Tornado Alley (PROG)

[SilverSurfer]

inflation occurs when money in the economy has velocity to chase after diminishing goods and services, not just because there is more fiat sitting on balance sheets of banks or corporations. Destructive Bubbles are what we have had more than the kind of inflation we had in the '70s where everything went up. There are plenty of goods and services in a globalized economy and plenty of places for the excess reserves to go, like bonds, oil or the stock markets. That does not change the fact that I have to pay over three bucks for a gal of gas when there is no shortage of gas or over four bucks for a gal of milk when milk is abundant. The U.S. Dollar is strong from time to time and weak from time to time but the overall trend is dollar dilution evidenced by the fact that a 2013 dollar will buy about 3 or 4 % of what a 1900 dollar bought, but prior to the institution of the Federal Reserve the U.S. dollar was really stable. A 1900 dollar would buy about the same goods and services as a 1792 dollar.

As Yogi Berra said, "In theory there is no difference between theory and practice. In practice there is."

No. 1: The U.S. Government Is Self-Funding

Economics textbooks assume the government borrows money from private citizens and then spends the borrowed money. When the government does this, there is less money for private businesses to borrow. This competition for money pushes interest rates upward.

In practice, when the government spends money it issues checks and the new government checks get deposited in banks. These checks raise the level of bank reserves. Banks don't want to hold low-interest reserves, so the banks swap the reserves with the government for interest-bearing Treasury bonds. In this process, the government prints money and puts it into the economy. Then it issues a bond and sells it to the bank in exchange for the money it just spent. In completing this transaction, the government borrows back the money it just spent.

Therefore, the federal government is in practice self-funding. It pays interest to the bondholder, but through a sort of slight of hand it gets the money from itself, not from private citizens. (This applies only to governments that put their names on their currencies not to state governments or euroland governments, neither of which have their own currencies -- e.g., there is no Greek currency or Montana currency.)

Imagine going to the bank and depositing $10,000 and at the same time taking a loan out for $10,000. Now you have your $10,000 back and a loan. That's what the government does -- it prints the money, deposits it into the economy, and takes out a loan. In the past, people have complained that this makes no sense -- but that's a different story. And it is immaterial for investors because this is how we do it in our modern economy.

No. 2: Banks Are Self-Reserving

In textbooks, banks loan out a fraction of their deposits. Each loan is backed by a small portion of the banks' deposits -- a reserve. Currently, banks are required to keep reserves. But, in practice, the amount of required reserve is miniscule and there is a significant time lag from when the bank makes the loan to when it must account for the reserves.

If you borrow money to buy a car, the bank gives you a check, you give the check to the dealer for the car, and the dealer deposits the check in the bank that night. When the dealer deposits the check, new bank reserves are created. The banking system now has the money to meet its reserve. (Also, if the bank doesn't have reserves, it can borrow the money from the Fed.) In practice, banks are self-reserving. Banks can loan as much money as they have creditworthy customers to borrow it.

http://seekingalpha.com/article/1310611-how-to-make-money-with-modern-money-theory?source=email_etf_daily&ifp=0