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View Diary: China Cuts US Credit Rating. Obama Cuts Hawaii Vacation Short. (171 comments)

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  •  Fiat currency, such as the US dollar, (2+ / 0-)
    Recommended by:
    Pluto, Mnemosyne

    has four qualities:
    1. The government can print an unlimited amount of money,
    2. The money is not backed by anything (such as gold),
    3. The money is an IOU from the government to be paid by the taxpayers, and
    4. The FINAL STAGE of ALL FIAT money is HYPER-INFLATION.

    Let's all be on the lookout.

    being mindful and keepin' it real

    by Raggedy Ann on Wed Dec 26, 2012 at 04:07:39 AM PST

    •  You forgot one option cinco... (2+ / 0-)
      Recommended by:
      judyms9, BobTheHappyDinosaur

      ...We could save the ink and paper.  Just mint fourteen fresh trillion dollar platinum/cadmium alloy coins and deposit it in the FED's bank account of your choosing.  Oh, and make sure they're all severely flawed so when they're 100 years old they're worth 10 times their face amount!

      "I wish to have no connection with any ship that does not sail fast, for I intend to go in harm's way." John Paul Jones

      by ImpeachKingBushII on Wed Dec 26, 2012 at 04:33:49 AM PST

      [ Parent ]

      •  No, not really. (1+ / 0-)
        Recommended by:
        Mnemosyne

        As I said, fiat currency isn't backed by anything, so this would be backing.  We, the US, operates under fiat currency, thank you Richard Nixon.  

        On another note, who or what is cinco?

        being mindful and keepin' it real

        by Raggedy Ann on Wed Dec 26, 2012 at 04:38:46 AM PST

        [ Parent ]

        •  cinco: espanol for 5 (1+ / 0-)
          Recommended by:
          Old Surgeon

          "I wish to have no connection with any ship that does not sail fast, for I intend to go in harm's way." John Paul Jones

          by ImpeachKingBushII on Wed Dec 26, 2012 at 04:39:48 AM PST

          [ Parent ]

        •  Ann - platinum coins are still fiat (4+ / 0-)
          Recommended by:
          sandblaster, jayden, jabney, Larsstephens

          The coin may coin may cost $1000 to mint, and be worth $1T. This is very close to the Seigniorage earned on Federal Reserve Notes. The law enabling the platinum proof coins very explicitly states that the value of the coin will be determined by the secretary - not by the value of the metals. Consequently, this is pure fiat.

          •  It would be backed by our (2+ / 0-)
            Recommended by:
            jabney, ozsea1

            various taxes and levies. So not pure fiat; nor in the way a Banker creating credit instruments can be called "fiat."


            The Internet is just the tail of the Corporate Media dog.

            by Jim P on Wed Dec 26, 2012 at 08:44:55 AM PST

            [ Parent ]

            •  No, it is backed by the "full faith and credit" of (2+ / 0-)
              Recommended by:
              FG, SherriG

              the United States. The coin most definitely would NOT be backed by taxes and levies. That's not how the monetary system works at all. Taxes and levies extinguish money on the federal balance sheet. Think about it, the dollar is an IOU from the government. When one gets back their own IOU, the transaction has come full circle. The IOU is extinguished and you tear it up, burn it, whatever. Same on the government balance sheet.

              Bank created money is credit money, not fiat money. It is backed by the assets or the perceived creditworthiness of a borrower. With government issued money, the asset is spent into the private sector and thus separated from the liability which is retained by the government sector. Thus deficit spending adds net financial assets to the private sector and budget surpluses push the private sector into deficit.

              •  Bank created money is created by (1+ / 0-)
                Recommended by:
                Pluto

                bankers saying "here is money for you, on loan." Fiat: A decree; an arbitrary order.

                Theoretically, there's a reserve, from deposits, to back that, but in practice it's been much less than the law requires. Bernanke, just last year, was floating the idea that there not be any reserve requirements at all. Which reveals how serious Banksters are about having reserves.

                The reserve itself is a device to ease the creation of money, and to reassure depositors that they will get their money when the go to the bank.

                Even if Banks keep 4% of your deposits as reserve (they don't), they still are liable for 100% to the depositors.

                So there's $100 dollars owed the depositor; plus there's $96 which isn't the banks given as a loan. (That loan gets deposited, and then 96% of that is lent; that gets deposited, and 96% of that gets lent, and so on...)

                There's only the $100. The rest is all spendable, and created because the banker says it exists, and proves it by issuing a credit instrument.

                Fiat money.

                The distinction between "fiat" and "credit" money is one without any practical meaning in the real world. Though economists might indulge in pointless distinctions, as is their habit and training. (Can't have a "science" without lots of technical terms can we?)

                And the full faith and credit of the US is, in fact, substantiated by revenue streams. If all taxes and levies were abolished in the US, leaving no surety, neither the proposed US Treasury Coin nor Federal Reserve Notes would be taken seriously, or as payment, by anyone on earth any more than the money in a Monopoly game set.


                The Internet is just the tail of the Corporate Media dog.

                by Jim P on Wed Dec 26, 2012 at 09:46:53 AM PST

                [ Parent ]

                •  Reserves are essential for clearing and payments- (1+ / 0-)
                  Recommended by:
                  Pluto

                  Canada has no reserve requirement because reserves are not the basis of lending, it is bank capitalization that matters. The "money" created by banks is not real in that credit money and the real assets that back it are confined to the private sector. It cannot be used to discharge obligations to the government. Only the net financial assets of the private sector (real money) can do that. The reason is the the government spends by increasing reserves and taxes by removing reserves. In monetary parlance these are vertical transactions whereas as bank lending and credit money constitute horizontal transactions. It is only base money that can move vertically.

                  US Banks are only constrained by their capital requirements, not by reserve requirements. Reserves are made up after the fact, and they are essentially guaranteed by the fed as the lender of last resort. Since the fed will currently loan reserves for 50bp and pays 25bp on existing reserves, banks know exactly what their cost of funds and their cost of funds storage are. They never have to see if there are loanable funds available - that concept is a myth.

                  You are correct that the elimination of taxes would make the money useless. That is one of the primary tenets of MMT, that taxes drive the value money. However, your impression of the reserve system is quite distorted from the system's actual implementation.

                  •  Never said "reserves are the basis" (2+ / 0-)
                    Recommended by:
                    Raggedy Ann, ozsea1

                    The Deposits are.

                    The reserves are there to reassure the public that they can withdraw their money on demand. That's about public relations.

                    The Bankers lend from their own profits, and from their deposits. Mainly the deposits.

                    Just in the past two weeks, Europe has moved to supervise all banks (or at least the biggest ones) and part of that supervision is to make certain they are holding sufficient reserves. Why, if it's not an issue?

                    Banks are also highly leveraged—most of them have liabilities that are at least 10 times their bank capital, so even small losses can wipe out the bank's capital. Furthermore, the use of leverage is achieved by using other people's money—deposits, loans, and stockholders' equity—which creates the moral hazard inherent in risking other people's money for one's own profit.
                    Like I say, economists have invented all sorts of nits and nuances to justify the existing practices (and the illusion economics is a science), but in the real world bankers control the economy, and economy controls politics, and politics is about how, and in what conditions, people live.

                    In the current situation, the banks' actions have resulted in a Depression which extends through most of the world, and nobody is seeing improvement, nor will they, as long as we let Central Banks drive everything.

                    And their main tool for driving things is declaring money to exist through issuing debt-instruments. That is, fiat money.


                    The Internet is just the tail of the Corporate Media dog.

                    by Jim P on Wed Dec 26, 2012 at 10:29:45 AM PST

                    [ Parent ]

                    •  Thank you, Jim P. (1+ / 0-)
                      Recommended by:
                      ozsea1

                      You got it right and with the correct words.  I appreciate your clarification.  I was just trying to bring up the fact we are on fiat money and didn't know the people here would attribute it to Ron Paul. Good grief!

                      being mindful and keepin' it real

                      by Raggedy Ann on Wed Dec 26, 2012 at 11:30:38 AM PST

                      [ Parent ]

                    •  If (1+ / 0-)
                      Recommended by:
                      SherriG
                      The reserves are there to reassure the public that they can withdraw their money on demand. That's about public relations.
                      Then why have the FDIC and how does Canada, for example, get by on zero reserves? Are Canadians are so civilized that they refrain from bank runs in the absence of reserves, or do they perceive things differently?
                      The Bankers lend from their own profits, and from their deposits. Mainly the deposits.
                      That's not correct; they lend by double-entry bookkeeping, by entering a loan and a deposit simultaneously on their books. The Fed will make up the reserve requirement later if the bank doesn't bring it about through other transactions. Banks can average over a 14day window. They are only constrained by risk weighted capital. Simple explanation here
    •  With all those CAPS it must be TRUE! nt (3+ / 0-)
      Recommended by:
      ImpeachKingBushII, rabel, sethtriggs

      Early to rise and early to bed Makes a man healthy, wealthy, and dead. --Not Benjamin Franklin

      by Boundegar on Wed Dec 26, 2012 at 04:41:34 AM PST

      [ Parent ]

      •  Just trying to make a point. (2+ / 0-)
        Recommended by:
        Pluto, Mnemosyne

        See how it worked?

        being mindful and keepin' it real

        by Raggedy Ann on Wed Dec 26, 2012 at 04:46:11 AM PST

        [ Parent ]

        •  Sounds like Ron Paul, or any number of gold- (4+ / 0-)
          Recommended by:
          emelyn, misslegalbeagle, rabel, sethtriggs

          promoting "financial advisers" sending newsletters out from Utah.

          •  No, I don't get this from Ron Paul. (2+ / 0-)
            Recommended by:
            Mnemosyne, Pluto

            I teach it to college students.  Perhaps I'm missing something here.  I thought we should all be educated on our money supply, but it looks like no one wants that information that is reading this article.  My mistake.

            being mindful and keepin' it real

            by Raggedy Ann on Wed Dec 26, 2012 at 07:03:52 AM PST

            [ Parent ]

            •  Hi Ann. Not saying you got it from Ron Paul, just (1+ / 0-)
              Recommended by:
              ozsea1

              that that's what he & the other gold & doom predictors have been saying for many years.  They always use the term "fiat currency", unlike anyone else I read.

              To me the ideas sound similar to those of the austerity folks, who have been wrongly predicting hyperinflation forever, for many decades, wrongly.  We all should be verrry afraid.  They are, I guess.

              I just don't get the magic of gold.  Though I wouldn't mind having some.
               

              •  My name is not Ann. (2+ / 0-)
                Recommended by:
                ozsea1, Pluto

                It's Raggedy Ann.  I teach college students about fiat currency.  We need to be aware of the monetary system we live under.  If people at this site don't want to know, that's fine with me.  Being an educator, I was just trying to educate others.

                being mindful and keepin' it real

                by Raggedy Ann on Wed Dec 26, 2012 at 11:15:24 AM PST

                [ Parent ]

                •  Sorry for assuming the name, Raggedy Ann. Good (0+ / 0-)

                  luck with your teaching & students.  I guess we just disagree on the potential perils of non gold-baked currency. Unless I'm assuming again, in which case more apologies are in order.

                  •  Well, I never said our currency (1+ / 0-)
                    Recommended by:
                    Pluto

                    should be gold-backed, nor did I say anything about
                    Ron Paul.  This community is sometimes too quick to judge.  I was merely pointing out that we live under fiat currency.  People don't know this and I think it's important.  My students and I have lively discussions about it and they are grateful to know.  I, like you, assumed this community would be interested to know more about our system.

                    being mindful and keepin' it real

                    by Raggedy Ann on Wed Dec 26, 2012 at 12:28:07 PM PST

                    [ Parent ]

                    •  I've been trying to figure out money for maybe 20 (1+ / 0-)
                      Recommended by:
                      SherriG

                      years, and still don't really get it.  Currently reading Graeber's "Debt."  Fan of Henry George, Margrit Kennedy, Marjorie Kelly, Krugman.

                      Great that you can get them discussing lively!

    •  It isn't true that fiat money (1+ / 0-)
      Recommended by:
      hestal

      always brings hyperinflation.
        Hyperinflation is usually a direct government policy.

    •  Wrong - fiat money does not cause hyperinflation (14+ / 0-)

      was never the printing of money. That was the result, not the cause. The most cited cases of hyperinflation are the The final stage of fiat money isn't hyperinflation. Take the Weimer Republic and Zimbabwe, the two cases usually brought up as examples. In both cases there were severe supply shocks preceding the hyperinflation. In Germany they were forced to pay reparations in gold-backed foreign currencies. The reparations were brutal and the republic defaulted. In response, France and Belgium seized the main industrial and mining assets in the Ruhr region. With the industrial base destroyed, the government then turned up the presses to chase the inflation precipitated by the supply shock. Similarly, in Zimbabwe a new government undertook radical land reform, throwing established producers off their farms and turning the land over to peasants who lacked the necessary skills and knowledge. Agricultural production plummeted and people had to rely on imports with no export base. Corruption again intervened and the printing presses went to work.

      The point is, a careful analysis shows that hyperinflation leads to excessive currency creation, not the other way around. The fundamental driver of hyperinflation is supply shock.

      •  The Swiss franc is hyperinflating too! (2+ / 0-)
        Recommended by:
        rabel, ozsea1

        Seriously, the anti-Fed Ron Paul stuff is pretty effectively distributed despite its real vapidity.

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Wed Dec 26, 2012 at 06:40:52 AM PST

        [ Parent ]

      •  It's okay. (1+ / 0-)
        Recommended by:
        ozsea1

        I understand you don't understand my point.  No problem - on to other dramas in the US for me.

        being mindful and keepin' it real

        by Raggedy Ann on Wed Dec 26, 2012 at 07:05:52 AM PST

        [ Parent ]

        •  Well I'd like to understand your point, Ann (3+ / 0-)
          Recommended by:
          FG, chuck utzman, Larsstephens

          That's why we're here. I only took issue with the proposition that fiat currency leads inevitably to hyperinflation, or that hyperinflation is due to other than a supply shock. Our only other disagreement seemed to be on the issue of whether the platinum coin if issued would be backing  the currency. My position is the platinum coin would still be fiat money, and it would not back the currency because backing would imply convertibility to platinum which is not a part of the proposal. The entire platinum coin proposal is formulated on compliance with current law, it is not predicated on changes to what is presently on the books.

    •  It is a real shame (0+ / 0-)

      When Liberals who don't know jack shit about economics make Ron Paul type statements on Daily Kos.

      When the power of love overcomes the love of power, the world will know peace. Jimi Hendrix

      by Dave B on Wed Dec 26, 2012 at 08:04:04 AM PST

      [ Parent ]

      •  What's a shame is that (3+ / 0-)
        Recommended by:
        Ignacio Magaloni, SherriG, Pluto

        you didn't read Jim P.'s answer above so you could understand what this liberal is saying.  No Ron Paul talk going on here - I'm a college professor who teaches students about our fiat money and they are so grateful.  I thought there would be some on DKos who would appreciate knowing something about it, too.  My job on this topic is now done.

        being mindful and keepin' it real

        by Raggedy Ann on Wed Dec 26, 2012 at 11:26:29 AM PST

        [ Parent ]

    •  It's like saying that the final stage of life is (0+ / 0-)

      death. It's certainly true. But it doesn't mean that no one is alive. Gold standard is a horrible idea.

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