4 ms·

Not saying that fiat money is necessarily a good idea, and not clamping down on gold standard currency, or anything, but the article doesn't say that the money

by aliswe 7y ago

Not saying that fiat money is necessarily a good idea, and not clamping down on gold standard currency, or anything, but the article doesn't say that the money would be printed. If I'm not mistaken. If what the mostly conspiratpry documentaries say is true, then the Fed lends "the state" money (at interest) which is then needed to be paid back. That would mean that the Fed probably has money reserves on its own.

lisper 7y ago
I think you may have some basic misunderstandings of how money works in today's world. All money is debt, which is to say, it's a ledger entry that gives the holder a claim on future productivity. Whether that ledger entry is purely electronic or rendered onto a physical artifact (a coin or a bank note) is irrelevant. At the end of the day it's all just bookkeeping. The national debt is the money supply. The key to nirvana is keeping the money supply in balance with the actual value of goods and services in the economy in order to keep prices stable. But that also has to be balanced against the need for short-term liquidity. That's the tricky part because what is happening right now is that the actual value of goods and services in the economy is shrinking, but the need for liquidity is growing. Those present two conflicting demands on the Fed, which controls interest rates which (indirectly) control the money (debt) supply. There are no "reserves", there is only the policy and decision-making that ultimately controls how much money is out there, and thus the value of that money in terms of purchasing power. Too much and you have inflation, too little and you have deflation and liquidity crises.
- indigochill 7y ago
  >the actual value of goods and services in the economy is shrinking On this point, are you referring to goods that already exist but are in less demand (thus less value)? Or that fewer goods are being produced, thus the total value of goods (supposing we assign some arbitrary value per good) is less?
  - lisper 7y ago
    Both. The value of services is shrinking because there is less demand for e.g. cruises, air travel, restaurant meals, concerts, sporting events, etc. This is partially offset by increased demand for non-perishables, but that is only a small fraction of what is being lost. And the total value of physical goods is shrinking because supply chains are being disrupted and so less stuff is going to be produced. There is a lot of time lag of course. This is all going to play itself out over a period of weeks if we're very lucky, more likely months, and possibly years. Interesting times.
- aliswe 7y ago
  That may very well be. So correct me where I'm wrong here. The Fed prints (or issues) currency, lends it to "the state" at interest. The state eventually pays at least a part of that money back. All I'm assuming is that if that paid money doesn't vanish, then the Federal reserve will have a Federal reserve containing that money.
  - lisper 7y ago
    No, the Fed lends money to banks, not to the state. Banks then in turn lend that money to borrowers who hopefully use it to fund productive activities which produce a profit that allows the loan to be repaid. It is actually a pretty cool system and it generally works very well. Being able to control the money supply as a simple matter of policy rather than, say, relying on the laws of physics to do it for you, is a very powerful economic technology. (But, of course, like any technology, it can be abused.) The state borrows money by issuing bonds which it sells to savers. That money, like all money in a central-bank-based monetary system, ultimately comes from the Fed, but only indirectly. The Fed could loan money to the government directly by buying government bonds directly, but it usually doesn't. Instead, it buys bonds from banks who buy them from the government. See: https://www.thebalance.com/how-is-the-fed-monetizing-debt-3306126 https://www.thebalance.com/how-is-the-fed-monetizing-debt-33... also: https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp https://www.investopedia.com/articles/economics/08/monetary-...

by aliswe 7y ago

lisper 7y ago

I think you may have some basic misunderstandings of how money works in today's world. All money is debt, which is to say, it's a ledger entry that gives the holder a claim on future productivity. Whether that ledger entry is purely electronic or rendered onto a physical artifact (a coin or a bank note) is irrelevant. At the end of the day it's all just bookkeeping. The national debt is the money supply. The key to nirvana is keeping the money supply in balance with the actual value of goods and services in the economy in order to keep prices stable. But that also has to be balanced against the need for short-term liquidity. That's the tricky part because what is happening right now is that the actual value of goods and services in the economy is shrinking, but the need for liquidity is growing. Those present two conflicting demands on the Fed, which controls interest rates which (indirectly) control the money (debt) supply. There are no "reserves", there is only the policy and decision-making that ultimately controls how much money is out there, and thus the value of that money in terms of purchasing power. Too much and you have inflation, too little and you have deflation and liquidity crises.

indigochill 7y ago
>the actual value of goods and services in the economy is shrinking On this point, are you referring to goods that already exist but are in less demand (thus less value)? Or that fewer goods are being produced, thus the total value of goods (supposing we assign some arbitrary value per good) is less?
- lisper 7y ago
  Both. The value of services is shrinking because there is less demand for e.g. cruises, air travel, restaurant meals, concerts, sporting events, etc. This is partially offset by increased demand for non-perishables, but that is only a small fraction of what is being lost. And the total value of physical goods is shrinking because supply chains are being disrupted and so less stuff is going to be produced. There is a lot of time lag of course. This is all going to play itself out over a period of weeks if we're very lucky, more likely months, and possibly years. Interesting times.
aliswe 7y ago
That may very well be. So correct me where I'm wrong here. The Fed prints (or issues) currency, lends it to "the state" at interest. The state eventually pays at least a part of that money back. All I'm assuming is that if that paid money doesn't vanish, then the Federal reserve will have a Federal reserve containing that money.
- lisper 7y ago
  No, the Fed lends money to banks, not to the state. Banks then in turn lend that money to borrowers who hopefully use it to fund productive activities which produce a profit that allows the loan to be repaid. It is actually a pretty cool system and it generally works very well. Being able to control the money supply as a simple matter of policy rather than, say, relying on the laws of physics to do it for you, is a very powerful economic technology. (But, of course, like any technology, it can be abused.) The state borrows money by issuing bonds which it sells to savers. That money, like all money in a central-bank-based monetary system, ultimately comes from the Fed, but only indirectly. The Fed could loan money to the government directly by buying government bonds directly, but it usually doesn't. Instead, it buys bonds from banks who buy them from the government. See: https://www.thebalance.com/how-is-the-fed-monetizing-debt-3306126 https://www.thebalance.com/how-is-the-fed-monetizing-debt-33... also: https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp https://www.investopedia.com/articles/economics/08/monetary-...