Sunday, August 31, 2008

Someone Please Help Me Understand!

The whole Federal Reserve thing. I was trying to tackle that but it made my little pea brain hurt. I don't get it. I need someone to break it down for me kindergarten style.

1. What/Who decides how much money the Federal Reserve makes? I don't get it.

2. If we are so far in debt as a nation... how is the Federal Reserve being paid back... And why do they have to be paid back if the money was just made? I don't get it.

3. Why not just make all the money that is needed?

Talk to me slow and don't use big brainy words.

One Salient Oversight answers:

I won't answer 1 & 2 because I'm pretty sure I did a month or two back.

*Sorry! I will go back and look at that again... I just can't grasp it and retain it! Some subjects make me cross eyed and itchy.

#3 is an interesting one.

Money is created by 2 institutions. The first is the central bank (in America's case, the Federal Reserve). The second is commercial banks.

Most of the growth in the money supply happens because of commercial banks. They are the ones lending out money and they are the ones who take people's deposits.

By leaving money creation to commercial banks, both the supply and the demand for money is determined by the market.

If banks were not allowed to create money, and if the Federal Reserve did it all, then the money supply would be determined by the Federal Reserve Bank - in other words, the government.

If money creation stopped, and if the amount of money in an economy simply stopped growing, then the economy would value it more and more because it becomes a finite resource. If an economy wants to grow and the money supply remains at the same level, then the production of goods and services will devalue in relation to money. The outward result of this would be a rather large dose of deflation.

Money is very useful because it is the only "thing" we use to attribute numerical value to the things we buy. A Chocolate is "1", while a house is "300,000".

But for money to do its job properly, it needs to retain its value. Inflation or Deflation affects the use of money and confuses the market when it attempts to value goods and services. If inflation is at 100%, for example, then the chocolate you bought for "1" is now "2" a year later.

Keeping a lid on either inflation or deflation is the responsibility of the Federal Reserve. Inflation is dealt with by increasing interest rates. Deflation is dealt with by decreasing interest rates.


Two Dogs answers:

As far as the actual supply of currency, I deem that unimportant, welcome to that island, population ONE. Most of us no longer carry much more cash than absolutely necessary, we plop down the plastic. This does seem to cause a problem to folks that still think that actual paper means something, but in my opinion it means nothing to actual wealth.

If economic issues are where the questions are directed, lemme say this. The government removes money from the economy with taxes. Then they redistribute that "wealth" to other areas that do nothing to grow the wealth of this country. One dollar removed, is a dollar lost forever. We build government subsidized housing, provide medical care for around 45% of our population, feed them, clothe them, and educate them. Oddly enough, this philosophy has been created mostly in my lifetime.

Understand this point: fully 12 million people are employed by the Fed solely to give your money to other people. IF those 12,000,000 people ONLY made minimum wage, do you realize that is 158 BILLION dollars in salary alone per year? I am not counting the continuous upgrades to government facilities to house them, the heating and cooling costs of those facilities, nor the facilities themselves. I'm guessing that kinda slows down the economy to remove that money and place it directly into the hands of someone that produces NOTHING.

Paper money? Not on my radar.

4 comments:

Brenda said...

Holy Cow. You've been thinking. I'm anxious to hear the answer.

One Salient Oversight said...

I won't answer 1 & 2 because I'm pretty sure I did a month or two back.

#3 is an interesting one.

Money is created by 2 institutions. The first is the central bank (in America's case, the Federal Reserve). The second is commercial banks.

Most of the growth in the money supply happens because of commercial banks. They are the ones lending out money and they are the ones who take people's deposits.

By leaving money creation to commercial banks, both the supply and the demand for money is determined by the market.

If banks were not allowed to create money, and if the Federal Reserve did it all, then the money supply would be determined by the Federal Reserve Bank - in other words, the government.

If money creation stopped, and if the amount of money in an economy simply stopped growing, then the economy would value it more and more because it becomes a finite resource. If an economy wants to grow and the money supply remains at the same level, then the production of goods and services will devalue in relation to money. The outward result of this would be a rather large dose of deflation.

Money is very useful because it is the only "thing" we use to attribute numerical value to the things we buy. A Chocolate is "1", while a house is "300,000".

But for money to do its job properly, it needs to retain its value. Inflation or Deflation affects the use of money and confuses the market when it attempts to value goods and services. If inflation is at 100%, for example, then the chocolate you bought for "1" is now "2" a year later.

Keeping a lid on either inflation or deflation is the responsibility of the Federal Reserve. Inflation is dealt with by increasing interest rates. Deflation is dealt with by decreasing interest rates.

Two Dogs said...

As far as the actual supply of currency, I deem that unimportant, welcome to that island, population ONE. Most of us no longer carry much more cash than absolutely necessary, we plop down the plastic. This does seem to cause a problem to folks that still think that actual paper means something, but in my opinion it means nothing to actual wealth.

If economic issues are where the questions are directed, lemme say this. The government removes money from the economy with taxes. Then they redistribute that "wealth" to other areas that do nothing to grow the wealth of this country. One dollar removed, is a dollar lost forever. We build government subsidized housing, provide medical care for around 45% of our population, feed them, clothe them, and educate them. Oddly enough, this philosophy has been created mostly in my lifetime.

Understand this point: fully 12 million people are employed by the Fed solely to give your money to other people. IF those 12,000,000 people ONLY made minimum wage, do you realize that is 158 BILLION dollars in salary alone per year? I am not counting the continuous upgrades to government facilities to house them, the heating and cooling costs of those facilities, nor the facilities themselves. I'm guessing that kinda slows down the economy to remove that money and place it directly into the hands of someone that produces NOTHING.

Paper money? Not on my radar.

Melanie said...

Great discussion and responses... I'm going to follow this blog carefully! Thank you Coffee Bean!