From: joe webb <webfoote41@yahoo.com>
Date: January 3, 2011 9:01:59 PM EST
To: michael santomauro <reporternotebook@Gmail.com>
Hi Mike, the Jeff Gates piece you sent out prompted me to write the below. JOe
--- On Mon, 1/3/11, joe webb <webfoote41@yahoo.com> wrote:
From: joe webb <webfoote41@yahoo.com>
Subject: [CMS] let's get straight on monetization, the Fed , how banks work, and so on
To: CMS-MembersList@yahoogroups.com
Date: Monday, January 3, 2011, 5:45 PM
Every day we get messages, usually wrong I think, about the above. I would call especially on John Gardner to step in here.
First, monetization, per Wikipedia, is simply a process of making some tangible object ...money. Thus sea-shells, precious metals, paper notes, and IOUs and loans and other business contracts (debts or assets) can be passed around in exchange relationships.
The first thing I would recommend is that folks read the Wikipedia definition of money, money supply, and fractional banking.
Since so many folks are convinced that the Fed is a conspiracy of jokers, jews, capitalist pigs in general, illuminati and freemasons, it is really high time to try to get straight on the Fed and fractional reserve banking.
Here is my sense of things, and I do not pretend to understand money completely. Money is a kind of mystery, for those who can perceive that they do not know enough of x.
First, there are not enough precious metals to accomodate population/demand growth for money. If the amount of precious metals remains at a limited quantity, then more pressure for more money means that precious metals' prices inflate. Is this a source of bottlenecking an economy? Probably.
Second, fractional banking, the practice of creating money out of "thin air" as so many critics claim, by loaning out, say 10 times what the bank actually has in terms of deposits and other assets, has a very long history of success and occasional failures. I read that in the last 100 years or so, capitalism has created economic wealth in the West in the area of ten times the per capita wealth of a hundred years ago. One of the reasons for this spectacular achievement is credit...that is, what banks do when they lend "money." Without credit, projects do not get started. It is that simple.
Not all projects are successful, and when they fail, the bank is left holding the bag, or non-bag, of disappeared money. That money went up to money heaven, never to return. When projects succeed, the economy is enhanced, and the thin-air money turns into concrete goods and services.
No economy runs without credit and credit creation. No economy runs without banks. Now, a bank can be held privately or publicly. I understand that North Dakota has the only State bank in the U.S. It does very well, and possibly is a model for more socially responsible and wealth spreading. (Is there anything wrong with spreading the wealth particularly when one of the choke-points in our economy is the poor performance of consumer spending, 70% of the economy? When ordinary folks don't have much dough, they cannot spend. The middle class has been spending less and less for the last 20 years...consumer spending, WSJ a few weeks ago.)
The Fed is no different than banks in creating money out of "thin air". The Fed does so by the purchase of treasury bonds. Even the WSJ agrees that quantitative easing (QE) by the Fed has helped the economy. The Fed buys the bonds, gives the gov't fresh new greenbacks and the gov't spends and gets more dough out into folks's hands. Then, the Fed holds debt, and, if I understand this correctly, that is tacked onto the Federal deficit.
So, yes, more national debt is accumulated, which is not good, but the economy is supposed to start cooking again so that the national debt can be paid down thru taxes, reduced spending by gov't, inflation, and, most importantly, economic growth which is the only thing that can generate more revenue ultimately.
So, there is no free money here. An economy within a country is not like home economics because it is 1, huge, 2, can expand and contract its money supply, 3, does not have to pay down its debt in bad times. On the other hand, too much debt begins to make everybody nervous, as it should, especially potential lenders (see Europe's sovereign debt crisis). Ultimately national debt must be paid down. The consensus of economists is that no more than maybe around one quarter of a country's GDP should consist of debt. (Today, the U.S. is approaching 100% of its GDP and Japan is at about 200% of its GDP.)
At the macro level, household economics is similar to sovereign debt. If you don't look like you can pay back your loans, you either don't get more loans, or you pay a large risk premium. If you are tied down by debt payments, you cannot invest in productive projects, let alone pay for bloated pensions and the like that are based on politics rather than economics. (The days of the pols getting rich may be over.)
So, assuming I got this correct, fractional banking at the micro level is like the Federal Reserve Bank. What is different is that the Fed is huge and can pretty much do what it wants, until of course, the whole economy is going over a cliff. The point is that the Fed is supposed to prevent it going over a cliff thru adjustment of the money supply.
The other major economics 101 feature with regard to the role of the Federal gov't is trying to regulate the economy, is its fiscal policy. All that means is how and how much it spends our tax dollars. Economists argue whether fiscal measures are more or less important than the money supply.
Clearly, spending tax money and public debt money on things that do not work, like useless wars for Israel, extravagant pensions and welfare payments, education boondoggles for the uneducable..are all a waste of money inasmuch as they do not contribute to economic wealth. (although they may buy social peace by preventing blacks from burning down cities...).
As I see it, the issue is not spending money, it is spending it on things that work, never mind the pump-priming for the economy right now. Scandinavia spends about half its wealth on Programs that are social and educational, and future oriented. They also enjoy the highest per capita wealth in the world (maybe there is an oilogarchy somewhere that is higher>). Spending money on White kids in schools works for the overall economy and the social fabric. In contrast, the U.S. is pouring billions down a black and brown hole in the ground...no economic benefit because black and brown skills acquisition end at about the 8th grade.
So, fractional reserve banking is, if not the heart and soul, of capitalism, it is its legs. Likewise, all countries have central banks and "fiat" money. A national currency is worth what it can buy, nothing else. It can buy lots of goods and services if the economy is productive.
If the economy is not productive, but is sitting on piles of gold, the only thing it can sell is its gold. When the gold is gone, then it is dead in the water.
Credit runs an economy, and all credit is based on a certain degree of "faith". That faith is, for example, to be seen in your credit rating. If you have never bounced a check and paid all your bills, you have a credit rating above 800. It is similar with a county, but not exactly. It gets more political with countries for obvious reasons, but nobody can forever can get away with economic idiocy.
Joe welcomes comments.
Let me add here that war, at a purely technical level, can or could be good for the economy, but not in the way that the usual leftie hysterics say it is. (the mere 4 or 5% of the GDP devoted to war cannot offset the overall cost to the economy in terms of useful projects that could be funded. Thus, the economy does not need war spending. Left-wing critics confuse morality with economics.) Also, the U.S. economy does not need the small piles of money from arms sales. It is negligible. The costs of paying soldiers and keeping bases is another issue, economically, but not a large issue. In short, the way the U.S. spends on war is a net loss, but could be a net gain, except for the genuine deterrent that ICBMs, war planes and trick guns provide. That is another issue. The deterrence could be maintained for a fraction of what we spend. Think Switzerland.
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