[jmpbear]

I am having trouble with the ECB issuing money. They do not back it with anything. When we look at the big picture did the fed do the same thing with their QE??? As I did not see an increase in the national debt related from their actions.

Joe

[Calvin Bear]

Well yes Joe. And no. (I'm an economist, can you tell!)

The phrase 'backed with' makes a huge assumption that not many people challenge. Who says it actually needs to be backed with anything. As long as it is used and functions as money, it IS money fullstop. And doesn't need to be backed with anything.

On the other hand(!) what I think we all really mean to say is that unless there is some really substantial underlying meaning for why something should be accepted as money, then even if you use legal force to coerce people into accepting it, it doesn't function properly, it is not fulsomely used, and in the end it weakens into a disastrous cause of hyperinflation.

It's the underlying MEANING that is important, not the 'backing.' Because if you back a token with something more valuable then you are defeating the point of the token in the first place and saying there is a better form of money, namely 'the backing.'

'Backing' is better applied to the asset reserves of banks in the banking system, rather than the money tokens.

The presumed 'meaning' for the ECB is the trade and producer strength of a combined Europe and it is the strength of trade flows and production that underpins the money. That is why there is this pressure to have member economies observe some kind of fiscal and output discipline.

But... ...if you are saying that all the same there is doubt as to the purity and independence of standards applied to 'fiscal and output discipline,' then I would agree with you.

That is where gold comes into its own - in spite of old YogiB. It provides one totally independent parameter from which to judge 'fiscal and output discipline.' Production quality, first world standard progessive output, is realistically judged only when the figures are not being 'self-manufactured.'

All these experiments of currency formation, are bound to fail in the end. But they can go on a long time vampiring economies and societies before things are so weakened that something 'final' happens. And that 'final' thing is usually a political thing combined with a technical advance that changes the game in terms of governments holding unchallenged power. The fact is, right now, governments and the media and the banking establishment supported by criminal 'bailouts' using taxpayers' contributions - hold unchallengable power.

Calvin J. Bear

[Lee Adler]

Any time a bank makes a loan, it creates money. The ECB, or the Fed for that matter, is no different from any other bank, in that regard, with the exception that they have no reserve or capital ratio requirements. All lending institutions create money simply by waving their magic wand and making a credit entry in somebody's bank account. That becomes an asset of the bank, and a liability of the entity getting the credit. Voila! Money!

[IntheHills]

jmpbear, on 13 January 2012 - 09:35 AM, said:

I am having trouble with the ECB issuing money. They do not back it with anything. When we look at the big picture did the fed do the same thing with their QE??? As I did not see an increase in the national debt related from their actions.

Joe

The dark side of central banks is electronic money. The vast majority of money (any currency) does not exist in paper form. For example, when Japan decides the yen is too high as opposed to the dollar the boj creates billions of yen in an electronic form and has their traders sell these electronic yen until the price drops.

Since no western currency is backed by anything physical cb's can and do fund any purchase by electronic transfers.

This is a poker game where all cards are wild.

[SuperCycleBear]

The Fed's QE practices are backed by debt. They buy the debt created either by the US Treasury or private banks (or the economy's financial assets).

They do it to try and prevent total credit from declining as its contraction can result in systemic collapse. Debt is not forthcoming from the banks and many borrowers are deleveraging to avoid capital loss, so to keep a debt deflation at bay, the CBs are buying bonds to keep debt in the economy as a whole from monetary contraction.

[HYPERTlGER]

The bank uses whatever it's buying as the collateral backing the notes they issue.

in teh case of a central bank...they buy bonds lets say and it shows up on their balance sheet as 600 Billion dollars and they issue 600 Billion dollars of credit...if later on they sell the bonds back into the market...the credit they created out of thin aire then returns back into thin air.

The bonds are exchnaged for credit and the balance sheet of the central bank shrinks.

commerical banks are teh source of all the credit creation...unless consumers reach their maximum potential to request commercial banks to create credit...like in 2008...then central banks can be used to force consumers to back debt...that's basically what quantative easing is...forcing consumers to consume when they either reach the point where they refuse of can't.

it's a temporary operation to buy time.

In commercial banking...a consumer uses their current income which is composed of previously created credit...which is debt used as money or an asset inflated in price like real estate by previously created credit which is debt used as money as collateral backing their request for a commercial bank to create new credit which is debt used as money.

Like for a mortgage...of lets say $200,000

the bank inflates the money supply by 200,000 Dollars by creating an asset of $200,000 and a liability of $200,000 and then amortizing it at lets say 5%.

The consumer or requester of the so called loan of created out of thin air money has to pay back principal and interest.

the principal amount paid back causes the asset and the liability and money supply to shrink by that amount and the interest portion is the amount the bank obtains as revenue from the creation of money out of thin air operation.

All commercial banks have operated like this for 600 years.

All the commerical banking operations in the history of the USA have operated like.

The entire economic history of the world for centuries has been financed this way.

it's only been in the last 50 years or so that the general population has had access to the information and become aware of it.

most of you think that it's only been like this for decades...

It's been like this for centuries before any of you existed.

but there is a maximum potential expansion...and when reached the credit system implodes.

You all are fortunate or unfortunate enough to have been born at the right time to see it happen.