http://www.webofdebt.com/...cles/dollar-deception.php

or in video format!
http://www.youtube.com/...p;feature=player_embedded
(Thanks Unsympathetic)

too long.

You should read it.

How is money created?

Private enterprise takes over a nation's legislature, government does what it wants, banking on a populace of people who will say "too long," so long as there are material trinkets in their hands.

money is created when i go to the loo

Hm it's good; basic economics again, but explained in a nice historical and global perspective.

And I tend to agree, we've handed over an inordinate amount of power to private banks; the government should be in control of the money supply...

Balin: The article's focus is much more basic than what you are saying. You would do well to read it :)

There's nothing wrong with money. Its just a representation of real value, which our society defines. The problems you're talking about are social. Like how we define wealth, how we've bought into the idea of infinite growth or at least allowed those paradigms to dominate.

Money is supposed to represent value. But I think we've banked so much on that idea that we don't question if it is that way anymore.

It seems more along the lines of we're letting money tell us what is valuable. The power has been transferred from the people to determine their currency and what it represents to a small group who have such leverage that they can, through various means made available by the possession of currency, tell the people what their currency is, what it represents, and how what value something has.

So what happens when we value money? What does money then represent?

That's the thing. It isn't actually what our _society_ defines anymore. That's really more an illusion of what the situation is. You have to ask yourself how and why rapid inflation is occurring (albeit at a rate much faster than it has ever been historically).

Bang on the spot.

Before, money, or more specifically, currency used to have a value backed by gold. In that era, the actual VALUE of money was driven more so by our societies' perception of what it's value is. But as oats said, that's been completely reversed over the past 60-70 years. We now let money dictate the value of other things. If you think about it, it's actually quite absurd to place VALUE on something which the general member of a society has no control over (i.e. printing money, making credit out of thin air etc.)

aponic: The title is misleading, anyone who didn't understand this simply wasn't educated. It isn't a deception, it is just widely not understood byt the public.

davidoss: not sure if you have read the article? this isn't about the gold standard. Also, WTF did you mean by this:

"You have to ask yourself how and why rapid inflation is occurring (albeit at a rate much faster than it has ever been historically)."

I direct you to:

http://inflationdata.com/.../historicalinflation.aspx

how is the current inflation rate (~3.39%) "much faster than it has ever been historically"? See over 4% in 2007, 2005 and over 10% in 80, 81, 74, etc.

Certainly money has become more important than what it supposedly represents, and that there are a bunch of vested interests manipulating the system to keep it that way. I was just trying to argue that having a common medium of exchange does not create these ill effects, people do. Canada also has currency but its banking system is effectively regulated to prevent uninhibited speculation. Although if you're making the argument that the capitalstic system is inimical to real value, then the canadian tar sands are a rather poignant example of such.
The idea that using gold backed currency will solve our financial problems is not very thoughtout, shiny rocks hold no more real value than green paper. 90% of the gold supply is bullion, industrial application is very small part of the market.

Aside from this guy's article jumping around semi-randomly, I laughed when I got to the line noting that government could avoid owing a debt to private banking corporations because the "government could have issued itself, debt-free." Wonderful strategy. Worked wonders in Zimbabwe. Shoot, I even bought a $50 trillion Zimbabwe note as a gag gift for a friend.

Currency is a measure of value that is determined by the collective pysche of those using the currency. Tell me what practical value gold had during the gold standard? I mean, they weren't using moderm computers then so...right. If everyone thinks their paper dollars are useless tomorrow than they will become quite useless, but as long as those participating in the market believe in the respective currency than we're fine.

Funny... because I don't value money very high. I value material objects and food more. Particularly, I value metals the highest, and no, not precious metals, fluff gold. If it's made of steel, it holds the highest value to me since it's the most useful.

This sounds like the typical story told to someone emerging from a what is popularly referred to as a cult. I doubt 5% of the United States or Canada is 'educated' on this matter. I have never met anyone who can explain with coherency the system by which money is created and distributed. Occasionally I meet a person who can rhyme off a talking point but if I ask them to run me through the cycle or process that is used in the US with, say, a simple visualization I have yet to meet a single capable person.

Even people who I know doing commerce degrees seem rather oblivious beyond a simple theoretical model they seem to hardly understand. Sure, maybe it's reflective of their individual capacity. That still leaves the idea that people aren't briefed on this whole thing until later in post-secondary education, and then only if they fall into a very narrow group of majors.

I watched a youtube video of a dude who was just trying to figure all this out himself. Smart enough, did well in school, etc. He had an interview with Paul Martin (former Cdn Finance Minister, like the sec of treasury) and he was trying to get him to delineate the financial crisis. When the topic of fractional reserve banking arose as one of the major topics the kid was sort of taken aback. He asked the minister to explain. He then says to the minister (along these lines), 'Why aren't people told about this?' and the minister replies, 'People should know about this.'

read it :)

think they use some kind of printing press.

nope

already know how, is the reason why I drink my sorrows away every fiscal year :3

More in-depth descriptions are:

http://www.fedupusa.org/educational-videos/
Look for the "Money as Debt" series

In short: Banks sell DEBT.

The public thinks the bank lends money. Hell, the public thinks the banks have money. Our entire global economy became a Ponzi built on the banks' ability to SELL DEBT! This is why Keynesian economic theory (at least the selective 'borrow' portion of it) is so prevalent. The system has become, in short: Sell debt or die.


Why are recessions necessary?
Any lending of capital at interest - no matter how you do it - creates a need for recessions in order to clear the system of the excess debt that accumulates over time. That is, some percentage of the people who take said debt (and those who lend that capital) have to go bankrupt.

But that's not a bad thing. It is in fact a good thing, as that both rebalances the economy by eliminating the weakly-run firms, and at the same time eliminates the debt overhang. It is the attempt to eliminate recessions that causes the problems, as mathematically that is simply not possible.

But luckily the purpose of recession is to interrupt the compound growth by bankrupting both lenders and borrowers, which contracts the credit supply (credit = money). This is how balance is restored.

Nice video set Unsympathetic

"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." - Kenneth Boulding

by a machine, doh.

That would be the misconception Scode.

Really interesting article if you can get through it. A lot of external link posts are fluff - bravo aponic.

oats: you are dead on. Although I agree with what you said, the system CAN be understood if you have the education and take the time to. Just because the system ISN'T widely understood does not make it inherently bad. It may or may not be bad. The misunderstanding of it just means that very few people are capable of judging it and there is a high chance those people will just exploit their unique understanding rather than challenge it.

Unsympathetic: What you posted is true, in what I would call a "new classical" model. That is, when ordinary banks and ordinary debt/lending mattered. The fact is, all the "loans" in the world are miniscule compared to the values of markets like derivatives, etc.

For an easy visual reference, try to drilldown and really understand relative values in this:

http://xkcd.com/980/

Drill into the "trillions" box.

Total World Liquid Assets: $77T

World Total Proven Oil Reserves: $132T

World GDP: $62.9T

Estimated Total Economic Production of the Human Race (so far): $2,397T

Size of the Derivatives Market in 2005: $227T
Size of the Derivatives Market in 2009: $439T

Just think about that. $439 TRILLION DOLLARS of "value" is in that market in 2009... that's 7x World GDP.

No, most people don't understand it.

my grand daughter asked for an ATM for christmas. She thought thats where everybody got their money and having one from Santa would be a good deal for her!

Money printing like there is no tommorrow in the US does not create any Inflation in the US for a reason:
The money created is NOT directed into the US economy.. It is and has been used to achieve "other" goals.

Do your reasearch, you'll be shocked....

Hints: Iran-Contra-Gate, also make a search on which Army is guarding the largest opium fields of the world. Its all conected..

Hint #2: Look up where the vast majority of the 2008 bailout funds where given..

Money Printing not leading to inflation is part of the "Reaganomics".

Another old but informing and educating video is the MoneyMasters.

http://video.google.com/...docid=-515319560256183936

Hash... lol... Iran-Contra and all the Opium in the world is NADA compared to the derivatives market. You are talking about a drop in the ocean.

Glad to see people were interested in this.

But the derivatives market isn't actual money.

It's like trading on margin, but backwards, in that you have 10x the 'money' to trade with versus 1/10th.

Imagine getting a loan for 500$ using your stereo as collateral. Then going to another bank and getting another 500$ loan using the 500$ you just got as collateral.

Then imagine the banks using your stereo as collateral to get another loan of 500$.

and on and on to the point where everyone owes everyone like 10,000$ and it's all 'secured' by the 500$ stereo debt.

Now the 10,000$ are put into derivatives that aren't expected to deviate more than .1% from their base value.

But bammm. Those mortgages, oil futures, etc. lose value and the derivatives lose 1% of their value. That's 100$ gone. Now try to start unwinding all the loans that the banks owe to one another when you're down to only 400$ to deal with. Yea, big problum~

We think and act like there's a lot more money than there is. If they froze all financial transactions, started unwinding the webs of derivatives at the current prices, and found out the base amounts of what one institution really owes another we'd be back into much smaller numbers.

Would it be manageable then as opposed to trying to inflate the monetary base to fill in the 700 trillion derivative construction with most of the injected currency flowing immediately to the hands holding all the derivatives (the top % and financiers)?

Easy answer: money is created when a Bank makes a loan.

oats: in one sense you are right, but in another it is much more serious than that. Because the bets are tied up with real actions that have real (economic) consequences.

Suppose I create a derivative based on the value of the DJIA. I somehow get a reputable institution like Goldman Sachs to take the other side of the bet. If the market goes up 1000 points in the next 24 months, I owe them $1M and if it goes down 1000 points they owe me $1M. Anything in between, nothing happens. This provides a hedge if we assume that we are both reputable.

Now, I go to someone else who is REALLY certain the market is going to crash or needs the hedge even more than me. What I need right now is $500k cash. So they loan me $500k cash with the $1M derivative as collateral against the loan. I go out and hire a bunch of people with that money. Now, lots of things could happen at this point.

1. I fail to repay the loan and the market stays neutral. I go into bankruptcy and the ppl lose their jobs. The guy who loaned me the money also loses out because I didn't repay and the derivative is worthless.

2. I fail to repay and the market goes up. I go into bankruptcy and the ppl lose their jobs. I also owe GS $1M but they'll never see that either. Again, the guy who loaned me the money loses out.

3. I fail to repay and the market goes down. I go into bankruptcy and the ppl lose their jobs. GS loses $1M and the guy who loaned me the money makes something under $500k (his $1M less the loss on the $500k loan and interest).

4. I repay the loan and the market is neutral. Nothing happens to anyone here. The lender made interest on the loan.

5. I repay the loan and the market goes up. I probably declare bankruptcy as I owe GS $1M and don't have it (unless someone wants to loan me THAT based on a succeeding business which I saddle with debt, ultimately leading to its demise anyway). The lender makes his interest.

6. I repay the loan and the market goes down. The lender makes his interest. GS loses $1M and I make $1M.

In 4 of these 6 scenarios the people who were hired lose their jobs.

My point isn't that money was "created or destroyed", but that the derivative was used as an item of value that led to actions that had real economic consequences for people who had no knowledge of the derivative transaction in the first place.

Thus the size of the derivative market is very important. Not because it represents "money created" but because it represents risk in the system with real consequences for people beyond those involved in the transactions.

It is legalized gambling.

Sure, but those values were assigned theoretically 'marks'. The question becomes who assessed the mark-to-market, how did they come to this assessment and were they profiting on the back sence? Hence the entire ordeal with Congress lambasting some of the ratings agencies who were marking fluff ridiculously.

On the marking side, those assigning the relative value and risk were operating under an old model. The old model believed in the notion that a national downtick in housing was next to impossible. So they would evaluate the CDOs, which are the primary derivatives you two are referring to, based on this old model. Namely, were the properties spread geographically (they presumed that a downtick could occur in regional markets, particularly during a recession--such as housing going down in manufacturing regions), were the valuations of the properties a spread, and were the incomes spread among other factors. Clearly this method was far from fail-proof when the recession was driven by a depressed housing market and people who bought way above their potential. Of course now you're getting into how were people approved for loans, which those writing the CDOs see only what the sheets record for your income and people sure as hell weren't running legitimate background checks on income.

Once we get past the marking process then the picture becomes more clear. When the housing market was booming and using the old methodologies, betting/hedging with derivatives based on existent profits/funds/etc seemed like a no-brainer. The downside risk was minimal if the CDOs contained proper marking. And everyone trusted the gold standard of marking, at least for the purposes of investing.

The derivatives became their own shadow market. Folks were shorting them, folks were using them as collateral for borrowing, folks were doing everything done in the regular market except that with derivatives there isn't a place clearly recording the exchanges, let alone transparency in said recording.

And this was the US government's fear of why one guy like Lehman could theoretically unravel the whole derivatives pie. It's also why the government could effectively get other big banks to buy up the 'bad banks' or 'bad firms' because they knew they were just as tied to the unraveling as other folks.

Do derivatives have value? Yes, but how is the value determined and assigned? And does it have value is all of the other derivatives it's up against lose value too. That's a whole other debate.

We should start a bank. That's all I have to say.

Thanks for those posts trumper/Atryn.

Is it safe to understand, then, that the value represented by many derivatives is in fact based off the perceived value of other derivatives?

You seem to have a good grasp on this. It would be helpful if you could maybe paint a clearer picture as to how this affects the perceived money supply in the hands of an everyday Joe. How do the derivatives translate into more money in the economy? If the derivatives market contracts abruptly, how much would that decrease the functional money supply used by normal people to exchange for goods?

And, if the derivative structure were to begin to implode who would be the biggest loser? Whose loans that were initially made with real money/backing would not be paid back? Obviously most people who were playing with the paper backed paper money would lose out.

That's a lot to ask, I know, but if you could even clarify a little the process of how any of those things would go down we'd all appreciate it I'm certain:P

If the derivatives market contracts abruptly, how much would that decrease the functional money supply used by normal people to exchange for goods?


actually... I think Atryn sort of covered that in his last post.

..

money is created with a printing press:P

trumper: I agree entirely with what you said, looking at the housing crisis and CDO's, etc. I was trying to generalize more about the derivative market which not only persists but continues to grow after the financial crisis.

oats: yes, many derivatives are nested, essentially. Kinda like re-insurance but worse. heh. My general concern is that if the derivatives market were to implode (and there are many ways that could happen) there would be tons of collateral damage. Forget just unwinding the failed investments and bits and bytes that suddenly disappear from accounts... Lots of people could also lose their jobs.

On top of that, there is the question of whether loans, derivative based hedges, and other various financial transactions were entered into by institutions that over leveraged their exposure. When those institutions go under, it can affect everyone (as we recently saw with just the housing market CDO derivative market which is only a fraction of all derivatives). Ability of institutions to lend dries up, FDIC insurance gets stretched (hopefully not to the point of breaking), new investment activity weakens, etc.

This is why, in my mind, the size of the derivative market isn't about money supply (or else we'd see much higher inflation) but about risk in the system. As trumper stated, that risk proved to be a lot worse than people thought in the housing market because the forecasting algorithms (written by some of the best minds in mathematics, btw) were based on data that only went back so far (not to the great depression)... hence the model was flawed. There is no telling how many other flaws might lie within this huge mass of derivatives out there...

Does a 70% drop in the flow of the world's oil factor into their models? Why do you think the U.S. is about to take military action against Iran if they block it?

Does a major devaluation of the credit rating of all EU countries or devaluation or even dissolution of the Euro factor into their models?

Does a crazy nuclear attack by someone factor in?

The problem is that the risks are more systematic and the reach of any issue becomes broader with these markets than the basic bank-business loans of yore. Even fractional banking was safer, IMHO...