Trying to get my head around this...

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switters's picture
switters
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Trying to get my head around this...

I've watched this a few times and I can really relate to those folks Chris referred to who took his seminar four times and were just barely beginning to understand money creation.

I have glimpses of understanding punctuated by periods of incomprehension.

One question I have is whether the statement "all money is loaned into existence" was also true when the dollar was still backed by gold.  It doesn't seem like it could be true, because gold can't simply be loaned into existence!  Is what Chris is saying only relevant to the period following the close of the gold window?

 

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gsti
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switters wrote: One
[quote=switters]

One question I have is whether the statement "all money is loaned into existence" was also true when the dollar was still backed by gold.  It doesn't seem like it could be true, because gold can't simply be loaned into existence!  Is what Chris is saying only relevant to the period following the close of the gold window?

 

[/quote]

You are right that gold cannot be loaned into existence, it can only be found and mined.  A note promising to pay gold can be loaned into existence.  This aspect of usury is very very old.  Hope that clears it up.

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switters
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Fractional reserve banking

Thanks for your response, gsti. 

I read a little more in Turk & Rubino's book on the collapse of the dollar and it became more clear.  I learned that fractional reserve banking actually started long before paper money was widely used.  

In the fifteenth and sixteenth century Europeans would deposit their gold at a local goldsmith (banks hadn't been invented yet), and the goldsmith promised to keep enough gold on hand to pay his customer back on demand.  Because the goldsmith didn't turn around and lend his customers' money to anyone else, he usually charged customers a small fee for keeping their savings safe.

However, by the seventeenth century, Italian and English goldsmiths had figured out that they could lend out some customers' gold for a profit.  Since only a few of their customers demanded their gold back at any given time, the fraction of their deposits that the goldsmith held in reserve (hence the term "fractional reserve") was usually sufficient to meet their obligations.  And with the money they earned by lending, they were able to pay their depositors interest rather than charging them for storage, producing smiles all around. 

As time progressed fractional reserve banking became even more popular, until, as Chris points out in the "Money Creation" section, banks were loaning out 90% of their reserves.  I was surprised that this was happening long before currencies were completely divorced from gold.

However, even with the destabilizing effect of fractional reserve banking, interest rates were low in most gold-standard countries because the basic money supply (gold) grew only by a couple percent each year.  This limited the amount of paper that member governments could print, minimizing the risk of inflation and making debt denominated in gold-standard currencies attractive to investors.

Today, on the other hand, debt isn't backed by gold and there's nothing to stop governments from printing more money whenever they wish.  The current U.S. bailout plan demonstrates this perfectly.  Likewise, there's nothing to stop inflation from ensuing and interest rates from skyrocketing.

Good grief.  We're in for it. 

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gsti
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FRB and a gold standard

Hi switters,

 thats good reading you are doing.  While my personal feelings about FRB are on the whole negative and feel, essentially an unfair or fradulent system is at work, I cannot throw my hat in with those who would scrap FRB, scrap a fiat currency scrap the central bank and take up a commodity based currency such as the gold standard. 

I think alot of people see the unfairness of FRB and want to scrap it without fully considering the implications.  When money is lent in a system that does not have FRB, the interest is still as unearnt as it is in an FRB system, and that interest payment still has to be found from somewhere. 

Imho the amount of money in an economy should be changing to reflect the needs and state of the economy. No new money means no growth, more or less.  So the upside of a gold standard it that there is a very stable money system. You know what your currency is worth.  The downside is that gold in your fault may not accurately reflect the value of your economy, so essentially if you didn't have much gold you could stay poor for a long time, despite being rich (having assets in other areas). 

The advantage of a fiat currency is that it can represent the value of a nation more completely, its natural resources, it's people, infrastructure and so on.  Another huge advantage is that the money supply can be controlled alot easier - and that is a very very good thing.

The downside of a fiat money supply is that it is open to huge abuse, as we can sadly see.

Fractional reserve banking has allowed huge strides forward that may otherwise have never been achieved, and that should not be dissmissed out of hand.  It has for centuries allowed for the matching of liquidity to assets in a very fast and effective way.  If FRB is going to be scrapped, and I think it should be, a very great deal of thought should go into what will replace it.

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That makes sense

gsti,

Thanks for the clear summary of both the advantages and disadvantages of FRB and a fiat currency.  I do not know enough yet to have an opinion on whether FRB should be abandoned completely, but I do understand the problems you pointed out with a gold standard.

However, I wonder how those problems apply in an economy that is shrinking each year rather than growing - which it seems certain ours will be doing over the next several years.  Robert Hirsch has said that the ratio between energy supply and economic growth is roughly 1:1, so if oil declines at 3% a year our economy will contract at that same rate.  He predicted this would go on for at least two decades if we hit peak oil with no serious prior mitigation efforts, which is what has happened by most accounts.  Peak is here or very nearly so, and we've done almost nothing to prepare for it.

If he's right, and oil supply does decline at 3% for the next ten years, that would mean an economic contraction of 30% over that period.  I can't even begin to imagine all of the effects that would have on our daily life, nor do I know what money system would be best in that scenario. 

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gsti
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I wish I knew

Hi switters,

I have to tell you straight up, I am an optimist :) 

Regarding energy, if for example, everyone turned their central heating this winter by 3 degrees and put on an extra layer of clothes, and additionally maximised their journeys, I mean doing several chores in one car journey rather than home >>out >>home >> out, that would make a fair reduction on consumer useage.  Could that amount to a 1% reduction in consumer use?  I don't know.  Then there are other wonderful inventions, like the air powerd car, no where near as powerful or flexable as our current cars, but still very useable and petrol free :)  ... Tata the indian car producer who just purchased Jaguar have purchased the rights and designs of this technology for use in India, so it is a very serious proposition. 

There is a huge amount of oil available in tar sands for example, just its hard and expensive to mine, this gives us a nice chance to ween ourselves off oil.  There are alot of things we can do now on a personal level.

I big problem in western economies is how we account for things, I mean cashflow, and yearly profit and loss.  So that means somthing like an air powerd car is not likely to be taken on at mass production.  Most car makers use the same engine today that they were using 10 or even 20 years ago.  kitting out new plants is expensive.  As oil prices continue to go up the costs of ramping up production for these cars will not drop, but they will seem less expensive propositions compared to petrol cars. There is alot of very useable technology around for us to harness.  I do not think there is one answer or replacement for oil, but many many small ones.  I have hope.

 Here are a couple of links:

http://www.youtube.com/watch?v=uVIwropRMME

http://www.youtube.com/watch?v=hwgQsF18NVM

 

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I'm an optimist too... over the long-term

I believe that eventually we'll figure out how to make wind, solar and nuclear cost-effective and scalable, and we'll reorganize our society to run on electricity rather than liquid fuels.  However, where I may disagree with you is 1) how quickly that will happen, and 2) what the transition will be like.

Everything I've read, including the Hirsch report for the Department of Energy (DOE) that I referred to in my previous post, suggests that this transition will take a minimum of two decades - and that's with a "crash effort" on the scale of what happened in the U.S. during WWII.  Not only are we not mobilizing for such an effort right now, but no one is even talking about it.

Just imagine how long it would take to completely replace liquid fuel-based cars with PHEVs.  That's a minimum of 8 years right there, and that's incredibly optimistic.  Then of course we'd have to totally replace the national infrastructure to accommodate these new EVs.  What's more, currently there is no electric technology that would power a large truck or tractor.  Our economy depends upon these large vehicles so this is a real problem.

During those two decades, therefore, we're almost certain to have a decline in energy supply which is almost certain to cause a contraction of the economy.  I just can't see how it could go any other way.  Conservation will help mitigate the decline in some way, and it will be mandatory - not the current "voluntary" efforts of environmentalists.

 

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I agree

Yes, I think you are right.  Although I think the change from everyone owning a car to the majority using public transport could be very fast transition.  Not forced as such , just petrol becoming to expensive for the average person. Vehicles used for agriculture and public transport and distribution will probably enjoy decent tax breaks on fuel if it becomes to expensive.  The adoption of alternative fuel transport will take a long time, but I think possible and as you said over several decades, with the processes and capabilities becoming more refined as time goes by.  I think we will also change our expectaions of energy from an always on society to a use when needed approach in general. 

I remember reading a post from a guy in India, he was a bit annoyed with an American about his view of the world.  Anyway the point the Indian guy wanted to make is that unless you lived in Western Europe, North America, Australia or NZ, or one a few other capital cities around the globe, power cuts were the norm.  Nobody expected to have power all day long.  I think that is a likely future for us.

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joe2baba
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power

hi  i just read your posts and i thought i would add my 2 cents.

i live in india half the year. i have electricity about 12 hours a day 

there is a schedule but not in stone. i have an invertor 

and batteries so i have power 24 hours. about 10 percent, and rising ,

of our electricity is from huge wind farms . amory lovins was here in ar.

in june and rmi is working on a lot of things energy wise. i think the estimates

for how long it could take are very pessimistic if we put our efforts into it. 

as long as the sheeple think we can be energy independent by drilling every other foot 

we are up the creek and yet no candidate no politician has come out and told the truth about 

peak oil. 

instead of the idiotic wars over oil we should be taking that money and investing in 

solar and wind and other renewables. but deploying on a smaller scale.

bernie sanders introduced a bill in the senate to install 10 million solar panels on home and 

businesses in the next ten years. we can decentralize the grid thereby getting our electricity out of the hands of corporations and clean up the environment. we use the existing grid and self storage. net metering will enable us to sell it into the grid and a small amount can be deducted for grid maintenance.

google wade for more info on micropower which is growing by leaps and bounds. 

as far as frb i am against it. the amount of gold had nothing to do with the amount of money in circulation. as proven by degaulle. lincoln did very well financing   the war of aggression with greenbacks all you have to do is say this is what you pay your taxes with.  but hey i could be wrong . in any event paying exorbitant interest to a private bank to print our current money which is not backed by anything seems pretty stupid. it also makes a ntional debt a certainty and impossible to pay off.

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gsti
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Your 2cents are very welcome, we need as much as we can get!

Thanks for sharing your expirience with us Joe2baba,

India is such a vast country, I am intrigued about how it will cope in the years to come.  I am not sure if it is better placed or not than the USA. What do you think ?

Yes, it is amazing how so many politicians either 'don't know' or 'won't say' anything useful on the subject.  In the UK the politic of environment seems to be simply to tax us more.  I think they are working on the basis that if fuel is expensive enough we just won't use it.

You are quite correct about Lincoln et al I think Joe2baba, but they didn't really get around the problem, they just devalued the currency.  I think greenbacks where quite inflationary, but I am not too sure about the use of dollars at this time, I think it was mostly used to finance the civil war.  I think the greenbacks where payable on demand for gold or silver, so they still counted as real money, if everyone had demanded gold for their greenbacks ... there would have been a new civil war ;)  Fortunately while new gold and silver are being mined, and wars fought (and won) , goverments have historically got away with printing more money against a commodity backed currency.

Sometimes are politicians, media and banks are so completely useless it is hard to believe anything other than a conspiracy.

 

 

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FRB isn't just about loaning out other's people's money...

However, by the seventeenth century, Italian and English goldsmiths had figured out that they could lend out some customers' gold for a profit. Since only a few of their customers demanded their gold back at any given time, the fraction of their deposits that the goldsmith held in reserve (hence the term "fractional reserve") was usually sufficient to meet their obligations.  And with the money they earned by lending, they were able to pay their depositors interest rather than charging them for storage, producing smiles all around.

switters,

If it were only that simple.  Remember in It's A Wonderful Life when the main character is telling everyone how "Sally's money is in Fred's garage and your money is in Sally's house..."? In a "pure" fractional banking system, this would be all there is, but the insidious truth is that it is more than that.

It's not just that the banker is loaning out your money, he is loaning out more money than he has deposits for! This is the fradulent part of FRB and why it is immoral in my opinion.

Richard

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Carl Veritas
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Re: FRB and a gold standard

The quantity Of Money Theory.    Money needs to be elastic to serve the needs of commerce. Sound familiar?  This is from the proponents of the creation of a central bank in the US. and from the writings of Keynes, a major backer of government fiat money.

There is no optimum quantity of money required to serve the needs of the economy.   

In a productive economy where the stock of money remained relatively constant,  money will simply buy more goods.  In fact because of technological advances and productivity of the American economy, our moneys purchasing power should naturally increase.   Proponents of unbacked paper money sees this as the deflation bogeyman that you've heard time and again.

The opposite----where the stock of money in circulation is always increased in relation to the availability of goods----creates inflation.   In other words,  money loses its purchasing power.    $1 in 1913 is the equivalent of $22.10 in 2008   is agood example.     What is more important is that the money supply is not tampered with.

The book titled " A History Of Money and Banking In The United States" by M.Rothbard covers the colonial era to WW ll.        The origins of the Federal Reserve chapter is unlike anything you may have read.

If you want to read a decent and brief accounting of our monetary system,  here is one------

 http://www.citizeneconomists.com/view_articles_detail.php?aid=129

 

 

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Mean
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Re: Trying to get my head around this...

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