Our understanding of monetary system is wrong?

[jueco2005]

I do not think a lot of you here understand how FRL lending works and its difference from banking.

BANKING is not FRL

FRL: Banks lend the people their own money and make profit out of nothing. Specially when given counterfeiting privileges like our "Federal Reserve System"

Without FRL we have no need for central banks (the so called lender of last resort). Banks only lend those funds investors provide for investment purposes. No longer will banks be able to make their own money. Savings will rise, real and productive investments will rise too.

 

[Traden4Alpha]

Quote from trefoil:

I understand your position, but you have to understand the components of the gold price.
All commodities eventually wind up selling for the cost of their extraction plus some small premium that makes it economically viable to get the stuff. Every dollar over that small premium amounts to speculation on the commodity in question's price rising in the future due to some circumstance that makes it more valuable, which in the case of any other commodity means some new use for it that will make it more valuable, or some looming shortage due to, as in oil last year, the depletion of the resource.
In the case of gold, the price tends towards the residual premium unless there is, as Bernard Baruch once put it, "a question about the currency".
Call it atavistic, barbaric, or whatever other adjective you want, people will gravitate towards gold in times of crisis because it represents value. It probably costs, these days, somewhere between 400 to 600 dollars an ounce to extract gold. Given that, every dollar over, say, 660 or so represents a premium that gold buyers are willing to pay because, in these times, there is that question about the currency. Every single one.
The spot market in gold doesn't measure jewelry demand: it measures confidence in the world's currencies, which is another way of saying that it measures confidence in how the world is being governed, since currencies are, in this day and age, purely a product issued by the governments of the world.
The gold price has a persistent premium on it because the world, in its collective judgment, thinks the world's governments are not up to the challenges facing them.
A floating gold price doesn't really float: the world's currencies are still being measured in terms of gold, which is why there is, in normal times, a strong negative correlation between the gold price and the price of the world's reserve currency, which for the time being is the dollar. In terms of the gold price, then, all currencies are depreciating. Which explains how a floating gold price is nevertheless consonant with a gold standard.
In short, the gold standard never really went away. It just went underground.

Excellent post! Thank you.

I totally agree that the price of gold is an amalgam of the extraction costs, investment value of gold as an alternative store of value, the decorative value of gold for jewelry, and the business value of gold in industrial processes. The price of gold will appreciate to the extent that extraction costs grow, confidence in fiat currencies weaken, the middle class of BRIC countries reach higher standards of living, and gold-consuming industrial processes (e.g., consumer electronics) increase in sales. In that sense the informal gold standard is pretty sloppy -- gold prices can fluctuate significantly even if confidence in fiat currencies remains fixed.

I think there is a vast difference between a world in which gold provides minor service as an informal hedging currency that has a floating exchange rate with other economy-dominating fiat currencies versus a world in which gold entirely backs a major currency (i.e., a currency in which the number of units of that currency are strictly and by law tied to an effectively fixed quantity of physical gold). Although I can see the attraction of a backing a currency with a fixed quantity of some physical material, gold simply won't do the job because there is far too little gold above ground and far too little control of where gold is below ground.

P.S.: The premium between the market price of some commodity and the extraction costs is only small with respect to the marginal cost of the most expensive extraction method/source required to clear the market (i.e., at the intersection of the supply & demand curves). Moreover, the "small premium" case only occurs in the limit of equilibrium. The average premium can be extremely high if some extraction sources are cheap (but bounded in capacity). The premium can also surge if demand surges but supply occurs with a lag (e.g., the time required to invest in, construct, and bring new supply capacity to market).

 

[trefoil]

Full reserve banking is theory, not fact:

From NationMaster:

Full-reserve banking is a theoretically conceivable banking practice in which all currency circulating in a financial system would be backed up by an asset that is generally considered to be a stable store of value, such as gold. This implies the existence of a government body (such as a central bank) that would convert currency to a more stable type of asset if requested to do so. It also implies that the resources available to the central bank (and commercial banks) would be sufficient to convert all currency if so required.
The cash reserve ratio of all banks operating in such a system would be 100%, making the deposit multiplier equal to zero. In such a system, commercial banks would have no obvious incentive to extend loans.
A system in which all currency is backed by another asset and commercial banks are required to maintain a 100% cash reserve ratio has never been implemented in any actual economy.

What is fact is that, since 1933, the FDIC has demonstrably made banking - real world banking - safe, until this current crisis.
The FDIC did what the Federal Reserve was supposed to do, but failed to: make the banking system stable.
Unfortunately, the FDIC can't make up for things like the repeal of Glass-Steagall, which was an integral part of what made the FDIC work.
If we put Glass-Steagall back in place and reinstitute the uptick rule, we'll be back to a much safer place than where we are now.

 

[jueco2005]

Are yo sure??

So........ allow me to conclude ...............FRL was discovered and invented by the "caveman"

Quote from trefoil:

Full reserve banking is theory, not fact:

From NationMaster:


A system in which all currency is backed by another asset and commercial banks are required to maintain a 100% cash reserve ratio has never been implemented in any actual economy.

 

[antitrust]

Quote from trefoil:

Here we go again.
Fractional reserve banking has always been a part of capitalism. Take it away, and we're back to the Middle Ages.
Islam still prohibits interest on money, which is of course the product of fractional reserve lending. It does it for the same Medieval reason that it was prohibited under Christianity: time belongs to God.
I will concede that you can't kill time without injuring eternity, but fractional reserve lending is as much a part of free markets as limited liability companies, forward selling of commodities, and a host of other practices that the ignorant think are unwise, but that the educated know are absolutely vital to a functioning market economy.

the most prosperous time in American history was in the colonial times when the government ( not private bankers issued it"s own money) issued money at the rate of GDP. No inflation resulted because the money supply was pegged to the production out put. when the government created this money they spent it into the economy, this was in place of taxing the people.

The notion that the world economy is to big or complex now, not to have frb is laughable. money is simply an exchange mechanism and economic problems are born if it is treated otherwise.

which educated people are you talking about. Greenspan the godfather of endless credit expansion. All he had to do was look back at the roaring 20's. the massive credit pump and dump. the only difference today was that instead of inflated stock prices we have inflated house prices, but the argument from the Greenspan camp (those educated smart guys you adore)
was that it's different this time because houses are tangible.

The only thing FRB does is inflate asset prices it adds on real value to the economy or innovation.

BTW islamic culture circumvents the usury law by increasing the principal of the loan

 

[trefoil]

Quote from Traden4Alpha:

Excellent post! Thank you.

I totally agree that the price of gold is an amalgam of the extraction costs, investment value of gold as an alternative store of value, the decorative value of gold for jewelry, and the business value of gold in industrial processes. The price of gold will appreciate to the extent that extraction costs grow, confidence in fiat currencies weaken, the middle class of BRIC countries reach higher standards of living, and gold-consuming industrial processes (e.g., consumer electronics) increase in sales. In that sense the informal gold standard is pretty sloppy -- gold prices can fluctuate significantly even if confidence in fiat currencies remains fixed.

I think there is a vast difference between a world in which gold provides minor service as an informal hedging currency that has a floating exchange rate with other economy-dominating fiat currencies versus a world in which gold entirely backs a major currency (i.e., a currency in which the number of units of that currency are strictly and by law tied to an effectively fixed quantity of physical gold). Although I can see the attraction of a backing a currency with a fixed quantity of some physical material, gold simply won't do the job because there is far too little gold above ground and far too little control of where gold is below ground.

You're welcome!
Think about this: if all currencies floated against each other, and some international body like the WTO actually strictly enforced rules against currency manipulation, it would work exactly the same as a universal gold standard where all currencies were required to maintain a fixed amount of gold to back them.
How so? Well, to take what just happened in the current debacle: the big event was China lending money to the US so the US could buy their exports, while China deliberately maintained first a fixed rate, and then a crawling peg, against the dollar, a thing they could only do by deliberately debasing their currency. The only way to deliberately debase the currency is to create lots of credit, and that credit expansion fueled a boom in China and the recently demised real estate bubble in the US.
If the US had run the combination of fiscal and private deficits it had in the past eight years in a world of strictly floating currencies, its own currency would have fallen, its inflation rate would have ballooned, and interest rates would have soared. This would have cut off at least the private part of the debt bubble much sooner, and therefore at much smaller cost to the US and world economies.
Under a strict gold standard you would have had the same effect, since under that standard gold would have left the US and interest rates would have risen in order to attract that gold back. The rise in interest rates would have choked off the private debt bubble.
So, the operative word in the phrase "gold standard" is "standard". The problem with today's world is that we don't have a systematic way of measuring the values of the world's currencies; what we have is a mess.
To quote Robert Mundell, Nobel laureate and informally known as the "father of the euro":

A monetary system in the strict sense of the word does not presently exist. Every country has its own system. Most people do not understand how unusual the system is...since the international monetary system broke down [after Bretton Woods] countries have been on their own, a phenomenon that has no historical precedent in the cooperative game known as the international monetary system.

...from his speech "Could gold make a comeback?"

 

[jueco2005]

You did mentioned something very interesting about the colonials using their own currency attached to the real economic output. In fact, the real cause of the revolution was the outlaw of this banking practice by London.

FRL as we know today is fraudulent. I just can’t see why people don’t see it.

Because of FRL we need the fed (lender of last resort), because of the fed, we pay this banking institution for using their “federal notes”. Even the governments must pay interest to the fed, for using their notes.

If you don’t see anything wrong with this………………I have nothing else to add.

If you see something wrong with this………………..you would agree to remove FRL as a banking practice.

Quote from antitrust:

the most prosperous time in American history was in the colonial times when the government ( not private bankers issued it"s own money) issued money at the rate of GDP. No inflation resulted because the money supply was pegged to the production out put. when the government created this money they spent it into the economy, this was in place of taxing the people.

The notion that the world economy is to big or complex now, not to have frb is laughable. money is simply an exchange mechanism and economic problems are born if it is treated otherwise.

which educated people are you talking about. Greenspan the godfather of endless credit expansion. All he had to do was look back at the roaring 20's. the massive credit pump and dump. the only difference today was that instead of inflated stock prices we have inflated house prices, but the argument from the Greenspan camp (those educated smart guys you adore)
was that it's different this time because houses are tangible.

The only thing FRB does is inflate asset prices it adds on real value to the economy or innovation.

BTW islamic culture circumvents the usury law by increasing the principal of the loan

 

[Traden4Alpha]

Quote from moo:

Of course the government does not set the price of gold, it is set by the market. All the government needs to do is to get completely out of the way after outlawing FRB (which is fraud anyway). Gold will naturally rise to the role of money, because it is best suited for it (perhaps aided by silver). I was only speculating that if this were to happen, the price of gold in today's fiat money would have to rise at least tenfold.

If the market sets, the price, then its NOT a gold-backed currency. It's only a gold-backed currency if every citizen is assured that $1 of their currency is always and forever backed by exactly X ozt of gold. A floating price of gold means that the $ can freely inflate or deflate which is exactly what you want to prevent.

Quote from moo:
That fear is completely unfounded. The annual production of gold is minimal to the total stocks available (because all gold ever mined stays in use, unlike oil which is consumed). No miner, nor all the gold miners combined can have any noticable effect on the price of gold ever.

WRONG! Run the numbers. At $10,000 an ozt, gold-using economies would be shipping nearly $1 trillion/year to gold producing countries. (And that assumes we only need $7500 in gold-backed currency per person and that gold producers don't accelerate production if the price of gold goes to $10,000/ozt). And don't forget the initial transfer of wealth when the current owners of gold discover they own $45 trillion of the world's wealth.

 

[jueco2005]

GOLD WONT COME BACK WHY???
He who has the gold makes the rules.
Do not crucify humanity in a cross of gold.

Quote from Traden4Alpha:

If the market sets, the price, then its NOT a gold-backed currency. It's only a gold-backed currency if every citizen is assured that $1 of their currency is always and forever backed by exactly X ozt of gold. A floating price of gold means that the $ can freely inflate or deflate which is exactly what you want to prevent.

WRONG! Run the numbers. At $10,000 an ozt, gold-using economies would be shipping nearly $1 trillion/year to gold producing countries. (And that assumes we only need $7500 in gold-backed currency per person and that gold producers don't accelerate production if the price of gold goes to $10,000/ozt). And don't forget the initial transfer of wealth when the current owners of gold discover they own $45 trillion of the world's wealth.

 

[antitrust]

Quote from jueco2005:

You did mentioned something very interesting about the colonials using their own currency attached to the real economic output. In fact, the real cause of the revolution was the outlaw of this banking practice by London.

FRL as we know today is fraudulent. I just can’t see why people don’t see it.

Because of FRL we need the fed (lender of last resort), because of the fed, we pay this banking institution for using their “federal notes”. Even the governments must pay interest to the fed, for using their notes.

If you don’t see anything wrong with this………………I have nothing else to add.

If you see something wrong with this………………..you would agree to remove FRL as a banking practice.

Our forefathers understood this


“If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

—Thomas Jefferson in the debate over his opposition to the Re-charter of the Private Bank Bill (1809).


Thomas Edison did too


“People [private Federal Reserve Corporation stockholders] who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money [usury] from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest …But here is the point: If the Nation can issue a dollar bond, it can issue a dollar bill [U.S. Note]. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one [Federal Reserve Notes] fattens the usurer and the other [U.S. Notes] helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men [International Bankers] who control the fictitious value of gold. Interest is the invention of Satan”.

—Thomas A. Edison


And even the money lenders knew it


“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin. Bankers own the Earth. Take it away from them but leave them the power to create money, and with a flick of a pen, they will create enough money to buy it back again. Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. But if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.”

—Sir Josiah Stamp, president of the Rothschild Bank of England and the second richest man in Britain in the 1920s, speaking at the University of Texas in 1927.


industrialists knew it


“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

—Henry Ford inventor and founder of the Ford Motor Company.



I don't know why everybody is so scared of something proven to work. They either don't understand or they are so dependent on bank credit at this point in history that they can't fathom another way

Or they might think that we can all get rich by swapping fiat money for other types of debt instruments, without ever having to labor or produce any goods

The fire economy (finance real estate and insurance) can only survive if credit is increased exponentially (ponzi scheme)

And the only people who think an exponential system can go on forever is an economist