money "out of thin air" is an emotional appeal

[Pianist4Freedom]

Now that I fully understand how credit money/fractional reserve banking/fiat money works, I realize that it isn't really created out of thin air as long as all the banks/governments balance sheets are kept straight.

Whenever someone takes out a loan, you're basically promising to earn whatever you end up buying with that loan. The bank doesn't get the principal on that loan, only the interest. In that sense, the money is not created out of thin air, and the bank provided the service of taking a risk on you so you could be productive with whatever work you wanted to do.

Similarly, when the government sells a bond to the Fed, the money isn't out of thin air because the bonds are paid off by taxes at a future date. This forces all new money that is placed in circulation to be backed by economic output at some point.

I also realized that the debt virus doesn't happen because banks, and the government, spend interest/taxes etc. back into the economy.

I think the main thing that caused me cognitive dissonance before was the idea of
"monetizing debt." When I earn federal reserve notes, they are mine. But they came into existence via a debt as a treasury bond or perhaps a private loan somewhere. What I realized is that it is a big circle. Like, if I owe someone money, they might buy something from me and then I use the money they paid me to pay off the loan I owe them.

What I'm realizing is, the present system facilitates the ultimate form of barter, with the idea of value totally abstracted and totally relative. Therefore, the currency unit is not a unit at all, but represents the sum total of:

"everyone haggling everyone else for everything all at once." While this may be more volatile/chaotic than commodity money, it does encourage trade of real wealth---things that are useful on a day to day basis.

Furthermore, the present system does not stop anyone from investing in rapidly appreciating capital whether it be physically holding precious metals or investing in the stock of some hopeful start up company.


So in sum, I've concluded that the "out of thin air" saying that one keeps hearing is primarily an emotional appeal. Debt isn't out of thin air at all, it is a promise to work for something. So in a sense, in our system we are trading future work and future economic value. Which obviously is going to have less certainty than savings and value already earned, but maybe it presents more wildly successful opportunities too? I'm not sure (yet). I really think the crash everyone is predicting MUST happen for people to truly rally behind Ron Paul. If we rocket into another credit boom for another 30 years after this current recession/downturn...nobody will listen.

 

[spudea]

i'm afraid you still lack understanding. I will rebuttel later, possibly tonight, when I have more time.

 

[Pianist4Freedom]

Don't worry, I understand all about the inflation tax and how it works. I feel that is a more subtle argument against fiat money rather than "out of thin air" though. If you wish to elaborate on that though be my guest...I don't think I'm going to come to a conclusion about this whole debate for a while. I need to read more. The world isn't simple enough to jump to conclusions and I've only been reading about these issues for about half a year.

 

[scooter]

I agree with nearly everything you said. Of course, I've been making these arguments on here for a long time.

The way the system works is not the problem. There is nothing inherently wrong with credit money expansion, as long as that expansion doesn't far outpace the future development that actually occurs.

The problem in the system comes from the government intervention. It takes away the free markets control over the financial assets, and thus, the balances do not occur properly. The credit expansion essentially never stops because with so few people setting the rules, they obviously never want to put on the breaks and make themselves look bad.

I applaud you for actually learning a lot of information and trying to figure out how it really works. Most people hear a few soundbites like "out of thin air" then they watch a few conspiracy videos and believe they have it all figured out.

Ron Paul is right that the monetary system is messed up. I love that he pushes for sound money and economic prudence for government. I even love the idea of competing currencies. He understands that it is government control that causes the problems, not necessarily just the system itself. He's more attached to gold than I would be, but in his case he sees that as just another competitor to runaway paper dollars, not as being the sole standard.

 

[sratiug]

So let's spend all the future money now! Today! Screw the future! Those who own the present will own the future anyway, those that are out of debt and aren't taxed at least.

If your premise was true then the inflation of the money supply is only because we are spending future money now. And when we pay those debts off that money disappears and what will we have then, except the same massive deflation that everybody worries about with gold currency.

 

[aravoth]

Now that I fully understand how credit money/fractional reserve banking/fiat money works, I realize that it isn't really created out of thin air as long as all the banks/governments balance sheets are kept straight.

Whenever someone takes out a loan, you're basically promising to earn whatever you end up buying with that loan. The bank doesn't get the principal on that loan, only the interest. In that sense, the money is not created out of thin air, and the bank provided the service of taking a risk on you so you could be productive with whatever work you wanted to do.

Similarly, when the government sells a bond to the Fed, the money isn't out of thin air because the bonds are paid off by taxes at a future date. This forces all new money that is placed in circulation to be backed by economic output at some point.

I also realized that the debt virus doesn't happen because banks, and the government, spend interest/taxes etc. back into the economy.

I think the main thing that caused me cognitive dissonance before was the idea of
"monetizing debt." When I earn federal reserve notes, they are mine. But they came into existence via a debt as a treasury bond or perhaps a private loan somewhere. What I realized is that it is a big circle. Like, if I owe someone money, they might buy something from me and then I use the money they paid me to pay off the loan I owe them.

What I'm realizing is, the present system facilitates the ultimate form of barter, with the idea of value totally abstracted and totally relative. Therefore, the currency unit is not a unit at all, but represents the sum total of:

"everyone haggling everyone else for everything all at once." While this may be more volatile/chaotic than commodity money, it does encourage trade of real wealth---things that are useful on a day to day basis.

Furthermore, the present system does not stop anyone from investing in rapidly appreciating capital whether it be physically holding precious metals or investing in the stock of some hopeful start up company.


So in sum, I've concluded that the "out of thin air" saying that one keeps hearing is primarily an emotional appeal. Debt isn't out of thin air at all, it is a promise to work for something. So in a sense, in our system we are trading future work and future economic value. Which obviously is going to have less certainty than savings and value already earned, but maybe it presents more wildly successful opportunities too? I'm not sure (yet). I really think the crash everyone is predicting MUST happen for people to truly rally behind Ron Paul. If we rocket into another credit boom for another 30 years after this current recession/downturn...nobody will listen.

I think alot of times the "thin air" comment comes about becuase FRN's have no backing. At least no physical backing. Because of that, they can "print it out of thin air" cause inflation, charge interest, yadda yadda. It's usury, and it's evil. The Idea that money can work for it's self is just strange to me. Money is nothing but a reflection of labor and production. Debt and interest does not represent future work, or future economic value. Those two things are chains, chains that keep a person working 2 sometimes 3 jobs to pay it off, whether it's the national debt or some stupid kid that made some mistakes in college, the effect on the nation is the same.

Everyone has to pay more into the system, the burden becomes to large, the other parent in the family has to go to work to make ends meet. Now you have 2 working parents and a kid in day care. But it's not enough, so they get a credit card to buy groceries and keep the lights on. Costs keep increasing becuase the rest of the public begs for help from the government. The government complies, taxes increase, people not needing the help apply for it anyway, the costs of the program run wild, the burden on the families gets harder, tax money is diverted from other programs to pay for social services to ease the burden on the family. Other services, starved for funding due to the overwhelming demand for social services and war, begin to deteriorate, bridges fall, potholes appear, public transit begins to break down. As the infrastructure crumbles around us and the wilderness creeps back into the cities, the people will still beg for more looting of their neighbor so that neighbor can pay for it, and then, with nothing left to loot, nothing left to spend, and nothing left to work for, it all falls apart, painfully, but eventually it crushes it's elf under it's own weight.

And how did it all start? Someone got into a debt they couldn't pay back. Just like our Government. A debt that can never be paid, it is not an investment on future work. A personal debt is a personal choice, made by you and only you. It is no one else's responsibility. Federal Reserve Notes, and the interest they bear, are not a choice made by the working class, nor are the a choice made by the individual. They force an entire nation into servitude, forcing entire generations to pay for the mistakes of thier parents, and sometimes grandparents, while the central bank forces us into bankruptcy. Which of course, should not be surprising to any of us here. The money wasn't real, it literally was, "worthless paper conjured out of thin air", It's value plucked out of the ether. It's a fantasy world everyone has lived in, not realizing, we were bankrupt all along.

I think that is where The "thin air" comments we hear come from.

 

[Libertytree]

What is not an abberation or an emotion is the $53+ trillion in debt that we're in, that can never be paid down. The root causes and dynamics are semantics at this point. Understanding and intellectually dissecting the problem is fine and dandy but the bottom line is the bottom line, we are in a hole that there is NO way out of.

 

[Pianist4Freedom]

Doesn't that depend on the choices of our government though? Not that we should trust them of course, I certainly don't. But if a miracle happened and they became responsible, that situation could reverse, couldn't it? I don't know much about the history there but doesn't Japan have (or had) some ridiculously huge debt in comparison to their GDP? I seem to recall reading they have account surpluses frequently now because they've really had to rein in the spending. And they're doing fine. Seems to me if things get really bad for us we could turn things around too. Maybe I'm wrong... keep the posts coming I love learning/talking

 

[aravoth]

Doesn't that depend on the choices of our government though? Not that we should trust them of course, I certainly don't. But if a miracle happened and they became responsible, that situation could reverse, couldn't it? I don't know much about the history there but doesn't Japan have (or had) some ridiculously huge debt in comparison to their GDP? I seem to recall reading they have account surpluses frequently now because they've really had to rein in the spending. And they're doing fine. Seems to me if things get really bad for us we could turn things around too. Maybe I'm wrong... keep the posts coming I love learning/talking

You can only patch the hull so many times before something finally gives, and the mighty ship of state is taken down by a sea of debt.

 

[Libertytree]

Our gov has no intent on addressing the problems though, IMO they are intent on destroying the dollar and there is NO miracle in sight. If anything our gov/Fed is multiplying the problems...are they that stupid??? We aren't and we are just regular folks and I for one have lost all hope of us/US correcting anything. They have their plans and we are just in the way, for the time being.

Sorry I can't be more optimistic but I think those fuckers know exactly what they're doing and it's not for our or the country's benefit.

 

[WRellim]

Now that I fully understand how credit money/fractional reserve banking/fiat money works, I realize that it isn't really created out of thin air as long as all the banks/governments balance sheets are kept straight.

Whenever someone takes out a loan, you're basically promising to earn whatever you end up buying with that loan. The bank doesn't get the principal on that loan, only the interest. In that sense, the money is not created out of thin air, and the bank provided the service of taking a risk on you so you could be productive with whatever work you wanted to do.

Similarly, when the government sells a bond to the Fed, the money isn't out of thin air because the bonds are paid off by taxes at a future date. This forces all new money that is placed in circulation to be backed by economic output at some point.

I also realized that the debt virus doesn't happen because banks, and the government, spend interest/taxes etc. back into the economy.

I think the main thing that caused me cognitive dissonance before was the idea of
"monetizing debt." When I earn federal reserve notes, they are mine. But they came into existence via a debt as a treasury bond or perhaps a private loan somewhere. What I realized is that it is a big circle. Like, if I owe someone money, they might buy something from me and then I use the money they paid me to pay off the loan I owe them.

What I'm realizing is, the present system facilitates the ultimate form of barter, with the idea of value totally abstracted and totally relative. Therefore, the currency unit is not a unit at all, but represents the sum total of:

"everyone haggling everyone else for everything all at once." While this may be more volatile/chaotic than commodity money, it does encourage trade of real wealth---things that are useful on a day to day basis.

Furthermore, the present system does not stop anyone from investing in rapidly appreciating capital whether it be physically holding precious metals or investing in the stock of some hopeful start up company.


So in sum, I've concluded that the "out of thin air" saying that one keeps hearing is primarily an emotional appeal. Debt isn't out of thin air at all, it is a promise to work for something. So in a sense, in our system we are trading future work and future economic value. Which obviously is going to have less certainty than savings and value already earned, but maybe it presents more wildly successful opportunities too? I'm not sure (yet). I really think the crash everyone is predicting MUST happen for people to truly rally behind Ron Paul. If we rocket into another credit boom for another 30 years after this current recession/downturn...nobody will listen.

I would say that you have ALL of the above essentially correct, except for the ETHICAL side of things.

What I mean by that is that it is a major question of WHO gets to place WHOM into debt. Do *I* as a father, get to place a debt burdern on my minor children? How about my yet-to-be-born child? My Grandchildren? Can I "sell them all into slavery" in order to pay off a "loan" so that I can use that money now?

And by extension, therefore, while one CAN countenance that we -- as a society -- can vote as a "majority" (50% or even a plurality... say 40% in a 3-way race like Clinton-BushI-Perot) to place ourselves under an immediate and current DEBT -- and perhaps even a SHORT-TERM debt (say out 4 to 8 years)...

But do we have an ETHICAL right to place such LONG-TERM debt (say out 30, 60 or 100 years) onto people who not only are not allowed to VOTE, but who may not even have been born? And to do so, so that we can take advantage of the "benefits" of that money NOW, rather than later?



And keep in mind, that the MAJOR "virtual" ACCOMPLISHMENT of an increased "SUPPLY" of monetary units in the here and now -- is NOT an actual increase in WEALTH or ASSETS per se -- but rather is simply an increase in (or maintenance of) the relative PRICES of already existing assets in said monetary units.



Note also, that it is a DISTINCT and DIFFERENT thing if we were to spend that money on creating some type of ACTUAL increase in wealth or wealth-creating systems (say investment in infrastructure -- plants to generate hydro, wind or solar power -- or machinery or other "investments" that will reap rewards for many future years -- the equivalent of a grandfather planting Fruit Trees, trees that only his children and more likely grandchildren will eat fruit off of).

BUT, THAT IS NOT WHAT WE (as a society / country) ARE DOING.

For the most part, what we are doing (currently) is to "reverse mortage" the future for CURRENT CONSUMPTION (wars, old folks medical bills, etc). What we are doing is chopping down fruit trees in order to burn the wood in stoves to cook out dinner and heat our homes!


So in conclusion -- yes, like ANY "invention" or "tool" of mankind (say an AXE or a HAMMER) -- both the FRB and Fiat money systems are NOT inherently evil in and of themselves. But, like that AXE and HAMMER, they can be used constructively, or destructively, they can create & build, or destroy and kill. The blame does not really lie with the AXE or the HAMMER... but with the person wielding and using them. (And in the case of our system... we know that for the most part, they have been placed in the hands of sociopaths... children like Lizzie Borden!)

 

[WRellim]

On additional comment... (hopefully not TOO long).

Another aspect of the difference... Monetary units created by as either "Fiat money" or "credit money" are both essentially "promissory notes" -- a way of "cashing-in" on future time/work. Now the problem with that is there is NO GUARANTEE that that future work will occur, or that it will even be POSSIBLE.

A Parable of Future Seeds..

For instance lets say that I issue a bunch of "paper seed shares" based on generic "seeds" that I "plan to harvest" this next summer & fall. If I am allowed to trade my "future unharvested seeds" as the EXACT EQUIVALENT alongside of current EXISTING "seeds"... I inherently lower the "value" the existing seeds.

Now you say... well, it will be obvious to people that your "paper seed shares" are NOT the same as existing REAL seeds... (how can you "eat" a "future unharvested seed" for instance)...

Aha, but here's the rub... you see last fall, the government made everyone TRADE IN their "excess" real seeds and gave them "paper seed shares" in exchange... so there is NO WAY TO KNOW whether you are getting one of those original "paper seed shares" or one of my "future-promise-to-harvest paper seed shares".

Now IF I actually harvest the correct number of seeds... well then everything should be fine. Some people can "redeem" there seed shares from me, and others redeem them from the government. (And provided the government "seed-storers" didn't EAT the things in the meantime! But that's a different parable.) In this end, everyone would eat.

But what if, none of my "future-seeds" ever gets planted or harvested... (maybe because I just happen to be a horrible farmer... or maybe my fields were flooded... or maybe I get hit by a bus before then and never got to actually plant them... or maybe I just "ran off" once I'd suckered everyone)... nevertheless, my "claim checks" for those seeds -- the "paper seed shares" I had printed up -- are still out there floating around, looking just like the original "paper seed shares."

And if/when it comes time to divide up the ACTUAL seeds... well, our society that thought it had LOTS of seeds... actually has no more than it did before. And who truly has rights to the (smaller number of seeds) anymore? Will they be divyed up proportionally? OR, will they be handed out first-come, first served? (So the first to get there eat, and everyone else starves?)

And note that regardless of HOW the seeds are distributed, the original owners of the seeds have either LOST a portion, or perhaps ALL of their original seeds -- the equivalent of theft.
​

"Future Money" is thus treated FALSELY as the equivalent to existing money, when there is (and can be) no guarantee that it truly is, and theft HAS occurred

 

[davver]

How hard is this.

Year 1: $100 in circulation
Year 2: $110 in circulation ($10 out of thin air)

The person who used to have $1 is out 10% of its value.

 

[Pianist4Freedom]

What if that person invests or got a raise? Then he has the same purchasing power as before, and gains back that 10% (and sometimes more)

I agree excessive debt can be destructive and can be considered immoral. So how are we to prevent our society from over using debt? Just outlaw it?

 

[brandon]

I agree excessive debt can be destructive and can be considered immoral. So how are we to prevent our society from over using debt? Just outlaw it?

Not outlaw it... We could raise the ratio of reserves banks are required to hold in their vaults.

Or, we could just let the free market handle it. I know if I had a choice, I would not be starting a checking account at a bank that is just going to give my money to someone else. I would gladly pay a user fee to a bank that actually kept my money.

 

[hypnagogue]

How hard is this.

Year 1: $100 in circulation
Year 2: $110 in circulation ($10 out of thin air)

The person who used to have $1 is out 10% of its value.

I lolled!

Anyhoo... as to the solutions people are suggesting. Maybe set a reserve rate, but most importantly, don't allow a Federal Reserve or any central bank to undercut the proper valuation of future growth, ie interest. The market must be allowed to decide how much $100 properly utilized will be worth in 6 months, a year, 20 years, etc. It's a truly elegant system when unhindered. As productivity increases, the value of future investments rise, and accordingly interest rates increase, holding the rate of growth in check and encouraging wise investment. As productivity slows, future investments are worth less, and people are more willing to loan out their capital. The increase in "cheap" money encourages broader investment and helps to stimulate productivity.

I think banks should probably be able to set their own reserve rates, but (and I feel bad saying it) they should probably be required to hold debt insurance, basically like the FDIC. Having a lower reserve ratio would likely make their insurance payments more costly.

 

[davver]

What if that person invests or got a raise? Then he has the same purchasing power as before, and gains back that 10% (and sometimes more)

I agree excessive debt can be destructive and can be considered immoral. So how are we to prevent our society from over using debt? Just outlaw it?

That's retarded. What if I was the queen of england? I don't even see how that relates to the matter at hand.

Goods/$ = Purchasing Power.

If $ goes up purchasing power goes down. Are you the one running the counterfieting machine? Thought not. The people who printed up the money and spent it had thier purchasing power increased, the rest of us had our savings robbed.

 

[brandon]

That's retarded. What if I was the queen of england? I don't even see how that relates to the matter at hand.

Goods/$ = Purchasing Power.

If $ goes up purchasing power goes down. Are you the one running the counterfieting machine? Thought not. The people who printed up the money and spent it had thier purchasing power increased, the rest of us had our savings robbed.

The thing is, the Fed seldom actually prints new notes, except to replace existing notes. Most of the time when they want to increase the money supply they just change some numbers in a computer. That is why "printing money out of thin air" isn't entirely accurate.

 

[Fox McCloud]

What if that person invests or got a raise? Then he has the same purchasing power as before, and gains back that 10% (and sometimes more)

The value of the investment is lower now that there are too many dollars in circulation--and even if you do invest, it's rate of growth has to out-pace the rate of inflation.

Even if it does, it still doesn't justify ballooning up the currency to pay for Federal programs or bailing out banks.

Also, more often than not, people don't get raises that coincide with inflation....if everyone's wages went up the minute the Fed inflated, the cost of their program would go up as well-if they tried to meet the new gap, they'd just push everyone's wages up, and the gap would (marginally) still be the same.

Of course, that's the beauty of the system (for them); wages don't go up instantly (if ever), and therefore, the majority of the population (minus government officials) loses purchasing power with their money.

There's always someone that get screwed over with a fiat currency.

I agree excessive debt can be destructive and can be considered immoral. So how are we to prevent our society from over using debt? Just outlaw it?

full reserve banking+gold/silver standard currency would eventually force banks to be far more conservative with the money they lend out (right now, they have little to no incentive to be conservative).

You'll never fully prevent people from going into and continuously staying in debt...but look at the early 1900's and 1800's--there was far less debt than there is now.


As Aravoth said...usury (charging of interest) is evil; it allows money to be gained and earned by doing nothing...worse yet, with our system, if everything goes bad, there's always the Fed+FDIC to bail you out.

 

[Pianist4Freedom]

I don't see how charging interest on a loan is doing nothing. The one who issues the loan is taking a risk. Taking a risk requires judgment, action, perhaps market research. How is that evil? Also, I thought usury was *excessive* interest. And what excessive really is is a subjective thing, I think.

I agree though--if banks make bad choices, loan to people who can't pay off their loans....they shouldn't be bailed out. The guilty banks should be allowed to fail. I guess what is being pointed out here is bailing out bad banks is exactly what is happening in our country.