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Source link: http://archive.mises.org/11578/the-fed-as-giant-counterfeiter/

The Fed as Giant Counterfeiter

February 1, 2010 by

Once you understand the details of modern central banking, you are able to step back and see that it truly is a way for the government to use the printing press to pay its bills. FULL ARTICLE by Robert Murphy

{ 53 comments }

Paul February 1, 2010 at 9:03 am

In response to Murphy’s article, I agree that the inevitable (high inflation) will eventually occur. But I also believe that the inevitable is still a few years away. The key is, what do people do with that new money? Do they go out and actually spend it immediately? My belief is no. Instead of the public holding onto Treasuries, they are now holding onto newly created dollars. Would the holder be any more willing to “spend” if the underlying security is simply converted from one asset to another – particulary if the original intention was to preserve wealth? My guess is that much of these newly created dollars will be converted back into treasuries, money market funds, or sit in a bank account. Unless the government point a gun to your head and tells you to spend, you won’t see inflation. It is my thinking that periods of inflation and deflation is likely the result of mass human behavior. Of course, the government’s policy can exaggerate the effects of price fluctuations.

Nick Bradley February 1, 2010 at 9:15 am

Dr. Murphy,

This was the best article I’ve read, ever, on how monetization works. I’ve e-mailed it to everyone I know who’s interested in the issue.

But I’ve got to agree with Paul on when inflation is going to hit. Right now, inflationary expectations have not increased amongst the public. As a result, demand for dollars is still high — they are hoarding them or converting them to securities. Once expectations of higher inflation sets in, the demand for dollars will drop and price inflation will go on a tear; I expect this to happen once the public feels confident that the recession is truly over.

Paul,

What do you think about the following possibility:

The US Government forcibly converts all of these new dollars back into treasuries through 401(k) regulation.

This has been talked about in the press recently. The USG could simply force x% of retirement holdings into treasuries. With about $15T in retirements accounts, requiring a 10% holding in T-bills should cover it. However, if they put this amount at 25% they would have enough to cover future issuances and soak up any liquidity caused by foreigners backing out of the dollar.

Nick Bradley February 1, 2010 at 9:23 am

FYI – the foreign debt bogey is about $4 trillion. Assuming they diversify out of half of it, you’re looking at $2 trillion that needs to be absorbed.

christopher February 1, 2010 at 9:37 am

I really think this is the ultimate experiment in selfishness since it appears that those who have a vested interest in keeping the music going under the guise that they will be either dead and gone and/or their families will always be protected once the house of cards comes crumbling down.

Bob Kaercher February 1, 2010 at 10:51 am

I assume that the big reason we haven’t yet seen as much price inflation as one would expect is due to the banks taking Bernanke’s interest payments on all those new reserves instead of loaning on them, which could be indicative of just how much the fiat dollar has ravaged the capital structure of this economy–banks just don’t see many ventures profitable enough to risk lending to.

But there’s no way that banks are going to sit on those nice, big, fat juicy reserves forever. The whole point of the game is earning interest, that’s how they make the bucks. They stop making loans and they’re done for. So they will start lending out that money sooner or later, rationalizing all the new loans with bold new creative innovations in bullshit underwriting. They’ll essentially be shooting in the dark, but they’ll be hoping to hit some targets.

Never underestimate the human tendency to take full advantage of moral hazards whenever they are present.

Joe Robertson February 1, 2010 at 12:28 pm

These master minds (Fed Chairman & Treas Sec) are arrogant and to think we can cheat the laws of the universe with some Grand Kiting scheme is naive or malicious.

ABR February 1, 2010 at 1:07 pm

A concise, simple narrative that explains central banking. Well done.

Eric February 1, 2010 at 1:21 pm

The article only touched on the fractional reserve money multiplier effect. The big effects of all that new money will be seen (as the others here said) when the banks loan out these funds, since that action in itself creates more money out of thin air.

The example given of $1 million new fed money being lent out as $900,000 is only 1/10th of the story. After the $900k is lent out, it too becomes reserves for some bank. When the new borrower spends that money (after all, why did he borrow it if not to spend it) he writes a check on that $900k, and if it is deposited in a different bank (highly likely), then 90% of that, or $810k is once again loaned out.

The 90% of 90% of 90%…. continues on until approximately $10 million is lent out with only that $1 million initial money creation by the Fed backing all of it. In other words, the banks get to counterfeit 10 times as much as the initial Fed injection. And the Fed itself decides on the number 90% (100-10 with 10 being the reserve requirement) which if changed will change the total of the money multiplier effect.

So, while the article was indeed concentrating on the Fed’s effect on treasuries, it should be noted that this is small potatoes compared to the Banks action. No wonder the Banks created the Fed to begin with.

Ben W. February 1, 2010 at 1:48 pm

As some of the above readers noted, the inflation in prices across numerous assets will occur when the fractional reserve pyramiding takes hold. However, right now banks are disincentivized from lending money out for a variety of reasons:

1. They need to stay capitalized as loan losses slowly but surely pile up

2. There are not many good credit risks worth taking out there

3. As mentioned, they earn a risk-free spread right now given govt interest being provided on reserves

4. As John Allison of BB&T Bank has noted in the past, regulators are forcing banks not to lend money out for the solvency of the banking system

5. Market uncertainty of which there is a great amount; lending will probably be made to the sectors being subsidized most heavily by govts

That being said, we still see overt price inflation in the ridiculously low Treasury yields, overpriced stocks and bonds, increased prices in commodities and everyday products derived from commodities, and in indirect inflation in the fact that prices in assets such as houses have arguably remained higher than they would have were their not to be the massive monetary inflation of the Fed.

billwald February 1, 2010 at 2:33 pm

Gresham’s Law will still rule.

As long as every major economy uses bad money and some bad money is better than others the international money traders will keep Gresham’s Law functioning. If the Bank of England does better than the Fed the exchange rate will reflect it and all will be well except for the Americans who exclusively invest in dolars.

Mike Sproul February 1, 2010 at 3:34 pm

The Fed is not a counterfeiter.

(It is an unjustifiable monopolist, but that’s another matter.)

1) A counterfeiter does not put his name on the money he issues. The fed puts its name on its dollars.

2) A counterfeiter does not recognize its money as its liability. The fed’s dollars are listed as liabilities on the fed’s balance sheet.

3) A counterfeiter does not use its assets to buy back the money it has issued. The fed uses its bonds, foreign currencies, and potentially, even its gold, to buy back its dollars.

4) As a counterfeiter issues more paper dollars, there are no additional assets backing paper dollars, so the value of the paper dollar falls falls. As the fed issues more money, the fed gets new assets as backing for that money, and the value of money is unaffected. Note, however, that if the fed issues $100, while it gets assets worth only $99, then there will be inflation due to inadequate backing

Doob February 1, 2010 at 4:46 pm

Excellent description of the central banking system!

Mike Sproul,

The Fed does not get any new assets (legitimate ones at least) to back the money it creates. It “pretends” to do so primarily through transactions with the Treasury, but it’s really nothing more than an accounting trick..no REAL assets are used or created, just more debt in a realistic sense. It’s almost like using your influence and previously counterfeited money as asset collateral to justify creating even more counterfeit money. Crazy!

greg February 1, 2010 at 5:50 pm

The Fed printing money is no different than a company that issues additional shares. When a company splits 2 for 1, the shares are now worth half as much at the time of the split. The same applies with the Fed, the value of the dollar goes down in a direct relation to the amount printed. This value decrease is at the time the money is entered into the market.

But you need to explore the reasons why a company splits its shares. Primarily it is done to reduce the price of the shares to maintain a high level of trading and it is that trading that pushes the stock higher than it would have if the stock price remained high. Just look at the effect of the Berkshire B shares had after the 50 to 1 split. Furthermore, it incourages more capital investments.

If the underlying company continues to grow, their stock will grow to pre split levels. The same applies to the US economy. If the business cycle is in recovery, the market will outgrow the inflationary effect of money creation.

I really don’t care that a dollar is worth what a nickel was in 1913. All I know is that the for what I earn today, I can purchase much more that I could have in 1913. This phenomenom is called productivity.

And that’s the problem with looking at the economy in terms of money supply. It is a whole lot more which can be discussed and argued, but can never be 100% predicted!

Mark June 14, 2010 at 4:26 pm

What about the devaluation of savings? I think you really do care.

Paul February 1, 2010 at 6:21 pm

Another thing I can add is that much of the inflation that occurred in the last 25 years was channeled into assets such as stocks and real estate. Not so much in consumer prices. I doubt they’ll be a revolt, if that was to continue.

Peter February 1, 2010 at 6:36 pm

greg: except that when a company splits its shares 2:1, someone who owned 1 share now owns 2; he isn’t harmed. When the Fed does it, someone who owned 1 dollar before the “split” still owns 1 dollar–and the bank owns the other!

Seattle February 1, 2010 at 7:42 pm

greg,

When a corporation splits shares, are all the stock holders left with the same number of shares as they had before, but all with the new lower value? I admit I don’t know myself for certain but I’m willing to bet on No.

Comparing shares in a corporation to dollars is a horribly bad analogy.

Gil February 1, 2010 at 8:43 pm

Indeed Mike Sproul. A real dictionary defines counterfeiting as passing off something fake as real. The only Austrians could call the Fed a ‘counterfeiter’ is by saying they’re making paper notes as ‘money’ through legal tender laws when gold is the one true money. Hence the paper ‘money’ is counterfeit gold. However the Fed printing more money isn’t ‘counterfeiting’ the existing stock of money – it has a licence to do so and the new money is made the same way as the earlier money.

Interestingly people do get access to more money hence wages are higher even though prices are higher. Therefore greg’s share splits are a reasonable analogy.

danny February 1, 2010 at 10:00 pm

greg

“I really don’t care that a dollar is worth what a nickel was in 1913. All I know is that the for what I earn today, I can purchase much more that I could have in 1913. This phenomenom is called productivity.”

You should really think through all of the negative ramifications — it isn’t just that your salary may (or may not) have kept up. This practice of monetary inflation dis-incentivzes savings. It requires that average (non) investors become investors / speculators in order to try to keep purchasing power in savings. Why can’t I store my wealth in cash? Why should I have to become an investing expert on top of my day job?

Mentioned earlier, but in a 2:1 stock split, each owner of one share before now has two — same proportional claim on the company. Certainly not true with money printing. The FED’s balance sheet has more than doubled in the last year or so. I cannot say the same for my salary or net worth. So somebody is coming out ahead, but it ain’t me (nor is it 99.5% of the rest of us).

This is a scheme to skim off the top in every transaction. They fool you into watching CPI, but like the bull in the ring that is focused on the cape instead of the sword, you are watching the wrong thing. Who benefits from productivity when you watch CPI? Look at all the efficiencies that have come in the last 40 years. Look at all the production moved to low-cost labor countries. Our standard of living should have gone through the roof. Why haven’t prices fallen like a rock. They should have…so where did the benefit go? Again, not to me, nor to 99.5% of the rest of us. Instead, today it normally takes two wage-earners in a household to provide a roof over the family where 40 years ago it normally took one.

The system is set up to scam almost all of us. It works exactly as intended, and even has most of us convinced that as long as my wages increase 3% per year, everything is OK. Just keep in mind, the 3% wage increase is like the red cape to the bull — just there to divert your attention. And the bull that is watching the cape ends up being sacrificed for the show.

Gil February 1, 2010 at 10:44 pm

Why should our standard of living have gone ‘through the roof’ danny? Alternatively few are alive who lived prior to 1913 and they’d probably argue the overall standard of living for Westerner is extremely high.

jubilado February 2, 2010 at 1:28 am

” “I really don’t care that a dollar is worth what a nickel was in 1913. All I know is that the for what I earn today, I can purchase much more that I could have in 1913. This phenomenom is called productivity.” ”

“You should really think through all of the negative ramifications — it isn’t just that your salary may (or may not) have kept up. This practice of monetary inflation dis-incentivzes savings. It requires that average (non) investors become investors / speculators in order to try to keep purchasing power in savings. Why can’t I store my wealth in cash?”

i am not sure what type of wealth individuals would have if a constitutional money system had been adhered to….as close to 100% reserves as i can see.
if the current standards of living are ‘accomplished in spite of’ a wrecked govt money system i would like to see information that says such.

it does seem very likely that whatever banking and money crises that have taken place were due to someone not having what they said they had (or what someone hoped the bank had) -or- flooding a market with a near-costless paper (germany?).
gold and silver and its additional aquisition with existing gold and silver (or 100 % backed notes) would seem to produce less of the above.

but it doesnt appear to me (from what i have been told) that the fed is a counterfieter, but rather a money producer like a mine-n-mint would be – just that the govt produces at its rate rather than a markets.

i am not sure if current inflation rates (and what ever ills that stem form that) are in excess of what a true modern gold/silver money would yield.

jubilado February 2, 2010 at 2:20 am

” It is my thinking that periods of inflation and deflation is likely the result of mass human behavior. Of course, the government’s policy can exaggerate the effects of price fluctuations.”

governmetn behavior seems to be the most geared to you so-called infaltion and deflation.

and how does the government exaggerate the effects of price fluctuations? taxir fare ceilings??

maphorn February 2, 2010 at 2:52 am

The Federal Reserve is actually a private bank, and not government. It only returns 25% of it’s profit to the government and the rest is distributed to its private owners.
This is the case of most central banks in the world.

By manipulating supply of money, ‘

increase volume, more money chases goods and services, and when money supply grows faster than ‘productive’ GDP then the excess becomes speculative – High inflation Boom.
decrease volume again then you cause a bust, and can buy up everything at vastly deflated prices.

As the financial institutions recapitalise over the next few years all this money from QE will work its way to cause the next great speculative boom over the next decade, only to be followed by its subsequent bust.

This method has been used for hundreds of years by controllers of money to transfer wealth from the working people to themselves.

maphorn February 2, 2010 at 2:57 am

The Federal Reserve is actually a private bank, and not government. It only returns 25% of it’s profit to the government and the rest is distributed to its private owners.

This is the case of most central banks in the world.

By manipulating supply of money, ‘

increase volume, more money chases goods and services, and when money supply grows faster than ‘productive’ GDP then the excess becomes speculative – High inflation Boom.
decrease volume again then you cause a bust, and can buy up everything at vastly deflated prices.

As the financial institutions recapitalise over the next few years all this money from QE will work its way to cause the next great speculative boom over the next decade, only to be followed by its subsequent bust.

This method has been used for hundreds of years by controllers of money to transfer wealth from the working people to themselves.

maphorn February 2, 2010 at 3:47 am

The Federal Reserve is actually a private bank, and not government. It only returns 25% of it’s profit to the government and the rest is distributed to its private owners.

This is the case of most central banks in the world.

By manipulating supply of money, ‘

increase volume, more money chases goods and services, and when money supply grows faster than ‘productive’ GDP then the excess becomes speculative – High inflation Boom.
decrease volume again then you cause a bust, and can buy up everything at vastly deflated prices.

As the financial institutions recapitalise over the next few years all this money from QE will work its way to cause the next great speculative boom over the next decade, only to be followed by its subsequent bust.

This method has been used for hundreds of years by controllers of money to transfer wealth from the working people to themselves.

jubilado February 2, 2010 at 4:37 am

“The Federal Reserve is actually a private bank, and not government. It only returns 25% of it’s profit to the government and the rest is distributed to its private owners.”

the website i found says http://www.federalreserve.GOV

chase banks website say http://www.chase.com

The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office.

The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms.

just like many government cabinet seats??

In making appointments, the President is directed by law to select a “fair representation….

The primary responsibility of the Board members is the formulation of monetary policy…..the nearby pawns shops policy??

Another area of Board responsibility is the development and administration of regulations that implement major federal laws governing………

http://www.federalreserve.gov/pubs/frseries/frseri.htm

Doug Stewart February 2, 2010 at 6:39 am

Dear Robert Murphy,

I kept up with your very clear description until here, “Sorry, but our own monetary system has the same feature. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed rolls over the debt. Over time, the nominal market value of the Fed’s holdings of Treasury debt continually grows.”

HOW does the Fed “roll over” the debt? Does it sell these soon to mature debts & buy new ones with a longer time to maturity? Doesn’t the Treasury have to pay the principal to the new owner? Kindly explain. Thanks!

Doug

Mark June 14, 2010 at 4:28 pm

I was going to ask the same question…
Do they monetize?

John February 2, 2010 at 7:05 am

Right now, with the current situation, printing all that money, a huge debt and inflation on the horizon, seeing inflationg come over the hill wouldn’t be such a bad thing. We could use some inflation in this economy for a short time period. With inflation, we can shrink our debt and possibly grow faster. With more growth and a shrinking debt due to inflation, our economy will be fine.

Paul February 2, 2010 at 7:24 am

John, the “printing” of money actually leads to more debt in our system. That’s exactly the thing that’s killing our economy. If they would just let the natural economic forces take care of themselves, we could start over fresh.

The Feds want to create inflation, but all they succeeded is making a bigger bubble and a bad situation worse. I forsee a vicious deflation down the road followed by very high inflation.

danny February 2, 2010 at 8:19 am

Gil

“Why should our standard of living have gone ‘through the roof’ danny? Alternatively few are alive who lived prior to 1913 and they’d probably argue the overall standard of living for Westerner is extremely high.”

I never stated that the standard of living today is lower than 1913. Your statement could be applied during many 100 year periods in history. It doesn’t prove or demonstrate anything.

Wealth comes from savings, it cannot be created from “nothing” (only God has made such a claim of making something from nothing regarding the heavens and earth; the FED isn’t in the same league). Inflation destroys savings and instead provides incentives for debt. These are valid and observable statements.

Would we have more savings if there were positive incentives to save? Yes. Would we have more wealth if we had more savings? Yes. Would our standard of living be higher if we had more wealth? Yes. I think the statement stands on its own.

I don’t need a Ph.D. economist from Princeton to explain to me the nature of human behavior — we react very well to incentives. Inflation provides an incentive to consume wealth, not to create it. That man has created some wealth over the last 100 years is only a testament to our natural human desires in spite of this creature unleashed in 1913.

Al February 2, 2010 at 8:36 am

The federal government/”fed” have a relationship that is akin to a junkie/dealer. Bureaucrats don’t understand the value of actual production. It is always easy to spend other people’s money. I suppose the most critical issue at hand is how the public will direct it’s wrath when prices go through the roof… Any thoughts on this folks? Will sever (hyper?) inflation strengthen big brother or destroy him?

Mike Sproul February 2, 2010 at 9:06 am

Doob:

Whether or not the fed issues paper dollars for ‘legitimate’ assets, those assets have value. The fed could issue 100 paper dollars for $100 worth of gold, silver, land, or bonds, and either way, the fed acquires just enough new assets to be able to buy back its dollars at par, so the value of the dollar is unaffected by the new issue.

Greg:

The stock/money analogy is good, except that the issue of money is analogous to a new issue of stock, not a stock split. In a stock split the company gets no new assets, and each new share is worth half as much. In a new issue, a firm whose shares sell for $60 each issues 10 new shares and sells them for $60 each. The firm’s assets rise by $600 while 10 new shares are added to the liability side of the firm’s balance sheet. There is normally little or no change in the share price, since assets change in step with liabilities.

Similarly, when the fed issues a new dollar, the fed gets a dollar’s worth of new assets (usually bonds). Just like in the stock case, the fed’s assets rise in step with the fed’s issue of money, so the value of the dollar is unaffected.

Nick Bradley February 2, 2010 at 10:34 am

maphorn,

You are incorrect. The Fed is allowed to keep only 6% of its profits (a 6% dividend), profits are after they pay for overhead (trading costs, personnel, systems, etc.). that remaining 6% is distributed to member banks.

mikey February 2, 2010 at 12:51 pm

Mike Sproul- balance sheets balance by definition.
If the fed lists paper dollars on its balance sheet as a
liability, what is the offsetting asset?

Rui February 2, 2010 at 1:00 pm

Mr. Murphy,

I thoroughly enjoy your writing in this blog as well as your own; I have learned lot from your postings and your ability to debate honestly with your critics has impressed me much more. But I recently came across some other references explaining how the money supply operates. According to Winterspeak, Mosler, and Mish, I believe, loans create deposits (MMT I think is what they refer to it), in the fiat monetary system, not the other way around, therefore debunking the money multiplier effect that Austrian economists focus on. Another point that I found interesting was that the accounting system used by the banking system (CAR or LAR)to determine reserve balances and so forth, places the FED in a reactionary rather than proactive position when it comes to providing needed reserves to the banking system as a whole, therefore never in a position to increase the money supply through their own actions. In your opinion, is there any objective evidence or criteria that can help a noneconomist, more precisely a MBA student like me, to assess and determine which theory is truly more representative of how the fiat monetary system works, since it is the one under which we currently operate, and impacts the overall economy? Because in the end, making entrepreneurial decisions based on sound evidence is the main goal for corporate managers.

Gene Callahan February 2, 2010 at 3:13 pm

I can’t believe this idea of the Fed as “counterfeiter” has ever been taken seriously.

counterfeit: made in imitation of something genuine so as to deceive or defraud.

So what is the “thing” that Federal Reserve notes are “imitating” that makes them counterfeit? They certainly aren’t imitating gold! Not are they even imitating commodity backed money. In fact, they aren’t imitations of anything — they are out and out, upfront about it fiat money. Now, you may think fiat money is a bad idea — and maybe it is! — but to call it “counterfeit” is to abuse the language for propaganda purposes.

TK February 2, 2010 at 5:39 pm

WARNING!!! WARNING!!! WARNING!!

Quadrillions upon quadrillions upon quadrillions of US dollars worth of Federal Reserve Notes have been printed and distributed by the United States Federal Reserve (a.k.a No-Good-Dirty-Rotten-Counterfeiters) for almost 100 years.

Question:
How can I tell if I possess US dollars printed on paper out of thin air by those Dirty-Rotten-No-Good-Counterfeiters down at the Federal Reserve?

Answer:
Easy. Take this simple test.

Empty your pockets and carefully examine all the cash you possess. Then go to the your bank and withdraw every dollar from your accounts in cash and spread all the money out on the kitchen or living room floor. If you have any bill of any denomination that says: FEDERAL RESERVE NOTE across the top of the bill, unfortunately for you, those No Good-Dirty-Rotten-Counterfeiters down at the Federal Reserve did order those bills to be printed on paper and completely out of thin air, just like Mr. Murphy and Mr. Hummel said they did.

Question:
My gosh! All my bills say Federal Reserve Note on them! What on earth do I do next?

Answer:
Too bad for you. According to the article you just read, The Federal Reserve has been counterfeiting Federal Reserve Notes since 1913. Worse for you, you can be arrested for circulating counterfeit currency. But, I am willing to go all out in this crisis and help you and everyone in the world rid themselves of these useless Federal Reserve Notes. Send all you possess to:

Tim Keane
1116 Stone Harbor Blvd.
Stone Harbor, NJ 08247

Question: What if I don’t send you all my Federal Reserve Notes and keep them myself instead?

Answer:
Then I guess you’re not buying anything the article was selling.

Doug Stewart February 2, 2010 at 7:02 pm

I think I figured it out.
The Fed sells the soon to mature debt. The new owner will indeed collect from the Treasury. In order to pay the new owner, the Treasury issues new debt maturing later & sells it to the Fed for FRN’s, which the Treasury uses to pay the new owner of the matured debt.
The money the Fed receives from the maturing debt buyer roughly off-sets the money it pays to buy the later maturing new debt from the Treasury.
Did I miss anything important?

Mark June 14, 2010 at 4:31 pm

…makes sense!

Bala February 2, 2010 at 7:03 pm

Gene Callahan,

” So what is the “thing” that Federal Reserve notes are “imitating” that makes them counterfeit? ”

I’ve been wanting to take a guess at this for quite some time now. So, let me take a shot.

Low-end counterfeiters counterfeit objects. High-end ones like the Fed counterfeit concepts. IMO, the Fed is counterfeiting the very concept “money”. They are using this act of counterfeiting to pass off what isn’t and never can be “money” as “money”.

markb57 July 22, 2010 at 8:15 pm

…bingo!

mpolzkill July 22, 2010 at 8:23 pm

That’s right, if 99% of the population *knew* they were actually holding coupons, then it wouldn’t be counterfeiting. And they wouldn’t be holding so many.

Mike Sproul February 2, 2010 at 8:24 pm

mikey:

“If the fed lists paper dollars on its balance sheet as a
liability, what is the offsetting asset?”

The offsetting assets are the bonds, etc that the fed bought with the dollars it issued. They are identified on the fed’s balance sheet as “Collateral Held Against Federal Reserve Notes”.

jubilado February 2, 2010 at 9:12 pm

“The offsetting assets are the bonds, etc that the fed bought with the dollars it issued.”

by issuing dollars…is that fundamentally different than giving away gold?

now if you have a bond or an asset you can certainly take anyting you want for them if you wish…but is there a distinction (do say, unpleasant ecnomic occurences happen) when you just issue ‘dollars’, ie accounting entries for real goods or gun-to – head claims on goods instead of some type of commodity money…metal form the ground??

Peter February 2, 2010 at 9:48 pm

In a stock split the company gets no new assets, and each new share is worth half as much. In a new issue, a firm whose shares sell for $60 each issues 10 new shares and sells them for $60 each. The firm’s assets rise by $600 while 10 new shares are added to the liability side of the firm’s balance sheet. There is normally little or no change in the share price, since assets change in step with liabilities.

That, too, is nonsense. If that were the case, why doesn’t every company just issue an “infinite” number of shares (i.e., however many will sell), and keep raking in the cash forever?

Bennet Cecil February 2, 2010 at 10:18 pm

Holders of US currency can quickly exchange them for real estate, gold, stocks etc. When the purchasing power of US currency collapses you will be sorry that you have so much money in the bank. Our government has increased our debt by about 9% annually since 1970. Voters refuse to elect politicians who will cut government spending so we will all have to endure severe economic pain. You can move your savings out of the US and buy foreign stocks.

Bennet Cecil February 2, 2010 at 10:19 pm

Holders of US currency can quickly exchange them for real estate, gold, stocks etc. When the purchasing power of US currency collapses you will be sorry that you have so much money in the bank. Our government has increased our debt by about 9% annually since 1970. Voters refuse to elect politicians who will cut government spending so we will all have to endure severe economic pain. You can move your savings out of the US and buy foreign stocks.

Bennet Cecil February 2, 2010 at 10:23 pm

Holders of US currency can quickly exchange them for real estate, gold, stocks etc. When the purchasing power of US currency collapses you will be sorry that you have so much money in the bank. Our government has increased our debt by about 9% annually since 1970. Voters refuse to elect politicians who will cut government spending so we will all have to endure severe economic pain. You can move your savings out of the US and buy foreign stocks.

jubiladu February 3, 2010 at 12:52 am

i have read here that purchasing power has been declining since 1913.
and that people have more total purchasing power because they have more dollars.
are you saying a collapse is going to take place that would outpace the previous declines in dollar purchasing power despite the increases in wages?

i guess gold and silver fully backed wouldnt collapse.

mikey February 3, 2010 at 4:39 pm

From Mike Sproul-

“The offsetting assets are the bonds, etc that the fed bought with the dollars it issued. They are identified on the fed’s balance sheet as “Collateral Held Against Federal Reserve Notes”.

http://www.federalreserve.gov/Releases/H41/Current/

Is there a chance that current market value of some of these assets, ie. Maiden Lane, Mortgage backed securities, would not be the same as the amount the Fed paid for them?
If not then your earlier statement-

“Whether or not the fed issues paper dollars for ‘legitimate’ assets, those assets have value. The fed could issue 100 paper dollars for $100 worth of gold, silver, land, or bonds, and either way, the fed acquires just enough new assets to be able to buy back its dollars at par, so the value of the dollar is unaffected by the new issue.”

-would be wrong, as the assets at market value would be worth less than required to buy back the affected dollars at par.
TIA, mikey.

Mike Sproul February 3, 2010 at 10:55 pm

mikey:

“Is there a chance that current market value of some of these assets, ie. Maiden Lane, Mortgage backed securities, would not be the same as the amount the Fed paid for them?”

Yes. If the fed issued $100 and received assets worth $99 in exchange, then the fed’s money outruns its backing and the result would be a fall in the value of the dollar.

If, for example, some bank has issued 100 currency units, while holding assets worth 100 oz of silver, then each currency unit will be worth 1 oz. But if that same bank then issued 100 new currency units, while getting new assets worth only 98 oz, then each currency unit will now be worth 198/200=.99 oz of silver.

John Williams February 28, 2010 at 3:11 pm

Mile Sproul said:

Whether or not the fed issues paper dollars for ‘legitimate’ assets, those assets have value.

I have to disagree with this. You state that when the fed issues paper dollars for bonds or “assets” those assets have value but the problem is that the bonds and the paper dollars really get their value from products produced and sold in the economy separate from the banks. If everyone decided to switch to gold, another currency or a barter system neither the bonds or the paper dollars would be worth anything this is proof that bonds and American currency have no intrinsic value they are therefore backed by goods and services with value given to money when it is used in a transaction such as when a person accepts it for payment for work done or when a retailer accepts it as payment. You write that the real bills doctrine is true and that all money is backed by assets but you neglect to understand that products, goods and services are the backing not the banks “assets” unless the banks have assets with value in a barter economy otherwise it is not an asset but a representation of a good,product or service. A representation of an asset is not a real asset because its value relies on someone choosing to accept it in order for it to be redeemed for a real asset whereas real assets have value and usability whether someone else accepts it or not. The person that accepts money and bonds is the sole basis of its worth.

The only function of money in reality is as a way to relatively price one good or service relative to another good or service (eg. Doctor gets 10 times more than laborer) in a mutually agreed upon exchange ( based on individual subjective valuation) using money as an abstract bookkeeping device that represents past or promised future productivity in a way that is infinitely divisible, this method of abstracting real products creates a lot of efficiency in comparison to a barter system. The 2 individuals attempting to make a trade value their time, talents and/or work in relation to the benefits of what they will gain on subjective individual terms and money is an abstract representation of what is or will be spent vs what is or will be gained.
Your understanding of the real bills doctrine is the same as saying money is backed by money, it is circular logic. The only thing that can ever back money is the product it buys during a transaction.

A monetary system based on gold has similar problems to the current system even if it is not fractional but instead of inflation gold generally creates deflation which is just as problematic.

With gold the spending power increases when the owner of that gold puts it under a mattress and does nothing. In order for him to gain spending power without doing anything he has to be gaining it from someone who is productive, essentially leeching off productive members of society. The problem with that is it encourages people to become leeches instead of actually producing something creating less and less producers supporting more and more leeches. That is without going into all the problems deflation can cause for business especially if very rapid deflation occurs due to the percentage of gold that can be efficiently mined decreasing relative to the above ground gold supply. A “peak gold” scenario would be bad for an economy based on gold and would result in rapid deflation disincentivizing businesses until productivity increases fell to the point where the “time to delivery” did not cause a loss of value wherein a cost of $1 to produce something returned 99c with greater spending power leaving the producer better of not risking his capital to produce a good.

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