How about foreign countries?

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Liberator's picture
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How about foreign countries?

So the US pulls "money" out of the ether when the Federal reserve writes a check to the Treasury, which presents an interest-bearing IOU in return, which future taxpayers will be forced to repay. Okay, got it.

However, foreign governments don't have "Federal Reserves", they own central banks instead. How do they issue fiat money, does anybody know?

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Doug
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Chris, what about the gold standard?

I introduced the crash course to a banker friend.  He found it interesting until he saw something about the gold standard, when he completely stopped listening.  I'm not sure exactly where he saw it, but it may have been in this chapter.

My question is, does Chris advocate going back on the gold standard?  My reading is that it wouldn't be possible to do so at this point.  I believe he actually acknowledged as much when he mentioned that there was no longer enough gold to back the dollars.  If anything the mismatch between dollars and gold has exponentially grown since then.  Do I have this about right?

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Re: How about foreign countries?

Central banks operate in the same way as the Federal Reserve Bank.  They loan money into existance.  They too set certain key interest rates.  The banks are owned by the government, but are given autonomy to supposedly filter out political influence.  Here in Japan, the Bank of Japan was made the central bank.  

The act which created the role says, "The Bank of Japan's autonomy regarding currency and monetary control shall be respected."  But to make sure it isn't too independent, it also says that the bank shall "always maintain close contact with the government and exchange views sufficiently."

A gold standard is possilbe, but the people and instututions that run the world won't allow it IMO as it would greatly curtail their power.

I doesn't matter if the central bank is like the Fed or is a government owned bank, or even what political system is in place.  What matters is how it opperates, and virtually all of them operate under a fractional reserve system.   (Even Switzerland dropped the gold standard with its new constitution in 1999.)

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Re: How about foreign countries?

Doug: I'm not Chris, obviously, but I'm going to answer you anyway.

It really makes no difference how much Gold there is. Conventionally, we say "There isn't enough Gold to back the money." But this is bass-ackwards. The rational way of looking at it is that there are too many money substitutes for the Gold that does exist. Indeed, the money substitutes have become THE money. But not even paper money anymore. Now the Fed's largesse to everyone who is hurting is created literally out of thin air. And in the long run, it will be worth just about as much.

We need to understand the basics of money. Money--rationally understood--is something which is generally accepted in the Marketplace as a medium of exchange AND as a store of value. Bogus fiat paper 'money' pretends to be a medium of exchange, but by no stretch is it a store of value; and therefore it is not money. Only the Marketplace can determine what is preferred as a medium of exchange and a store of value. Government cannot do so by arbitrary edicts. Governments can pass all the laws they want, but it will make NO difference if the participants in the Marketplace disagree.

When the Marketplace--i.e., the preponderance of individuals who produce, exchange, and consume--has decided what the medium of exchange will be, there are several negative feed-back servo-mechanisms which keep production, exchange, and consumption in optimal balance throughout the world. But the operation of these monetary servo-mechanisms is short-circuited when 'money' is not also a physical commodity which is in demand in the Marketplace. This has now been the case throughout the world for many years; this has resulted in monetary inflation and economic stagnation; and this has caused the current crises--which are the inevitable unraveling of this miserable mess.

The Marketplace's preference for Gold--for endless centuries--has been due to the physical and esthetic characteristics of Gold. But the same negative feedback servo-mechanisms would operate in the same ways if people treasured tea leaves or toothpicks as they have always treasured Gold. The point is that a monetary system, to function properly, must be based on SOMETHING, and all the monetary systems in the world today are based on NOTHING.

We are witnessing a worldwide crisis of CONFIDENCE. Gold has always been the ultimate basis of confidence. Therefore, after the bogus fiat currencies have destroyed themselves, stability and growth can resume only if and when the world returns to the traditional basis of confidence--which is Gold.

The short answer to your question is this: Given the universal preference for Gold, which has existed for many centuries and still exists today, until the Gold Standard is re-established, monetary chaos will continue to exist throughout the world.

If anyone is interested in the details of how the Gold Standard servo-mechanisms function to balance the economies of the world, I can post some diagrams which explain these details. The irony in all of this is that I learned these details from none other than Alan Greenspan himself! Greenspan is a BRILLIANT free market economist, or at least he was back in the 1960s. But you'd never know it now.

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Why is the $ so strong ??

Why is the $ dollar so strong in this crisis ?

The NZ $ has fallen 30 odd cents in the past 3 weeks and we have a food export economy so I just don't understand when this is a US caused crisis why the US $ has not collapsed  ??

yours Tim 

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Re: How about foreign countries?

MAJORMONEY

Thanks for the feedback.  Your explanation pretty much conforms to my understanding.  But, that leaves a couple of questions:

1.  Assuming gold, like many other naturally occuring commodities, is becoming more scarce, it should be considered a relatively static commodity.  In other words, the amount available to be stashed away in vaults isn't going to grow much.  How then can an expanding economy be accomodated?  You can't create wealth because there is only so much gold.  Then we're back to the same old cycle of printing more money that becomes less and less valuable.

2.  Even if we go back on the gold standard, gold itself has only a symbolic value of what we collectively think its worth.  Again, our money is based on faith.  It's true that historically gold has been recognized as a standard of value, but it's pretty darn scarce these days, so most of us would be flat broke if we had to rely on gold as the only store of value.  So, it seems to me that the only monetary system that we can say is truly based on objective value is barter.  In other words, you and I agree that a swap of my bread for two hours of your labor is a genuine exchange of value. 

Am I missing something?

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Re: How about foreign countries?
[quote=Pandabonium]

Central banks operate in the same way as the Federal Reserve Bank. They loan money into existence. They too set certain key interest rates. The banks are owned by the government, but are given autonomy to supposedly filter out political influence. Here in Japan, the Bank of Japan was made the central bank. [snip]

[/quote]

Thanks for the answer. So the mechanism is the same as in the US, and the difference is (right?) that no interest is charged abroad, whereas 4% or so is charged in the US and paid to the strange hybrid called the Federal Reserve. Presumably it then recirculates, as those alleged fat bankers buy more cigars, champagne and limousines.

That seems a rather small difference, whereas in the Course, Chris makes a lot of it by showing that it compounds (which it does, if taxpayers are not made to pay if off) - eventually creating a runaway hyperinflation. I think that at one point he says that it's "mathematically inevitable" that the money system will self-destruct, for that reason.

Perhaps it doesn't even matter whether or not taxpayers pay off the 4% every year, because we would pay it with money that the Fed created in this manner, all other types of money being verboten. I'm not sure about that, it's a brain-twister.

Either way, let's check the math. The Fed has been around for 95 years, and 1.04^95 is 41.5 times. Is the amount of money in the US system about 42 times what it was in 1913? So far, I've been unable to find an estimate of M3, say, for 1913. Today it's about $12 trillion, so if this theory is correct the 1913 figure "should" be around $289 billion. Anyone know?

Assuming that it was, there "should" have been no corresponding inflation overseas, since no such interest is charged by central banks elsewhere; and in that case, the value of the US dollar relative to other currencies "should" have fallen by about the same factor, 41.5 times. Yet I'm pretty sure it did not. The British Pound, for example, would buy about $4 at that time and through 1940, while today it will buy $1.60 and very recently, $2. Had the 41.5 factor prevailed, it would buy (4 x 41.5 =) $166.

So what am I missing?

 

 

 

 

 

 

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Re: Why is the $ so strong ??

Think of mice on the Titanic scrambling to stay above water.

Because the dollar is the base currency of every currency in the world, it's gold in the fiat sense. So if the dollar collapses, every currency in the world collapses with it. Therefore it's in the self interest of every central bank in the world to keep the dollar afloat. This won't last long term. There is talk among other nations for an alternate monetary system not based on the dollar. The US has not been invited to those talks.

Central banks have been making a deliberate effort to keep their currencies within a fixed range, so it remains to be seen how much it falls on this round. The've set the Maginot Line on the Dollar Index at 72. It's hit there three times in the past and bounced back up. When we see a significant penetatration below 72, we're in for some serious inflation. The wild card is an alternate monetary system.

Charts show that the dollar hit a parabolic spike, a sure indication that it's peaked and on the way down within days or weeks. 

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Re: How about foreign countries?
[quote=Doug]

Assuming gold, like many other naturally occuring commodities, is becoming more scarce, it should be considered a relatively static commodity. In other words, the amount available to be stashed away in vaults isn't going to grow much. How then can an expanding economy be accomodated? You can't create wealth because there is only so much gold. Then we're back to the same old cycle of printing more money that becomes less and less valuable.

[/quote]

 

If wealth (desirable goods and services produced) increases while the supply of money remains fixed, prices would surely fall. That is unfamiliar to us only because it has never happened in living memory - the money supply having risen faster than the increase in wealth. But a world of steadily decreasing prices looks pretty attractive to me.

I looked recently for estimates of how much gold exists, and it seems to be about 130,000 tons above ground and another 50,000 tons (both metric) yet to be mined. Not all of it could take monetary form, of course, if it were again to be used for that purpose; but if (say) 100,000 tons furnished the world's money supply, I figured that the present exchange rate of about $750 per ounce would be too small by several order of magnitude. That suggests gold is a real bargain right now.

 

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Re: How about foreign countries?

[quote=Doug]

How then can an expanding economy be accommodated? 

Am I missing something?

[/quote]

 

Yep........  what expanding economy ?

We are entering an era of contracting economies, so the question is academic Undecided

Hamish

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Reasoning behind the USD and gold as a substitute

I wish there was a way for people to look up previous posts by subject line or key word but I wrote on this a while ago.  If you would like to analyse how a currency will do, I find it useful to break the issues up and rank them.  Firstly, it is important to realize that currency valuation is a RELATIVE VALUE game.  Secondly, the issues of money supply and a replacement are very real and will require something to happen before a substitute currency can be found and I'll talk on that later.

 A country's currency's prospects should be measured qualitatively on the following, in my opinion,

1.  Debt/GDP  2.  Overall size of Money Supply  3.  Level of Foreign Investment  4.  Economic Diversity and 5.  Ability to use Monetary and Fiscal Policy to affect change.

 That's it... it pretty much explains every move in relative currency valuations.  The USD gets a premium because it is the largest, most liquid currency that has a lot of foreign players who want to see the value maintained and the gov't has the ability to act quickly and bring about change.  It is also has a diverse economic base and while the debt levels are high, remember, this is a relative value game so is it higher than the europeans?  Not really...  This also explains why currencies like the AUD, NZ, Baltic state countries, Russia etc. are vulnerable because their economies are not as diverse and can't handle the stress of a 3 sigma event like we're having. 

As for gold... I also thought that it isn't a reasonable substitute because the overall money supply is so huge, that there wouldn't be enough gold but then I thought about it some more and the answer came to me while helping my Grade 3 year old do his math homework.  It required reducing fractions... Money supply around the world can indeed be shrunk without any relative value pain by taking out the largest common denominator.  Unfortunately this will require a global effort but basically money supply gets reduced by the smallest contributor to the new money regime.  Power will still be maintained by those who have the largest money supply and therefore gold reserve.  So for example, the G7 gets together and the US has 10 units of money supply, Japan has 8, Britain has 6 etc etc and Canada lets say is the smallest at 4.  Well let's reduce those fractions by a multiple of 2.  The US now has 5, Japan 4, Brit 3, Canada 2 etc... money supply is now less and then each unit is assigned a value based on the amount of gold they have... probably this is way too simplistic but I thought it might address the question about the overall size of money supply as being a reason that gold can't be used.

One more thought on gold... it is indeed the best way to store value.  When I went to buy my gold bars, I was amazed to see how quickly $20k got represented by, in these little gold wafers.  I can't think of anything else I could buy to store value.  While I can't eat, burn or use gold for any other purpose, others around the world do use it to store value which is it's main use.  How else would you easily store let's say $100 million?  How about $100 trillion?  Once you get into large numbers, it becomes more and more clear why gold has value.  This all being said, I'm not as much of a gold bull as others here, I bought some for more of an experiment and to follow Chris' suggestions but it is not even a meaningful fraction of my overall wealth.  Personally I think we're in for a phase of deflation which is bad for silver and gold but hey... I"m just posting a comment on what I think of the USD and the issue of money supply and the prospect of using gold as a substitute currency.

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Re: How about foreign countries?

The question has been asked: How can an economy grow indefinitely if the money supply is relatively fixed--e.g., if Gold IS money?

All exchanges are essentially barter. Money comes into existence because all exchanges are expedited if one side of all exchanges involves the same commodity, e.g., Gold.

But we don't need, or want, a parallel system in which we have various forms of wealth: land, buildings, etc., and then a second system, money, which represents ALL of those other forms of wealth.  We need money only for transactions.  We need money only when the ownership of other forms of wealth is changing, only when other forms of wealth are 'in play.'

At any given point in time, only a very small percentage of the existing wealth is being exchanged; only a very small percentage of the existing wealth is 'in play.'  Money is needed to facilitate those exchanges; and any given ounce of Gold can serve this function, over and over again, indefinitely.

If the money supply, i.e., the Gold supply, is changing in sync with the total wealth in an economy, then prices will be stable.  If the money supply, i.e., the Gold supply, is increasing faster than the total wealth in an economy, then prices will rise.  If the total wealth in an economy is increasing faster than the money supply, i.e., the Gold supply, then prices will fall.  But ANY Gold supply will suffice; prices will adjust accordingly.

Again, money is a universal substitute for the 'other commodity' in all (barter) transactions. The monetary system must be anchored to SOMETHING, so these various transactions can occur in an orderly fashion; i.e., so that accurate forecasting can occur, and so that CONFIDENCE is maintained.  But all of the monetary systems in the world today are anchored to NOTHING; and the result is the continuing crises in confidence which are destroying the present irrational monetary systems.

BTW, Gold is not a "substitute currency" as the previous poster stated.  Gold has been the voluntarily accepted medium of exchange throughout the civilized world for five thousand years.  The "substitute currencies" are all the bogus scraps of government paper that we are expected to use in place of Gold. 

There are no rational alternatives to the TOTALLY free market.

See my post, The Fundamental Problem, in the Chapter 20 forum. 

 

 

 

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Re: How about foreign countries?

Rothbard's book The Mystery Of Banking suggests denationalizing gold to help with the conversion.

The US government is still hoarding Americans gold at Fort Knox and other depositories.  This gold was confiscated by FDR

to force Americans to accept paper dollars that cannot be redeemed in gold. This way, the money supply could be easily

manipulated and clear the way for the Bretton Woods agreement.    The same agreement that Nixon reneged on in 1971 paving the way for todays unchecked monetary system.

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