When real money is short, why not just use funny money?

From The New York Times:


Stocks Surge After Central Banks’ Action on Debt Crisis

By CHRISTINE HAUSER
Published: November 30, 2011

A move announced by central bankers on Wednesday to contain the European debt crisis resulted in euphoria in global stock markets, but it also prompted skeptics to wonder: will this time be different?

As the crisis has worsened over the last 18 months, pronouncements of plans to fix the euro zone debt problems have led to more than a half-dozen rallies that just as quickly withered as the proposals fell short of hopes.

Wednesday’s rally was among the biggest yet, with the three main indexes on Wall Street rising 4 percent or more, and the Dow Jones industrial average rising 490.05 points, its largest gain since March 23, 2009. Still, some analysts warned that the central banks’ action addressed only some symptoms of the euro financial crisis, so this rally, too, could evaporate.

“It helps to prop up the banks for a while which is going to buy time for Europe to fix the problem,” Burt White, the chief investment officer for LPL Financial, said. “This is basically a Band-Aid.”

Much more at the link. THE WALL STREET JOURNAL also has plenty of coverage: Central Banks Take Coordinated Action, Close Ties Facilitated Coordinated Moves, and Dow Surges 490 Points.

It’s pretty simple: we can “print money,” or engage in “quantitative easing” all we want, as long as people are willing to accept the newly-created-out-of-thin-air dollars as real money. Given the shakiness of the euro, why wouldn’t they?

It’s just a new way of creating money. Remember the lessons from Econ 101,¹ about banks lending money, it getting deposited, and then the bank has the original demand deposit and the new deposit on account, creating money? Think of it as a financial covalent bond

If someone writes a check on an account that he doesn’t have sufficient money to cover, but the bank says, “Yes, you do have the money,” as long as everyone in the financial transaction chain accepts that, hasn’t money been created? That’s pretty much what the Fed is doing, and it’ll work right up to the point where people start to not accept that money as existing. China has been the primary financier of our deficit, and in a supposedly independent move designed to stimulate their own economy, China has also let us know that they are accepting the US and European financial moves for now.

Using that theory, I don’t know why we need to tax or borrow money at all. As long as the government sends out checks on its own account, and the Fed doesn’t say that those checks have bounced, they we ought to be able to pay for government completely, without taxation and without borrowing, and it’ll work just fine, right up to the point that it doesn’t.

Now, it would be illegal for PNC Bank to simply keep honoring my checks, if I start to write them for more money than I have in my account, if I don’t have some sort of overdraft protection or a linked savings account from which my checking account can be supplemented. Banks have to keep good records and banks get audited, but, right up to the point at which PNC is audited, and their generosity to me discovered, wouldn’t money have been created, just as in the method we all learned in Econ 101 in college, concerning bank loans, demand deposits and reserve requirements?

Well, not quite: as soon as the auditors discovered what happened, it would turn out that PNC Bank didn’t have the funds it said, and all sorts of bad things would happen, fines, perhaps the bank going bankrupt, possibly including people going to jail. However, there is no one who audits the Federal Reserve System with the authority to declare their transactions illegal or fraudulent. While it would be illegal for a private bank to be that nice to me, what is to stop the federal government from writing all of the checks it wants, drawn on the United States Treasury, as long as the Fed says those checks are good? Doesn’t that create money, just as surely as the Econ 101 method, and, with nobody having the authority to stop it and send Ben Bernanke to jail for it, how is the money not created? It ought to be perfectly acceptable, right up until people stop accepting it.

The Times original noted that such moves as the central banks³ took on Wednesday have been made before, and the initial enthusiasm didn’t last long. Further, interest rates increased: the Treasury’s benchmark 10-year note fell 24/32, to 9912/32, and the yield rose 0.08% to 2.07% late Tuesday. Decreases in bond prices, which mean higher interest rates, are a quick indication that investors are wary that the moves by the central banks will lead to higher inflation, requiring higher interest rates to make money. Gold futures also increased, another hedge some investors use when they anticipate the value of currencies to decline.

Your editor will be the first to admit that he does not know what will happen. December is traditionally a time when stock prices rally:

Since World War II, the S&P 500 has had the best average monthly performance during December, with an average increase of 1.8%. That’s two times better than the average for all months.

Given the record Black Friday Christmas sales this year, followed by a record Cyber Monday, we could well see strong December/Christmas sales this year . . . or we could discover that people took advantage of bargains and got a larger percentage of their Christmas shopping done early. A strong November jobs report may also indicate that Christmas sales could be higher. Given those things, it may not be until mid January until we see if the central banks’ actions are going to be seen as lastingly strong, or just a quick blip.

_____________________________
¹ – It’s been over thirty years, but, if memory serves, it was actually labeled Eco 161 at the University of Kentucky in the 1970s.
² – When I had trouble with the initial description of how money was created, it was the covalent bond concept, from chemistry, that helped me to understand it.
³ – The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

27 Comments

  1. While we had a strong November jobs report, linked in the main article, The Wall Street Journal reported:


    Jobless Claims Climb Back Over 400,000


    By JEFFREY SPARSHOTT And ERIC MORATH

    The number of U.S. workers filing new applications for unemployment benefits unexpectedly rose last week, an indication that the jobs market remains shaky amid a slow recovery.

    Initial jobless claims climbed by 6,000 to a seasonally adjusted 402,000 in the week ended Nov. 26, the highest level in more than a month, the Labor Department said Thursday.

    Economists surveyed by Dow Jones Newswires had forecast claims would fall by 3,000 to 390,000.

    More at the link.

  2. “….as long as everyone in the financial transaction chain accepts that, hasn’t money been created?”

    No. The lack of money has been accepted. You’re starting to sound like the idiot Pho. Nobody is saying money can’t be created out of thin air but when it is it has no value. That idea underminds the very concept of the money itself. Money without value (purchasing power) is just printed paper.

    “….as long as everyone in the financial transaction chain accepts that, hasn’t money been created?”

    Again, no. What has been created is called “credit”, not money. And credit has only as much value as the ability of the principal to repay it. Can we repay our debt?

  3. BTW, a check is not money. A check is a formal I.O.U. which if not backed by actual money is an overdraft and in some cases, FRAUD! ( the fraud comes in when the writer of the check has no ability to cover the IOU and when writen had no intention of doing so). Can we cover our checks (IOU’s)? The answer is NO. It’s fraud, pure and simple.

    If you or I did that we’d be in court, perhaps jail. Why should we accept our government doing what the government wouldn’t accept us doing? Double standard anyone?

    Spend what you like, but earn what you spend. Not too hard a concept I think.

  4. I guess that I wasn’t sarcastic enough in tone: this is the kind of thing which actually works, right up to the point it doesn’t, at which point, you have a catastrophe. There are already stories about financial regulators in London telling British banks to be prepared for the collapse of the euro — the United Kingdom isn’t part of the eurozone — and we’ll start seeing such stories in the American press as well. I haven’t seen anything like that in The Wall Street Journal online yet, which makes me think that the stories have been over-sensationalized, but there certainly are weaknesses in the euro. And the US stock market is already slightly lower in early trading, which could be profit-taking, or it could be that some of the exuberance of yesterday has calmed down.

  5. Okay, Editor but you have that little “sarcastic” logo so use it. I actually thought you went “down under” and thought a debased currency was all right. Thought perhaps you were getting your economic ideas from Pho. I stand corrected, sorry.

  6. “Thought perhaps you were getting your economic ideas from Pho.”

    Hoagie, Dana and you should have paid more attention to him, because he knew more about the fundamentals of economics than either of you, in my opinion. I do note that Mr. Editor has finally understood the distinction between money and wealth, so that’s progress. What is not progress is that our esteemed Mr. Editor has blocked the erudite “Pho” from participating in here on his new blog. Just what is it that Mr. Editor fears? Is it perhaps speech? The old lively days of debate are gone, banished by an ego interested more in right wing propaganda and less in discussion and debate. “Common Sense” has been left by the wayside to rot!

  7. “…. because he knew more about the fundamentals of economics than either of you, in my opinion.”

    Really? So I, having a degree in economics, having owned 17 restaurants in the U.S. over the last 35 years and owning 72 restaurants in Korea now, know less about economics than a librarian? Thank you. You prove my point.

    ” What is not progress is that our esteemed Mr. Editor has blocked the erudite “Pho” from participating in here on his new blog. Just what is it that Mr. Editor fears? Is it perhaps speech?”

    I was not aware he is “blocked”. However, if he could blog without snarky ad homs, perhaps he wouldn’t be. You and I don’t see eye to eye on very much but you and I seem to be able to talk without calling each other drunks, stupid, morons, cowards, and a litany of other adjectives. You’ve met the Editor and so have I. He dosen’t strike me as a man who “fears” aanything. And if the Editor did block Pho, perhaps it’s Pho’s fault not the Editor’s. Or are you doing the usual liberal thing and making Pho a “victim”? IOW, it’s the Editors job to provide, maintain and finance a forum to be insulted by Pho?

    The Editor has the absolute right to block, deny, censor and eliminate any speech he finds offensive on his blog. It is a priveledge to blog here, not a right. If the Editor choses to block Hoagie, it is his right to do so. Hoagie does not own the blog, the Editor does. If Hoagie does not like it he can create his own blog site. You got a problem with that, Wagonwheel?

  8. ” I do note that Mr. Editor has finally understood the distinction between money and wealth, so that’s progress.”

    The distinction between money and wealth is a minute, a subtile line only drawn in economics and accounting. Money IS wealth and if you can’t grasp that basic then you shouldn’t have either. One cannot be rich without having money and one cannot have wealth without having money. Or have the rules chainged while I slept?

  9. “…. because he knew more about the fundamentals of economics than either of you, in my opinion.”

    I still can’t that statement of yours out of my head. You actually believe a guy in a government job, supported by the tax payers of New Zealand, with zero business or market experience knows more about economics than Dana or I? Think about that Wagonwheel. Does that make sense to you? A guy who has done absolutly nothing in his life but be a consumer and a government employee knows more about economics? So I, with a degree in economics, 35 years of experience in business here and in Asia, know less about “the fundamentals of economics” than he? Tell me Wagonwheel, other than just agreeing with you (and Krugman ) what must I do to earn your respect in economics? Does a person who phishes the net actually know what economics is? Or are you both just picking and choosing your idealogical points on a subject about which you know nothing? As I’ve asked before so now I’ll ask again: if he’s so phuckin’ smart, why ain’t he rich?

  10. Wagonwheel, here is our new web site from Hong Kong: haodou.com. Check it out, that’s economics! That’s business! Our first two stores are doing over $40,000 a week, EACH. Now, quote the “librarian” for me once again.

    Knows more about economics, indeed.

    [Comment edited to enable link; no changes made to content. -- Editor]

  11. Hoagie, from your business experiences, failures and successes alike, you have gleaned what I would call pragmatic economics. Down here in the streets, you know what to get, who and where to go to get it, and how to make an investment assessment. Moreover, when you run a business, you get in there and do what it takes to make and keep the business profitable, including the skills you have regarding people management. PiaToR obviously does not have this experience or saavy. I call this microeconomics, On macroeconomics, I have to give PiaToR the nod, as there were many times where he had to go into teaching mode to try to get more understanding of an issue across. At least this is my perception from past performances on CSPT.

    Regarding money and wealth, they are not the same. Money is a “medium of exchange”, whereas wealth is “all property that has a money value or an exchangeable value”. Or put another way, wealth is value, money is a measure of value. Wealth only has value depending on what someone else is willing to give in a sell/buy/trade transaction.

    Regarding blocking access post, of course the Editor has the right to do so, nor do I question it? However, when the Editor presents himself as a proponent of absolute free speech, his blocking of PiaToR puts to shame this proclamation which then is revealed to be false.

    Regarding the use of expletives and personal attacks, it was telling that PiaToR got singled out, and others who were actually much worse, were overlooked, and still are. How do you and the Editor here explain this, Hoagie? I believe the editor used blinders with embedded political/ideological labels, which eventually brought down his previous blog.

    On being smart and rich, these don’t necessarily go together, Hoagie, as I am sure you would agree. Does one have to be smart to be fortunate enough to inherit a large amount of wealth?

  12. BTW, it’s pronounced Hoe-doo, just so you know. And if you visit the site scroll right on the photos till you see the Heart of Hoagie pheasant eggs and my personal Italian touch of spaghetti. Yeah, thatta boy…gettin hungry yet?

    You’ll also be happy to know we’re pulling in about a thousand a month on the sidebar ads. Also the Dong-Yin restaurant chain is sending their VP to my home before Christmas to talk about opening Authentic Chinese restaurants in major cities in the U.S.. Dong-Yin holds upscale dining facilities in hotels and casinos throughout China and Asia. So if I manage to bring Chinese money into America and Canada, am I still a tax cheat? Am I still un-American?

  13. “I call this microeconomics, On macroeconomics, I have to give PiaToR the nod, as there were many times where he had to go into teaching mode to try to get more understanding of an issue across.”

    How can someone who is not an expert on the subject go into “teaching mode”? How can someone with zero experience in the supply side of economics even begin to understand macroeconomics? Without the very basic and fundimental understanding of microeconomics, the concept of macroeconomics is usless. That’s why they teach micro first.

    ” Does one have to be smart to be fortunate enough to inherit a large amount of wealth?”

    Absolutely not. But that does not mean diddily nor sqwat! I’m not talking about “inheriting” wealth, I’m talking about creating it. Somebody had to create or earn that inherited wealth in the first place, no?

  14. “Regarding money and wealth, they are not the same. Money is a “medium of exchange”, whereas wealth is “all property that has a money value or an exchangeable value”. Or put another way, wealth is value, money is a measure of value. Wealth only has value depending on what someone else is willing to give in a sell/buy/trade transaction.”

    Okay, once more for the impared: All money IS wealth but all wealth is not money. Yes, money is a measurement of wealth but if I have 5 million dollars I’m wealthy. If I have 1000 acres of land I have zero untill I convert it into cold, hard cash. Both the money and the land is wealth. And if you still don’t believe me just send me a check for all your money that isn’t your wealth and I’ll call it even.

  15. Yes, of course it takes intelligent planning and execution to earn wealth the right way. Unfortunately, our system, as it now operates, permits too much wealth to move up, and too little to be shared by the many who work to produce the wealth. Certain Wall Streeters have found ways to manipulate the market in their favor, which does not involve the production of goods and services in the manner in which a capitalist system is supposed to work for the benefit of employee and employer alike, and the economy as a whole.

    We know now how the mortgage market was manipulated, together with the reluctance of the manipulating lenders to now clean up their act. We know now that certain Wall Street entities were creating knowlingly worthless paper (default swaps and such), and marketing it globally. We know now how unreasonably high executive pay, bonuses and stock options have distorted compensation of employees of may corporations.

    Let me cite a couple of recent personal experiences. I have made a stab at day trading, and discover two practices which work against me. First is that trading occurs on the off hours in which I cannot participate, therefore am at a disadvantage against those who can trade off hours. I’ve been burned several times by this, where I put in a buy order for the opening bell, only to find that the price has increased significantly overnight. This is not right.

    Another is in evaluating performance at the end of a quarter, we are told whether or not a company has met earnings expectations, which then influence the near future pricing of the stock. It is never revealed who sets these expectations, so I have wondered how easily they may be manipulated in order to assist a few insiders in their investment decisions, with my being on the outside, too often blind-sided.

    And then there are the nanosecond traders who make money on nanosecond short sales and the like. And then there are the futures traders who sometimes have the capacity to drive commodities prices at will. How is this Capitalism as we like to imagine it should be?

    Our stock markets are to some extent rigged

  16. “…when the Editor presents himself as a proponent of absolute free speech, his blocking of PiaToR puts to shame this proclamation which then is revealed to be false.”

    That’s bovine feces Wagonwheel. The Editor owns the site and has the responsability to control, regulate and maintain that site. If he chooses not to have the KKK or CPUSA on his site it’s his perrogative. The Editor has no right nor the power to stop Pho’s free speach, but he does have the power and responsability to control what goes on on his site. Pho is free to spout his hatred and vitriol all over the globe, just not here.

    I declare FSJ a Pho-free zone!

  17. “Okay, once more for the impared:”

    Ha, that’s pretty funny. Who is the impaired one here, Hoagie.

    Moreover, you added nothing. All you did was to reword the money and wealth concept I stated. But that’s OK, it was our Editor who had the main problem with this.

    On your comment about land, it is not necessarily negotiable. Money is not always negotiable either. Ask the Germans before Hitler took over, when they were wheeling their currency around in wheelbarrows in order to make a simple purchase. The dollar still stands apart as being the one universally negotiable currency, even after all the Republicans have done to weaken it with their outrageously wasteful spending most recently on long and costly wars. Would it not be great to have that almost $2 trillion back?

  18. I understand your frustration with trading on the exchange Wagonwheel. You must remember, you’re not the only trader and the “world” is always open. Overnight trades to you are daytime trades to someone else. You should ask my wife how many times I was at my computer at 3am trading in China or Korea or Japan. Or how many times our phone rang at 2 or 3 in the morning regarding business on the other side of the world. Scares the hell out of me, I always think somebody died. But business is business and it must be taken care of in a timely fashion. If you snooze, you loose.

  19. “I declare FSJ a Pho-free zone!”

    Typical fearful wingnut speaking here!

    As I said before (Did you read it, Hoagie?), I am not questioning the Editors right to pick and choose as he chooses, I merely question his judgment, which you chose not to address!

    As far as spouting hatred and vitriol, I have to point out to you that there was plenty more emanating from the Right contingency on the old CSPT than there was from the Left. But that is the past; let us not allow ourselves to sink to such depths here!

  20. “Unfortunately, our system, as it now operates, permits too much wealth to move up, and too little to be shared by the many who work to produce the wealth.”

    First of all “wealth” does not move up, down or sideways. People do. And “our system” as you call it allows PEOPLE to move up, and down, and sideways. When you opine about controlling people’s wealth you are really saying you want to control the people themselves. In our society (so far) we are free to try and “get ahead”. If we succeed, good. If we fail, not so good. But we are all free to try. You liberals want to take the risk out of risk-taking. When you do that all that is left is the “taking” part.

  21. “Typical fearful wingnut speaking here!”

    Are you insinuating I am afraid? The only thing I fear is Mrs. Hoagie. I certainly don’t fear Pho. he’s pathetic.

    “…I merely question his judgment, which you chose not to address!”

    I’m sorry. Perhaps I didn’t make myself clear. I think the Editor’s judgement was on the money. How’s that?

    ‘… let us not allow ourselves to sink to such depths here!”

    Agreed. Maybe it’s just me but somehow we are able to discuss things here without the invectives. How can that be? Could it be the disruptive force has been removed? Could it be that the crude, purile miscreant isn’t here?

    Well, I’m heading for the Club so I’ll see ya later.

    Check out my web site Wagonwheel, I’m sure you will find it interesting. I know it’s in Mandarin but the pix speak for themselves.

  22. WW wrote:

    Hoagie, from your business experiences, failures and successes alike, you have gleaned what I would call pragmatic economics. Down here in the streets, you know what to get, who and where to go to get it, and how to make an investment assessment. Moreover, when you run a business, you get in there and do what it takes to make and keep the business profitable, including the skills you have regarding people management. PiaToR obviously does not have this experience or saavy. I call this microeconomics, On macroeconomics, I have to give PiaToR the nod, as there were many times where he had to go into teaching mode to try to get more understanding of an issue across. At least this is my perception from past performances on CSPT.

    Regarding money and wealth, they are not the same. Money is a “medium of exchange”, whereas wealth is “all property that has a money value or an exchangeable value”. Or put another way, wealth is value, money is a measure of value. Wealth only has value depending on what someone else is willing to give in a sell/buy/trade transaction.

    This, to me, is a perfect example of the problem. You have admitted that our raconteur restauranteur understands “pragmatic economics” very well, yet defended someone else for being able to parrot book knowledge.

    But if you have ever taken economics, you’ll know that they are great for presenting theories in mathematical settings, but it is frequently a struggle to translate those formulae into real world settings; was not President Obama’s 8%/9% argument something based upon rock solid theoretical calculations, which fell apart when measured by real world results?

    And the theoretical exposition you made about money is along those same lines. What you wrote could have come out of a textbook, but has only a tangential relationship to the real world. Money is not wealth, according to the definition, but money is wealth in the real world because it is treated as wealth by the people.

    Wealth, you tell us, is “all property that has a money value or an exchangeable value.” Yet money itself is property with an exchangeable value, and many of the things you would consider to be real wealth have little or no exchangeable value because nobody else wants them. We would consider gold to be wealth, but if you are in the middle of the desert with no food, you can’t eat your gold coin; it is worthless. If you own a beautiful home, but need to sell it, and nobody wants to buy it, is it really wealth? All wealth, as you have defined it, depends specifically upon the willingness of others to consider its exchange value, and that’s no different from money. Money simply has a specific denominated value, and even that is subject to change when the subject becomes currency transactions.

    An example. Let’s say that Hoagie buys 1,000 oz of gold at $1,500 an ounce, and then turns around and sells it for $1,600 an ounce. He will, in all likelihood, never have taken physical possession of the gold, but simply made a paper transaction which has made him wealthier. Under your definition, the gold would have been real wealth, but Hoagie’s $100,000 profit on this shows up as real wealth, because it is treated as real wealth.

    Even you define it that way. You don’t say, “We should increase taxes upon those holding large amounts of media of exchange,” but “We should raise taxes on the wealthy.”

  23. WW wrote:

    Regarding blocking access post, of course the Editor has the right to do so, nor do I question it? However, when the Editor presents himself as a proponent of absolute free speech, his blocking of PiaToR puts to shame this proclamation which then is revealed to be false.

    Regarding the use of expletives and personal attacks, it was telling that PiaToR got singled out, and others who were actually much worse, were overlooked, and still are. How do you and the Editor here explain this, Hoagie? I believe the editor used blinders with embedded political/ideological labels, which eventually brought down his previous blog.

    CSPT became a toxic place, which I greatly regret, and it was due in large part to the commenter from New Zealand. That is not to say that there wasn’t acrimony from both sides of the political divide, but it became apparent that, regardless of what I believe about freedom of speech, it was no longer working on CSPT.

  24. WW wrote:

    On being smart and rich, these don’t necessarily go together, Hoagie, as I am sure you would agree. Does one have to be smart to be fortunate enough to inherit a large amount of wealth?

    I’d suggest that, intelligence being largely an hereditary trait, the children of people smart enough to get wealthy are often smart themselves.

    Paris Hilton is usually used as the example, because she’s a major party girl who inherited half a billion dollars. But if you actually read about her, she is a money-making machine herself; she’s fortunate to be a celebrity, but she uses her celebrity to make more and more money. She actually gets paid to party, as she has reaped many attendance fees for showing up at the right parties. She’s dumb like a fox.

  25. From The Wall Street Journal:


    Fed’s Plosser Worried About Rising Pressure on Central Banks to Monetize Debt


    By Michael S. Derby

    A key Federal Reserve official warned Friday of wavering commitments to keep inflation contained among government officials in the U.S. and elsewhere, in what he views as a worrisome development.

    “Despite the well-known benefits of maintaining price stability, there are increasing calls to abandon this commitment in both Europe and the U.S.,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “This is a disturbing trend that risks undermining the independence of the central bank to control monetary policy and its ability to preserve a credible commitment to price stability,” he said.

    The pressure on central banks to do something in a time of large scale budget deficits in many major nations is not a new impulse. “History suggests that governments often resort to the printing press to try to escape their budget problems,” Plosser said, explaining “we all understand that this option is a recipe for creating substantial inflation.”

    More at the link. The Journal described Dr Plosser as “a steadfast opponent of additional action” by the Fed. Sounds like a guy that, were Hoagie President — and I support his candidacy — should be appointed to replace Ben Bernanke as Chairman.

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