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Old 09-07-2009, 06:16 AM
 
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Chris Martenson's Blog - A Dollar Crisis in the Making - Sep. 1, 2009 | Blogs at Chris Martenson - Chris Martenson's Blog, Federal Reserve, foreign, Mish, Purchase, treasury, WSJ

fascinating article with graphs to back up information. he also poses a valid question:

As an aside, one reason that I suspect the Federal Reserve is reticent to be audited concerns the UK purchases of Treasury bonds. One might wonder how an island nation that is mired in a deep and profound fiscal crisis finds itself in a position to buy so many Treasury bonds. Where did the money come from?

While part of the answer lies with the fact that the UK banking center often operates as a pass-through for other entities (like Saudi Arabia, for example), it could also be operating on the behalf of other official parties. Like the Federal Reserve, perhaps? While that is rank speculation, it would certainly be nice to have a simple audit put such nagging worries completely to rest.
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Old 09-07-2009, 07:49 AM
 
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ok, i have some catching up to do(actually a lot), but i have this question, if the fed is buying the IOU's itself is putting out, where does the cash used to buy the IOU's come from, and if the fed did have those cash, why does it need to put out those IOU's in the 1st place? i hope i'm posing a valid question
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Old 09-07-2009, 07:53 AM
 
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i just realized maybe the Fed doesn't print out treasuries, Treasury does, so that little mess up aside, my overall question is still valid, or at least i hope...
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Old 09-07-2009, 10:54 AM
 
Location: Great State of Texas
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Quote:
Originally Posted by brassbin View Post
i just realized maybe the Fed doesn't print out treasuries, Treasury does, so that little mess up aside, my overall question is still valid, or at least i hope...
To put a little history here in easy layman terms:

Our dollar used to be backed by gold. You could only have as many dollars as you had gold. That put a limit on how many dollars were in circulation.

Moving forward we dropped the gold standard which meant that our dollar had nothing backing it so the Fed/Treasury could "print" as many dollars as they needed. That put more money in circulation.

When the Treasury sells it's bonds, it's like a loan. The more they sell the more they are borrowing. But if people stop buying them then they are stuck. What has happened is that foreign buying has slowed down. The Fed has said they would help by buying them from the Treasury. While not illegal, it's rather extreme but used to keep an economy running.
Look at Treasuries as IOU's. It's not good when one part of the government (Fed) buys from another (Treasury)..it's the right hand feeding the left. That indicates that foreign countries do not think our money is safe.

Here's an even simpler explanation:
You are the US. You need money. You take a piece of paper and write IOU on it and sell it to me for $1000. Do it some more and sell to your friends. Now you have $10,000 in loans. Now you need more but your friends won't buy them..you're too far in debt. So, what do you do ?
Why sell it to your wife. Your wife would never say "no" so now you have found the holy grail..as much IOU's as you print, your wife will buy them.
Now you have no reason to stop spending or worry about paying back your friends because your wife is a ready and willing buyer.
Now all this trading is not in hard money but computer entries. But how valid is your wife buyiing your IOU's ?

I left out a lot of details here but tried to make it as simple as possible to explain.
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Old 09-07-2009, 11:19 AM
 
Location: Great State of Texas
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brassbin..link for you

Money creation - Wikipedia, the free encyclopedia
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Old 09-07-2009, 12:37 PM
 
13,811 posts, read 27,378,934 times
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Quote:
Originally Posted by brassbin View Post
ok, i have some catching up to do(actually a lot), but i have this question, if the fed is buying the IOU's itself is putting out, where does the cash used to buy the IOU's come from, and if the fed did have those cash, why does it need to put out those IOU's in the 1st place? i hope i'm posing a valid question

It's a great question. The Federal Reserve (a private entity) doesn't ever "have" cash. It creates it. Out of thin air. Literally. Debt = money in our economy.

The expand further, the Federal Reserve "credits" the large banks, or in this case, the treasury, a certain amount. But that amount is just entered in on a ledger. It doesn't come from anywhere.

It would be like your sister coming to you for a loan, and you printing your own money and handing it to her. Then charging her interest on that fake money.

Quite a racket, eh? The Federal Reserve creates its own money, and then gets to charge interest on it!

Here's an example of how money is created in our economy:

A Bank, lets call it "Bank of America", gets a $1,000,000,000 (billion) loan from the Federal Reserve at their discount rate of 1%. This is created by "crediting" their account at the Federal Reserve $1,000,000,000 (billion). To credit the account the Federal Reserve simply wrote (or clicked these days) on Bank of America's account that money. It was created.

The Bank now has a $1 billion loan. The interest payment on that loan is say $10 million - 1% of $1 billion (yearly, simplified).

Due to fractional reserve banking rules, the bank has "reserves" of $1 billion and can now lend out NINE TIMES that amount. So they lend out $9 billion. $9 billion at an interest of say 5%. That's interest of $250 million (yearly).

That's a total of $9 billion created out of thin air.

This system is called fiat money. It's money that isn't backed by anything of value.

Time and time again throughout history (going back thousands of years) pretty much every monetary system started out as what is known as commodity and/or receipt money (backed by gold/silver coin) and then moved toward a fractional reserve system then moved toward fiat money. In every single case, this move toward a fiat monetary system (just like the US uses) has ended the empire.

Here's something that will blow your mind. If every single person in America paid back their debt and America paid back its debt to foreign countries by buying back its IOU's America would not have one single penny in circulation. Our "money" would vanish, completely.

The only civilization in history to ever NOT STRAY from their gold standard was the Byzantine empire. They ruled for over 800 years and their coinage was used for centuries afterward.
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Old 09-07-2009, 03:12 PM
 
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Debt" is not money. Instead, it's a charge against future money. But even though it's a charge against future money, it can still be spent as if it was today's money -- except that it must be repaid with interest. And therefore debt must have some sort of balanced relationship to the total size of the economy -- albeit the future economy -- for it not to be destabilizing.

what we have now is an economy which has "charged" disproportionately more than it could "earn", creating an imbalanc which destabilized the economy.

what we also have is a federal reserve which FAILED in its listed functions: (as defined on its website)
1. conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates,
2. supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers,
3. maintaining the stability of the financial system and containing systemic risk that may arise in financial markets,
4. providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

then what we had, which made things WORSE, was a government which decided that the problem was not enough credit instead of too much credit! the apparent economic prosperity of the last 50 years was artificial, unsustainable, and essentially a borrowed prosperity, borrowed from future earnings. the market is simply trying to force the american economy to pay down its debt.

Last edited by floridasandy; 09-07-2009 at 03:22 PM..
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Old 09-07-2009, 03:29 PM
 
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Floridasandy, since you plagiarized 99% of that, why don't you tell us in your own words what you think it means.

Debt is money in our economy. Without debt, we have no money under our fiat system.
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Old 09-07-2009, 03:37 PM
 
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Quote:
Originally Posted by wheelsup View Post
Floridasandy, since you plagiarized 99% of that, why don't you tell us in your own words what you think it means.

Debt is money in our economy. Without debt, we have no money under our fiat system.
i already told you what it meant. that we have an economy that was running on money that it PULLED AHEAD, while wages did not keep up. (sort of like cash for clunkers artificially pulled car demand forward), that led to an imbalance, which we are now having to address.

our government, in its lack of infinite wisdom, has chosen to address it by increasing spending and trying to pull more debt forward. of course, this is not sustainable and will be disastrous for the united states down the road, since we do not have a wage structure to keep up with the spending. again, our problem is not a lack of credit, it is overextension of credit!
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Old 09-07-2009, 06:53 PM
 
13,811 posts, read 27,378,934 times
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Originally Posted by floridasandy View Post
this is not sustainable and will be disastrous for the united states down the road, since we do not have a wage structure to keep up with the spending. again, our problem is not a lack of credit, it is overextension of credit!
Paying folks more in inflated dollars won't avert disaster. It's still fiat (ie fake) money. The only way to avert disaster is to move toward a more sound monetary policy.
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