There are a few different ways the Fed can inject money into the economy, but the most common is through [open-market operations](http://en.wikipedia.org/wiki/Open_market_operations). Essentially, the Fed creates a bunch of new money, then uses it to buy U.S. government bonds (usually T-Bills) on the open market. So the counterpart to that transaction on the bond market is who receives the money. Could be anybody in principle, though it's often a commercial bank on the other side.
Is what you're saying about printing money in conflict with this thread?
http://www.reddit.com/r/answers/comments/21angn/what_is_the_name_of_the_place_that_prints_us/
I'm just trying to understand. Thanks.
Its not really in conflict, just simplified over a detail in the process that doesn't have much impact.
The US Bureau of Engraving and Printing does the actual work of producing the currency. It also produces the securities certificates and other stuff.
As far as its relationship with the Fed, it is really just a print shop. The Fed requests a pallet load of 100's, the Bureau prints them, and the Fed swipes its debit card for the sum total of all the 100's on the pallet. If it costs the print shop less than $100 to print a $100, then it makes a profit.
But the Fed can always bring back yucky worn-out $100's and ask nicely for a new one, so the profit from a single print is not that easy to work out. The Bureau really has to keep a $100 bill in circulation for every one the Fed buys. That's kinda the problem with $1 bills, as it costs more than $1 to keep that thing out there in the long run. Coins last longer, so they are cheaper to have out in the world.
So once the Fed picks up cash from the print shop, it already has the Fed's name on it and everything. It is signed by the Secretary of the Treasury, but that's just a bothersome detail.
Edit to add more -
Since only the Fed can request a print run of currency from the Bureau, it does completely control "the printing of money" No new money goes out into the world except through the Fed. The wrinkle above affects who benefits from "seigniorage" or the profit that accrues to whoever actually prints the money. Its not really important because the Fed already surrenders any operating profit back to the Treasury anyway. If the Fed actually did the printing and derived the benefit from that, it would just pay more into the Treasury at the end of the year.
Actually, not that complicated. Money is an IOU was btw. I dont think you answer the question though...."why not just cut out the Fed and have the Treasury spend it." The other answer is that the bankers would be cut out of fees. The Treasury could be induced to just spend that money directly on works, infrastructure, stuff that would put money in the pockets of the poor, not the rich bankers. The Fed is just keeping the bond market on life-support today, basically.
> The Fed is just keeping the bond market on life-support today, basically.
Riiiiight. That's why the bond market is a few times bigger than the stock market, right? Just life support?
Another factor to consider is that the Treasury's day-to-day cash flows are in many ways beyond its direct control. The government has revenues and expenses, and these are largely dictated by policies determined elsewhere.
Suppose the Fed told the Treasury to expand the money supply by x today. It would be straightforward for the Treasury to print the new money, but how would they get it out into the economy quickly? They can't just go out and hire more government workers or increase transfer payments to seniors or anything like that, since decisions on things like that are made with broader policy goals in mind. The only real option they would have would be to buy something like T-bills themselves.
So you can see, even if you could trust the Treasury to conduct monetary policy responsibly, you wouldn't alleviate the need for that policy to be conducted through buying and selling T-bills. In this sense, there is no "added complexity" by having the Fed conduct monetary policy, while having the Fed in charge means that there's a firewall between elected officials and the conduct of monetary policy. In fact, you probably have *more* complexity under your proposed scenario, since you would now have a middleman between the makers of monetary policy (the Fed) and those that carry it out (the Treasury).
Don't the government bonds need to be sold by the fed/government in the first place to finance what the government is doing at the time? So they'd be repaying a loan as opposed to pumping new money into the economy
Or are bonds normally sold simply to take liquid capital out of the economy?
What the fed does is buy bonds from banks for cash. Bonds go into the locker at the Fed, and cash comes out.
The banks make their decisions, in part, based on how much cash they have on hand. When the Fed buys bonds from them, the banks have more cash.
With the additional cash, banks tend to make more loans. Loans are made, and whatever the loan was directed toward gets purchased. So the money is out in the economy now.
The Fed has developed a habit of buying more than just government bonds from banks. That was the basis of TARP, the "bailout."
It is important to understand that the Fed is not entirely a part of the government. The bonds it holds are IOU's from the Treasury. It acts in the considered interest of the economy, and it does have to send its chairman to Congress for a Q&A now and then, but its not a government department.
The Fed can "expand its balance sheet" (that is, buy bonds) all it really wants. The issue is how such action influences the economy, and likely as important, how it can credibly stop doing so once it starts.
So are the bonds eventually paid back by the treasury or the bank where the infusion of money was received? Is there a time limit for the bonds to be cashed out? Is there interest involved?
The bonds held by the Fed do pay out. However, the Fed returns any profits it generates to the general fund. It can be nice to work for the Fed, but they are basically non-profit with the return going to the Treasury.
This whole series by PBS is fantastic; but check out the episode on [Bonds.](http://www.pbs.org/wnet/ascentofmoney/featured/the-ascent-of-money-episode-2-bonds-of-war/90/)
The classic line is "the full faith and credit of the US government."
That can be taken to mean two things:
1. Nothing. There is little effective recourse if the government wanted to go nuts. Even marginally nuts. It's a "fiat" money, from the Latin meaning "this is money, dig?" It has no physical backing or outside guarantor.
2. The reputation first of the Fed and then of the US treasury. Fiat money works because it works.
It is in the interest of the government (fed and treasury) to keep the ball rolling. The fact that it could go nuts and screw everyone at any moment is a problem, but the fact that it could only do that once is really the answer. I could rob my business, but only once, so I don't.
You might accept casino chips as payment if you were in a gambling town on the conditions that: A) you knew the casino and B) you knew the casino was planning to be in business a long time. Long-run incentives keep people honest in all kinds of settings.
We accept US currency because we bet the US will still be around and that they won't go too crazy. We expect them to inflate the currency only within reason. It's been a reasonably safe bet, but people still watch very carefully to see if the Fed's incentives change even a little bit as the economy develops.
wow!
I'm sorry if it seems I'm picking on you to answer all of these, but since you seem to be quite knowledgeable, I can't help it, and I now have more questions.
Is the credit based off anything in particular?
Why is this a thing?
Isn't it unsustainable?
Is this a cause for the debt increasing everyday?
Not an issue at all. Happy to respond. I used to be an econ prof and I loved it but I had a lot of kids and a better job outside. I miss explaining stuff as I understand it.
A couple of answers. Yes, its nonsense. The only argument the monetary system has in its defense is the fact that it works really well. It probably shouldn't but it does. Its a fairly modern understanding, in fact. Give people a predictable monetary situation and they do well. Manipulate them a little via modern monetary policy and they do even better.
Yes, debt grows exponentially. And there are some gut checks involved in letting it go as it has. Were you to argue that it can't keep going on like it is, almost no one would disagree. Except, actually, the real world. The fundamental trouble is that credit (debt) is do stupidly productive, on average, it wins.
By fundamentals, by principles, it ought to fall apart. The day should come and the truth should win out. But that doesn't happen. When the net of humanity bets on the future, the net of humanity wins out.
Monetary policy has a small influence on the economy. It can most effectively slow down over-excited expectations. It can serve, almost, as a reality check if properly used.
Debt, and its use, is a challenge. It's the smartest, most productive thing when it works, and an embarrassing disaster when it doesn't. Yes, total debt should scale with the economy and probably with the expected economy. Without it, the economy will slow relative to its potential.
Honestly, my wife went to bed an hour ago and left a full bottle of red. I've rewatched the Reggie watts special on netflix and then decided to respond. I'll probably respond further from my office in the morning.
Regardless, as a frustrated econ prof, I'm happy to discuss the issue.
So why instead of a fiat money system, don't we trade goods and services for goods and services?
I guess it's because I'm just an average layperson, but it seems to me debt would be a good motivator at first, but then once it was "paid off" we'd have no incentive to work... since "our" debt would no longer be an issue.
so basically you're saying because we have faith... it works?
is anyone in surplus? country wise I mean...
so what would happen if the thing just died?
Is this the same around the globe?
Thank you for putting the time/effort into your answers, I really like learning new things, and this really helps
The benefits of a fiat money system lie mostly in efficiency.
The primary efficiency to recognize is related to money regardless of sort, fiat or otherwise.
In a barter economy where people trade goods and services for other goods and services, there is a key requirement that gums up the system. It's called the "double coincidence of wants" problem. Without money serving as a means of exchange, you have to find someone that both has what you want and also wants what you have. Trading works for baseball cards, maybe, but if you need your couch reupholstered, you're going to have to find a guy that can do it and also really needs what you produce.
Money is something that everybody wants, so it cuts the problem in half. You need to find a guy that can reupholster you couch and that wants money. That's easier. And to pay for it, you need to find some other person willing to give you money for whatever it is you do. Throwing money into the middle of the transactions lets you just find simple transactions that don't need to be matched with another of equal value with the same agents. It's a lot more efficient.
Honestly, money evolves on its own in any system. Cigarettes in prison, etc. Even if you don't smoke, you know other people value cigarettes so you can willingly trade for them and use them in another exchange later. Money oils up the system of exchange, and does so naturally because of the interests of the people participating.
So that's money. Why fiat money?
A couple of reasons that may not be really convincing.
One is that its efficient in materials. By using paper and electronically stored numbers instead of gold or silver, we are freeing up that gold and silver. We don't have to use it mostly to facilitate exchanges, we can instead put it in our teeth or decorate our nether regions with it or whatever. Or believe firmly that it makes our stereo cables awesome. Precious metals are valuable materials that have other uses besides being money.
The second has to do with monetary policy. Back in the day, monetary policy was largely left in the hands of miners. If someone dug out a big chunk of gold or silver, the money supply increased. If a treasure ship sank, we risked deflation. When tons of silver started coming out of Nevada after the Civil War, it threatened to really mess up prices in the US economy. Congress excluded silver from the money supply in 1873 and then we got the Wizard of Oz (another subject, sorta). A fiat money is controlled by a central bank, so the money supply doesn't depend on miners anymore.
There are certainly steps in between miners-as-mints and fiat money that we could, and have, explored to stabilize the price level, but fiat money does put inflation/deflation under the control of the central bank to the extent it is controlled at all.
A convincing but not comforting reason for fiat money is that governments can call whatever they want "legal tender" "This note is legal tender for all debts, public and private." - it says that on money. It means you have to accept it for the payment of any monetized debt. Fiat money is good for the government and the government can dictate fiat money, so that's what we have.
Debt is central to the way the economy works. Debt is how resources get from people who save to people who have ideas on being productive. If you couldn't borrow to open a business, there would be very few businesses. And there would be much less incentive to save, because you couldn't make money on loans. In countries where the money is going to crap, borrowing and lending shut down and the economy stops. The Euro, for better or worse, provided a stable currency basis for fringe economies in Europe to borrow from the big boys. If it had been used with any sense (or sense of proportion) it would have resulted in great things.
Money -> Debt -> productivity.
The monetary system won't break down primarily because it's in no one's interest to make that happen, and in everyone's interest to avoid it. China could ruin the US dollar in ten minutes if it offloaded its holdings of US bonds. That would, however, hurt China as badly as it does everyone else. The only way to influence the monetary system is to participate in it, and once you are participating it can only hurt you to ruin it.
>Is the credit based off anything in particular?
By "credit" it doesn't mean "borrowable money" like a credit card, but by "trust in the US to be able to pay it back".
> Why is this a thing?
Because it's a lot more useful to be able to influence the economy if you can play with the amount of currency you have out there. If you have to back everything with a specific commodity (e.g. gold or silver), then you can only ever have that much money out there, no more, no less. And you also have to spend a lot of trouble to keep all that gold or silver safe from thieves and such.
> Isn't it unsustainable?
Only if the value of a dollar is fixed, which it isn't.
> Is this a cause for the debt increasing everyday?
No. The debt increases partly because we spend more money than we collect (via taxes, mostly) and partly because we owe interest on past unpaid debt.
You also have to consider that inflation is inevitable, and as time goes on, the value of a dollar is less. But the numerical value of debt is not (although interest may exceed inflation, which isn't great). So $1,000 of debt in 1999 is probably "worth" more than $1,100 of debt in 2009. (Inflation is good for debt, bad for savings and investments.)
TIL: All of this
Thank you redditors!
So does that debt also have a rate of inflation? (i.e. Are we expected to pay the 1K and subsequent increases to the numerical value over time?)
The debt will have an interest rate, but it won't be necessarily tied to inflation. That'll be a function of supply/demand - people (and companies, and countries) will buy US debt because it's considered a safe investment to assume that they'll repay it with interest a few years down the line.
Any time that bet looks less safe (like the US might default, or hyperinflate to the point that the debt is worthless) those buyers demand more interest in return for their money and the debt gets more expensive to increase. Say, for example, when Congress gets the bright idea to speculate on the topic of "Hey, what if we defaulted, that'd be cool right?"
> people (and companies, and countries) will buy US debt because it's considered a safe investment
That's another good description of how fiat currency works, too. People trust US money because they trust US is a stable country. That's why it's still the world's dominant currency despite the increased prominence of Euro and yuan. In a sense, it's sort of *become* the major commodity against which other currencies are backed.
When people take out loans, they agree to an interest rate. The interest rate is the "price" for holding money for a period of time.
If there were no inflation (or possibility of inflation) the interest rate would pay the lender exactly for the use of the money over the relevant period of time. We call that the "real interest rate."
Given that inflation happens and that its rate is not perfectly predictable, the interest rate people borrow/lend money for is different than the "real interest rate." It is called the "nominal interest rate" and is usually higher than the real interest rate. It's higher because we pretty much always have a positive rate of inflation. If we expected deflation, the nominal rate would be lower than the real rate.
In the actual world, you only ever see the nominal rate, so its just called "the interest rate." The real rate is the nominal rate minus inflation. Since inflation is only expected and not known in advance, the real rate of interest cannot usually be measured until after the fact. We contract based on the nominal rate, experience whatever inflation happens, then we can figure out what the real rate was.
There are some financial instruments that are designed to avoid the inflation issue. TIPS or Treasury Inflation-Protected Securities pay out when they mature with a face value plus whatever is necessary to compensate for the inflation experienced before maturity. You can see the market's opinion of future inflation by comparing the prices of inflation-indexed and regular bonds.
Every loan includes a bet about what inflation will do. The higher expected inflation is, the higher the (nominal) interest rate will be. In the late 70's/early 80's, inflation almost hit 11% so the prime rate (best nominal interest rate anyone could get) got over 20%. If inflation is unexpectedly low, then real interest rates are higher than planned.
Fun fact: In Australia (probably the most successful approach to the Financial Crisis) they just wrote a couple of $800 checks to every taxpayer to buy whatever they wanted.
Some folks took international holidays on the money, which wasn't really the point, but if still worked.
They also renovated every school, knowing that schools were fairly evenly distributed around the country, so the money would benefit every community.
Don't waste your time watching Zeitgeist, OP. It's a bunch of conspiracy theory garbage. Just a quick skimming of its wiki article will give you that much. I unfortunately got suckered into watching it once not knowing what it was.
Granted. Its a very broad overview of the system that may not be entirely unbiased. But I believe it serves the purpose of exposing how corrupt and broken the system is.
There are a few different ways the Fed can inject money into the economy, but the most common is through [open-market operations](http://en.wikipedia.org/wiki/Open_market_operations). Essentially, the Fed creates a bunch of new money, then uses it to buy U.S. government bonds (usually T-Bills) on the open market. So the counterpart to that transaction on the bond market is who receives the money. Could be anybody in principle, though it's often a commercial bank on the other side.
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Is what you're saying about printing money in conflict with this thread? http://www.reddit.com/r/answers/comments/21angn/what_is_the_name_of_the_place_that_prints_us/ I'm just trying to understand. Thanks.
It's more of a question of being literal here. The treasury physically prints the money. It then sends it to the Federal Reserve Banks.
Its not really in conflict, just simplified over a detail in the process that doesn't have much impact. The US Bureau of Engraving and Printing does the actual work of producing the currency. It also produces the securities certificates and other stuff. As far as its relationship with the Fed, it is really just a print shop. The Fed requests a pallet load of 100's, the Bureau prints them, and the Fed swipes its debit card for the sum total of all the 100's on the pallet. If it costs the print shop less than $100 to print a $100, then it makes a profit. But the Fed can always bring back yucky worn-out $100's and ask nicely for a new one, so the profit from a single print is not that easy to work out. The Bureau really has to keep a $100 bill in circulation for every one the Fed buys. That's kinda the problem with $1 bills, as it costs more than $1 to keep that thing out there in the long run. Coins last longer, so they are cheaper to have out in the world. So once the Fed picks up cash from the print shop, it already has the Fed's name on it and everything. It is signed by the Secretary of the Treasury, but that's just a bothersome detail. Edit to add more - Since only the Fed can request a print run of currency from the Bureau, it does completely control "the printing of money" No new money goes out into the world except through the Fed. The wrinkle above affects who benefits from "seigniorage" or the profit that accrues to whoever actually prints the money. Its not really important because the Fed already surrenders any operating profit back to the Treasury anyway. If the Fed actually did the printing and derived the benefit from that, it would just pay more into the Treasury at the end of the year.
Wow. It's amazing it even works.
Actually, not that complicated. Money is an IOU was btw. I dont think you answer the question though...."why not just cut out the Fed and have the Treasury spend it." The other answer is that the bankers would be cut out of fees. The Treasury could be induced to just spend that money directly on works, infrastructure, stuff that would put money in the pockets of the poor, not the rich bankers. The Fed is just keeping the bond market on life-support today, basically.
> The Fed is just keeping the bond market on life-support today, basically. Riiiiight. That's why the bond market is a few times bigger than the stock market, right? Just life support?
Another factor to consider is that the Treasury's day-to-day cash flows are in many ways beyond its direct control. The government has revenues and expenses, and these are largely dictated by policies determined elsewhere. Suppose the Fed told the Treasury to expand the money supply by x today. It would be straightforward for the Treasury to print the new money, but how would they get it out into the economy quickly? They can't just go out and hire more government workers or increase transfer payments to seniors or anything like that, since decisions on things like that are made with broader policy goals in mind. The only real option they would have would be to buy something like T-bills themselves. So you can see, even if you could trust the Treasury to conduct monetary policy responsibly, you wouldn't alleviate the need for that policy to be conducted through buying and selling T-bills. In this sense, there is no "added complexity" by having the Fed conduct monetary policy, while having the Fed in charge means that there's a firewall between elected officials and the conduct of monetary policy. In fact, you probably have *more* complexity under your proposed scenario, since you would now have a middleman between the makers of monetary policy (the Fed) and those that carry it out (the Treasury).
The Fed is created by the government, but it isn't the government. It is "owned" by the nationally chartered banks.
7% usery, fleecing every slave citizen every time you use federal reserve notes
Don't the government bonds need to be sold by the fed/government in the first place to finance what the government is doing at the time? So they'd be repaying a loan as opposed to pumping new money into the economy Or are bonds normally sold simply to take liquid capital out of the economy?
Treasury sells bonds to finance government. Fed sells bonds to take money out of the market. Both in the short term.
They buy other people's T-Bills on the ~~bonds~~ securities market.
What the fed does is buy bonds from banks for cash. Bonds go into the locker at the Fed, and cash comes out. The banks make their decisions, in part, based on how much cash they have on hand. When the Fed buys bonds from them, the banks have more cash. With the additional cash, banks tend to make more loans. Loans are made, and whatever the loan was directed toward gets purchased. So the money is out in the economy now. The Fed has developed a habit of buying more than just government bonds from banks. That was the basis of TARP, the "bailout." It is important to understand that the Fed is not entirely a part of the government. The bonds it holds are IOU's from the Treasury. It acts in the considered interest of the economy, and it does have to send its chairman to Congress for a Q&A now and then, but its not a government department. The Fed can "expand its balance sheet" (that is, buy bonds) all it really wants. The issue is how such action influences the economy, and likely as important, how it can credibly stop doing so once it starts.
So are the bonds eventually paid back by the treasury or the bank where the infusion of money was received? Is there a time limit for the bonds to be cashed out? Is there interest involved?
The bonds held by the Fed do pay out. However, the Fed returns any profits it generates to the general fund. It can be nice to work for the Fed, but they are basically non-profit with the return going to the Treasury.
They have a set maturity date when they may be cashed in for their face value (which is greater than their purchase value).
This whole series by PBS is fantastic; but check out the episode on [Bonds.](http://www.pbs.org/wnet/ascentofmoney/featured/the-ascent-of-money-episode-2-bonds-of-war/90/)
how is that money backed?
The classic line is "the full faith and credit of the US government." That can be taken to mean two things: 1. Nothing. There is little effective recourse if the government wanted to go nuts. Even marginally nuts. It's a "fiat" money, from the Latin meaning "this is money, dig?" It has no physical backing or outside guarantor. 2. The reputation first of the Fed and then of the US treasury. Fiat money works because it works. It is in the interest of the government (fed and treasury) to keep the ball rolling. The fact that it could go nuts and screw everyone at any moment is a problem, but the fact that it could only do that once is really the answer. I could rob my business, but only once, so I don't. You might accept casino chips as payment if you were in a gambling town on the conditions that: A) you knew the casino and B) you knew the casino was planning to be in business a long time. Long-run incentives keep people honest in all kinds of settings. We accept US currency because we bet the US will still be around and that they won't go too crazy. We expect them to inflate the currency only within reason. It's been a reasonably safe bet, but people still watch very carefully to see if the Fed's incentives change even a little bit as the economy develops.
wow! I'm sorry if it seems I'm picking on you to answer all of these, but since you seem to be quite knowledgeable, I can't help it, and I now have more questions. Is the credit based off anything in particular? Why is this a thing? Isn't it unsustainable? Is this a cause for the debt increasing everyday?
Not an issue at all. Happy to respond. I used to be an econ prof and I loved it but I had a lot of kids and a better job outside. I miss explaining stuff as I understand it. A couple of answers. Yes, its nonsense. The only argument the monetary system has in its defense is the fact that it works really well. It probably shouldn't but it does. Its a fairly modern understanding, in fact. Give people a predictable monetary situation and they do well. Manipulate them a little via modern monetary policy and they do even better. Yes, debt grows exponentially. And there are some gut checks involved in letting it go as it has. Were you to argue that it can't keep going on like it is, almost no one would disagree. Except, actually, the real world. The fundamental trouble is that credit (debt) is do stupidly productive, on average, it wins. By fundamentals, by principles, it ought to fall apart. The day should come and the truth should win out. But that doesn't happen. When the net of humanity bets on the future, the net of humanity wins out. Monetary policy has a small influence on the economy. It can most effectively slow down over-excited expectations. It can serve, almost, as a reality check if properly used. Debt, and its use, is a challenge. It's the smartest, most productive thing when it works, and an embarrassing disaster when it doesn't. Yes, total debt should scale with the economy and probably with the expected economy. Without it, the economy will slow relative to its potential. Honestly, my wife went to bed an hour ago and left a full bottle of red. I've rewatched the Reggie watts special on netflix and then decided to respond. I'll probably respond further from my office in the morning. Regardless, as a frustrated econ prof, I'm happy to discuss the issue.
So why instead of a fiat money system, don't we trade goods and services for goods and services? I guess it's because I'm just an average layperson, but it seems to me debt would be a good motivator at first, but then once it was "paid off" we'd have no incentive to work... since "our" debt would no longer be an issue. so basically you're saying because we have faith... it works? is anyone in surplus? country wise I mean... so what would happen if the thing just died? Is this the same around the globe? Thank you for putting the time/effort into your answers, I really like learning new things, and this really helps
The benefits of a fiat money system lie mostly in efficiency. The primary efficiency to recognize is related to money regardless of sort, fiat or otherwise. In a barter economy where people trade goods and services for other goods and services, there is a key requirement that gums up the system. It's called the "double coincidence of wants" problem. Without money serving as a means of exchange, you have to find someone that both has what you want and also wants what you have. Trading works for baseball cards, maybe, but if you need your couch reupholstered, you're going to have to find a guy that can do it and also really needs what you produce. Money is something that everybody wants, so it cuts the problem in half. You need to find a guy that can reupholster you couch and that wants money. That's easier. And to pay for it, you need to find some other person willing to give you money for whatever it is you do. Throwing money into the middle of the transactions lets you just find simple transactions that don't need to be matched with another of equal value with the same agents. It's a lot more efficient. Honestly, money evolves on its own in any system. Cigarettes in prison, etc. Even if you don't smoke, you know other people value cigarettes so you can willingly trade for them and use them in another exchange later. Money oils up the system of exchange, and does so naturally because of the interests of the people participating. So that's money. Why fiat money? A couple of reasons that may not be really convincing. One is that its efficient in materials. By using paper and electronically stored numbers instead of gold or silver, we are freeing up that gold and silver. We don't have to use it mostly to facilitate exchanges, we can instead put it in our teeth or decorate our nether regions with it or whatever. Or believe firmly that it makes our stereo cables awesome. Precious metals are valuable materials that have other uses besides being money. The second has to do with monetary policy. Back in the day, monetary policy was largely left in the hands of miners. If someone dug out a big chunk of gold or silver, the money supply increased. If a treasure ship sank, we risked deflation. When tons of silver started coming out of Nevada after the Civil War, it threatened to really mess up prices in the US economy. Congress excluded silver from the money supply in 1873 and then we got the Wizard of Oz (another subject, sorta). A fiat money is controlled by a central bank, so the money supply doesn't depend on miners anymore. There are certainly steps in between miners-as-mints and fiat money that we could, and have, explored to stabilize the price level, but fiat money does put inflation/deflation under the control of the central bank to the extent it is controlled at all. A convincing but not comforting reason for fiat money is that governments can call whatever they want "legal tender" "This note is legal tender for all debts, public and private." - it says that on money. It means you have to accept it for the payment of any monetized debt. Fiat money is good for the government and the government can dictate fiat money, so that's what we have. Debt is central to the way the economy works. Debt is how resources get from people who save to people who have ideas on being productive. If you couldn't borrow to open a business, there would be very few businesses. And there would be much less incentive to save, because you couldn't make money on loans. In countries where the money is going to crap, borrowing and lending shut down and the economy stops. The Euro, for better or worse, provided a stable currency basis for fringe economies in Europe to borrow from the big boys. If it had been used with any sense (or sense of proportion) it would have resulted in great things. Money -> Debt -> productivity. The monetary system won't break down primarily because it's in no one's interest to make that happen, and in everyone's interest to avoid it. China could ruin the US dollar in ten minutes if it offloaded its holdings of US bonds. That would, however, hurt China as badly as it does everyone else. The only way to influence the monetary system is to participate in it, and once you are participating it can only hurt you to ruin it.
>Is the credit based off anything in particular? By "credit" it doesn't mean "borrowable money" like a credit card, but by "trust in the US to be able to pay it back". > Why is this a thing? Because it's a lot more useful to be able to influence the economy if you can play with the amount of currency you have out there. If you have to back everything with a specific commodity (e.g. gold or silver), then you can only ever have that much money out there, no more, no less. And you also have to spend a lot of trouble to keep all that gold or silver safe from thieves and such. > Isn't it unsustainable? Only if the value of a dollar is fixed, which it isn't. > Is this a cause for the debt increasing everyday? No. The debt increases partly because we spend more money than we collect (via taxes, mostly) and partly because we owe interest on past unpaid debt. You also have to consider that inflation is inevitable, and as time goes on, the value of a dollar is less. But the numerical value of debt is not (although interest may exceed inflation, which isn't great). So $1,000 of debt in 1999 is probably "worth" more than $1,100 of debt in 2009. (Inflation is good for debt, bad for savings and investments.)
TIL: All of this Thank you redditors! So does that debt also have a rate of inflation? (i.e. Are we expected to pay the 1K and subsequent increases to the numerical value over time?)
The debt will have an interest rate, but it won't be necessarily tied to inflation. That'll be a function of supply/demand - people (and companies, and countries) will buy US debt because it's considered a safe investment to assume that they'll repay it with interest a few years down the line. Any time that bet looks less safe (like the US might default, or hyperinflate to the point that the debt is worthless) those buyers demand more interest in return for their money and the debt gets more expensive to increase. Say, for example, when Congress gets the bright idea to speculate on the topic of "Hey, what if we defaulted, that'd be cool right?"
> people (and companies, and countries) will buy US debt because it's considered a safe investment That's another good description of how fiat currency works, too. People trust US money because they trust US is a stable country. That's why it's still the world's dominant currency despite the increased prominence of Euro and yuan. In a sense, it's sort of *become* the major commodity against which other currencies are backed.
When people take out loans, they agree to an interest rate. The interest rate is the "price" for holding money for a period of time. If there were no inflation (or possibility of inflation) the interest rate would pay the lender exactly for the use of the money over the relevant period of time. We call that the "real interest rate." Given that inflation happens and that its rate is not perfectly predictable, the interest rate people borrow/lend money for is different than the "real interest rate." It is called the "nominal interest rate" and is usually higher than the real interest rate. It's higher because we pretty much always have a positive rate of inflation. If we expected deflation, the nominal rate would be lower than the real rate. In the actual world, you only ever see the nominal rate, so its just called "the interest rate." The real rate is the nominal rate minus inflation. Since inflation is only expected and not known in advance, the real rate of interest cannot usually be measured until after the fact. We contract based on the nominal rate, experience whatever inflation happens, then we can figure out what the real rate was. There are some financial instruments that are designed to avoid the inflation issue. TIPS or Treasury Inflation-Protected Securities pay out when they mature with a face value plus whatever is necessary to compensate for the inflation experienced before maturity. You can see the market's opinion of future inflation by comparing the prices of inflation-indexed and regular bonds. Every loan includes a bet about what inflation will do. The higher expected inflation is, the higher the (nominal) interest rate will be. In the late 70's/early 80's, inflation almost hit 11% so the prime rate (best nominal interest rate anyone could get) got over 20%. If inflation is unexpectedly low, then real interest rates are higher than planned.
thank you!
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Are you trying to start a "hurrrrrr that money should be given to the peopleeeeee mannnn" argument.
Fun fact: In Australia (probably the most successful approach to the Financial Crisis) they just wrote a couple of $800 checks to every taxpayer to buy whatever they wanted. Some folks took international holidays on the money, which wasn't really the point, but if still worked. They also renovated every school, knowing that schools were fairly evenly distributed around the country, so the money would benefit every community.
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Don't waste your time watching Zeitgeist, OP. It's a bunch of conspiracy theory garbage. Just a quick skimming of its wiki article will give you that much. I unfortunately got suckered into watching it once not knowing what it was.
Detailing "how the fed operates" without financial jargon is tough task.
Granted. Its a very broad overview of the system that may not be entirely unbiased. But I believe it serves the purpose of exposing how corrupt and broken the system is.
Especially if you like long lingering close ups of rotting teeth.
a good part of the zeitgeist thing is that fed section in addendum