Sally Hutchins :

Please continue. So printing more money is creating more debt? Educate me. Love, Sally

Hi Sally:

Let me try to answer your question as succinctly as I can, however, it may result in another blog post.

“Printing money” is a term used today that nobody really knows what it means. Historically it meant the government physically printed little pieces of paper which were then spent into circulation by buying goods and services the government needs. For example, in the revolutionary war, the government printed continentals to pay the troops. Allegedly, British counterfieting rendered the currency eventually worthless. Again, when New York Bankers refused Abraham Lincoln additional financing during the Civil War, Lincoln then decided simply print “greenbacks” to pay the troops. It worked and merchants accepted greenbacks because Lincoln decreed that greenbacks would be accepted by the governments for the payment of taxes. “Greenbacks” remained in circulation for decades and largely contributed to subsequent economic growth.

Today, 98 percent of all money is electronic blips or signals recorded on the computerized ledgers of the banking system. Obviously printing money really doesn’t happen anymore. Money creation is a more apt term. Money is created when a bank makes a loan. Presto. That’s it. I already know that you’re going to ask how that creates money if they are just lending money that someone else deposited with them. The answer is that the banking system can create new loans of up to 10 times the amount of deposits (reserves) that they have on hand. At present, our banks are required to maintain cash reserves of 10% of its demand deposits. With a reserve requirement of 10%, the banking system may create new money of up to $1,000 from an initial deposit of only $100. It’s called fractional reserve lending. How does this work? The Federal Reserve explains it the best:

Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500).
From the website of the Federal Reserve Bank of New York: http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html

Nifty huh? The problem arises, as I wrote in my post, when people and companies fearing future uncertainty don’t want to borrow or be in debt and when banks fearing future economic uncertainty and loan defaults, don’t want to lend anymore. The reverse mutiplier effect kicks in and the money supply collapses as loans get paid off. Because we’ve abdicated control of our money supply to a private banking system, all of our money in circulation originated as a debt and vanishes when the debts vanish. We have no equity money, debt free money, such as Civil War era greenbacks, in circulation.

So in answer to your question, printing more money does not create more debt, it is debt that prints (creates) money. No more debt, no more money. The Fed and the administration are fit to be tied trying to create debt and money by keeping interest rates at zero and spending humongous deficits, but it ain’t happenin’ very fast. There’s ways to do it, but none that are considered morally acceptable by the corrupt banking system which, candidly, veritably owns the congress and the administration and is not likely to give up their power and control over the money supply regardless of how much harm they cause to people and the economy.

I hope this helps and didn’t confuse you more.

Thanks and love,

Joe

I think the question you pose, is a question of the chicken and egg theory. For example, will the given allocation in an SDR basket affect a currency’s value with respect to others, or, will a currency’s market value as determined by economic fundamentals thereupon then determine it’s allocation in an SDR basket?

The Chinese, control freaks and manipulators that they are, obviously opt for the former thinking that SDR’s are a vehicle for greater control of exchange rates. The U.S. on the other hand, by it’s ambivalence towards the prospect, believes in the latter. And as usual, the Europeans are caught in the middle and can’t decide.

Current U.S. economic dogma stipulates that governmental efforts at exchange rate manipulation through open market operations or other manipulation is temporary at best and that no one, not even China has sufficient capability to much affect the massive amounts of currency that changes hands in the banking system in commerce and trade on a daily basis. Even central banks with their massive resources are ultimately easily overwhelmed by the overall trading in the banking system. Experience seems to support that theory.

For myself, I also tend towards the latter, that creditworthiness, economic strength, fiscal and monetary policies will ultimately determine the market price or strength of a given currency which in turn will determine it’s ultimate allocation in any given basket such as SDR’s. However, it’s an interesting question and one that deserves to have the experiment run. Such an experiment will yield an immense amount of data for use in future policies and in future generations.

Joe

Joe :
The Chinese can re-allocate their portfolio of currencies to mirror that of SDR’s without actually using SDR’s. The effect in the open market would be the same as selling their inventory and replacing it with SDR’s.

I guess the question I have about that is the sdr’s makeup changes according to exchange rate and may change more to include other currencies, weakening the importance of the dollar. I imagine that if the dollar fell on the world market changing the sdr basket the sdrs already out would then reflect the new basket not the old basket.

IF that is the case wouldn’t sdr’s provide an extra layer of protection for the Chinese? they could switch their current reserves to sdrs, then dump their remaining dollars (T-bills) with the knowledge that they are protected from the collapse of the dollar (partial or full) that would then happen because the SDR’s would reset their makeup to include less dollars.

The Chinese can re-allocate their portfolio of currencies to mirror that of SDR’s without actually using SDR’s. The effect in the open market would be the same as selling their inventory and replacing it with SDR’s. I’m a little more cynical than you. I think it has more to do with temporary price manipulation.

Great thoughts John. Thanks.

Joe

Also regardless of what is backing the sdr currency using sdr’s would create a new currency that though backed by other currencies would be similar to federal reserve notes prior to 1969, inflatable by themselves.

Just thoughts