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"Bankers talk about “governance”, ways to ensure private banks and central bankers make sound decisions—so they create just enough money make commerce easier, but not so much that the system collapses through inflation or panics."

Many people don't know that central bankers literally, not figuratively, mean CREATE money out of nothing.




Someone has always been able to "create money out of nothing." At some point there was no money; some time later there was. Someone or some group of people had to create the first money. People have actually "initialized" money many times throughout history e.g. when starting a country.

As long as you can separate "money" from its representation, there is nothing particularly problematic about some people being able to create money, at least some of the time. In fact it is necessary to provide money with liquidity as the economy grows and money is needed for more and more things (liquidity problems have triggered or worsened economic crises several times in history, especially when countries were trying to base their money on weights of metals).


Actually, only since August 15, 1971 here in the USA. Not "always."


Sounds like you are referring to the gold standard. A few things:

1. The dollar itself was created two centuries before the US left the gold standard. "Created" being the operative word. Created by Congress because America needed its own national currency.

2. Anyone who dug some gold up in their backyard was creating money when we were on the gold standard.

3. In 1862 paper money became legal tender in the USA without any guaranteed convertibility to any metal; that remained the situation until 1879. I.e. the government simply created money.

4. On January 31, 1934, the US dollar was devalued from $20.67 per gold ounce to $34. In other words money was created by an act of Congress.

Or to sum all that up for you: at a minimum Congress has always had the power to create money. All the metallic standards ever conceived of have been arbitrarily decided and governments have always had the ability to change the standard at will to create more money.


Actually, since 1777. For as long as the government is able to print paper currency instead of using metal coinage, it is able to make up as much money as it wants. Since not everyone is going to demand conversion to bullion, it generally doesn't matter--this is the principle behind fractional-reserve banking as well. If the government is caught out on printing too much money, then either the paper currency is accepted at less than face value (as happened to the original Continental Currency), or the government decides to suspend conversion (as most recently happened in 1971, but also in 1933).


No.

Before 1971 dollars were backed by Gold, now they are backed by US Tbills (and some real-estate since 2008).

It's not that different.

Gold and US TBills are both valuable assets.


No, he is right.

What the OP meant by creating money out of nothing was fiat currency, which we do have now.

If you decide to use a commodity also as money, that's fundamentally different, and econ textbooks can confirm this for you.

T-Bills are backed by fiat currency, not by a commodity.

The Fed, and also the banks through fractional reserve banking, genuinely do create "money out of nothing."

Check out A Monetary History of the US by Milton Friedman and Anna Schwarz. Here you will find a Nobel Prize winning econonist who wanted to dramatically reign in, or even end, the Fed and get rid of fractional reserve banking.


"T-Bills are backed by fiat currency, not by a commodity."

What?

No.

TBills just bonds. They are 'backed' by the US Governments credibility to pay back the loan.

USD is generally backed by an asset - fractional reserving not withstanding.


Think about it again. You said T-Bills back currency today like gold used to, but that's not true. T-Bills are just notes to pay back more dollars. So it is dollars backed by dollars if you really are honest about your statement that USD is backed by an asset.


Everybody creates money out of nothing all the time. That's what business credit is for example. We just swap promises around.


Not to mention that the value of a currency, like everything else, is driven by supply and demand; so in the face of fluctuating demand, adjusting the supply is necessary to ensure the currency measures a consistent amount of wealth, and doesn't inflate/crash.


"mean CREATE money out of nothing."

No, this is not true.

Central banks do 'create' money, but they trade it on the market for real assets.

The Fed creates dollars and exchanges them for an equal amount of US Tbills (bought at market rates). $1 created = $1 in Tbills on their balance sheet.

They're not just creating money and keeping it, or giving it away.

The practice of 'fractional lending' by retail/commercial banks amplifies this, but as far as central banks go - every dollar they 'create' is essentially backed by an asset that they keep on the books for that dollar.

The idea is to manage how much currency is in circulation at any given time, so that inflation (and employment) hover at certain target.

If politicians were 'printing money' to pay national debts, or buy stuff or whatever - that would be straight forward dilution.

What the Fed does is not dilution, and it's not a bad thing, it's a good thing.

Same for ECB.


There is as much money in circulation as is required to clear the promises between people that are worth doing.

At the summit of the tree the assets are just 'other assets'. An accounting fiction.

The state can purchase whatever is for sale in the token it controls. And it can make sure there are things available for sale by imposing a liability on you in that token you cannot avoid.

The value then depends upon how much stuff the state extracts for the public purpose in return for its token. And the belief in the coercive power that gives that process weight.


"Distilled to its roots, the Fed has been manufacturing “savings” from thin air for the better part of a decade. When the financial crisis hit in 2008, American savings were depleted, so the Fed had to step in to produce savings (to finance huge government deficits). Now the Fed is attempting to remove that “savings” at a time when:

1) The private sector is experiencing falling savings. 2) The government is likely on the precipice of expanding its dis-saving in the form of greater deficits.

...

Not to state the obvious, but all else equal, if the Fed started shedding assets at $30 billion a month (or $360 billion a year), it would exhaust the entire stock of private savings. This doesn’t allow for larger government deficits. Given the current savings level, it is mathematically impossible for the Fed to shed assets at $50 billion/month. By 2019, as we are farther out from peak net savings rates set in 2015, it is likely the stock of private savings is smaller still, and hence the ability for the Fed to shed assets at a rate of $50 billion/month is utterly impossible. Net savings have fallen in the last 2 years from a peak of just over $700 billion to the current $355 billion. Will savings halve again in the next two years? If so, there is no mathematical way in the world the Fed can shed assets at the rate it outlined yesterday."

Source: http://blog.knowledgeleaderscapital.com/?p=13520

I tend to side with the uneducated who think the FED prints money out of thin air because it is closer to the truth of the matter of where real economic value exists moreso than the anachronistic mechanics of FED policy three card monte. When all is said and done, the FED took on toxic assets it will not be able to unload into a weak economy. The only hope it has is to sell the assets at face value in exchange for inflated dollars or hope the economy booms beyond everyone's expectations in the next two years. Sure hope the latter happens because otherwise the FED has done nothing but defer the pain of 2007 into the catastrophe of 2020.


Why can't the fed just hold onto said toxic assets indefinitely?


In order to "hold onto the assets" the FED actually has to buy US Treasuries when its current treasury holdings mature. The way the FED sells assets is to simply allow the treasuries to mature without buying any to replace it. The implication is that by choosing to buy or not buy treasuries, the FED can help control the US treasury interest rates which either help boost or slow down the economy as needed. The issue with holding and never selling is perpetually low interest rates which encourages people to borrow more since it is cheaper to do so (in theory stimulating growth, but in reality inflating asset prices when it goes on too long). If the FED doesn't unload its treasury holdings, interest rates stay low and capital will continue to take bigger risks to find higher yield, plus an unsustainable asset price inflation as it remains cheap to borrow money to buy assets like houses which then go up in value which creates even more demand through more cheap credit.

I'm already over simplifying, but here is a less abstract illustration: Imagine you lose your job and you need some money to get back on your feet. You borrow against a line of credit to cover living expenses. You find another job but it doesn't pay enough to cover your standard of living, so you keep the line of credit open and just make the minimum payments. You are the US economy and the line of credit is the FED right now. If the line of credit is not paid off, if you lose your job again, there will be nothing to borrow against or even make the minimum payments. The smart thing to do is pay off the credit card balance so you can use it again if you're in trouble. The problem is you can't do that unless you cut back on spending... and this is why the FED always points out that the control of the situation is not with the FED but with congress, they need to cut spending... <insert laugh track>

And I didn't even address your exact point. This is just the "non-toxic treasuries". The toxic stuff is non performing home loans. Imagine trying to sell those back to someone! Are you willing to buy them?

More info here: https://www.newyorkfed.org/markets/mbs_faq.html


Look, this is what the Fed is:

A private bank. It prints a dollar and either: (1)buys a T-Bill with it through the FOMC, or (2) lends it out through the discount window (only to big banks, not to Americans directlt), or since 2008, buys "toxic assets" with it.

How many dollars are printed is decided by unelected technocrats with no public transparency, oversight or accountability.

What the Fed also does is insure the banks because they are for some ungodly reason allowed to lend out over 10x more money than they have (to increase the money supply, econ textbooks say).

There are a lot of people who have said something between 'the Fed is a welfare system for the rich that steals from the poor' to 'it should be ended,' including Bernie Sanders, Milton Friedman, Aaron Schwartz.

In fact during the Civil War Lincoln actually ignored the banks who were all betting against him. He used the a constitutional right to print money through congress and it worked.

In academia, the groupthink around the Fed is strong. Think stronger than Challenger Disaster groupthink. And they're almost all in favor of it.


«The Fed creates dollars»

Exactly what the parent said.

The fact it is used to buy TBills is irrelevant: the Fed creates money out of thin air. Period.


I think the reason the system has evolved this way is because politically it is hard for the treasury to "print" money, even though they have the legal right to.

Having the Fed inject money into the system is a dodge, but effectively the same thing. It gets the treasury off the hook, because they can say they are "borrowing" rather than "printing" money.

It's unclear to me why this bothers people so much?


Replace TBills with gold - is it still being created out of thin air?

The point is it’s backed by an asset


Did the fed dig out the gold nugget? If not, there is now more dollars chasing the same amount of goods.

Yes it's still backed but less than before, i.e., devalued.


"Yes it's still backed but less than before, i.e., devalued."

No.

1 Trillion in Assets = 1 Trillion in Currency.

1 Trillion + 1 dollar in Assets = 1 Trillion + 1 Dollar in currency.

No dilution by the Fed.

(Fractional lending notwithstanding - that's another can of worms)


You do realize that you are backing a dollar with a dollar?

But you cannot eat a dollar or play games on a dollar or drive with it. In and of itself a dollar is just a piece of paper and has an intrinsic value of say 1ct.

So adding a paper note to the economy increases the backing by 1ct and the currency by 1$. Adding an iPhone increases the assets by say 100$ (just made that up by taking 500$ cost - 400$ used materials) and leaves the currency as it is.

Hmm, now that I think of it: Are you maybe talking about accounting?


"The fact it is used to buy TBills is irrelevant:"

Heyzeus its extremely relevant.

HNers are having conspiracy issues with this.

* Obviously if there is going to be more money in circulation, it needs be 'created' somehow *

But that it is traded for a specific asset, which is kept on a balance sheet - and the 'reverse' can be done to pull the currency out of circulation - is * hugely relevant *.


So can I. I just give you a piece of paper that says I owe you $1000, which you can use to buy things. $1000 was created out of nothing.


I don't know about nothing.. I think paper and ink were used.




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