How the banks create money

[Finsend]

Long piece of gibberish, feel free to skip it!

Hi psion, I just mutter on here, but please if you have better things to do skip it, it is not very important and badly written as always, heheh. Just some (absurd musing/thinking on my own here is no problem!

Sure, in everyday conversation when we talk about money we are referring to the total of our notes and coins or our bank account balance. There is nothing wrong with this. However, if you want to understand how economics works, you need a better understanding of the concept of money than you will find in a non-economics dictionary.

I understand. And the details are obviously important, but for me the big picture (which might be less correct is sufficient for now. If I only get the basic for now it would be fine.

No, units of physical measurement have precisely defined values that don't depend on human interpretation.

I understand what you mean, I think. And in a way I agree, but in another way I don't

=OT=
Take for example:
The metre (or meter), symbol m, is the base unit of length in the International System of Units (SI). Originally intended to be one ten-millionth of the distance from the Earth's equator to the North Pole (at sea level), its definition has been periodically refined to reflect growing knowledge of metrology. Since 1983, it is defined as the length of the path travelled by light in vacuum in 1⁄299,792,458 of a second.[1]

First - as you can see - definitions (of metre for example) have been fine-tuned (changed) many times during the ages! Check: it out here: http://en.wikipedia.org/wiki/International_System_of_Units#Units)

AND we see another unit in the definition of the metre, the second!
Which is defined by the duration of 9,192,631,770 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the caesium 133 atom.

So we have also to assume Einstein is 100% correct on light etc and the final story...which might be true, but - as we have seen before (with many theories/systems like Newton's) - does not necessarily have to be the case (always and everywhere, etc).

Since 1983, a metre is defined as the length of the path travelled by light in vacuum in 1⁄299,792,458 of a second. Hmm yeah, second (based on a number of periods of radiation of some caesium atom) = comparison and assumes that it would always be the same everywhere? I doubt that, and what vacuum btw?

What if this 9,192,631,770 periods of radiation was sometimes going on faster or slower? This would make the unit second 'longer' or 'shorter'? And we know processes go slower or faster sometimes, don't we?. Just step into a rocket with a watch on and leave one at home, go very fast and come back, see the difference, etc.

The kilogram is defined as being equal to the mass of the International Prototype Kilogram[1] (IPK),[Note 3] which is almost exactly equal to the mass of one liter of water.
1 http://en.wikipedia.org/wiki/Kilogram#International_prototype_kilogram

Now I ask, what if I put this IPK somewhere else, lets say into a singularity or blackhole? Would that change it's mass?

Anyway I think I do not fully agree with this you wrote: "No, units of physical measurement have precisely defined values that don't depend on human interpretation."

I think they DO depend on human interpretation.
But I understand what you say/mean, I hope, on some level and a car is a car and a house is a house, a helium atom = a helium atom, a dollar = a dollar and money = money
=END OF OT=

Money is purely an abstract concept. In reality, there is no physical substance called money. The notes and coins that you handle are called tokens (not money). They represent a certain amount of money but don't have value in themselves.
<snip>
Unlike physical units of length, mass, charge or time (and units derived from these), units of money have no relationship with the physical world. A monetary unit is worth whatever people say it is at the time. Therefore, money is susceptible to inflationary and deflationary pressures.
<snip>

Why do units of money not have a relationship with the physical world? I mean 10 dollar has (for me) a relationship with the physical world, with the (physical) brains of other humans for example. If it was 10 euro it would be a different story So the unit, euro or dollar has (for me) a relationship with the physical world. When combined with numbers it (might) represent something in the physical world (like 7-8 euro for a beer, 10 dollars for a beer). More or less the same as 10 kg of flour.

A metre would not exist without us humans either... I mean, it is just a random choice in a way and has no meaning (we also have a mile, a cm etc etc etc) So I see no (essential big) differences between a metre or a dollar. They are both defined by humans and created by humans and the value attributed to them (using comparison and other units/words/etc) both changed many times during history.

We basically measure physical things by comparing them to other physical things (that are presumably of a "standard" size). However, since money is not a physical substance, we can not meaningfully compare it to any physical substance. All we can do is hope for a consensus on its value and know that the value will be different tomorrow.

A standard = an agreement. A choice, since a metre could also have been something else like 104 cm or 200 km etc. We have different measure units in the world, miles metres etc. We also have different kinds of money.

A metre is also no physical substance and a second neither. We compare money (meaningful) to other substances all the time, imho (see above). I mean the 'normal' money - I compare my 10 dollar (which is (token)money I hope) with stuff I can buy, etc.

So money and units of money have for me a relationship with the physical world, a meaning and a fluctuating/(ever)changing definition.

BTW I just read this:
http://www.forbes.com/sites/traceyg...the-feds-16-trillion-bailouts-under-reported/

For $16 trillion bailouts?
16 trillion????? 8 ( saywaaa? )
That is more than eh... this national debt!

That's eh... funny, because I was working all the time?
Stupid me!!! dummdummdumm, I better start a bank tomorrow and go catch some money as well!

Who btw controls the FED and makes sure they do not inflate my *ss of?
Or do other nasty things to my society and world?
I don't know, do they know what they are doing?
I wonder, same for the ecb overhere in Europe, btw.

Anyway, peace,
finsend

 

[Finsend]

Not any more.

It's magic

 

[Finsend]

 

[ngc6205]

There appears to be some confusion here about how Federal Reserve Notes (FRNs) enter circulation and the relation of PRINTED FRNs to the overall money supply.

When the Federal Reserve buys U.S. Treasury securities or other allowed purchases on the open market from primary dealers, the money supply (or that portion relating to bank reserves) is increased. When the Federal Reserve makes the purchase and the broker delivers the security, the Federal Reserve increases the broker's bank's account at the Federal Reserve. This increases the broker's bank's reserves. That is an increase in liabilities. The securities are added to the appropriate securities account which is an asset.

At this point, there has been NO INCREASE IN PRINTED FRNs and no increase in the amount of FRNs listed as liabilities on the Federal Reserve balance sheet. The FRN liability account is increased only when additional printed FRNs (that are not replacing old, worn-out FRNs) are requested by the member banks. If a member bank wishes to get more printed FRNs to meet the needs of its customers, it requests them from the Federal Reserve district bank. The Chairman of the Board of Directors of that district bank then requests them from the Board of Governors. The Federal Reserve reduces that bank's deposit account at the Fed and then ships the new notes to the bank. IOW, one liability account is decreased (deposit account) and another liability account is increased. Contrary to what some may believe, a printed FRN is not tied to a particular security.

As I stated previously, FRNs, as a group, are a paramount lien against all assets of the Federal Reserve district bank that issued them. So, as far as printed FRNs are concerned, the creditor is the person or entity that actually has a printed FRN in their possession. The debtor is the Federal Reserve district bank that issued it.

 

[ngc6205]

BTW I just read this:
http://www.forbes.com/sites/traceyg...the-feds-16-trillion-bailouts-under-reported/

For $16 trillion bailouts?
16 trillion????? 8 ( saywaaa? )
That is more than eh... this national debt!

That contributor piece on Forbes grossly misstates the findings of the report. See the following thread... http://www.internationalskeptics.com/forums/showthread.php?t=215486

 

[psionl0]

There appears to be some confusion here about how Federal Reserve Notes (FRNs) enter circulation and the relation of PRINTED FRNs to the overall money supply.

I wouldn't have thought so. It doesn't take a Rhodes Scholar to figure out that if a bank wants more FRNs then it will have to pay for them out of the credits in its central bank account.

It is childishly simple to show that if a central bank buys a security - whether privately or from a member bank - then money is created in the form of additions to a bank's reserve account.

The only confusion here is the apparent belief that a mathematical/economic argument can be trumped by a legal argument.

So, as far as printed FRNs are concerned, the creditor is the person or entity that actually has a printed FRN in their possession. The debtor is the Federal Reserve district bank that issued it.

Obviously!

 

[psionl0]

No, you're confusing an accounting trick with logic. One could just as easily balance the liability column using equity. If I own a stack of gold free and clear, I can simply account for it by putting the number of ounces in the asset column, and equity in ounces in the liability column. That doesn't mean it's a liability, it's accounting convention.

That doesn't make sense at all! Equity is the monetary value of your ownership in a property. It is an asset not liability. If you own gold free and clear then you don't have any liability associated with the gold.

Acquiring something valuable is completely different to creating money.

 

[Finsend]

That contributor piece on Forbes grossly misstates the findings of the report. See the following thread... http://www.internationalskeptics.com/forums/showthread.php?t=215486

Thanx, I'm going to read there right now!

 

[Finsend]

The only confusion here is the apparent belief that a mathematical/economic argument can be trumped by a legal argument.

:

 

[tensordyne]

That doesn't make sense at all! Equity is the monetary value of your ownership in a property. It is an asset not liability. If you own gold free and clear then you don't have any liability associated with the gold.

Acquiring something valuable is completely different to creating money.

Yes, the above is why I think that bankers and economists continually are perplexed by people who complain about banking. In terms of banks, everything is supposed to zero out. On the other hand, the evidence of history seems to show that, in at least the way banking is done now, it does lead to some very unstable situations.

You know how in the banking balance sheets there are four main entries, both for central banks and for commercial banks? I wonder what the four entries would be for average people. Maybe you would have to include some non-monetary unit in like work, or something.

 

[psionl0]

You know how in the banking balance sheets there are four main entries, both for central banks and for commercial banks? I wonder what the four entries would be for average people.

I first thought that this would not be a practical exercise since human beings are not businesses. However, in thinking about what it would mean if you treated individuals as businesses an interesting point came up which gives me an excuse to go into "musing" mode.

A bank is like any other business - its assets and liabilities must match. The reason for this is that everything a business makes it owes to its owners. The net of assets over liabilities (the capital account) shows how much the business owes its owners.

The situation becomes a little more interesting if you look at companies. A company is an "artificial person" and can own property in its own right. The only liability a company has to its owners is what they paid into the company when they bought their shares. A company can - if it chooses - keep some or all of its profits for itself instead of paying them to its owners. Yet undistributed profits still have to be accounted for. This is usually done via a "capital reserve" account.

A balancing equation could be: capital reserve = assets - liabilities
or, when re-arranged: assets = capital reserve + liabilities

Note that the capital reserve account is a liability for the company. Even though a company doesn't have to share any of its profits with its shareholders, it still owes its profits to the shareholders. Sounds paradoxical? Yes but the two things to remember are that the company is owned and the distinction between shareholder capital and reserve capital is largely a legal one.

We could in analogous fashion, come up with a balance sheet for a human being:
net worth = assets - liabilities or assets = net worth + liabilities

Again, we are recording a person's net worth as a liability. But a human being is not owned by anybody so who does he owe his net worth to? You could say he owes it to himself but that is just a play on words. You could also argue that God owns all human beings so they owe their net worth to God but that is more of an argument for the religion and philosophy forum than an economics forum. In totalitarian regimes, the government owns everything and everybody but I don't think anybody would like to make that argument in the US.

Maybe we just owe our net worth to anybody who can take it away from us. (Thieves owning honest people? - now that's a thought!) Or maybe, since a human being is (supposedly) a free spirit, he doesn't have to give an account of himself so treating him like a business is meaningless.

Nevertheless, if you want to account for a human being as if he were a business the "four main entries" would probably look like this:

Assets:
possessions
debts owed by others

Liabilities
debts owed to others
net worth

Maybe you would have to include some non-monetary unit in like work, or something.

I haven't discussed income and expense sheets but at the end of the accounting period, the net income over expenses (profit) is added to the capital account.

Anything that can't be given a monetary value is irrelevant to a business. Fortunately, work is not one of them.

 

[Tippit]

There appears to be some confusion here about how Federal Reserve Notes (FRNs) enter circulation and the relation of PRINTED FRNs to the overall money supply.

I wasn't talking about currency, I was talking about whether the Federal Reserve Note was an IOU or not.

When the Federal Reserve buys U.S. Treasury securities or other allowed purchases on the open market from primary dealers, the money supply (or that portion relating to bank reserves) is increased. When the Federal Reserve makes the purchase and the broker delivers the security, the Federal Reserve increases the broker's bank's account at the Federal Reserve. This increases the broker's bank's reserves. That is an increase in liabilities. The securities are added to the appropriate securities account which is an asset.

Yes, this is consistent with my understanding. Primary Dealers buy an alotment of bonds at US government auctions, and the Fed credits the bond dealer's bank with nothing more than a bookkeeping entry (adding high powered money to the system and inflating the money supply) as it buys bonds from the PD, and records the bond as an asset on its balance sheet and the corresponding increase in the member bank's deposit as a liability.

Since the PDs have to buy bonds with pre-existing money before the Fed buys from them, how is this money accounted for and how did it come into existence? Since the Fed purportedly can only monetize debt, to the extent this is true then if all debts were to be paid then there would presumably be no money for the PDs to buy bonds with! This also raises the rhetorical question, why doesn't the Fed simply purchase bonds from the US Treasury directly, instead of enriching the short list of PDs on Wall Street from the transactional costs? I already know the answer, but I'd like to hear your spurious rationalization.

So we know that the member bank's deposit with the Fed is a liability of the Fed. But since the fed is "holding" that ethereal deposit on behalf of the member bank, it is also an asset of the Fed. Since it also has bonds in the asset column that correspond to the amount incremented, where is the corresponding liability on the other side of the ledger? We can't have 2x the number of assets than we do liabilities, as balance sheets have to balance. The ethereal fiat money for the initial bond purchase has to be recorded either as a "liability" (to which no one is owed), or equity, as distinct from the member bank's deposit. What it's called is purely semantic, but what it certainly doesn't represent, is anything owed. It is simply money by decree.

At this point, there has been NO INCREASE IN PRINTED FRNs and no increase in the amount of FRNs listed as liabilities on the Federal Reserve balance sheet.

Currency is irrelevant here. However, if the member bank's deposit with the Fed was increased, how is this not recorded as a liability? As soon as the PD's account with the Fed has been credited, high powered money has been added to the system. The member bank is now entitled to lend on the basis of those reserves. If you have evidence to the contrary, please cite an official source and be specific. You are a shill for the Fed and the status quo, so your word isn't good enough. By the way, what do you do for a living?

The FRN liability account is increased only when additional printed FRNs (that are not replacing old, worn-out FRNs) are requested by the member banks. If a member bank wishes to get more printed FRNs to meet the needs of its customers, it requests them from the Federal Reserve district bank. The Chairman of the Board of Directors of that district bank then requests them from the Board of Governors. The Federal Reserve reduces that bank's deposit account at the Fed and then ships the new notes to the bank. IOW, one liability account is decreased (deposit account) and another liability account is increased. Contrary to what some may believe, a printed FRN is not tied to a particular security.

The action in printed currency is largely irrelevant to the inflationary effects of bond monetization, regardless of how it is accounted for.

As I stated previously, FRNs, as a group, are a paramount lien against all assets of the Federal Reserve district bank that issued them. So, as far as printed FRNs are concerned, the creditor is the person or entity that actually has a printed FRN in their possession. The debtor is the Federal Reserve district bank that issued it.

Do you have any evidence?

From reference.com:

par·a·mount
   [par-uh-mount]

adjective
1.
chief in importance or impact; supreme; preeminent: a point of paramount significance.

2.
above others in rank or authority; superior in power or jurisdiction.



lien
1    [leen, lee-uhn]

noun
Law . the legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation.
​

I don't see anything on any Federal Reserve Note about a "paramount lien", or about any obligations to the FRN holder by the Fed, at all. Do you have any evidence? If so, cite it and please be specific.

Can you please describe the circumstances in which this "paramount lien" can be satisfied by the Fed, and what the property is in question? Thanks.

 

[Tippit]

That doesn't make sense at all! Equity is the monetary value of your ownership in a property. It is an asset not liability. If you own gold free and clear then you don't have any liability associated with the gold.

It makes perfect sense to people who understand basic accounting. Stockholder's equity is recorded on the liability side of the ledger. If you're doing a personal account of things that you own, then it's just "equity", and it's still on the liability side of the ledger, only you "owe" it to yourself.

Acquiring something valuable is completely different to creating money.

Yes, it is. Most people have to first exchange their labor for Federal Reserve Notes in order to acquire valuable things. The Fed and private banks just conjure it out of thin-air.

 

[psionl0]

It makes perfect sense to people who understand basic accounting.

People who say things like that usually contradict themselves in their next sentence.

Stockholder's equity is recorded on the liability side of the ledger.

Not the stockholder's ledger! Equity is an asset for the stockholder and a liability for the company.

Consider a company that buys shares in another company. Where will the company record the value of these shares? On the asset side or the liability side of the ledger?

If you're doing a personal account of things that you own, then it's just "equity", and it's still on the liability side of the ledger, only you "owe" it to yourself.

Sure, I can list my assets and my liabilities. However, if I own shares or have equity in a property, I am going to record it as an asset because I don't owe them to anybody.

Yes, it is. Most people have to first exchange their labor for Federal Reserve Notes in order to acquire valuable things. The Fed and private banks just conjure it out of thin-air.

Yes but while the fed gets a free lunch, the private banks get a liability that they actually have to pay out on.

 

[tensordyne]

:

Finsend, your advanced knowledge of emoticons and such always makes me laugh! Thank you for that. I should start a post with a dialogue like the one above. At the very least it is a very creative use of technology.

 

[Tippit]

People who say things like that usually contradict themselves in their next sentence.

There is no contradiction. Now you're trying to spin your misunderstanding of accounting as mine. Remember, you were the one who wrote this:

"That doesn't make sense at all! Equity is the monetary value of your ownership in a property. It is an asset not liability. If you own gold free and clear then you don't have any liability associated with the gold."
​

Clearly, an asset is not a liability. You insinuating that I made such a claim is just a dishonest lie. But clearly, when doing a personal accounting, "assets" correspond with "equity" on the liability side of the balance sheet. I'm not sure you knew this until today, judging by your quote.

Not the stockholder's ledger! Equity is an asset for the stockholder and a liability for the company.

I wasn't talking about the "stockholder's" ledger, I was talking about a typical corporate balance sheet as an example of how equity is accounted for. Are you deliberately trying to confuse matters, or is this just a communications breakdown?

Personal ownership of corporate stock is marked as an asset in the asset column, and "equity" in the liability column on the stockholder's personal ledger, which has nothing to do with what I was talking about.

Consider a company that buys shares in another company. Where will the company record the value of these shares? On the asset side or the liability side of the ledger?

Why are you acting like we both don't already know this?

Sure, I can list my assets and my liabilities. However, if I own shares or have equity in a property, I am going to record it as an asset because I don't owe them to anybody.

You're pointing out what's obvious, in a vain attempt to make it appear as if I am missing the obvious. The point is that your assets are also recorded as equity on the liability side of your personal ledger, to make your balance sheet balance.

Yes but while the fed gets a free lunch, the private banks get a liability that they actually have to pay out on.

Again, we both already know this. I think you are not debating in good faith anymore, so this just seems like pointless bickering. Truth is the first casualty in these types of "debates". This is unfortunate, as I would actually like to resolve these types of questions once and for all (and I think I have, at least in my own mind). I don't post on forums to insult others or engage in typing contests, I post in order to learn, or possibly teach, maybe at the same time. Obviously that isn't happening here.

 

[ngc6205]

Yes, this is consistent with my understanding. Primary Dealers buy an alotment of bonds at US government auctions, and the Fed credits the bond dealer's bank with nothing more than a bookkeeping entry (adding high powered money to the system and inflating the money supply) as it buys bonds from the PD, and records the bond as an asset on its balance sheet and the corresponding increase in the member bank's deposit as a liability.

Since the PDs have to buy bonds with pre-existing money before the Fed buys from them, how is this money accounted for and how did it come into existence?

Value is added to the overall economy through production. In order for an economy to grow, so does the money supply.

Since the Fed purportedly can only monetize debt, to the extent this is true then if all debts were to be paid then there would presumably be no money for the PDs to buy bonds with! This also raises the rhetorical question, why doesn't the Fed simply purchase bonds from the US Treasury directly, instead of enriching the short list of PDs on Wall Street from the transactional costs? I already know the answer, but I'd like to hear your rationalization.

One reason is that the money wouldn't get to the economy directly. Additionally, the law was setup so the Fed cannot buy debt from the Treasury directly.

Currency is irrelevant here. However, if the member bank's deposit with the Fed was increased, how is this not recorded as a liability?

I never said it wasn't recorded as a liability. In fact, I specifically stated that it was recorded as a liability. When the Fed buys bonds, the bond account (an asset) is increased and the PDs bank's account (a liability) at the Fed is also increased.

As soon as the PD's account with the Fed has been credited, high powered money has been added to the system. The member bank is now entitled to lend on the basis of those reserves. If you have evidence to the contrary, please cite an official source and be specific.

I never said anything to contradict that statement.

You are a shill for the Fed and the status quo, so your word isn't good enough.

I was going to write something snippy in return, but I'll simply ignore that statement.

By the way, what do you do for a living?

I'll do better than to just tell you what I do now, I'll tell you my entire working history. After highschool, I attended the University of Florida where I received a Bachelors and Masters in Accounting. Afterwards, I joined the Army where I served 8 years in Germany, with a brief stay in Kuwait, and in the states, with a second brief stay in Kuwait. After I got out, I started a business with a couple of partners making environmental air monitors and supplies. Just a couple of years after starting the business, I decided to attend Miami University and received a Master of Economics degree. That was 14 years ago. I sold my share of the business in 2009 and retired at the age of 44.

The action in printed currency is largely irrelevant to the inflationary effects of bond monetization, regardless of how it is accounted for.

And where in my post did I even mention inflation? If you would stop being so obtuse about inflation for a few seconds...never mind.

Do you have any evidence?

Yes, I do.

I don't see anything on any Federal Reserve Note about a "paramount lien", or about any obligations to the FRN holder by the Fed, at all.

Why does it have to be on the note itself? The answer is that it does not.

Do you have any evidence? If so, cite it and please be specific.

Will the law satisfy you? See 12 USC §414 http://www.law.cornell.edu/uscode/usc_sec_12_00000414----000-.html

Can you please describe the circumstances in which this "paramount lien" can be satisfied by the Fed, and what the property is in question?

The law is clear.

 

[Finsend]

Gold Yacht + Meltdown

Finsend, your advanced knowledge of emoticons and such always makes me laugh! Thank you for that. I should start a post with a dialogue like the one above. At the very least it is a very creative use of technology.

Thanx, and thanx for the nice graphics you've created here before!
And for the better content - - of course.

Some more creativity here:
http://www.news.com.au/travel/holid...ory-supreme-wows/story-e6frfqf9-1226098872900

And eh... one sudocu:
http://www.youtube.com/watch?v=ZWU65Zbka4E&feature=related

I all saw this.

And then I wondered...

And wondered...

About who's crazy and who's not.

 

[Tippit]

Value is added to the overall economy through production. In order for an economy to grow, so does the money supply.

That is an oft-repeated lie in order to justify the inflation tax. Economic growth is not dependent upon monetary expansion, it's dependant upon the production of real goods and services. If the money supply remains mostly static, either because the supply is physically limited, like gold, or limited because of fiat monetary policy, then a unit of currency simply buys more goods and services as real output increases - prices fall. Please either acknowledge or dispute this.

I asked you this specific question, can you please answer it?

"Since the PDs have to buy bonds with pre-existing money before the Fed buys from them, how is this money accounted for and how did it come into existence?"
​

One reason is that the money wouldn't get to the economy directly. Additionally, the law was setup so the Fed cannot buy debt from the Treasury directly.

Again, not true. If the Fed were to simply buy bonds directly from Treasury, it would be spent into circulation by the US Government, just like it is now. The source of the funds, whether it's the Fed or a PD using pre-existing money is completely irrelevant. The bond-seller, in this case, the US Government, receives the funds either way, and spends them. This should be obvious to you. Please acknowledge or dispute this.

You also have the annoying habit of using the existence of a law to justify a moral argument.

I never said it wasn't recorded as a liability. In fact, I specifically stated that it was recorded as a liability. When the Fed buys bonds, the bond account (an asset) is increased and the PDs bank's account (a liability) at the Fed is also increased.

You said, and I quote:

When the Federal Reserve buys U.S. Treasury securities or other allowed purchases on the open market from primary dealers, the money supply (or that portion relating to bank reserves) is increased. When the Federal Reserve makes the purchase and the broker delivers the security, the Federal Reserve increases the broker's bank's account at the Federal Reserve. This increases the broker's bank's reserves. That is an increase in liabilities. The securities are added to the appropriate securities account which is an asset.

At this point, there has been NO INCREASE IN PRINTED FRNs and no increase in the amount of FRNs listed as liabilities on the Federal Reserve balance sheet.

Can you expound upon this apparent contradiction?

I was going to write something snippy in return, but I'll simply ignore that statement.

You are dealing with someone who understands, fundamentally, what our monetary and banking system is about. Make no mistake about it, I am very angry. If I sound harsh, abrasive, or insulting towards anyone who attempts to apologize for it, there is a reason. Try not to take it personally.

I'll do better than to just tell you what I do now, I'll tell you my entire working history. After highschool, I attended the University of Florida where I received a Bachelors and Masters in Accounting. Afterwards, I joined the Army where I served 8 years in Germany, with a brief stay in Kuwait, and in the states, with a second brief stay in Kuwait. After I got out, I started a business with a couple of partners making environmental air monitors and supplies. Just a couple of years after starting the business, I decided to attend Miami University and received a Master of Economics degree. That was 14 years ago. I sold my share of the business in 2009 and retired at the age of 44.

Thanks, I appreciate that. I'll return the favor. I am a college dropout with a background in computer science, and a sucessful stock market investor, retired at 29. I am 41 now.

And where in my post did I even mention inflation? If you would stop being so obtuse about inflation for a few seconds...never mind.

I'm not "obtuse" regarding inflation. Obsessive and monomaniacal about it on this forum, definitely.

Why does it have to be on the note itself? The answer is that it does not.

I think in order to satisfy the condition of it being an "IOU", it does. Perhaps not a "lien".

Will the law satisfy you? See 12 USC §414 http://www.law.cornell.edu/uscode/usc_sec_12_00000414----000-.html




The law is clear.

Thanks for the link. I will read it and comment. And thanks for offering your considerable experience and expertise on the subject (I really mean that). Of course, none of this is terribly relevant as to the moral question of whether the Fed should exist, and the banking system be reformed, your credentials and legal citations notwithstanding. The fact that you have refrained from making any moral judgements, and that your responses are always directed at criticism of the institution belies your tacit acceptance of the status quo. If not, feel free to offer your criticism.

 

[ngc6205]

That is an oft-repeated lie in order to justify the inflation tax. Economic growth is not dependent upon monetary expansion, it's dependant upon the production of real goods and services. If the money supply remains mostly static, either because the supply is physically limited, like gold, or limited because of fiat monetary policy, then a unit of currency simply buys more goods and services as real output increases - prices fall. Please either acknowledge or dispute this.

Prices fall because there isn't enough money circulating to support the level of production. That puts contractionary pressure on the economy. Gee, falling prices, contraction of the money supply, 25% decrease in the economy, 20% unemployment, I wonder when that occurred.

I asked you this specific question, can you please answer it?

"Since the PDs have to buy bonds with pre-existing money before the Fed buys from them, how is this money accounted for and how did it come into existence?"
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The total money supply isn't on the Fed's balance sheet and it doesn't have to be. It is accounted for money circulating through the economy which is deposited, withdrawn, spent, borrowed, etc. etc.

Again, not true. If the Fed were to simply buy bonds directly from Treasury, it would be spent into circulation by the US Government, just like it is now. The source of the funds, whether it's the Fed or a PD using pre-existing money is completely irrelevant. The bond-seller, in this case, the US Government, receives the funds either way, and spends them. This should be obvious to you. Please acknowledge or dispute this.

It would eventually get circulated. However, portions that are used to pay down debt, if Congress would ever do this, might simply be withdrawn from circulation. Regardless, it would take time for the money to be spent and then deposited by the recipients into various banks and some may even go overseas. Through purchases on the open market, it goes directly into the reserves of banks operating in the U.S. and more directly influences the overall money supply.

You also have the annoying habit of using the existence of a law to justify a moral argument.

To the best of my knowledge, I have never said that the Fed was moral or right or the government was right. I only said what was legal. You have the annoying habit of failing to see that.

You said, and I quote:

When the Federal Reserve buys U.S. Treasury securities or other allowed purchases on the open market from primary dealers, the money supply (or that portion relating to bank reserves) is increased. When the Federal Reserve makes the purchase and the broker delivers the security, the Federal Reserve increases the broker's bank's account at the Federal Reserve. This increases the broker's bank's reserves. That is an increase in liabilities. The securities are added to the appropriate securities account which is an asset.

At this point, there has been NO INCREASE IN PRINTED FRNs and no increase in the amount of FRNs listed as liabilities on the Federal Reserve balance sheet.

Can you expound upon this apparent contradiction?

There is no contradiction. The account on the Fed's balance sheet for circulating printed FRNs IS SEPARATE from the depository institutions deposit accounts. When the Fed buys bonds from a PD, there is an increase in a liability, but there is NO INCREASE IN PRINTED FRNs. Just as I stated.

The following link is the 2010 combined financial statements of the Federal Reserve district banks. http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2010.pdf Go to the balance sheet on page 6. The Federal Reserve notes outstanding, net account is the amount of physical printed bills circulating in the economy. Coins are not included in this account because they are direct obligations of the U.S. Mint. Further down under "Deposits" is an entry for "Depository institutions" and this amount is the reserve accounts for banks at the Fed.

When the Fed buys bonds from a PD, the "Depository institutions" amount increases (which is a credit) and the "Treasury securities, net" account also increases (which is a debit). However, the "Federal Reserve notes outstanding, net" does not increase unless a member bank requests additional new bills that are not replacing old, worn-out ones. When a member bank does request new bills, "Depository institutions" amount decreases (a debit) and the "Federal Reserve notes outstanding, net" amount increases (a credit).

You are dealing with someone who understands, fundamentally, what our monetary and banking system is about. Make no mistake about it, I am very angry. If I sound harsh, abrasive, or insulting towards anyone who attempts to apologize for it, there is a reason. Try not to take it personally.

I don't think you understand it as well as you think you do. Especially since you thought there was a contradiction in my earlier post.

Thanks, I appreciate that. I'll return the favor. I am a college dropout with a background in computer science, and a sucessful stock market investor, retired at 29. I am 41 now.

Congratulations.

I'm not "obtuse" regarding inflation. Obsessive and monomaniacal about it on this forum, definitely.

Ok, obsessive and monomaniacal to the point that it creeps into everything even when inflation isn't even mentioned until you mention it.

Thanks for the link. I will read it and comment. And thanks for offering your considerable experience and expertise on the subject (I really mean that). Of course, none of this is terribly relevant as to the moral question of whether the Fed should exist, and the banking system be reformed, your credentials and legal citations notwithstanding. The fact that you have refrained from making any moral judgements, and that your responses are always directed at criticism of the institution belies your tacit acceptance of the status quo. If not, feel free to offer your criticism.

I direct responses to those who post obvious fallacies or exaggerations. I do make mistakes, I'll admit that. However, a discussion is useless unless reality and facts are used. To the best of my knowledge, that is all I have ever attempted to do here. Exaggerations, like "the Fed loaned $16 trillion to foreign banks" does nothing to support any side of a discussion. Consensus, learning, and understanding can only occur through learning the facts. A person may think they have learned something by reading some erroneous information online, but in reality, all they have done is expanded their ignorance.

If you believe that attempting to provide some facts into a discussion is equivalent to being a "shill for the fed", then I feel sorry for you.