RE: The American money capture

["Istvan Oszaraz von Keszi" <vkisosza@acs.ucalgary.ca>]

Russell Nelson wrote:

>    > Would it be too complex and lengthy an explanation to provide to say 
>    > how the money supply is decided in the first place; that is, how an 
>    > appropriate amount of it is calculated initially?  Is this in reference 
>    > to the gold or other backing which gives each dollar its monetary value?
> 
> Money supply is an arbitrary thing.  We could have a money supply of
> one dollar (and billionth cent coins) if we wanted.  The Fed
> supposedly *tries* to print up new money when new wealth is created,
> so that the dollar stays at about the same level.  If they didn't,
> then cash would constantly increase in value, reflecting the new
> wealth creation.

Sorry, but cash in circulation is a very small, infinitesimally
small portion of "money supply".  No one in the system really has
faith in M-1, M-2, and M-3 anymore, simply because they do not
reflect reality. 

>    In it's simplest form money is simply debits and credits kept on
>    certain ledgers.  Let me present the most simple example.  Alice
>    has a supply of money.  Let's say a $1000.  She deposits this in
>    her favourite bank.  The bank then lends the money to Bob.  Alice
>    has $1000, and now Bob has $1000.  The supply of money is now
>    $2000.
> 
> Nope.  Alice can't spend her money.  She's renting it to the bank.

Sure she can, especially if she's depositted the money in a
demand account.  Let me simplify some more.  Alice deposits her
$1000,  she then wirtes a check for a $1,000 and deposits it to
her business account.  She then writes a check on here business
account and deposits it in another account, and so on, until she
finally writes a check back to herself to cover her original
check.  Throughout the process, she has created money.  Money
which she can use to collect interest.  This is known a s kiting
and is illegal if an individual does it since they can use the
created money to earn interest.  As long as institutions keep
accepting Alice's checks, she's creating money which she can use.

>    Central banks try to limit growth by using interest rates to
>    reduce the demand for money, and by requiring banks to post
>    reserves with their central bank on their deposits.  
> 
> Banks would have to do this anyway, because they have to deal with
> people coming to get "their" money.  They have to keep a certain
> amount of liquidity.  The term for that is "reserve", but it just
> means very liquid investments, e.g. cash.

Try a very simple experiment with your local bank.  Go in
unannounced and attempt to make a very large cash withdrawl.
They will do everything in their power to give you a draft and
not cash, since there usually is not enough cash on hand.  Also
call your local bank, and ask for foreign exchange.  Get a
buy/sell rate on sterling cash and sterling drafts.  You'll be
surprised to find that your sterling cash is worth less than a
sterling draft.  Generally, this is because cash is awkward.

>    So if Alice deposits $1000, and there's a reserve rate of 10%,
>    then only $900 can be lent, and then $810, and then $729, as the
>    money makes it's way through the economy. 
> 
> Right.  Banks have to balance liquidity against uncertainty.

>    So the money went around, and around, growing and growing, until
>    it slowly became worthless.  The only thing that keeps money
>    growth in check is market discipline and faith.  The whole house
>    of cards doesn't come tumbling down, because Alice has faith that
>    she has $1000.  In reality the emperor has no clothes.
> 
> In reality Alice's investment is nowhere near as liquid as she thought
> it was.  Hers is only liquid if no one else's is.

Eaxactly, most financial institutions tend to "borrow" from their
customers (Depositors) on the very short term, and lend on the
long term.  So if all the Alice's wanted their money at once, the
money would not be there.  The problem in international banking
was and continues to be Jumbo loans ($1,000,000,000+) which are
generally syndicated.  These loans when they went into default,
or the risk of default trigger cross-default provisions in loan
agreements which makes all loans to that borrower non-performing.

Unfortunately, many institutions had a substantial amount of
their capital and reserves, lent to single borrowers, so a
default would make them bankrupt as opposed to insolvent.

>    No, most major currencies are not on the Gold Standard.  They
>    float purely in relation to other currencies.  So what gives
>    money it's value?  Purely, the loans which back it up.  This is
>    why it is practically impossible to stop, eco-disasters from
>    continuing.  If the countries that have "borrowed" this money
>    default, the whole thing collapses.  It collapses everywhere,
>    simultaneously.
> 
> Well, no.  As long as banks can keep collecting and paying interest
> and *some* of the principal, they're mostly okay.  They can rebuild
> the lost principal through lower profits.  The place where the "faith"
> comes in is the confidence investors have that their investment in the
> bank is as liquid as they thought it was when they made it.

Yes, except the way banks collect interest on Jumbos is simply to
lend them more money, so they can pay the interest.  Look at the
U.S.  The entire nation simply keeps borrowing money to pay the
interest on the money they borrowed.  This gets added to the
principal and the amount of the debt compounds.  This means that
next year, more money is owed, and so more money has to be
borrowed to pay the interest on the money which was borrowed
before.  Not a pretty sight.  

Here in Canada, our Government actually has an operating surplus
on it's program spending.  But the interest costs on our
accumulated debt, keep piling up, each year taking an ever
greater chunk out of revenues.  Now, we are cutting health care,
deindexing pensions, closing schools, closing hospitals, doing
whatever we can to keep our heads above water.  All to pay the
interest on our debt, which keeps growing and growing.

>    Now we get to the problem with digital money. It's a stand alone
>    system with no "faith" in it and with no growth built in.  Faith
>    is the only thing that keeps things working, that and legislating
>    paper as legal tender, so people are forced to accept it.
> 
> Not really, not at all.  I can start issuing my own wealth receipts
> (digitally or not) as long as I can show people that I actually have
> the wealth that I'm issuing the receipts for.  And yes, I'm subject to
> keeping a reserve, otherwise how would people trust me?

The trust issue is fungible.  If you trust Yankee greenbacks, and
my receipts rank pari-pasu, with them, then you trust my
receipts.  No reserve is necessary, because I don't make loans.
And since I don't make loans, and don't pay interest, I'm not a
bank subject to banking regulations.  All I am is a trustee.

>    Obviously, legislating digital money as legal tender is outside
>    our power.  Putting growth into the system without destroying
>    faith is also very difficult.  The only logical step is to make
>    digital money repesent something.  It must be convertable into
>    something that people already have faith in.  Otherwise I fear,
>    that digital money may not fly.
> 
> In the end, you have the right of it.  Digital cash must be
> convertible to be accepted.

Exactly, except convertible to what?  Do you want Swiss Francs?
Yen? Sterling? Canadian? Australian?  Gold? Oil?  It depends on
what you're going to use the cash for.  My view is that it is up
to the client to decide how they want their funds held.
Personally, I have a Canadian Dollar account, which I use for my
day to day purchases, and I keep a US Dollar account for when I
travel south of the border.  I also keep an account in Schillings.