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Money Manufacturing How our Fiat Money System Works and Fails Dr David Evans November 2010 1. Introduction “Fiat” Money System? Fiat currency: State-issued money whose value comes only from government fiat (Latin: let it be done) – legal tender laws.

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manufacturing

Money

Manufacturing

How our Fiat Money System Works and Fails

Dr David Evans

November 2010

fiat money system
“Fiat” Money System?
  • Fiat currency:State-issued money whose value comes only from government fiat (Latin: let it be done) – legal tender laws.
  • Commodity currency:Money unit is a fixed quantity of some commodity.
  • The West converted from a commodity currency to a fiat currency in stages from 1914 to 1971.

Cute but irrelevant

where does our money come from
Where Does Our Money Come From?
  • There is more money than there used to be. (A million dollars used to be a lot of money.)
  • So someone is manufacturing it (i.e. literally making money).
taboo topic money manufacture
Taboo Topic:Money Manufacture
  • Much of the economic conversation is at kindergarten level because hardly anyone knows how money is manufactured.
  • Do you know how money is manufactured? (Remember, most money is never cash, but just flows between bank accounts.)
  • Vaguely referred to by euphemisms in public (e.g. the economy is “overheating”)
money manufacture dominates the economic landscape
Money Manufacture Dominates the Economic Landscape
  • Interest rates
  • Bubbles
  • The GFC
  • Money is power: its manufacture plays a large role in determining which elites get to run society
what if you could manufacture money
What if You Could Manufacture Money?
  • Would not have to work.
  • Produce the medium of exchange, instead of goods or services that others want.
  • Freedom! Material wealth! Buy almost anyone to do almost anything you wanted!
good news
Good News
  • No one can just legally manufacture money without consequence.
  • System is not that unfair.
  • Counterfeiting is illegal.
  • In legal manufacture, a matching liability is always created. Prevents gross exploitation of the manufacturing power.

(nothing)

$

-$

bad news
Bad News
  • Some people have founds ways of capturing value from money manufacture, by second order effects.
  • They are wealthy, without working hard.
  • Historically, fiat currencies engender corruption and unfairness.
  • Fiat currencies usually die after one or two generations, 25 – 50 years.
the silence is speaking
The Silence Is Speaking
  • Money manufacture is central to our economy, yet is rarely discussed.
  • Therefore those who manufacture money must:
    • Obtain advantage from it. (Otherwise why be quiet about it? If it was onerous or disadvantageous, they would complain.)
    • Be powerful enough to persuade the press, economists, and economics commentators to talk about it in euphemisms, if at all.
banking isn t secret but no one tells you how it works
Banking Isn’t Secret, But No One Tells You How It Works…
  • Banking thrives behind a wall of complexity, confusion, and misdirection.
  • Banking is a little too complicated for most people to grasp without a fair bit of effort.
  • Most of the time we just can’t be bothered, because the system appears to work well enough (and we are blissfully unaware of how it transfers wealth from producers).
henry ford
Henry Ford

“ It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

early money
Early Money
  • Barter
    • Inefficient
    • “Chunky” (no change)
  • Commodity Money
    • Gold evolved as the money of choice in most of Asia, Europe, Africa, and Central and South America
    • Used coins etc directly, until the middle ages
  • Representations of gold started evolving in Europe from 1300, widespread by 1700.
fractional reserve banking
Fractional Reserve Banking
  • Goldsmiths took gold deposits, issued receipts.
  • The receipts circulated as money, more convenient than the metal.
  • Goldsmiths learned they could issue more “receipts” than they had gold.
  • Lent out these extra receipts and charged interest on them (to cover risk of non repayment, and profit).
  • Typically safe to lend out 10 times as many receipts as gold deposits.
fractional reserve example
Fractional Reserve – Example
  • Deposits with goldsmith: 200 oz of gold.
  • Issues receipts for these 200 oz.
  • Then issues receipts for an extra 1,800 oz.
  • Charges 5% interest on the extra receipts  income of 90 oz per year!
  • Goldsmith pays gold to anyone who presents a receipt, then destroys receipt.
  • Very profitable if everyone repays loans.
  • Borrowers need to find more gold to pay interest.
fractional reserve features
Fractional Reserve – Features
  • Base money = gold
  • Bank money = receipts (cash, bank notes)
  • Bank money is created out of nothing, yet can buy stuff the same as gold.
  • Amplifies the base money by 10.
  • 90% of “money” is created by banks, by lending.
  • Depositor’s money is NOT lent out; they have access to their money at all times.
fractional reserve problems
Fractional Reserve – Problems
  • Creating something out of nothing unearned income, cheating, chicanery.
  • Fractional reserve banking was outlawed as immoral by many governments in the middle ages.
  • Private banks may not accept receipts from other banks  many bank “monies”.
  • Private banks can fail in a bank run. Depositors lose their gold, and the bank money they lent out becomes worthless.
fractional reserve chicanery
Fractional Reserve – Chicanery
  • Not enough money for everyone to repay debt with interest, unless money supply increases faster than the interest rate.
  • Private banks profited big time by manipulating the money supply:
    • Lend freely by low interest rates  increasing debt, money supply booms, economy booms
    • Raise interest rates (or cut off lending, e.g. 1894)  money supply busts, debts cannot be repaid, business failures allow banks to acquire or buy assets cheaply
fractional reserve economic problems
Fractional Reserve – Economic Problems
  • Money supply fluctuates, depending on amount of lending.

 Fluctuating prices and interest rates.

    • Business cycle.
    • Unstable economy.
  • Creating something out of nothing causes economic distortions and misallocation of resources. Too much human effort spent on gaming the system, rather than producing good and services.
the banker s solution
The Banker’s “Solution”
  • A central bank:
    • Guarantees private banks against bank runs.
    • Homogenizes receipts into a national currency.
    • Tames the business cycle.
    • Gives bankers more power and profits.
  • Bank of England 1694, finally allowed by government under pressure of war.
  • US Federal Reserve 1913, 3rd central bank of the USA. Major issue in US history, e.g. Andrew Jackson’s main issue.
switched from gold
Switched From Gold…
  • Using gold as base money constrains the money supply.
  • But governments often “need” more money.
  • Paper money issued by the central bank replaced gold as the base money, in stages from 1914 to 1971:
    • Gold standard unworkable after too many war bonds were issued in WW1.
    • Bretton Woods broke after US printed too much money in the 1960’s to fund the burgeoning welfare state and the Vietnam war.
to fiat paper
…To Fiat (Paper)
  • Gold was finally eliminated from the money system altogether in 1971 when President Nixon ended the last avenue of convertibility of paper money to gold.
  • The base money is now created without constraint by the central bank.
  • This base money derives its legal status and value from government fiat.
today s money system
Today’s Money System
  • The current system is a fractional reserve system amplifying up a fiat base.
  • Combines two types of something-for-nothing (“cheating”):
    • Base money, created by the central bank.
    • Bank money, created by private banks.
  • Each form is unbacked.
  • Each form somewhat unstable historically.
  • What could possibly go wrong?
modern base money
Modern Base Money
  • Two forms:
    • Physical cash – Manufactured by a printing press or coin press.
    • Money in an account at the central bank – Manufactured by increasing the account balance on a computer.
  • Manufacture is technically unconstrained.
  • Moderated in practice by the desire of the central bank not to raise inflationary expectations too far.
modern bank money 1
Modern Bank Money (1)
  • One form:
    • Money in an account at a private bank – Manufactured by increasing the account balance on a computer.
  • Manufacture subject to many constraints.
  • The private bank must have sufficient reserves of base money at the central bank at all times to cover its issued bank money  bank money amplifies base money, generally a bit over 10:1.
  • 90 – 95% of all money is bank money.
modern bank money 2
Modern Bank Money (2)
  • New bank money is created by lending:

amount of bank debt = amount of bank money

  • Interest is being paid on all bank money.
  • When a private bank manufactures bank money, it also effectively creates a matching liability.

(nothing)

Bank money

Matching liability

$

-$

modern bank money 3
Modern Bank Money (3)
  • If the private bank’s liabilities exceed its assets (mainly performing loans) it must cease business.
  • When bank money is repaid to the bank as a loan repayment, it is destroyed.

Bank money repaid

Matching liability

$

-$

(nothing)

bank money constraints 1
Bank Money Constraints (1)
  • Reserves can simply be borrowed.
  • Main constraints in practice are the Basel capital ratios, especially the Tier 1 ratio.
  • Tier 1 capital

= Equity capital + retained earnings

= Losses absorbable without having to cease trading

  • Assets = Loans, bonds, cash
  • Tier 1 Capital Ratio

= Tier 1 capital / Risk weighted assets

> 4% (although investors now demand 10%)

bank money constraints 2
Bank Money Constraints (2)
  • So a bank can create more bank money if it:
    • Makes less risky loans.
    • Raises more equity capital.
    • Increases depositor’s funds (minor).
  • Return on new bank equity capital in Australia last year was about 45%:
    • Raise $1 by issuing new bank shares.
    • Create $10 of bank money, charge interest of 6%, incur total costs of 1.5%.
    • Income is 10 * (6% - 1.5%) = 45%
bank money constraints 3
Bank Money Constraints (3)
  • Private banks do NOT lend out depositor’s funds, which are still available on demand.
  • Far more borrowers than lenders.
  • A private bank can also increase its lending simply by borrowing money at low interest rates (e.g. Japan, USA, or for short periods) and lend that same money at a higher interest rate – no money manufacture involved.
modern money
Modern Money
  • Bank money represents base money, exchanged at 1:1.
  • Base and bank money kept separate within the banking system.
  • Most transactions just transfer bank money from account to account.
  • System gives some systematic advantage, which gives incentive to unsustainable build-up of debt and bank money.
monetization
Monetization
  • When central bank buys stuff with newly created base money.
  • Can monetize anything, but usually bonds.
  • Modern money “printing”:
    • Treasury issues bonds.
    • CB buys them with newly created money.
    • Government spends that money.
    • Treasury pays interest to the CB, as per the bond repayment schedule.
  • QE2 buys government bonds on the open market instead (lowers interest rates).
monetary experiment starts 1982
Monetary Experiment Starts 1982
  • Novel money system started in 1971, with the switch to fiat base money.
  • 1970s dealt with inflation of 1960s.
  • Reset in 1980 by 20% interest rates.
  • New extreme monetary experiment:
    • Base money, created by the central bank
    • Bank money, created by private banks.
  • Both unbacked, created from nothing.
  • What could possibly go wrong?
the biggest bubble 1982 201
The Biggest Bubble, 1982 – 201?
  • Bubbles are due to excess money.
  • Prices are ratio of money to goods-and-services. So when there is more money, prices go up.
  • Operates sector by sector, as banks become willing to lend into that sector.
  • What happens when the central banks simply keep interest rates low until something breaks? 1929, 2012?
the debt to gdp ratio
The Debt-To-GDP Ratio
  • Modern money is (almost all) debt, so…
  • “Amount of money” = total debt
  • “Size of economy” = GDP
  • “Size of bubble” = Debt-To-GDP ratio
  • This is the financial story of our times…
slide39

Housing Bubble Starts

Greenspan:

“Irrational Exuberance”

GFC

Tech Crash

Clinton Strategy Starts

1987 Crash

Bubble Starts

Change to Fiat Base Money (Nixon)

235%, 1929 & 1987 crashes

Gold peaks at 800 USD/oz

Volcker 20% interest rates

Karl Denninger, http://www.ronpaulforums.com/showthread.php?t=249716

slide40

Gold peaks at 800 USD/oz

Volcker 20% interest rates

GFC

Tech Crash -> Housing Bubble

1987 Crash

235%, 1987 crash

235%, 1929 crash

Change to Fiat Base Money (Nixon)

Clinton Strategy Starts

Bubble Starts

The longer view: 1870 – Q3 2009

the clinton strategy
The Clinton Strategy
  • Clinton’s Problem: Government spending initiatives constrained by bond market.
  • Solution:Surreptitiously:
    • Lower Long Term Interest Rates.
    • Lower the CPI.
    • Suppress the Gold Price.
  • Result: Lower short and long term interest rates  extended a long bubble into the biggest, deepest, longest bubble ever.
slide42

Gold peaks at 800 USD/oz

Volcker 20% interest rates

GFC

Tech Crash -> Housing Bubble

1987 Crash

235%, 1929 crash

235%, 1987 crash

Change to Fiat Base Money (Nixon)

Clinton Strategy Starts

Bubble Starts

The longer view: 1870 – Q3 2009

the bubble is ending
The Bubble Is Ending
  • World is running out of borrowing capacity:
    • Not enough income to service more debt
        • Debt = 400% of GDP
        • Interest rate = 4%
        • Interest repayments = 16% of GDP
    • World running low on unencumbered collateral.
  • Money manufacture by private banks stalled in 2008  Global Financial Crisis (GFC)
response of the politicians
Response of the Politicians
  • Stimulus programs: Public debt growth replacing private debt growth.
  • Base money manufacture by governments replacing bank money manufacture by private banks.
  • Politicians and public think the bubble was “normal”, that debt can grow forever.
  • Attempting to kick start back to “normal” with yet more debt.
political system is clueless
Political System is Clueless
  • Our politicians and economic commentators have little idea of:
    • Previous graph
    • How money is manufactured.
  • Totally surprised by the GFC, still have no idea what caused it.
  • Cargo cult: Create more debt and stimulus and the good stuff will resume.
paper aristocracy in control
Paper Aristocracy in Control
  • Banking class laughing:
    • Profited mightily during the bubble (finance industry made 45% of ALL profits in 2006 with 5% of employees).
    • Bailed out and protected at the end of the bubble.
  • Know what is coming next:
    • Already own the next assets to do well.
    • Will acquire distressed businesses cheaply in the upcoming turmoil.
essence of problem
Essence of Problem
  • Money is a promise – of similar purchasing power sometime in the future.
  • Work is motivated by those promises.
  • Too much debt = Too many promises.
  • Promises cannot all be kept:not all debts can be repaid in dollars near current value.
  • Business as usual is not an option.
  • Like an average family that has run up $200k on credit cards. No way out!
the dismal arithmetic
The Dismal Arithmetic
  • 1994 – 2007: Extra money (debt) added an extra 1 – 2 % to GDP, every year.
  • So 15 - 25% of growth was borrowed from the future.
  • To return the debt-to-GDP ratio to normal, must pay back that borrowed GDP growth

 15 – 25% fall in GDP

  • Double depression!!
politicians will be forced to pick speed of gdp loss
Politicians Will Be Forced to Pick Speed of GDP Loss
  • The inevitable fall in GDP can be:
    • Quick – Two years, sharp deep depression brought on by deflationary deleveraging.
    • Slow – At rate of natural GDP growth. Stagnation for 10 – 20 years.
    • Hyperinflationary and messy.
  • Politicians will choose the route of least short-term pain  2.
  • But mismanagement could see 1 or 3.
politicians will be forced to pick winners and losers
Politicians Will Be Forced to Pick Winners and Losers
  • Political system will decide which promises are kept and who will miss out.
  • Two basic choices:
    • Formal defaults. Which debts? What penalties apply to defaulters?
    • Devalue debts through inflation. Most debts nominally repaid, but in devalued dollars.
  • 1970s saw choice 2. Ran 10 – 15% inflation for 6 years. But debt much worse now.
politicians will choose inflation
Politicians Will Choose Inflation
  • Basic democratic calculus:
    • Lenders – Few in number
    • Borrowers – Many in number, lots of votes!
  • So politicians will choose inflation “to reduce people’s debt burden”.
  • QE2 is such a choice.
stimulus money won t be repaid
Stimulus Money Won’t Be Repaid
  • Governments borrowed the stimulus payments (if only from the central banks).
  • Paying back the stimulus money by raising taxes will later suppress GDP.
  • Harald Uhlig [Harvard, 2005] estimated $3.40 of output is lost for every borrowed dollar spent on stimulus!
  • Only way out is gross money manufacture by government  Inflation
more government stimulus
More Government Stimulus?
  • If spending existing money:
    • Only useful if government stimulus spending is more efficient than private spending at satisfying people.
    • Roof insulation? School halls?
  • If manufacturing new money:
    • Can no more help the real economy than counterfeiting (which is illegal because it transfers real wealth from everyone else to the counterfeiter – only governments and banks have this privilege).
government policy
Government Policy
  • Most nations will choose to inflate (by manufacturing new base money and lowering interest rates) to devalue their money, in order to:
    • Lower the real debt burden of their voters.
    • Devalue their currency, to encourage exports.
  • The fiat currencies will race to devalue against each other.
  • It has already started.
price rises
Price Rises
  • If currencies are devaluing against each other, they are also devaluing against stuff. So prices will rise.
  • But many wages, and thus prices of many goods and services, are tied to the CPI.
  • The CPI underestimates inflation. This causes hardship and friction.
  • Commodities are the least tied to wages, and will rise first and most. (Anyone notice what happened last week?)
losers
Losers
  • Savers (inflation taxes their savings).
  • Producers (wages tied to CPI, weak economy).
  • Shareholders (profits and PE decrease).
  • People on fixed incomes.
  • People living off interest (rates artificially low).
  • People living from paycheck to paycheck (CPI).
  • Pensioners, welfare recipients (CPI).
  • The Economy (suboptimal allocation of capital, friction costs of inflation).
winners
Winners
  • People without savings (spend your money before it becomes worth less).
  • Borrowers.
  • Owners of real assets, particularly those less tied to wages such as commodities.
  • To the extent that the public realize that the problems are caused by our system of money manufacture, gold and silver.
the future of capitalism
The Future of “Capitalism”
  • Capitalism (as generally understood) :
    • Free markets – The most efficient way of setting prices and thus allocating resources.
    • Property rights – Secure, easily transferred, provides basis for lending, etc.
    • Manufacturing money out of nothing – Good for bankers and government.
  • Most pathologies of modern economies traceable to way we manufacture money. Not intrinsic to capitalism, could remove it or rein it in.
gold and silver
Gold (and Silver)
  • Gold is honest, an anti-cheating device, and a reliable store of purchasing power.
  • Bankers and governments hate gold. The current money manufacturing gives them all the advantages and few constraints, watering down money by printing more.
  • Gold is the foremost non-government money, evolved in the marketplace over 5,000 years. Fiat currencies come and go.
  • Gold might return to the monetary system, back by popular demand.
gold price
Gold Price
  • GFMS, Kitco, major banks:
    • Predicted fall in gold price for last 10 years
    • Now say “it’s in a bubble”
    • Jim Sinclair: 1,650 USD/oz by 23 Jan 2011
  • Me:
    • 1,600 USD/oz in April 2011
    • Many thousands of USD/oz by its peak, sometime in 2014 – 2020. (Beware: Wages and costs might have risen considerably.)
what can you do
What Can You Do?
  • Partake in bank profits by owning bank shares.
  • Profit from the rise of commodities and/or changes in money manufacture by owning gold or silver.
  • But you have to get the timing right!
  • Elite knowledge used to be needed.
  • Internet makes it possible for ordinary people to join in.
what do i do
What Do I Do?
  • Moved investments from banks to 100% gold.
  • ASX gold stocks, for security.
  • Direct exposure to gold price via long-dated options (not ETFs). Traded gold futures.
  • Started GoldNerds. We sell spreadsheets comparing all 320 ASX gold stocks, every two weeks.

www.goldnerds.com

bank ownership
Bank Ownership
  • Banks manufacture national currency, so are effectively government utilities.
  • The profit motive is necessary to make loans sensibly.
  • So banks should be private but heavily regulated.
  • History (including the GFC) suggests banking runs government, not the other way around.
the banking government combo is anti free market
The Banking-Government Combo Is Anti-Free-Market
  • The price of money (short term interest rates) is set by bureaucrats, in our so-called market economies!
  • Bureaucrats setting prices didn’t work for the USSR, and it makes us poorer too.
  • Free markets work best for setting prices because they balance supply and demand without political interference.
imagine
Imagine…
  • Before money was manufactured out of nothing:
    • Interest rates were stable.
    • Inflation was tiny.
    • No business cycle, or misallocation of resources due to false rates from interest rates.
    • Savings were worthwhile.
    • No paper aristocracy.
    • Producing goods and services was more lucrative than playing financial games.
corporate activity
Corporate Activity
  • Takeovers: Just convince a bank you can pay back the takeover price with interest, and they will manufacture the money (it’s not like the money comes out of a limited pool of savings). Reduces competition.
  • Recent high CEO wages: Companies use lots of cheap borrowed money now, levers up profits, and upper management helps itself to a slice (look how clever we are!).
economic classes
Economic Classes
  • Society is evolving a three class system:
    • Producers
      • Produce goods and services. Most people.
    • Welfare Recipients
      • Entitled to goods and services taken from producers.
    • Paper Aristocracy
      • Manufacturing money for your own direct benefit is forbidden, but they obtain goods and services by exploiting side effects of money manufacture.
      • Small, powerful, wealthy, prefers low visibility.
      • Wealth growing as money manufacture rages on.
rise of the paper aristocracy
Rise of the Paper Aristocracy
  • Started as goldsmiths in the Middle Ages, as low-status tradesmen.
  • Found they could over-issue paper that represented gold. Grew rich, powerful.
  • Found the key to the financial universe: people would use their paper for money!
  • Eventually dispensed with gold and all its constraints (1914 – 1971).
  • Current bubble is logical endpoint of hundreds of years of banking history.
the paper aristocracy
The Paper Aristocracy
  • People who control and manufacture paper money: those who know how to work the system of paper money, the banks, and some of government. The “banking class”.
  • They rule the financial universe with a money system based entirely on paper, the paper they produce.
  • Runs the banks and government financial policy (as recently proved by the GFC!)
is banking fair
Is Banking Fair?
  • Some folks have the power to manufacture money out of thin air and, miraculously, they do not work particularly hard and they have lots more stuff than most of the rest of us.
  • Rent seekers, definitely. Parasites?
  • If everyone understood what really goes on, who are the winners and who are the losers, it would be outlawed in an instant. It used to be.
banks are pervasive
Banks Are Pervasive
  • Most large economic activities require a loan, from a bank. Without bank approval, the activity does not happen.
  • The banks end up owning nearly everything substantial in society that can be pledged as collateral.
special situation in the usa
Special Situation in the USA
  • The European paper aristocracy “conquered” all other countries long ago.
  • The American Revolution was mainly about whose money to use.
  • The US was free of the paper aristocracy for most of 1776 – 1913. The biggest economic miracle in human history, free of the predations of any aristocracy.
  • The US Constitution was designed to prevent takeover by the paper aristocracy, but has failed because it was subverted.
the us dollar
The US Dollar
  • The USD is the world’s reserve and trading currency.
  • The single biggest export of the USA for the last few decades has been US dollars.
  • The rest of the world has been sending the USA real goods and services for years, and receiving paper money in return.
  • Ships travel to US full, return half empty
  • This privilege is ending. US living standards will fall, but US manufacturing will revive.
free markets are now broken
Free Markets Are Now Broken
  • Each part of the Clinton strategy had to be clandestine, designed to mislead the public and to interfere with the normal operation of markets.
  • Free markets find and set prices most efficiently, free of political influence.
  • Long bonds, short bonds, stocks, housing, gold and silver, agricultural, oil?,…
  • There are no free markets anymore, just interventions.
modern money is debt
Modern Money is Debt
  • All bank money and most base money (that created to purchase bonds) :
    • Created by the act of lending
    • Earning interest
    • Is debt.
  • Total bank debt

= Amount of money owed to banks

 Amount of money in circulation (money supply)

  • About 90 – 95% of money today is bank money, the remainder is base money.
interest creates a ponzi scheme
Interest Creates a Ponzi Scheme
  • Interest owed on all nearly all money.
  • To repay all debts with interest requires the money supply to expand each year.
  • Requires new money to pay the interest on last year’s money.
  • If growth of money supply stalls below the interest rate, defaults must occur and we risk a deflationary contraction.
manufacturing new money devalues existing money
Manufacturing New Money Devalues Existing Money
  • Prices are set by the ratio of money supply to the goods and services for sale.
  • Typical recent year:
    • 8% increase in money supply
    • 2% more goods and services
    • 6% higher prices, unevenly across economy
    • CPI shows 3% increase
inflation 1
Inflation (1)
  • Inflation is the increase in money supply, which causes an increase in prices, which the government underestimates with CPI.
  • Increasing prices are strongly associated with inflation, but is not inflation.
  • The political system would prefer you to believe that prices increase for reasons other than the government and banks are manufacturing too much money.
inflation 2
Inflation (2)
  • Manufacturing new money (inflation) is a tax that transfers wealth from existing dollars to the recipients of the new money.
  • The people with the new money get to spend their new money before prices are bid up by the new money.
  • Saving in our money system is almost pointless. Inflation and taxation usually take it all, and more.
asset bubbles 1
Asset Bubbles (1)
  • In our casino economy, it is more rational to buy assets that (we hope) will appreciate faster than the growth in the money supply.
  • Better still, buy the assets with borrowed (newly manufactured) money.
  • New money mainly bids up asset prices – which are not tied to wage growth, which is in turn is tied to CPI which underestimates money supply growth.
asset bubbles 2
Asset Bubbles (2)
  • Everyone pouring newly manufactured money into an asset class bids up the prices of those assets  a bubble.
  • A house purchase is an exchange of house for money. So house prices are set by housing supply AND money supply.
  • The recent housing bubbles around the world have been mainly driven by money supply increases, not by increased demand for housing.
thomas jefferson
Thomas Jefferson

“ If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

This is coming to pass as the bubble in the US pops. Presumably we will follow.

manufacturing money
Manufacturing Money

sciencespeak.com

available at