A Mental Walkthrough on how the United States monetary system actually works!

Discussion in 'Political Opinions & Beliefs' started by akphidelt2007, Dec 7, 2011.

  1. akphidelt2007

    akphidelt2007 New Member Past Donor

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    Here's a fun mental activity to start understanding how the country works. Try to conceptualize starting a country from scratch. You have an untapped territory and 1 million humans at your disposal. So now you want to create a fiat currency system exactly like ours. There is $0 in the economy.

    So now you have a million people who need money in order to transact. So the first thing you want to do as the country creator is to build an infrastructure. You take 100,000 of your humans and pay them to build roads, bridges, highways, railroads, buildings, etc. So you want to pay them $1 billion.

    But wait a second... you don't have $1 billion. So what do you do? There are two options... you can take seigniorage of your currency by just issuing it to the citizens. This would mean if you spent $1 billion there would be $1 billion of interest free money in the economy.

    Now that sounds good. But now how do you influence monetary policy? The only possible way in this scenario would be to tax your citizens a variable rate in order to best control inflation. This would be a mess and tax rates would fluctuate on a monthly basis.

    So now what do you do? You introduce the currency through debt. The only way to do this though is to borrow it. But how can you borrow money that does not exist? You set up a bank (aka Primary Dealer)... that will lend you the money. The actual controlling structure to your economy is the banking system. So the banks lend you $1 billion and you give the banks $1 billion in Treasuries which is an interest bearing debt instrument. Your country is now in debt $1 billion. The only way to get out of debt in this scenario is to pay the banks back $1 billion.

    What you gotta understand here now is no one owns this money. The banks lent it in to existence, so if you pay the banks back, based on accounting identity, the money disappears just like it appeared. Now we have a base for pumping money in to the economy. You borrow $1 billion from the banks, give them $1 billion in promises, and give $1 billion to the citizens.

    Now a common misconception is that in America the Federal Reserve creates our money. But let's see how this is not entirely true. In your country the banks have $1 billion in ASSETS, they do not have $1 billion in money. So you create a central bank (aka the Fed). The Fed's responsibility is to make that $1 billion usable in the real economy. Because think about it realistically... right now your citizens have $1 billion in bank accounts but banks have $0 to turn those deposits in to currency. So the Fed creates $500 million in currency/reserves and purchases $500 million of debt from the banks. So you tell the banks that they are not allowed to lend their reserves. Reserves are only used to turn deposits in to currency and for interbank transactions to make sure you have enough cash/reserves on hand to give to your customers.

    So now that $500 million is the basis for fractional reserve banking. Now banks can leverage that $500 million. That is how the Fed influences monetary policy. They do not create private sector money, they do not ever give private citizens money. They simply give the banking system the ability to leverage more money.

    So now what does your country look like? The private sector has $1 billion in their accounts, the banking system has $500 million in reserves and $500 million in Treasuries, the Fed has $500 million in Treasuries, and the country has nothing. They owe $1 billion to the banks and to the Fed. The Government of the United States represents you in this scenario. The essential creator of the country. Replace the word Government with country and it starts making more sense. The country is $1 billion in debt because the country created $1 billion.

    And think about it. As the creator and currency issuer, you are never broke, you never run out of money. If you need $1 billion more to build a military the next year, you simply borrow $1 billion and you are now $2 billion in debt. So no matter what the only money that exists (outside of bank loans) is money the Government (aka the country) has spent. We simply have chosen to introduce the money via interest bearing debt instead of through non-interest bearing seiniorage.

    If you want to balance your budget... then you are essentially saying that $1 billion is all that will ever exist. No matter what the population increase is or the increase in productivity, etc. If you run a surplus, you are taking more money from the private sector than you are giving them. Essentially, you are taking away from the $1 billion you created and there is now less money in the economy.

    The public portion of the national debt is simply the amount of money the Government (aka country) has spent (aka created).

    This is just the basis for your new country. Later we will go in to taxation, inflation, deficits, balance of trade, GDP, and money supply. Lots of fun to be had in the future!
     
  2. maat

    maat Well-Known Member Past Donor

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    The purpose of currency is to enable the exchange of goods and services in a more efficient manner.

    The fractional lending system was designed to allow for growth, but without proper management can lead to improper allocation of resources.

    Monetary policy should be based on growth and the value of assets in the country and not based on the whims of government expenditures. The only time government should borrow money is in order to defend the country, not to fulfill unconstitutional socialistic promises.

    IMO, monetary supply should be determined by population. If the population has grown, you increase the money supply. You could either do this through bank lending(using banks as middlemen for a small fee) or, by my preference, just send an even amount to all taxpayers.

    There is no reason why we should be talking trillions or billions. If a hamburger cost 50 cents many years ago, it should still cost 50 cents(with exception to normal market forces and available resources).
     
    Ethereal and (deleted member) like this.
  3. akphidelt2007

    akphidelt2007 New Member Past Donor

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    I think you missed the purpose of the example. The point is that the Government doesn't actually "borrow" money. In our system we require the Government to "borrow" money. That doesn't mean that they are borrowing existing money. If the Government never ran a deficit, the country would never have any more money unless the Fed's increased the reserves in the banking system.

    But eventually the Fed's would run out of Govt debt and the country would be dependent on loans from the banking system.

    And there is literally no reason why a hamburger should cost the same now as it did 50 years ago.
     
  4. thediplomat2.0

    thediplomat2.0 Banned

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    Correct. The value of the dollar has actually lost 95% of its value since 1913. What costed you $1.00 in 1913 now costs you $22.87.

    The reason why we required the government to borrow money was because our original currency had intrinsic value. It derived from silver. Therefore, we had a limited amount of silver reserves, and the money supply had to be controlled.

    However, when we adopted a fiat currency, which is backed by no intrinsic value, government would no longer "borrow" money, but merely create it and circulate. Technically, the only way we can run out of federal reserve notes is if we run out of paper. What can occur is the dollar will essentially lose all of its value.
     
  5. akphidelt2007

    akphidelt2007 New Member Past Donor

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    Everything you just said is 100% false except the inflation numbers. What you guys always fail to understand is that there is MORE MONEY. Silver and gold have absolutely no intrinsic value in regards to currency and suffer through the same rigors of economic fundamentalism as fiat currency.
     
  6. akphidelt2007

    akphidelt2007 New Member Past Donor

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    And what do you mean a dollar will lose all it's value? Inflation simply shows price differential between two periods of time. It does not mean the dollar is losing value, it simply means 1913 dollars are worth less than 2011 dollars. That is simply a ridiculous and severely uneducated statement.
     
  7. Black Monarch

    Black Monarch New Member

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    Wait... the United States monetary system actually works?
     
  8. akphidelt2007

    akphidelt2007 New Member Past Donor

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    I guess for some of us
     
  9. thediplomat2.0

    thediplomat2.0 Banned

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    Sorry for not utilizing the correct term. I meant to say purchasing power. The current dollar has 95% less purchasing power than the 1913 dollar.
     
  10. Roelath

    Roelath Well-Known Member

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    Silver & Gold aren't exactly common metals because if they were I could go to the local hardware store pick some up fairly easy for a cheap price. Trees on the other hands... I happen to cut down around forty every year just to be safe during the winters and they're quite common. There is definitely more Trees/Ink available so I guess you're right on the part dealing with more money being present. But you're definitely wrong on saying he is 100% false because your words provide nothing and if you cannot provide evidence otherwise your case is null. You made the post so expect to back your sources up considering we're dealing with Economics and not something opinionated like the Death Penalty.
     
  11. Roelath

    Roelath Well-Known Member

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    http://www.thetrumpet.com/?q=3037.1530.0.0

    "Between 1783 and 1913, the U.S. dollar was a real store of wealth. Except during war-time periods, inflation within the U.S. was essentially zero. If you saved one dollar in 1800, a hundred years later you could still purchase approximately the same amount of goods with that dollar.

    But then in 1913 something changed, and the U.S. dollar started down a long, steady road of dollar devaluations. Using the U.S. government’s own figures, to obtain the same amount of purchasing power of $100 in 1913, you would need $2,038.38 today. "
     
  12. akphidelt2007

    akphidelt2007 New Member Past Donor

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    If you had $100 in 1913 and you didn't do anything for 88 years to increase the amount of money you have then you would have 95% less purchasing power (taking your data that I have not checked) with that same $100. Why do you think that $100 should be worth the same? What about all the people who took their $100 and invested it, started businesses, and earned more money? Should they suffer because you were too lazy to make more money?

    The problem with you people that have this innate fear of inflation is you always forget the other side of the equation. THERE IS MORE MONEY. Real GDP per capita has gone up substantially since 1913. This means that people have more money and can purchase more goods than in 1913. Just look around. We are the biggest consumer in the entire world and we produced over a quarter of the world's output last year.

    Dwelling on how much your 1913 dollars are worth is useless. If you are talking about 1980 to 2011 than you would have much more of a case since real wealth for the middle class has actually declined. But between 1913 and 2011 it has sky rocketed. Your case has no substance.
     
  13. akphidelt2007

    akphidelt2007 New Member Past Donor

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    All you focus on is one side of the equation. The purpose of inflation is to motivate people to earn more money and put their money to use. The reason Taco Bell employees make $20k a year is the same reason a loaf of bread now costs $3. Inflation is and will always be a necessary evil if you want maximum productivity.

    Here is a chart of real gdp per capita since 1790. Now tell me that people aren't better off?

    [​IMG]
     
  14. Roelath

    Roelath Well-Known Member

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    Your point is... Simply because someone caught you saying something stupid you call their evidence irrelevant by saying others used their money well for the period of time the US Dollar has been around. Oh Bravo good sir I'm glad you can simply brush aside evidence of the US Dollar dropping like a stone and losing its own power to actual materials. You know things with actual value and aren't backed by how many trees/ink the Federal Reserve can scrounge up.
     
  15. Roelath

    Roelath Well-Known Member

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    The purpose of FIAT system is to allow the US Government and Corporations to be given easy money in which those who don't have power & sway get (*)(*)(*)(*)ed. It's simply an exchange/tax on the people themselves invisibly so the said Governments/Corporations can bail themselves out of problems and not handle their finances well. It really is nothing more than a Ponzi Scheme run by the Government itself and a trap for anyone not part of the "inner" circle. Notice the bailouts? I'm glad the Corporations got bailed out while the people suffered... Oh that's right the Dollar also lost value at the same time so people were forced to cutback more. Bravo to the US Government and their Corporations for laying down a solid plan to steal from innocent people without their knowing by having Printing Machines (*)(*)(*)(*)'m over.
     
  16. Black Monarch

    Black Monarch New Member

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    Great. Now divide that by debt per capita and see what happens.

    We're living on borrowed prosperity.
     
  17. thediplomat2.0

    thediplomat2.0 Banned

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    And the purchasing power of the dollar may be even greater than I suspected:

    http://www.usinflationcalculator.com/
     
  18. Roelath

    Roelath Well-Known Member

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    No no no no that just means that ummm your evidence is irrelevant and that those who didn't spend were simply unwise to umm.. yea.
     
  19. akphidelt2007

    akphidelt2007 New Member Past Donor

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    Every dollar in existence in a fiat economy like ours comes about through debt. We didn't actually borrow our own made up currency. Read the OP, it will shed some light to you one what the national debt actually is.
     
  20. thediplomat2.0

    thediplomat2.0 Banned

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    I'm wondering if the OP has read any of the works of Hayek or Friedman. Even Ben Bernanke considers himself a monetarist, although he has turned his back on his principles.
     
  21. freakonature

    freakonature Well-Known Member

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    What are you talking about? Those that invested, started businesses, and earned more money still have less actual worth due to inflation. How does zero inflation penalize those increasing their monetary holdings?

    More money means really nothing. Folks have more discretionary income due to innovation and increased productivity. Worth for worth transactions are not affected long-term by an increased money supply. Theories of lubing the wheels of the economy with expansions in the money supply to combat recessions is arguable, but MORE MONEY does not equal more worth.

    Real wealth increasing have nothing to do with the vast devaluation of our currency.
     
  22. akphidelt2007

    akphidelt2007 New Member Past Donor

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    You still aren't making any sense. What do you mean "dropping like a stone". You mean the dollar you had in 1980 is worth less than the same dollar you have in 2011? Big friggin whoop... go work at taco bell and you will be making more money now than a manager in 1980. Like I have said, you are only focusing on one side of the equation.
     
  23. Roelath

    Roelath Well-Known Member

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    You're only focusing on the fact there is only an upside to the entire equation and that this money supply goes to infinity with absolute chance of it becoming wall paper. I'm suuuuure all the FIAT currencies of the World have been so successful in History and clearly the US Dollar is the exception to the case right? Go write something more so I can snicker behind my monitor with your clear showing of having no rational thought process.
     
  24. freakonature

    freakonature Well-Known Member

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    Relative to what? The products that you buy may have decreased as far as the amount of value you must trade for them, but your pay has not increased just because you receive more dollars.
     
  25. thediplomat2.0

    thediplomat2.0 Banned

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    We are obviously on two sides of the argument, unless you choose to explain the negative side effects of a fiat currency.
     

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