It makes perfect sense that most people in the top 0.1% are associated with the financial and banking industries if you know how banks work. Banks, and the Federal Reserve, create new money. They give this money to themselves, and then loan it out. This is as bad as, and effectively equivalent to, counterfeiting. Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. It merely changes the distribution of the purchasing power of the money away from most people who have the money and to the people who get the new money. This is where the wealth of the top 0.1% comes from. Freshly printed money. It is a terrible system. The people with the highest wealth are not contributing in proportion to their wealth. Rather, they are stealing their wealth from the bottom 99.9% by stealing their purchasing power by printing new money.
If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org.
For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.
This misses the point of the article, which is that many in the top 0.1% got there from some form of self-dealing. His argument is that they are profiting from their position in the economy rather than from the value they add.
And by position, he doesn't mean nearness to the money press. I think he means nearness to the center of wealth and power, which at the moment happens to be the financial industry.
> This is where the wealth of the top 0.1% comes from. Freshly printed money.
I'm sorry but this statement is very wrong. Newly printed money enters the economy through interbank loans. If I borrow $100 my net worth is exactly the same as before. I'm not any wealthier.
To set the record straight: the ability to expand or contract the money supply is an essential tool in managing the economy: the Fed can cool things down in a bubble (by raising rates and contracting the money supply) or heat things up in a downturn (by lowering rates and expanding the money supply). Otherwise, inflation or deflation can spiral out of control.
> Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth.
Ok, but creating new money in an effort to grow the economy while managing inflation does create new wealth-- or more accurately, creates an environment in which wealth can more easily be created. Especially in comparison to the alternative: an unmanaged economy that is completely at the mercy of panics and bubbles. Think the last crash was bad? The unemployment rate rose to 14% during the six years following the panic of 1873, which was largely caused and substantially prolonged by the inflexibility of the money supply (which was still tied to silver and gold).
I'm getting a little tired of the anti-fiat currency crowd. You say you learned about economics; you might want to get your money back. I'm sure you're a very smart person, astrohacker, but your perspective here is unsupported and stands in direct contradiction to the last 80 years of economic thought. And no, the bitcoin crowd do not count as economists.
The self-dealing by the banks since 2008 has been almost wholly underwritten by the Fed and the Treasury. Beyond TARP there are myriad guarantees, lending programs, and regulatory exemptions, all designed to provide the banks with greater profit and allowing them to offload risk, usually to the Fed or the taxpayer. Indeed, if you look closely, much of the "profit" in the banking system today is coming from banks borrowing at Fed subsidized rates and lending that money back to the U.S. government.
Most of the profit in the banking industry comes from being able to take on massive risk, while simultaneously being cushioned from that risk by the government. Risky positions and derivatives are extremely profitable, but for most people -- those without guaranteed bailouts, or cushy borrowing rates -- the risk is too great. For investment banks, as we've seen, the risk is minimal to nonexistant (or at least the banks seem to function as though it is).
Traditionally, the role of the financial industry was to "provide access to capital," primarily by underwriting, facilitating, and assisting in the execution of large transactions and deals for corporate clients. This role is, ostensibly at least, productive to the overall ("real") economy.
Over the last 30-odd years, and especially over the last decade, the center of profit for the financial industry has shifted away from its traditional role (transactional facilitation), and toward the taking of proprietary positions in various capital markets. It's simply too tempting not to -- as Uncle Sam will lend you your leverage virtually free of charge, and he'll also be there to mop up your mess if you make one.
Imagine being able to gamble at a roulette table with free money, and being given more chips every time your bet busts.
I'd like to add that responsibility for banks providing loans backed by the taxpayer ultimately falls on voters. This is what fannie mae/sallie mae etc are all about. Disconnecting access to credit from the ability to repay it inevitably results in loans that will default.
Politicians sold people stuff like fannie mae and people voted for it by electing them. And I guess voting in favour of such things is inevitable when not all voters are taxpayers. An extreme solution might be limiting votes to people who are paying taxes. This seems logical but is obviously politically impossible.
"...I guess voting in favour of such things is inevitable when not all voters are taxpayers."
I get the premise of this logic, i.e., that poor people don't pay taxes and therefore don't care about spending taxpayer dollars. I've seen it presented hundreds of times. But I think, in all honesty, that such a theory is giving the poor too much credit. It assumes that the poor are making conscious decisions based on rational evaluations of their economic incentives. I'm not convinced they think that way. Furthermore, I'm not convinced that they're even informed enough to know what they're doing when they vote on such things.
Some of the blame lies on the voters for voting without understanding, sure. But the politicians -- many of whom are paid for by lobbies -- bear greater responsibility for selling bullshit to underinformed voters, and for coucing the bullshit in emotionally manipulative ways.
> [programs are] designed to provide the banks with greater profit and allowing them to offload risk
Yes, the Fed is essentially paying the banks to loan money. It's not because the Fed is corrupt, though. It's because that's how bad the economy is.
Normally, banks will happily lend money. But when the risk of default is greater, as it is in a recession, banks are stingy with loans: they only loan to those with better credit-- and at a higher interest rate.
Bank liquidity is so tight right now (yes, it's their own fault) and the economic outlook so dim that if they had their druthers, banks wouldn't lend at all. If that happened, the economy would have an even worse outlook.
Luckily, the Fed can encourage banks to lend by giving them a discount on money (usually around 0.25%). Right now, however, the Fed can't give a discount because the rate is already at 0%. Thus, the present situation of the Fed basically throwing money at the banks, begging them to lend it out to the broader economy.
This is what is known as an edge case.
Don't like it? Join the club. What's happened since 2008 has sickened the remaining responsible, ethical folks managing the economy. But it's not right to impugn the Fed with the actions of a few irresponsible investment banks. If you read Sorkin's account in Too Big to Fail it's plain to see how Paulson and Geithner's actions amounted to making the best of a bad situation. In their case, it's important to distinguish between the appearance of impropriety and actual impropriety.
Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?
If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value, then why must the ordinary people or businesses be charged twice by first the lowering in value of the money and second the paying of a higher interest rate, often much higher, to the end bank which lends it?
This system currently concentrates wealth and thus power to the banks. Why, when we probably do not even need them at all and can simply have a massive national bank.
> Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?
Good question. Two questions, actually: why doesn't the central bank lend to individuals, and why can't individuals get the same interest rate on loans as a bank.
One reason you and I can't get loans at the prime rate (normally in the 2-5% range) is because we don't have the same creditworthiness as a bank. I don't know about you, but I don't have hundreds of millions of dollars of assets like banks do.
(A decade or two ago, when banking was a more boring and staid business, the creditworthiness of a bank was virtually never in question. In comparison, individuals go bankrupt all time. Granted, there have been periods of banking abuse-- the S&L scandal, the over-leveraging in the 2000s, etc-- and one can rightly criticize the banks in those contexts. In fact, lots of people think that banking should return to the lower-risk model of banking, where banks are more deserving of their credit. But back to your questions.)
Why doesn't the Fed lend to individuals? The Fed's mission is to set fiscal policy. From
http://www.federalreserve.gov/pf/pf.htm, "Goals of Monetary Policy":
The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates. When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living. Moreover, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation - and the need to guard against such losses - are minimized, households are encouraged to save more and businesses are encouraged to invest more.
So you see, the intent of this modern economic tool, control of the money supply, is to promote stability while maximizing output. You said:
If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value...
Actually, printing money doesn't necessarily mean that existing money loses value. The Fed attempts to expand the money supply as the economy grows to maintain the current value of money. If it the money supply were suddenly static while the economy continued to grow, I believe this would result in a deflationary spiral: the first stage is where the expanding value of the whole economy must be denominated by a fixed pool of money, causing the value of that money to increase-- which sounds nice at first. But deflation reduces incentives toward spending and lending, and ultimately curbs growth-- which is bad. So if the size of the economy were fixed, then perhaps a fixed money supply would be desirable. Fortunately, the global economy, in the long term, is growing; so the money supply must grow as well. This reaches the limits of my memory of basic macroeconomics from my B.A. in the late 90s. I'm a programmer; this stuff isn't top of mind, so I'm sure an actual economist could provide better explanations of several of the points above. But I think it's generally accurate.
If I could get 0-1% APR loans then I could make money buying US treasuries. This while technically different from being handed money that you get to keep it is still functionally identical. As to comparing unemployment rates, if you compare identical numbers we have a higher unemployment rate now than during the great depression.
PS: A close friend of mine overheard a conversation that was basically "My husband only made 80 million last year, what happens if my social circle finds out?". Her friend actually understood how terrible this was, why her friend was sobbing, and was vary sympathetic. When you are close enough to overhear those in power but don't the goodies there is a lot of pressure to seek it out. However, a family of 4 living off of 42k/year without heath insurance can feel the same way to a 250k combined income. Which IMO muddles the debate.
I understand the reasoning that the fed & equivalents in other countries are supposed to manage the money supply as a smoothing function in booms and busts. I have never managed to accept though that the decision making of a committee can outperform the decision making of the market itself.
The problem is that market performance is never pure, and even when it is, the performance can be so volatile that side-effects permanently harm communities and subsequently offset the market performance.
And of course performance isn't everything. The 1-person committee in charge of driving a tractor trailer, for example, will deliberately choose sub-optimal performance when driving down a steep grade, because optimal short-term performance would result in a crash and complete long-term failure.
You say "in direct contradiction to the last 80 years of economic thought", but we have not been off of gold and on fiat for that long, more like 40 years IIRC.
Even the swiss franc was pegged to gold until 2000. The Fed is getting pretty limited to what it can do by lowering rates.
With only 6% more unemployment, we would be at 1870s levels (completely unmanageable)?
Calling it counterfeiting is a bit extreme, though.
Gold was criminalized for use in transactions in 1933 by executive order. I think that's a fair point to mark the end of the "gold standard" and the beginning of the fiat era. It is true the US government would redeem dollars for gold for foreign countries up to 1970 or so, under Nixon... but indie the USA, it was a crime to use gold as money. (Though jewelry was allowed) up until the 1970s.
He's using the term "counterfeiting" in the economic sense.
One of the things that makes something money in economics is that it is difficult to duplicate, so you can't just make more of it for yourself. Fiat currency doesn't have that restraint. So, we can say it is not money, or we can say that it is being counterfeited. This is not a word chosen for its alarm value, though it should make you alarmed.
Not really. Gold is held as a standard, but I would argue that gold itself is nothing more than another form of fiat. Why is gold worth anything? Because we all agree that it is. How much gold is there? Whatever is reported by the governments who hold it. There's no way to check. There are ways to guess, but it's just a shiny metal that we all agree is worth exchange.
Limiting us to gold also exposes us to massive economic swings, due to the limited ability to control how much or how little we all agree exists. I always hear people talk about how we 'print money' when we need it but NO ONE mentions that we also take money OUT of the economy all of the time.
"Why is gold worth anything? Because we all agree that it is."
True to some extent, but it does have more intrinsic value than paper currency. 1) It's rare enough that small amounts can be used to trade, but common enough that lots of people can have some. 2) It is pretty (subjective, but agreed-upon across many cultures). 3) It is chemically stable - doesn't rust or tarnish - so if you have 5oz today, you'll still have 5oz 10 years from now.
Reasons like these were explored on a Planet Money podcast, and they concluded that gold isn't an arbitrary choice; if you could pick any element from the periodic table to use for money, gold is the logical choice.
You described the requirements for a medium of exchange, and they make sense. But I don't think that that means "value" necessarily. Value is bread when I am hungry. Or gold when I need to make microchip contacts - but that usage is nowhere near justifying the price that gold actually trades at.
This is just a nitpick with the use of term "intrinsic value" - gold's characteristics make it a good form of money, but it's still (abstractly speaking) on a fiat basis.
I don't see how it could really work otherwise. There is no such thing as a good that everyone would value equally. Intrinsic value varies depending on the needs of the traders.
See, that's exactly the problem. The intrinsic value of anything - in this case, gold - relies on agreement of the scarcity. Truthfully, we don't know the scarcity of gold, or the amount that exists. We have only educated guesses.
Controlling the monetary supply with "paper" currency (which is an inaccurate term, "digital" currency is the reality) is much more stable and controllable. The US Government says they have $50,000,000,000,000, and the global economic capital markets either agree or don't agree.
Newb question: If new money only gets in the system by loans how do we not run out of money? If I lend you 100 bucks you have to pay back 105 that is great and all. If I loan you every dollar in existence and you have to pay back every dollar in existence plus 5% then there is a problem.
If there is only $100 in the economy, I can still owe you $105. To pay it back, I could start working for you and be paid $1 per hour. Now everytime you pay me $1, I would pay you back this dollar until my debt is zero.
In the real-world, with more than two persons, it would look more like this: I pay you back some amount of the debt, you spend this money and it propagates through the economy, until some part of it reaches me (in the form of a wage), so that I can use it to pay back more of the debt.
I realize that the amount of debt can be larger than the total amount of money. In fact given every dollar in existence is on loan from the federal reserve the total amount of debt will always be higher than the total number of dollars in the system by design. The question is, how does the system not implode under the massive amount of debt that is ever increasing?
This fact is part of the money system. When a loan is taken out from a bank, the principal of the loan is created, but the interest is not. This creates a competition in the economy to get the money that is not created to pay back the interest on the loans where some people can and some people cannot. Defaults are inherent to the monetary system as it is currently implemented. See "The Money Fix" (documentary) for the best explanation of this process that I have seen.
Read up on Steve Keen or find a good explanation video for fractional reserve banking.
The short answer is that we have a money supply that must grow by the amount of interest owed each year. This necessitates more loans. Which means more interest...
You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you mentioned it by name, you are definitely talking about the US, but the same state holds in virtually all developed countries as well: one designated "central bank" entity creates money, the others don't.
Per your main point, yes, the central bank creates money, but it doesn't "give" it to anyone. Seriously, you describe it as if there's a "printing party" at the FR, and only the rich get invited to grab booty bags stuffed with trillions of freshly minted dollars.
The truth, of course, is that the FR (and secondary banks) can only lend that money. They lend it for a variety of people and reasons. Not too long ago, they lent it to too many people. Not because their kind heart, but because it's a business: they lend it out hoping to get it back with interest.
Who do they lend it out to? Well, to some of the people here, for starters. Because what you failed to consider is that if I'm already at the top 0.1%, the best thing for me is to keep the situation static: not printing any new money. Because you're talking about the top 0.1% dollar earners and holders. Inflation dilutes their assets and earnings just like everybody else's, and in absolute values, they lose more.
Lending is (generally) an instrument of economic growth, a way to fund innovation and investment in production of new products and services. Guess what, if nobody can get loans, new businesses and startups won't get funding either.
Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out.
And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.
So you're calling fractional reserve banking "counterfeiting". I assume you oppose it.
Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments.
So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available.
You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc.
Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit.
In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely.
The fact that current millionaires are first generation is kind of inapposite. We haven't really been on a fractional reserve system for long enough to really create generations of financial dynasties.
... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor.
No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.
> The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180
you should learn about accounting. the loanee also has an $80 debt to the bank. no money is created. in fact, even if the bank didn't exist, in your fantasy land, basically everyone would be "money counterfeiters".
let's construct a scenario. when you loan your aunt $100, you give her $100, and then you sign a little contract with her indicating she owes you $100. you now have an asset worth $100 (the contract), and she now has a fresh $100 bill. oh my god, you just magically created $100! you're a counterfeiter!
when you deposit money in a bank, you loan them your money, which they then loan out. your checking account is essentially a low risk, pooled, variably timed bond that you buy from the bank.
i have a question for you though. do you believe in free markets? if so, then why do you oppose fractional reserve banking, which, at its fundamental core, is a contractual agreement between two parties?
Fractional reserve banking is the process you described. Give the bank $100, it is then legally obliged to only keep X%, let's say 10%. Hence, why most - if not all - banks today are vulnerable to a 'run on the bank', because banks never have 100% of outstanding liabilities immediately liquid.
However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand. Those entrepreneurs take that money at a relatively low interest rate (in America anyway) and invest it into their company, believing that the return they can generate is higher than the interest they pay.
Those entrepreneurs in turn hire people and when they are successful, they pay themselves a lot of money. They can also sell the business at some point in the future.
All the while, they pay back the bank the principal + interest and they have their business. This is the way it should work and this is the way it works about 80% of the time.
The other way fractional reserve banking works is that those same banks, end up using some of those funds to invest. They invest in a diversity of assets - stocks, gov't debt, etc.
They also invest in an asset class known as 'Alternative Assets'. You know what type of fund is a major beneficiary of raising money from banks and large financial institutions by fulfilling the alternative asset type category? Venture Capital funds.
Sure, you can argue that there is a bubble in Silicon Valley, but VC funds have been - undoubtedly - a major part in the major creation of MANY things we take for granted today. From Fairchild Semiconductor to Apple to Intel to Facebook, Twitter, Microsoft (eventually), Cisco to FedEx, UPS, McDonalds, Burger King, to many others in between.
Guess who got rich along the way? All those founders + many employees. Not just in earning good wages, but also in stock options and experience for their next job.
So let's just cut this crap about fractional reserve banking being the bane of society.
Sure, fiat currency, can and does lead to inflation - but inflation is the cost of technological advancement.
If there was no fiat currency, we (the ENTIRE world) would have gone through the worst depression we have ever seen - rather than just a 'Great Recession'. It would make the 1930s look like a blip in the radar.
It is precisely because the fiscal and monetary authorities were able to take those drastic measures to save the global economic system, that we can even be discussing this today.
It's also easy to dismiss the crisis as being caused by Wall Street, but...again...progress and advancement comes with a price.
Also, if you hate fiat currency so much and you think the world would see less recessions as a result of going back to the gold standard or backed by some finite amount of money, how about you take a look at history for a sec: http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...
As you can see, the list of recessions before 1960 is pretty extensive.
America 'broke' the Bretton Woods system in 1968 - http://en.wikipedia.org/wiki/Bretton_Woods_system - and that essentially marked the end of using a reserve currency backed by a physical good (gold). Since then, there have been recessions but they haven't been as severe as many before the great depression.
The 1800s were absolutely BRUTAL when it comes to economic recessions. Going through that list, it feels as if almost every year was a recession. Kinda insane.
I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight. Every system has it's drawbacks, and has its pros. The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks. What this 2008 credit crisis has shown us, is that they were DEAD right. We can debate the causes of the crisis until the cows come home, but what cannot be debated is that the policymakers (from Hank Paulson, Geithner, Bernanke, Sheila Beir, Jean-Claude Trichet, Mervyn King, and everyone else around them in their jurisdictions) made the right choices and used the right tools - because the world economy has truly been saved from possibly the worst recession we have ever seen. The only thing worse than what could have been, is what could have been had America defaulted on it's debts - but that's another argument for another day.
Oh, and when the Fed prints new money and earns interest on that new money, if they earn any profit you know who gets that? You. The taxpayer. It's called seigniorage - http://en.wikipedia.org/wiki/Seigniorage . At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range. Imagine ANY corporation paying a tax bill that large.
Edit 2: Here is a nice summary of the Feds performance and how much it paid over to the US Treasury in 2009 and 2010 if anyone wants to debate their performance, oh and this is ON TOP of them saving the world economy (basically single handedly) - http://www.marketwatch.com/story/the-feds-annual-profit-surg...
> However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand.
Banks create 80% of the money and declare themselves owner of it, which they then loan out. There is nothing wrong with loaning money. But there is something very wrong with creating new money and then loaning it out, which is what banks do. They are money trolls... hijacking 80% of the money and charging a toll for using it.
> I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight.
Bitcoin is a viable alternative. (I'm aware of all the limitations of bitcoin, like the maximum rate of transactions. But the fundamentals are sound. The problems that exist can and will be fixed in time. Bitcoin will scale to be a global currency.)
> The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks.
Nope. It very much is because bankers wanted to get rich. The Federal Reserve was designed by bankers. Other central banks are designed by bankers. Governments go along with it because they get to benefit from the inflation just like the bankers.
> At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range.
The Fed does not produce wealth. Any profits they give to the government, thus saving taxpayers a little money, are more than offset by the loss in purchasing power the taxpayers suffer through inflation.
At this point now, based on your replies, I can only assume you are trolling so I will ignore the first 2 responses and reply the to third and fourth.
>Nope. It very much is because bankers wanted to get rich. The Federal Reserve was designed by bankers. Other central banks are designed by bankers. Governments go along with it because they get to benefit from the inflation just like the bankers.
Are you a techie? Do you understand the web? Who would you want writing legislation to govern the web? Lawyers who are clueless about the web and think that the internet is a series of tubes, or people that are VERY web savvy - like Tim Berners-Lee, et. al? The same thing applies to finance, banking and everything else. Makes no sense to have people writing legislation or creating systems that don't understand what they are doing.
>The Fed does not produce wealth. Any profits they give to the government, thus saving taxpayers a little money, are more than offset by the loss in purchasing power the taxpayers suffer through inflation.
If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
>If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
That is because all that inflation has been exported to other countries. There are economies who have bet their growth on exports and depend on a strong dollar.
It's going to be just hilarious when China realises it can't actually do anything with all the shiny pieces of green paper we've posted them in exchange for most of their industrial output for a couple of decades, not to mention the whole Middle East.
I'm not a troll. Read my blog, my past posts here, posts on reddit, posts on the Bitcoin Forum, and my Tweets. I mean what I say.
> Are you a techie? Do you understand the web? Who would you want writing legislation to govern the web? Lawyers who are clueless about the web and think that the internet is a series of tubes, or people that are VERY web savvy - like Tim Berners-Lee, et. al? The same thing applies to finance, banking and everything else. Makes no sense to have people writing legislation or creating systems that don't understand what they are doing.
The tech equivalent of the Fed would be if the techies designed an internet where 1) all information goes through some central servers that they control, 2) they sell that information and profit, 3) everyone is legally required to use their internet and not a competing internet for sending information over long distances. This would be a corrupt, Fed-like version of the internet where some particular group of people have all the power and use it for their own benefit. This analogy isn't perfect, but it captures the basic point, that the Fed was designed in a corrupt way. It doesn't matter that the corrupt people were experts or not. If anything, being experts and using expert-jargon just allowed them to mislead everyone about the true purpose of their design - socialism for the rich.
For more of this type of information on the Fed, read "End the Fed" by Ron Paul and "The Case Against the Fed" by Murray Rothbard.
> If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
The Fed publishes misleading inflation numbers. Anyone who spends a lot of their income on things like food and energy recognizes that prices are rising pretty quickly. For me one price that stands out is that a cup of coffee used to cost less than $2 a few years ago, but now costs something like $2.30. It stands out because paying $2 and receiving a nickle as change is a lot more convenient than paying $3 and receiving $0.70 as change.
However, I agree that inflation is not as high as I would expect given just how much money the Fed has printed. I'm not exactly sure where the new money has gone, but it is probably just sitting around in some bank accounts somewhere, not circulating in the economy, and that's why we haven't felt it more than we have. I suppose it is probably being used by banks to patch up their balance sheets after the crisis and that's why it is just sitting there. My bet would be that in the coming years, that money will get used, and that's when we will really start to feel the inflation. When coffee reaches $5 per cup, we will know QE1 and QE2, etc., have trickled down.
I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight
Bashing something when you don't have a better option is timeless. People do it all the time. I don't blame you for getting a little warm under the collar over it. Heck, I'm currently irked by the same thing with power. Alternative power never gets to move forward because nuclear is scary, windmills kill birds, etc. Coal is the worst by far, but we're sticking with it because we haven't found the perfect free energy source.
I agree with you, but it's a better argument to say Intel, Facebook, etc. created huge consumer surpluses, so the real beneficiaries of VC investment were the consumers of the products which were created due to VC investments in companies, more so than employees and founders.
Hundreds of millions of people have benefitted from Intel CPUs; far more than have every worked for Intel or owned Intel stock.
I agree that hundreds of millions of people have benefited from Intel CPUs, McDonald's burgers and everything else by those companies.
But I was talking in strictly financial terms. The founders, employees and early shareholders benefited the most from those companies in financial terms. The economy did benefit significantly, indirectly, no doubt....just trying to bring it back to his argument about 'bankers milking the fractional reserve system for their profit'.
I have been wondering about this and you may be the person to answer it. My thought is that inflation only occurs when the increase in money supply is greater than the increase in wealth generated in the economy. So if an economies' wealth increases at 5% a year and so does the money supply then there's no inflation.
This is an interesting way to put it, but I must admit I am not sure.
The issue I have with this definition is that wealth can be generated even without new money being created - we are seeing it in Silicon Valley at the moment, where vast amounts of wealth are created largely on the back of old money being recycled.
Strictly speaking, inflation occurs when more money chases the same assets - so the prices of those assets rise to accomodate the new money. So in theory, by having the prices for those assets rising, wealth is created. i.e. if $100B in new money is injected into the economy, and half of that goes into residential real estate, then the average house prices will increase by no other reason than more money is chasing fixed supply.
So the $200,000 house is now worth $300,000 - therefore $100K has been 'created'.
But the way the economy is so complex and intertwined, that increase in wealth could beget another increase in wealth - i.e. the owner of that house could take out say $50K of that to start a business which increases his wealth even more (PG has a fabulous essay about creating wealth from nothing) out of his sweat (i.e. not related to inflation other than the fact that he used the rise in the price of his house to start the process but everything else was his own doing).
The truth is that I don't think modern economics truly understands inflation yet. For instance, America pumped a TON of new money into the economy (both fiscally and monetarily) and inflation has been subdued in America.
China pumped in a moderate amount of money, and inflation has been out of control recently. i.e. much more than the money they have pumped in, so they have been having to tighten the reins.
Suffice it to say, I don't know. I wish I could condense it to a nice nugget like that, but I can't.
FRB is fine in a free banking system. Competition would create an ideal level of reserves by means of some banks dying and some thriving. We do not have that. Large banks are shielded from their fuckups. This creates perverse incentives for them to make high risk/high reward investments with other people's money.
Exactly. All this massive discussions about creating new money somehow ingnores the elephant in the room: If banks with too much leverage would actually be able to default people will suddenly notice the problem and check their bank's reserves before opening a deposit or something like that (in historical timeframes, i.e. years ...).
Now the problem is obviously that everyone who went along for the ride, hoping for the best will go bust, too. Among them the top 0.1% (or at least a large part, you need to substract the Warren Buffet type). Obviously the rich and powerful don't like becoming poor and deprived of power, so the bailout themselves via the gov't/fed.
And as a strawmen they set up the crumbling 401k savings of the 99.9% normals.
An aside: I seriously wonder what would have happend if the gov't would have continued to let banks default. I don't think it'd be much worse than the Marshall plan for Germany with it's complete reset of the (liquid) wealth after WW2. And that went really well. And for a bit of fairness, resetting the clock every 80 (because people tend to forget the last utter economic catastrophe) probably won't hurt.
You can argue about what constitutes "giving money" vs. loaning money, but in certain cases there has been very little difference. Take the "loans" made available to the top .1% via TALF. Matt Taibbi describes the non-recourse loans handed out the wealthy and well-connected in this piece: http://www.rollingstone.com/politics/news/the-real-housewive... .
Banks do create money using the fractional reserve system. The majority of money in the economy was created by banks other than the Federal Reserve. This is a simple fact. They also create money through loans, mainly mortgages. They loan out money they don't actually have, which is the same as issuing money. Since this behaviour carries systemic risk, they are protected by the FDIC -- the taxpayers.
> That is factually untrue: only the Federal Reserve can legally create new money in the US
That is factually untrue: Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public... The actual process of money creation takes place primarily in banks
In the United States - Federal Reserve is a private organisation and its owners are hardly known to anyone, its like a commercial bank with special rights to print money
while in other countries in the world central bank is a government institution - state organisation
Yep, fiat money systems are at the core of modern wealth inequality. Regulations and other measures will have little impact until we address this. Bailouts, taxes, budgets, deficits, regulations: none of it has much relative quantitative significance when the Fed is doling out many trillions behind the scenes. This money directly benefits the very wealthiest and regressively dilutes the rest on a scale that vastly exceeds the effects of any other policies. Abuse of fiat money is the ultimate economic elephant in the room.
It's funny that you say this, because prior to the adoption of fiat money systems, class-warfare leaders agitated for decades (centuries, even?) in favor of a system of fiat money, because they saw fiat money as a way to reduce wealth inequality. The logic goes like this:
1: In general, poor people borrow money from rich people. Interest payments on these loans is a transfer of wealth from the poor to the rich: an increase in debt inequality.
2: Fiat money is much more subject to inflation than commodity money.
3: When inflation occurs, the real value of debts is reduced.
4: By adopting fiat money and the accompanying continuous inflation, a situation would be created whereby poor people could borrow money from the rich, use it to create wealth for themselves, and then effectively pay back less than they had borrowed.
I'm not saying they were right, I'm just describing their ideas. I find the whole situation ironic.
Agreed. Inflation amounts to stealing from people with savings.
I haven't read the book you linked to yet but I just wanted to chime in and reference another great little book "How and economy grows and why it crashes" by Peter & Andrew Schiff. It's an extremely readable cartoon book that explains recent American economic history in a comic fashion and shows the differences between keynesian and austrian thinking on the subject.
As much as I favor low taxation and hate class warfare attacks on the wealthy, I think we ought to tax "freshly printed money" at a much higher rate, or figure out a more equitable way to create money... if we have to create money. Our financial system (the one created and regulated by the U.S. Federal Government) is so corrupt, as evident by TARP and the lack of lending and recovery. The only way its gonna change is if the dollar stops acting as the world's reserve currency, i.e. collapses. Only then do I think we have a chance of replacing it with something better. Don't hold your breath. The rest of the world is just as corrupt and financially unhealthy, so the dollar will remain superior.
There's no reason to create new money[1]. As I argued in my post, all inflation can do is change the distribution of the purchasing power of the money... not create new wealth. But the market already handles the distribution or purchasing power just fine through normal market forces. Good businesses get more purchasing power and grow. Bad businesses lose purchasing power until they collapse. The only reason to inflate the money supply is to scam everyone because you get all the new money.
As for replacing the dollar, bitcoin is the only reasonable alternative that presently exists. Fiat currencies almost certainly will never work, because the temptation to inflate them is too great. Gold can't work because you can't send it over the internet. But bitcoins both can't be inflated and can be sent over the internet. No government will decide to switch from dollars/Euros/whatever to bitcoins. Rather, it will be the market that chooses them if they are appropriate.
[1] If you actually halted inflation of the dollar, then as technology continues to increase the supply of everything, eventually the dollar would be so valuable that a cup of coffee would cost less than a penny. You would need to make new monetary units worth less than a penny so that cheap things like coffee can be purchased with them. You would do this by taking your pennies to a bank and getting, say, 100 penny pennies with each penny, and then a cup of coffee could cost 78 penny pennies.
Right, new dollars have to enter the economy somewhere, and the purchasing power is increased at those points of entry, decreased everywhere else by an proportional amount.
I'm all for bitcoin but the powers at be will find a way to stop it if it catches on. But the cat is out of the bag. I just can't see the dollar standing up to all the benefits a technology like bitcoin affords.
What he's saying is that new dollars don't have to enter the economy. If you remove one penny and inject 100 penny pennies, you've only split up the penny, nothing else. With electronic banking this doesn't even have to be anything, as you can just work with fractional dollars (yes I know current software doesn't work like that, but it could).
And I agree with that as well. There might be some psychological issues switching to a deflationary system, though. Things that typically appreciate in nominal value (real estate, job skills, precious metals, art, etc.) will be appear to not be appreciating, even though relative to everyday goods in services, they will still appreciate. The only problem is that you can't have too much deflation, or else people will want to hold onto cash too much, will they not?
It makes sense that the members of the top 0.1% that a professional money manager comes in contact with are associated with the financial and banking industries. Yes, that I agree with.
If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org.
For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.