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mvassilev
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posted October 26, 2009 01:41 AM |
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No. The Federal Reserve buys treasury bonds, thus injecting money into the system.
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TheDeath
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posted October 26, 2009 01:43 AM |
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No. The Federal Reserve buys treasury bonds, thus injecting money into the system.
Buys with what? I assume since it's money what they buy, what do they give?
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mvassilev
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posted October 26, 2009 01:47 AM |
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They buy Treasury bonds with the same thing everyone else uses - money.
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TheDeath
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posted October 26, 2009 02:01 AM |
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Ok I'm confused now.
I thought money was printed and GIVEN to banks/whoever buys, not that the Treasury TAKES money away... if so, where does the printed money go?
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mvassilev
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posted October 26, 2009 03:02 AM |
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The Federal Reserve buys Treasury bonds from whomever has them.
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Elvin
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posted October 26, 2009 08:53 AM |
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It's all about regulating the amount of money in the market. According to the situation they can release it or draw it back in, does that sound so weird? Reason is to affect its demand, the more money there is out there the more the inflation rate. There are examples of some countries creating more and more money which made their currency weaker and weaker, when that happens a bubble gum price can reach a few hundred bucks  Really messy.
From wiki:
Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.
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Binabik
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posted October 26, 2009 11:12 AM |
bonus applied by Elvin on 26 Oct 2009. |
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Thedeath, you probably don't understand what the Federal Reserve is. But that's OK because nobody else does either. I don't even think THEY know what it is.
Keeping those last two sentences in mind, I'll charge ahead in ignorant bliss. (in other words I'm on pretty shaky ground explaining this stuff, so you certainly shouldn't take it as 100% true and correct )
First, the Federal Reserve is not the government. But it's not entirely private either. It's kind of a weird hybrid and the exact nature of it is a closely guarded secret. In some ways you could look at it as an association of member banks (so in that sense it's private). But they partially answer to the government and work closely with them. In this sense they are government. They are charted by the government to perform certain economic and financial services that are deemed necessary for a healthy and functional system of banking and finance.
The government has no money on it's own. They gain revenue through taxation, or by borrowing (along with some very small amounts from other sources). Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds) are three similar types of securities used as a means for the government to borrow money. Basically these are IOUs. The government borrows the money, and they issue one of the above papers as proof of that loan, stating the amount that will be paid back to the lender, and on what date the money comes due.
So when Mvass mentioned the Federal Reserve buying T-Bonds, "they" (think of the member banks) loaned the money to the government. The government will then pay it back to the Federal Reserve. The method and length of time they use to pay them back depends on whether they issued T-Bonds, T-Bills, etc.
To make things more confusing. You asked about the printed money. The only printed "money" is Federal Reserve Notes. There is no such thing as "printed" US dollars. The Federal Reserve Notes are more or less just a medium of exchange. Consider that most money is basically just an accounting entry that says so-and-so has XXXX money in the bank. The Federal Reserve Notes are only used for day-to-day transactions for small stuff.
It's always weird to think of it this way, but what we call "money" is nothing more than a piece of paper which the government has declared to be "legal tender". It's just a common medium of exchange that everyone (within a given economy) more or less agrees on the value. It's really not much different than bartering for gold, or labor, or borrowing your neighbor’s tractor for a day. In the previous examples, the "value" is determined at the time the barter is done....."if you loan me your tractor for a day, I'll give you 5 dozen eggs from my chickens". The value of the dollar, and hence the value of the Federal Reserve Notes which are tied to the dollar, also is basically determined by a barter system, but a very large and complex one.
It's easy to try to tie down "money" or "dollar bills" and think that *IT* is the thing that has the value, when in reality it only represents value. So when the farmer has "sold" thousands of eggs, and thousands of other people have made things, provided service, etc, the *NET* affect of all this is recorded as an accounting entry at the bank, with each person having a specified amount of "money".
Now when Joe in California wants to buy eggs from Fred in New York, Joe doesn't have to drive his tractor to New York to make the trade. The value of Joe and Fred's work is recorded at the banks. But if Fred doesn't get the tractor for a day, SOMETHING needs to be traded so that Fred can be paid for his eggs. That SOMETHING is Federal Reserve Notes. They represent the value of the money Joe has in the bank in California.
If there are a lot of these transactions going on, transaction where more than an accounting entry is needed, then there needs to be an amount of Federal Reserve Notes so all these exchanges can take place. If there are too many "cash" transactions compared to the number of Federal Reserve Notes in circulation, you don't want the bank to tell you "sorry, I know you have the money in your account, but we are out of notes so you'll have to wait until Joe's Notes from California to get here before we have enough to give you".
There's no need to wait for Joe's notes to get there, Fred already HAS money in his account, all he needs is SOMETHING to represent that money, SOMETHING he can use to pay for the movie. So the bank can print more "notes" to represent the money in his account, WITHOUT creating "new" money out of thin air. The new notes simply represent money that already existed. It's not inflationary to essentially write on a piece of paper "Yes, Fred does indeed have $100 in his account, and when he hands this to you, he will no longer have it, you will". Nothing new has been created, no increase in money supply, nothing inflationary, just a piece of paper used to transfer existing money from one person to another.
It's getting way too late to try to wrap this up. There's a major hole in the above, it doesn't explain the inflationary affects of the money supply. It's not meant to. It's only meant to (hopefully) simplify some of this stuff. But also I wanted to try to show that printing more Federal Reserve Notes is not INHERENTLY inflationary. In other words, printing additional Federal Reserve Notes, is not the same thing as increasing the money supply.
Man I'm really tired. I REALLY shouldn't be doing this.
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posted October 26, 2009 02:40 PM |
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QP for binabik's nice, informative post, please.
(Perhaps economics would be a good topic to have another education thread on, hmmm?)
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TheDeath
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posted October 26, 2009 02:55 PM |
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Well I think this should be moved out of the VW now, due to Binabik's great informative post. 
I still don't get something though. How can someone even "get" money in his account in the first place? I'm talking about getting new (i.e more in TOTAL -- overview of the entire world) not just "changing hands" from Joe to Smith. That's what I'm confused about: when and how exactly does that happen? (ok not exactly, if you have a simplified example, I'm all for it ).
In other words, how do you increase the money in circulation? (or Federal Reserve notes, whatever).
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posted October 26, 2009 03:06 PM |
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QP for binabik's nice, informative post, please.
(Perhaps economics would be a good topic to have another education thread on, hmmm?)
Mvass has already made one. I could move this one to osm or binabic could copy his post there, depends if the rest of the discussion been covered in the economics thread. And yes great post, you should in fact keep doing this
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Corribus
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posted October 26, 2009 04:11 PM |
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Edited by Corribus at 18:50, 26 Oct 2009.
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I know mvass has already made one, but that one devolved into a combative discussion about capitalism, rather than just a discussion on economic principles/philosophy.
Anyway, just wanted to give my to bin's post.
EDIT: Maybe a thread title change is in order, too? Or this thread could be merged with the old economics thread, if that's possible to do here.
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mvassilev
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posted November 06, 2009 01:32 AM |
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TheDeath
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posted November 06, 2009 01:43 AM |
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Edited by TheDeath at 01:51, 06 Nov 2009.
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What I understand from that is that money is created when lending, which is the same principle with the "debt" economy I was talking about previously. So either was that suspicion correct, or there's something I don't get 
BTW there's a table in that wiki article afterwards which makes no sense to me: the result is 100, which is the initial amount. Where is the money "created"? I only see it circulating...
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TheDeath
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posted November 06, 2009 02:07 AM |
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Edited by TheDeath at 02:16, 06 Nov 2009.
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Hmm read it a bit more, and it seems to be "worse" than I thought. (this 'fractional-reserve system' I mean).
Here's how i understood it: someone deposits money, say $100, into Bank A. Bank A then loans part this money to someone else, $80 for example, and keeps $20 for reserves.
But the total amount of money now is $180, which means the damn bank creates all the money it loans. WOW! 
(i.e the original depositor still has the $100 in his deposit!, while the bank lends 80% of it to person B... I can't believe this system works at all, talk about inflation )
BTW what's your economic opinion on this article, it seems very on the spot, at least compared to the wiki article:
http://www.nolanchart.com/article5144.html
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mvassilev
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posted November 06, 2009 02:58 AM |
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As I understand it, the result isn't $100 but $457. The circulation is actually creating new money.
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But the total amount of money now is $180, which means the damn bank creates all the money it loans. WOW!
The central bank creates the initial injection. Then it spreads out through the system.
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talk about inflation
Well, that's why the central bank only needs to inject a little money into the system to create a lot.
As for the article you posted, I don't see anything wrong. That's the way banks work - and that's good. That's the way things are supposed to be. It's not fraud - everyone knows banks work that way.
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TheDeath
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posted November 06, 2009 03:01 AM |
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Edited by TheDeath at 03:12, 06 Nov 2009.
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I don't think "it's good" because if people simultaneously want their money back from deposits it will have to issue ("print") much more money to compensate so inflation would occur.
Also someone could loan money and not be productive enough to pay it back with profit (productivity), which means the newly created money will again lead to inflation.
This system assumes that a loan implies productivity, which most certainly isn't the case. No wonder we have so much inflation these days.
EDIT: It also assumes that productivity only increases with loans. That is, if you don't make a loan, you aren't productive, which certainly isn't the case especially today in the internet age where setting up businesses, especially virtual ones (like software or other IT development), don't need a lot of money for starting up (and thus loans).
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posted November 06, 2009 03:14 AM |
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Grrrr, it's articles like that which are the reason I threw away my economic texts.
The section heading says "money creation". Well it's just not true. No money was created, only debt. Debt was created multiple times based on the original deposit. That's not money creation. Debt might spend LIKE money but it's not in itself money. It's only a loan, and when it's all paid back, you still only have the original deposit. (for simplicity I'm assuming no interest on the debt)
NO MONEY WAS CREATED
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TheDeath
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posted November 06, 2009 03:17 AM |
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Grrrr, it's articles like that which are the reason I threw away my economic texts.
The section heading says "money creation". Well it's just not true. No money was created, only debt. Debt was created multiple times based on the original deposit. That's not money creation. Debt might spend LIKE money but it's not in itself money. It's only a loan, and when it's all paid back, you still only have the original deposit. (for simplicity I'm assuming no interest on the debt)
NO MONEY WAS CREATED
Mvass certainly disagrees with debt-driven economics though and prefers the term money.
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mvassilev
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posted November 06, 2009 03:20 AM |
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No, money isn't created when banks try to pay back depositors - it's created when the central bank lends to private banks (or buys T-bonds). Then banks lend that money out. When banks don't have enough money to pay back depositors (such as when there is a bank run), they don't (and can't) "issue more" - they just collapse. (Under the modern system, though, the government insures deposits up to $250,000, so depositors don't have to worry, and also this decreases the risk of a run on the bank.)
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Also someone could loan money and not be productive enough to pay it back with profit (productivity)
Well, that's really the key question here, isn't it? The lender asks themselves, "Do I think this guy can pay off his loan?" The borrower asks themselves, "Will this loan make me productive enough to pay it off (and make more money in the process)?" Of course, some people borrow money and then spend it on stuff that doesn't increase their productivity. Then they have to reduce their standard of living in the future, because they squandered their money in the present. Or they just declare bankruptcy and leave the bank with nothing. 
And the newly created money leads to an increase in the money supply anyway - whatever people spend it on, they buy something from somebody else. Eventually, that money is going to be deposited. (And be sure to distinguish between inflation and increases in the money supply.)
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TheDeath
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posted November 06, 2009 03:25 AM |
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What I see is this: if someone loans money, like with credit card (or how do you call those cards), from the bank, new money (or debt) is being created (due to interest), without increasing the number of products (all other things being static, for simplification). So more money, same amount of products, means inflation.
Anyway I'm going now so I'll continue this tomorrow.
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