Showing posts with label money. Show all posts
Showing posts with label money. Show all posts

Tuesday, 19 December 2017

How Is Money Created?

Money isn't just pixel dust!
In an earlier post I described money as “pixel dust.” I was being cute—way too cute! Sometimes an analogy can hide much more than it reveals. Money is not created by Tinker Bell, though I did feel a bit smug upon realizing that the writers of the Zeitgeist film series repeated my observation that when you take out a bank loan you create that debt out of nothing.



Banks have the right to create money, but they need your help
The bank does not have the money it is lending you. Stop and think about that for a moment, because it is the answer to the question “how is money created?” As more and more people struggle to understand bitcoin, the fact that money is just a way of recording debt is starting to sink in. When I googled the question “how is money created?” I was surprised by the number of sites covering the question—the number of people who knew the answer. I found myself asking, as I often do, how could I not know this? Shouldn’t every ten-year-old know the answer to this question?  Every time you take out a loan for a house or a car or an education, or buy a cheeseburger with a credit card, you create money--those pixels on a computer screen somewhere that are the reason you work and save and struggle.

The Federal Reserve gives banks the right to create money
In the USA the Treasury prints the money, but the amount of printed money is less than three percent of the total money supply in the system. Actually no-one really knows how much digital debt (i.e. money) there is floating around on the internet and in the intranet systems of all the banks and financial institutions in the world. We know, as I pointed out in my earlier post, there are 1.35 trillion US dollars in circulation (i.e., paper money), but the US debt is 18 trillion dollars. The unregulated derivatives market (the one that caused the crash of 2008) is believed to be worth between 710 trillion and 1.2 quadrillion dollars. To answer the question how much US money exists in the world today (remember money is just a measurement of debt), you need to add up all these numbers: 1.35 trillion plus 18 trillion plus (to be conservative) 710 trillion.  In total, a conservative estimate is that there are  729.35 trillion US dollars in circulation right now. How was all this money created?

The rules for creating money
There is an exchange of paper but, basically, the US Treasury gives it to the Federal Reserve. The Federal Reserve then distributes the money to 12 Reserve Banks across the country which in turn pass the money onto private banks. So how does so much money get produced?  We've been here before: leverage.  It's all about the leverage ratio.  




This graphic (above), which I found online, does a nice job of showing how the money flows in what is known as the "fractal reserve banking" system.  "Fractal" means that the banks get a fraction of the amount that they are allowed to lend out, so it really boils down to leverage.  Descriptions of the "fractal system" make it sound as if the amount of leverage in the system is quite modest, but as Blinder (who you might remember was a vp in the Federal Reserve) points out, in After the Music Stopped, financial institutions figured out ways to create synthetic leverage ratios of up to 40%.  Let me remind you of what a 40% leverage ratio means.  A 4% leverage ratio means a bank with $1 can lend out $25,  a 40% leverage ratio means that a bank with $1 can lend out $250--250 times more than it actually has.


What is the US Federal Reserve? 
The Federal Reserve is the moola machine, the institution that creates money and runs the monetary system.  It is the model for and has tentacles into just about every central bank in every country in the world.  The cynical, conspiratorial answer to the question is that the Fed is a bunch of bankers, a cabal of the CEOs from the biggest banks and financial institutions in the world. According to the Zeitgeist movement, all the ways that we might imagine the world is being run--politics, religion, economics--are distractions, cover-ups, window dressing.  The only real power is the monetary system which remains hidden behind the activities of governments, religions, and all movement of goods and services.  If you ask why the USA is constantly at war with someone or something, the Zeitgeist answer is that nothing feeds the monetary system better, profiting and empowering those closest to the system, than warfare.  Even conservatives acknowledge that money is the life-blood of the economic system, and nothing pumps more spending, borrowing and debt (i.e., money) into the system than a war.
graphic of Federal Reserve System



Who owns the Federal Reserve?
This may seem like a strange, dumb, childlike question, but I as I have attempted to get a handle on how the system works, I understand perfectly how we end up at this question.  The pervasive suspicion that the Fed is owned and run by self-serving financial titans is hard to dismiss.  In her book Plutocrats, Chrystia Freeland notes a study on the incomes of Harvard University graduates showing a "split between bankers and everyone else, with financiers earning 195 percent more than their classmates."  Harvard grads aspiring to become part of the 1% of the 1% have figured out that being connected to the monetary system is the way to do it.  Certainly Jamie Dimon, a card carrying member of the .1%, CEO of Morgan Chase, the largest bank in the USA, being a member of the board of the New York Federal Reserve has got to have the average wage-earner wondering "what the fuck! how is that possible?"

The official answer is that the Federal Reserve is “a blend of public and private characteristics.” The Chair of the Federal Reserve and the seven members of the Board are chosen by the President of the USA and ratified by Congress. They all inevitably have strong connections to the world of banking and finance. As you work your way through the layers of administration, through the lip service and platitudes, the Federal Reserve does seem to be more and more a system run by banks for banks—despite repeated claims that the objective of the system is “to promote the effective operation of the U.S. economy and, more generally, the public interest.”

There are three kinds of answer to the question "Who owns the Federal Reserve?"

  1. The historical, conspiracy-inclined answer is that the Federal Reserve is owned by eight families: https://www.linkedin.com/pulse/federal-reserve-cartel-eight-families-max-kofoed
  1. The official answer is “The Federal Reserve System is not 'owned' by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.” https://www.federalreserve.gov/faqs/about_14986.htm
  1. The third answer, on the other hand, is “The Fed is privately owned. Its shareholders are private banks.” https://www.globalresearch.ca/who-owns-the-federal-reserve/10489

Whatever answer you accept, it seems clear that the much mocked concept of "trickle-down economics" is beside the point, we live, without much question, in a trickle-down monetary system.

https://www.investopedia.com/insights/what-is-money/

Thursday, 23 March 2017

Saint Mathew Pray for Us! Bank Deregulation Is Back!

Shock and awe and bank deregulation

Amid the boom and flash of the spectacular political theatre going on right now, you may not have noticed the announcements in a single utterance on television or in columns in the back pages of your local newspaper—“banks need to start lending money again,” (Trump on CNN), “President Donald Trump promised a meeting of community bankers to strip away some Dodd-Frank financial regulations” (B3 Globe and Mail 10 March 2017) and White House fires Preet Bharara “the high-profile Manhattan prosecutor known for his pursuit of public corruption and Wall Street crime” (A18 Globe and Mail 11 March 2017)—bank deregulation is back! “Bank deregulation” was the precursor to the financial collapse of 2008 causing banks and financial institutions to go bankrupt, individuals to lose homes, jobs and pensions, and triggering the government bailouts of the banks costing taxpayers what is now estimated to be a trillion dollars.  (Historically the British and Americans defined “billion” and “trillion” differently, but these days the American definition seems to prevail.  In the American system, a “billion” is a thousand million and a “trillion” is a thousand billion. Here is a more visual and visceral sense of how much a trillion is.)   The “Dodd-Frank regulations,” about to be "stripped away," were the rules put in place to prevent the collapse of 2008 from happening again.




Saint Mathew, the patron saint of bankers and accountants

Saint Mathew was an apostle of that Jesus the Anointed (who was voted “God” by the Council of Nicaea in 325).  Mathew is the alleged evangelical author of the first gospel of the New Testament  (although his name was not attributed to the text until after he was long gone, and oddly, in the gospel, he refers to himself in the third person--but then again so do I sometimes), and the patron saint of bankers and tax collectors (these days we might suggest that he choose a side), of accountants and money in general  He has a lot to answer for.  Even though I have graduated from agnosticism to atheism since beginning this blog, I’m recommending prayer in this case, because there really don’t seem to be any other options.  Bank deregulation isn’t just on the agenda, it seems a foregone conclusion.  



Bank regulation, bank-robbery deregulation; tomato, tomaato

I have to confess that I broke my pedagogical rule of Do No Harm Part II: Avoid Irony in my last post on bank robbery, but the point I wanted to make is that the next time you hear someone talking about “deregulating banks,” you can substitute “deregulating bank robbery”  and discover that the arguments, the logic and justifications turn out to be the same. So what?  We may be living in a global oligarchy these days with wealth dictating government policy and the law, but perhaps there is some measure of solace in being able to say, “I know you are going to screw us because you have that power, but forget being smug and self-righteous because we know what you’re doing.”

Step one of being un-fooled is to understand what the expression “bank deregulation” means.  Here are three words that you need to know in order to know what "bank deregulation" is all about: "derivatives," "leverage," and "rent-seeking."

  • Derivatives.  I may have talked “derivatives” to death in my earlier post, but basically what you need to understand is that “derivative” means that banks and financial institutions can “bet” on the stock and bond markets.  “Bet” is the important word here.  As described in The Big Short (both book and film), these “derivatives” are not investments in companies or products or services, they are simply companies and individuals betting that a stock will go up or down without actually investing in the company they are betting on or against.  Finance people make “derivatives” sound reasonable by describing them as “insurance”; as in you buy an insurance policy on your house to protect yourself against the possibility that it might burn down.  However, a derivative is more like buying an insurance policy on your cigar-smoking, alcoholic neighbour’s house in the hopes that his house will burn down—so why not buy him a bottle of vodka and a box of cigars for Christmas, his birthday, etc?  In the film version of The Big Short derivatives are shown as being like following your neighbour to the casino and when he bets two dollars on the roulette table, you bet 10,000 dollars with someone else that he is going to lose his two dollars, and someone else bets 100,000 dollars that you are going to lose your 10,000—that’s the derivatives market.  The derivatives market is estimated to be between between 710 trillion and 1.2 quadrillion US dollars.  (see "The Size of the Derivatives Bubble").  Just to put those numbers in perspective once again the total GDP of the USA is 17 trillion.

  • Leverage. How are these crazy numbers possible?  How is it possible that so much money—40 to 70 times the total wealth of the USA, 700 to 1000 times the amount of US paper currency which actually exists in circulation—is being gambled?  The answer is “leverage” (that’s chapter six in The Art of the Deal, the book which Trump’s ghost writer, who wrote the book, called “a tissue of lies”).  “Leverage” is what “bank deregulation” is all about.  If a bank has assets worth one million dollars, the average person might imagine that a bank can therefore lend out to clients up to one million dollars.  Under current US banking regulations the leverage ratio is 4%, which translates as a ratio of 1 to 25.  In other words, if the bank has 1 million dollars, they can lend 25 million dollars.  That’s right; for your mortgage or your car or your kid’s education, they can lend you 24 million dollars that they don’t have—but you, of course, must repay in money that you actually have.  (By the way, the mortgage that you owe to the bank is considered one of the bank's assets.  If you owe the bank $200,000, by regulation the bank is considered to have that money within its assets.)  The current "leverage ratio" (1 to 25) is the key regulation that banks find too onerous, limiting and difficult to comply with.  They want to change the leverage ratio so they can lend you even more money that they don’t have.
  • Rent-seeking.  This is the concept that we really need to watch out for.  The idea has been around since the 1970s, and is being much discussed in financial circles.  I found out about it reading Christia Freeland's Plutocrats:  The Rise of the New Super-Rich and the Fall of Everyone Else.  You might imagine that with all this money floating around it should be easy to cure cancer, end world hunger and poverty, offer everyone daycare and free education from kindergarten to PhD, but as the operations of rent-seeking become more obvious, it is becoming apparent that all this fabulous wealth doesn't actually produce anything, and it isn't the result of anything being produced.  Monumental wealth is being produced simply through the manipulation of government regulations, in particular the laws govern finance and banking. "Money" has become like Tinkerbell's pixie dust, not tied to anything of value, but available to the super rich to sprinkle on politicians, and for politicians to sprinkle back in greater measure on the super rich by adjusting the regulations for banking and finance to their whims and favour.  The disappearing middle class can look back on "trickle-down economics" and crumbs from the big table as "the good old days" because pixie dust may float in cosmic clouds above  but the .1% are exceptional at keeping it afloat and have little motivation to let it fall on the rest of us.





Tuesday, 27 December 2016

Money Can Buy Happiness. The Question Is: “How Much Happiness Is Enough?”

How much money buys happiness?

Thanks to Malcolm Gladwell we can now say that increased wealth correlates with an increase in happiness up to an annual salary of $75,000 USD—that’s $100,000 Canadian  (See Good Teachers Are Always Underdogs).  After $100,000 CAD, more money produces less and less happiness, until wealth eventually causes more problems than pleasures.  

    = < $100,000 CAD



We are left with the question: “How much happiness is enough?”  Strange question?  I hope so.  



Being unhappy is not a mental illness

Listening to a lecture given by Thomas Szasz, the psychiatrist who denied the existence of anything that could be called a “mental illness” (see also Terrorism and Madness:  Between Sympathy and Understanding), I was struck by his description of people who came to him thinking that they were mentally ill because they were not happy.  As Szasz reported, being unhappy is a perfectly reasonable, sane response to some of life’s events and circumstances.  



The pressure to be happy causes depression

I take as exceptions to the rule the numerous stories we hear of parents making their children direly unhappy, pressuring them to the point of neurosis, break-down and alienation over every choice imaginable from friends to habits to lifestyles to marriage partners to careers and everything in between.  For the average parent, myself included, wanting the offspring to be happy—no matter what else—is the number one priority.  However, I have at times found myself wondering if wanting your progeny to be happy isn’t just another way of putting pressure on them. (Overthinking!?  It’s what I do.)



Sometimes being unhappy is healthy

How often do we put pressure on the average millennial by telling her/im s/he should be happy, convincing her/im to believe, like one of Dr. Szasz’s clients, that being unhappy is a sign of mental illness?  How often do we oblige him/er to put on an endless display of alacrity and to answer every “How are you?” with Pollyanna enthusiasm?   Underlying these prescriptions for required happiness is the worst of all proscriptions:  “Sammy Jane, you do not have the right to be unhappy!”  At some point we all have to admit the obvious.  Being bored, irritated, frustrated and enraged are the normal, sane, appropriate responses to situations which are boring, irritating, frustrating and enraging—if you have not encountered these situations in your life, you are not from this planet.



Imposing our view of happiness

The real risk of parents insisting on their kids being happy is that the things we ancestors might imagine as the precursors and prerequisites to happiness, might not actually be what will make our heirs happy.  The prerequisites we imagine might actually be the things that would make us happy—if only our kids would do them.  We parents might unwittingly be insisting that our kids make us happy under the guise of our wanting them to be happy.

"The child is father to the man"

Happiness is not just a parenting issue.  True Romantic that I am, I happen to believe Wordsworth’s claim that “the Child is father to the Man.”   In most cases, adults have a lot more to learn about happiness from children than the other way around.  (Ever notice how many adults worry about spoiling children but never about spoiling themselves.)  In the adult world, happiness and its prerequisites have become addictions.


Definition of addiction

I once heard a specialist in the field describe addiction this way:  “You’re not hungry, but when someone places a bowl of salty peanuts near you, you decide to have one.  The taste of the first peanut creates a craving for more.  That is the process of addiction.”  As I listened, I wasn’t sure if this was just an analogy or if he meant it was possible to become addicted to peanuts.  No doubt the obesity statistics make it obvious that food is a North American addiction.  The desire for food is not created by hunger, but by food itself.



Sometimes addiction is the norm

I have to admit I guffawed when I read that Tiger Woods was in rehab being treated for sex addiction.  The idea that sex can be an addiction makes sense, I guess, but we live in a society where sex addiction is the norm.  Men are advised to take little blue pills to maintain the addiction, and women are expected to support the cause with purchases from the Victoria’s Secret catalogue.  I’ve heard that men think about sex every seven minutes (not sure who gathered these statistics—see Lies, Lies, Nothing but Lies ).  That sounds about right, not because men are naturally inclined to having sex every seven minutes, but because seven minutes is a typical interval between exposures to some sexual stimulus—ad, image, scene, smell, physical person or all of the above—in our society.  




The concept of enough

I am still fascinated by E.F. Schumacher’s concept of “enough” from Small is Beautiful.  (See Good Teachers Are Always Underdogs.) How much of each of the things that are supposed to make us happy is enough?  How much food, sex, comfort, attention, fame, power, status, beauty, knowledge, admiration or love is enough?  How can we answer this question when each of these pleasures and affects can become an addiction; in fact, already are addictions in our culture and society?




Happiness is the absence of pain

On a Mediterranean cruise recently, I was struck by how many passengers—myself included—were beginning to find the endless luxury and pampering oppressive.  The philosopher Schopenhauer argued that happiness was the temporary absence of pain.  According to Schopenhauer, the achievement of our desires makes us sated and bored causing the endless cycle of pain to begin again.

Why are the Danes the happiest people in the world?

Year after year, Denmark is identified as the happiest country in the world.  The Danes, however, do not seem like a smiley, joyous people.  Analysis reveals that the basis of their happiness is their low, and therefore achievable, expectations.  The key, then, to being happy is knowing how much is enough.