There are people, like Bernanke, who talk as if electronic dollars are different than paper dollars. These are really both part of base money but for this post let's think of them as two different types of dollars.
Dollars in a bank's reserve account at the Fed are "electronic dollars" and green dollars on paper are "paper dollars". Now the Fed maintains a 1 to 1 peg between these two things. If a bank gives them a paper dollar the Fed will credit them an electronic dollar. If a bank has an electronic dollar it can turn it in and get a paper dollar.
Since there is a 1 to 1 peg between electronic dollars and paper dollars, it is really the banks and their users that determine what fraction of the base money is paper money and what fraction is electronic money. It is not really up to the Fed.
If the Fed makes lots of new electronic dollars, and people still want the same ratio of electronic dollars to paper dollars, it will result in lots of new paper dollars as well. They might not have to print the new paper dollars the same day they made the electronic dollars, but after things equalize they will.
Since the Fed can make both electronic dollars and paper dollars, it can theoretically always maintain the peg between electronic dollars and paper dollars at 1 to 1.
However, imagine that many people holding government bonds no longer roll them over and want to get paid in paper dollars. There could suddenly be $1 trillion of electronic dollars turned in for paper dollars. I am sure the Fed does not have enough $20 and $100 bills around to cover this. It would probably take a long time to print a trillion dollars in $20s or $100s. So what would the Fed do? It would probably make a $1,000 bill and maybe even a $10,000 bill.
In the Caribbean many people won't take a $100 US bill now because the risk of counterfeit is too great. I doubt that a $1,000 bill or $10,000 bill would go over well.
Sunday, December 19, 2010
Wednesday, December 8, 2010
Sunday, November 28, 2010
22,727 Golden Geese
A goose egg weighs about 144 grams and is about the density of water. Gold is 19.3 times the density of water. So let us postulate that a golden goose lays a 2779 gram or about 89 troy oz gold egg. At current market prices of about $1360/oz this comes to about $121,000 per egg. If we figure a goose lays one egg each day then we get $44,165,000 worth per year. The US is printing about $1 trillion per year. This is equal to the yearly profits from 22,727 golden geese.
The total value of all US public companies is $14.2 trillion with a P/E of 18.2 and dividend yield of 1.85% which means total earnings of about $0.78 trillion and total dividend of $263 billion. Bernanke's printing presses make more money each year than the total earnings of all US public companies and about 4 times as much as the total dividends.
The total of individual income taxes in the US is about $1 trillion. So Bernanke's printing is as much as all individual income taxes.
The total US military spending in 2009 was $711 billion, more than the rest of the world combined. Bernanke is printing well over this amount.
There is an interesting phenomenon called the resource curse where countries exploiting natural resources tend to have lower growth rates than countries without much resources. The US ability to print the world's money is like a magical resource equal to 22,727 golden geese. The features of the resource curse seem to be applying to the US.
The total world production of gold was only 2,572 metric tons per year in 2009 which is equal to the production of 2,545 golden geese. If the US really had 22,727 golden geese the total world gold production would be about 10 times the current rate. If there were such high production of gold, clearly we would expect the dollars per ounce of gold to go down. With such high production of dollars, we should expect the value of each dollar to go down in terms of gold.
When the world stops treating US dollars like they were "as good as gold", it will be as if all these golden geese die. When they are gone the US will miss them. The US will have to export real things to be able to import oil and stuff from China. Life in the US will be much harder.
The total value of all US public companies is $14.2 trillion with a P/E of 18.2 and dividend yield of 1.85% which means total earnings of about $0.78 trillion and total dividend of $263 billion. Bernanke's printing presses make more money each year than the total earnings of all US public companies and about 4 times as much as the total dividends.
The total of individual income taxes in the US is about $1 trillion. So Bernanke's printing is as much as all individual income taxes.
The total US military spending in 2009 was $711 billion, more than the rest of the world combined. Bernanke is printing well over this amount.
There is an interesting phenomenon called the resource curse where countries exploiting natural resources tend to have lower growth rates than countries without much resources. The US ability to print the world's money is like a magical resource equal to 22,727 golden geese. The features of the resource curse seem to be applying to the US.
The total world production of gold was only 2,572 metric tons per year in 2009 which is equal to the production of 2,545 golden geese. If the US really had 22,727 golden geese the total world gold production would be about 10 times the current rate. If there were such high production of gold, clearly we would expect the dollars per ounce of gold to go down. With such high production of dollars, we should expect the value of each dollar to go down in terms of gold.
When the world stops treating US dollars like they were "as good as gold", it will be as if all these golden geese die. When they are gone the US will miss them. The US will have to export real things to be able to import oil and stuff from China. Life in the US will be much harder.
Saturday, November 20, 2010
The International Monetary System has a Structural Flaw
In a recent talk Bernanke gave he said, "As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances." He is trying to put the blame on "surplus countries" like China. But the real problem with the international monetary system is that it is based on the US dollar and there are no limits on the US as a "deficit country". There is nothing stopping the US from printing as much money as it wants and having a huge trade deficit. The only reason China has a trade surplus is that the US has a trade deficit.
People like to believe that their problems are due to others, so Bernanke and Obama saying the problem is due to China plays well in the US. But clearly China is not buying it.
As the US prints more money it exports some in exchange for real goods. Think about this, the US can run off some money (electronic or paper) and buy an oil tanker full of oil. How cool is that? The US can make some money, loan it to Goldman Sachs at 0.1%, who can then buy huge parts of Africa. There is currently nothing limiting this kind of thing. This US money made out of thin air can be used to buy up huge amounts of stocks on stock markets around the world and vast quantities of real estate around the world. This is a huge structural flaw in the world financial system.
When central banks backed their currencies with gold, any country that printed too much would lose its gold to other countries. As it lost gold, prices in both countries would naturally adjust to help keep it from losing more gold. And theoretically if it ran out of gold it could buy nothing else. The current system has no market forces to keep the US from just printing forever.
The world has been counting on the US to play nice and for most of the last 40 years this flawed system sort of worked. But now the US is printing at a rate of about $1 trillion per year. This is about the same as the $1 trillion per year the world spends on importing food. So to the world this is a very big number, even if Krugman thinks there should be $8 to $10 trillion in quantitative easing. My own feeling is that $1 trillion per year will be enough to force the world to stop using the dollar as the world reserve currency. At this point the US will have to export as much as it imports. It is used to importing far more than it exports. This will make things very hard for the US.
People like to believe that their problems are due to others, so Bernanke and Obama saying the problem is due to China plays well in the US. But clearly China is not buying it.
As the US prints more money it exports some in exchange for real goods. Think about this, the US can run off some money (electronic or paper) and buy an oil tanker full of oil. How cool is that? The US can make some money, loan it to Goldman Sachs at 0.1%, who can then buy huge parts of Africa. There is currently nothing limiting this kind of thing. This US money made out of thin air can be used to buy up huge amounts of stocks on stock markets around the world and vast quantities of real estate around the world. This is a huge structural flaw in the world financial system.
When central banks backed their currencies with gold, any country that printed too much would lose its gold to other countries. As it lost gold, prices in both countries would naturally adjust to help keep it from losing more gold. And theoretically if it ran out of gold it could buy nothing else. The current system has no market forces to keep the US from just printing forever.
The world has been counting on the US to play nice and for most of the last 40 years this flawed system sort of worked. But now the US is printing at a rate of about $1 trillion per year. This is about the same as the $1 trillion per year the world spends on importing food. So to the world this is a very big number, even if Krugman thinks there should be $8 to $10 trillion in quantitative easing. My own feeling is that $1 trillion per year will be enough to force the world to stop using the dollar as the world reserve currency. At this point the US will have to export as much as it imports. It is used to importing far more than it exports. This will make things very hard for the US.
Thursday, November 18, 2010
The Bubble that Broke the World
I highly recommend that people read the book, "The Bubble that Broke the World". It was written in 1931 and published in 1933. It is available online for free as a PDF. There are many similarities between the bubbles, excessive debt, and international bailouts back then and today. It is a good book and helps in understanding what is going on today.
Wednesday, November 17, 2010
The Fed's Ponzi Gold Standard
In 1914 the Fed opened their doors. We can see in the law governing the Fed that it says, "reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation". So during the Roaring Twenties the Fed was issuing $2.50 for every $1 worth of gold it got and the money supply expanded. This created a bubble in Treasury bonds, a bubble in Florida real estate, and a stock bubble. Then as people and countries took their gold back from the Fed the law required that they reduce the money supply. Moving back to gold would undo this inflationary factor of 2.5. This caused deflation and very hard times in the early Depression. When they stopped redeeming paper money for gold in 1933 the deflation stopped.
This period from 1914 to 1933 is called the Interwar Gold Standard but I think "Ponzi Gold Standard" is a much better name. The Fed was acting like any other Ponzi scam. As long as people are putting funds in things can work, but if people try to take their money out it all falls apart. Instead of admitting that the Fed was a bankrupt Ponzi scam, the government made it illegal for citizens to own gold so the Fed did not have to pay people gold.
If the Fed had tried to keep paying out gold it would have run out of gold and been bankrupt. As it became clear that was what was going on, paper money would have dropped rapidly in value, which is hyperinflation. In order to save the Fed and paper money the US made it illegal to own gold. Given that gold has been money for 5,000 years and the US constitution says the states can only use gold and silver as money outlawing ownership of gold was a desperate measure. So along with hyperinflation in the American Revolution and American Civil War, America came close to hyperinflation in the Great Depression.
The spacing between these periods is similar and about as long as from the Great Depression to the present. This trend would say America is about due for hyperinflation once again.
Most economists seem to use the history of the Ponzi Gold Standard failing to claim that a gold standard does not work. But gold has been money for more than 5,000 years and never failed. Paper money fails all the time. When the Ponzi Gold Standard ran into trouble the US dollar was 60% fiat money and after 1971 it was 100% fiat money. Fiat money fails all the time. Most economists learned the wrong lesson.
This period from 1914 to 1933 is called the Interwar Gold Standard but I think "Ponzi Gold Standard" is a much better name. The Fed was acting like any other Ponzi scam. As long as people are putting funds in things can work, but if people try to take their money out it all falls apart. Instead of admitting that the Fed was a bankrupt Ponzi scam, the government made it illegal for citizens to own gold so the Fed did not have to pay people gold.
If the Fed had tried to keep paying out gold it would have run out of gold and been bankrupt. As it became clear that was what was going on, paper money would have dropped rapidly in value, which is hyperinflation. In order to save the Fed and paper money the US made it illegal to own gold. Given that gold has been money for 5,000 years and the US constitution says the states can only use gold and silver as money outlawing ownership of gold was a desperate measure. So along with hyperinflation in the American Revolution and American Civil War, America came close to hyperinflation in the Great Depression.
The spacing between these periods is similar and about as long as from the Great Depression to the present. This trend would say America is about due for hyperinflation once again.
Most economists seem to use the history of the Ponzi Gold Standard failing to claim that a gold standard does not work. But gold has been money for more than 5,000 years and never failed. Paper money fails all the time. When the Ponzi Gold Standard ran into trouble the US dollar was 60% fiat money and after 1971 it was 100% fiat money. Fiat money fails all the time. Most economists learned the wrong lesson.
Sunday, November 14, 2010
Friday, November 12, 2010
Euphemisms for "printing money"
The world is not overall better off when someone just "makes money out of thin air". Nobody thinks that if a counterfeiter prints money the world is better off. When money is printed some people become better off and some become worse off. Let's call the people who become worse off "suckers". The more people who do not understand what is going on the easier it is to have a good supply of suckers. So the powers that be often try to keep people confused. One way is talking about "making new money" using lots of different and confusing terms. To try to help clear things up I am collecting euphemisms for "printing money". I also have a video with these euphemisms. Here is my collection so far.
Some people try to make a big deal out of the fact that often money is represented on computers and not actually printed. First, the Fed would print paper money if banks wanted delivery from their account. From Bernanke's helicopter paper we know he understands this equivalence from his comment, "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Also, from Bernanke's fantastic video we can see the electronic and paper money are essentially the same.
A few of the above terms can also theoretically be used when reducing the money supply but that hardly ever happens.
The point of a euphemism is to make something not sound as bad as it really is. Most of these are trying to hid the badness of "printing money". However, some like "monetary diarrhea" are clearly used by people who are not happy with money printing.
This reminds me of the idea that Eskimos who spend a lot of time on snow would have a lot of words for snow. Seems like Americans spend a lot of time printing new money.
(*) In the case of the starred terms the government is deficit spending, which will lead to more money printing, but it is arguably not a true euphemism for "printing money".
- accommodative monetary policy
- achieving price stability
- acting to the detriment of creditors
- adding to bank reserves
- adding liquidity
- aggressive monetary policy
- ample liquidity
- acquiring Treasury securities on the open market and only on a temporary basis
- asset price inflation
- asset purchase plan
- asset swap
- bailouts (*)
- banana republic
- Bernanke's toolkit
- bond-buying by the U.S. central bank
- central bank financing of government deficits
- cheapen the currency
- collecting an inflation tax
- conjuring money up from the ether with black magic Fed spells
- creating inflation
- creating money
- creating money electronically
- creating excess reserves
- creating reserves ‘ex nihilo’
- crediting bank reserve accounts
- CTRL+P
- currency intervention
- currency manipulation
- dangerous experiments with our currency
- default by stealth
- deficit accommodating
- deficits don't matter
- deficit spending *
- dovish monetary policy
- debasing the currency
- debasement
- destroying the value of the dollar
- devaluing the currency
- disbursing currency
- dollar conjuring
- driving the dollar down
- dump more dollars onto the market
- easing credit
- easing credit conditions
- easing monetary policy
- easy monetary policy
- easy money
- ensuring sufficient liquidity
- expansionary monetary policy
- expanding high powered money
- expanding liquidity
- expanding the Fed's balance sheet
- expanding the global supply of dollars
- Fed purchasing debt
- Fed’s purchase program
- fighting deflation
- free money
- fully sovereign in its own currency
- funding the deficit
- government thievery
- helicopter drop
- helping exports with cheaper dollars
- imagineering money
- imposing an inflation tax
- increasing the money supply
- inflating away the debt
- inflation
- inflation targeting
- implementing alternative monetary policy
- increasing the monetary base
- injecting money into the economy
- issuing fiat currency
- issuing reserves
- just monetary policy (Bernanke)
- keep the short-term interest rate at exceptionally low levels
- Keynesian economics
- liquidity enhancement
- liquidity injection
- liquidity management operations
- liquidity operations
- loose monetary policy
- lowering interest rates
- low-rate monetary policy
- LTRO - long term refinancing operation
- making money
- marvelous monetary sweetener
- modern monetary theory (MMT)
- MMT like policy
- monetizing the debt
- monetization
- monetary diarrhea
- monetary expansion
- monetary policy tools
- money out of thin air
- money rains
- mortgage security purchase program
- no surer means of overturning the existing basis of society
- nontraditional policies
- not monetizing the debt
- not printing money
- open market operations
- outright monetary transactions (OMT)
- papering over problems
- playing god with the economy
- plucking money from a money tree
- policy of dollar depreciation
- preventing the currency from strengthening
- printing money
- promiscuous easing
- promoting price stability
- providing additional accommodation
- providing liquidity
- pump-priming
- pumping money into the banking system
- pushing inflation upward
- pushing up inflation to levels consistent with our mandate (Bernanke)
- qualitative and quantitative easing
- quantitative easing
- quantitative counterfeiting
- QE
- QE1
- QE2
- QE3
- QE Infinity
- QE to infinity and beyond
- QE Tapering
- recipe for financial disaster
- retiring Treasuries
- ruinous monetary insanity
- run the printing presses
- seigniorage
- solution to the credit crunch
- sowing the seeds of future inflation
- spending without borrowing
- stemming disinflationary pressures
- stimulus (*)
- supplying banks with extra cash
- supporting the economic recovery
- surreptitious transfer of wealth
- the punch bowl
- the US can always meet its financial obligations that are denominated in US dollars
- throwing money out of helicopters
- trick people into working for lower real wages - See page 9 of Keynes "The General Theory"
- unconventional policy tools
- unconventional monetary policy
- unsterilized intervention
- weakening the dollar
- Not QE
- Nothing like QE
- QE4Ever
- In no sense is this QE
- Not-QE4
- MP1 - Monetary Policy 1
- MP2 - Monetary Policy 2
- MP3 - Monetary Policy 3
Some people try to make a big deal out of the fact that often money is represented on computers and not actually printed. First, the Fed would print paper money if banks wanted delivery from their account. From Bernanke's helicopter paper we know he understands this equivalence from his comment, "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." Also, from Bernanke's fantastic video we can see the electronic and paper money are essentially the same.
A few of the above terms can also theoretically be used when reducing the money supply but that hardly ever happens.
The point of a euphemism is to make something not sound as bad as it really is. Most of these are trying to hid the badness of "printing money". However, some like "monetary diarrhea" are clearly used by people who are not happy with money printing.
This reminds me of the idea that Eskimos who spend a lot of time on snow would have a lot of words for snow. Seems like Americans spend a lot of time printing new money.
(*) In the case of the starred terms the government is deficit spending, which will lead to more money printing, but it is arguably not a true euphemism for "printing money".
Thursday, November 4, 2010
Money Printing and the Stock Market
The S&P has nearly doubled from the recent low of 666. The Insider selling/buying ratio is at record highs. The Mutual fund cash levels are very low. People think that inflation will drive up stock prices; however, the first thing it does is drive up interest rates which drives down bond prices. As bonds get cheaper and with higher yields people move from stocks to bonds, which lowers stock prices. So the relatively high P/E ratios we see with low interest rates will drop as interest rates go up and stocks go down.
Warning, this is not investment advice, just educational.
Warning, this is not investment advice, just educational.
Thursday, October 7, 2010
Silver vs. Dollar
In 1486 the Germans started using a 1 oz silver coin. It was very popular as the other types of coins had been debased and people no longer liked using them. In 1497 Spain defined their silver pieces of eight to match the German thaler. After America's independence they defined the US dollar as 1 oz of silver to match the "Spanish dollar". Today silver is about $23/oz. So compared to silver the dollar has only gone down by a factor of 23 in more than 500 years. But really all of this drop is in the last 75 years. The Fed is printing paper dollars a thousand times faster than they did 75 years ago (printing a trillion per year instead of a billion per year). Paper money is being debased a thousand times faster and silver is only 23 times as expensive. Hum.
Time to use Occam's Razor, "the simplest explanation is usually the correct one". It could be the value of the dollar is going down. Or it could be there are simultaneous bubbles in copper, wheat, cotton, oil, gold, iron, rice, silver, etc. Which explanation is simpler?
All these things look like they are in bubbles because the value of the dollar is going down. The dollar is going down because they are printing too many and because it is becoming less loved as an international reserve currency (in large part because it is being debased).
Also, we could be getting closer to a crack-up-boom where people bail out of paper money into commodities and other real things.
Time to use Occam's Razor, "the simplest explanation is usually the correct one". It could be the value of the dollar is going down. Or it could be there are simultaneous bubbles in copper, wheat, cotton, oil, gold, iron, rice, silver, etc. Which explanation is simpler?
All these things look like they are in bubbles because the value of the dollar is going down. The dollar is going down because they are printing too many and because it is becoming less loved as an international reserve currency (in large part because it is being debased).
Also, we could be getting closer to a crack-up-boom where people bail out of paper money into commodities and other real things.
Recommended Reading
I think this article by Doug Casey does a really good job of discussing the situation we are in and what is coming. Well worth reading. I disagree on some small details, like which things count as deflationary. But it is well written and I think very accurate.
Wednesday, October 6, 2010
Just a question of when...
Predicting that a fiat currency will die is no big prediction, all will eventually. Gold coins from a government that failed 2,000 years ago are still worth at least $1,340/oz today, but fiat money from a government that failed is worthless. So the big question is when a particular fiat money will fail. Is it 100 years from now, this month, or when?
The Dollar Index has dropped about 13% in a few months. At some point people are going to be unhappy holding dollar bonds that pay 1% per year. Foreigners will notice exchange rates but even dollar users will notice the price of commodities going up about as fast as the dollar goes down. With commodities going up double digits in a few months, bonds look like a poor investment.
Just a few moments ago the Dollar Index was 77.7 and it made me think. The S&P hit 666, you know, 66.6 would be a fitting time for the dollar to go to hell. :-)
The Dollar Index has dropped about 13% in a few months. At some point people are going to be unhappy holding dollar bonds that pay 1% per year. Foreigners will notice exchange rates but even dollar users will notice the price of commodities going up about as fast as the dollar goes down. With commodities going up double digits in a few months, bonds look like a poor investment.
Just a few moments ago the Dollar Index was 77.7 and it made me think. The S&P hit 666, you know, 66.6 would be a fitting time for the dollar to go to hell. :-)
Sunday, October 3, 2010
How Fiat Dies
With this economic mess I have been reading lots of stuff. I have been writing up what I find interesting in http://pair.offshore.ai/38yearcycle/ I would like to get more feedback and so have started this blog. As I put in new sections I will post here.
The latest stuff is related to MMT. In particular Chartalism, Hyperinflation in MMT Terms, and Common Errors in MMT.
The name of this blog, "How Fiat Dies" is referring to Hyperinflation which is a big theme in my stuff. Hyperinflation is how fiat money makes the transition from normal money to money nobody will take.
Hyperinflation seems to come after a government that can print money gets deficits to over 40% of spending for a few years. First people move into short term bonds, then they stop buying bonds. At this point the government has to print money to cover both the full deficit and all bonds coming due. The government is forced to print money fast as the short term bonds come due very rapidly. This causes 3 things. An increased money supply, people spend their money faster to minimize the loss between when they get it and when they spend it, and it hurts the economy. All 3 of these effects combine to cause prices to go up in a non-linear way. Since a large part of the population depends on the government for support, as prices go up the government is forced to print more and more. This all spirals out of control, as taxes can not possibly be raised enough to cover all the bonds coming due or the deficit.
We live in interesting times, the kinds of times when fiat money dies.
The latest stuff is related to MMT. In particular Chartalism, Hyperinflation in MMT Terms, and Common Errors in MMT.
The name of this blog, "How Fiat Dies" is referring to Hyperinflation which is a big theme in my stuff. Hyperinflation is how fiat money makes the transition from normal money to money nobody will take.
Hyperinflation seems to come after a government that can print money gets deficits to over 40% of spending for a few years. First people move into short term bonds, then they stop buying bonds. At this point the government has to print money to cover both the full deficit and all bonds coming due. The government is forced to print money fast as the short term bonds come due very rapidly. This causes 3 things. An increased money supply, people spend their money faster to minimize the loss between when they get it and when they spend it, and it hurts the economy. All 3 of these effects combine to cause prices to go up in a non-linear way. Since a large part of the population depends on the government for support, as prices go up the government is forced to print more and more. This all spirals out of control, as taxes can not possibly be raised enough to cover all the bonds coming due or the deficit.
We live in interesting times, the kinds of times when fiat money dies.
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