How The Fed Creates Money

Tyler Durden's picture




 

Submitted by Adam Taggart via Peak Prosperity,

As a follow-on to the two previous chapters -- one explaining the nature of fiat money, the other showing how money is loaned into existence through our fractional reserve banking system -- this week's video details the Fed's near-magical ability to create money out of thin air (literally!).

We've devoted these past three chapters of the Crash Course to the process of money creation in order to understand this key question: What does the future look like for fiat currencies? (e.g. the dollar, the euro, the yen, the pound...)

In the case of the dollar (which operates similarly to the other major world currencies), we've learned that -- since all are "loaned into existence" -- all dollars are backed by an equivalent amount of debt. Debt upon which interest must be paid. As all outstanding debt must compound over time at the rate of its interest (at least), we come to this important conclusion: Our money system is designed to grow exponentially. And it requires ever more debt in order to do so.

Is this good? Is this bad? At this point, we're not here to cast judgment (yet). But, it does raise some important questions:

  • If the money supply must always increase over time, isn't the purchasing power of each unit of currency (e.g., each dollar) destined to speed its way towards zero?
  • What happens when hard limits prevent the system from expanding at the rate it needs to? (see: 2008 liquidity crisis)
  • Are those responsible for the rate of increase in the money supply doing a responsible job? (see: central bank quantitative easing programs since 2008)

Most of the people holding the majority of their wealth in fiat currency have little clue how it is created or managed. This leaves them very vulnerable to what happens to it over their lifetime.

How vulnerable are you?

 

Coming next Friday: Chapter 9: A Brief History of US Money

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

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Sat, 08/09/2014 - 17:51 | 5070931 goldhedge
goldhedge's picture

Amerika Stronk!

Sat, 08/09/2014 - 18:09 | 5070969 InjectTheVenom
InjectTheVenom's picture

END. THE. FED.

Sat, 08/09/2014 - 18:13 | 5070984 kchrisc
kchrisc's picture

Guillotine the Fed!

Sat, 08/09/2014 - 18:21 | 5071004 Boris Alatovkrap
Boris Alatovkrap's picture

Boris' urban proximity sub-terranean copper mine operation is more legitimacy than is Federal Reserve wealth dilution and selective skimming operation.

Sat, 08/09/2014 - 20:05 | 5071283 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is think to understand... when nature is to call, use fiat money for colonic scrub.

Sat, 08/09/2014 - 21:25 | 5071477 RafterManFMJ
RafterManFMJ's picture

Boris if you're ready to franchise, I have a ready supply of lightly-documented workers who will work for a shockingly low rate; they will probably work for beans and an incentive pay scale.

In addition to copper, many homes around here inexplicably have accumulated stocks of coal and wood outside that is easy to harvest after dark.

Sat, 08/09/2014 - 21:52 | 5071561 Boris Alatovkrap
Boris Alatovkrap's picture

"shockingly low rate"

Ha ha! Boris is see what you are do with extravagent english linguistic pleasure! You are very smart funny!

On more serious notation, Boris is well supply with minor, but is sharp needful for stripper for extraction of ore contaminant.

Sat, 08/09/2014 - 23:28 | 5071826 wintermute
wintermute's picture

Buy your Bitcoins before its too late beeeeeeeeetchizzzzz!

Sun, 08/10/2014 - 08:04 | 5072288 Truthseeker2
Tue, 08/12/2014 - 19:21 | 5084552 Boris Alatovkrap
Boris Alatovkrap's picture

You are thread troll bandit.

Sat, 08/09/2014 - 18:29 | 5071015 kaiserhoff
kaiserhoff's picture

Be careful mit der sawsall mein Freund,  vill cut your leg oft in eine New Yawk minute.

Sat, 08/09/2014 - 18:50 | 5071071 Urban Roman
Urban Roman's picture

More important than that, make sure electricity is off. Water, less important but nice as a courtesy.

Oh, yeah, also gas.

Sat, 08/09/2014 - 20:01 | 5071275 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is alway to be very very careful for checking voltage differential against ground before dig trench. (Okay, so maybe Boris is have mother-in-law to dig trench - is win-win scenario:) But you are mention gas line. With redirection of gas supply trajectory for bypass of Ukraine, this may become new hazard in Western territory of Russia. Thank you, you are very good friend advisor for Boris!

Sat, 08/09/2014 - 18:38 | 5071023 Landotfree
Landotfree's picture

Our money system is designed to grow exponentially. And it requires ever more debt in order to do so.

 

False or a lie.

The system is built to expand, peak, collapse, and liquidation of the unfunded walking liabilities.   It does require more debt/credit to expand, unfortunately humans do not have unlimited power to supply the equation, usually 60-80 years or a generation before liquidation of the unfunded walking liabilities.   Last time 100+ million had to be liquidated, my guess this time 1-2 billion.

The system is not designed to exponentially grow, it must be feed exponential growth... or its starts eating the hairless monkeys.  Attach interest to you medium of exchange, eventually liquidation... last time ovens and atomic bombs were used among other things.

"End the Fed"

Sure, well its going to end either way but you can pull the plug... you will go directly to the liquidation phase... I have my popcorn ready.   Quite a few are going to have to go when the wheel stops spinning.  

I have my bet on Asia as the leader in the category of liquidated walking liabilities when all is said and done.

 

Sat, 08/09/2014 - 21:24 | 5071475 The Phallic Crusader
The Phallic Crusader's picture

any system predicated on fractional reserve lending/creation of new money will achieve exponential growth.  That's just math.

Add in interest on money created out of nothing this way, and debts grow increasingly faster than the currency available to pay it.

So, while at any given point, you could freeze new money creation, that means freezing the ability to pay outstanding debt, meaning collapse and liquidation as you say.

I think the interesting thing is the money from nothing/creation by private banks aspect.  Because of the interest function, people are working 'for nothing' and the system guarantees a transfer of wealth from productive labor to passive capital.

 

Entropy and waste are built into the system, and like a giant star, massive concentrations of capital warp the normal rules, in a sense. 

 

Think of buying a house.  Say a guy buys it for 100k, gets a 30 year, ends up paying around 270k for it.  But the bank created 90k out of thin air based on a reserve 10k in deposits - money that by no means is the banks legal property.

So bank essentially buys this house, a real good, for nothing as a proxy for worker, who must spend 30 years toiling to give nearly 3 times that amount to the bank.

The system is insane, and it is no wonder that banks and banking dynasties of the late middle ages are largely still around today...

 

We are all slaves to the private banks which have taken the issuing power from The People - to whom it properly belongs.

Sat, 08/09/2014 - 21:32 | 5071499 RafterManFMJ
RafterManFMJ's picture

No my friend, the system is FAR from insane ... Evil? Demonic? Sure! But not insane.

Here, for the pleasure of ZH I present ten bankster quotes.

“The bank hath benefit of interest on all moneys which it creates out of nothing.”
William Paterson, founder of the Bank of England in 1694

“Let me issue and control a nation’s money and I care not who writes the laws.”
Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

“If my sons did not want wars, there would be none.”
Gutle Schnaper, wife of Mayer Amschel Rothschild and mother of his five sons

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”
The Rothschild brothers of London writing to associates in New York, 1863

“Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits.”
Sir Josiah Stamp, President of the Bank of England in the 1920s, the second richest man in Britain

“When you or I write a check, there must be sufficient funds in our account to cover the check; but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”
From the Boston Federal Reserve Bank pamphlet, “Putting it Simply.”

“Neither paper currency nor deposits have value as commodities. Intrinsically, a ‘dollar’ bill is just a piece of paper. Deposits are merely book entries.”
“Modern Money Mechanics Workbook” – Federal Reserve of Chicago, 1975

“I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.”
Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924

“I am just a banker doing God’s work.”
Lloyd Blankfein, CEO, Goldman Sachs, 2009

“Banks do not have an obligation to promote the public good.”
Alexander Dielius, CEO, Germany, Austrian, Eastern Europe Goldman Sachs, 2010

Source - libertygoldandsilver.com

Sat, 08/09/2014 - 22:44 | 5071703 Dr Hackenbush
Dr Hackenbush's picture

“Let me issue and control a nation’s money and I care not who writes the laws.”
Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

 

Please indicate where, how and when this quote was made.  Looking for a credible, objective source. 

Sat, 08/09/2014 - 23:05 | 5071762 RafterManFMJ
RafterManFMJ's picture

True or not? It really doesn't sound like something he would say, and I could find no video of it, sorry.

Sun, 08/10/2014 - 01:01 | 5071942 Dr Hackenbush
Dr Hackenbush's picture

Thanks!  I often find made up quotes and wanted to see if others have the same experience.  As a monetary reformist,  I find it hurts the cause. Also, from an objectivist standpoint, an often repeated misquote completely mires down any plausible chance of finding the true etymology

 

 

 

Sun, 08/10/2014 - 10:45 | 5072502 radiobomb
radiobomb's picture

"dont beiieve every quote on the internet", Benjamin Franklin, 1736.

Sat, 08/09/2014 - 21:33 | 5071502 Unknown User
Unknown User's picture

How about we nationalize the Fed, wind down fractional reserve (i.e., pay off the debt), and issue value based money, i.e., the US Notes.  Just like the good old US Constitution said we should. The Fed pretends to be an agency of the US government, so nationalizing it wouldn't be a problem. Issuing value based money isn't a problem. But winding down the fractional reserve scam is a big problem ... for the banksters. 

 

Sun, 08/10/2014 - 09:51 | 5072393 newworldorder
newworldorder's picture

I would normally agree but here is the problem.

The FED is no longer the US FED, but the worlds central bank.

The $$ is no longer the US currency but the debt currency to the world.

Successive US governments with the help from the US FED have succeeded beyond their wildest dreams in controlling world wide resources through finance.

With the FED, IMF, BIS, World Bank we are closer to one world financial CONTROL than most think or would care to admit. Where this ends, I do not know, but you can bet the average person in the world has no clue.

Sat, 08/09/2014 - 20:59 | 5071422 Greenskeeper_Carl
Greenskeeper_Carl's picture

i think 'audit the fed' is a more realistic way to bring the average person around (I say this as a way to get more people involved, i am 100% for ending it, no audit needed). The status quo has done too good of a job of making people stupid and thoughtless for a campiagn of "end the fed" to work. All you will do is sound like a crazy person to most people going around saying that. Too many people think it is a branch of govt, or part of the treasury. Ive explained how it works to people, and goten blank a lot of blank, uncomprehending stares at the end. An honest audit of it would reveal how disgustingly corrupt it is, and how much behind the scenes actions theyve taken, and its probably even worse than most of us think. Even the half assed audit they did revealed trillions of "loans" given to banks around the world. Once people are made aware of what the fed really does and what it is as an institution, no rational person could defend its existence

Sat, 08/09/2014 - 23:19 | 5071795 sleigher
sleigher's picture

"no rational person could defend its existence" 

 

I wouldn't be surpised...  My brother is somewhat rational.  His argument is "what are we supposed to let congress control it?"  And I have to say, he has a point.  End it anyways, if nothing else it kills off a bit of evil in the world.

Sat, 08/09/2014 - 23:49 | 5071860 El Vaquero
El Vaquero's picture

Hell, I'm one of those extremests who wants to go back to carrying coins minted from PMs around.  I'd let nature and trade control the money supply.

Sun, 08/10/2014 - 07:48 | 5072263 sleigher
sleigher's picture

Agree 100%.  

Sun, 08/10/2014 - 09:43 | 5072383 messymerry
messymerry's picture

Audit the FED, tar and feather the FED, THEN end the FED...the FED is wrong by design. 

Sun, 08/10/2014 - 13:27 | 5072898 estebanDido
estebanDido's picture

It's easier to audit the vatican books. Not recommended for healthy reasons.

 

Sat, 08/09/2014 - 18:11 | 5070972 goldhedge
goldhedge's picture

/s

Sat, 08/09/2014 - 19:51 | 5071247 ZH Snob
ZH Snob's picture

being as fiat can only be paid in more fiat (or debt) and this revolving circus has just about run its course it would seem that he who holds the most fiat loses the most when the music stops.  there has to be a re-structure or reset of this debt into real commodities, and in the future no one with any sense will accept any type of currency that is not directly backed by something tangible, real and of a measureable value.

Sun, 08/10/2014 - 01:11 | 5071966 good man
good man's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://goo.gl/bhiamE

Sat, 08/09/2014 - 17:56 | 5070946 debtor of last ...
debtor of last resort's picture

That Yellen lapdance, in the early days, sure made my $50 into another million by now.

Sat, 08/09/2014 - 18:25 | 5071010 Bossman1967
Bossman1967's picture

Yellen ever giving a lap dance is as repulsive as what they are doing to our country

Sat, 08/09/2014 - 18:32 | 5071026 debtor of last ...
debtor of last resort's picture

Our country? Tell that to the millions of people that suffer from overexpansion outside your country asshole.

Sat, 08/09/2014 - 18:06 | 5070961 Sudden Debt
Sudden Debt's picture

The system needs more humans and that's why they open the borders in europe and america to get more units in so they can borrow so the system can survive another day.

To bad they all use the system to support them and the liabilities increase much faster than the credit.

Sat, 08/09/2014 - 18:11 | 5070976 InjectTheVenom
InjectTheVenom's picture

Damn, and all this time I thought the open border was all about getting more votes for the 'blue' team !

Sat, 08/09/2014 - 19:32 | 5071195 Urban Redneck
Urban Redneck's picture

Jeff Immelt and his buddies borrow more every week than of "them" put together.

Sat, 08/09/2014 - 21:00 | 5071424 Otrader
Otrader's picture

I thought open borders was for cheap corporate help.  You know, to tame the inflation beast.

Sat, 08/09/2014 - 18:14 | 5070986 debtor of last ...
debtor of last resort's picture

Yeah, that's why they opened the borders and imported those niggers from Africa. Slave labor,

Now; get two, with Ebola, for only $99,95

Sat, 08/09/2014 - 18:36 | 5071037 debtor of last ...
debtor of last resort's picture

And of course, for the Americano' s without any feelings for humor, sarcasm, cynism, beyond your dollar borders, i forgot the sarc....

Sat, 08/09/2014 - 18:12 | 5070978 philosophers bone
philosophers bone's picture

UltraCoin?

Sat, 08/09/2014 - 18:18 | 5070994 pauhana
pauhana's picture

Rehypothicated to the moon, Alice!

Sat, 08/09/2014 - 18:27 | 5071014 stormsailor
stormsailor's picture

nuke martha's vineyard

 

Sat, 08/09/2014 - 18:52 | 5071082 Urban Roman
Urban Roman's picture

... orbit ... sure.

Sat, 08/09/2014 - 19:38 | 5071213 stormsailor
stormsailor's picture

its for the chidren

Sun, 08/10/2014 - 09:37 | 5072379 messymerry
messymerry's picture

The Russians and the Iranians are going to EMPDC...and (drum roll please,) Chicago. 

Sat, 08/09/2014 - 18:28 | 5071017 Captain Obvious.
Captain Obvious.'s picture

"To infinity and beyond!"

Sat, 08/09/2014 - 18:32 | 5071019 PeeramidIdeologies
PeeramidIdeologies's picture

Everyone know the dollar is toast. But how and when? That is the question. My line of thinking is that it will be deliberate, the evil dollar must be vanquished, and reserve currencies are things of history. A couple more signals will confirm. Or I'm bat shit crazy. Either or.

Sat, 08/09/2014 - 21:35 | 5071511 RafterManFMJ
RafterManFMJ's picture

Batshit be full da Ebola! Cook for one hour b4 consumin'.

Sat, 08/09/2014 - 18:33 | 5071029 stormsailor
stormsailor's picture

and feed hillary and janet to 100 month starved 12 ft alligators.  i bet the pay for view on that would set a record,  throw in pelosi and biden as the warm up event.

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