Posted on 06/15/2022 5:22:33 AM PDT by RaceBannon
“The only “commercial” transaction that destroys money is (I think) bankruptcy. The amount of money lost by the lender is, in effect, destroyed.”
And that is missed by many. After 2008, a lot of money was going off to money heaven. When the FED was replacing that money, it was not new, “added’ money.
The very first step is to ask yourself “what is money?”
When there is no gold standard and no increase in taxes, increases in government spending requires increased borrowing and increased creation of money out of thin air to pay for it. When the velocity of money is constant, increased creation of money out of thin air causes increased money supply, which causes increased aggregate demand, which leads to higher average price level.
“Printing money dilutes it’s value. More money chasing the same quantity of goods and service drive up their prices.”
Let’s say I own a bakery. So, i manufacture and sell loaves of bread every day. Let’s say I price them at 5 dollars a loaf.
Then one day the government decides to print up and give away 1 million dollars in cash to each and every citizen in the country. Now, all my customers, regular or not, when they come into my store, they’re all millionaires (including myself).
They each now have more than enough money to buy out my entire inventory for the day if they please.
Ok, but then why do I, or why should i have to, raise the price of loaves of the bread i baked to anything more than the 5 dollars a loaf I was charging just a day or two before? Why not just sell them at the old price of 5 dollars a loaf?
Prior to 2008 during the financial crisis, when the government ran deficits, they issued T-bills borrowing the money from anyone who would buy the T-bills, promising to pay the money back at various times, depending on the maturity of bonds.
In 2008 the Federal Reserve began actually directly buying the bonds from the Federal Government, hence the term Quantitative Easing, basically the Federal Reserve creates whatever amount of money it wants to cover the cost of government.
In addition, the Federal Reserve around 2008 started buying up private assets like Mortgage-Backed Securities, etc. With the stated goal to stabilize the markets by removing bad assets from banks.
All that money the Federal Reserve paid for T-bills and Private assets has filtered thru banks into the private economy, keeping interest rates low and encouraging consumption, it’s taken quite a few years, but Covid has proven to be the trigger to setoff this inflation, trillions were sent to the private sector to essentially consume without working.
What has happened, we’ve seen housing prices and rental rates skyrocket to a point middle income families can’t afford to pay, even though interest rates have remained historically low which further fueled asset inflation.
The stock market has skyrocketed over the last decade, basically we’ve had massive asset inflation of stocks, housing, etc.
The Biden Administration came in and destroyed the energy sector and with the help of Republicans threw more money to consumer.
Now you have a combination of dramatic asset price increases, fuel price increase, food price increase, inflation has come to everyday consumer inflation.
And we have complete idiots running things which only makes things worse.
Buckle up the next few years will be really hard on just about everyone.
Let’s say you did a lot of work for someone, and they offered as payment a limited series art print by a very famous contemporary artist - numbered and signed by the artist. There are only 50 of these prints in existence. You see it as an investment, and you accept.
The artist, though, overspends what he makes (think US government) and needs more money. So he decides to print many more of this same print, sign them and sell them. He prints so many that you can see them in bars, restaurants, even sold on a home shopping network.
How much is your print now worth? If you were trying to use this print as barter to purchase something you need, could you purchase as much with it AFTER the many additional prints were distributed as you could before?
The Fed can decrease the money supply by increasing interest on the loans it gives to the banks.
When the bank gets the interest, it would make it cease to exist instead of recirculating it.
In the debt free money theory, interest would only be charged by the fed to “mop up” excess cash in circulation. The goal being to keep the money supply in a stable realtionship to goods and services being produced.
“Why not just sell them at the old price of 5 dollars a loaf?”
Because you are a good business man and will price your product for “what the market will bear”. If every citizen is a government enriched millionaire, you will take advantage of that. I was talking with a Kroger’s regional manager about food price increases. He said when a supplier gives them a price increase, they don’t just automatically pass it along. But they consider “consumer price sensitivity” and their competition. If the price increase is 30% but consumers would balk badly at a 30% increase, they might juts raise the price 20% so as to not kill sales.
““Why not just sell them at the old price of 5 dollars a loaf?””
The other reason you would raise bread prices is because those multimillionaires will be bidding the prices of everything you Mr. Baker has to buy, flour, bread making equipment, etc. If you don’t you’ll go out business. And that is how inflation ripples out and about.
but that is the market, not the government, that is not printing money, that is manipulation of goods through monopolies? ( the first to buy all controls all)
“but that is the market, not the government”
No, because it happened because the government made those citizens millionaires. Read the original story.
Because it’s printed out of thin air and dilutes the real value of a dollar!
Check out the US debt clock which does not include unfunded liabilities: The U.S. has $162 trillion in unfunded liabilities.
https://usdebtclock.org/index.html?taxpayer=
That is a common misunderstanding.
From the link I posted in #26.
"4) When the Fed performs quantitative easing they perform open market operations (just like they have for decades) which involve a clean asset swap where the bank essentially exchanges reserves for t-bonds. The private sector loses a financial asset (the t-bond) and gains another (the reserves or deposits). The result is no change in private sector net financial assets. QE is a lot like changing your savings account into a checking account and then claiming you have more “money”. No, the composition of your savings changed, but you don’t have more savings."
You aren’t correcting me. I said “part of.”
As you imply, the Federal Reserve actually does NOT make the majority of the medium of exchange. It only makes this small part.
The Federal Reserve makes M0 (the monetary base or high-powered money), a part of which constitutes the paper money part of the medium of exchange, and the other part of which constitutes bank reserves (almost all of which nowadays is in digital accounts).
The banks make the checking account part of M1. Bank deposits subject to check plus currency in circulation (paper money issued the Fed and coins issued by the Treasury) is the total of M1.
So, paper money is (a) made by the Fed, and (b) part of the medium of exchange. So, it serves the purpose of illustrating my point.
In the future, when you want to make a point, please say what the point is instead of merely saying that another person hasn’t said everything. Everything anybody says is always incomplete. Incomplete isn’t the same thing as wrong. Incomplete can not only be correct, incomplete can be useful for some purpose.
I have a question about this because I genuinely don’t know the answer.
When the Fed buys billions of dollars of junk assets from Vanguard and Blackrock to stabilize the markets, who is who? How do we know what price they paid and what determines the price?
For example, if the Fed gives Vanguard $1B for junk bonds that have a market value of $100K, how would we know? Where does the extra $900K come from?
Is Blackrock Paul?
Is the Federal Reserve Paul?
Who is Peter?
Where did the Fed get the $1B?
The late Walter Williams described this situation: A man walks down the street and sees a man dressed in a nice suit. He pulls out a gun, demands $100 from the guy in the nice suit, who gives it to him. The first man then continues walking down the street and gives $20 to the first four beggers he meets on the sidewalk and keeps $20 for himself. Is he a hero, or a thief? (He's a thief.)
Note Biden’s actions it covers it all.
The metaphor was just a demonstration of how money supply impacts prices. Where the shells came from wasn’t important at the time.
And apparently, nobody is interested in paying anyone back for the seashells, regardless.
Can bankruptcy destroy money?
Here, “money” is used in the sense of wealth (not in the sense of medium of exchange and not in the sense of income) (a big part of the confusion of money is that, in the English language, “money” means three very distinct things).
Ignoring the cost of administering a bankruptcy (which cost can range from nearly zero to substantial), the answer is no. Bankruptcy “merely” re-arranges financial claims on wealth.
For example, before: liabilities (as measured) constitute 80% of a firm’s total assets (again, as measured), and equity (again, as measured) 20 percent. After, debt holders receive per dollar of claim 40 cents in new debt, and 40 cents in new equity, old shareholders receive zero, and assets are written down by 20 percent.
Nothing really has changed. Assets are written down to current value (and their loss of value since put into place is merely recognized); and, claims on these assets are brought into line with the current value of assets in a way that recognizes their priority of claim.
Getting back to money as a medium of exchange, if every new unit of the medium of exchange was “backed” by things of value, there couldn’t be inflation.
But when we have unbacked money (whether paper or digital), new money can be issued in excess of the availability of goods and service. Such issues are inflationary.
The case of the Fed buying distressed assets in 2008.
This was the way that operation was supposed to work and actually worked:
1. The Fed bought mortgages backed securities, the mortgages of which were guaranteed by federal housing authorities, at a bargain price relative to face value.
2. The Fed paid for these assets with brand now money. Ben Bernanke just printed up the money.
3. The Fed paid interest of bank reserves so that much of this brand new money just stayed in banks. In effect, this part of M0 was part of the national debt.
4. At the time, the Fed had a very good reputation for keeping inflation in check, and the private-sector was in shambles. Many people were happy to carry safe securities at a very low interest rate. If everything worked out well, at a later time, the Fed would re-sell the mortgages-backed securities at a profit and soak up the brand new money it had issued during the panic.
5. There was a risk of inflation. At least some people I know within the Fed were aware of the risk. If the brand new money started getting into the economy (M0 getting multiplied into M1 by the banks), an inflationary spiral would get under way.
6. But the inflationary spiral never got underway and, by the late 2010’s, the Fed was liquidating its portfolio of mortgage-backed securities and disappearing the money it had created during the panic.
7. Then came COVID and the Trump administration thought they could do it again. And, maybe they could have. But, the Trump administration spent so much money it was like the Yellowstone caldera exploded.
8. Then cam Biden and he continued the policy of massive deficit-spending.
9. Here’s the lesson, boys and girls, just because you can make a turn on the instate at 80 mph doesn’t mean you can drive an Indy car at 200 mph in a residential neighborhood.
10. Or, to quote Clint Eastwood, A man’s got to know his limitations.
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