The American money capture

[Istvan Oszaraz von Keszi]

Blanc Weber wrote:

> Would it be too complex and lengthy an explanation to provide to say 
> how the money supply is decided in the first place; that is, how an 
> appropriate amount of it is calculated initially?  Is this in reference 
> to the gold or other backing which gives each dollar its monetary value?
> 

Gee that's like asking, is it too complex and lengthy to explain
how crpyto works?  

But here goes.  I'm posting this purely in regards to how it
relates to digital money and how value can be given to it.  

In it's simplest form money is simply debits and credits kept on
certain ledgers.  Let me present the most simple example.  Alice
has a supply of money.  Let's say a $1000.  She deposits this in
her favourite bank.  The bank then lends the money to Bob.  Alice
has $1000, and now Bob has $1000.  The supply of money is now
$2000.

Bob then spends the $1000, he borrowed. The seller deposits this,
which the bank then relends, and on and on. So money grows, and
grows, eventually becoming valueless.

Central banks try to limit growth by using interest rates to
reduce the demand for money, and by requiring banks to post
reserves with their central bank on their deposits.  

This theoretically keeps a cap on money growth.  If the central
bank raises the reserve rate the banks have less money to lend,
since they must post their reserves not just on new money, but on
old money that they've already lent out.

So if Alice deposits $1000, and there's a reserve rate of 10%,
then only $900 can be lent, and then $810, and then $729, as the
money makes it's way through the economy. 

The central banks can also control interest rates, and reduce the
demand for money or vice versa.  Since a change in reserve 
rates, affects not only new deposits, but old deposits as
well, it's a very powerful instrument.

Unfortunately, (and this is where it really gets interesting,
there are no reserve requirements in international money centers,
with London being the center of most of this money.  These funds
are called Euro-Funds, and the interest quoted is the London
Inter Bank Offer Rate. (LIBOR). Most of the growth of money
occurred, here during the 1970's, when OPEC put the world into shell
shock with their sudden increase in the oil price.  OPEC nations
had billions of dollars which they deposited in London.  These
funds were then relent primarily to nations, which then spent the
money on *projects*.  (Marcos comes to mind, as well as Brazil
and the destruction of the rain forests, but I digress)

The problem of course is that since these funds are non-domestic.
Domestic central banks can't control them.  It's a free for all.

So the money went around, and around, growing and growing, until
it slowly became worthless.  The only thing that keeps money
growth in check is market discipline and faith.  The whole house
of cards doesn't come tumbling down, because Alice has faith that
she has $1000.  In reality the emperor has no clothes.

No, most major currencies are not on the Gold Standard.  They
float purely in relation to other currencies.  So what gives
money it's value?  Purely, the loans which back it up.  This is
why it is practically impossible to stop, eco-disasters from
continuing.  If the countries that have "borrowed" this money
default, the whole thing collapses.  It collapses everywhere,
simultaneously.

Now we get to the problem with digital money. It's a stand alone
system with no "faith" in it and with no growth built in.  Faith
is the only thing that keeps things working, that and legislating
paper as legal tender, so people are forced to accept it.

Obviously, legislating digital money as legal tender is outside
our power.  Putting growth into the system without destroying
faith is also very difficult.  The only logical step is to make
digital money repesent something.  It must be convertable into
something that people already have faith in.  Otherwise I fear,
that digital money may not fly.

--

Istvan