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

Feel free to invite Griffin on board to defend his claims. I defend mine.

If the dollar collapses in dust, it is because we had 30 years (excepting the Clinton administration) of governments more interested in diverting more money to the 1% with tax cuts than maintaining a responsible budget.

To the contrary, it is an innovation that has allowed otherwise idle capital to be made available in the economy to individuals and companies to borrow to create tremendous expansion and economic progress.

Without that access to capital, economic growth would be crippled and we'd have nothing like the economy we have today.

I've watched it and noted its errors and distortions in other threads.

I did cite the evidence proving Griffin was complete wrong with his claim that 5% inflation is "institutionalized". Which you did not rebut. Maybe you missed it because it was an edit to my post. Go back and you can see the link.

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Why is it dependent on massive debt?

 

...and Nixon took us off of the gold standard, changing it to worthless paper.

 

Your dollars are worthless?

Please send your worthless dollars to me. I'll pay postage. I like them for sentimental reasons.

 

There isn't a money multiplier effect and banks do not need reserves to create loans and the Fed does not create money that people use in our economy when they purchase treasuries. You are 0-3... lol. All of these statements are backed by reliable sources. Whereas you are your only source, lol. Sorry if I do not find your opinion that credible.

 

why do you believe there is no multiplier effect?

 

This is getting too painful to try to respond over and again to the same things. What I proposed was a different way to run a monetary system based on fiat currency backed by the same nothing it's backed by now (good faith and credit of the US Govt). So let's assume faith remains and money is stable in terms of survivial.

I proposed issuing currency and credits, just as the Fed does now, but with no ties to debt. That's the difference. Money created from nothing, just as it is now (whether spent or credited to a major bank). What would be removed is fractional lending. Banks would borrow (via credit) any money they want to lend. You see that as inflationary, but remember, the loans get paid back to the government. If the government destroys those funds (electronically) as they are received, they remove the inflationary effect along the life of the loan. But in the beginning of the loan both demand for goods (the reason for the loan) and money (from the loan) are created and would likely offset in the aggregate. Someone has to produce those additional goods, otherwise prices would fall from decling demand on over-produced goods. So let's assume there is equilibrium in effect from the loan's demand and resultant supply. When the money is paid back, the bank also pays back the federal government. The ultimate effect is a good required materials and labor to produce, a worker was paid, a company made a profit and an individual spent money to induce that activity. The end result is a piece of wealth is then owned by an individual, money changed hands but was paid back to all parties, and all that is left in the economy is the additional interest that was generated, of which the bank kept for profit (mostly) and the federal government received a small part as well. Where in that chain is anything inflationary?

So let's go to government spending. The same practice is needed, but not via a loan. Instead the government contracts work that we need, but let's use a new bridge to replace an aging one. They take bids after planning it out and they choose the most effective supplier(s). They credit the accounts of those suppliers after awarding a contract. Suppliers go out and buy materials and equipment, hire the appropriate force of people or use existing talent, local contractors are subbed out to do work on that bridge for the suppliers, such as haul in gravel, cement, iron, etc. That leads to further workers needed, fuel purchased, materials gathered and purchased, food supplied to workers, hotels housing workers, etc. All that money changes hands to pay for things, accelerating the velocity of money, eventually deposited as profits by the supplier with the other dollars used as needed, through wages, taxes, procurement, etc. Again, how is that inflationary? In the end we have a brand new bridge able to stand for many years and carry hopefully larger amounts of traffic and untying gridlock on the roadways.

You keep mentioning too much money. Clearly we agree that anytime supply and demand are out of whack, or dollars to demand are out of whack, we have pricing pressures. Too much money for too few goods = inflation. I get it and we agree. That hasn't changed but you keep bringing it up in support of something. I have not once advocated for creating too much money, wasteful spending or anything else inflationary. It would require effective use of funds to keep inflation in check. If it got out of whack, the treasury, under the same Ben Bernanke we have now, could tighten the supply of money via interest rate hikes and slow the economy, which would bring prices back to adequate levels. We do the same thing today through tightening the supply of money in an overheated economy. We're very far from that right now.

QE has been painfully slow and not nearly as effective as intended. We can create money at will without waiting on a future result from an action today. The government could start out small and cautiously, or it could go risky and take on big challenges by using large sums up front for big projects. Either way, demand is created just by putting money in the pockets of workers. And because there is no debt, $30-40B per month gets to stay in the pockets of the public because it isn't needed for debt servicing. That's additional demand in the economy as people replace old cars they have running today that they can't afford loans for, as they move since they've stayed in place for so many years due to the housing market, and on and on. The only difference I have advocated is:

1. The federal government should NEVER pay interest on its own right to monetary sovereignty
2. Contraction to the economy would come via either destroying interest collected on outstanding loans to banks or hiking rates. To spur the economy they could re-spend those dollars, or even loaning them out at lower rates in the future to continue borrowing by banks to re-loan to the public
3. Banks loan money they have or that they themselves borrow from the US Government. Government has no incentive to screw banks and interest would be set at levels that accommodate steady economic growth (unemployment and inflation targets)
4. Banks pay back the government as they are paid back, keeping profits for themselves to do as they wish in the future, which could also mean pumping them back into their businesses to loan without borrowing, further profiting from the transactions
5. Interest rates to borrowers would be within guidelines to prevent the rape of the public we've seen by institutions that lend historically

Banks would compete just like businesses that are not banks. They would earn customers through how they conduct business and satisfy customers, they would borrow and pay back money with interest just like any other business, they would never create money themselves, and they would no longer be special and capable of the type and amount of power to wield over the nation. I think we can all agree the government should be in charge, not the banks.

I advocate for proper use of funds at all times. That's a requirement to me. And I advocate for the Ben Bernanke who is a government employee to be accountable to Congress and appointed by the President, just as he is now. But his badge would be federal that he clips to his shirt with full accountability and disclosure. That's how it's supposed to work anyway.

Source: http://www.michaeljournal.org/lesson4.htm Note: yes, it's a blog, but the same answer can be found in many places via Google

 

I'm just focusing on the Govt now. I'm considering the effect of the changes in banking you've suggested and will write a post about that later.

But what you are saying about the Govt is inconsistent.

1) You are saying that the Govt would not issue debt, but just create money.
2) You agree the Govt can't create too much money or the result will be inflationary.

If the Govt had done that over the past 30 years, it would have had to create another $14 trillion in new money. That would have resulted in very high levels of inflation.

You cannot create $14 trillion in new money and then reign in inflation. How would you do it?

You can't have it both ways.

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LOL thanks for proving my point.

 

Exactly. They create money as it is needed, not as it is desired. Demand for money is not inflationary.

Where did that $14T go? We got money and gave out a debt instrument in exchange, right? What did we do with the money or credit? What became of it?

 

Nice try. 0-3. Keep thinking you are right, lol. You act like a conservative.

 

Creation of money is, in that amount.

The Govt got the money in exchange for new debt. It spent the money. There was no money created, because the Govt spent the money it received from third parties.

That's the difference. What you are proposing is that instead the Govt could have just created a new $14 trillion in money in lieu of issuing debt. That vast increase in new money, as you agree, would result in high inflation.

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Keep making yourself look ignorant. It's entertaining.

 

The Federal Reserve even says it in plain language just so the crazies like Iriemon who push this "money printing" crap can be told they are wrong. Yet Iriemon continues to insist he understands it more than the Federal Reserve, lol. That's a typical conservative move, not sure what he's thinking.

Is the Federal Reserve printing money in order to buy Treasury securities?

http://www.federalreserve.gov/faqs/money_12853.htm

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Your new debating strategy is entertaining. You have been proven wrong, just suck it up and admit it.

 

What a lame and dishonest attempt to try to discredit me by mischaracterizing my statements, a typical Akphidelt tactic.

As usual, your quip says nothing inconsistent with anything I have posted.

 

This is what you posted...

Can't even keep up with your own comedy laced comments.

 

The point of my statement is that of the $16 trillion in debt created since 1980, only a small portion of it, about $2 trillion, has been purchased by the Fed with new money. The rest was purchased by non-Fed investors, and not "monetarized".

But my statement is absolute true. In 1980 the Fed had bought about $200 billion in US Govt debt. Today that figure is close to $2 trillion.

http://research.stlouisfed.org/fred2/data/FDHBFRBN_Max_630_378.png

And the money base has increased accordingly -- more actually, because the Fed has been buying other assets than US Govt debt (mostly MBS).

http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

Nothing in my statement is in any way inconsistent with the Fed quip you posted.

Once again you demonstrate your ignorance.

 

This is not about taxes. It is not about tea parties or faculty lounge discussions. This is about the structural components of fractional reserve banking, & what it does. It ROBS the wealth & labors of the worker, & REWARDS the idle & shifty money shufflers. They do not even loan their own money, to profit from, but only debt, created by illusion. Abe would be appalled. Andrew Jackson would have sent troops. This systematic plundering of the working class is a ponzi scheme, concocted by bankers & an elite ruling class for control of the worker, & to keep him a slave to the ruling elite's excesses. If you defend the current banking system, you are an enemy of the working man & individual freedom. There is nothing in it for him, unless he joins with the scammers in exploiting the other workers.. eventually, he will not have to work, either, but can leech off of others.

Personalities are not the issue. Content of the words are. Your pitiful support of clinton, while condemning everyone else is a partisan distraction, good only for furthering the statist agenda. You dodge the issue of fractional reserve banking, it's excesses, the plundering of the working class, & the slow move to statist domination. I don't care about party politics, or partisan talking points. Lets look at the root issues of our currency. Follow the money. That is where you find the scoundrels.

Yes, there has been economic growth.. but it has been on the foundation of pyramid principles, which have had to up their dosage to keep it going. At some point, collapse is inevitable, if we don't make major structural moves to fix things. Patting people & saying, 'everything's fine, take your soma', is a tactic of the despots, to oppress the workers. It is in line with the corporatists & money grubbing, greedy capitalist exploiters. To claim to care for the working man, yet support the institutions that plunder & defraud him of his labors is the pinnacle of hypocrisy & deception. It is the orwellian 'brave new world', where illusion replaces reality.

We are at the breaking point, imo. We have used debt to artificially 'create' trillions of dollars in currency, with NO basis. There is NO production to justify it. The balance of trade is completely out of whack, & has been for years. The gdp is mere propaganda, ginned up by the bankers & economists to deceive. The only thing that could extend the madness is another round of easy credit.. where people could borrow extensively.. not on their houses, since they lost it when they tightened up credit requirements. But the boom in the late 90's to early 2000's was due to easy credit. People could buy a house with nothing down, which infused the system with lots of new money. The housing crash ended that, as trillions of dollars was LOST. It was all paper losses, just like the paper credits that they represented. But now, with no new means of buying a house, that means of money creation was over, & we have to look at the consumer market to keep it going.

But we end up with an economy built not on production, hard work, & entrepreneurial ventures, but money shuffling, stock market gambling, & 'financial sector' activity. Nothing is produced by these thieves, nor do they really 'partner' with those who do. It is a house of cards, poised to collapse. The govt cannot control them, as they control the govt. The longer this goes on, the more the working class will be reduced to poverty, & the wider the gap between the elite money shufflers, who do nothing, & the workers, who do it all. Oh, the money shufflers will enlist the very poor, or shiftless, to vote for their scams, promising free stuff. But they do not produce it. The worker does. The money shufflers are just dependents.. worse, leeches on the production of a nation. They are worse than the welfare queens who make babies for money.

I've posted this graphic before. It is clear & accurate. It does not include fractional reserve banking, but only production. But if you follow the money, you can see the result of the explosion of debt has been an increase in the division between poor & rich. Why is that?

 

How does it ROB workers?

What ROBS workers is increasing their taxes while you cut taxes on the 1%, crush the unions that would give them a better wage, stomp on overtime laws that would increase their pay, and let the minimum wage fall below inflation levels.

If you want to stop ROBBING workers reverse prohibition.

Clinton took us from a then record deficit, proportionately bigger than it is today, to a surplus, created 22 million jobs, oversaw real increases in income in all income groups, took a 7.8% unemployment rate to 4.2%, and presided over the longest boom in post war history and the strongest economy since the 1960s.

With a tax increase on the wealthy that conservatives told us would wreck the economy and destroy jobs. That was pitiful, could they have been more wrong?

Fractional lending has been a great system. It's powered two centuries of unparalleled economic growth. Why do you have a problem with that?

Why is collapse inevitable?

The currency isn't supposed to be production. It's a means of exchange.

If you have a problem with the debt write your Republican Tea Party reps and tell them to stop worrying so much about the 1% and compromise on increasing tax revenues to get the deficit down.

Gee, given that conservatives cut the investment tax to only 15%, less than half the up to 35% plus FICA rates people who earn and produce pay, I wonder why that would happen?

Isn't it conservatives who always talk about how low taxes create incentives? Our tax structure incentivizes "money shuffling, stock market gambling, & 'financial sector' activity."

The answer is to make the tax on "money shuffling, stock market gambling, & 'financial sector' activity" the same as earned income and production.

But the 1% would never let the Republican Tea Party go for that, would they?

Given the explosion of debt was cause by cuts in top income tax rates, elimination of the estate tax, and cuts to investment tax rates, it's no mystery at all.

I'm glad you support and care about workers. Help them by supporting stronger unions, higher minimum wage, lower the SS tax rate and remove the $113k income cap and investment income exemptions, expand and enforce OT laws, increase top income tax rates, and increase estate and investment taxes.

 

Bingo. It SPENT the money. It took funds that were not previously in the economy and it introduced/injected them. It matters not whose money is added to our economy, nor how it comes about. The key is those $14T were spent in our economy so they became the holding of banks, businesses and individuals, and some of it returned to the government as taxes.

Right, instead of us borrowing and using other people's money at interest, we create it, spend it, and destroy it when we need to calm the economy. The vast increase has no concern for where it came from and the economy cares not whether it was printed or borrowed.

Imagine you have a money printer and you own the only one. You decide how many dollars go out, who gets them and when. But you have to do it through me, a separate entity that ensures you pay interest to anyone who "borrows" your money. My friend is the only customer and he needs money. I direct you to give him money and I, the federal reserve, buy the "debt" in order to allow you to print money. Since I bought the debt (the piece of paper you call a debt instrument) you pay me interest when due. But since I'm the federal reserve it's my obligation to give you, the government, the interest money. So you paid me to pay you your own money (authorize cash creation) so my friend can have money, which he got for next to nothing and plans to loan at interest to the public to make lots of money off of. That's our current system. Why is that the most efficient way when you could have just printed it with no consequence? The winner is my friend and we forgot that the interest money on the debt was never created, so that's an additional debt we'll need in order to satisfy the first debt. And the interest my friend the bank is charging his customers, from the nearly free use of your money, hasn't been created, so that's additional debt required as well.

So who is winning? Our system works, but it's a convoluted mess that could be efficient and controlled as it was intended. That's all I proposed.

 

yes and inflation reduces debt...

 

Bingo what? That is absolutely wrong. The didn't take funds that were not previously in the economy. They took funds that were previously in the economy from the individuals and governments and corporations that bought the bonds. No money was created in this transaction. It was simply a transfer.

That is fundamentally different from what you are proposing, which is the creation of entirely new money, which can cause inflation, and an additional $14 trillion absolutely would.

Of course it matters. The money for the bonds came from the holdings of banks businesses and individuals, and after it was spend by the government it went back to banks businesses and individuals. There is no money creation going on.

Contrary to what you've proposed.

And instead of a money transfer, which is not inflationary, you're talking about creating trillions in new money, which definitely is.

Sounds great. I'd print us up a few billion each. Though since we are the entire money system, inflation would shoot thru the roof.

 

Perhaps I stated it incorrectly. I meant foreign investment buying debt. I did fail to include that and it invalidates what I said by doing so. My point was that we can introduce debt dollars from foreign investors and spend them in the economy. Is that inflationary since they are newly injected? They are not. Just like they would not be in my scenario. Obviously a shift from Americans (business or consumer) to the government to spend is just recycling and that was not what I envisioned. That's just incidental interest that causes further debt to come up with the interest. But a focus on foreign borrowing, such as we hear so dramatically from the media from China (and they leave out money we borrow from Japan for some reason), does not create inflation although it is clearly new money that we trade for a piece of paper. If those new dollars do not cause runaway inflation, why would new sovereign money?

In the other scenario, you'd destroy the system because there's no demand for your money and you are creating no economic demand for them, resulting in inflation. Same point I've been making all along.

We may just have to agree to disagree. Creating money that contributes to economic activity is not inflationary. Debt is used as smoke and mirrors but serves no real purpose if we had no interest charged for use of our own money.

 

The Fed says no such thing. I find you a little less credible than a hamster. No offense.

 

..and robs savings

sure, if you want to count on inflation, it can be useful as you build massive debt to pay back with cheaper future dollars. But this encourages irresponsibility, as people get over their heads in debt, and some go under. It would be better to provide a stable currency, that is consistent year after year, so people CAN save. Not all can be money shuffling wall street types, getting rich off of other people's labor.

 

So many like him have felt the same way. The interesting part is once we understand it, we still support it.

http://www.michaeljournal.org/lesson4.htm

 

That is exponential. If there is 3% this year, then next year's 3% is a bit larger than this year's assuming it grew that much. If the base keeps getting bigger, then the wealth that % represents gets bigger too. So basically, you have ever escalating amounts of debt, a requirement for an exponentially growing economy, and any stopping causes the amount of money to shrink. Great idea, so this system working is dependent on us being able to pull off what we did in the 20th century forever. Good luck with that.

 

The Fed answers it specifically

Is the Federal Reserve printing money in order to buy Treasury securities?

No.

http://www.federalreserve.gov/faqs/money_12853.htm


Your stubbornness is amusing. Your apology will be accepted though. Thanks.