[Scactha]

I distinctly remember there being a thread about the EMU having a clausule (sp?) saying that in the event of another currency falling to rapidly vs. the Euro the ECB, or similar power, had the option to fixate the Euro vs. said other currency. But I cannot find the thread anywhere. Basically it would be a fail safe vs. a Weimar republic scenario as I understand it.

Anyone else remember this? Inquisitive minds wants to know

[Bas]

is there anything at all that you remember about the thread title?

[DantesPeak]

$this->bbcode_second_pass_quote('Scactha', 'I') distinctly remember there being a thread about the EMU having a clausule (sp?) saying that in the event of another currency falling to rapidly vs. the Euro the ECB, or similar power, had the option to fixate the Euro vs. said other currency. But I cannot find the thread anywhere. Basically it would be a fail safe vs. a Weimar republic scenario as I understand it.

Anyone else remember this? Inquisitive minds wants to know

[MrBill]

Scatha, I believe you are talking about the possibility of capital controls in the case of a euro currency crisis. This would effectively limit the amount anyone could take out of the eurozone.

This type of capital control was used by S. Africa after the end of Apartheid to stop capital from leaving the rand. It did not work as people found other ways to take capital out of the country like buying real assets and then moving those abroad.

But it is my understanding that the ECB would have the power to impose capital controls if there were a crisis in the euro. Not very likely, but they would have this alternative.

None the less whether a law is on the books or not is quite irrelevant. In times of crisis law makers can always pass such a law or suspend an existing one assuming they have the two thirds majority, double voting majority or whatever majority they need to change the constitution or amend its laws. I guess in the ERM this would mean a unanimous decision by all its members.

They could also fix the value of the euro against the US dollar, for example, but then they would be surrendering monetary policy to the Federal Reserve. I cannot imagine any realistic scenario where they might wish to do such a foolish thing? It just isn't going to happen.

On the other hand I can imagine situations under which countries like Italy may be forced to leave the euro due to unsustainably high debts and deficits in excess of the Maastricht Criteria and/or if Italian industry is simply unable to compete due to a strong euro and lack of productivity that causes high unemployment and low or no growth. Were Italy to go it would likely force France, Spain and Greece to follow. That would be a more realistic scenario and one that would threaten the euros' credibility.

[paimei01]

My country did not switch to Euro yet, I hope we never do.
I have some questions like : who prints the Euro ?, how do they know how much to print ?, to who do they give it after printing ?

Money As Debt :
http://video.google.com/videoplay?docid ... 83451279&q

When "they" want to put money into the system they give it to some private banks to lend to the people.
Only trough banks money gets into the economy - which means "grow or disappear" for any business, because they have to pay back more than they borrowed, and there is no other source of money than the banks, so there is no chance to pay back more unless you borrow some more.

Those who print the money should lend them at 0% interest. Aren't they representing the people - which have given them the power to print money ? Why is there the need for the middleman, the bank ?

Private institutions should never be in control of the monetary mass

[Bas]

money as debt video is a scam paimei, money doesn't "disappear" from the system; any profit the central bank makes goes to paying it's employees and other costs, what's left over goes to the governments, and nobody forces anybody to borrow anything. The grow or disappear "idea" is a myth. Lots of people take out loans which they simply pay back with their earnings after which they are debt free again, also there are plenty of non-growth industries some of which are debt free if that makes more business sense. (usually though, it makes more sense to have a loan to increase the return on your own capital, for example you have a business financed with 50% of your own capital and 50% of the bank against 5% interest per year. Now your return on total capital per year is 10%, but you have to pay the bank only 5% so you can add up that 5% that's left to your own capital, making that 10+5=15% return on capital)

The central bank prints the money, but doesn't "give" it to anyone; it lends it to the private bank and they have to pay interest over it. The private banks may charge a little bit more for lending it to businesses or consumers because banks also have their empoyees to pay and they want to make a profit (but they still have to compete with other banks for the lowest rates etc).

Now there is some more to it, like money "creation" by licensed private banks, which some people get seriously hung up on. (I can't see why personally) And it's quite complicated to explain/understand in a single post; if you really want to understand it I suggest you follow a course at your local university or college, rather than watching the docu's "money as debt" and "money masters" which twist the truth here and there for, which I suspect, to be political reasons. (or maybe the enjoyment of lovers of conspiracy theories)

[Scactha]

$this->bbcode_second_pass_quote('MrBill', 'S')cactha, I believe you are talking about the possibility of capital controls in the case of a euro currency crisis. This would effectively limit the amount anyone could take out of the eurozone.

[MrBill]

paimei01 we have had some very mean-spirited dog fights on peak oil dot com over this debt as money issue. For background read MonteQuest's
Our Money System and Oil Depletion; Are they Compatible? and jato's Economic Growth with Declining Energy?

Basically, the argument that our current economic system 'requires' endless growth because money supply is equal to P / P + I (where P = principle and I = interest) is a red herring.

As Bas mentioned, the supply of money is created by the government's agent. Either The Mint or the Treasury or whomever else is charged by the government to print notes or mint coins.

Yes, it is created out of thin air - using linen, ink and metal alloys that is - but money represents a call on ALL the assets of the government of whatever country is issuing its own currency. A practice called sovereignage. It is literally only worth as much as all the assets of a country less all its liabilities. Some say that is less than the value of a single asset, like physical gold, but I beg to disagree.

But then that is no different than a stock, bond or land title that are also created out of thin air, but also represent a call on real assets of the issuer. Even a gold certificate or shares in a mining company are mere pieces of paper with no worth of their own except as legal proof of a broader claim.

Some have said that credit is money because you can convert credit into cash. This of course is wrong. You can borrow all the money you want, so long as someone is willing to lend to you, but you still have to pay that money back. Even at zero percent interest. The principle has to be paid back out of future earnings (or assets sales for example). It is hardly free then is it?

That money has to be re-paid in the future out of profits, not growth. You can grow sales all you want, but if you are not generating a profit you cannot repay your loans with interest or even the principle for that matter.

A store that borrows money at 6% to buy inventory worth $1000 and sells that inventory at a 20% mark-up can easily afford to pay $60 interest on its $200 profit. The net profit is then of course $140 before other expenses. This requires no growth. The store can do that year in and year out. Of course, the store's shareholders may be unhappy with their return and insist that the store try to grow sales through credit and expansion.

But the value of the business is the present value of $140 (less expenses) times whatever multiple you want to use. If the S&P 500 P/E is say 18 today then the PV of $140 x 18 or $2520. If someone wants to buy the business for 25 or even 36 times earnings then it would be their problem to either try to grow sales or reduce expenses to earn a higher profit to justify the price.

However, I would suggest that the PV of $140 per year in 18-years would not be $2520 because the value of P (as in Principle) itself varies. How? For one, inflation devalues the value of P. Secondly, real growth or efficiency gains can change the value of P relative to the store's revenues. They can increase or fall. Thirdly, competition can lower revenues or margins. And a new competing business model (like a bigger store nearby) may even make the store redundant or unprofitable. So a store does not need growth to survive, but it may need growth to remain profitable. Then again it may just need a better business model, too.

The fact that money supply has to grow to pay for goods and services in the real economy is also misleading. Of course it has to in an expanding economy. Just like if you pay for your goods in gold you need to have gold in the first place. Therefore, it has to be mined out of the ground to be put into circulation. It is like saying there would be no bread without grain. Well, no shit, Dick Tracey! Of course, if the real economy contracts, say due to a scarcity of energy, then the money supply will contract as well. Less money will be needed to pay for goods and services. If money supply does not contract then it is inflationary. The same amount of money chasing a shrinking economic pie.

But would that not happen with gold as well? It would take more ounces of gold to buy a barrel of oil if demand stayed the same while supply shrank, right? So we see that no commodity, no currency, no asset (physical or financial) has an absolute value. They all fluctuate vis a vie one another in response to relative supply and demand. You could argue that the fundamentals favor oil for energy over gold as a means of payment, so I would expect petroleum to become more expensive relative to gold as well. Just because it has not happened for the past 6000 years, as gold bugs like to point out, means little prior to peak oil, but post peak oil depletion may change that equation.

However, even post peak oil it will be profits and not growth that pay for goods and services as well as profits needed to repay the principle and interest on loans. Therefore, credit is not unlimited, but limited by a borrower's ability to generate a profitable return on that capital. If the borrower cannot repay then it is the lender that is stuck with a loss. They are unlikely to continue to lend at a loss because they have to pay for their capital as well. And so it goes.

[paimei01]

Why do money need to come from the banks and with an interest attached to them ?

Why don't they come from the state - which should be the only one with the right to print and lend them out, and create credit cards, whenever someone needs a loan he borrows, there is no shortage of money, they can always print more. For example borrow 1000$ , return 1000$.

The economy needs money to grow, but they are not created when someone has to pay interest.
Because that someone cannot create money. He can only get them from other people , who also got them from the banks, that means more need to borrow at interest all the time for the loans to be repaid.

And there is no need for all these tricks, as I said above ,the state could lend as much money as the economy needs, anytime and at 0% interest.
The only "bad thing" is the disappearance of the banks - which are the middle man who does nothing, I can see no other problem.

[Bas]

Banks under direct control of governments have a history and a tendency to use the moneypresses for political goals, sometimes causing massive inflation and derailing the economy that way; because of this history financial markets have little faith in currencies that are managed directly by governments, they are however, still a semi-autonomous part of the State. Unlike what some would have you believe, the Fed in the US is a part of the state and not in private hands (though the licenced private banks are forced to buy a stake in the Fed, they don't have any say in it whatsoever; this money was originally used to finance the setting up of the system back in 1914)

[MrBill]

Interest rates are the cost of money. They ration demand for money. With zero interest rates there would be no incentive to repay the principle out of retained earnings, but simply to borrow another $1000 to repay the first $1000 and then you have $2000 in circulation, which is inflationary.

That is why the central bank does not deal directly with individuals, but through banks that supposedly assess the borrower's ability to repay both the principle and interest and may ask for other collateral, like a mortgage deed as security, or charge higher interest rates for risky borrowers like unsecured credit card debt. I said, supposedly! ; - )

On the other hand the government can and does send out cheques all the time directly to its citizens in the form of pensions and other benefits. These cheques are also calls on the governments' assets and are redeemed at banks, for example, in exchange for cash. The government, of course, does create these benefits out of thin air by selling bonds that are mere promises to repay principle and interest at maturity plus any coupon as the case may be.

So whereas the banks have to pay to borrow from the central bank and often post collateral of their own (repos) the government can send money directly to its citizens. But whereas banks are limited by commercial logic as they need to pay for their capital the government is not because like your zero interest example they can simply issue new debt to pay for retiring debt. So I would in no way favor eliminating the banks, but I would be all for restricting government spending by passing strict balanced budget laws.

By the way I see you're from Romania, so I assume you have never seen a well-functioning economy with a strong central bank and clean government before, but if a country ran balanced budgets and restricted money supply growth to neutral (or a slight tightening bias) then their currency would appreciate and bring down domestic inflation. That should be every country's goal.

[mmasters]

I agree paimai it's a brilliant scam.

I did a thread a few months ago where I documented the fractional reserve process. Money does get created and destroyed on a regular basis through the fractional loan process. Very very few understand it, especially here. In any case, more money is created than destroyed, hence the perpetual inflating of the currency.

Mr Bill is correct on the central bank/government phase of the process, where money is created out of thin air by the fed to buy treasury bonds. This accounts for around 5-10% of the money in circulation. The other 90-95% comes from the fractional reserve process. Essentially the commercial banks get ahold of this 5-10% high level fed money and use it as a basis for giving someone a loan. Then they keep a small amount of money in reserve to satisfy withdrawl demands like 10% and typically take collateral for the loan. So say the bank gets 1 million bucks created out of thin air from the fed, then they loan out 900K of it and create a debt contract worth 900K, when that 900K returns back to the banking system they retain 90K loan out 810K of it and create a debt contract worth 810K, and so on. Essentially high level money forms a revolving door through the commercial banks all the while debt contracts are created in tandem. One could argue that the debt contract is new money created (since debt contracts can be exchanged for cash) or that the cash being loaned out is new money created. From an accounting standpoint once this new money or credit is birthed it's not officially new money until that person spends it and it goes into somebody else's account such that they can use it, then it is effectively newly created money (credit Mr bill for arguing that absurdity but it's valid).

So anyway once these debt contracts (which can be sold by the bank to third parties, or bundled up and sold to the stock market, witness Mortgage Backed Securities or Subprime MBS), again when these debt contracts are paid off they are no more and vanish into thin air. It is effectively money destruction though there may be some deceptive accounting like arguement to say otherwise.

So yes, money is getting created and destroyed continually in the fractional reserve process. Just created in ever larger amounts. On the central bank to government side of the process money isn't destroyed but just continually created. To understand this look to why the fed was created. It was created in a partnership with the banks and government. What does the government get out of it? They get free financing, because all they have to do is create more bonds and the fed will create money to buy them. And if they have problems repaying money/interest to the fed they can create more bonds and use that money to pay that obligation. It's an unlimited credit line the government has with the fed. And to assist the government in paying interest on their credit line with the fed we have the federal income tax (but that's another story altogether)

Regarding bad loans. If the banks make bad loans that can't be paid back well then the debt contracts created lose value, which is essentially premature money destruction and causes a loss of faith in the system. This is what has happened with the subprime loans. Now when this happens there are ways to deal with it. Ultimately the fed can print up new money to buy these junk loans from the banks thereby restoring faith. Or the fed could make the crisis worse if it wanted reducing everything to pennies on the dollar (but that's another topic). Also if the bank uses up all it's reserve money writing off bad loans (that it hasn't sold out to third parties and has kept on it's balance sheet) it could go bankrupt and be forced to be shut down by law. Or the fed could help keep it operating by loaning it newly created money to prevent the bank from shutting down and a bank run ensuing. This is the premise the fed was created under as a way to prevent bank failure (i.e safety). In reality it's more like the fed controls which banks live and which banks don't.

So anyway, what's the benefit for the banks in the government partnership? The banks decide who gets loans and therefore control the funding. Also they make a fortune on interest charged on these legally backed loans created out of thin air. And the bigger the loans ,the bigger the relative interest royalty owed, the bigger the money that's created in the fractional process. That is what makes the commercial/ big business/ international banks the greatest benefactors in the scheme and of course they are who own and control the central bank. And when you have that kind of money and power you can buy influence and lobby government for more power and control.

[threadbear]

$this->bbcode_second_pass_quote('zensui', 'I')n a free market with a state that doesn't interfere at all, precious metals tend to become money. Why are some people against this?
Why a gold coin cann't be used as money? It was like this for thousands of years, this paper money is just a (failed, in the opinion of many) experiment.

[CrudeAwakening]

$this->bbcode_second_pass_quote('MrBill', ' ')
As Bas mentioned, the supply of money is created by the government's agent. Either The Mint or the Treasury or whomever else is charged by the government to print notes or mint coins.

[CrudeAwakening]

$this->bbcode_second_pass_quote('zensui', 'I')n a free market with a state that doesn't interfere at all, precious metals tend to become money. Why are some people against this?
Why a gold coin cann't be used as money? It was like this for thousands of years, this paper money is just a (failed, in the opinion of many) experiment.

[Euric]

$this->bbcode_second_pass_quote('zensui', 'T')he euro is another sinking boat, it just sinks slower.

We need to go back to gold as money. I don't feel happy (being forced because of lack of options) trading my work for paper money.

[bodigami]

$this->bbcode_second_pass_quote('Euric', 'T')hat is the most ignorant idea anyone has ever suggested. Gold is as much a fiat currency as paper. It has no value on its own and depends on the value others give it. --snip-- The only problems that can result are those that would come from American resistance. If the US can't see the logic in a well balanced basket in which everybody plays a part then there will be no choice but to boot the dollar out of the basket and let the Americans suffer hardship until they see the light.

[Euric]

$this->bbcode_second_pass_quote('zensui', '
')
Why is paper that doesn't have value used as money? This is completely arbitrary and gives far too much power to Central Banks, which is always abused.

I stand with my position: for something to be used as money it has to have value on its own, if not it's another method for the perpetuation of financial monopolistic authorities.

http://www.mises.org/efandi/ch17.asp

[manu]

$this->bbcode_second_pass_quote('Euric', 'T')hat is the most ignorant idea anyone has ever suggested. Gold is as much a fiat currency as paper. It has no value on its own and depends on the value others give it. --snip-- The only problems that can result are those that would come from American resistance. If the US can't see the logic in a well balanced basket in which everybody plays a part then there will be no choice but to boot the dollar out of the basket and let the Americans suffer hardship until they see the light.

[halcyon]

I do think Euric is correct in his assessment that Gold was just one form of money.

Sure, it could not be printed out of thin air, but it's value was still due to it's legal position as universally accepted tender.

Once you remove that, gold has no more value than what it industrially has + some culturo-historical value as a hedge among investors.

There is also the downside, according to macroeconomic theory, that once economy grows faster (in real terms) that stock of gold, the amount of gold is limiting economic growth. Hence we have paper money (although not only due to that as there are other reasons).

In this sense I'm not sure having a limited money supply would be a bad thing: we probably need to start considering a move to a no-growth economy at any rate.

However, I don't think that gold is a guaranteed hedge gainst inflation (and probably even less against deflation as some think).