Dear Gordo,
Gordo wrote:
> Please explain how loans backed by dollars (which is what
> treasuries are), which in turn are backed by nothing, can go into
> default by the US government which can create any amount of
> dollars at any time, with the stroke of a pen (as we've seen in
> unprecedented fashion over the last decade but especially in the
> last couple weeks). This is why all the hysteria about FDIC not
> being able to pay claims in the future was so completely
> ridiculous. I'm not sure why so many people have such a hard time
> grasping this concept. We haven't been on a gold standard in
> decades, and yet people act and talk like we're still on it.
> From the Philadelphia Fed's publication called "The National Debt"
> (page 8) (as cited in How Money is Created): "The Federal
> Government, with the cooperation of the Federal Reserve, has the
> inherent power to create money - almost any amount of it. This
> power makes technical bankruptcy out of the question."
>
http://www.freerepublic.com/focus/f-new ... t_id=00024
This stuff does not contradict anything I've written, provided that
you remember that it was written several decades ago when $1 trillion
was considered an "unlimited amount of money."
The kind of money creation described here is debt creation, that's in
category #3 of my money typology.
The problem is what you mean by "an unlimited amount of money." Can
banks really create an unlimited amount of money?
Sure, if you want to create a lot of credit, and let a lot of people
borrow money, even people without the ability to pay it back.
Oh, wait, that's what's been happening the last few years. It was
done through subprime mortgages, auto loans, and credit card loans.
Now all those loans are collapsing, because it was believed that
banks could "create an unlimited amount of money." Well, it turns
out that banks CAN'T do that. There's a natural limit, and that
limit becomes apparent when loan defaults start increasing.
During the credit bubble, commercial banks, investment banks, hedge
funds and other financial institutions did create an almost unlimited
amount of money -- $1 quadrillion in credit derivatives.
What we've now learned that it doesn't work very long.
Now let's get back to your basic question: How can the government
default, since it can create as much money as it wants?
Answer: The government can default because it can't pay its debts.
And it can't pay its debts by creating more debts. And that's why
your suggestion fails.
Sincerely,
John