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Is the fiat monetary system a ticking time bomb?

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Zagros View Drop Down
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    Posted: 04 Jun 2013 at 19:53
With the printing of money - agianst basically nothing - by the Fed an others like the BoE, labelled euphemistically as QE (quantitative easing), is the global economy heading for an unprecedented crash?

What's happened to the trillions upon trillions of dollars that's been printed since 2009?

Will there be a return to the gold standard?

What's the best way to protect yourself against such a crash?
"There was glory in pissing, Corabb decided as he watched the stream curve out and make that familiar but unique sound as it hit the ground." So true.
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Al Jassas View Drop Down
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 05 Jun 2013 at 21:57
Who told you fiat currency isn't backed by something? The whole economy of a country, more accurately the flow of cash to and from that country plus the spending/taxing policies, determines what a currency is worth.

Now where did all the money used in QE go? No where. QE is essentially expanding the supply of money by taking bad securities off the books of banks and financial institutions in exchange for cash. This will free assets of these banks to engage in lending thus stimulating the economy.

Without QE banks would have to use their own assets to write off these bad loans which will reduce the amount of capital available for lending, cause these banks to register losses forcing to downsize or even causing them to go bankrupt.

Once these banks return to profitability and stability they will buy back these assets from the CBs that will actually make a profit out of the sale.

Over the past 4 years QE has worked brilliantly especially in the US. It was slow to achieve its goals but achieved them none the less and the slowness is largely due to contraction in the money supply through fiscal policy (which affects jobs in a much greater capacity than monetary policy) and the fact the crash was bigger than anyone thought and not because of QE policies.

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Post Options Post Options   Thanks (0) Thanks(0)   Quote Zagros Quote  Post ReplyReply Direct Link To This Post Posted: 05 Jun 2013 at 22:38
Actually, dollars, the world reserve are backed against nothing, they are just printed.  Other currencies are backed against it.

QE is working for whom exactly? banks?  The growth seen in the US is artificial and stimulated by QE in the stock market.  the economy as a whole is not benefiting.   Belts are tightening in America and the whole western hemisphere because of a failed fiscal and financial system which instead of being fixed is being fuelled.  Stock market prices rise massively yet living standards drop and unemployment rises.

Securities aren't part of the fiscal system, they are assigned artificial value which is outside the scope of money supply in the first place.  Now they are printing more money, money which shouldn't be and was never in existence, used to artificially manipulate the system - that can't last and undermines this completely:

Quote The whole economy of a country, more accurately the flow of cash to and from that country plus the spending/taxing policies, determines what a currency is worth.


Edited by Zagros - 05 Jun 2013 at 22:39
"There was glory in pissing, Corabb decided as he watched the stream curve out and make that familiar but unique sound as it hit the ground." So true.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jun 2013 at 04:01
Originally posted by Zagros Zagros wrote:


Actually, dollars, the world reserve are backed against nothing, they are just printed.  Other currencies are backed against it.


This statement is totally wrong. The dollar is a commodity and like any commodity it is subject to the laws of supply and demand. The US can't just "print" dollars. They need to look at the consequences chief among them is inflation. If there is no way to absorb the "printed" money, that is other countries selling their own currencies and buying dollars, to finance dollar valued imports like oil or Coffee, inflation will occur if the Fed doesn't intervene by raising interest or buying bonds.

In other countries the flow of cash (balance of trade plus direct investment) determines the strength of the currency. If a country is a net importer it is in big trouble unless it attracts more cash inflows than outflows like through a big financial system which is why the City is the only line of dense between the UK and turning into another Greece and which is why people attacking the City are tying the noose around their own necks.

Originally posted by Zagros Zagros wrote:


QE is working for whom exactly? banks?  The growth seen in the US is artificial and stimulated by QE in the stock market.  the economy as a whole is not benefiting.   Belts are tightening in America and the whole western hemisphere because of a failed fiscal and financial system which instead of being fixed is being fuelled.  Stock market prices rise massively yet living standards drop and unemployment rises.


In the short run yes and for good reason. You can't have a functioning economy without a functioning banking system and without one your economy will simply collapse. Case in point Spain.

By employing QE policies you prevented banks from either outright collapse or massive downsizing both of which will be catastrophic since they will mean trillions of depositor money (both corporate and individual) will evaporate and thus an effective end to regular banking. Since interbank dependency is much greater now than in 1929 the range and deepness of the collapse would be much greater than the Great Depression. Thankfully, quick, even if not adequate, action mitigated the disaster.

Is QE artificial? Well yes and no. Yes in the sense it is simply 0s and 1s on a computer screen. No because it was decisive in freeing trillions of dollars world wide that went into lending of economic activity rather than being used in writing off losses. This created millions of jobs in the US including 1 million manufacturing jobs. This in turn helped reducing the deficit by less than half by the end of this year.

Plus the stock market jolt is good. Not only it indicates the health of the economy but one must not forget, countless millions have their life and retirement savings in the stock market. They took a good beating last time around and now many are seeing their savings not only returning to where they were before but even becoming better.

Originally posted by Zagros Zagros wrote:


Securities aren't part of the fiscal system, they are assigned artificial value which is outside the scope of money supply in the first place.  Now they are printing more money, money which shouldn't be and was never in existence, used to artificially manipulate the system - that can't last and undermines this completely:

Quote The whole economy of a country, more accurately the flow of cash to and
from that country plus the spending/taxing policies, determines what a
currency is worth.





Do you even know what are securities?

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Post Options Post Options   Thanks (0) Thanks(0)   Quote Zagros Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jun 2013 at 06:46
Yes, they are, in no small part, the problem with their artificial values. For every dollar pumped into the system, a factor of four is inflated into the securities market which is why the problem occurred in the first place when things went tits up. People lost money that didnt actually exist and others gained as such. QE just adds more fuel to the fire, and we can see already the inflation it's caused in the markets, another recipe for disaster.

QE is life support for the not so free market and is intended only to preserve the status quo, which is the only way as you make out and what governments would kie s to think. Spain is a terrible example, if you want to promote the success of QE.

Do you know what commodities are? The dollar is not one.

Edited by Zagros - 06 Jun 2013 at 06:49
"There was glory in pissing, Corabb decided as he watched the stream curve out and make that familiar but unique sound as it hit the ground." So true.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jun 2013 at 07:17
Originally posted by Zagros Zagros wrote:

Yes, they are, in no small part, the problem with their artificial values. For every dollar pumped into the system, a factor of four is inflated into the securities market which is why the problem occurred in the first place when things went tits up. People lost money that didnt actually exist and others gained as such. QE just adds more fuel to the fire, and we can see already the inflation it's caused in the markets, another recipe for disaster.


And how are they artificial exactly? And where did you get your numbers from?

QE adds to inflation there is no doubt about it, that is its function after all, expanding money supply. Is inflation bad? Right now no. In fact the reason why the PIIGS are in so much trouble is because they can't resort to inflationary policies to solve their debt issues.

As long as the inflation is under control, and it is and still way under historical normal, there is nothing to fear. Japan's problem back in the 90s was following what you want to prescribe, anti-inflationary policies.

Originally posted by Zagros Zagros wrote:


QE is life support for the not so free market and is intended only to preserve the status quo, which is the only way as you make out and what governments would kie s to think. Spain is a terrible example, if you want to promote the success of QE.


And this is bad because?

Look, policy makers were faced with two options, let the banks fail and enter into a decades long depression (its been 23 years since the Japanese collapse and Japan is no where near recovering) that sees 40-60% of the population see their entire savings and investments evaporate into thin air and witness unemployment rates in the upper 30s with all the social upheaval that it entails or engage in policies that will in addition to helping the banks will soften the blow.

There should be no choice between the two approaches. If you can prove that QE has failed then produce your proof and give an alternative plan based on sound economic principles. Else swallow the bitter pill and pray next time you will be better prepared.

Originally posted by Zagros Zagros wrote:


Do you know what commodities are? The dollar is not one.


Yes it is. According to definition, a commodity is a marketable item that satisfy wants and needs. Since the dollar, or any currency for that matter, is freely traded in international markets then as the saying goes "If it walks like a duck and quacks like duck then it is definitely not rooster"

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Post Options Post Options   Thanks (0) Thanks(0)   Quote Captain Vancouver Quote  Post ReplyReply Direct Link To This Post Posted: 06 Jun 2013 at 15:43
Originally posted by Zagros Zagros wrote:

Actually, dollars, the world reserve are backed against nothing, they are just printed.  Other currencies are backed against it.

QE is working for whom exactly? banks?  The growth seen in the US is artificial and stimulated by QE in the stock market.  the economy as a whole is not benefiting.   Belts are tightening in America and the whole western hemisphere because of a failed fiscal and financial system which instead of being fixed is being fuelled.  Stock market prices rise massively yet living standards drop and unemployment rises.

Securities aren't part of the fiscal system, they are assigned artificial value which is outside the scope of money supply in the first place.  Now they are printing more money, money which shouldn't be and was never in existence, used to artificially manipulate the system - that can't last and undermines this completely:

Quote The whole economy of a country, more accurately the flow of cash to and from that country plus the spending/taxing policies, determines what a currency is worth.
 
True, the world financial system did come close to collapse, but it wasn't because of too much money being injected into it. It was because of corruption and profiteering enabled by deregulation, and more broadly by a kind of corporate/self interest/greed paradigm that has been promoted vigorously since the Reagan administration, and accepted by a sizable portion of the population. The volume of money fluctuates quite a bit due to government intervention in the bond markets, and also the fractional reserve system of banking. Throwing in a couple of trillion may sound over the top, but it is actually not untendable in relation to the size of the economy and of the stock and bond markets around the world. Some economists, such as Paul Krugman, have advocating spending much more on QE.
 
I think it is also true that some large corporations are sitting on piles of money. But they are doing so because of low demand, and that is due to, ironically, the skewing of wealth away from the middle class and towards the more affluent in recent years. Corporate lobbyists have demanded their security buffer, and recieved it, but such influence, and general political sentiment today prevents such wide-scale distributions to individual workers. And so the traditional drivers of a consumer society, the middle class family making purchases that have a multiplier effect in the community, are becoming a smaller influence. Why build that car plant in Michigan, when so many there can't afford new cars- better to go to China.
 
Trillions now rocket around the world at the speed of light, speculating on currencies, commodities, stocks, bonds, and anything else one can lay a bet on. But the belt tightening comes not from the volume of money and its negative effects, but from the failure of the political system to face up to the global nature of the financial system today, and also to the new technologies that are changing work and employment in revoluntionary ways.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Zagros Quote  Post ReplyReply Direct Link To This Post Posted: 12 Jun 2013 at 18:59
I've not forgotten about this gents. I had posted two lengthy replies in two separate windows, left my computer on and to go on standby in my study, only for my sister to flick the switch from the wall and thereby fry my ssd as she has been staying in there whilst we take turns looking after my dad, who's not well (chronic illness) and visiting from Iran.

"There was glory in pissing, Corabb decided as he watched the stream curve out and make that familiar but unique sound as it hit the ground." So true.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote VALKO Quote  Post ReplyReply Direct Link To This Post Posted: 14 Jan 2014 at 05:33
I do not believe in the danger of such a crash.  We just just got rid of  "Commodities Capitalism" back in 1945.  Experts then knew that in order for Capitalism to work properly, international borders and tarrifs had to be removed.  A part of this process was the elimination of nationalists rivalries and international politcal tensions and wars which interfered with global free trade and commodity prices.

John Maynard Kaynes envisioned a new global system. In order for it to work, every major player on the world stage had to put away their hatred and distrust of one annother and agree to a single world reserve currency, as well as a globally organized banking system which would help regulate and stabilize lending and interest.  The idea was based on the assumption, that the larger a system is, with a maximum number of members, the safer and more stable the system would be.  It is kind of like the fact, that the larger a ship or airplane is, the safer and more stable it performes.

Old Commodities Capitalism was encumbered by "Balance of Payments" transactions and fluctuating currency valuations.  Insiders knew how to exploit the lag in the system to their advantage, often causing panic buying and selling on the international market.  Thus Kaynes stated plainly, that a system globally organized and globally interdependant would benefit all traders.  And this is the way it works today. Of course WW2 had to be gotten out of the way first. Today we enjoy that streamlined system envisioned by Kaynes: We have a World Bank, an International Monetary Fund, and a Federal Reserve System with many interdependant member banks, and a Single Global Reserve Currency.

If we were to return to the "Gold Standard" International Capitalism would soon collapse.

In order to understand the Kaynesian system, we must understand the following principals:

Money is not something natural , but is completely artificial in nature.  There are two distinct kinds of money:  Common Currency, and Investment Capital.  In order for any economy to operate, there must be a minimum ammout of Common Currencey in circulation.  The Crash of OCT 2008, caused several trillion Dollars in Investment Capital to literally disapear. This stopped the Credit System dead in its tracks, and removed billions in Common Currency from world circulation. How and Why? Because Real Estate Brokers and sales persons deliberatlely over-valued properties in order to get loans approved and collect their fees and profits quickly so they could re-invest them elsewhere. The act of overvaluation causes a "Baloon" or economic "Bubble", because values have been pumped full of "hot air".  The collapse of 2008 was nothing more than a reality check on Real Estate values. An "economic Adjustment". This drastic slowing of Credit, suddenly REMOVED billions of Dollars in currency from the economy. The so-called "Economic Contraction". If you think the USA suffered, ask the Chinese how much investment capital they lost !

 A lack of something causes it to rise in value. Thus the US Dollar rose in value against international currencies and prices within the US Economy dropped or remained flat. This is the "Deflation" we now have.  This is the exact opposite of Inflation which you express so much fear of.  So how then is money actually created, and what exactly backs up its value? 

The government does not simply "print money". It creates money by borrowing it:  All money comes into existance by being LENT: A Central Banking System LENDS the money. Money lent comes with a promise, (obligation), for it to be repaid, and thus "made good". And, his money must be REPAID with interest, as a kind of insurance against loss. 

 This is how WEALTH is produced: A company or an individual, with a great idea, needs financing to fund the production of a new product of vital service.  The banks lend the money. This puts people to work. These wage earners then spend the money consumming other goods and services. This is called "Economic Activity and "Economic Progress" In addition to creating jobs and new products, it also generates taxes which support government and public sector.

Thus money in no longer based upon somebodies estimation of the price of wheat, corn, oil or precious metals, but upon the productivity, industrialness, and a reliable estimation of the ABILITY of the borrower to repay the loan. His "Credit Score".  This is the way new products and technologies come about.  Do not forget, that the entire World Banking System is backing all loans with Loss Insurance on a world-wide-system of interdependancy! 

This is why post-WW2 Capitalism has been so immensely successful. If you want to buy and collect gold coins, go right ahead, but the current world trading price for gold is far inflated, but don't let that stop you if you think Keynsian Capitalism is going disapear and be replaced by Old Pre-War Commodities Capitalism !


Edited by VALKO - 24 Jan 2014 at 04:31
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Captain Vancouver Quote  Post ReplyReply Direct Link To This Post Posted: 14 Jan 2014 at 10:28
Nice post Valko.
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