I offer you a challenge

[Special K]

Originally posted by: GuitarDaddy

Originally posted by: Special K

So when the US government puts more money into circulation, do they do it electronically, or do they literally print off more money and use it from there?

They literally print more currency, which is much like when a company issues stock.
And just like when companys increase their outstanding shares the price per share goes down, ie... the US currency goes down against foriegn currencys. They can also take currency out of circulation which has the opposite effect.

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

 

[GuitarDaddy]

Originally posted by: ViRGE
Both. They'll produce new currency to replace old currency or if there's a need for more currency, but they'll also electronically transfer money to banks if they borrow from the Federal Reserve.

Yep, and when they electronically transfer money and borrow from the FED this becomes a part of the national debt calculation. This is the exact proccess our current administration has used to fund the war efforts for the last 6 years and one of the reasons our national debt is a record levels.

 

[Born2bwire]

Originally posted by: Special K

Originally posted by: GuitarDaddy

Originally posted by: Special K

Originally posted by: GuitarDaddy

Thats the importance of a centralized banking system, all banks in the system have to post their daily balances with all other banks to the federal reserve every night. In simple terms every bank is an account and has a net balance, and when all banks are posted the federal reserve ledger has to balance to zero

But I thought our economy was not a zero-sum system? That is, just because someone gained a dollar does not necessarily mean that someone else had to lose one.

Plus how would the federal reserve keep track of foreign transactions?

The economy is not zero-sum, but the currency system is. This is a difficult concept to get a grasp of, the other factors that influence economics are national debt, land and asset values, import export, and many, many others.

I'm not as familiar with the international banking system but the US federal reserve clears against foriegn systems in much the same way as individual domestic banks clear within the US system, with the added complication of exchange rates.

So when the US government puts more money into circulation, do they do it electronically, or do they literally print off more money and use it from there?

Probably both. Banks are only required to keep a certain percentage of their money on hand. In addition, banks are allowed to lend out up to a certain percentage of the money deposited in the bank. This works because people practically never demand all the money in their accounts. With the exception of runs on the banks which often caused bank failures in the wake of the crash of 1929 but this is now protected against in a few ways, the least of which is deposit insurance, like FDIC.

Anyway, since there realistically is not going to be a demand of printed money equal to the actual amount in circulation, I doubt the Treasury would actually print all of the money it issues to save costs (unless this is done out of a federal law or something).

OK, but it's not like interest rates have been steadily increasing since the 1970's (arbitrary point in time), yet the value of a dollar has gone steadily down since then. Why is that?

The federal reserve controls currency by manipulating both the velocity and supply of money. Increasing the supply of money devalues the dollar and causes inflation. Greenspan seems to favor manipulating the velocity of money by adjusting interest rates. When interest rates are high, less money is loaned out and investments in securities decrease. This causes money to be spent more slowly. If interest rates are low, then a lot of loans are taken out and investments in securities increase, causing a greater rate of money to transfer hands. It's like the end to Wakko's Wish. He wishes that instead of having one half-penny, he has two half-pennies. But despite this limited wealth, the half-pennies exchange hands throughout the village bringing internal prosperity. It's a pretty good example of how the velocity of money can reflect an effective increase in money.

 

[Born2bwire]

Originally posted by: Special K

Originally posted by: GuitarDaddy

Originally posted by: Special K

So when the US government puts more money into circulation, do they do it electronically, or do they literally print off more money and use it from there?

They literally print more currency, which is much like when a company issues stock.
And just like when companys increase their outstanding shares the price per share goes down, ie... the US currency goes down against foriegn currencys. They can also take currency out of circulation which has the opposite effect.

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

Quite simply, to pay their bills. The US government has the power to create currency and can do so to compensate for a budget shortfall (short of bringing in revenue via taxes, tariffs, and loans (bonds, T-bills, etc)). The government also prints money to replace money taken out of circulation due to wear or destruction.

 

[GuitarDaddy]

Originally posted by: Special K

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

Inflation=growth, growth in the value of goods and services, growth in property and asset vaules, etc...

Inflation is not bad and is quite necessary, only when it gets out of control is it bad. To understand more about inflation study the 1929 stock market crash and resulting great depression, and the hyper inflation that occured in some european economies post WWII

 

[Rogodin2]

The Saudis were contemplating this 3 years ago... at least someone understands this ****** besides me.

necine

It's strange that there are only three people in this whole thread that understand where the commodity support of the USD comes from.

Rogo

 

[Born2bwire]

Originally posted by: GuitarDaddy

Originally posted by: Special K

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

Inflation=growth, growth in the value of goods and services, growth in property and asset vaules, etc...

Inflation is not bad and is quite necessary, only when it gets out of control is it bad. To understand more about inflation study the 1929 stock market crash and resulting great depression, and the hyper inflation that occured in some european economies post WWII

Ahh Weimar Marks. The only time I could have not only been a multi-billionaire, but I could wallpaper my entire house with money.

 

[Special K]

Originally posted by: Born2bwire

The federal reserve controls currency by manipulating both the velocity and supply of money. Increasing the supply of money devalues the dollar and causes inflation. Greenspan seems to favor manipulating the velocity of money by adjusting interest rates. When interest rates are high, less money is loaned out and investments in securities decrease. This causes money to be spent more slowly. If interest rates are low, then a lot of loans are taken out and investments in securities increase, causing a greater rate of money to transfer hands. It's like the end to Wakko's Wish. He wishes that instead of having one half-penny, he has two half-pennies. But despite this limited wealth, the half-pennies exchange hands throughout the village bringing internal prosperity. It's a pretty good example of how the velocity of money can reflect an effective increase in money.

Do the interest rates set by the federal reserve affect both borrowed money (e.g. car loans, mortgages, student loans, etc.) and invested money (savings accounts, bonds, etc.)? So if interest rates were low, I could understand why more money would be borrowed, but would the yield on bonds and savings accounts decrease as well? It seems that would make people less likely to invest, since the interest rates of those investments would be lower.

 

[Born2bwire]

Originally posted by: Special K

Originally posted by: Born2bwire

The federal reserve controls currency by manipulating both the velocity and supply of money. Increasing the supply of money devalues the dollar and causes inflation. Greenspan seems to favor manipulating the velocity of money by adjusting interest rates. When interest rates are high, less money is loaned out and investments in securities decrease. This causes money to be spent more slowly. If interest rates are low, then a lot of loans are taken out and investments in securities increase, causing a greater rate of money to transfer hands. It's like the end to Wakko's Wish. He wishes that instead of having one half-penny, he has two half-pennies. But despite this limited wealth, the half-pennies exchange hands throughout the village bringing internal prosperity. It's a pretty good example of how the velocity of money can reflect an effective increase in money.

Do the interest rates set by the federal reserve affect both borrowed money (e.g. car loans, mortgages, student loans, etc.) and invested money (savings accounts, bonds, etc.)? So if interest rates were low, I could understand why more money would be borrowed, but would the yield on bonds and savings accounts decrease as well? It seems that would make people less likely to invest, since the interest rates of those investments would be lower.

That's what I meant by securities (stocks). If interest rates are low, less money is placed into investments that reflect the interest rate and into other areas. So like you said, money would be pulled out of T-bills, bonds, etc. since their yield would decrease and put into stocks, thereby increasing the money being transferred to companies (via the sale of stock) as opposed to sitting in the bank in the form of a CD, or T-bill.

 

[Exterous]

Originally posted by: eoliss

Originally posted by: Perry404
How does money work? I want to know. I realize they should have taught me this in high school or collage but they didn't.

So given this scenario:

A small world of 1000 people where no money exists.
Everyone has their respective jobs farmers, metal workers, carpenters etc...
But because they use no money they simply trade goods. So one day someone comes up with the idea to use money.

How would this community begin using money? Can anyone explain this so that the rest of us can understand?

I very simplified story that I was told on how money/banking started:

At some point, a person gave their valuables to someone very trustworthy and honorable. Lets say a farmer gave some gold to the village elder or something while he left the area. The elder then would give a written piece of paper with the information on it, namely the amount of gold. This is the receipt. The farmer would come back, hand in the receipt, get his gold back. Over time, people saw the elder as trustworthy and gave him their gold too. Additionally, it was thought that the gold was safer with the elder.

When people needed to do transactions, they would turn in their receipts, get their gold, give it to seller. Then the seller would then go back and turn in the same piece of gold. To reduce the redundancy of this process, the elder just started to trade these receipts.

These receipts developed into currency. The elder turned into a banker.

We have fiat money in the U.S. Basically, it has value because most believe it has value.

The first large scale banking system was put in place by the Knights Templar around the times of the First Crusade. It was have been a logistical impossibility for the Kings/nobles to take their wealth with them on the long march to Jerusalem. Instead they turned in the wealth - be it gold, livestock or what have you - to a local Templar and got a sealed parchment with their "monetary value" transcribed on it. If they needed something along the way they just needed to stop and see an appropriate Templar on the journey - he would distribute the desired amount of wealth and make the deductions from the parchment.

 

[Exterous]

Originally posted by: GuitarDaddy

Originally posted by: Special K

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

Inflation=growth, growth in the value of goods and services, growth in property and asset vaules, etc...

Inflation is not bad and is quite necessary

Inflation being bad is a common misconception. It's hyper or unchecked inflation that is bad. Also, deflation is usually much much worse. Deflation discourages people from buying things since they will be cheaper tomorrow and then cheaper the day after that and so on. It would quite literally be a better idea to keep you money under the mattress than to buy or invest in something

 

[Special K]

Originally posted by: Born2bwire

Originally posted by: Special K

Originally posted by: Born2bwire

The federal reserve controls currency by manipulating both the velocity and supply of money. Increasing the supply of money devalues the dollar and causes inflation. Greenspan seems to favor manipulating the velocity of money by adjusting interest rates. When interest rates are high, less money is loaned out and investments in securities decrease. This causes money to be spent more slowly. If interest rates are low, then a lot of loans are taken out and investments in securities increase, causing a greater rate of money to transfer hands. It's like the end to Wakko's Wish. He wishes that instead of having one half-penny, he has two half-pennies. But despite this limited wealth, the half-pennies exchange hands throughout the village bringing internal prosperity. It's a pretty good example of how the velocity of money can reflect an effective increase in money.

Do the interest rates set by the federal reserve affect both borrowed money (e.g. car loans, mortgages, student loans, etc.) and invested money (savings accounts, bonds, etc.)? So if interest rates were low, I could understand why more money would be borrowed, but would the yield on bonds and savings accounts decrease as well? It seems that would make people less likely to invest, since the interest rates of those investments would be lower.

That's what I meant by securities (stocks). If interest rates are low, less money is placed into investments that reflect the interest rate and into other areas. So like you said, money would be pulled out of T-bills, bonds, etc. since their yield would decrease and put into stocks, thereby increasing the money being transferred to companies (via the sale of stock) as opposed to sitting in the bank in the form of a CD, or T-bill.

So do all banks initially borrow directly from the government? That is, the government sets the interest rate at which it will loan to its primary customers directly, and then the interest rates increase from there so that everyone down the line makes a profit when they loan their money out?

 

[Born2bwire]

Originally posted by: Special K

Originally posted by: Born2bwire

Originally posted by: Special K

Originally posted by: Born2bwire

The federal reserve controls currency by manipulating both the velocity and supply of money. Increasing the supply of money devalues the dollar and causes inflation. Greenspan seems to favor manipulating the velocity of money by adjusting interest rates. When interest rates are high, less money is loaned out and investments in securities decrease. This causes money to be spent more slowly. If interest rates are low, then a lot of loans are taken out and investments in securities increase, causing a greater rate of money to transfer hands. It's like the end to Wakko's Wish. He wishes that instead of having one half-penny, he has two half-pennies. But despite this limited wealth, the half-pennies exchange hands throughout the village bringing internal prosperity. It's a pretty good example of how the velocity of money can reflect an effective increase in money.

Do the interest rates set by the federal reserve affect both borrowed money (e.g. car loans, mortgages, student loans, etc.) and invested money (savings accounts, bonds, etc.)? So if interest rates were low, I could understand why more money would be borrowed, but would the yield on bonds and savings accounts decrease as well? It seems that would make people less likely to invest, since the interest rates of those investments would be lower.

That's what I meant by securities (stocks). If interest rates are low, less money is placed into investments that reflect the interest rate and into other areas. So like you said, money would be pulled out of T-bills, bonds, etc. since their yield would decrease and put into stocks, thereby increasing the money being transferred to companies (via the sale of stock) as opposed to sitting in the bank in the form of a CD, or T-bill.

So do all banks initially borrow directly from the government? That is, the government sets the interest rate at which it will loan to its primary customers directly, and then the interest rates increase from there so that everyone down the line makes a profit when they loan their money out?

I'm not sure in regards to the creation of a bank, I am not familiar with how that's done. The interest rates do not really increase on down the line solely for profits. The government can borrow from private citizens. You can buy government or municipal bonds, treasury notes, and etc and cut out private institutions like banks. But what banks do want is your money so that they can loan it out. As I said before, they are allowed to loan out a portion of their deposits. So it is advantageous for the bank to provide incentives for you to keep your money in the bank. This can be done by having you place your money into M2 money supply. That is, money that has lost some of its liquidity by being tied up in a time deposit like CD's and savings accounts. If you buy a certificate of deposit, you have guaranteed the bank that money for a certain time period (3 months, 6 months, etc). The bank can then loan that money out knowing that they will not have to pay it out for a certain amount of time. Likewise, savings accounts generally require a short time period of advanced notice for withdrawals. This is in contrast to M1 money, that is money that has high liquidity like your checking account. Your checking account fluctuates rapidly as you make deposits and withdrawals and thus the bank needs to keep more money out of loans to be available for these kind of accounts. The incentive for you to place your money into M2 are the interest rates. So not only do private institutions like banks have to compete with other forms of investments (securities, government bonds), but they also want you to keep your money in the bank so that they can make it work for them in addition to keeping the interest rates for their M2 accounts low enough to make a suitable profit on their loans and investments. In this regard, having competitive interest rates are desirable.

 

[mooglemania85]

In the Land of the Euro, Small Towns Adopt Alternative Currencies

ROSENHEIM, Germany ? Christian Gelleri, with his straightforward manner of speech, rumpled suit and home office, hardly resembles the polished central bankers whose every breath captivates financial markets. But just as Jean-Claude Trichet, president of the European Central Bank, lays claim to the title ?Mr. Euro,? Mr. Gelleri can plausibly call himself ?Mr. Chiemgauer.?

Mr. Gelleri runs an organization that issues an alternative currency, known as the chiemgauer, that consumers in the region southeast of Munich use to buy products as diverse as pizza, haircuts and rugs. Aimed at fostering the production and consumption of local products and services, the chiemgauer challenges the central banking orthodoxy that pumping more cash into an economy accelerates inflation and eventually harms growth.

?When people use the chiemgauer, the apple juice producer sells more bottles and the cheese maker sells more cheese,? Mr. Gelleri said. ?In theory, this is not supposed to happen, but the fact is it does.?


full article

 

[rikadik]

This video is probably of interest to a lot of you in this thread:

Money As Debt

 

[skace]

There is some good information in this thread, but there is also plenty of information here: http://en.wikipedia.org/wiki/Currency#History

 

[silverpig]

A great explanation was already posted, but I'll elaborate a bit on it:

Say Joe has some gold he uses to buy things with. He keeps his gold underneath his mattress. Now Joe wants to travel via horseback across the country through dangerous territory to visit some family. He will need to buy things along the way but he doesn't want to carry his life savings of gold along with him, nor does he want to leave it unattended at home. Joe would visit the goldsmith.

The goldsmith is a respected member of the community. You could give him your gold for safekeeping and he'd give you some slips which you could sign away to someone who could then go back to the goldsmith and reimburse the slips for your gold.

Now, it would be a little cumbersome to have to constantly collect slips, travel to the goldsmith who issued them, collect the gold, deposit the gold with your goldsmith, and then get your own slips to give to someone, so people began just trading the slips. If they were from reputable goldsmiths, they were just as good as gold themselves.

 

[imported_Tango]

Originally posted by: Special K

Originally posted by: darkswordsman17

Originally posted by: Special K
Also how do exchange rates work? Who decides those?

The market does. If one day everyone on Wall Street wakes up and decides that they feel the U.S. dollar is worth 2 Euros, they can. Its up to the people they trade with to decide if they agree. If not then it won't be traded and they'd have to figure out at what value people do agree with.

But there are markets everywhere. Do all of the smaller markets just go by what the NYSE says?

FOREX is a single big market.

 

[imported_Tango]

Originally posted by: eoliss

Originally posted by: Perry404
How does money work? I want to know. I realize they should have taught me this in high school or collage but they didn't.

So given this scenario:

A small world of 1000 people where no money exists.
Everyone has their respective jobs farmers, metal workers, carpenters etc...
But because they use no money they simply trade goods. So one day someone comes up with the idea to use money.

How would this community begin using money? Can anyone explain this so that the rest of us can understand?

I very simplified story that I was told on how money/banking started:

At some point, a person gave their valuables to someone very trustworthy and honorable. Lets say a farmer gave some gold to the village elder or something while he left the area. The elder then would give a written piece of paper with the information on it, namely the amount of gold. This is the receipt. The farmer would come back, hand in the receipt, get his gold back. Over time, people saw the elder as trustworthy and gave him their gold too. Additionally, it was thought that the gold was safer with the elder.

When people needed to do transactions, they would turn in their receipts, get their gold, give it to seller. Then the seller would then go back and turn in the same piece of gold. To reduce the redundancy of this process, the elder just started to trade these receipts.

These receipts developed into currency. The elder turned into a banker.

We have fiat money in the U.S. Basically, it has value because most believe it has value.

Modern banking was actually invented by the Italians during the Renaissance (the word bank comes from the Italian banco), specifically in Florence during the Medici and Pittis era. Double-entry bookkeeping was in fact developed by accountants working for the medici family to keep track of borrowed/lent money.

But even before that, Knights Templar had a system for pilgrims to deposit money in one city and retrieve it when in Palestine in order to avoid carrying money during the peregrination.

 

[Special K]

Originally posted by: Exterous

Originally posted by: GuitarDaddy

Originally posted by: Special K

So then what is inflation? Is that just the value of the US dollar relative to itself at different points in time? If inflation is bad, why would the government want to ever print more money?

Inflation=growth, growth in the value of goods and services, growth in property and asset vaules, etc...

Inflation is not bad and is quite necessary

Inflation being bad is a common misconception. It's hyper or unchecked inflation that is bad. Also, deflation is usually much much worse. Deflation discourages people from buying things since they will be cheaper tomorrow and then cheaper the day after that and so on. It would quite literally be a better idea to keep you money under the mattress than to buy or invest in something

If deflation were occuring, wouldn't it still be good to invest your money? You would get the rate of return of your investment, plus a percentage increase in value due to deflation.

 

[Rogodin2]

'Money' is a representation of a highly valued commodity. What is 'money' tied to in our contemporary world?

Rogo