I need some help understanding the role of money in our society as it relates to personal finances / fortunes.
If the money in my wallet / checking account / investments, etc.. is borrowed from the Federal Reserve to be repaid through work / taxes, then I really don’t have any money right? I am simply carrying around a bunch of community I.O.U.'s, no? So, in other words, what I spend must be repaid but it won’t necessarily be repaid by me. It will be repaid by other workers, especially if I somehow manage to spend way more now than I earn in the future. I guess what I’m saying is, wouldn’t it be a tremendous benefit to me to spend everything I earn and then go on government assistance, forcing everyone else to repay my debt to the Federal Reserve? Wouldn’t a collective act of this kind actually end Socialism immediately, as it would throw the entire economic system into complete chaos and expose the truth about our system… i.e. that nobody really has any money.
Let’s take a different approach. Rather than spending every penny I have, let’s say I borrow an insane amount of money. I’m a Vet that hasn’t used his VA loan yet. First, I go out and buy a house on a 5/95 VA loan. (Personal note: I make good money, live overseas. pay minimal U.S. taxes and I have a lot of cash and disposable income… or at least borrowed money from the Fed.)
First off, the house has no value that can be measured in dollars, since the dollars themselves have no value since their value is derived from the work of future taxpayers and that work has yet to be accomplished. Does that statement describe things properly? If not, the rest of this will make no sense. I understand the basics of housing valuation: how much would it cost to build the house, what is the value of the land, what is the value of improvements, future cash flows from rents, etc.. But I’m asking how can you put any price on these things if your means of indirect exchange (dollars) is in itself a credit for future work.
So I want to buy a house and I’d prefer to borrow as much as possible. Why would I use my IOU’s when I can pyramid my debt? I don’t have any real money anyway.
In other words, I don’t know what the point of saving is if what you are saving is IOU’s, or paying in cash for big purchases like a house. This all makes no sense to me.
How about, you are carrying around a currency that is being heavily counterfeited by our government.
As the counterfeit money is spent on a good or service, the price of that good or service will eventually increase.
You’re thinking backwards. The paper bill is a debt that the Federal Reserve owes you. The only thing they will pay back in is some other paper bill, but so long as the total quantity of these bills is limited then it will retain some value.
Could you elaborate on this, please: “If the money in my wallet / checking account / investments, etc.. is borrowed from the Federal Reserve to be repaid through work / taxes, then I really don’t have any money right? I am simply carrying around a bunch of community I.O.U.'s, no?”
Money is a generally accepted medium of exchange. Granted, Federal Reserve Notes are only generally accepted as a medium of exchange because we are forced by government edict to accept them, but that’s what they function as (for now) nonetheless. How do you figure they are “community IOUs”?
“How do you figure they are “community IOUs”?”
I think i agree with that. How are they IOU’s? What exactly is the federal reserve going to give you for them?
Nothing as far as i know.
Money is created by the issue of debt, which is someone else’s promise to produce to pay back their debt.
I need a pair of shoes next month. I have my eye on a pair. You need a pair of shoes today. You borrow my money and go buy these shoes. You now have the shoes and there is none for me to buy. You borrow my purchasing power. I can’t buy anything until you pay me back. You have consumed this wealth from the economy. You don’t owe me money. You owe the economy the wealth equivalent of those shoes, to pay back that which you have consumed. If someone printed some money, gave it to you and you repaid me, the shoes or consumed wealth is still missing from the economy. It is your job to work and produce a good or service to the economy, to sell that it for money, so when I get back this money there will be a good or service for me to consume.
Hopefully someone will have reproduced another set of shoes for me to buy by then.
The Fed doesn’t produce anything, besides dollars. They don’t create wealth. Dollar’s are not the Fed’s IOU. It is your IOU. You can and do sell your labor to produce goods. Dollars are only valuable as to the goods and services that dollars can buy. If you have a debt it means you owe the economy a product, service or some other form of physical wealth that you have not yet created. If you die or default on this debt then the wealth is lost from the economy. There is less wealth that dollars can then buy. If the Fed prints money to reimburse banks or creditors that suffer loss due to debt default, no wealth is being added to the economy that those new dollars can buy. All you get is increased prices because there’s more money chasing after the few remaining goods or services in the economy.
Thanks. Can you please expand on this comment? I’m sorry but I’m just not getting it.
How can the Fed owe me something that is just another promise of payment? That is mind boggling for me. What did I provide them in exchange for the debt that is owed to me?
The Fed creates money and buys say a mortgage from a bank. This mortgage is an asset because it keeps paying $1000 / month in revenue. The Fed’s newly created money (to buy the asset) enters the hands of the mortgage seller, from there it flows into the economy. Those dollars are as good as the asset behind their creation. You could take your dollars to the Fed and buy back that mortgage asset from them and get $1000/month in payments.
If the Fed buys a building with newly created dollars then they own the building while the seller owns dollars. Those dollars are as good as the building’s worth. You could take those dollars in to the Fed and get a building for the dollars.
Now a problem arises. What if the Fed overpays for the mortgage or the building? The asset isn’t worth what the Fed paid. You buy the asset back from the Fed at a lower price. What happens to the rest of the money that entered the economy? It lingers there and as a result there’s more money chasing fewer goods. Prises rise.
Then there’s also the argument that the Fed is creating money to buy existing assets. The Fed is pumping more money into the economy than are new goods being produced. They are continuously expanding the money supply compared to the number of fixed goods or assets in the economy. Also, some assets or goods are consumed or wear out - yet the money supply continues to grow. Their actions are continuously reducing the purchasing power of money.
Then I don’t understand why anyone would be selling real estate, ever. At least the house is an asset. If our economy is driven by debt, and debts default, there is no end to the Fed’s printing of money.
I mean, I get the idea of a glut of dollars chasing after the same resources creating a bubble. That makes sense to me. But just because this housing bubble burst, why does that mean there won’t be another housing bubble? And another after that? And after that? Until finally the dollar hyperinflates. At that point, wouldn’t you want to be the guy that bought and house, never sold, lauged at all the bubbles, and still had your house when it was all said and done? I suppose, unless you were dumb enough that you refinanced every time the price went up.
Inflation, bust and then re-inflation isn’t how an economy supposed to work.
We are going to hyper inflate. The dollar is on the path to complete destruction. You will want to own physical assets, like houses or gold or food, when inflation starts to take off.
I do really appreciate you taking the time to help me understand these concepts. They don’t come to me that easily.
Stranger,
What about people that collect unemployment checks, food stamps, etc..? What do they provide in exchange for the debt that is owed to them? Do they provide the work of other private citizens in exchange for their money?
one the dole, meaning those of us with jobs - that are productive contributors to society and the economy share our savings with those unable or too lazy to work. We do this through the employment insurance tax or other taxes that pay for welfare, which confiscates that portion of our savings.