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Printing Money Out of Thin Air?

We are all familiar with this phrase by now. I know that it refers to the expansion of the money supply. Is it a literal or figurative expression? I mean how much of the money supply is actually physically printed as opposed to just digitally created. Can anyone shed some light on this?

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"The dollar is not money any longer but a handful of paper"

"The dollar is not money any longer but a handful of paper distributed in the world without commodity support,"

Iran has stopped using the U.S. dollar in its oil transactions with the outside world, switching to currencies such as euro.
Oil prices have hit all-time highs above $115 a barrel in recent weeks, amid reports that oil and gasoline reserves in the United States were lower than expected and as the dollar sinks to record lows.

"The oil price of $115 a barrel in today's global markets is a deceiving figure. Oil is a strategic commodity that needs to discover its real value," the Web site quoted Ahmadinejad as saying.

Crude oil futures surged to a new trading record of $117 a barrel Friday following an attack on a key pipeline in Nigeria. The increase capped a week of record highs fueled by supply woes and the dollar's weakness relative to other major currencies.

Ahmadinejad said despite high oil prices, the true value of crude oil, adjusted for inflation, is currently less than what it was in 1980.

"While the price of other commodities have increased, the economic value of the current oil price is even less than 1980," he said.

This is a response

I received from someone who I have been having a dialog with. I shared Republicae's post from below into the email. Here is his response.

_______________________________________________________________

I was under the impression that most of our national debt is in the form of securities which are sold domestically and to foreign governments, Japan holding the most of our foreign debt with China coming in second. Relative to that, how much creation or printing of "new" money, which devalues existing currency, is created. As I understand what you have said, if the Fed writes a check, that may be sourced by sell of debt or by creation of money.

A concern is that the tone of this discussion is a bit of "the sky is falling" nature and raises my alarm bells that the problem, like so many, may be overstated. It is always difficult for us lay people to assess the relative merits of conflicting analysis by experts.

A problem that I have in my field is that advocates of one market design or another, tend to overstate the positive attributes of their pet design and neglect to mention the related problems. My consulting colleagues and I have always tried to help our clients to understand alternatives and their advantages and disadvantages and then decide on a new set of rules which bests fits the local political, regulatory, business and technical set of constraints. In contrast, competing consultants and ideologs fasten onto a particular set of rules without regard to important local factors. That seems to me to be the same way as the neo cons apparently decided we needed to invade Iraq.

Thanks for illuminating the issue of money supply.

To answer that question directly...about 5% is actually printed

Republicae....excellent....once again thank-you for the detailed explanation. I learn from you every time you write!

Republicae's picture

Our present Fiat Monetary

Our present Fiat Monetary System, like all that came before it, has a finite life-span due to the fact that it is completely dependent upon the creation of debt for its existence. Since each and every single Federal Reserve Note and every other currency in the world must be borrowed into existence each of them basically represent a legal notification of a debt obligation, or an IOU.

Due to the fact that each "dollar", whether physical or digital, is created by the formation of debt, the debt is proportional to the circulation of the currency. However, since the currency is borrowed it also carries with the primary debt an added interest obligation. Since all economic growth in this country and around the world now depends on the expansion of credit and conversely debt, there will come a time when the debt demands far more than the economy can service because the debt multiplies exponentially due to the addition of the interest obligation.

In a fiat monetary system the debt can never really be paid down without contracting economic growth, it simply continues to multiply. In very simplistic terms, when the government does "pay" against the periodic principle and periodic interest obligations of the debt it must immediately re-borrow that amount to maintain the expansion of the economy. Since the debt multiplies exponentially it is irreversible and will continue to expand due to the weight of the interest obligations of the original debt.

The Federal Reserve economy, and for that matter all Central Banking Systems which rely upon a total fiat monetary system is can be likened to a balloon with the skin of the balloon representing the economy and the air representing the circulation of fiat currency, therefore the debt. The action of inflating the balloon is the expansion of the money supply/debt. The Federal Reserve blows air into the balloon, and although it should allow for a little deflation between breaths now it simply takes the deflated amount from the balloon and blows it back into the balloon. Eventually the outer skin of the balloon can no longer contain the amount of expansion from the internal pressure of the debt and collapses due to the demands of the internal debt.

Every fiat system in history has been shown to have a finite life-span, ours is no different. Eventually, and I think we are already seeing it, the skin of the economy can no longer maintain viability due to the internal pressure of the massive debt that siphons off the structural integrity of the economy.

The entire system terminates itself due to insoluble debt. Now, the question is what do you think happens to all those government programs, government bonds, investments, pensions, insurances, 401ks, savings, corporations, jobs and even the basic services that depend on our fiat monetary system?

What happens to you and your family when the fiat monetary system collapse under the weight of the debt that solely forms its entire foundation?

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Republicae's picture

Prices are “sticky” in

Prices are “sticky” in markets. In a similar manner that expected inflation would prematurely inflate prices before the actual effects of inflation hit the market place. Deflation is, in most cases, a side effect of aggregate demand where production is weighted by a drastic decrease in spending which then contributes to an increase in unemployment and financial stress on several levels that perpetuates the deflationary cycle.

Lets say, for simplicity’s sake, that we just use gold as money and we live in a totally different world. Let’s also take “Paper Money” out of the equation for a moment. Like all goods or commodities, the changes in the gold stock would also change based upon production. We also must take into account that the vast majority of people, especially in government and in my field: banking, believe that you have to have some controls over the system instead of allowing the market to manage it.

While commodity money is similar to other produced goods, it is very different in that it confers not only a medium of exchange, but also social benefits that other commodities simply don’t share; in addition, unlike other goods, commodity money is never “used up”, but continues to circulate while retaining its value. Unlike fiat money, commodity money [our example being gold] does have a price based upon the inherent value of the metal itself. Supply and demand determines price and therefore the measure of exchange, unless the measure of exchange is fixed by mutual agreement or government decree.

So, say the miners of ABC Gold Company hit a very rich vein and suddenly the supply of money increased, what would happen to the prices of goods and services? Although it would not happen immediately, eventually as the abundant supply worked its way through the economy the prices of goods and services would bid higher because the price of gold would decrease based upon the extra supply. This would continue for a while until the market began to adjust to the supply through economic growth, which unlike a fiat system, would eventually stabilize the prices of both goods and services and the gold itself. In a total fiat system, you don’t have those market forces upon the money itself and therefore, as we have seen since 1971, inflation increases unabated.

Conversely, if the supply of gold decreases, the purchasing power of the commodity money increases until the market forces take effect and make adjustments. While most people would say that it is not stable, it is much more stable and much more secure then the current fiat system we have in place. In every incident where a commodity currency system has seen a drastic disruption, you will also see some sort of heavy meddling by governments/banks.

If you gave people the choice between using fiat currency and commodity currency which do you think they would choose? The only reason we have fiat currency is the government mandates that taxes be paid in fiat currency and one of the reasons we have taxes is to prop up the fiat currency system; another reason is to redistribute the wealth in this country. If you read publications from the Federal Reserve they explain why they tax us:

"In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount. What, then makes these instruments: checks, paper money, and coins acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and services whenever they choose to do so. THIS IS PARTLY A MATTER OF LAW; CURRENCY HAS BEEN DESIGNATED "LEGAL TENDER" BY THE GOVERNMENT, THAT IS, IT MUST BE ACCEPTED."

"Modern monetary systems have a fiat base, LITERALLY MONEY BY DECREE with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as RESERVES. The DECREE appears on the currency notes: "This note is legal tender for all debts, public and private." WHILE NO INDIVIDUAL COULD REFUSE TO ACCEPT SUCH MONEY FOR DEBT PAYMENT, EXCHANGE CONTRACTS COULD EASILY BE COMPOSED TO THWART ITS USE IN EVERYDAY COMMERCE. HOWEVER, A FORCEFUL EXPLANATION AS TO WHY MONEY IS ACCEPTED IS THAT THE FEDERAL GOVERNMENT REQUIRES IT AS PAYMENT FOR TAX LIABILITIES. Anticipation of the need to clear this debt creates a demand for the pure fiat dollar."

Unless and until a currency collapse happens, it certainly is wealth. Paper dollars will remain "wealth" as long as markets exist in which those dollars can be traded for goods or services, and as long as stability of the currency remains. 



While it is true that under the current system the fiat money is a medium of exchange however, since it is debt-based all so-called wealth is based upon that debt. Now remember, everything is connected and cannot be separated from the debt-based system of fiat currency. Everything in the entire global economy is based upon money, which stands solely on debt. All Treasuries, stocks, bonds, real estate, 401ks, pensions, Certificates of Deposit, everything is based upon and driven by debt. While we may consider fiat money wealth, in fact it is merely a medium of exchange and unfortunately most people are not very good at exchanging it for real wealth or property. Now, gold money is also not wealth per se, but it is closer to wealth then fiat currency.

Now, continuing with the issue of gold. At one point, lets say in 1913, the fixed price of gold was $20 per ounce, so lets take that as a measure. Today the price of gold settled at $635 per ounce, so lets compare that to our 1913 measure of $20 per ounce. In 1913 it took 20 Dollars to buy one ounce of gold: a Dollar was valued at 1/20th of an ounce. Today it takes 917 Fiat Dollars making the value of a Dollar 1/917th of an ounce of gold. Now what happened? Did the price of gold rise or did the value of the Dollar been debased? Actually, it is a combination of two factors that are closely tied together: the Dollar has been devalued through inflation of the money supply over the years and there is currently fear within the market driving the price of gold higher. It now takes a little over $22,000.00 to buy what $1,000.00 bought in 1913.

Fiat is nothing but borrowed money, that is the only way it can come into existence. Without the debt backing it there is no circulation of the fiat currency (paper or digital). Every single dollar must be “borrowed” into existence creates the entire volume of fiat currency; whether the borrower is an individual, a corporation or a government.

In the Federal Reserve publication "I Bet You Thought" states: "Printed Federal Reserve Notes that sit in the Treasury's vault do not become money until they are released into circulation in exchange for checkbook money that was CREATED BY A BANK LOAN. As long as the bills are in the vault with no debt-based money to replace them, they technically are just paper, not money."

The difference between the two systems is not only the manner they function in an economy, but also in the fact that sound commodity money is in fact a definite substance, a measure, a weight; while fiat is nothing more than an credit and debit system built upon and entirely supported by the debt that creates it.

In fact, the debt is also different between the two systems; fiat, based solely upon debt carries no value in an of itself but must be manipulated through various measures of the Central Banks deflating and inflating the economy…far from a “free-enterprise” system, indeed it is far from Capitalism. Commodity money, on the other hand, bears the shifts within the market itself, and all debt carries an equal measure of money (commodity) to support it as it works through the economy.

In the fiat system, debt drives the entire economy through Central Bank manipulation; conversely in Sound Money systems the market itself drives the economy with the money merely being the tool of exchange. All growth in this economy [recovery started in 2002 and has extended until 2006] is built upon the influx of debt based upon “cheap money” thanks to the Fed lowering interest rates to 1962 levels and that is one reason you see such incredible booms like the latest one in Real Estate. The problem with the latest Real Estate Boom is that it was produced in reverse then almost every other boom in Real Estate. Instead of higher wages, higher productivity and growth producing it and driving it to a sustainable level, it was solely the effect of very low interest rates (cheap money). Every single boom that is solely produced by the extension of credit [in other words debt-based] will always collapse and usually there will eventually be a correction close to pre-boom levels.

When the Fed began its interest rate dive, the economy was expanded because of the low cost of capital. Money was so cheap that everything began to “rally”. The problem is that consumers went wild with the cheap debt and financed just about anything they could. Savings dropped like a stone to negative numbers that are actually lower than the 1930s.

The problem is that all the stimulation by the Fed did not have the consequences they had hoped for and the economy didn’t produce normal new job volume, it has been extremely high with inflationary pressure and it was almost solely dependent on Real Estate. Most recoveries don’t operate that way; instead of a robust economy driving the Real Estate Boom, the Boom was really the only thing driving the economy and it is apparent that the Fed has no idea what to do next because they have played their hand and frankly it sucked.

The problem is that most people in this and other countries think money [particularly fiat money] is something it’s not; it is not wealth. The vast majority of wealth in this country is borrowed or rented wealth due to the overwhelming load of debt that hangs over such “wealth”. The major issue is that not only are most consumers weighted down with debt, but corporations and the government is weighted down. It is the kind of debt that weighs upon this Nation that is the problem.

In a Sound Money system, you do not make the money out of debt as with the fiat system, therefore the monetary system itself is not weighted by debt. Now in a Sound Money system you certainly can generate debt [considered “healthy” debt] and it is desired in a Sound Money system, but the monetary system itself is not generated by debt as with a fiat system. Concerning usury, within the Central Banks fiat system, every single Federal Reserve Note carries interest because every single Federal Reserve Note [or instrument] is an obligation; that is not the case with Sound Commodity Money.

Market forces drive the economy in a Sound Money system whereas the Fed drives the market in this fiat system, and based upon the Fed’s record it is not a very good driver.

Fractional reserve banking allows bank money creation even with commodity currency. It doesn't matter if we carry around paper dollars or gold nuggets, if banks exist (and banks will always exist), money can be created "from thin air" . The only way to prevent this is to prohibit fractional reserve banking along with all other unsecured private paper obligations. It should be obvious that without paper obligations we would have no functional financial markets and consequently, a "dark ages" economy.

The problem is the Fractional system itself. For a fantastic study do some research into the way that the Fractional system came about. There’s not enough time [getting late here], or space to go into it at this time, but it is a fascinating study. I think you will find that the Fractional System of Banking doesn’t benefit the economy as much as you might think, but how it benefits the banking cartels and that it why it was invented. The Fractional/Fiat System is the primary reason we are in deep kaka today.

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Whether you own a "digital

Whether you own a "digital dollar" in the bank or have a paper dollar in your pocket, they are both part of the overall money supply and mean the same thing in that regard. The "thin air" refers to how the money comes into existence to be part of the money supply. It is just "created" at the whim of central bankers, so there is no limit on how much can be in existence.

Here is a great video series which explains it:

http://www.youtube.com/watch?v=cy-fD78zyvI

Printing Money

used to be what they did before the computer/electronic age. I am reading a book called "When Money Dies, The Nightmare of the Weimar Collapse" about post WWI Germany. They were always referring to turning the printing presses to make more marks and this was making them more worthless and driving hyperinflation. This book is an excellent read and gives insight into what is going to happen in this country, if we don't fix things.

Healthnut4freedom

"Trust in the Lord with all thine heart; and lean not unto thine own understanding. In all thy ways acknowledge Him, and He shall direct thy paths." Proverbs 3:5,6

Healthnut4freedom

The lip of truth shall be established forever: but a lying tongue is but for a moment...Lying lips are abomination to the LORD: but they that deal truly are His delight. Prov 12:19,22

I believe that one of Hiltler's desparate plans at the end

of the WWII was to print US dollars to cause the collapse of the US currency.

It's electronic money

It's not practical to physically print the cash. What we perceive as money is actually credit given by the Fed to depository institutions or created in the fractional reserve banking system.

Fiat money isn't backed by anything. Not even paper.

Both of the responses below are true.

Regardless of the form, electronic or paper, it's fictious money with no labor, savings or goods behind it. It's like printing monopoly money from your computer.

It is the ulitmate money making machine and history's greatest scam of all time.
It is watergate times a million and when the American people realize what has happened it will be a riot!

It makes one truly appreciate the wisdom of "Throwing the money changers out of the temple" declaring them to be a "den of theives".

I think it's figurative

Should say "Created out of thin air", but printed sounds better?
I don't think the printing presses could keep up! ;-) ;-(

northstar's picture

I think both are the same.

They both can be spent.
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People worldwide support Dr. Paul too :-)
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Real eyes realize real lies

We want our country back

Every year is a year for Ron Paul!

Excellent questions

Excellent questions. Part of the problem in answering is that they stopped publishing M3 a while back and manipulated the Consumer Price Index (CPI) to paint a prettier picture for the American cattle.

"We don't have to start a brand new revolution...All we have to do is restore the original Constitution." -Ron Paul

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"...a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people." -John F. Kennedy