if people in the private sector ever paid off all of their debts, and the federal government paid off all of its bondholders, then the supply of US dollars would be virtually extinguished.
The idea being that the Fed always lends the money it prints to the Treasury, meaning the taxpayer now owes money to the Fed. And the banks always increase the money supply [through fractional reserve banking] by lending to the private sector, increasing the private sector debt.
So first off, apologies to all who insisted money is debt and got a deaf ear from me.
That being said, it doesn’t seem like he thinks that money is debt is the problem with our economy.
I’ll try and find the quote of an old Atlanta Fed Gov. that said something like, “the system of money and debt is the most perplexing thing for intellectuals of our time to ponder.” He mentions that very scenario where everyone has paid off all of their debts.
“We are completely dependant on the commercial banks. Someone has to borrow every dollar
we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system… It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.” — Robert H. Hamphill, Atlanta Federal Reserve Bank
I just thought of this now: besides being debt, isn’t money claims people have to the central bank assets? In this sense every dollar is worth a percentual of the Fed’s buildings, tables, chairs and printing press machines which is given by 1/(monetary base).
In which sense is it, then? I know they put it on the liabilities because they create it at the same time they buy stuff they put on the assets and I know it comes from the gold standard eras when every dollar had a counterpart piece of gold in the assets. But now they extinguished the gold (not at all, I think there’s still gold on the Fed assets, maybe not), they still owe people something, don’t they? I’m not saying they do this legally. Legally they can do what they want, but on the justice of the accountability they still have to pay the liabilities with something.
In which sense is it, then? I know they put it on the liabilities because they create it at the same time they buy stuff they put on the assets and I know it comes from the gold standard eras when every dollar had a counterpart piece of gold in the assets. But now they extinguished the gold (not at all, I think there’s still gold on the Fed assets, maybe not), they still owe people something, don’t they? I’m not saying they do this legally. Legally they can do what they want, but on the justice of the accountability they still have to pay the liabilities with something.
Please clarify my mind, thanks.
I’m pretty sure, legally, we owe them. It is a swindle. None of it is going to, on the brightest of days, undo what has been done, other than to stop it. We might be able to bring about a situation where the FED will go bankrupt, then the government can buy the assets back for cheaper. But my guess is that the other central banks will get those assets unless we go to war and seize them.
All money does not come in as debt. We’ve gone through this already a millionj times. The Fed injects most of its money by open market transactions in which it buys from the public already existing government bonds. It can buy them directly from the treasury, but historically it has not. All that new money increases banks’ reserves and if those banks use those reserves to pyramid new bank deposits and make business loans or buy government bonds, then you can say that the money came in as debt. But the base money the Fed created did not.
A recent illustration of massive money pumping that did not come in as debt is the 1 trillion (or whatever) the Fed created to buy mortgage back securities in 2009. Here you have the biggest injection of money by the Fed in History, but the myth of “money as debt” still lives on.
EDIT: "Hemphill’s horror at the “tragic absurdity” of our current financial system was understandable. The government and powerful bankers established a system in 1913 that typically works like this: Every dollar of the monetary base (or “narrow money” or “high-powered money”) comes into existence with a one-to-one increase in the public debt, collectively owed by the taxpayers. Then, private banks use that base to create more dollars (in “broad money”) that come into existence with a one-to-one increase in private debt.
Going the other way, if people in the private sector ever paid off all of their debts, and the federal government paid off all of its bondholders, then the supply of US dollars would be virtually extinguished.
This is the sense in which our fiat-money, fractional-reserve system uses “debt-based money.” Although market prices are flexible and can react to deflation much better than most people realize, it is still true that our system is tragically absurd."
Ok, but this just a conceptual point. I don’t want the chair Bernanke uses not anything from that bunch of stupid people. I also don’t have a single dollar, because I’m brazilian and live in Brazil.
The point is that the Fed did not “monetize” this debt that has already come into existence in the past. To say that money comes in as debt, you must show that the new money came into existence as a loan (an exchange between the new money and a fresh newly issued IOU). If the Fed buys from you a government bond that you have bought from the treasury a few years ago, it did not lent you money. It did not lent anybody money. You had lent the original sum to the treasury, not the Fed. The Fed, therefore, did not monetize it, and you see that money came into existence NOT as debt. After the treasury pays its loan (now to the Fed), you will still have the money (or somebody else in the economy) that the Fed used to purchase your bond.
But how many Treasuries can we say have been created from an excess of credit available to buy them. Whether on the private market or not. They still subsidize/facilitate illegitimate debt purchases by its member banks.
And when the loans are repaid, this credit is contracted back until only the reserves are left (assuming banks had not issued any new debt to offset the contraction). The origin of the reserves as explained above is mostly not debt. It is real cash backed by cash. The system did not start from federal reserve notes on day one. You have to remember that. There is always real base money at the bottom of the pyramid. Even if it’s a 100 year pyramid.
Right man i don’t think that is how i was trying to present it.
Rothbard, who i like to reference in these here parts, makes the case for an inverted pyramid with real money being the smallest part (the tip) which is at the bottom (foundation). Tiny bit og gold with stacks and stacks and stacks of demand deposits (paper claims) on top of it. Unstable, inherently insolvent, immoral, and deceitful.
fiatjaf: