John wrote:You're right that the Fed has no money, as I've said many times.
Its balance sheet is pretty depleted.
In fact, you could even say that the U.S. has no money, inasmuch as
we owe China, Japan and other foreign countries far more money than we
can ever pay back.
But that's not the issue. The dollar has been the reserve currency
since at least the 1930s, and there are huge amounts of dollars in
countries around the world.
In the case of the Weimar Republic, few people outside of Germany
owned marks. In the case of Zimbabwe, no one outside of Zimbabwe
owns Zimbabwe dollars.
But there are huge amounts of dollars outside of America -- Europe,
China, the Mideast -- and all of those holders are as committed to
the value and integrity of the dollar as America is.
Forget about the dollar as an American currency. Think of the dollar
as a world currency. Even if America no longer had any dollars
whatsoever, the dollar would still be valuable on international
markets as a world currency.
People have accused me of being "nationalistic" when I write this
about the dollar, but that has absolutely nothing to do with it.
It's not nationalistic to say that the dollar has become an
international world currency, whose value no longer even depends on
how many dollars America has. America is just one holder of dollars,
among hundreds of other countries, and the value of the dollar is
determined by the collective value assigned to it by all those
hundreds of countries.
John
Thanks John for this explanation.
I tried to understand little about it since I find still something wrong there.
I think that "small model" as you done on your site often would be the best for explanation.
Lets imagine 100+1 man.
Every man has 100$.
Together amount is 10000+100 $.
1 of them is "the BIG" one. Others are subordinated "The BiG".
Everybody has a own currency, but the value "of all" is the BIG currency - lets say $.
Everybody has 100$ as reserve currency AND even currency to buying things (commodities, energy...) between them.
So they do not use a neutral currency (gold) or other but the BIG currency. Simple - it is the "world currency".
Even if that is an agreement - BIG has obvious had the more then good position in this system - but, this currency
had something behind as production and brutal force (of course).
That was before (couple years ago).
In the last couple years the BIG spend much more then he earned.
With other words - he borrowed money for different reasons:
- Huge spending on the commodities
- Huge spendings on the housings
- "financial engineering" spendings
- globalization - outsourcings
- Had (still have) a couple huge wars.
If we going back to the complete amount of 10000+100$... the following could be stated:
This is total amount of money.
If BIG one (since only he could do it) increase (print) supply with additional 100$ -
the value loss of the BIG currency would be about 1%.
If BiG one decided to increase supply 10 times i.e. 1000 (fresh printed)
- the value loss is about 10%.
So it is obviously that this is not favorable for subordinates.
If we forgetting the stocks for a while, and concentrate just on the Total amount of money =10000+100... It looks like your explanation would be OK if amount of printed money is not huge. (under 10 %)
Lets say it BIG do not printing 10 times amount of its part... (BUT he has possibility (!) sine he need not printing machine for it. It is good enough with computer)
In all cases, now when amount of money destroyed on the stocks and due to "financial engineering" is huge the amount of "new printed" money can not "catch" it.
Since subordinates were more or less forced to invest the BIG dept in the "financial engineering". The possibilities to bay for it, for example, BIG harbors - was of the table.
So you explained that other $ holders (lets imagine 100 of them) are interested to keep $ value high!
Yes.
I agree. (Question is how much of this piece of cake has everyone?... but OK)
But -
when they will stop tolerate more printing of BIG, and position in they are forced to by "fresh printed" money from BIG in order to by commodities from each other? (As yesterday S. Korea)
Every body new:
- that BIG spent too much
- that BIG did not save
- that the BIG has NO money more
- that money supply coming from printing (NOT from industry for example)
- that BIG has NO production (or very small production less than 15%) anymore
- that BIG has only - brutal force still
I mean - since everybody understand that BIG in treasury for currency covering - has
nothing (but brutal force)...
(Even worse - the BIG owe very much REAL money "covered" in commodities and hard work from subordinates)
In short - everybody need to "believe" that $ has some kind of covering by the BIG (similar as 1945) - since even subordinate have much of "nothing" in the treasuries!
How long it can take until subordinates - do not finish this "believe" game?
Shell they just wait until the BIG print "enough" money ("nothing") to cover ALL of his losses?
Or shell they try to organize themselves about another trade system - with for example gold as standard.
And since that BIG has "nothing" but the brutal force - will he just look what happens?