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Quantitative easing bleeds the poor and feeds the rich

In the past,  David and I have written about how money supply is rampantly expanding, and how this benefits the spenders and the speculators while punishing the producers and the savers (in a relative sense of course). We’ve been called conspiracy theorists for pointing out systematic problems with paper currencies.

Today in The Australian we find some more people who agree with us: Rupert Murdoch, Veteran Reserve Bank economist Peter Jonson, Warwick McKibbin (former Reserve Bank Board), and Bob Gregory (Professor of economics at ANU and another former Reserve Bank Board member). It’s good to see this issue make the front page. Shame it wasn’t there 15 years ago.

“Rupert Murdoch had warned G20 ­finance ministers that money printing by central banks had exacerbated inequality…”

“Mr Murdoch is saying what a lot of people including central bankers are saying in private and increasingly in public,” said Warwick McKibbin

Here’s the latest US money base* graph. The massive injections started in August 2008, the numbers ran right off the old graph scale. It was a temporary liquidity injection to tide us over difficult times. It took 90 years to grow the US base money to $800 billion. Now six years later the money base of the US has grown by 500% to $4.5 trillion. No one is pretending the money base will ever return to what it was. Instead officials try to manage the market and the money supply with repeated warnings of “the end of tapering” and markets leap or dive depending on the phrasing. Stock investing is not about company valuation anymore, as about predicting the bureaucrat. Markets have become bets on what interest rate committees will do.

The bank bailouts in 2008 and this little-known graph are what underlie both the Tea Party and the Occupy movement. People know something is wrong. It’s long past time to discuss it.

US Money Base, 1918 – 2014

St Louis Federal Reserve

Central banks are printing money (with digital wheelbarrows). Like temperature data, officials can adjust inflation figures to hide the effect of the extra dollars (look up hedonic adjustments, and changes to the weighting of “fixed” baskets). Like temperature data, there doesn’t need to be an overt conspiracy, just a systematic culture that rewards bureaucrats who think of reasons to reduce CPI. Which government minister will reward the senior bureaucrat who finds that inflation figures are biased low, and need adjusting upwards? Which government has an incentive to expose hidden inflation, and pressure the central banks to put up interest rates and make voters pay more in mortgage repayments?

If you or I print money, it’s counterfeiting and a crime. When central banks and large financial institutions do it, they’re saving the economy.

Money begets money

Ultimately the winners are the ones who get to spend the newly printed money first — that’s borrowers and speculators. To borrow, you need collateral, so wealthier people can borrow more. The commercial banks create new money for them to spend on assets, and because lots of people with newly created money are bidding up the price of the assets, those asset prices go up. Which means more collateral, so repeat.

As prices inevitably rise, the savers lose purchasing power, and political power too. So shareholders and property owners grow wealthier by borrowing. (As long as they don’t make a hash of it. Some of the biggest investors of all nowadays are the investment arms of banks, who are extremely well informed because they lend money and know everyone’s balance sheets, and are the ones choosing how to lend against various asset classes and when.) Some of their wealth is gained through taking smart risks, and is well deserved because it allocates capital to more profitable enterprise. But some of it is gained at the expense of workers who earn by the hour or year and get pay rises that are pegged to the CPI (which doesn’t grow with shares and property). There’s a balance between favoring risk takers or low risk producers who save for a rainy day. If the balance swings too far towards the risk-takers, the workers payrises don’t keep up with the money printing. Pensions likewise. Inflation steals from retirees too.

Feel like your income isn’t keeping up with expenses like it used to? Could be.

Did you get your share of the new money?

A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.

“The increase in wealth concentration is due to the surge of top incomes,” the authors said.

Borrowed money has just as much political influence as hard-earned cash does. So it’s a deep problem for any Democracy — when voters vote themselves the contents of the Treasury they’re voting for hand-outs and indirectly for governments to make manufacturing money easier. Who represents the worker anymore? All sides of politics support borrowers. It’s time the West started talking about the downsides of having a group of bureaucrats set the price of money while others create money out of nothing. There is no free market in currencies, only managed, fixed rates.

For comparison, here is the graph back in the pre GFC days. The tiny slowing of the exponential climb in 2007 set the scene for the collapses of 2008. That’s the problem with debt-based paper money — it has to constantly accelerate or we get a hangover.

US Money Base, 1918 – 2008

Back in 2009 a reader suggested this graph above should be a log graph so that the changes in past years were not compressed and invisible. To deal with that I published a graph of month-by-month percentage growth in the money base, so I could capture the scale of the proportional change. I haven’t had time to update it, and the spike has come back down since 2008. Some recent year-on-year figures have been as “low” as 25% and 33% growth –  that’s way back to World War II levels — but without the world war.  The scale of the GFC interventions is not like anything that’s been done before.

 

Some of this money has found it’s way into higher monetary aggregates and the curve on the M1 and M2 have shifted up a gear since 2008. The quickening continues. The problem exposed by the GFC is far from over.

_______________

* Our money system has two layers. Base money is the money created by the central bank. It is the “base” on which the commercial banks create bank money (the money in our bank accounts, called “credit” by the banks). There is usually about 10 to 20 times as much bank money as base money in existence. You might think of base money as like the gold in a gold-based system, and bank money as like bits of paper or computer entries that represent gold. One of the constraints on the creation of bank money by commercial banks (which they do by lending) is the amount of base money they have, so, theoretically, this recent expansion of base money should show up in broader monetary aggregates in the future–but not necessarily.

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Quantitative easing bleeds the poor and feeds the rich, 9.6 out of 10 based on 74 ratings

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131 comments to Quantitative easing bleeds the poor and feeds the rich

  • #
    the Griss

    Jo, third line..McKibbon not McGibbon ! :-)

    Gotcha.Thanks. Jo

    Sillyfilly posted an OT hijacking comment which was removed. So apologies, replies to that were orphaned at the bottom of the post. – Jo

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    • #
      The Backslider

      Quoting Silly filly: So much for the “debt and deficit disaster” in Oz, about as credible as our esteemed PM “climate science is crap” expose. Latest news, Climate Change Authority maintained, carbon pricing back on the agenda. Abbott, the scientific idiot, addresses science awards. Recipients not happy with anti-science government. (Comment was #1.1 now deleted.)
      —-

      So good of you to speak on behalf of those who received awards. I wonder however how they would feel about it.

      Carbon pricing is not “back on the agenda”. Please take the time to learn just a little about politics.

      I would bet my left nut that Tony Abbot knows a whole lot more about science than you do, particularly as to what is crap.

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      • #
        The Backslider

        No, I’m not talking to myself…. this was in reply to the Dumb Ass, it’s post was moved here


        REPLY: Sorry, I am doing your head in. I tried to move all four comments to the bottom of this thread by shuffling them to the old overflow thread and back. It didn’t work. So I deleted SF #1.1. Your comment is now orphaned. Thanks for your patience. — Jo

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        • #
          tom0mason

          .
          To misquote Oscar Wilde -
          To lose one thread may be regarded as a misfortune; to lose both thread and comment looks like carelessness.

          Just joking… :)

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        • #

          Don’t try to “tidy up”, Jo.

          Decreasing entropy in one place requires the generation of more entropy elsewhere.

          The greater the rate of increase in entropy, the quicker time passes.
          (I made up the last bit. It might be so.)

          20

  • #
    Sean

    The Japanese started the zero interest monetary policy to assist in recovery after a boom and bust market cycle of the late 1980′s. Nore than two lost decades later they are still on the same low growth path and are joined by the US and EU. The definition of insanity is doing the same thing over and over again expecting a different result.

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  • #
    Mark D.

    The million dollar question is how and when does it end?

    Chiefio has an interesting post on the subject of deflation: http://chiefio.wordpress.com/2014/10/28/the-present-eu-economic-problem-and-the-incipient-usa-one/

    It seems we are about to find out the limits of Keynes theory.

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    • #
      Paul in Sweden

      “How does it end?” is the magic question. There is no place for the Federal Reserve to go. Nobody seems to have an answer. Speeding downhill in a truck that is on fire without brakes, you can try to stay on the road until it runs out or you can slam into a tree. What do you do? Govt. needs to find a way to stimulate growth without printing money. Maybe some creative tax incentives to stimulate massive private investment? The economy must build up to equal & justify the printed money some how. -Paul

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      • #
        Sceptical Sam

        Maybe, Paul in Sweden, Maybe not.

        What you suggest is more likely to distort an already very distorted market, in my view.

        Do you really think that governments can pick winners? I mean, to which industries would you grant the tax incentive? Why those and not others? Do you think that government subsidy of bird-chopping windmills is a good government policy?

        No? Well that’s what governments do. That’s why we have the problem in the first place.

        My preference is to get governments out of the way of those who are capable of producing real wealth and hence jobs.

        So get rid of all the unnecessary regulation. Reduce government expenditure which either crowds out private sector borrowing or raises taxes to pay for it. Reduce tax so that people are required to make a better go at looking after themselves, and have more money in their pockets to do so.

        Take the nonsensical green taxes as an example. Since Australia removed the Carbon Dioxide tax power bills have fallen. people have more money to spend on other things – or invest.

        I reckon I’m a better judge of what I’d like to spend my “hard earned” on that are governments.

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        • #
          Paul in Sweden

          Tax incentives and subsidies are two different things. One is a tax break allowing a period of time or a set amount and the other is an outlay of money which we do not want the government to do.

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          • #
            Sceptical Sam

            Tax break? give me a break.

            How do you decide who gets the tax break?

            How do you know you’ve made the right decision?

            Think: tax breaks for bird-chopping windmills. Good decision?

            In any case, capital investment is usually amortised over a set period of time in most tax systems. Any further tax break distorts that system and give a free kick to the moochers, bludgers and the mates of government ministers. It’s part of the problem, not part of the solution.

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        • #
          Mental Wanderer

          I do hope the conservative fairy tale about getting “governments out of the way of those who are capable of producing real wealth and hence jobs” will eventually run out of steam. Government is NEVER in the way the wealthy Monopoly Guys. The Monopoly Guys have more influence on government policy than anyone or anything in the world. They already pre-determine virtually all government policies and vet every law. The proof of this is in how these policies continue to efficiently and effectively funnel the wealth of the entire world into just a few bulging pockets. Government policies that are truly “in their way” get quietly swept away. It is quite true, Sceptical Sam, that you know best how to spend your money. And, when you have billions upon billions to spend, you will also, most likely, spend it controlling and manipulating government policy to your advantage. You wouldn’t be able to force yourself to do otherwise. Perhaps, rather than wishing government would go away, you should embrace democracy and make your influence felt in strengthening your government to do the right thing. Just keep an eye out for the big guys in black suits who will come knocking on your door in the middle of the night if you ever successfully get your government to stop serving “the Monopoly Guys.”

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          • #
            markx

            Dead right, MW. Fairy tale is the exact description. These ‘get the government out of the way’ ideas gave us the GFC, and are behind the coming debacle.

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            • #
              Sceptical Sam

              Sorry markx but you’d best review your assumptions.

              The big government progressive Democrats and their interventionist policies were the most pertinent precursor to the GFC. Their pushing of Freddie Mac and Fannie may to make big loans to clients who could not afford the payments set up the system for collapse. It escalated from that one policy push.

              Securitisation and other market responses flowed from those policies of the Democrats.

              Leftist governments invariably go that way. And the people they supposedly “look after” cop it in the back of the head every time.

              Then the left-wing apologists come out of the woodwork and try to rewrite history. It’s a leftist phenomenon, not only apparent in climate “science” but in most areas of policy development.

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          • #
            PhilJourdan

            It would be wise for you to learn how a monopoly is created. IN almost every case, it is the government creating it. So what you are trying to accuse conservatives of is to allow monopolies to be created by government, but then not regulated. I defy you to find anyone advocating that.

            Perhaps when you understand how Monopolies come about, and how they are maintained (hint: Only government can do it), why conservatives do not like monopolies.

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  • #
    J Cuttance

    Wow, enlightened stuff.

    It’s not hard to see that our benevolent public service alarmists and their reflections in the media and finance world are first in line for the freshly printed money.

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  • #
    PeterS

    Yes the US is indeed in deep trouble because of debt. However, that’s only part of the story. The world debt is now approaching $200 trillion. heaven helps us when the world financial system collapses. Swedish central bank lowers its rates to 0%. It’s not inflation that’s the problem, it’s deflation. Despite all this quantitative easing and pumping, they can’t even inflate a small bubble. Me thinks they have to scrap all currencies and start again. Same thing happened over and over again throughout past empires. BTW, the US has for some time passed the point where all their revenues form tax, etc. can’t even keep up with the interest they owe on the money they have borrowed. It’s a debt bubble that’s out of control and will have to burst, and when it does the aftermath will be devastating to all of us. It will make any thought of a global warming catastrophe pale into insignificance; yet another reason the AGW alarmists are riding the wrong horse.

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    • #
      Andrew

      Sorry, that’s rubbish. The US at debt of 100% of GDP and say 3% int services debt for 3% of GDP. Tax is about 17% of GDP. They’re 6x from that.

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      • #

        Andrew,

        Debt at 100% of GDP becomes unsustainable if interest rates rise.

        If tax is 17% of GDP and debt servicing rises from near zero (as now) to 5% (in a few years, maybe less) then nearly a third of tax revenue has to go to debt servicing.

        How would you reduce government spending by a full third ?

        Has it ever been done ?

        50

    • #
      Ted O'Brien.

      PeterS, you say: “…they have to scrap all currencies and start again”.

      That is the prime objective of people at the leadership of this problem. Just as a developer demolishes a building to make room for a new one, their plan is to destroy the capitalist system so that they can install another system of their choice. And as far as I can see, that system is the one that failed in the USSR 20 or 30 years ago after a lifetime of trying to make it work. These people have studied the Marxist texts, but have ignored the Marxist history.

      People have short memories. They don’t notice a lot of things.

      When the Hawke government was elected, they immediately deregulated the banks. The curious thing about this was that it had always been the right wing Liberals who wanted to do this. So why would a Labor government do it?

      At the same time they promoted the activities of Alan Bond. I saw nobody ever observe a connection between these two actions. The connection was that Bond was abusing the bank deregulation. The promotion of Bond continued even as Bond was engaging in the activities which landed him in gaol years later.

      Of our “Big Four” banks, three joined the fun. After all, the PM was showing the way. The CEO of the fourth, the NAB, criticised what was being done, for which he was subjected publicly to personal vilifification by the Prime Minister.

      Every prudent businessman knew that what they were doing had to lead to a bust, and in 1987 it did. This had been part of Australia’s contribution to the bust. Only part of, mind you, there were other budgetary actions.

      The expectation was a return to 1930, whereupon the world would embark on a new plan. But the Marxists were outsmarted. The people on top of the pile could still remember the 1930s. They knew that there is no fun on top of a pile that is flat. So, instead of extracting every pound of flesh as had been done ever since Adam, they took losses sufficient to ensure that the pile did not collapse, which left them still on top, and the Marxists still on the outer.

      And the NAB, which had been one of the smaller banks, became Australia’s biggest.

      It had appeared to me that the government had set out to give the capitalist system enough rope to hang itself, then urged it to get out there and hang itself as quickly as possible. As time passed, I became ever more convinced.

      Post 1987 they continued activities which destroyed private capital, e.g. the Pilots’ Strike was one outstanding example. The running up of government debt. Public debt must be funded through taxation by private capital. This was pursued again by the Rudd/Gillard government.

      At the time of the election of the Hawke government Australia was a remarkably egalitarian society. It was that government which set in place the measures which promote the gap between rich and poor. According to their textbooks, when that gap gets sufficiently big, the textbook Marxist revolution will occur.

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  • #
    john karajas

    The Marshall Plan helped initiate a period of economic growth in post-WW2 Europe. World demand growth is low at the moment, so what about a new Marshall-type plan to help stimulate economic growth as well as demand in the developing economies? It would be nice to see their wage rates rising, both from a humanitarian viewpoint and also, more equal competition with workers in the developed economies. Wage rates are really out of kilter around the world and are causing enormous hardships as well as denying opportunities for wealth creators in developed economies, for example.

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    • #

      Actually, the Marshall Plan, compounded by Korea, prevented the UK economy from recovering from WWII. This was a key part of the US plan to take over as top dog from the British Empire.

      It worked. We only paid you off in the last decade.

      80

      • #
        Anton

        True Jeremy, the USA could have licked communism a whole lot easier and faster if it had gone into a strategic worldwide anti-commie partnership with the British Empire. In 1945 the Brits were into socialism but emphatically not communism. But the Yanks, perhaps thinking back 200 years, prioritised decolonialism over anti-communism. There’s a great book about the later part of World War II with various comments about what might have been, written by the Aussie war journalist Chester Wilmot who perished in a 1950s early jet airliner crash. It is called The Struggle for Europe.

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  • #
    Olaf Koenders

    Since 1933 in the U.S. and shortly thereafter globally, gold currency was removed from circulation. Money today is entirely worthless as there’s nothing tangible backing it and therefore no valuable consideration in circulation to pay any debt.

    “Legal Tender” is a promissory note – meaning “Promise to pay bearer”. What backs it? Another promissory note.

    All credit is lent to countries by the World Bank – with interest. How can countries pay back the interest? Never, because they had to borrow it in the first place.

    Banks are by law NOT allowed to lend their own money. So where do they get it? It’s created on the fly by securitising. The credit they lent you for a car or house never came from anyone but your signature, which set-off the security under your name. So what did the bank lend you? Why are they asking for it back?

    Do yourself a favour and ask them to provide evidence of the actual money they lent you. At the end of the day, their ledgers must balance, or the auditors would have a field day. So why are they demanding you repay it?

    To find out more about the secret of money, start HERE “(I want…) The Earth Plus 5%”.

    On a side note, it’s interesting that The Currency Act 1965 (still in force), mentions (my bold):

    Part IV—Legal tender

    16 Legal tender

    (1) A tender of payment of money is a legal tender if it is made in
    coins that are made and issued under this Act and are of current
    weight:

    (a) in the case of coins of the denomination of Five cents, Ten
    cents, Twenty cents or Fifty cents or coins of 2 or more of
    those denominations—for payment of an amount not
    exceeding $5 but for no greater amount;

    (b) in the case of coins of the denomination of One cent or Two
    cents or coins of both of those denominations—for payment
    of an amount not exceeding 20 cents but for no greater
    amount;

    (c) in the case of coins of a denomination greater than Fifty
    cents but less than Ten dollars—for payment of an amount
    not exceeding 10 times the face value of a coin of the
    denomination concerned but for no greater amount;

    (d) in the case of coins of the denomination of Ten dollars—for
    payment of an amount not exceeding $100 but for no greater
    amount; and

    (e) in the case of coins of another denomination—for payment
    of any amount.

    (2) For the purposes of subsection (1), a coin shall be deemed to be
    not of current weight if it has become diminished in weight by
    wear or otherwise so as to be of less weight than the weight
    prescribed as the least current weight of that coin.

    Note that a debt greater than $20 cannot be legally repaid: S 16(1)(c). Also, the Currency Act doesn’t mention banknotes of any kind.

    So how would the bank prefer you satisfy your loan to them using an unlawful and fraudulent “contract”, where no actual transaction of valuable consideration took place and with promissory notes that likewise are of no valuable consideration?

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    • #

      Except that… you can buy “Australian Dollars” minted by e.g. the Perth Mint, from precious metals as “permitted” by s115 of the Constitution though they are not “currency” except by approval under the Currency Act (e.g.2012); meeting the required composition as set out in that Act.

      Such allows the payment in coin for amounts greater than $20. But that’s not necessary as the Reserve Bank Act¹ makes bank notes legal tender.

      Other numismatic deviations are provided for in Currency Regulations such as those of 2013 25 cents, $75 and $20,000; which don’t hit general circulation as their face value is substantially less than their material value; (usually) the reverse of coin intended for general circulation.

      Crimes (Currency) Act 1981 says that paper money means money comprising a note written, printed or otherwise made on paper or any other material.

      ¹Every Australian “bank note” says that it’s legal tender as was established by the Reserve Bank Act (1959). (RBA, CommLaw)

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      • #
        Olaf Koenders

        Understood Bernd, but as you can see the Australian currency system under legal definitions and Acts is a jigsaw puzzle that requires overhaul.

        Paper money also means a cheque, which is still a promissory note with no intrinsic value to back it. If banknotes are actual legal tender, they could be swapped directly for gold currency at banks, who these days give us blank stares if we ask.

        S115 of the Constitution provides that no other coin except gold an silver are to be minted. The Constitution written in 1900 secured that actual gold and silver were to be used, not this faux coloured stuff we have today.

        As the face value of coin is almost impossible to determine since they must be valued by weight, they have no real value.

        The Reserve Bank and its accompanying Act don’t belong to Australia. The RBA asserts it belongs to the Commonwealth of Australia, which no longer exists as the original entity prescribed under Elizabeth II.

        10

        • #
          Lewis P Buckingham

          It may be apocryphal but I did read that the value of the nickel in the Australian 5 cent coin now exceeds its face value.
          There are forty 5 cent coins in $2.
          Its not worth picking one up if it falls to the ground.

          10

  • #
    Olaf Koenders

    Seems I’m being moderated again. I hope we don’t have to moderate and “[snip]” the word “f r a u d”, because that’s going a bit too far.

    [Olaf, the "House" -Jo's house- has determined that a defamatory post claiming fraud could bring about legal action. The House has no interest in dealing with lawsuits no matter how frivolous hence the word "fraud" is picked up automatically by the moderation filter. I agree with this decision even though it makes more work and slows down conversation.]ED

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    • #
      handjive

      Alternative words are ok.

      Some are even more descriptive.

      I like quackery.

      Climate Change Quackery has a nice ring & rhyme!

      Wikipedia: “U.S. courts have ruled in defamation cases that accusing someone of quackery or calling a practitioner a quack is not equivalent to accusing that person of committing medical fraud.
      To be both quackery and fraud, the quack must know they are misrepresenting the benefits and risks of the medical services offered (instead of, for example, promoting an ineffective product they honestly believe is effective).”

      20

    • #
      Annie

      My thumbs up was for ED’s reply.

      [Thanks Annie] ED

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    • #
      Olaf Koenders

      Thanks for that clarification ED. I understand that free speech has different connotations depending on location and context. However, the claims above can be proven and if they wish suit for defamation it would likely unravel their unlawful schemes. I shall use the latter reference in future.

      [Olaf, Joanne and us moderators are doing our best to permit truly free speech. Your comment was not snipped and your use of the word "fraudulent" was acceptable i.e. did not create risk of suit. However, the filter still caught your post and we had to manually free it after review. If you had singled out and named a specific banker, a real person, you would have likely been snipped. Presumably you are posting under your real name and ultimately are going to be responsible for your choice of words but even that does not protect Jo from the potential costs she might face. Thank you for understanding.]ED

      20

  • #
    Tim

    I don’t pretend to understand the global money manipulation agenda. However,I thought that money was totally digitised these days, so why does ‘printed paper money’ matter anymore? Maybe for PR purposes?

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    • #

      Tim – the very rich are never rich enough.

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    • #

      Tim, I should make it clear in the post. Most money is digital these days, but most people use the phrase “printing money” because it’s well understood and has historical meaning. In a sense, printing money now just means printing binary code in the right computer. Whether the dollar is in paper or a silicon chip is irrelevant. What matters is if that dollar is accepted as legal tender.

      Printing digital money has the same effect as printing paper money. But digital tricks with leading indicators like CPI can hide that effect for a while.

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      • #
        klem

        I read somewhere that we only ‘print’ about 5% of our currency on paper and metal. The rest are little more than ones and zeros.

        Bitcoin and others like it, are no more or less valid a currency as the US dollar now. They’re all just ones and zeros.

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        • #
          Olaf Koenders

          True Klem. Banks should have at all times in their vaults the balance of the day’s transactions in valuable consideration – but they don’t.

          Imagine what happened in the Cyprus experience a couple of years ago when there was a rush on the banks – everyone removing their savings in cash. There wasn’t enough cash to go around, because it’s not backed by any other valuable consideration.

          Security? What security? Keep it in the freezer, under your mattress etc. Would save on “accounting fees” which used to be legitimately handled by a human, but is now done automagically by computer for next to no cost, if not a profit after paying for the hardware and software. And STILL they get it wrong.

          Next time there’s a bust on the stock market, watch the banks panic. That’s where all their (our) money is, based on speculative trading on volatile securities.

          Glass-Steagall legislation (look it up) should be reinstated to ensure greater security. This should help avoid banks legally stealing your savings to prop themselves up if they go bust through their speculative trading(Cyprus again).

          20

    • #
      Olaf Koenders

      Tim, paper money (promissory note) is a receipt. There’s essentially no real value backing it. The actual note costs barely 2 cents to make, be it $5 or $100.

      Electronic money must also be backed by something of valuable consideration. However, as per above it isn’t when decomposed back into a promissory note, which is all you can receive in exchange.

      10

  • #
    PhilJourdan

    Great article to return to (if only for a couple of days)!

    You and David are correct. What Olaf does not understand is that gold means nothing. The value of a currency is backed by the wealth it represents. In old times, metal coinage (gold, silver, copper) represented an easier way to represent the wealth, but other than a few trinkets of jewelry, it is not worth any thing more. Those 1000 bar stools you just made, or the 500 law mowers, or the 2000 computers – that is wealth. When someone wants to “trade” you for one, it is easier to use an agreed upon medium, than to pull up with a trailer full of beef cattle. That is what money is. That is what gold is. That is what backs the currency.

    But when you create more currency, with no increase in “wealth”, you are devaluing the currency. So instead of having $1000 for each computer, you now have $10,000 or more! (By the figures in the article, you now have $50,000). That means the savers lose – they cannot print money, so their savings are worth 1/5 of what it use to.

    Wage earners lose.. They are paid in the currency, not cows. So their incomes are plummeting. As you indicated, the speculators, and those able to move their “currency” into wealth are the winners. And the only reason that money is not worthless yet is that the banks have been sitting on the stuff (not totally through choice).

    Woe be to the trading of the world should that worthless paper ever see the light of trading for goods.

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      Around 18 million of those useless gold coins trade on the London Market each day. They can be pretty liquid and transferable for some people. If governments wanted the masses to trade them…

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        PhilJourdan

        Sorry, I did not mean to imply they are ‘useless’. But gold (outside of jewelry and some electronics) IS useless other than as a representation of wealth. If Man tomorrow declared it ugly, it would be relegated to scrap heaps (that will not happen, it is just a hypothetical).

        it is the arbitrary value that man assigns that determines its worth. It cannot be used to make cars efficient, food more nutritious, or homes more comfortable outside of its “store of wealth”.

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          Bobl

          I have to agree, a better base currency would be wheat or iron since they have substantive uses (are commodities) but being relatively plentiful they dont have carrying capacity (are cheap). Oil, coal or uranium might be better bases, though holding a lot of uranium in vaults might not be real good for the banking system. Neodynium would be ok except it’s few uses are replaceable with other materials. Gold like fiat currencies has only a proxy value, it’s intrinsic value isn’t huge, but it’s not useless either, gold is one of the least reactive metals, it’s very useful properly applied. In many cases gold is substituted out because of its expense, make it cheaper and uses would multiply very quickly.

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            Duster

            Actually a perishable material employed as a currency would help stabilize monetary value. There is no reason to make money out of something imperishable, since value derives from work to modify or create materially valuable “things” – even services are things here. The material is only a symbol. Gold is just a really cool one. As it stands, every time we “save money,” we are effectively taking money out of circulation (it doesn’t matter whether what is saved is material or electrons). That in turn means that “new money” needs to be created to cover the short fall. Unhappily that means that the actual money supply has increased (inflation), fractionally lowering the value of whatever marker you call money. The only way that might help dampen boom-bust cycles would be to require all money to be in circulation at all times.

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            PhilJourdan

            Commodities are not good currency. You want something easily transported and traded (what gold was in early times). It really does not matter what is the currency, just so long as it represents real wealth and not just the medium it is printed on.

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          I would put it that metals do have an inherent value to us beyond trinkets. We forget this in our ‘civilized’ society, but metals were/are a rare commodity.. They are hard to obtain, they can be bent, shaped and forged into useful tools – some like silver have medicinal properties as well as electrical ones. Copper is extremely ductile and is incredibly valuable for conducting heat. They have so many properties that make them useful to us. Paper promissory notes were a con perpetuated by the banks to convince you the paper was worth the same amount as the metal you owned, but the fact is, you we supposed to hold those rare bits of copper, silver and gold. Some have forgotten this, others have not – you’ll find many an Indian holding metal, and the French who’ve had their economies destroyed by banks in the past are notorious for hording metal coins.

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            ExWarmist

            Gold makes great money – for multiple reasons, but also because it is largely useless in an industrial sense, and therefore is not subject to consumption.

            A good place to start is here with Silver & Gold – Hidden Secrets Of Money Ep 1 – Currency vs Money – Mike Maloney

            Then the next 4 episodes to round it all out.

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            PhilJourdan

            Note I did add those exceptions. But copper is much more valuable than gold (as is silver) due to uses alone, yet Gold is the standard. Metals are hard to come by. But they do not feed you. They do not house you (other than the more common ones like Iron and Aluminum), nor do they clothe you.

            But they were hard to come by, and prized due to their color and durability, so they became the coinage – the medium of exchange of the basic necessities of life. In some primitive societies, Iron was more prized than gold because of its uses. But the uses also meant that they would not serve as a medium since they were in the weapons and armor that was used, not in the jewelry the rich wore.

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      or the 500 law mowers

      I wish we had just one functioning law mower. ;-)

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      Olaf Koenders

      The value of a currency is backed by the wealth it represents.

      The man who made the chair can no longer afford to buy the chair.

      Most of that “wealth” lies in property which is traded on the markets, without the property being liquidated into currency to trade. It’s purely speculative.

      Property is easily built, gains and loses value with the markets and can be just as easily destroyed making it highly volatile. Insurance? Legalised gambling.

      When the property market’s backside falls out, as they often do dramatically, there’s nothing to repay the debt to the bank’s customers, other than the property which has now lost substantial value.

      Gold isn’t as volatile. It can’t be created at the drop of a hat and is usually never destroyed.

      Einstein’s favourite discovery? Compound interest.. ;)

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    NoFixedAddress

    Hi Jo and David,

    A scattered commentary.

    In late 1986, or early 1987, I was handed a document to read.

    I did not get to keep a copy of that document but there were some things that stuck.

    1. October 1987 would be a correction in Stock Markets;
    2. Taxation Revenue will determine the value of a country’s currency; and
    3. Know, Understand and Remember the world’s history.

    There were a few other things commented upon but I will leave them aside.

    I have looked at booms and busts as far back as history can take us, degradation/clipping of ancient coinage, and really looked at the 1929+ American experience (and lots of others).

    One of the saddest aspects of the 1930′s depression when there was production and there was demand for goods was the lack of money. Partly because of the enormous droughts in America, Canada and preceded by the Federation droughts in Australia, financial folk would not lend money.

    Nowadays there are so many $trillions sloshing through the world.

    Maybe its time to go deconstruct our national stock exchanges.

    Maybe its time to allow local people decide what they will put their money into.

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    All that printed money (to the extent that it exceeds the value of goods and services created to match it) has so far merely staved off general deflation but in doing so has inflated the value of certain specific asset classes such as property and shares.

    If money printing stops then there will be deflation and all or most debtors including governments will become insolvent.

    The values of the inflated asset classes will drop most as many rush to reduce their debt servicing costs by trying to sell off assets with rapidly falling values.

    The value of cash rises in a deflationary scenario and there will be a lot of shares and property available at much lower prices to buy with that cash.

    As long as money printing continues without fuelling general inflation (as now)the bigger the gains to cash holders there will be when deflation can no lomger be held at bay.

    Money printinmg which results in immediate inflation does indeed penalise cash holders due to the decreasing value of cash but if that money printing is instead deferring deflation then the holders of cash will benefit when the dam bursts.

    That underlying deflationary trend has been put in place by the vast increase in productive capacity from developing nations such as India and China. Normally that increase would have resulted in a rapid fall in the cost of goods and services worldwide but instead of allowing that natural market driven deflation governments around the world bought votes by inflating into it and hoped no one would ever notice.

    When that inflation from newly printed money comes to an end the underlying pent up deflation will come through in a sudden rush.

    I’m inclined to hold on to cash rather than move it into artifically inflated asset classes which will collapse when deflation can no longer be forestalled.

    The trouble is that I have no idea how long the current global Ponzi scheme can go on. I expected it to peak long before now.

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      Bobl

      I think you are wrong, realestate is inflated because the supply of realestate is limited rather than the supply of money is too great. Realestate will maintain it’s relative value and in the end is the only real hedge against a collapse, if you have a coiplemof acres then you can always feed and water yourself

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        The Backslider

        Real estate is the biggest con out there. It does not take anywhere near the cost to actually build a house.

        What can you buy in Australia for less than 500K? Not much.

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          Bobl

          I’m talking about land, not houses. Houses can be built for well under 100K, not mansions but certainly livable. If the economy was to collapse, those with real property will fare the best because it has an absolute value, you can farm it, rent it to someone, mine it etc. I’m not saying you can’t lose just that property is a better maintainer of wealth than gold.

          Put it this way, the rental yield on say two average houses renting for $320 nett per week, is sufficient in general to feed and clothe a small household (given no debts). With inflation the rental yield might go up and down but relatively speaking that yield should always be enough.

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            You can’t mine it in Australia.

            Everything underground belongs to the “Crown”; sovereign property of the States. Most States will grant permission for you to dig up minerals, etc but may also require royalty payments based on what and how much you “dig” up.

            I’m not sure about the ownership if oil, gas, latinum, etc. just start percolating to the surface.

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              Olaf Koenders

              Thanks Bernd, I was just about to mention that. I believe that what land you actually own extends barely a metre under the surface. I may be wrong in the measurement but I know the Crown has interests in the land.

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              The Backslider

              You have never lived in Lightning Ridge :-)

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            This sounds reasonable, but the Dutch property records show an interesting story. They date back to the 1500′s and support a few old adages – one was ‘always invest in property, the value always goes up’ – this would last about three generations which is about as long as we have links to the past, and thus a vague memory.. the other adage was ‘never buy property, it always goes down’, which similarly is shown in the records to be the case and it similarly spanned three generations – long enough for it to be in the memories of those living that leg of the cycle, and long enough for the adage to develop. We’re currently living during the upswing. As to the farming aspect, I always felt the same which is why I felt indignant at land ‘values’ being touted. I doubt I could feed myself and my wife off the quarter acre I hold, I cannot see how anyone on those piddling 320m square blocks entirely covered by a house could cope. The rental value is largely dependent on the jobs available in the area too (see Detroit for an example, or closer to home, Koolyanobbing). We don’t have a heck of a lot of manufacturing left in Oz.

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        I would agree if the real estate had been purchased with real money (fully matched by goods and services in a healthy economy) but in fact most has been purchased with debt at artificially low rates.

        That reverses the scenario when debt servicing costs rise, as they must, a short while after creation of more fake money stops.

        Once that fake money stops being created people can then only borrow money already in existence and competition for it will rise with interest rates following.

        The Fed has judged that the US is now in a position to minimise the resulting disruption but other parts of the world are already on the brink of deflation, especially Europe.

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    A two minute lesson in economics:

    The act of printing/digitizing new money is simply another form of the worship of brute force. Sadly, money is seen as the CAUSE of things rather than as only a consequence of the production of values. The printing/digitizing of money has no productive act providing a new value standing behind the money. Hence, it cannot be used as a medium of exchange of value for value. The producer who accepts the new money is the cause of the value not the new money. The new money produces nothing and the transaction is nothing but an act of theft.

    That the theft actually destroys wealth is explained by The Broken Window Fallacy. Production is focused on the wrong things causing production to become less efficient and effective. Ultimately, there is less less accumulated wealth as values are consumed to maintain everyone as the wrong things (thereby of diminished value) are produced. It is this accumulated wealth (capital) that forms the bases of new production. The whole productive system is thereby impoverished. The effect may be small, widely distributed, and easy to ignore in the beginning but it is none the less there.

    The printing of tens of trillions of dollars of new money, is anything but small. It is theft, on a grand scale, of the yet to be produced wealth of many generations to come. The balancing of accounts will eventually come and we will all pay dearly for it.

    Saying “After me the Deluge” is not an escape. Consider an 18th Century King and Queen, who spent the future wealth of France, lost their heads shortly after saying it.

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      PhilJourdan

      @Lionel Griffith – reading your comment (which I agree with), caused me to have another thought.

      Those doing the stealing by printing are like the bank robbers of old. They do not understand what wealth is, they only understand the symbols. John Dillinger did not understand that the money represented the hard labor of people, he just saw the greenbacks as the means to the end.

      They think the currency is the wealth. So anyway they can get it, short of legitimate efforts, is good.

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        Roy Hogue

        The wealth is in the ability to make money, to provide goods or services that people need and want. The money is just a yardstick by which we measure wealth. And changing the size of an inch on that yardstick doesn’t make anyone better off.

        And I lied. I couldn’t quite stay out of this after all. Oh well…

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          PhilJourdan

          It is a comparative measure as it converts cows and rocking chairs into a common scale. In its earliest usage, it was a note that said you had umpteen bales of hay that could be transferred.

          Eventually, the wealth behind it was lost and the currency itself became the object of acquisition. And that is when the idiots came up with QE.

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            Roy Hogue

            Phil,

            I suspect the idiots came along long before there was anything like QE or anything on or with which to do QE by manipulating the value of the medium of exchange. It happened even while the monetary unit was backed by some recognized, fixed unit of value, like gold. They took over as soon as they realized that people mistook money for wealth — almost as soon as any formal medium of exchange was in use. I think that was 3 or 4 thousand years ago at least.

            Central banks made it worse but the seeking of money as a thing of value on its own merit was already very old by then. And I suspect that those who do it, then or now, spend a whole lot of their time worrying that they needn’t do if they had a better grasp of the value and use of wealth.

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              PhilJourdan

              the idiots came along long before there was anything like QE

              of course. Idiots, like death and taxes, are a given. QE is just the latest greatest way that the Soros of the world enrich themselves.

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        John Dillinger also saw money as a cause rather than a consequence and came to the same conclusion as our feckless leaders who initiated and continue the practice of generational theft. Actually, John Dillinger was less evil in that he stole money on a vastly smaller scale than the Federal Government has over the past 100 years. When the bank vault was empty, he took no more. The Feds simply won’t stop until the economy is dead and civilization has collapsed.

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      Roy Hogue

      All that new money printed up is actually debt, debt we must repay from the sweat of our brow every day for the foreseeable future. The government borrows it, otherwise the situation would be even worse.

      My curse to the bunch of them. They know better but are addicted to this fraud on the people.

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        PhilJourdan

        There are 2 ways out of debt. One is as you describe. The other is to inflate the currency so it buys less, then repay with less goods.

        The latter is what will happen.

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          Roy Hogue

          And as I’m sure you know, Phil, it’s also the method that hurts the public the most. Even when I was working and had a good salary, one well above the median, my income never kept up with the rate of inflation, much less did my investments which were ravished several times by plain old dishonesty in high places. What will it do now?

          But complaining doesn’t help, does it? To whom do you complain with any hope of redress?

          Only action at the ballot box will do anything and I think too many are already addicted to the gravy train and the rest don’t understand the problem in the first place.

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            PhilJourdan

            YOu are correct again. Let us just hope that the voter fraud has not gotten too widespread yet. The early revelations are scary and show a complete lack of trepidation by the administration, and total disregard for the laws.

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      Graeme No.3

      Lionell:

      The French Bourbon kings were noted for the economic mess they made.
      Louis 14 fought wars and built Versailles, but left the State bankrupt. Bonds were trading at 80% discount, and the interest might not be paid for years.
      During the Regency there was the Mississippi bubble, which destroyed french faith in banknotes.
      Louis 15 continued the old methods, mortgaging future income for current expenditure; e.g. selling titles of nobility (which carried tax exemptions), tax farming which brought in a fixed amount much less than collected. A raft of taxes which raised little once the bureaucrats in charge were paid, and stifled trade.
      It was L15 who said “Après moi…
      Louis 16 ran out of money and time .. reign cut short.

      Since then various french Republics have made a mess of the economy, proving you don’t need a king to do that.

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      Ted O'Brien.

      In NSW, and I think Victoria too, Labor governments established major infrastructure works, tunnels in Sydney, which were ultimately funded by bankrupting the builders. It looked very much that those governments believed that debts don’t have to be repaid.

      The first major announcement by the Rudd government after its election in 2007 was that the previous Howard government had let the inflation genie out of the bottle.

      This was barefaced lie. So the message was that the new government intended to engage in inflationary policies and blame their predecessors for it. They really do believe that they can repay debt with inflation.

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        ianl8888


        They really do believe that they can repay debt with inflation

        Yes

        And as the initial post correctly points out, this is hidden from the public gaze by constantly but quietly re-defining how “inflation” is measured

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    Roy Hogue

    I would comment on quantitative easing but the comment would be unacceptable in polite society so I will stay out of this one.

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    Bruce

    Just found out that QE transfers money to the rich?

    We will look back and consider this a bizarre aberration.

    Will it happen again?

    Probably.

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      Olaf Koenders

      Just about everything transfers money to the rich, considering they have the money to pay for the control to gain more money.

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    pattoh

    Ever since Greenspan allowed “gold leasing” nobody has had any idea who really own what gold .
    It has been rumoured that every ounce of gold in CoMEx & BoE is supposedly owned by over a hundred people.
    With the more than doubling of the monetary base since QE, it has become blatantly obvious that the gold price is completely manipulated by naked paper short futures in New York.
    Worryingly it is not just the gold market which is drowned by or completely dominated by a fabricated torrent of paper trading. Most metals & energy are being gamed. >20 times for oil:-

    “October 13 (King World News) – Corrupt Paper Markets May Reverse Gold, Silver & Oil Higher

    Excluding options and the over-the-counter market trading, a top energy analyst we follow recently computed that the volume of trading for “financial oil” was 20-times the volume for physical oil on a global basis. Given the murky data from which even he must work, it is safe to say that the number at which he arrived is no doubt a severe understatement….”
    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/10/13_Corrupt_Paper_Markets_May_Reverse_Gold%2C_Silver_%26_Oil_Higher.html

    While we all go to work to survive & pay our taxes; there are a bunch of cynical rent seeking parasites in New York & the City gambling with the money yet to be earned by future generations.
    Sadly, they are probably working for the same people who brought us everything from the Fabians, the RIIA, the CFR & AGW , because “they know what is good for us – a NWO !” /SARC!!!!!!!!!!!!!!!

    The clock is ticking. The Swiss are holding a referendum about repatriating their reserves at the end of next month & Italy has a loud small opposition spruiking a break from EMU. Any major & immediate demand on the physical reserves could cause the breakout.

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      ianl8888


      Any major & immediate demand on the physical reserves could cause the breakout

      There was a story about 6-8 months ago that some German banks had demanded their phusical gold stocks be transferred from the US Fed Reserve to their own vaults

      Not only were they told “No Way Jose”, but their request to simply view their physical stock was refused

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        pattoh

        I believe they were told to come back in 7 years. Germany has had a small amount delivered but they have gone quiet as they too are riding on the “overloaded camel”. ( building windmills?)

        Scratch the surface of the “Petro Dollars” started by Nixon & Kissinger a couple of years after the US went off the gold standard & then consider that quite a few of the “Arab Spring “countries had dallied with Euro & gold contracts for oil.

        Also consider that with the massive one way movement of physical gold to China over the last few years, their balance of trade situation, Yuan contracts on oil & the BRICs Bloc perhaps the hegemony of the $US may be on the wane.

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    David S

    I have spent a lifetime in the finance sector and the only certainty about economics is its uncertainty. Today’s guru is tomorrow’s dunce. People forget that Warren Buffet under performed for perhaps 10 years in the 90 s and early 2000s came back with vengeance after the GFC. . No one knows the future ( not even God). A dozen top economists when asked to predict future values of currencies 12 months out invariably will have the value fall outside their range. Government policies can kill investments overnight. Sharemarkets are highly irrational as are property values, bubbles come and go and the only real way of knowing its a bubble is after it has burst.
    So whilst low interest rates in theory should favour those that have access to those funds the Japanese Share market is still less than 50 % of its peak value it was in the early nineties more than 20 years ago despite having the worlds lowest rate.
    Whilst I am a climate realist ( I hate the term sceptic) economic theories are unfortunately about as accurate in predicting the future as climate models .

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      PhilJourdan

      David, you are entirely correct, but on the wrong subject. It is not economics that you find so hair pulling. It is the markets. They are a part of economics, but they are more a study in human nature. Human nature, a property that cannot be quantified and calculated, is what drives the markets you are talking about. It is the “faith” of people that determine the winners and losers. That is how one company (say Apple now) can be so over valued, and still be rising, while another is prime meat for a hostile takeover and breakup because of the UNDERVALUE of its stocks (I refer you to OPM – a great movie if you have not seen it).

      A butterfly sneeze in Saudi Arabia can send the price of crude skyrocketing! Yet the supply and demand has not changed. What did change is the confidence of the speculators (if warranted, the price will remain high, and if not, it will fall as fast as it rose – no one knows).

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    u.k(us)

    Make no mistake, the gamblers know of a “safe haven” when things start to unravel.
    It is the U.S. dollar/economy/last hope (such as it is).
    Never bet against it (for now).

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    Peter Miller

    Unfortunately, populist and incompetent politicians merged with greedy bankers to create the greatest financial crisis of all time in late 2007.

    There was only possible solution – like it or not – and that was to flood the financial system with cash. Not to do so would have resulted in a replay, only a bit worse, of the Great Depression

    Quantitive Easing saved our finicial system, nothing else would have done it as well. Sure, it has caused huge distortions, but we will work through them with time and one of these ways is called the Velocity of Circulation of Money will just slow down and that means inflation won’t happen anytime soon.

    It is pointless to seek refuge in gold, as this is now one of the most manipulated markets in the history of man.. If gold was in a real market, it would be indicating a monetary crisis in the offing, so best to nip that one in the bud. If you are a large owner of paper gold, just try getting immediate delivery – well, good luck with that.

    More to the point, why aren’t all those populist, incompetent, politicians and greedy bankers in jail?

    Only one country has done the tight thing and that is Iceland.

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      PhilJourdan

      No, I disagree. First, it would not have been worse than the great depression unless the same mistakes were made (the opposite were made). Second, there was no need to do ANYTHING. Long before the 30s, the US and the world had gone through similar crises. The difference is the governments did not try to fix it then. They let the markets do that.

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    handjive

    O/T But one for the blog hosts:

    Canberra convert Anna Rose wins Australian Geographic conservationist of the year award

    Ms Rose became a recognisable figure after co-starring with former Howard government minister Mr Minchin in the ABC documentary I Can Change Your Mind on Climate, which aimed to focus on the root causes and consequences of human-caused climate change.

    “Looking back on the documentary and the book, I’m happy it was able to reach millions of Australians with access to reliable information on climate change and experts,” she said.

    http://www.smh.com.au/environment/canberra-convert-anna-rose-wins-australian-geographic-conservationist-of-the-year-award-20141029-11dpjb.html

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    Paul Deacon

    Hi Jo -

    There is a lot of misunderstanding about the “printing” of money. Most of the creation of money does not involve any printing. Most money is created by lending, i.e. when a lender makes or “writes” a loan. Most of this is done by banks, but it does not have to be. Non-bank corporations and individuals can and do lend money (which creates money), it’s just not their core business. In a banking crisis in the UK in the 1970s, when banks were forbidden to make new loans, large corporations obtained credit by lending to each other (typically by discounting each others bills of exchange).

    My understanding of QE (quantative easing) is derived from looking at the operations of the Bank of England (their balance sheet is easily viewed on the internet). QE (in Britain) is done by the Bank of England buying UK Government paper (“gilts”) from commercial and investment banks. In exchange, the commercial and investment banks are given money in the form of a balance with the Bank of England. This money cannot necessarily all be used by the banks, as in the wake of the 2008 financial crisis, I understand that the reserve requirements of the banks (how much money they must keep in their balance with the Bank of England) was raised.

    The Bank of England is left with, on the one hand, assets in the form of gilts (UK Government bonds), and on the other hand, liabilities in the form of balances in the books of the Bank of England owed to commercial and investment banks. Last time I looked, both of these IIRC were around 287 million pounds Sterling. Taking a helicopter view, it looks something like a wartime economic measure, with the reserves of the commercial and investment banks being “nationalised” (lent to the Treasury). Gilts (UK Government bonds) are dated, so without further intervention by the Bank of England, the stock of gilts held by the Bank of England will run down eventually to zero (the Treasury will repay the gilts as they mature). I suspect there is a practical limit to QE, which may have been reached in the UK and the US (which may be one reason the programmes have been stopped for now). The practical limit is the size of the commercial and investment banks’ balance sheets (there is only so much they can realistically hold in reserves with the Bank of England).

    The chief beneficiary is the Treasury (borrowing arm of the UK Government). Firstly, they get to borrow much more than they likely would if the Bank of England were not buying gilts (government bonds) in the market. Secondly, they get to pay much lower interest rates, as the buying of gilts by the Bank of England inflates the price of gilts, thereby depressing their interest rate (the price and interest rates of bonds are inversely related). Thirdly, by promoting modest inflation (say 2% to 5% per annum) by an increase in the money suppy (the money supply is increased when the Bank of England writes new balances for the commercial and investment banks in exchange for gilts), while keeping interest rates very low (by the same process), the UK Government is “inflating away” its debt (real interest rates, i.e. after inflation, on this debt are negative, while the value of the debt in real terms is falling, something that is significant over decades).

    I will not attempt to predict how it will all end, but I hope that little explanation is of use to you and your readers.

    Paul Deacon, Christchurch, NZ

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      Paul Deacon

      I would add that the underlying cause of QE is the capture of central banks by governments. Originally the Bank of England was a private institution, then (I think in 1949) it was nationalised, i.e. purchased by the state. Then about 10 years ago it was made “independent” from the government, although still 100% owned by it. Then the Bank of England did QE. QE is something that a privately owned central bank would not have done, and I believe that the Bank of England prior to its famous “independence” would not have dared to do (since it is so obviously a measure in favour of the government of the day). We might observe how easily an “independent” central bank is more captured by its government.

      The Swiss National Bank (Switzerland’s central bank) is not owned by the Swiss government. Instead, IIRC 47% is owned by private individuals (I think they have to be Swiss nationals) and the remainder is owned by the cantons (of which there are 20 or 22).

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        Anton

        It is absolutely right that central banks should be run by elected politicians not unelected bankers. Granted that it is a choice between the bad and the worse, but who would not prefer the former?

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    AJ

    John Mauldin from Mauldin Economics (http://www.mauldineconomics.com) has been advising investors how to manage the very negative longer term impacts of QE for a few years. If you’re interested in the topic you should subscribe to his newsletter. By the way, he thinks the consequences when the music stops won’t be pretty…

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      Bulldust

      I am glad there are other readers. I am continually impressed by the quality of the posts and guest posts at Mauldin’s site. He is clearly connected with some of the best economists in the world.

      I was expecting this wild ride to end a couple years ago, but completely underestimated the desperation of the central bankers. Seems like they pull out all the stops and then retire to leave the steaming turd with the next muggins to step into the role.

      Thankfully the Fed’s QE is finally over (for this session), but I have little faith Yellen is any better than Bernanke before her. Besides which, the EU looks poised to unleash the printing presses anyway… at least holidays in Europe should become a bit cheaper if that happens.

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        PhilJourdan

        The fed continues QE. The latest was pumping in $85b each month into the banks and stock market. That was reduced in January to a slightly lower (but undisclosed) level. It has not ended.

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      PhilJourdan

      He and I are in agreement.

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    Bobl

    Can any of our US friends give us the lowdown on the midterms? I’d especially like to know how the Ballooning debt, the EPA war on coal and the botching on the Ebola response is playing out in the electorate.

    Particularly on Ebola, I think Obama has “lost it; political correctness seems to have trumped science yet again and quarantines of even health workers from Ebola infected regions aren’t being quarantined. Surely the president who is supposed to protect the citizens is falling down on the job, putting Americans and inded the rest of the world at risk of a pandemic… surely this has to play out badly in the electorate.

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      PhilJourdan

      Unfortunately those will not be defining issues. The 2 issues that seem to stand out is Obamacare and the economy. And while the MSM and the administration proclaim good times are here again, the man on the street does not see it. They claim unemployment is down. But more people are working part time due to Obamacare, and more people have left the market. The numbers do show that (if you dig into them), but the press does not report that.

      Ebola is a simmering rage. Some want to believe that the administration knows what it is doing. But as long as it has not become a contagion, they are not too worried about it, and so even the ones that think the administration is stupid are not going to use that as they vote. The debt is something that they have no conception of (they see the numbers, but it does not have meaning for them in their daily lives).

      Ebola and the debt are merely the outward demonstration of the incompetence of the administration. But that is seen by the political wonks, not the general populace.

      It will be a major defeat for the party in control. But think of it as the local elections in Australia and other Parliamentary countries. Obama will continue to rule, mostly by fiat, and the problems will get worse.

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    JJM Gommers

    Think about what’s going on in Switzerland, 30 november 2014 election about the return of the goldreserves. The printing of money by the central banks starts to concern more people.

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    Richard

    China have been buying gold like crazy recently some say to protect themselves for when the US dollar collapses. I think it was the famous French philosopher Voltaire who once said “All fiat currency eventually returns to its intrinsic value – zero”.

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    pat

    25 Oct: AFR: Banks look for model to serve the wealthiest
    The Credit Suisse Global Wealth Report found that in 2013, Australia’s median wealth of $US219,500 ($244,500) put it at the highest level in the world. The same report found there were 1.762 million people in the top 1 per cent of global wealth holders in 2013 and Australia accounted for 3.8 per cent of this group, despite having just 0.4 per cent of the world’s adult population.
    Financial institutions are keen to attract this growing segment of rich investors…
    East & Partners analyst Lachlan Colquhoun: “Meanwhile, SMSFs have gone berserk. That isn’t to say SMSF investors aren’t taking advice, they’re just not necessarily taking it from private banks.”
    http://www.afr.com/p/banks_look_for_model_to_serve_the_0CbvZnigZhmcL1D2XNtvUK

    pdf: 156 pages: Credit Suisse Global Wealth Databook 2014
    https://publications.credit-suisse.com/tasks/render/file/?fileID=5521F296-D460-2B88-081889DB12817E02

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    pat

    14 Oct: Guardian: Jill Treanor: Richest 1% of people own nearly half of global wealth, says report
    Credit Suisse study shows inequality accelerating, with NGOs saying it shows economic recovery ‘skewed towards wealthy’
    According to the Credit Suisse global wealth report (pdf), a person needs just $3,650 – including the value of equity in their home – to be among the wealthiest half of world citizens…
    http://www.theguardian.com/business/2014/oct/14/richest-1percent-half-global-wealth-credit-suisse-report

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    John Of Cloverdale WA

    OMG, Michael Mann is at it again. Money is backed by tree rings instead of gold.
    Sorry, just trying to be funny.

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    I did a few calculations a little while back.

    I knew the banks invented money on the spot when people apply for loans (most people don’t seem to be aware of this) and I knew this money injection flows steadily into other ‘investment’ locations such as the stock market as people seek to increase their wealth or find a safer haven for it this money they’ve never actually touched or seen.. but when I found just how bad it was it really worried me. Others I’ve spoken to seem happy to believe the Powers In Charge must know what they’re doing, so they don’t lose sleep over it, but I’m afraid I do.

    Here http://en.wikipedia.org/wiki/Circulation_%28currency%29 is a link to how much printed money there is in Australia – this is supposed to represent the amount of gold we have to sell on the international market. It states Australia has $ 32.4 billion printed or minted currency units in circulation. however below I find the RBA states how much gold it holds, and it has a lot less gold than the money printed:

    Armed with an idea of how much printed, not pretend bank money there was, I went to the REIWA site and looked at the median value of some suburbs in Perth. I picked six at random, and worked out the value of the houses – just the houses, not units, commercial properties or vacant land – just residential houses. The value was nearly 12 billion dollars – that is 1/3 of all the currency in Australia. So if roughly eighteen of WA’s 350 suburbs were to sell up and demand cash – that would be every single unit of currency in Australia removed from circulation. Every note, every coin. ..and far, far more gold than the reserve bank holds

    I also calculated how much printed money there was per Australian, not hard dividing the amount of printed currency by the number of people in Oz, it came to just short of $1,400 per person.

    Here is where the reserve bank lists it’s official assets http://www.rba.gov.au/statistics/frequency/reserve-assets.html and it states the gold reserve is valued at $3,734,000,000 .. for 23 million people, that’s a mere $162 worth of gold per person.. or 18 grams per person.

    I put more on the REIWA calculations, as well as outlining my concerns her http://photoweasel.diaryland.com/Money.html

    Am I right to be worried?

    Reading Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Mackay, 1841, I came to understand that while gold is the currency of nations, silver appears to be the currency of banks, and I also wondered why in this day and age with silver being so important to industry and medicine, and when stocks can be so low that American buys have to wait months to purchase the stuff, how can it be so cheap? I wonder if this is not another case of banks shorting to secure as much of the stuff as they can..

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    John F. Hultquist

    Two other things that contribute to an average person’s financial burden (in the developed world):
    1. people are living longer and funding retirement is more difficult for companies and individuals – link here:
    http://calwatchdog.com/2014/10/13/longevity-increases-pension-problems/
    2. Quants and high speed trading
    ~~here:
    http://www.telegraph.co.uk/finance/10188335/Quants-the-maths-geniuses-running-Wall-Street.html
    ~~ and here:
    http://www.cbsnews.com/news/how-speed-traders-are-changing-wall-street-07-10-2010/

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    Richard Hill

    News about the Swiss Gold Referendum might be buried in the comments. It is worth knowing that on Nov 30 the lucky people of Switzerland will have a chance to instruct their central bank to a. hold minimum percent of reserves in gold, and b. to repatriate all reserve gold into their own country. The Swiss would have to buy 1000 tons of physical gold over the next 5 years. This could well trigger world-wide instability in the gold market.

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    markx

    This is in fact a far bigger problem than the climate game.

    In fact I wonder if the whole AGW scare is just a convenient way to distract us and keep the ball rolling a bit longer while the banks continue to digitally create currency to lend to the ultra rich (and bonus themselves in the process) and the whole sorry ruthless group of them continue to wheelbarrow it all away.

    They will be living in nice reinforced housed, invested in property and productive industries when the rest of us find our currency is suddenly worth nothing.

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    There are things we can do. Fully exploited endocannabinoid medicine would cut medical expenditures by 1/4 to 3/4. Anything in that range would bankrupt the current medical establishment.

    The maker movement is figuring out how to cut the cost of new product R&D fantastically. The problem is that it takes money to go into production even if you have a good idea. Crowd funding can help some.

    And then we have incipient DNA medicine. Another cost killer. With the cost of gene sequencing coming down rapidly. But opposing that is the GMO movement.

    When the hurt gets bad enough the new tools will be “allowed” to work.

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    Nic

    Currencies are backed by the faith and credit of us. But we use a system which we didn’t create so we pay usery. The irony again is that the credit belongs to us. WE have been so fooled it is us that give rise to our own slavery through signing as ‘persons’ which are the tokens of commerce in this system. Your person does not belong to you. We are modern serfs and are bonded through our Governments. Our Governments went bankrupt in the 30s. They too are corporations registered with the Securities Exchange Commission in Washington DC.

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    Dariusz

    The world is now a giant casino and a ponzie scheme. This will eventually will lead to a global war.

    Do you think that hitler wanted to go to war just because of his drang nach Osten ideas. He had to as Germany was about to go bankrupt on the 1st of jan 1940. War is the best remedy to wipe your balance clean and avoid bankruptcy by sealing someone else,s wealth.

    Hitler was able to conduct IIWW with max. Tax rate of approx. 30per. We can, t make it with some 50per in peace time. What chance of the long term future do we have?

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    RJ

    “One of the constraints on the creation of bank money by commercial banks (which they do by lending) is the amount of base money they have, so, theoretically, this recent expansion of base money should show up in broader monetary aggregates in the future–but not necessarily”.

    Jo please stick to subject you know something about. You haven’t a clue what QE is (its an asset swap where bonds were swapped with reserves. This was done to decrease interest rates and increase bank holding of Fed / UK reserves). So no one gets to spend this money firsT.

    And your statement above is outdated nonsense. Bank lending now has nothing to do with base money. And hasn’t for many many years.

    But posting this that is so inaccurate. It does your credibility no good in an area where you do have good knowledge.

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      Robert you say “Bank lending now has nothing to do with base money. ” But you don’t even make a case. Does Basel III not even exist? Do banks have no capital requirements any more?

      And even you say that the point of QE was to decrease interest rates. Lower rates makes it easier for people to borrow money, and stops people foreclosing or getting margin calls. In other words it protects the big borrowers who would have gone broke if the “swap” did not occur. And that “swap” of reserves for bonds saw the Fed acquire many bonds from the banks that were worth less than face value, aka buying “toxic” muck from the banks at full price to bail them out.

      QE keeps assets valuable that would have vanished or shrunk. People spend money based on their expectations of wealth. When a house is used as an ATM, there are no new assets suddenly blinked into existence (the world has just as many houses as it had before) but someone’s bank balance increases and they buy toasters or restaurant meals that they could not have bought. The money supply increases.

      Read here for one view — not that I agree with all of it.
      http://www.financialsense.com/contributors/matthew-kerkhoff/qe-printing-money-inflation

      The people who got the money first borrowed big before QE. The QE stops them from going broke. How many of those risk takers would still have their assets if interest rates were 5%? How many of them would be borrowing real money based on those assets now?

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        RJ

        Joanne. Thanks for the article link. But
        “These new cash? reserves are available to banks for lending” This is not correct (not even close). The writer clearly does not understand the banking system. Banks do not loan reserves. Never have and never well. Banks need a credit worthy willing borrower and then simple create the required bank credit (our money) by a journal entry
        DEBIT Loan Account = banks asset / our debt
        CREDIT Bank credit = banks liability / our money asset
        And if need be find the reserves to settle with other banks after the event (see below example)
        What is money.
        The highest level money is Fed (or central bank) reserves (or base money). This is the banks and treasuries money (they use reserves to settle with each other like we use cash or bank credit) not our money. Now we could all have accounts at the central bank. But this would give us no choice. So banks were set up.
        Level two money is bank credit. Where one central bank reserve equals one bank credit. If I buy a car from you and you bank at another bank to me. Then my account is decreased, your account is increased and the bank settle with each other using central bank reserves.
        Level three money is notes and coins. These are tokens for bank credit.
        Banks need reserves to settle with other banks. But if they are short the central bank just creates the necessary reserves. At the going interest rate. So bank lending happens regardless of reserve holdings
        If you want to read books / articles by economists who do understand the banking / treasury system (many economist are hopelessly confused). Try MMT. Say Warren Mosler. A good free book (or cheap through Amazon) is ‘The 7 deadly economic frauds of economic policy’.

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          RJ

          Re you post
          “The people who got the money first” T bonds only exist due to Govt spending (so Govt spending starts this process). US Govt spending creates new reserves (and bank credit= our money). Tax drains these reserves (and bank credit). As do T bond issues. That’s the reason for T bond issues to drain (or reduce) excess reserves held by banks. QE is a process where the T bonds are purchased back and replaced with reserves. To achieve a desired interest rates (for reserves) but also to increase the banks holdings of reserves.
          “Interest rates” This a complex issue. But The Fed is the monopoly supplier of net reserves to its banking system, and therefore has no option but to set at least one interest rate. Warren Mosler. I would prefer higher interest rates though as a saver.
          The Fed bought US treasury bonds. They were (as far as I understand) bought at fair market values. So the banks (or sellers of US T bonds) just swapped one asset (Fed reserves) for another one (T bonds). So it’s nothing like buying toxic muck. If US T bonds ever become toxic muck the US and world economy is finished.

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            MRW

            T-bonds are technically US currency, broadly speaking. Only 11-12% of US currency are physical cash and coin. The rest, the 88%-89%, of US currency are treasury securities. The US Treasury prints them up out of thin air; since April 2013, electronically.

            T-bills: mature within a year
            T-notes: mature between 2-10 years
            T-bonds: mature between 10-30 years.

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            MRW

            Correct. The government spends first through congressionally appropriated spending bills.

            This increases the money supply by the amount of the spending bill.

            Then the US Treasury sells treasury securities on the open market at auction in the amount of the spending bill.

            These are lapped up in a nanosecond. Why? Because the FDIC does not insure commercial bank accounts for more than $250,000 per account. US treasury securities (bonds, usually, because of the yield) are the safest financial instruments in the world, back by the full faith and credit of the US Government.

            In an example of the worse use of the English language evah, the US Treasury’s act of selling treasury securities at auction is called “borrowing.” Sometimes, ‘borrowing from the public’. Nothing could be further from the truth.

            What the selling of treasury securities does is restore the money supply to balance. It’s a pickled system started when we were on the gold standard and all of this was necessary, including the ‘debt ceiling’ from 1917, which has zero meaning today. WWII intervened and no one bothered to change the laws.

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        MRW

        @JoNova,

        RJ is correct. Loans create deposits, in the US, at least. Yes, created out of thin air, and based on the bank’s perception/knowledge of the borrower’s creditworthiness. The bank DOES NOT LOAN OUT bank reserves, which the bank is required to have in its checking account at the Fed to support the loan. (Think it’s now around 1% in the US, don’t hold me to it.) Why? Because what if Mr. Borrower moves his bank loan from Bank A to Bank B? Bank A must transfer the reserves that back up the loan to Bank B.

        I must admit that RJ is correct, in my view, that you have a muddled and incorrect understanding of reserve and federal accounting as it applies to the US. There is a short book (87 pages), “Freedom from National Debt” by Frank N Newman that would explain what you and David are not clear on. It was printed in April 2013. Newman was Deputy Secretary of the US Treasury. A math whiz like David would find it fascinating.
        =================

        FYI
        The US Federal Reserve has four broad clients: US government, US banks, Foreign governments, Foreign banks. The US Federal Reserve has two kinds of bank accounts for these four clients: checking and savings. (They have fancier names, but best and easier to understand them this way.)

        When a country like China, for example, receives a $2 billion payment from, say, Walmart for goods produced in China, Walmart wires China the money. Because of the way the settlement and payment system works when paying in US dollars–which China wants to be paid in!–Walmart operationally wires the money to China’s checking account at the Fed in NYC. (By law, no USD can leave the US banking system; tourists and citizens can only take out $US 10,000 in currency per trip.)

        China now has four decisions it can make:
        (1) Do what you or I would do if we wanted Yuan: go on the open market and exchange the USD for Yuan, then wire it home.
        (2) Leave it in checking and earn zilch in interest (technically it’s now 25 basis points since 2008; that’s 0.25%)
        (3) Buy something American with the money: Boeing planes, corn huskers, nuclear power parts, whatever. Vegas Hookers? ;-)
        (4) Earn interest on its money.

        Let’s say it chooses Door No 4: Earn interest on its money.

        China instructs the Fed to transfer the $2 billion from its checking account to its savings account. Then, China buys US treasury securities at auction on the open market for $2 billion. Those treasury securities remain in China’s savings account at the Fed (the way your bank CD stays in your savings account at your bank) earning interest until China instructs the Fed to cash the treasury securities in.

        OK. Cash-in Day. China tells the Fed it wants to cash in the $2 billion in treasury securities (t-bills, t-notes, or t-bonds) and return the principal and interest to China’s checking account. The Fed does it. Incidentally, the act of moving China’s money from savings to checking is called “Paying Off the National Debt.” (When we cash in our CDs at our local bank we call it ‘cashing in our CDs’, not “Paying off the Local Bank’s Debt,” although, technically, that is what the LOCAL BANK IS DOING from its perspective.)

        At no time was China’s money moving between anything except its own accounts.

        The Federal Reserve similarly maintains checking and savings accounts for the US government.

        Because our inept, cruel, and badly educated congressmen (and the same applies in your country) have no idea, or have forgotten, that their duty is to use fiscal policy to produce jobs for the people in economic downturns by spending, the Federal Reserve in 2008 , after saving the banks to the exclusion of the people, used monetary policy to coax what Congress failed to do. (The Federal Reserve can only do monetary policy.) The Federal Reserve used QE.

        Quantitative Easing (QE) was the purchase on the open market of US treasury securities. Remember, in the China example above, that US treasury securities remain in Fed savings accounts. When the Federal Reserve purchased these treasury securities on the open market, it paid the principal and interest into the banks’ checking accounts.

        New terms to know Now you can know that the official name for a checking account at the Fed is called a reserve account. A savings account at the Fed is officially called a securities account.

        So when the Federal Reserve paid the principal and interest into the banks’ checking accounts, it was increasing the banks’ “reserves,” on the misbegotten idea that it would convince banks to lend to ordinary folk by reducing the banks’ need to worry about getting reserves. Didn’t happen. Instead, they moved the velocity of financial capitalism up a notch loaning to the rich and derivative marketers.

        All that happened is that the Federal Reserve was now the proud owner of trillions of USD’s worth of treasury securities, and the Fed was earning the interest on these treasury securities, instead of the previous owners in the private sector. The Fed was booking interest on these treasury securities at a clip of around $100 billion/year. That’s $100 billion that the private sector no longer had available to spend. QE removed that amount of money from the economy. You could call it a tax on the country, and you would be right. At the year of the year, because of a 1947 law, the Federal Reserve returned all of that $100 billion profit minus Fed expenses to the US Treasury, extinguishing that money from the economy, and driving up the value of the USD because there was $100 billion per annum less of it swilling around the country and the world.

        When RJ talks about a swap, s/he was right. QE was nothing more than a swap from the Fed’s savings to its checking account, with the profit for onward-forwarding back to the US Treasury.

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    Golly… I came over to ‘catch up’ on your site and find that you published an article very similar to one I published (in what is likely hours of yours, though I think a bit later? Don’t really know as I’m timed / dated on UTC and don’t care to do the date math right now…)

    At any rate, completely independently we were whacking the same nail at the same time. (Cue spooky music and deep voiced narrator insinuating telepathic connections ;-)

    http://chiefio.wordpress.com/2014/10/30/as-the-money-tree-grows/

    I have some different graphs (including money in other countries showing it is a global issue), but the thesis is remarkably similar. That there IS a real economy, that the money economy can be disconnected from it, that failure to reconnect can be Very Bad, and that Keynes has limits, and we are well past them.

    Maybe it’s just a soul mate thing ;-)

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      PhilJourdan

      I did not realize you read her site, but will make sure I post links over at yours should I note the similarity, or common interest, in the future. I read yours first, but then came here and both of you on the same track.

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    Let Richard Feynmann explain to you exactly why CAGW is not science.

    https://www.youtube.com/watch?v=EYPapE-3FRw

    “Physicist Richard Feynman explains the scientific and unscientific methods of understanding nature”

    Test at 11

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