Tuesday, January 15, 2013

John Stewart Platinum Coin Fail


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I like Jon Stewart and think he has been very funny over the years, but what he and other don't seem to understand is our money is NOT based on gold in Fort Knox or some buried national treasure, it's based on NOTHING but the goodwill of America!

That's correct, since President Nixon took the US off the gold standard the US Dollar has been a fiat currency. Fiat money is money that derives its value from government regulation or law. The term fiat currency is used when the fiat money is used as the main currency of the country. The term derives from the Latin fiat ("let it be done", "it shall be").

From 1944 to 1971, the Bretton Woods agreement fixed the value of $35 United States Dollars to one Troy Ounce of gold. Since then some say the US Dollar has had a de facto oil standard, referred to as the Petrodollar. The idea is based on the fact that all barrels oil are sold in United States Dollars on the international market, but there is no set amount of oil backing a dollar.

The Petrodollar system came about because of the United States overwhelming military power and an arrangement President Nixon made with the Saudis. Some say this is also the hidden reason why the US is so adamant about maintaining control over the Middle Eastern region. Some like former Congressman Ron Paul have gone as far to say the real reason for the Iraq War was Saddam Hussein threatening to sell oil in Euros. Similar claims have been made about Moammar Khadafy.

Furthermore we have had a fractional banking system since 1913 that lets banks just create money out of thin air even when it was based on a gold standard. The way it works is say Bank A has $10 dollars, and John Smith wants to borrow $100 dollars.  Bank A then tells the Federal Reserve they need $90 dollars, then Bank A loans John Smith $100 [their $10 dollars and the $90 dollars the Federal Reserve just printed up]. They do however have to maintain a reserve or balance amount according to Fed rules, the current reserve rate is 12%. How much money could you make if you could do this? This is literally the single largest wealth transfer mechanism in human history.

Bottom Line:


The point of all this is minting a trillion dollar platinum coin is exactly the same thing the Federal Reserve does on a daily basis, create money out of thin air, the only difference it is the Treasury doing it, not a private bank. My question for Jon Stewart is why is it OK for a private bank to create money out of thin air but not the very institution given sole authority to do it by the US Constitution?

6 comments:

  1. This comment has been removed by the author.

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  2. The problem with your theory is that printing excess money devalues the currency already in circulation. Yes, the mint is constantly printing and coining money, but much of that is to replace worn out currency, or currency taken out of circulation due to people stuffing it in mattresses and cookie jars. The total amount of hard USD in circulation is something under $2.5 trillion. You can't magically add a trillion dollars to the government's bank account without either: weakening the dollar against other currencies, or: jump-starting inflation. In reality, you'll likely end up with both those outcomes.

    The total (eg, currency and digital) US Dollar supply is estimated at about 14 trillion right now; arbitrarily adding 7% of the ENTIRE supply of USD is nuts - they weren't printing that much during the height of the recent recession.

    Your statement about the fractional banking system is completely and spectacularly wrong. The fed does not print money for bank loans. If a bank wants to lend out more money than it has on hand, it may borrow from other banks or from the fed, but it must pay those funds back.

    The way the fractional banking system works is this: the $100 that I deposit is loaned out, with a fraction of the $100 kept in reserve (the reserve rate). If we're using 10% here, 90 of my dollars may be loaned out to someone else, thus entering the economy again. Theoretically, that $90 will find it's way back into someone else's bank account - whereby it is again subject to the fractional reserve rate - and $81 of those dollars may be loaned out again, making a total loan amount of $171 on my $100 deposit.

    While this IS wealth creation ($71 dollars were created just on the first loan, and this is a recursive process), the fed is not printing money to accomplish it. Also, that $14 trillion total USD supply that I noted earlier includes all of the wealth created by the fractional banking system.

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  3. Great point, too bad it bears no resemblance to reality. If adding a $1 trillion would have such an effect then it would be a safe bet to assume that the $7 [to as high as maybe $18 by some accounts] trillion the fed pumped into the big banks after the crash would have had many times the effect, but it didn't.

    http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104?print=true

    But lets just go by your claim of 7% being so disastrous. As of November 17, 2011 the Federal Reserve reported that the U.S. dollar monetary base is $2,150,000,000,000. This is an increase of 28% in 2 years. Let me see, uhmmm? Which is bigger 28% [or 14% a year] or the disaster causing 7%?

    "The Fed does not print money for bank loans." Wrong, the Fed is sole source of US [non-coin] currency. Perhaps you mean they don't just create money out of thin air. Wrong again. Yes banks must pay back the money but the borrowed money is new money, created by keystroke. Paying it back doesn't mean it vanished from the economy.

    "If a bank wants to lend out more money than it has on hand, it may borrow from other banks or from the fed, but it must pay those funds back." Wow that is very funny. So if you can borrow money at less then 1% and then loan it out at upwards of 18% depending on the loan type vs using only your own money which one are you going to choose? Maybe in fairy land you would choose to use only your own money, the real world however doesn't work that way.

    Regarding the total money supply, there is a major problem with your figures, M3. There is a reason the Fed now refuses to report on this figure, they are hiding the true growth of the money supply which is substantially larger than M1 and M2 would lead the public to believe.


    Nice try, no cigar.

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  4. I wasn't saying that adding 7% to the total money supply would cause a global cataclysm. I said it would either weaken the dollar or increase inflation, or both. Many, many economists will agree that arbitrarily printing money leads to those things.

    As to your characterization of how the fractional banking system works, you said:

    "The way it works is say Bank A has $10 dollars, and John Smith wants to borrow $100 dollars. Bank A then tells the Federal Reserve they need $90 dollars, then Bank A loans John Smith $100 [their $10 dollars and the $90 dollars the Federal Reserve just printed up]."

    That is NOT what happens, and bears absolutely no resemblance to: "So if you can borrow money at less then 1% and then loan it out at upwards of 18% depending on the loan type vs using only your own money which one are you going to choose?"

    Your point about interest rates is absolutely true, but has nothing to do with either of our initial characterizations of the fractional banking system. Again, the banks do not ask the fed to print them some additional money when they are short on a loan.

    Also, "As of November 17, 2011 the Federal Reserve reported that the U.S. dollar monetary base is $2,150,000,000,000. This is an increase of 28% in 2 years. Let me see, uhmmm? Which is bigger 28% [or 14% a year] or the disaster causing 7%?"

    Well, the hard currency monetary base IS "something under 2.5 trillion" as I stated in my first post, and you are absolutely correct that it has gone up 28% in the last couple of years. Your $1 trillion coin, then would jack it up another 47%. Obviously that coin would never 'circulate', but would technically be hard currency. My point is, the 28% increase in m1 can't be compared to the 7% increase in m3, because they're not the same thing.

    Finally, your statement: "Regarding the total money supply, there is a major problem with your figures, M3. There is a reason the Fed now refuses to report on this figure, they are hiding the true growth of the money supply which is substantially larger than M1 and M2 would lead the public to believe."

    There is not a major problem with MY figures; the 14 trillion estimate is the best one the nation's economists can come up with right now. They are not MY figures. I did not create them. Go blame the guys doing the math.

    Furthermore, if you want to start slinging conspiracy theories, go right ahead, but don't use them to try and detract from the point that you screwed up and didn't do your research on how the fractional banking system works.

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  5. I will grant you that I didn't make it clear that the banks have to maintain a reserve in my example.

    You said: "Again, the banks do not ask the fed to print them some additional money when they are short on a loan". No but they do finance the loan minus the required reserve amount.

    Regarding M3, my point is the money supply is bigger than they are reporting. I am not blaming you for the figures, just saying M1 and M2 doesn't tell the whole story.

    The stated reason the Fed stopped reporting M3 was to save money, a more likely scenario seems to be they are withholding information. It took an act of congress just to get a first time independent audit, I don't think it's beyond the pale to say they lack transparency. If you want to call that a conspiracy theory have at it.

    One last point, while I do not entirely agree with your assertions, I would like to thank you for your well thought out and intelligent comments.

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  6. I thank you for your thank you, and I agree with you that Stewart didn't present a well thought out or articulated argument on a very complex issue. The debate on this shouldn't be 'nyaa, you're dumb'... our discussion here far better highlights some of the intricacies of the idea than Stewart and Krugman's bickering.

    ReplyDelete

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