I was reading an article on finance, it said the
Federal Reserve creates money, but not paper
currency; it's done through credit creation.

Can anyone explain this?  I thought, for every
dollar - including every number in a computer
account - there's a greenback floating around
somewhere.  Is this not so?

Then the question arises: money = credit = dollars?

And how is money removed from circulation?
(if that ever happens)

--
Rich

On Aug 1, 2:19 am, RichD  wrote:
> I was reading an article on finance, it said the
> Federal Reserve creates money, but not paper
> currency; it's done through credit creation.
>
> Can anyone explain this?  I thought, for every
> dollar - including every number in a computer
> account - there's a greenback floating around
> somewhere.  Is this not so?
>
> Then the question arises: money = credit = dollars?
>
> And how is money removed from circulation?
> (if that ever happens)
>
> --
> Rich

If I am not mistaken, you ask this question every
few months.  I'm so easy.

Suppose I agree to sell you my car for $20,000.
You don't have the money so I allow you to pay
over time.  Now your IOU to me isn't all that
negotiable but some banks will take it off my
hands at a discount from face value.

Now I'm sure you want to go on about the "debt virus"
but please don't.  Where did the $20,000 I "lent"
you come from?  Both parties thought they got
something better in the exchange or the trade
wouldn't have been made.  Suppose you die in
a car crash.  How much then is that IOU worth
and while I could get the car back in exchange
for the IOU based upon non-performance of the
terms, why would I want a squished car with
no retained value except as scap I'd have to
pay someone to haul away?

On Aug 1, 2:19 am, RichD  wrote:
(paraphrasing here) --- "Can anyone explain" (how the federal reserve
creates money? )
------------- reply follows -----------------
See << http://www.howto-ville.com/money%20copy/moneysupply.html >>

Where I try to answer that question and give sources of related
information.

Marty Carbone

martycarbone wrote:
> On Aug 1, 2:19 am, RichD  wrote:
> (paraphrasing here) --- "Can anyone explain" (how the federal reserve
> creates money? )
> ------------- reply follows -----------------
> See << http://www.howto-ville.com/money%20copy/moneysupply.html >>
> 
> Where I try to answer that question and give sources of related
> information.
> 
> Marty Carbone
> 

excellent

much better than the other response

On Fri, 01 Aug 2008 06:08:13 -0700, forbisgaryg wrote:

> Suppose I agree to sell you my car for $20,000.

Not sure if this is a good place to start. Maybe begin at the beginning 
with the 'creation' of real wealth which would be deep in the 
manufacturing process. 

Maybe better to start with a grain of corn.

On Aug 2, 8:01 am, ZerkonX  wrote:
> On Fri, 01 Aug 2008 06:08:13 -0700, forbisgaryg wrote:
> > Suppose I agree to sell you my car for $20,000.
>
> Not sure if this is a good place to start. Maybe begin at the beginning
> with the 'creation' of real wealth which would be deep in the
> manufacturing process.
>
> Maybe better to start with a grain of corn.

If I was wrong about RichD trolling for a way to introduce the
"debt virus" I was wrong to start where I did.

Certainly the distinction between financial and material
wealth would be a good place to start as would be the
purpose and properties of "money".  Since this isn't
where RichD wanted to start and he said he had started
reading an article on finance and came to focus on this
minor issue I assumed he had an agenda.  Focusing
on the Fed isn't  a good starting point for understanding
money.

On Aug 1, forbisga...@msn.com wrote:
> > I was reading an article on finance, it said the
> > Federal Reserve creates money, but not paper
> > currency; it's done through credit creation.
>
> > Can anyone explain this?  I thought, for every
> > dollar - including every number in a computer
> > account - there's a greenback floating around
> > somewhere.  Is this not so?
>
> > Then the question arises: money = credit = dollars?
>
> > And how is money removed from circulation?
> > (if that ever happens)

> If I am not mistaken, you ask this question every
> few months.  I'm so easy.

heh
I've been scrunching my brain over
the banking system for a while.

> Suppose I agree to sell you my car for $20,000.
> You don't have the money so I allow you to pay
> over time.  Now your IOU to me isn't all that
> negotiable but some banks will take it off my
> hands at a discount from face value.
>
> Now I'm sure you want to go on about the "debt virus"
> but please don't.  

I won't.

PS   I have no desire to jabber about the debt virus.
PPS  I never heard of it.
PPPS  What is the debt virus?

> Where did the $20,000 I "lent"
> you come from?  Both parties thought they got
> something better in the exchange or the trade
> wouldn't have been made.  Suppose you die in
> a car crash.  How much then is that IOU worth
> and while I could get the car back in exchange
> for the IOU based upon non-performance of the
> terms, why would I want a squished car with
> no retained value except as scap I'd have to
> pay someone to haul away?

Fascinating, really fascinating.  Except it
hardly addresses the questions I raised...

1)  My IOU is a promissory, to pay back
in currency ($$).  It is not currency.

But when the Fed issues its credit,
it IS currency/money/dollars.

2)  In what form does the Fed create, and
issue, credit?  Is it something other than
Federal Reserve notes?

If it is merely numbers in a computer
memory, who receives it, and how?

3)  The Fed creates money, by some mystical
method.  How does it remove money from
circulation?  When was the last time that
happened?

3)  Consider all the 'money' in the world,
denominated in dollars; greenbacks,
bonds, etc.  Now suppose everyone
wants to convert to green paper bearing
portraits of deceased emperors.  Are there
enough greenbacks floating around in
the world's bank vaults to satisfy them?


Please do try to focus, if you can...

--
Rich

On Aug 4, RichD  wrote:

> 3)  The Fed creates money, by some mystical
> method.  How does it remove money from
> circulation?  When was the last time that
> happened?
>
> 3)  Consider all the 'money' in the world,
> denominated in dollars; greenbacks,
> bonds, etc.  


3 is the highest I learned to count...

On Aug 4, 5:59 pm, RichD  wrote:
> Please do try to focus, if you can...

You're going to find it strange but the Fed doesn't create money
in any sense you'd care to think about.  It buys cash at printing
cost from the Treasury and coin at face value from the US Mint.

When the Fed want to inject liquidity into the economy it does
it through open market operations, that is it buys Treasury bills
on the open market.  The National government sells bonds on
the open market as well.  Intrest on the bonds held by the Fed
that isn't used for operational costs is returned to the Treasury.
The Fed doesn't just buy cash and buy bonds with the cash.
It adusts the velocity of the money by modifying reserve requirements
and Fed funds rates.  Mostly it just asserts where it thinks the
cost of money should be and lets the market do the work.  It
seldom modifies reserve requirements.

If you understand double entry accounting, you know that the
balance of debts and credits is zero.

Here's the history of how the Federal Reservee was formed:
http://www.bos.frb.org/about/pubs/begin.pdf

On Fri, 01 Aug 2008 06:08:13 -0700, forbisgaryg wrote:

> Suppose I agree to sell you my car for $20,000. You don't have the money
> so I allow you to pay over time.  Now your IOU to me isn't all that
> negotiable but some banks will take it off my hands at a discount from
> face value.

Is this correct?

Suppose you agree to sell the car, the buyer hasn't the money so you 
agree he can pay you the $20K in $250 monthly installments. However, in 
order for you to do this, you want an additional $2000 (interest) paid 
over that time to cover the costs of keeping track of the payments and 
the cost of not having the total amount of $20K and just to make a little 
more money off of the deal also. You shake on the deal, the buyer agrees 
and after the set time pays off the debt in cash.

In order to pay this debt off the buyer worked (as you had done) to buy 
the car and to pay you the extra dollars. The car was traded for work.

Now the bank. Another buyer goes to the bank to get a loan to pay you off 
completely. All 20K. the bank does not give the buyer actual money but a 
line of credit so that he can write a check which you accept and can 
deposit in your own bank account. 

You CAN cash this check but most likely do not. One reason being that the 
bank, neither bank, really has the cash on hand to back up all the checks 
it has assigned value to, that is, if all people who had money at this 
bank, or any bank, were to come in and want actual money, it would be 
impossible. The bank can, by law, loan out more money than they actually 
have on hand.

Back to the buyer. He is paying off this bank loan with money based on 
work. However, the loan did not have an equivalent value but was created 
as 'checkbook money' sort of 'poof', it's there cause everyone says it is.

The buyer goes to work and says to his boss, "well ok 'poof' my work is 
there just because I say so." Hilarity ensues.

On Wed, 06 Aug 2008 15:53:56 +0000, ZerkonX wrote:

> On Fri, 01 Aug 2008 06:08:13 -0700, forbisgaryg wrote:
> 
>> Suppose I agree to sell you my car for $20,000. You don't have the money
>> so I allow you to pay over time.  Now your IOU to me isn't all that
>> negotiable but some banks will take it off my hands at a discount from
>> face value.
> 
> Is this correct?
> 
> Suppose you agree to sell the car, the buyer hasn't the money so you 
> agree he can pay you the $20K in $250 monthly installments. However, in 
> order for you to do this, you want an additional $2000 (interest) paid 
> over that time to cover the costs of keeping track of the payments and 
> the cost of not having the total amount of $20K and just to make a little 
> more money off of the deal also. You shake on the deal, the buyer agrees 
> and after the set time pays off the debt in cash.
> 
> In order to pay this debt off the buyer worked (as you had done) to buy 
> the car and to pay you the extra dollars. The car was traded for work.

You did not have, nor did you need to have the $20k in cash.  You held
title to the car that was worth $20k.  I would assume that if the guy with
which you made the deal does not pay, then you would get the car back,
i.e. you still have an enforceable claim to the car. And I imagine you
would demand that the buyer have full insurance coverage on the car as a
part of this credit arrangement.  If the buyer does not pay you repossess
the car and sell it to someone who will pay.  I assume you were smart
enough to require a reasonable down payment that would cover the
repossession and re-marketing costs.  If not then you are a thieving
Republican.

> Now the bank. Another buyer goes to the bank to get a loan to pay you off 
> completely. All 20K. the bank does not give the buyer actual money but a 
> line of credit so that he can write a check which you accept and can 
> deposit in your own bank account. 

This is a 3 party deal and the bank is acting as a financial intermediary.
The bank will require the safeguards as described above.  The car is the
backing for the "loan".  The current car owner (manufaturer?) of the car
will be given "bank money" which he will deposit in a bank.  All the banks
are interconnected.  It is a game of musical chairs in which there are the
right amount of chairs. SO long as little banks (few depositors) make
little loans and big banks (lots of depositors) make the bigger loans than
all is well.  At the end of the day the bankers go have a beer and sort
all this out and see if they need to loan one another some money so that
the Fed don't raise hell.

> You CAN cash this check but most likely do not. One reason being that the 
> bank, neither bank, really has the cash on hand to back up all the checks 
> it has assigned value to, that is, if all people who had money at this 
> bank, or any bank, were to come in and want actual money, it would be 
> impossible. The bank can, by law, loan out more money than they actually 
> have on hand.

The bank has essentially done the same thing as you have done in the 2
party transaction.  The bank has "liquified" the car.  The car has a value
of $20k and that is the backing for the loan.  There need be no vault full
of gold.  If the buyer does not pay then the car is repossessed and sold
to someone who will pay.

> Back to the buyer. He is paying off this bank loan with money based on 
> work. However, the loan did not have an equivalent value but was created 
> as 'checkbook money' sort of 'poof', it's there cause everyone says it is.

So..... The bank did not get the value of the loan.  The
seller/manufacturer got the money.  the major portion of "interest" is
used to pay the people that provide banking services.  They have to eat
too.

> The buyer goes to work and says to his boss, "well ok 'poof' my work is 
> there just because I say so." Hilarity ensues.

Why is the real word hilarious to you?

-- 
"I know no safe depository of the ultimate powers
of society but the people themselves; and
if we think them not enlightened enough to
exercise their control with a wholesome
discretion, the remedy is not to take it from
them, but to inform their discretion by
education." - Thomas Jefferson
http://GreaterVoice.org/extend

On Aug 4, forbisga...@msn.com wrote:
> You're going to find it strange but the Fed doesn't
> create money in any sense you'd care to think about.
> It buys cash at printing cost from the Treasury and
> coin at face value from the US Mint.

How, with what, does it pay?

> When the Fed want to inject liquidity into the economy it does
> it through open market operations, that is it buys Treasury bills
> on the open market.  The National government sells bonds on
> the open market as well.  Intrest on the bonds held by the Fed
> that isn't used for operational costs is returned to the Treasury.
> The Fed doesn't just buy cash and buy bonds with the cash.
> It adusts the velocity of the money by modifying reserve requirements
> and Fed funds rates.  Mostly it just asserts where it thinks the
> cost of money should be and lets the market do the work.  It
> seldom modifies reserve requirements.
>
> If you understand double entry accounting, you know that the
> balance of debts and credits is zero.

That means the net money overall is just the
currency created by the Fed?

Also, the article claimed the declining dollar
causes other countries to purchase T bills
(to impede appreciation of their own
currency), which is inflationary as it injects
dollars into the american economy.

However, since dollars are the world's
reserve currency, there is no net addition
to the world financial system, so I find
this questionable.

And it stated that fractional reserve banking
creates money, which is also inflationary.
I find this dubious also.  I bring it up, as
it seems worthy of discussion.

--
Rich

On Aug 7, 3:51 pm, RichD  wrote:
> On Aug 4, forbisga...@msn.com wrote:
>
> > You're going to find it strange but the Fed doesn't
> > create money in any sense you'd care to think about.
> > It buys cash at printing cost from the Treasury and
> > coin at face value from the US Mint.
>
> How, with what, does it pay?
>
> > When the Fed want to inject liquidity into the economy it does
> > it through open market operations, that is it buys Treasury bills
> > on the open market.  The National government sells bonds on
> > the open market as well.  Intrest on the bonds held by the Fed
> > that isn't used for operational costs is returned to the Treasury.
> > The Fed doesn't just buy cash and buy bonds with the cash.
> > It adusts the velocity of the money by modifying reserve requirements
> > and Fed funds rates.  Mostly it just asserts where it thinks the
> > cost of money should be and lets the market do the work.  It
> > seldom modifies reserve requirements.
>
> > If you understand double entry accounting, you know that the
> > balance of debts and credits is zero.
>
> That means the net money overall is just the
> currency created by the Fed?

There are many definitions of money.
The only one's tracked by the Fed these days
are M0, M1, and M2.

From http://en.wikipedia.org/wiki/Federal_Reserve

The most common measures are named M0 (narrowest),
M1, M2, and M3. In the United States they are defined
by the Federal Reserve as follows:

M0: The total of all physical currency, plus accounts at
the central bank that can be exchanged for physical currency.
M1: M0  those portions of M0 held as reserves or vault cash
 the amount in demand accounts ("checking" or "current" accounts).
M2: M1  most savings accounts, money market accounts,
and small denomination time deposits (certificates of deposit
of under $100,000).
M3: M2  all other CDs, deposits of eurodollars and
repurchase agreements.

The Federal Reserve ceased publishing M3 statistics in March 2006,
explaining that it cost a lot to collect the data but did not provide
significantly useful information.[77] The other three money supply
measures continue to be provided in detail.

> Also, the article claimed the declining dollar
> causes other countries to purchase T bills
> (to impede appreciation of their own
> currency), which is inflationary as it injects
> dollars into the american economy.

They could have purchased T bills all along.
Why didn't they?

> However, since dollars are the world's
> reserve currency, there is no net addition
> to the world financial system, so I find
> this questionable.

I doubt the dollar will remain king.
It is only a store of value as long as
it retains its value.  I recently heard
China has moved 500,000,000 people
into the middle class in the last twenty
years.  The middle class in China isn't
like the middle class in the USA but
as people find themselves with more
choices they will make more consumer
choices and this will level prices from
this downward spiral.

> And it stated that fractional reserve banking
> creates money, which is also inflationary.
> I find this dubious also.  I bring it up, as
> it seems worthy of discussion.

The moves the Fed makes are a best second order.
They take the reverse requirement into consideration
when they make their moves.