How The Monetary System Works - And Why It Seriously Needs to Be Replaced

But it's an honorable concept that can't be cheated. It can't support the concept of credit cards, and spending beyond one's means, etc. That's why Aki and others support it, have no choice but to support it. It would take a radical transformation and some initial wounds.

And I don't deny it, it would be a pain for a while. But the alternative is the eventual demise of the Homeland and of all 300 million of us. That 'alternative' isn't even worth entertaining. A mere recession or even a new Depression pails in comparison to hundred of years of prosperity or even potentially thousands of years of prosperity.

 

Infinite human ingenuity -> infinite greater technology -> infinite improvement in use of resources -> infinite wealth.

If the value is whatever people think it is, how can you have a money supply that represents it? If you create enough money to represent the value of everyone's wealth, wouldn't you end up with the same amount of money that you have not?

 

Let's break this into two because were are intermingling arguments on two different subjects.

For this issue, you're arguing that rather than the Govt borrowing money to make up deficit shortfalls, it prints money (or creates money electronicall, same thing) instead. The problem is that will cause massive inflation. Since 1980, the Govt has borrowed $16 trillion dollars. Of that $16 trillion, the Fed has "monetarized" maybe $2 trillion which has been injected in the money supply. The rest has been borrowed from non-Fed sources, which has not increased the money supply.

If instead of that debt being borrowed from non-Fed sources (and not "monetarized") the government, whether the Fed or Treasury or some other agency, had created another $14 trillion in new money, we'd have had massive inflation over the past 30 years. The money base increased from about $400 billion to $900 billion from 1980 to 2010 and we had roughly 2.5-3% inflation, which is about what you'd expect given economic growth and a rough doubling of the money supply. If instead during that time period the money base had expanded to $15 trillion, you're talking about a 30x increase in the money supply. That equate to about a 16% per year increase in the money base, and when you figure in the effect of a money muliplier, your talking about inflation well into the double digits, at least.

It doesn't matter who prints up the money. If you increase the money supply on the same order that the debt has increased, you are dramatically increasing the supply of money, and that is going to result in dramatic inflation.

 

Um, it's already subjective as it is. I suppose you mean, how do you acomadate for growth in the economy? Larger money supply to adjust for growth, preemptively of course or you'd have deflation.

Your logic train above there is not accurate. Humans have limited intelligence, and we have limits to technology based on what we are physically capable of creating. We cannot, for example, create something that can power our energy needs using the sun as a giant reactor - it is hypothetically possible but even if we did do it, more and more exotic technology grows beyond our capabilities and the rate at which this monetary system accelerates towards bankruptcy is on a far smaller time scale than the time needed to figure out how to create the device described above. We would run out of money before we could develop the things needed to let us escape this planet and keep growing the economy as needed, and that time period before we would need to go even farther than that would be short. This is the problem with endless exponentials, they just get impossibly huge in a very short time.

 

Well no, there is an objective amount of money in the system.

No, I wasn't sure where you were going. You were criticizing the current system, so I asked who do you propose to make money policy if not the Fed, and you wrote: "Either us (market currency) or have the Fed do something like I mentioned earlier: the money supply represents the value of the economy, rather than debt."

I'm not sure what your are proposing here when you say "market currency" or "the money supply represents the value of the economy, rather than debt. I don't understand what you are proposing for those things as to how they would regulate the money supply.

If your position was correct, we'd still be hunter gathers eating berries or whatever carcass we came across.

The whole history of human beings is one of constant development of new techologies and skills that have allowed up to expand far beyond what were perceived as the limit of resources. When we were hunter gathers, we were largely limited by the resource of amount of game in a given area. If that resource was exhausted, we had to move somewhere else. A small group of people needed a fairly large resource of land and game that limited their potential for growth.

If you were correct, we'd still be small bands of humans eeking out a living by whatever game was available.

But then some intelligent person notices that in the place where seeds from wild grain they picked had fallen, new grain grew the following year. So they developed the technology of farming, and viola! Now a much smaller are of land could produce a far greater amount of food. Now groups didn't have to move all the time, food was much more plentiful, and people could start congregating in larger, permanent settlements. Technology had broken through the resource limitation, and allowed a large jump in growth.

This of course has been repeated over and over an infinite amount of times in the course of human civilization. And my all accounts, the pace of development has accelerated, not slowed down.

Another example. When I was a teenager, when had the first and then second, and then third gasoline price spikes. Prices quadrupled almost overnight. There were long lines at pumps. For the first time, people appreciated that there was not an unlimited supply of gasoline. And I remember reading books and predictions in that time frame about how by the turn of the century, gasoline would be so rare and so expensive that most of us would be riding bikes or horses and using wood burning stoves. Doom and gloom abounded.

Didn't happen. Despite a strong growth in demand, we developed technologies to extract more oil and use it more efficiently -- maybe if not as rapidly as we should. We learned to dig deeper and in more remote places. Even less than 10 years ago, we were on a scary path of being more and more dependent on foreign oil producers who were started to produce less, even as countries like India and China were demanding more and more.

But today, the US is the world's largest petroleum producer. Our oil imports are way down. We are exporting refined products. We have gas and oil to last us many decades, if not centuries.

What happened? Technology -- fracking. What was once a very limited resource became far more abundant because of this technology. At the same time technologies reduced the amount of oil we used, and we've ramped up alternative sources like solar and wind. I heard yesterday the first hydrogen powered car will be on the market next year.

So no, I don't buy you're "we can't grow" philosophy -- at all. I'm an optimist, but I think bright days are ahead. The ingenuity of mankind has also developed technologies that have broken through the limits of resources, and allowed us to develop a country of 300 million where most live a live of relative comfort and food that would have been unimaginable to all but royalty and nobility just a couple centuries ago.

 

I realize that, but it is very unlikely for us to have unlimited capability. We are simply another species on this planet, and we're still due for our first big die-off (species' populations rise and fall until they reach environmental equilibrium). To say we have nowhere to go but up might be true, but again, the question is, will it happen fast enough to keep this going?

Because once you get too far into it, any slowdown in growth at all would crash the whole thing. And I'm not willing to bet we will simply grow exponentially faster as required.

 

You should check it out, it's quite informative.

 

That's a good point. Banks can lend 10 times more than they have on deposit. Your deposit of real money (as real as it can be anyway), is now theirs. Your money is now funny money, generated on a keyboard.

 

Not at all. There are a lot of intelligent people that disagree with me. It's not a false dichotomy. What you are saying specifically is not even close to reasonable economic thought and it has nothing to do with you disagreeing with me.

We do not require infinite or exponential growth. We target 3-4% growth. Our productive capacity being overused is literally the least of our concerns. The fact it is not being used is a bigger concern.

 

We had a massive economic collapse. One that if left untouched would have produced results equivalent to or worse than the Great Depression. Having unemployment insurance, food stamps, social safety nets, the fed being able to keep liquidity in the banking system and interest rates low, etc are evolutionary things. The question I always ask people who say this stuff, is where would we be with out? Many conservatives will go in to this magical business cycle that just fixes itself if you let everything fail. But in reality that does not happen. Depressions can spiral along for a long time.

Whenever there are economic problems there is a lack of faith in the government. It's what allows groups like the Tea Party and Libertarians to gain a lot of traction. But people quickly learn that those ideas don't work either, lol. What I don't understand is looking back at a history... there was never a perfect economic system, never a time where economies didn't face problems and unemployment was high, poverty was high, etc, etc. This is nothing new we are facing now that every economic system in the history of mankind hasn't faced. The one thing we do have is the ability to keep the economy and real humans afloat during the crisis. I'm sure people in the Great Depression would have loved food stamps, unemployment insurance, etc, etc. And not having it certainly didn't help that economy out.

My opinion is we need a massive fiscal expansion. Trillions of dollars added to the money supply, millions of people put to work rebuilding our infrastructure, etc. We are basically starving the economy and there is no stopping it in sight.

 

It's not a gold standard, lol. You can't just bring lumps of gold in to a bank. It only takes government issued gold coins that they consider legal tender.

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Lol, what would our unemployment rate have been with out it?

 

economies are based greatly on people "perception" of the economy and that perception becomes reality

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Your assumption of massive inflation has no factual backing.

 

And he still can't grasp what the Fed does when it "purchases" debt from banks. He thinks that $2 trillion has been injected in the money supply. I've tried for years with this guy. He is a lost cause. Basically the conservative version of a democrat who just can't let go of his ideology.

 

This entire forum has been trying to convince me that we are printing unlimited money and are at extremely high levels of inflation. This couldn't be further for the truth. We didn't even reach 2% last year.

 

You just have to accept you are dealing with a lot of crazy people. Been on this site for 4 years, they will never change. They talk about hyperinflation every year, they talk about the Fed printing money every month. No matter how many times you try to tell them the facts of what is happening, they will never comprehend it. We are more in danger of having the worst case scenario with deflation than high inflation, lol. It's hilarious how we can have high unemployment, low growth, low capacity utilization and people are worried about inflation.

There are very few "learners" on this site. They all think they have all the answers because they read some .com blog.

 

I have no issue with people spouting opinions. That is the nature of the forum. However, perpetuating lies that our entire country's economic system self-destructing is imminent is just flat out wrong. Every time I go to the gym they have Fox News on one of the TVs and they have a headline at the bottom that is always some fear based "warning in America!" or something of the sort. You would think our inflation is 20% the way most people on here are talking.

 

US is a country and it can not stop to exist unless it splits up but this is not a realistic scenario, EU at the other hand is as you said a mess and Europeans will not stand for this.

 

I think you're only imagining pumping huge sums of money out of a printing press rather than seeing the whole picture I'm describing. If the government created those credits and the dollars were loaned, they could be considered to be non-inflationary because loans lead to spending, which increases demand for goods and contributes to a productive economic cycle. For the dollars the government spent directly, those dollars also contribute to economic activity because they aren't used to prop up savings unless they are wasted on excessive profits for procurements. Nobody would advocate for the printing of $16T for any reason that wasn't both a need and economically stimulating, as much as possible. Ignoring the demand side and focusing only on total dollars in the economy really tells you nothing. We could have $400T in the economy if we had sufficient materials, workers, demand and jobs to satisfy it. We run into trouble with excess that isn't doing anything, which supports your prior theory that too much saved is non-stimulatory, whether in domestic or foreign investments.

What is the trigger you imagine an offsetting amount of debt would provide to prevent inflation with the same number of dollars spent over time in the economy? Satisfying national need with our own currency is not an inflationary endeavor, but excessive creation of money that doesn't satisfy national need surely is.

 

Here's what I've always wondered and I agree we're choking the economy for the purposes of political ideologies. What would happen if the federal government decided they agree that we shouldn't have any additional debt for just a period of a few months, but in that period of months they agreed to pump money directly from the treasury, and without debt, into really needed and really effective infrastructure improvements? Basically if they just decided to create the funds (in cash if you will, but not real paper cash), spend them via contracts all over the nation for bridge repairs, interstate widening and improvements, new highways to relieve current ones, airports, the power grid, water supplies in areas having difficulty, fire and rescue equipment, hospital improvements, school expansions where overflows exist, and on and on? Those few months would be insufficient to get all those things completed, but they could be planned ahead and contracted during that period without one bit of debt. And remaining costs, what we call over and above costs beyond what was originally thought, would also be paid the same way once those costs were realized, justified and verified. Would that harm the economy in any way? I believe it would not and it would satisfy the side that disagrees with debt while satisfying the spending side with tremendous economic activity that would put millions back to work and further utilize those working less now. The offshoot of all that activity is further local economic activity to support all that work and all those people doing the work. Restaurants, hotels, road maintenance, shops, etc.

It would require legislation just to be able to do it, but it would, at least temporarily, show people that we can spend money and induce the economy to work harder with the hope that once the government money that built all that slows or stops, the activity it created can continue to grow the economy as tax revenue hitting local economies churned the engine.

We could do the same thing within the system we already have in place, but I just wonder if that would satisfy enough people to actually allow congress to get something, anything, done that actually does put people to work and not directly for the government as government workers so that we're caring for businesses and giving them the demand to allow them to grow.

 

Looking back at history before the government got involved the middle class was huge. These pictures are from 100 years ago. Before the Federal Reserve System orchestrated the devastating great depression wealth was widespread.

 

Nice hypothesis. The middle class died when manufacturing was moved away from this country, not because of the banking system. The banking system has actually increased wealth for the country.

 

To keep what going?

Get too far into what? Why is exponential growth required?

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The theoretical maximum multiplier is 10x the amount of reserves not deposits. A single bank can lend out 90% of its reserves.

 

The Federal Reserve System robbed the people of their wealth just exactly like it is designed to do. Before the Federal Reserve Act of 1913 individuals held the wealth. After the international bankers came to America and took over the banking scheme government/elite own the wealth. When you claim that the wealth of the country has increased, that means the wealth of the government at the expense of individuals.

The Federal Reserve System was designed to enrich some at the expense of the many. They tell us that, and does it in a manner which not one man in a million is able to diagnose.

 

Sure it it does. History is replete of examples of hyper inflation where money was created too loosely.

It's really basic economics. The value of money -- its purchasing power, is a function of supply and demand like anything else. If you increase the supply of money 10x the price (purchase power) will drop accordingly, by prices rising. Or to put it in a simplistic example, if you have an economy that produces 100 widgets and there is $1000 in circulation, the price of widgets will be $10. If you increase the amount of money in circulation by 10x, the price will increase to $100 per widget. Or play a game of monopoly. At the start of the game, where there is limited money in circulation, the price of properties your trade for money will usually be fairly close to the book price. By the end of the game, where there is lots more money in circulation (e.g. there has been inflation) the price of properties traded for cash will often be multiples of the initial price.

Generally, the more money people have, they higher they will bid of prices for goods and services they want to buy.