Money creation - some basic questions

[wegorkie]

Hello to all iTulip folks,

There is really mess in internet resources related to education about money creation. It seems like even proffessional economics often do not know much about the process. As iTulip experts analyze the thing closely I want to ask some questions cause I need to understand the process that central banks use to create money.

Anyway, let us go to concretes:

Starting from this point: http://en.wikipedia.org/wiki/Federal_Reserve I know about "repurchase agreements" and "outright transactions" that can regulate money supply. If Mr Hussman is right: http://www.hussmanfunds.com/html/fedirrel.htm than banks also can create money by credits and multiplications without even small reserves left so the money they can create is infinite.

Ok, my first questions are:

1. Is Mr Hussman correct in his article?

2. Is the process of "Outright transactions" in Wikipedia correctly described? If so, does it mean that government is getting money created from nothing and then spending on goods? I mean is government this way getting goods for nothing, i.e. is stealing goods from people? Is this an example of hidden tax?

I have more questions but would be gratefull for the answers for these two just to begin discussion that is interesting and important I think.

Thanks.

[soewhatman]

Re: Money creation - some basic questions

Hi there.

I'm muddling through a crash course on monetary policy right along with you.

Point 1: Here is a link to the Federal Reserve's current reserve ratio requirements.

http://www.federalreserve.gov/moneta...reservereq.htm

As you can see, there are categories of deposits that have no reserve ratio at all. There has been a steady decrease in the reserve ratio since the inception of the Fed in 1913, and it seems by the early 90's the reserve ratio was nearly irrelevent.

Here is an itulip article that has some great information on this.

http://www.itulip.com/forums/showthread.php?t=292

Point 2: Yup, money from nothing. There is a "hidden tax" associated with this which comes in the form of future inflation as the money supply is increased. There is a less hidden tax on this in that the government has to pay the interest on the Treasuries it sells to the Federal Reserve. The Fed doesn't keep all the proceeds, though, only a 6% (i think) dividend for each of the member banks. The rest is refunded to the Tresaury. The "money from nothing" aspect is why the government is so addicted to the Fed I imagine, but last I heard there wasn't any such thing as a free lunch.

Good luck. Hope I'm not steering you awry.

[Rajiv]

Re: Money creation - some basic questions

You can also see this video Money as Debt and the discussion around it

[wegorkie]

Re: Money creation - some basic questions

Thanks, just not to mess up the forum I will continue the discussion on the old thread:

http://www.itulip.com/forums/showthr...4565#post14565

[bart]

Re: Money creation - some basic questions

Ok, my first questions are:

1. Is Mr Hussman correct in his article?

2. Is the process of "Outright transactions" in Wikipedia correctly described? If so, does it mean that government is getting money created from nothing and then spending on goods? I mean is government this way getting goods for nothing, i.e. is stealing goods from people? Is this an example of hidden tax?

I have more questions but would be gratefull for the answers for these two just to begin discussion that is interesting and important I think.

Thanks.

1. Yes (I didn't read Hussman's full article - your statement/summary is correct - see the definition of fractional reserve banking)

2. Yes