Posted on 03/29/2008 6:48:20 PM PDT by ovrtaxt
How is Money Created? |
The Federal Reserve Bank of Chicago used to publish a pamphlet entitled Modern Money Mechanics, which explains M1, M2, and M3. It is a truly fascinating read. That pamphlet is no longer in print, and the Chicago Fed has no plans to re-issue it. However, electronic copies are available (see link).
In it, the process by which the Fed creates money "out of thin air" is detailed. Consider the opening paragraph:
"Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 2)
Really read that paragraph.
The USFed, in one of its own publications, is stating right there in black and white that money is not created from economic activity, nor from a government operation. How then is it created?
"The actual process of money creation takes place in the banks." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 3)
The pamphlet uses an example of $10,000 being deposited from the Federal Reserve Bank to "Bank A" and shows how that develops into an increase in assets to the amount of an additional $90,000.
Essentially the Federal Reserve simultaneously creates an asset and liability of the same amount with a private bank. The net sum is zero. This money is "deposited" in the bank's federal reserve account. The private bank can then use this money as a reserve through which they can lend out additional money to the public. This reserve rate is generally 10%. Thus, a "deposit" of the USFed of $10,000 will transform into the private bank being able to loan out $90,000.
A couple of points.
Firstly, if I loaned your company $10,000 would the net worth of your company increase by that amount? The answer is no, because while assets went up by $10,000 so did the liability. It would be fraudulent for you to report an increase in net worth of $10,000.
Secondly, your company could not lend out $90,000 from the initial $10,000 you borrowed from me. You simply would not have the funds and if you claimed to have them, again you would be committing fraud.
Thirdly, I would like to take a quote from another Reserve Bank publication, this time from page 8 of Philadelphia's The National Debt:
"The Federal Government, with the cooperation of the Federal Reserve, has the inherent power to create money - almost any amount of it. This power makes technical bankruptcy out of the question."
So not only are the banks committing fraudulent activity in the sense that they claiming asset value from their debt and secondly loaning out more than they have borrowed, they are protected from any risk of bankruptcy courtesy of the public! You and I would pay more for prices of goods and services should the Fed have to dilute the money supply further by printing sufficient money to prevent bankruptcy of a bank!
This is nothing short of outrageous.
Published on http://DollarDaze.org - Jun 6, 2006.
We’ve been over this already, rudeboy.
And also the fact that, in FR, it’s a “no no” to drag matters from thread to thread.
But, I am not the moderator or thread police.
foflol!
Todd must've stepped out. What did you do on that other thread that got you all lathered-up? Didn't you imply that CALPERS purchased no other stock other than Bear Stearns for all of 2007?
Oh, really? When did you learn that? Yesterday?
Didn't you imply that CALPERS purchased no other stock other than Bear Stearns for all of 2007?
Um, no. You all said that when you all were "lathered up" and hyperventilating about what you wished I had said...and then claimed it was what I said...and are now even saying it on yet another thread, unrelated to it (a "no no" in FR. It is AGAINST forum rules to do so).
You’ve been posting on FR long enough to know the forum rules.
Shouldn’t come as a surprise to you. Convenient memory you have, isn’t it? Perhaps I should just call you “LCD” from now on.
It is rather amusing that you claim (now) to be aware of the forum rules. Kinda’ sucks when the shoe is on the other foot, huh?
It is not I who drag matters from thread to thread....unless, of course, you are repeating the exact same thing on multiple threads.
The claims you made against me on the Bear Stearns threads were dragged to this thread because your buddy got reamed on this thread and I *dared* to snicker at how he was bested.
foflol. That is what is MOST amusing.
Believe me, your posting history would demand that we make such presumptions. But we don't have to presume you thought Calpers owned BSC 10 times over, we just have to read your post where you implied it.
That's also very poor grammar, BTW.
No, he implied that Calpers owned billions of shares of BSC and their retirees were going to get hit badly. And he backed it up by posting a shares traded/ commissions report which only showed how much business Calpers gave Bear. LOL
Um, no. A read through of the posts show that YOU all made those statements, I did not.
I stated that Calpers, unless it had divested itself of shares it owned, would be stiffed for those shares due to the Bear Stearns collapse.
That you wish to ascribe to me as having stated the specific loss in dollars or number of shares bought that YOU "went the extra step" and "added up" and stated yourselves, makes it not only YOUR OWN dollar amounts, number of shares, and value of shares, but YOUR OWN presumptions.
Hey, listen. If you want to agree with me to follow the forum rules from this point forward, I’ll gladly oblige. It’s not that difficult to treat people the way they treat you.
Wiggle, wiggle, wiggle. LOL.
I can agree with that.
I would also like to state that, in the interests of having honest discussions, if that is the true intent, then making presumptions against another’s statement(s), and restating those presumptions as if they are truthful or factual should not be the modus operandi.
Unless, of course, honesty in discussions in order to determine understandings, to clear up genuine misunderstandings, or engage in actual communication for the purpose of, at least, seeing another’s point of view is not the goal.
I enjoyed your link about the Real Bills Doctrine .thanks for pointing me in that direction. From what I could glean, youre right, thats how I conceive of the system in a very general way.
At the same time I agree with your knock about the potential downside of endless expansion (and I suppose higher interest rates would be the main brake). If people dont have enough substance to their dreams (instead of rolling up my sleeves and getting some work done for others, Ill just hop on this real estate bandwagon instead, for example) — and bankers dont bring their own value to the table in terms of being responsible and discerning about peoples ability to repay — you get an inflationary bubble where the value doesnt pan out, followed by a correction when the bill comes due.
But its interesting to me, even those mortgages that are upside down are far more collateralized with something real or tangible than loans to businesses. Even under the gold standard, it is the money multiplier (through the cycling at whatever reserve ratio), that appears to do the lions share of distributing the risk among peoples good faith in the form of promises to pay. long odds for a very thin sliver of gold, and a big bet on entrepreneurial value creation.
“But its interesting to me, even those mortgages that are upside down are far more collateralized with something real or tangible than loans to businesses.”
Businesses borrow against their merchandise. A car dealer against his inventory, a mine against their production. Business loans are often for something tangible.
The problem is pricing, which varies according to demand and the business cycle. Or the housing cycle. As the business cycle goes up prices go up, and bankers become more lax about lending. Looser lending will drive prices even higher. The cycle feeds on itself until something stops it. Sometimes that ‘something’ is simply the law of large numbers. Trees can’t grow forever, and the business cycle doesn’t just go up.
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