Question on money borrowing vs printing...
 

Just finished reading 'End the Fed' by Ron Paul - very interesting reading... and quite disturbing. Had some questions that after reading:

1) If FED can print all the money they ever want (discusting and dishonest) - then why does US ever need to borrow money from China - why not just print more?!

2) Are there ANY countries in the world that are stilll on Gold Standard?!

3) In a system that does not have central banking - who would print more money and what economic conditions would require it?

I strongly agree with the position Dr. Ron Paul is taking regarding the Fed's dishonest practices regarding our money - what's your opinion?!

James

if you print more inflation goes up

If you don't or can't print more because you are on the gold/silver standard you can get deflation like in the 30's.

I think it makes more sense to base the money supply on economic conditions rather than the supply of gold.The gold supply can change due to gold discoveries or new mining technology.

Ron Paul is interesting but keep on open mind and read some other books on the economy and depression.

-I have not read the book but I have heard about it. I need to finish a couple others first. Two different Econ. proffs I had who didn't know each other (different colleges) said we never really completely got off the gold standard (Ft. Knox and the other depositories never magically emptied on a government order). The Swiss treasury still has gold assets but doesn't directly peg the franc to it. (according to a relative working in Zurich.) BUT, they do it in different ways - bullion, species and exchange are very different ways of doing it. Today it's what's called a 'gold reserve standard.' REGARDLESS of the standard, the currency or the precious commodity tied to them, ANY TIME you increase the AMOUNT of currency without increasing the demand, you LOWER it value. The LAW of supply and demand applies to money the same way it applies to pork bellies or widgets.

We don't really 'borrow money' so much as have debt underwritten over a given time. In the end it's like borrowing but a big difference is the bottom line will change along with what happens over that given time. At that scale, money is not treated as currency or anything that trades for a commodity, it IS THE COMMODITY, because we all agree the money itself has both extrinsic and intrinsic value. -Increase the amount of existing money without increasing the demand = lowering the value with hyperinflation. Germany did this and their depression made ours look like kindergarten. A hard bread roll (broetchen) the size of your fist cost into the hundreds of millions of Marks.

I'm not sure where you fall in your schooling, but consider taking a Macroeconomics course at a local college. You'll quickly understand that most people talk out their *** when it comes to basic economic theory.

First off separate printing money from money creation. That is a whole 'nother lecture for another time. Money is created from interest rates in the form of loans.
Unlike the days of old the Fed creates money by saying how much money banks can loan out. The Fed can say we want to print more money, but that is rarely done since it is much easier to dictate how much money is in the economy by controling the loan industry.

1. The Fed doesn't print money, the Mint does and when they print money it's only to a point so the m1 supply equals a specified amount that equals the amount of paper money destroyed in circulation.

The Federal Reserve sets and maintains the Fed Funds rate which is the interest rate banks can charge for overnight loans. This percentage is also used for many other types of loans. When you hear on NPR that the Fed raised interest rates by .5 or 1 percent that is the rate they are talking about.

This rate affects many things. Lower interest rates means more lending since consumer don't want to pay as much for loans. I'm sure the fed funds rate as of now is at 1 or 2 percent. The banks add on a couple percentage points for a profit margin.

So now it is time for a quick lesson in macroeconomic theory. Money is created through inflation. Inflation in small amounts is a good thing. It means there is economic growth and for an economy to function it needs to be there.

Now how does money get created you may ask? Here's a simplified example. First National Bank decides to loan out 150$ to Suzy Q. Suzy uses that 150$ to purchase raw materials to make one couch. Suzy then takes couch and sells it at a mark up for 250$. That's a profit of 100$. She pays off the 5% interest. That extra cash she paid back to the bank is the money created.

The US operates on a fiat money system. EG our money is worthless. The only thing backing it is the full faith of the US government. The Fed is an independent body from the government. It is a semi public organization. The president appoints the chairmen and the largest members of banks in the country appoint the other board members.

China is buying up treasury bonds. In a time of inflation or substantial economic growth the Treasury will sell off federal debt to help suck money out of the economy. Anyone can buy these bond notes, you, me, China, Timbuktu, etc. The Treasury Department and the Fed sometimes operate counter to each other (eg The Treasury deals with federal government debt and the Fed deals with keeping a proper amount of growth in the market.).

2. I don't believe there are any. Pegging money to a rare metal limits the ability of the government to remove money from a market place. If 1 dollar equals one pound of gold then the governing body can't take steps to eliminate money from the market. This is why the great depression lasted so long. The government couldn't inject cash into the economy leaving little liquidity in the market.

3. In a country like the US we have the Fed that regulates interest rates for creation of money. In countries like China or the UK. They have specific ministries that handle such tasks.

In our country, if we need to increase the liquidity of the market place we lower interest rates. This increases borrowing and thus creates growth (and adds more money to the market place). If there is too much money in the market place then the Fed raises interest rates to discourage lending and slows economic growth.

If there is too much growth we have a bubble. This means that the GDP growth was too significant and does not reflect actual hard growth done in the market place. In this case the Fed has to be careful to slow the growth down to ensure that actual growth can reach up to the cited value.

If you use the term "printing money" in the more generic sense, rather than the actual running of printing presses, the Fed does indeed print money. By buying debt from other governmental agencies the fed creates money where it did not exist previously. Currently the fed holds over 5 trillion dollars of US government debt. The US treasury issues billions in bonds, the Fed "buys" the bonds and presto without actually borrowing money form an outside entity the Fed has created money. One branch of government borrowing money from a second branch of government. One big beautiful Ponzi scheme.

http://www.cnbc.com/id/29880401/The_Biggest_Holders_of_US_Government_Debt?slide=16

No doubt about that - even some college profs do, especially if it's a sociology prof trying to teach econ. I think the man was too damn dumb to be embarrassed.

Exactly. I don't recall a name but, in the early '90s, there was a female freshman congressional rep. who used her two minute speech to propose that we 'do something' with the annual multi trillion dollar windfall profit that the US Mint makes every year. I thought it was almost as good as when Rep. Sheila Jackson Lee said the rover on Mars should go take a picture of the American flag.

Chris, I don't think you understand how the Fed works. The only control we have as citizens over it is through the appointment of the fed chairman by the president. The largest banks then put there people in to give it a balance of public/private interests.

Money has no value and calling the bond buying scheme a "ponzi scheme" just detracts from what they actually do. Before you start contemplating reforming our entire system of control on economic growth read up on how the treasury bonds are used to eliminate liquidity in the market place causing excessive inflation.

Yup! Which is why you should take an econ class with a doctored PhD economics professor. I'm proud enough to say that I have. The theory behind it is quite easy, but I gave up when I got to the math section :P

Being on a gold standard does not keep central banks from over printing money. They can do it until too many notice and want to turn in their paper for gold. Then you have a run on the bank and the currency value collapses.

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/159420182X/ref=sr_1_1?ie=UTF8&s=books&qid=1269800505&sr=8-1

Suggest you read this next.

I took two taught be full professors with doctorates. The difference was they also had worked full careers outside of academia before they started teaching. They were what you call 'on the ball' - both complete opposites of the econ. prof. scene in Back to School with Rodney Dangerfield.

The medical sociology class was taught by a guy with an MA in divinity from Yale. BUT when he got hired in the 70s, all you needed was a pulse. He went on for a week way outside his own field about economics.

OKyoureabeast has said this just as about as good as anyone can. This is a subject that seems complicated until you understand it, then you see that while complicated it makes sense.

Why do countries hold gold? To pay debts to other countries. The Fed Reserve Bank in New York has a vault deep underground where gold is stored for different countries. Gold is transferred from one countries' vault to another when money needs to be transferred.

The most interesting thing I remember from my old Money and Banking class was that money is created by banks through loans. You may not agree with this but that would be because you do not understand it.

As one of the theives in Brech's 'Three Penny Opera' says, "Why break the law by taking money from people with a gun? If you own a bank you can take it from them leagally."

Sadly, I am stuck making money by working for it.

The gold standard is no bargin either, thats why no one uses it anymore.

If we were to revert back the money supply would have to substantialy shrink, leading to a very deep depression.

Yes, gold is just as artificial as paper money; it's just another commodity with a variable value. It makes no sense to limit the amount of currency based on the holdings of a specfic mineral. Money is supported by the GDP of the nation that issues it.

OTOH I think silver is a good investment, and will be buying some soon.

Its cheap, and demand is way outpacing supply.

Well, respectfully, your half right. Paper money varies quite a lot, including to values approaching zero (practical purposes - less than zero.) Gold will only fluctuate minutely in time, intrinsically (because it might be good to have some just in case.) It will NEVER have less extrinsic value than any paper money it backs (because I could trade the gold for something I need or use it for some purpose where other metals can't be substituted - easier than I could a nearly worthless piece of paper.)

On the other hand, gold's value (both extrinsic and intrinsic) have NEVER been zero and NEVER will be. A major trade off is with a currency tied to a the value of a finite commodity, some time or another, the value of the economy with that currency will be finite. [My background and training are scientific in nature and the words you just don't say in science are, "all, none, always" and "never."] But there are always times when you can say 'never.'

Gold's extrinsic and intrinsic values are not interchangeable BUT are very closely tied because 1. Since it's discovery before recorded history, it has ALWAYS been in demand, regardless of intended end use and 2. Even if we discover millions more tons somewhere there will NEVER be an infinite supply.

I'll edit and add this - DO NOT buy precious metals because 'the dollar will be worthless tomorrow.' Buy it because you would anyway and through history, it's been a stable hedge against inflation.