I not only read through your entry, I printed it and have been re-reading it for several days.

I am having trouble— (a la Seinfeld ‘It’s not you, it’s me") for I cannot force my logic into a linear format.  Your example of barter starts with a linear supposition:  "Bob has apples and wants apple pie."  Right off the bat I get bogged down BECAUSE I can’t get answers to all my follow-up questions:

  1. How did Bob obtain apples?
  2. Are they a never ending supply?
  3. Does he labor over them?
  4. Does he have someone to BS with about apples?  If so, do they labor over them together?
  5. If I were Bob I would be constantly thinking of ways to do something with my apples–applesauce, apple wine, apple dolls out of sheer inspiration or sheer boredom
  6. And if I had answers to these questions I would then have more to follow-up creating something that looks more like overlapping circles than one long line

To my thinking, a line cannot describe a universe.  The transaction example discounts the human emotional component.  "Bob has and now WANTS— is he desirous?  Is he obsessed? Is he jealous or covetous?  Is he curious?  To me, want or need underlies the creation of currency.  Where are we addressing this issue? When we look at our current global picture and our individual roles in it, aren’t we assessing blame/fault?  Aren’t we contracting emotionally?  Aren’t we retreating or gathering together based on our emotional reactions to what is going on?  The mathematics and the emotions are so interconnected I struggle to stay on track.  

Before I get too off topic, let me backtrack:  It’s not you it’s me.  I am not taking issue with your content or argument.  I understand for the sake of argument and to get your POV across, you are delineating examples to move your point forward.  And I am not finished with your writing.  I want to mentally run through the knowledge "until it just clicks" Wink

I am trying to explain that understanding currency must also underscore the emotional element of want or need.  And if we do take the emotional component into view, how can the use of a linear argument be effective in a circular field? 

Thank you for your generous post.


  • Mon, Nov 03, 2008 - 04:35pm



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    Re: Currency: An examination thereof

Excellent post Steve and excellent comments npeykani.


  • Tue, Nov 04, 2008 - 01:20am



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    Re: Currency: An examination thereof

I am trying to get my head around our economic system. Your post Steve has helped me a lot in beginning to understand. Npeyakis post I also find very interesting. I expect that after we understand Steves linear explanation, and take into account Npeyakis emotional and circular playground, we then approach the insight that we have to surrender our intellect to the infinate force of this universe. Becoming one with that which we are looking for and trying to understand…..!?

Steve writes

other words, every dollar of debt the Treasury offers decreases the

of the dollar. Thus, causing:
by declining assets.

* What does it mean that the treasury offers debt? That it buys more T-bonds? That should be currency expansion like with the apples right?

* Another question I have: Is it only the Fed that can buy T-bonds and creat money into the system? Or can other banks do so also? Then who can do it? How much and how is it controlled? What about other currencies than dollars?

* And can someone explain why the fed "really likes T-bonds, because every
T-bond it holds is a bit less interest the US government pays on its


Thanks for your sharing




  • Wed, Nov 05, 2008 - 12:09am



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    Re: Currency: An examination thereof

[quote]* What does it mean that the treasury offers debt? That it buys more
T-bonds? That should be currency expansion like with the apples right? [/quote]

The Treasury and the Fed are two different entities.   There is often confusion about this.  So just think of the Treasury as a ‘Bob’ and the Fed as a ‘Joe’, and remember that they are best friends.

All debt comes from thin air.   The T-bond — and likewise the debt you sell to a bank to buy your house — in essence is nothing more than a promise to pay something back at some future date.   This promise, like all promises, can be created from thin air.   The only difference is that the T-bond is the promise of the United States government.

* Another question I have: Is it only the Fed that can buy T-bonds and
creat money into the system? Or can other banks do so also? Then who
can do it? How much and how is it controlled? What about other
currencies than dollars?[/quote]

Anyone can create a currency.  However, to become a currency other people must accept it and use it as such.   Further, they must, in the end, trust the person who carries the ‘final value’.

There have been periods in our history where each bank issued its own currency.  The typical result is a big hulking mess.  In the US the Fed’s currency however, has a special status:  It is legal tender, and all that implies.

As for what prevents the Fed from doing something vile with our money?  Mostly laws, a human morality, nationalism, and the legal structure of the Fed itself.

As a side note: The Fed doesn’t have to buy T-bonds.  It can take anything as an asset.

* And can someone explain why the fed "really likes T-bonds, because every
T-bond it holds is a bit less interest the US government pays on its

Treasury Bonds like all debt pay an interest rate.   When the Fed holds assets that yield interest they do the following with the additional money:

1) Use the money to take care of basic expenditures

2) Give some of the left overs as a dividend to the member banks.  This is typically ~3% of the money collected.  (This is now a much higher number because of rule changes in early October-ish ).

3) Give the rest over the Treasury — and as such the US government.   This money effectively offsets taxes. 

Because the Fed is psuedo independent agency of the US government it prefers T-bonds.   That’s because every dollar of interest that the Fed pays back to our government is a few billion dollars less in debt our government is (If the Fed didn’t have this debt, the Treasury would be paying someone else interest).  To give an idea about the size of this, if the Fed didn’t carry T-bonds and instead used say, gold, for the last 20 years.   The US government would ~$1 trillion dollars deeper in the hole.


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