All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Some fraction of it.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
Please don't go all goldbug on us.
I'm just answering the question. I don't think that commodity money is feasible in a modern economy, but I also don't think it's fair to equate fiat money with actual existential money.
No, I made no such statement. However, to understand how to fix the problem, one must first understand the problem, which in our case, is a multitude of problems ranging from deregulation to overproliferation of bad business.
And government interference in the lending market aggressively aimed at home ownership for the masses.
What?
It makes the government look good when homeownership is at an all time high.
I'm not aware of specific government meddling, but I DO know that the government could have seen some of this crisis coming, but did nothing about it, because it would have meant clamping down on loans to the disprivelaged, which would have looked bad, politically.
Well, the huge push in the early 2000s for everyone to own a home (whether they could pay for it or not) basically paved the way for relaxed regulations on first-time home buyers, though a lot of commercial developers took advantage of the same relaxed atmosphere.
Yup.
We really need some level of mandatory economics classes in this country. Folks need to understand that bubbles do not last forever.
But it's the start of a golden age for the repo business. An age that shall never end.
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All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Some fraction of it.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
Your 1000 bucks is now 1900 bucks.
Then, because 1900 bucks isn't doing anyone any good for THIS quarter's balance sheet, I'm going to take that $900 that I already loaned out, bundle it with $Texas that I also already loaned out, and sell that $Texas900 on the derivatives market for $Unicornblood900. Because I can now report $Unicornblood900 on my balance sheet for the quarter, our stock price goes up and I get another gold back scratcher.
well, there is no existential money being that money is an idea
:P
Well, yeah, I guess it depends on what you'd rather irrationally value, a shiny metal coin or a signature from a really big government that says it's worth a lot.
well, there is no existential money being that money is an idea
:P
Well, yeah, I guess it depends on what you'd rather irrationally value, a shiny metal coin or a signature from a really big government that says it's worth a lot.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
Let's just rename our currency "Tinkerbells" and be done with it.
We'll call them 'bells for short, and some raccoon will own your mortgage.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
Your 1000 bucks is now 1900 bucks.
Happily, concerns over the fractional reserve banking system have generally shifted into the fringe over the past two decades. I think only the hardcore Austrians and goldbugs still worry about it; everyone else has realised that the crucial variable is the money supply, not the fractional reserve.
The required reserve of US banks is 10% - and there is an amazing amount of angst over this on the Intarwebs - but in the mainstream this is regarded as pretty backward. The required reserve of the UK and Canada is zero, for instance.
With monetary policy it is generally a benefit to have as simple a control model as possible. Tweaking the fractional reserve ratio sucks for controlling the money supply: where's a bank supposed to scrounge up millions of dollars when you need to raise the ratio? Call back debt and cause chaos? Tweaking the central bank interest rate is much more effective. This is a simple concept that hasn't been challenged by the recent crisis, by the way.
People have to have faith in [their] work too. Not just to make money, but to be actually accomplishing shit.
The goal of the wealthy is to be completely isolated from everyone. To never have to work or be a part of a community, and have all the worlds luxuries, pleasures, food, water, matter, energy, and everything good in the world brought to them in tubes. For them, that is the meaning of perfection.
It's frankly odd to explain the dramatic surge in income inequality in the US as a consequence of the banking system: it happened in the finance industry, yes. But income inequality also surged in other industries from law to academia to medicine: the top in the field now get paid many more times the mean wage than they did, say, thirty years ago.
This seems to be true of multiple professions, really. I haven't found any explanation for the shift to be satisfactory, myself - but blaming a shadowy manipulation of the money supply just doesn't pass the smell test. The conspiracy thread is over that way.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
Your 1000 bucks is now 1900 bucks.
Happily, concerns over the fractional reserve banking system have generally shifted into the fringe over the past two decades. I think only the hardcore Austrians and goldbugs still worry about it; everyone else has realised that the crucial variable is the money supply, not the fractional reserve.
The required reserve of US banks is 10% - and there is an amazing amount of angst over this on the Intarwebs - but in the mainstream this is regarded as pretty backward. The required reserve of the UK and Canada is zero, for instance.
With monetary policy it is generally a benefit to have as simple a control model as possible. Tweaking the fractional reserve ratio sucks for controlling the money supply: where's a bank supposed to scrounge up millions of dollars when you need to raise the ratio? Call back debt and cause chaos? Tweaking the central bank interest rate is much more effective. This is a simple concept that hasn't been challenged by the recent crisis, by the way.
The purpose of keeping a fraction (rather than dropping to zero) would be to instill faith in depositors, not as a regulatory measure.
Considering the crisis of faith that folks are having in the system, A) it clearly isn't working, and we do need SOMETHING to help with faith.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
Yeah, they had a segment on NPR explaining the nature of belief as it relates to currency and when the lightbulb finally clicked, there wasn't enough in the world for it.
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
Yeah, they had a segment on NPR explaining the nature of belief as it relates to currency and when the lightbulb finally clicked, there wasn't enough in the world for it.
It's not surprising.
For a normal, rational person to look at the situation, and realize that the only thing keeping us from living in total anarchy and Mad Max Land is the equivalent to Dorothy in Wizard of Oz closing her eyes, wishing really hard, and clicking her heels three times is enough to make you want to build a bomb shelter and hide for your life.
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DrakeEdgelord TrashBelow the ecliptic plane.Registered Userregular
All that money we thought we had doesn't exist in any way shape or form, and when we thought we were losing it we decided to make up more money?
No, we decided to make up more money before we even started losing it.
Was there ever a point where money actually existed?
Paper money? It existed back when it was backed by gold in Ft. Knox.
It's kind of gotten fuzzier and fuzzier as people have stretched it and made balloon animals with it, though.
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
Yeah, they had a segment on NPR explaining the nature of belief as it relates to currency and when the lightbulb finally clicked, there wasn't enough in the world for it.
It's not surprising.
For a normal, rational person to look at the situation, and realize that the only thing keeping us from living in total anarchy and Mad Max Land is the equivalent to Dorothy in Wizard of Oz closing her eyes, wishing really hard, and clicking her heels three times is enough to make you want to build a bomb shelter and hide for your life.
Yeah, it's like realizing that you may as well use the Dungeon Master's Guide to run your system.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
Your 1000 bucks is now 1900 bucks.
Happily, concerns over the fractional reserve banking system have generally shifted into the fringe over the past two decades. I think only the hardcore Austrians and goldbugs still worry about it; everyone else has realised that the crucial variable is the money supply, not the fractional reserve.
The required reserve of US banks is 10% - and there is an amazing amount of angst over this on the Intarwebs - but in the mainstream this is regarded as pretty backward. The required reserve of the UK and Canada is zero, for instance.
With monetary policy it is generally a benefit to have as simple a control model as possible. Tweaking the fractional reserve ratio sucks for controlling the money supply: where's a bank supposed to scrounge up millions of dollars when you need to raise the ratio? Call back debt and cause chaos? Tweaking the central bank interest rate is much more effective. This is a simple concept that hasn't been challenged by the recent crisis, by the way.
The purpose of keeping a fraction (rather than dropping to zero) would be to instill faith in depositors, not as a regulatory measure.
Considering the crisis of faith that folks are having in the system, A) it clearly isn't working, and we do need SOMETHING to help with faith.
Hm, I was getting my countries mixed up. Some countries use the reserve as a regulatory tool. The US uses it as a mechanism and uses treasuries as the tool.
It has nothing to do with faith; banks in countries with nil requirements have no issues attracting depositors. No issues which US banks don't, anyway.
The answer to the need for faith from the late 90s was to attempt to separate economic policy from politics as much as possible: hence the degree of independence of the Bank of England. The obvious American counterpart would be the Fed under Greenspan, yes. The Fed itself is not as independent as is desirable, but Greenspan wielded such a large amount of influence that this was not a concern.
The concern is not "politicians are stupid and greedy spenders" but rather the ability of the bank to make credible commitments to policy, even in the face of potential future political opposition. Hence Greenspan.
All this falls apart when the nominal interest rate hits zero, which reduces the role of monetary policy. Inflation still works, but nobody likes the idea of high inflation. Fiscal policy still works, but while politicians can spend or not spend, they can't make credible commitments to do either in the future.
The parts of 'the system' that have been discredited by the crisis are not the ones that you're taking aim at, I'm afraid. Bubbles burst across the 90s and didn't necessarily bring banks with them. And banks occasionally folded and didn't bring the entire banking industry to its knees.
But as far as the whole role of the Federal banking system goes - it's true that 'the system' sucked at absorbing a big shock - and this was a very big shock, I think you'll agree - but what system is? The errors were in allowing such a shock to occur in the first place, which is why the mainstream economist angst is focused on the role of regulation in banking, not overturning the Federal Reserve system.
There's nothing more magical or make-believe about the money system than there is about Robert's Rules. It's just an established set of rules that everyone follows. Practically everything we do is governed by agreed-upon systems of rules. Hell, government and companies are as make-believe as the money system, they're just on a smaller scale and easier for the common person to understand.
Saying, "Oh noes! What if everyone decide not to believe in money? We're fucked!" is like saying "Oh noes! What if everyone decides to stop listening to the president? We're fucked!"
There's no special danger of societal collapse because everyone suddenly realizes money is fake.
EDIT: In my opinion, there's no danger of the financial system completely collapsing here. That happens when faith in the administration of the system is shaken to the point that the system seems incapable of function, such as in periods of political upheaval like coups.
Arguing that money is useless because it depends on mutual belief is rather like arguing that traffic laws are useless because they rely on mutual coordination.
Oh no, everyone might be driving on the other side of the road today! How will I know which side to drive on?
There's nothing more magical or make-believe about the money system than there is about Robert's Rules. It's just an established set of rules that everyone follows. Practically everything we do is governed by agreed-upon systems of rules. Hell, government and companies are as make-believe as the money system, they're just on a smaller scale and easier for the common person to understand.
Saying, "Oh noes! What if everyone decide not to believe in money? We're fucked!" is like saying "Oh noes! What if everyone decides to stop listening to the president? We're fucked!"
There's no special danger of societal collapse because everyone suddenly realizes money is fake.
EDIT: In my opinion, there's no danger of the financial system completely collapsing here. That happens when faith in the administration of the system is shaken to the point that the system seems incapable of function, such as in periods of political upheaval like coups.
Normally I'd agree. The ONLY reason I think that there is any sliver of a risk of anything these days is the 24-hour news cycle, and how it likes to get people worked up.
Arguing that money is useless because it depends on mutual belief is rather like arguing that traffic laws are useless because they rely on mutual coordination.
Oh no, everyone might be driving on the other side of the road today! How will I know which side to drive on?
I dunno. When I come to a 4-way stop, it becomes clear pretty quickly that traffic laws don't do all that much.
Sorry, but given that most people believe that their currency is worth something and have been brought up to believe that something isn't valuable just because they want it to be, being told just the opposite is true tends to have a bit of a pants-shitting effect.
There's nothing more magical or make-believe about the money system than there is about Robert's Rules. It's just an established set of rules that everyone follows. Practically everything we do is governed by agreed-upon systems of rules. Hell, government and companies are as make-believe as the money system, they're just on a smaller scale and easier for the common person to understand.
Saying, "Oh noes! What if everyone decide not to believe in money? We're fucked!" is like saying "Oh noes! What if everyone decides to stop listening to the president? We're fucked!"
There's no special danger of societal collapse because everyone suddenly realizes money is fake.
There's a difference though.
Unlike the President, a company, as well as money itself, has a value with regulates every aspect of your life.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
Sorry, but given that most people believe that their currency is worth something and have been brought up to believe that something isn't valuable just because they want it to be, being told just the opposite is true tends to have a bit of a pants-shitting effect.
There's nothing more magical or make-believe about the money system than there is about Robert's Rules. It's just an established set of rules that everyone follows. Practically everything we do is governed by agreed-upon systems of rules. Hell, government and companies are as make-believe as the money system, they're just on a smaller scale and easier for the common person to understand.
Saying, "Oh noes! What if everyone decide not to believe in money? We're fucked!" is like saying "Oh noes! What if everyone decides to stop listening to the president? We're fucked!"
There's no special danger of societal collapse because everyone suddenly realizes money is fake.
EDIT: In my opinion, there's no danger of the financial system completely collapsing here. That happens when faith in the administration of the system is shaken to the point that the system seems incapable of function, such as in periods of political upheaval like coups.
Normally I'd agree. The ONLY reason I think that there is any sliver of a risk of anything these days is the 24-hour news cycle, and how it likes to get people worked up.
Actually, if anything, what protects the financial system is its arcane and ridiculously complex nature. The 24-hour news cycle can't penetrate the vagaries of the really deep shit, so it just recycles the few things that it knows will resonate with the target audience instead. MSNBC talks about the insolvent and irresponsible corporations and Fox News talks about how socialist the Obama Administration is.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
I'm uncomfortable with this statement. It feels kind of like saying that we need centimeters in order to know what inches are worth.
Value (or utility, if your prefer) is the real constant here, not dollars.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
Happily, iPods don't become valueless just because someone pulls the money rug out under it.
I grew up regularly dealing with multiple currencies with shifting exchange rates (occasionally rapid - 1997 and all) - you'll get used to it. Honest.
The problem is only in international trade: suddenly the vegetables from ten thousand km away are stuck in a warehouse somewhere! Argh! But such problems only arise with dramatic shifts in the value of fiat money, which then only arise from changes in policy, not changes in beliefs. Changes in beliefs are not rapid.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
Oh no, not this again. Look, if you distrust the US dollar, there's a simple solution. Use Yen. Or Euros. Or even the RMB. Or e-gold.
Want to create your own currency? Fine. Don't issue fucking coins! That's where the clash with laws trying to restrict counterfeiting occurs - note that it's also illegal to create coins similar to foreign currency, 18 USC 486 has a very obvious purpose against counterfeiting, not restricting alternative currency.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
See, this is what you need to tell the gold bugs and Rondroids: our currency is backed by metals. Not by silver or gold, but by lead and uranium.
I've never seriously studied economics, so I might be way off on this, and if so I encourage anyone here to clarify the situation. I saw this series of videos on YouTube (sort of long): Where does money come from? The video claims that the vast majority of money in circulation comes from loans from central banks. The video claims that this system is unsustainable because there is never enough money in circulation to pay off the loans from the central banks plus interest (when the interest rate is non-zero).
How does this work? Does the central bank expect (and allow) some banks to default on the loans? Is the money paid back to the central banks in interest put back into the economy through the salaries of the people working at the central bank? Or does the system just rely on endless exponential growth, so that old loans can be paid back with the money from new loans? I hope it's not the last one, because unless we start building a Dyson sphere I don't see how worldwide exponential growth can continue much longer.
Alright, I guess I'll get a bit more into the Federal Reserve system and banking in general to answer the OP, as well as some of the things it's been doing.
On the very basic level, banks operate by taking in money in the form of deposits and then in turn loaning most of that money back out, such as business loans or for mortgages. The loaned money should have a higher interest rate than the deposits, and differences between these two is how a simple bank will be making most of its money.
However, one of the central issues of banking is the matter of reserves. Depending upon the nature of the deposits, the depositors will be able to demand their money back immediately, but banks typically cannot demand that the people they loaned that money to pay off their loans immediately so they can pay back the depositors. If too many depositors want their money out of the bank at once, which is called a bank run, then a bank that doesn't have enough reserves or a means to get reserves won't be able to pay off all the depositors. This sort of problem has occurred a lot over the history of banking, and can kill a bank even if it is fully solvent and the value of its loans is higher than how much it owes to depositors (or in turn, to other institutions it got loans from).
This is one area where the Federal Reserve comes into the picture: they regulate the fractional-reserve banking system through reserve requirements. This means that they require banks to hold reserves of a certain percentage of certain types of deposits, while the remainder they can loan out. These reserves are in some combination of physical currency and federal funds, which are balances held at the Federal Reserve bank. As from the wikipedia page, the reserve requirements for net transaction accounts for large institutions is 10%, meaning the bank by law has to hold 10% of the value of these accounts in reserves.
The typical way the Federal Reserve implements monetary policy is by influencing and interacting with the market for these federal funds. Some banks are in need of federal funds to meet the reserve requirements, while others have excess that they are not in need of immediately, so they will lend them to each other. These loans are typically for a very short term, like a day. The interest rate on these overnight loans in the federal funds rate, and this the main interest rate that the Federal Reserve sets targets on and tries to manipulate. (Aside: keep in mind that there isn't just one "interest rate", there are many different ones for all sorts loans and bonds and assorted financial instruments affected by their different terms and risks and timelines. The different interest rates are often interrelated however, due to relationships between the underlying liabilities and the state of the financial system).
How does the Federal Reserve do this? The main way is through open market operations, where they can buy up government securities (in our case, US Treasury bonds and notes that finance the US Federal Government debt) or other financial instruments. Buying these up increases the money supply by increasing the amount of federal funds available to banks, which they can then turn around and increase how much they can loan out, and affect the federal funds rate by altering the supply. It can also loan out federal funds directly to institutions with the discount window, which is higher than the target federal funds rate and is usually discouraged in favor of interbank lending.
In terms of the current economic crisis, the Federal Reserve has expended it's typical response to recessions by lowering the federal funds rate, as it is now effectively zero. So it has started moving towards altering what it purchases in open market operations, through quantitative easing, and more directly involving itself in the matters of financial institutions. The first, which has been occasionally called "qualitative easing", is the Federal Reserve buying up things other than the standard of treasuries in open market operations, and in this case these things are far riskier and less liquid. The original stated intent of Treasury Secretary Paulson's TARP bailout program was somewhat similar to this: use a bunch of government money to buy up the illiquid mortgage backed securities and other toxic waste that was clogging up the arteries of the financial system. The effectiveness of this is very questionable and hard to determine.
The second, quantitative easing, is something that inspires fear from a lot of people, and they've gotten started on it. This is the "printing money" option, although they don't actually print more money to do it, but rather just increase the size of the Federal Reserve's balance sheet so it can go out and buy up more junk from financial institutions to flood the market with more money. As a lot of our problems have to do with being too deep in debt all around and the increasing difficulty of getting loans as old ones are blowing up left and right in the downturn, pumping a bunch more money in the system would be inflationary and could help deal with some of this. This is potentially very very risky, as if you rely on it too much to create too much money and you'll have hyperinflation, much like the Weimar Republic in pre-WWII Germany or Zimbabwe of today. This is also where we hold one of the guns of the murder-suicide pact with China (who owns a lot of the US Federal Government debt), as we could effectively wipe out the value of our debt by drastically devaluing the dollar.
The Federal Reserve has also been using some of its money more directly, such as by loaning up to $85 billion to AIG to bail them out. Unfortunately, I'm rather doubtful we are going to be seeing that money come back.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
Happily, iPods don't become valueless just because someone pulls the money rug out under it.
I grew up regularly dealing with multiple currencies with shifting exchange rates (occasionally rapid - 1997 and all) - you'll get used to it. Honest.
The problem is only in international trade: suddenly the vegetables from ten thousand km away are stuck in a warehouse somewhere! Argh! But such problems only arise with dramatic shifts in the value of fiat money, which then only arise from changes in policy, not changes in beliefs. Changes in beliefs are not rapid.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
Oh no, not this again. Look, if you distrust the US dollar, there's a simple solution. Use Yen. Or Euros. Or even the RMB. Or e-gold.
Want to create your own currency? Fine. Don't issue fucking coins! That's where the clash with laws trying to restrict counterfeiting occurs - note that it's also illegal to create coins similar to foreign currency, 18 USC 486 has a very obvious purpose against counterfeiting, not restricting alternative currency.
Alternative currency (other than foreign currency, which is very very limited in buying power domestically) is only useful in closed systems (like Second Life). You can't use it to buy anything outside of that system, because it doesn't have any sanction.
There's no historical or current basis for alternative currency being any reasonable substitute for domestic currency. Period. So saying it's a simple solution is massively disingenuous.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
Happily, iPods don't become valueless just because someone pulls the money rug out under it.
I grew up regularly dealing with multiple currencies with shifting exchange rates (occasionally rapid - 1997 and all) - you'll get used to it. Honest.
The problem is only in international trade: suddenly the vegetables from ten thousand km away are stuck in a warehouse somewhere! Argh! But such problems only arise with dramatic shifts in the value of fiat money, which then only arise from changes in policy, not changes in beliefs. Changes in beliefs are not rapid.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
Oh no, not this again. Look, if you distrust the US dollar, there's a simple solution. Use Yen. Or Euros. Or even the RMB. Or e-gold.
Want to create your own currency? Fine. Don't issue fucking coins! That's where the clash with laws trying to restrict counterfeiting occurs - note that it's also illegal to create coins similar to foreign currency, 18 USC 486 has a very obvious purpose against counterfeiting, not restricting alternative currency.
Alternative currency (other than foreign currency, which is very very limited in buying power domestically) is only useful in closed systems (like Second Life). You can't use it to buy anything outside of that system, because it doesn't have any sanction.
There's no historical or current basis for alternative currency being any reasonable substitute for domestic currency. Period. So saying it's a simple solution is massively disingenuous.
How do you categorize paypal dollars, or credit cards for that matter.
There's definitely a close relationship between these things and US dollars, but they aren't necessarily the same thing.
I've never seriously studied economics, so I might be way off on this, and if so I encourage anyone here to clarify the situation. I saw this series of videos on YouTube (sort of long): Where does money come from? The video claims that the vast majority of money in circulation comes from loans from central banks. The video claims that this system is unsustainable because there is never enough money in circulation to pay off the loans from the central banks plus interest (when the interest rate is non-zero).
How does this work? Does the central bank expect (and allow) some banks to default on the loans? Is the money paid back to the central banks in interest put back into the economy through the salaries of the people working at the central bank? Or does the system just rely on endless exponential growth, so that old loans can be paid back with the money from new loans? I hope it's not the last one, because unless we start building a Dyson sphere I don't see how worldwide exponential growth can continue much longer.
It is the last one. Sort of.
Our Economic System relies on perpetual growth.
This is why the market will always eventually contract to some extent and why the bubble will always eventually burst. The system contracts, and then grows again.
There's nothing really wrong with this idea.
All this is AFAIK. Someone better at this shit can correct/clarify if I got something wrong.
My last post got bottom-of-paged, and I'd like it answered. Does the entire global financial system depend on endless exponential growth?
It does not. I'd advise you to be careful if you wish to use YouTube as a source of information on economics; the hordes of cranks there are endless. It's like using the Internet as source of information on, say, 9/11. Or grassy knolls and JFK.
I'd rather not need to brainbleach myself again, so I think I'll skip the YouTube video you linked (also my bandwidth sucks, but that's neither here nor there). But using your sketch of the argument:
The video claims that this system is unsustainable because there is never enough money in circulation to pay off the loans from the central banks plus interest (when the interest rate is non-zero).
It is certainly true that there is never enough money in circulation to pay off existing loans. This doesn't require exponential growth. Why would it? As long as past loans are paid off the same rate new loans are made, nothing happens.
Posts
Some fraction of it.
Let's say you put 1000 bucks in the bank. The bank is required to hold, let's say, 10% of all money deposited, meaning that they hold on to 100 of your dollars, and then lend out the other 900.
Your 1000 bucks is now 1900 bucks.
I'm just answering the question. I don't think that commodity money is feasible in a modern economy, but I also don't think it's fair to equate fiat money with actual existential money.
:P
But it's the start of a golden age for the repo business. An age that shall never end.
Then, because 1900 bucks isn't doing anyone any good for THIS quarter's balance sheet, I'm going to take that $900 that I already loaned out, bundle it with $Texas that I also already loaned out, and sell that $Texas900 on the derivatives market for $Unicornblood900. Because I can now report $Unicornblood900 on my balance sheet for the quarter, our stock price goes up and I get another gold back scratcher.
Well, yeah, I guess it depends on what you'd rather irrationally value, a shiny metal coin or a signature from a really big government that says it's worth a lot.
shit
I call first investment into seashells
If you're referring to the gold standard, where a country's monetary unit was based on the amount of gold the country had, you're off by a century or so.
You see, if we had kept the gold standard, there's not enough gold in the world to circulate enough money in the US, let alone the rest of the world.
And when you're on the "inviso-unicorn fairy money" standard, you literally have no limit to the amount of money that can be circulating.
Hence the unprecedented growth on a worldwide scale. For all the benefits that inviso-unicorn fairy money gives a country's economy and standard of living, there's one bad thing about it.
And I am being completely serious when I say this. I am not making this up.
The people have to believe.
I'm being totally serious. Wipe that smirk off your face.
The entire world's economy is solely based on people's faith in the economy. When you lose faith in the economy, or if the country loses their people's faith, the entire system collapses.
Which is what happened during the Great Depression, and what's happening now.
If people have faith, they spend, knowing they'll make more. When they lose faith, they hoard and stop spending, clinging to the last vestiges of their up-till-now materialistic lifestyle.
Parappa is right, as was Yoda. You just have to believe in the money, and spend knowing there will be more to replace what you just spent.
well, technically, money is whatever people are willing to consider to be money
so anything can be money, if some one else agrees.
Let's just rename our currency "Tinkerbells" and be done with it.
We'll call them 'bells for short, and some raccoon will own your mortgage.
Happily, concerns over the fractional reserve banking system have generally shifted into the fringe over the past two decades. I think only the hardcore Austrians and goldbugs still worry about it; everyone else has realised that the crucial variable is the money supply, not the fractional reserve.
The required reserve of US banks is 10% - and there is an amazing amount of angst over this on the Intarwebs - but in the mainstream this is regarded as pretty backward. The required reserve of the UK and Canada is zero, for instance.
With monetary policy it is generally a benefit to have as simple a control model as possible. Tweaking the fractional reserve ratio sucks for controlling the money supply: where's a bank supposed to scrounge up millions of dollars when you need to raise the ratio? Call back debt and cause chaos? Tweaking the central bank interest rate is much more effective. This is a simple concept that hasn't been challenged by the recent crisis, by the way.
The goal of the wealthy is to be completely isolated from everyone. To never have to work or be a part of a community, and have all the worlds luxuries, pleasures, food, water, matter, energy, and everything good in the world brought to them in tubes. For them, that is the meaning of perfection.
And I want in on that shit.
This seems to be true of multiple professions, really. I haven't found any explanation for the shift to be satisfactory, myself - but blaming a shadowy manipulation of the money supply just doesn't pass the smell test. The conspiracy thread is over that way.
The purpose of keeping a fraction (rather than dropping to zero) would be to instill faith in depositors, not as a regulatory measure.
Considering the crisis of faith that folks are having in the system, A) it clearly isn't working, and
Yeah, they had a segment on NPR explaining the nature of belief as it relates to currency and when the lightbulb finally clicked, there wasn't enough
It's not surprising.
For a normal, rational person to look at the situation, and realize that the only thing keeping us from living in total anarchy and Mad Max Land is the equivalent to Dorothy in Wizard of Oz closing her eyes, wishing really hard, and clicking her heels three times is enough to make you want to build a bomb shelter and hide for your life.
Yeah, it's like realizing that you may as well use the Dungeon Master's Guide to run your system.
This is more like VtM: Currency Edition
Yeah, a book with a lot of fluff, an unlimited pool of number generators and one rule; Don't be a dick.
edit: Oh yeah, and if you've never played Vtm (or any WW games) no one is ever able to follow that rule.
Hm, I was getting my countries mixed up. Some countries use the reserve as a regulatory tool. The US uses it as a mechanism and uses treasuries as the tool.
It has nothing to do with faith; banks in countries with nil requirements have no issues attracting depositors. No issues which US banks don't, anyway.
The answer to the need for faith from the late 90s was to attempt to separate economic policy from politics as much as possible: hence the degree of independence of the Bank of England. The obvious American counterpart would be the Fed under Greenspan, yes. The Fed itself is not as independent as is desirable, but Greenspan wielded such a large amount of influence that this was not a concern.
The concern is not "politicians are stupid and greedy spenders" but rather the ability of the bank to make credible commitments to policy, even in the face of potential future political opposition. Hence Greenspan.
All this falls apart when the nominal interest rate hits zero, which reduces the role of monetary policy. Inflation still works, but nobody likes the idea of high inflation. Fiscal policy still works, but while politicians can spend or not spend, they can't make credible commitments to do either in the future.
The parts of 'the system' that have been discredited by the crisis are not the ones that you're taking aim at, I'm afraid. Bubbles burst across the 90s and didn't necessarily bring banks with them. And banks occasionally folded and didn't bring the entire banking industry to its knees.
But as far as the whole role of the Federal banking system goes - it's true that 'the system' sucked at absorbing a big shock - and this was a very big shock, I think you'll agree - but what system is? The errors were in allowing such a shock to occur in the first place, which is why the mainstream economist angst is focused on the role of regulation in banking, not overturning the Federal Reserve system.
Saying, "Oh noes! What if everyone decide not to believe in money? We're fucked!" is like saying "Oh noes! What if everyone decides to stop listening to the president? We're fucked!"
There's no special danger of societal collapse because everyone suddenly realizes money is fake.
EDIT: In my opinion, there's no danger of the financial system completely collapsing here. That happens when faith in the administration of the system is shaken to the point that the system seems incapable of function, such as in periods of political upheaval like coups.
Oh no, everyone might be driving on the other side of the road today! How will I know which side to drive on?
Normally I'd agree. The ONLY reason I think that there is any sliver of a risk of anything these days is the 24-hour news cycle, and how it likes to get people worked up.
Even so, I'm not worried.
I dunno. When I come to a 4-way stop, it becomes clear pretty quickly that traffic laws don't do all that much.
There's a difference though.
Unlike the President, a company, as well as money itself, has a value with regulates every aspect of your life.
If nobody listened to the President, there are still "safety nets" in place, like the VP, Speaker of the House, etc.
If everyone loses faith in the dollar, the entire world collapses on a scale which would land many of us (especially in the US) back on a bartering system and set western advancement back around a thousand years.
Everything, from imaginary ideals like time to gasoline and Hot Pockets to iPod upgrades, has a monetary value. If we woke up with no base value to judge items, then we're properly fucked.
most folks tend to get over it though
a few freak out, and hey, free entertainment.
Actually, if anything, what protects the financial system is its arcane and ridiculously complex nature. The 24-hour news cycle can't penetrate the vagaries of the really deep shit, so it just recycles the few things that it knows will resonate with the target audience instead. MSNBC talks about the insolvent and irresponsible corporations and Fox News talks about how socialist the Obama Administration is.
I'm uncomfortable with this statement. It feels kind of like saying that we need centimeters in order to know what inches are worth.
Value (or utility, if your prefer) is the real constant here, not dollars.
No, they both basically come back to the same thing. If you stop obeying the laws of the country, someone with a gun will come along to make you. If you stop using the currency of the country and, instead, create your own system of currency, someone with a gun will come along and shut you down.
Happily, iPods don't become valueless just because someone pulls the money rug out under it.
I grew up regularly dealing with multiple currencies with shifting exchange rates (occasionally rapid - 1997 and all) - you'll get used to it. Honest.
The problem is only in international trade: suddenly the vegetables from ten thousand km away are stuck in a warehouse somewhere! Argh! But such problems only arise with dramatic shifts in the value of fiat money, which then only arise from changes in policy, not changes in beliefs. Changes in beliefs are not rapid.
Oh no, not this again. Look, if you distrust the US dollar, there's a simple solution. Use Yen. Or Euros. Or even the RMB. Or e-gold.
Want to create your own currency? Fine. Don't issue fucking coins! That's where the clash with laws trying to restrict counterfeiting occurs - note that it's also illegal to create coins similar to foreign currency, 18 USC 486 has a very obvious purpose against counterfeiting, not restricting alternative currency.
See, this is what you need to tell the gold bugs and Rondroids: our currency is backed by metals. Not by silver or gold, but by lead and uranium.
How does this work? Does the central bank expect (and allow) some banks to default on the loans? Is the money paid back to the central banks in interest put back into the economy through the salaries of the people working at the central bank? Or does the system just rely on endless exponential growth, so that old loans can be paid back with the money from new loans? I hope it's not the last one, because unless we start building a Dyson sphere I don't see how worldwide exponential growth can continue much longer.
On the very basic level, banks operate by taking in money in the form of deposits and then in turn loaning most of that money back out, such as business loans or for mortgages. The loaned money should have a higher interest rate than the deposits, and differences between these two is how a simple bank will be making most of its money.
However, one of the central issues of banking is the matter of reserves. Depending upon the nature of the deposits, the depositors will be able to demand their money back immediately, but banks typically cannot demand that the people they loaned that money to pay off their loans immediately so they can pay back the depositors. If too many depositors want their money out of the bank at once, which is called a bank run, then a bank that doesn't have enough reserves or a means to get reserves won't be able to pay off all the depositors. This sort of problem has occurred a lot over the history of banking, and can kill a bank even if it is fully solvent and the value of its loans is higher than how much it owes to depositors (or in turn, to other institutions it got loans from).
This is one area where the Federal Reserve comes into the picture: they regulate the fractional-reserve banking system through reserve requirements. This means that they require banks to hold reserves of a certain percentage of certain types of deposits, while the remainder they can loan out. These reserves are in some combination of physical currency and federal funds, which are balances held at the Federal Reserve bank. As from the wikipedia page, the reserve requirements for net transaction accounts for large institutions is 10%, meaning the bank by law has to hold 10% of the value of these accounts in reserves.
The typical way the Federal Reserve implements monetary policy is by influencing and interacting with the market for these federal funds. Some banks are in need of federal funds to meet the reserve requirements, while others have excess that they are not in need of immediately, so they will lend them to each other. These loans are typically for a very short term, like a day. The interest rate on these overnight loans in the federal funds rate, and this the main interest rate that the Federal Reserve sets targets on and tries to manipulate. (Aside: keep in mind that there isn't just one "interest rate", there are many different ones for all sorts loans and bonds and assorted financial instruments affected by their different terms and risks and timelines. The different interest rates are often interrelated however, due to relationships between the underlying liabilities and the state of the financial system).
How does the Federal Reserve do this? The main way is through open market operations, where they can buy up government securities (in our case, US Treasury bonds and notes that finance the US Federal Government debt) or other financial instruments. Buying these up increases the money supply by increasing the amount of federal funds available to banks, which they can then turn around and increase how much they can loan out, and affect the federal funds rate by altering the supply. It can also loan out federal funds directly to institutions with the discount window, which is higher than the target federal funds rate and is usually discouraged in favor of interbank lending.
In terms of the current economic crisis, the Federal Reserve has expended it's typical response to recessions by lowering the federal funds rate, as it is now effectively zero. So it has started moving towards altering what it purchases in open market operations, through quantitative easing, and more directly involving itself in the matters of financial institutions. The first, which has been occasionally called "qualitative easing", is the Federal Reserve buying up things other than the standard of treasuries in open market operations, and in this case these things are far riskier and less liquid. The original stated intent of Treasury Secretary Paulson's TARP bailout program was somewhat similar to this: use a bunch of government money to buy up the illiquid mortgage backed securities and other toxic waste that was clogging up the arteries of the financial system. The effectiveness of this is very questionable and hard to determine.
The second, quantitative easing, is something that inspires fear from a lot of people, and they've gotten started on it. This is the "printing money" option, although they don't actually print more money to do it, but rather just increase the size of the Federal Reserve's balance sheet so it can go out and buy up more junk from financial institutions to flood the market with more money. As a lot of our problems have to do with being too deep in debt all around and the increasing difficulty of getting loans as old ones are blowing up left and right in the downturn, pumping a bunch more money in the system would be inflationary and could help deal with some of this. This is potentially very very risky, as if you rely on it too much to create too much money and you'll have hyperinflation, much like the Weimar Republic in pre-WWII Germany or Zimbabwe of today. This is also where we hold one of the guns of the murder-suicide pact with China (who owns a lot of the US Federal Government debt), as we could effectively wipe out the value of our debt by drastically devaluing the dollar.
The Federal Reserve has also been using some of its money more directly, such as by loaning up to $85 billion to AIG to bail them out. Unfortunately, I'm rather doubtful we are going to be seeing that money come back.
Alternative currency (other than foreign currency, which is very very limited in buying power domestically) is only useful in closed systems (like Second Life). You can't use it to buy anything outside of that system, because it doesn't have any sanction.
There's no historical or current basis for alternative currency being any reasonable substitute for domestic currency. Period. So saying it's a simple solution is massively disingenuous.
How do you categorize paypal dollars, or credit cards for that matter.
There's definitely a close relationship between these things and US dollars, but they aren't necessarily the same thing.
It is the last one. Sort of.
Our Economic System relies on perpetual growth.
This is why the market will always eventually contract to some extent and why the bubble will always eventually burst. The system contracts, and then grows again.
There's nothing really wrong with this idea.
All this is AFAIK. Someone better at this shit can correct/clarify if I got something wrong.
It does not. I'd advise you to be careful if you wish to use YouTube as a source of information on economics; the hordes of cranks there are endless. It's like using the Internet as source of information on, say, 9/11. Or grassy knolls and JFK.
I'd rather not need to brainbleach myself again, so I think I'll skip the YouTube video you linked (also my bandwidth sucks, but that's neither here nor there). But using your sketch of the argument:
It is certainly true that there is never enough money in circulation to pay off existing loans. This doesn't require exponential growth. Why would it? As long as past loans are paid off the same rate new loans are made, nothing happens.