skidstreet,
thanks for your response, but my questions were not directed to you; they were directed to golfin, the person to whom I wrote the response. I'm still waiting for his answers.
You are mostly (as in not totally) correct in the first paragraph so I wont bother to quibble about the details, except to state that it does not answer my questions which were: what is a real store of value, and what is thin air?
In your second paragraph you are virtually totally wrong on every point:
You wrote "The same thing happens on a smaller scale every day at banks". In the first paragraph you described how the FED prints (creates) money by buying Treasuries. What you left out is that immediately after that, the fed literally prints, and mints, new currency (legal tender) and the money supply goes up by the same amount. Commercial banks do not print money, therefore no money is created when they buy Treasuries, and the money supply remains unchanged.
You wrote "Here again money was created out of debt". That is totally false. Commercial banks do not create money; they facilitate the creation of debt. Only the Fed creates money. Keep in mind that the money loaned out to purchase that house went to a seller, and that seller put the money back in a bank. I'll get back to that in a minute. Conventional loans are not money; they are obligations to pay money at a later date. Now here is an extremely important point: commercial banks must, by law, have cash (legal tender) on reserve either in their vaults, or in the vault of the local Fed Regional Bank, an amount equal to the Fed's reserve ratio requirement. Right now I think the Fed has set that ratio as 12%. This means that the bank may only lend out 88% of what it receives. Remember the seller of that house? -- that money came out of the bank and went back into that bank or another bank, and 88% of that new deposit can be loaned out again; and again and again until 88% of the remainder compounds to zero. No money was created in the process; money simply flowed in and out of the bank in the form of loans. All that was created was more mortgage debt. That debt is not money, it is not legal tender. Once a bank's cash is at that 12% level of all outstanding loans (which means that the bank may have loaned out $7 for that initial $1 of deposit) they can no longer make any more loans to anyone. In other words, the initial deposit of $1 in cash has allowed the bank to create debt of $7. Once in a while a bank may be too close to that 12% level to be comfortable, so they borrow money from the Fed overnight -- that money must be paid back the next day.
Fiat currency is legal tender that cannot be converted to coin, and that's all there is to it. To gold bugs it means that the legal tender is not backed by gold.
You should look at all the money in your wallet. It all says "note". What is a note? It is an IOU. All legal tender is debt, and is what we call (legal tender) money. But not all debt is legal tender. The mortgage on a house is not legal tender but it is a debt. That mortgage may be bought and sold any number of times for any amount of money but, since it is not legal tender, those operations have no effect on money supply. Money is neither created nor destroyed by market operations on conventional debt. Money is created when the Fed purchases debt issued by the US Treasury.
You wrote "So there you have the full circle with money created out of debt". I just pointed out above (with the statements that not all debt is the same, and that conventional debt is not legal tender) that your statement is not true. Money is created when US Treasury debt is purchased by the Fed and distributed to its member banks in the form of legal tender. This action increases their amount of money held in reserve and allows the creation of new debt until the reserve ratio is met; thereafter, no more loans may be made until legal tender comes into the bank as loan pay-downs or as new money.
Now I would like to point out that neither debt nor money is "thin air". Debt is a solid legal obligation by the borrower (whether individual or government entity) to pay off the loan, under the terms of the loan, with legal tender. A note holder must accept legal tender offered as payment for the debt. The note holder is not legally obliged to accept any other form of payment. Non-payment could cause the borrower to end up in foreclosure, bankruptcy, or jail; and that is not thin air.
I hope you have fun at work and a nice day. Lucky me ... I don't have to go to work, and I know I will have a nice day.
AI
