Topic: Basics of the Current Monetary System - page 2. (Read 304 times)

I don't know too much of the story, but in the past, US dollar was the king in oil trades; for some time Euro is catching up.
Again, I am not 100% sure that this information is correct, but if it's so, it can be seen as a "declaration" against US Dollar.
Of course, Euro is not really better. I hope to see the day Bitcoin takes over.

It is no secret that we spend a ridiculous amount of money on our military. We spent around $800 billion this year, more than the next 11 countries combined. If we had instead spent the same as the next biggest spender, which is China at $250 billion, then not only would the debt have grown at $550 billion less a year, we would actually have turned a surplus during the last years of the Obama presidency. But despite all this, Senators are still trying to  secure another $50 billion for the military in the current spending bills going through Congress.

No country or government is going to come out and say "The US dollar is trash!", because their currency is unlikely to be faring much better right now. Instead what will happen is that there will be less foreign investment and fewer foreign business buying, holding, and using USD. No amount of military presence will change that.

Well, the obvious huge difference is that the government can't create or borrow money which didn't exist a second ago in order to continue to pay off its debts and keep functioning. When it runs out of money, then it runs out of money. It could be a great lesson in fiscal responsibility, but more likely what would happen is that they would come up with some new fractional reserve system between various governments and central banks which would allow them to spend 100 BTC for everyone 1 they actually hold.

     As someone being on a third world country, I am pretty curious on how the monetary systems work in other countries specially in the US. Upon reading, I realized that there are some similarities with the monetary systems if not the same,  despite the difference in economical statuses. The thing that I like the most about this post though is the quote from Henry Ford which applies not only to the US citizens but also to other country's citizens be it in a flourishing country or not.

     I can't help but wonder though, if crypto really does get legalized fully will it really have drastic effects on the current monetary systems? Will the effects be good and will make it easier for the people to adopt or will it be detrimental to the economy and the country as a whole? Hmm...

That definitely doesn't look good, and seen from the other side of the big pond people who understand what's going on there are pretty worried, it's no secret that sooner or later everything bad will spill over from the US to the rest of the world. It's even harder for me to watch the US president in that story, because given all the recent weird statements, is it just confusion or is it dementia? Man loses his balance, but as it seems, the ability to judge is not something we can trust.

When you ask a question of confidence in the US dollar, I think that US foreign policy is putting (as always) a lot of pressure on the rest of the world - and few can afford to say no, given that we know how aggressive that policy can be. If we go further, the spearhead of that policy is, to my understanding, an incredible military presence around the world. The latest figures show that the US has 750 military bases in at least 80 different countries around the world, and about 173 000 troops deployed in as many as 159 countries, which does not include covert operations and covert bases.

It seems to me that this is more than enough for anyone to start doubting the US dollar, no matter how deep it really fell into the abyss.

When considering the US national debt, then there are only two possibilities for the long term: It increases or it decreases.

The last time the US government turned a surplus and the debt decreased was in 2001. We were in a relatively small deficit until causing a constant small increase in the debt until the financial crash of 2008, when the deficit hit record levels. The deficit decreased from ~$1.5 trillion to ~$0.5 trillion between 2008 and 2016, before increasing every year under Trump up to $1 trillion again. Then COVID hit and the deficit surged to over $3 trillion. The fall out from COVID and associated spending, as well as the legacy of Trump's 2017 tax cuts, means that the deficit is projected to come back down to $1.5 trillion and slowly increase to $2.5 trillion over the next 10 years. But then all we need is another financial crisis or other major event and the deficit will be even higher.

Knowing all this, I can't see how the debt is going to be brought under control any time soon. To even just eliminate the deficit and break even, the US government would have to decrease spending massively on everything from education to healthcare to infrastructure to salaries to pensions to social security to the military... you name it, probably associated with increase taxes. Every sector would take a massive hit, and with lower disposable incomes and widespread job losses the economy take yet another hit. And that would just be to stop the debt growing. To actually start reducing the debt would be another thing altogether.

And so the only real outcome is the debt continues to increase. As a percentage of GDP, out debt is over 130%. During the Greek financial crisis back in 2010, their debt-to-GDP ratio was 150%. It will only be a couple of years before we surpass those levels. The question is how long will the rest of the world continue to have faith in a currency which, as you say, is turning in to monopoly money.

What I wonder is what comes next? They have convinced the whole world to use monopoly money which they can create whenever they want, but they should know such model is not sustainable and sooner or later will collapse, so what is the next step they have planned after the collapse of the current system comes? Or do they really believe that a system that exploits the vast majority of the population of the world can continue uninterrupted?

Correct. You can see the Fed's press release here: https://www.federalreserve.gov/monetarypolicy/reservereq.htm. The reserve requirements have remained at 0% to the present day.

This already happens, and indeed, is how that majority of new money printing happens. Whenever someone approaches a bank to take out a loan, the bank creates a matching credit and debit at the same time. They give you $1000 of credit (for example), and simultaneously create a matching $1000 of debt in your name. The bottom line of their balance sheet doesn't change, but now you have $1000 you didn't have 2 minutes ago. This is brand new money with no additional reserve. The bank does not have to wait for someone to make a matching deposit before they can hand out a loan.

Yes. That is true as of 2020. Since keeping only the 10% makes the supply 10 times greater, imagine what happens when they keep no reserves. This is when the “∞/21M” meme/joke became famous. The infinity symbol indicates the current money supply.

Indeed, since there's no limit in the currency inflation, you ought to be protected from a safe haven asset, otherwise you'll be pulled to poverty one way or another. Whether that asset is gold, Bitcoin, stocks etc. Although, I think that based on what's waiting us, Bitcoin is the best choice.

Interesting post. I already knew basically what you explain but many people don't know it. Another thing I would mention, is that with this system the Cantillon effect occurs, with which those who are closer to the artificially created money take advantage of the system to enrich themselves. You have pointed it out, but you have not mentioned the effect as such.

Another thing. Are you sure the fractional reserve is still 10%? I have been looking for information, because I heard that in Europe it was lower, and I find this:

"Overnight Deposit, Deposit,Debt Securities, Money Market Paper was set as 1.0 % in Apr 2021." (In the EU)

Source: European Union Reserve Requirement Ratio

In this article there is a table comparing the reserve ratio between the countries of the world. In the case of the USA, I see that it is 0%.

So, I have looked for some external source to CEIC, and I see in Investopedia:

"In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratio to zero across all deposit tiers, effective March 26, 2020.6 The aim of this reduction was to jump-start the economy by allowing banks to use additional liquidity to lend to individuals and businesses."

Which makes me think that we are in a total financial casino economy and also now the FED has no more room to go lower if another crisis comes. What is it going to do? Lower the reserve ratio to negative and allow banks to lend even if no one deposits?

Reserved. (I may continue this depending on how much recognition it'll gain)

This thread is my pursuit to summarize how does the current monetary system work (in USA) and explain some terms such as fractional reserve lending. The system is purposely difficult to understand, so I'll try to break it down as much as I can.

Everything begins when the government starts creating bonds. These bonds are essentially meant to be sold with an interest. It's like saying “Hey, give me some trillions of dollars and I'll pay you back in a decade plus an interest”. These bonds are our national debt, because we're the ones who're going to pay them in the future.

The bond is then auctioned and the world's largest banks buy it to receive the sweet interests. The banks then swap those IOUs with the Federal Reserve's checks which brings money into existence. It looks like this:


So what's actually happening is that the FED and the treasury swap IOUs (checks & bonds) with banks as middlemen. This process continues repeatedly enriching the banks and indebting the public by increasing the national debt.

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Fractional Reserve Lending

When you're depositing money in a bank, you shouldn't imagine that they're keeping those money in a safe closet. Instead, they loan it to other people, so you should consider that you're actually loaning them your money.

Now what's fractional reserve lending... It's exactly what it says. The banks are allowed to reserve only a fraction of your deposit and do whatever they want with the rest of it. According to Modern Money Mechanics the reserve ratio is 10%, so let's use this simple percentage in our example.

Let's assume you deposit $1000. The bank can now take $900 of those and lend them to someone. It is reasonable to think that these $900 come out from your $1000. However, that's not the case. What really happens is that these $900 are created out of thin air on top of the $1000. This is how the money supply is extended. Bare with me.

The bank creates a check (a liability) saying that you own $1000 even though, they have only kept $100 of your deposited dollars. The other $900 have been lent. Once the borrower deposits their $900 hard cash in their bank, the bank will give them a liability of $900, but will also keep only 10% of it. The bank can also lend those $810 and keep only the $90.

NOTE: The liability is an IOU. It's nothing more than that, but it is considered currency since it's used as medium of exchange instead of cash.

If we continue this further we can notice that there's always some liability which is 10 times greater the assets you deposited and your bank is keeping.

Seriously, the cash remains the same. It's $1000. But, they liability constantly rises; it's $1000 + $900 + $810 + + + ... = $10000.

As a conclusion, the currency supply expands. Specifically, around 92-96% of all the currency supply is created from this very procedure and not from the government.

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So, in this fractional reserve system there're two folks who decide about the nation's faith. The government and the banks (AKA - Fed). The interests of each bond increase the debt you and your descendants are doomed to repay. In this monetary system as long as there's demand for loans and reserve for them, the currency will be inflated.

Outside this system, only currency minting is considered the cause of inflation. You may have seen Bitcoin been brought as a solution to this fraudulent and built-to-be-corrupted system; the reason is simple: If there isn't a FED which controls the economy and increases the nation's debt, which is what pulls you to poverty and enriches the banks, this exploitation will cease to exist.