The Weiner Component #147 Part 1 – Development of Money & Its Uses

Various Federal Reserve Notes, c.1995. Only th...

Various Federal Reserve Notes, c.1995. Only the designs of the $1 and $2 (the latter not pictured) are still in print. (Photo credit: Wikipedia)

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Probably the most misunderstood entity that exists today is money, currency, what it is and all the ways it works in the existing societies.  The problem with money is its history, what it was and is, and how the concept is generally understood by most people today.

 

Originally money was an object of value like gold, silver, or some other precious entity.  Presumably, in places like early Phoenicia, well over two thousand years ago, goods were traded for precious metals.  This was done with scales; gold or silver would have a fixed value and an equal value of goods would be traded for a set amount of the precious metal.  Eventually someone or a group of someones came up with the idea of stamping a set weight on the gold and coins came into existence.  They were gradually refined, as time went on, with stamped pictures of the rulers profile and with these specific coins with set amounts of money came into existence.  From this, over the centuries, with occasional breaks in the sequence, the concept and use of money, set amounts of gold or silver, developed.  It was until the end of the first third of the 20th Century an exchange of value for value, the goods and services for the coins (money).  Money was as good as gold because it was gold.

 

The problem that developed over time was that the amount of gold and silver available for currency was dependent upon mining discoveries or exploitations of different parts of the world.  For example in the 16th Century Spain gutted the New World of its gold supply causing a 90 year period of inflation in Europe that lasted through most of the fifteen hundreds.  By the 17th Century there was again a shortage of the gold supply in Europe and not enough money (gold coins) available to supply all the monetary needs for economic growth on the Continent.  Consequently the value of gold rose and periods of deflation occurred, the value of the gold coins increased.

 

The problem here was that there were two totally different processes which were supposed to balance each other but never did.  Precious metals had to be discovered and mined at the same rate that business between and within nations expanded.  This never happened.  Added to this were economic systems like mercantilism, which hoarded gold by creating royal monopolies within European nations.  Economically much was not understood then.  And the amount of gold was never enough to cover all the needs for monetary growth.

 

The use of paper came into existence largely during the Renaissance with letters of credit, which allowed simple transfers of large amounts of currency.  This would eventually become paper money and checks.  Paper money was initially issued by banks and could, presumably, always be exchanged for gold or silver.  Of course if everyone decided to exchange their paper money for gold at the same time there would be a run on the bank and it would go bankrupt since generally they issued a lot more paper than they had gold.

 

Paper money was also issued by governments during times of crises when gold was in short supply, like the United States government did during the Revolutionary War or the Northern and Southern Governments during the American Civil War.  They did not have adequate gold or silver supplies to pay the cost of the wars.  Since the South lost the Civil War its money became worthless while the Northern greenbacks were eventually redeemed for gold coins.

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Up until 1933, when Franklin D. Roosevelt had assumed office as President, money was mostly gold and silver.  Other metals like nickel and copper were used for smaller coins.  The paper one and five dollar bills could be redeemed for silver; they were silver certificates.  The larger denominations were presumably redeemable for gold; they were Federal Reserve Notes.

 

Actually after 1933, the use of large bills being exchanged for gold ceased.  In the U.S. the Roosevelt administration collected all gold coins, melted them down into gold bars, issued paper gold certificates that were held by the Federal Government, and issued paper money starting with the ten dollar bill and going up.  These were Federal Reserve Notes which the banks distributed then and thereafter.  They were used in place of the gold coins.

 

The gold standard was essentially a fiction.  In 1933 the money supplied was doubled as the value of gold was legally doubled, going from $16 an ounce to $36 an ounce.  This essentially paid for Roosevelt’s New Deal.  Similar actions would also be done in other industrial nations.  The problem that existed was that there still was not enough money in circulation to meet the actual needs of most nations.  There would not be enough money available until World War II when it tended to be freely printed by the various governments.  During the war, since most production was going toward the war effort, there was more money available than the goods and services that could be purchased.  People worked double shifts in the factories and earned lots of currency, far more than they could spend.  At the end of the war there would be a large buying splurge that would create jobs for a good percentage of the returning veterans.

 

In 1969, under President Richard M. Nixon, the last limited amount of stored gold behind the dollar would be removed and the Federal Government would sell a large percentage of its gold supply.  It would cease to legally buy all gold mined within the country.  Gold would within a relatively short period of time, several years, go from $36 an ounce to $800 an ounce.  It would later go to well over $1,000 an ounce and eventually rise to $1,800 an ounce.  At this time one of the agencies in Texas would buy gold and set up its own depository.  Later, gold would drop down to around $1,100 an ounce, where, with continued slight oscillations in price, it would remain in 2016.

 

This entire process has been going on for the last 46 years.  The value of gold is determined by the economic laws of supply and demand.  The value of gold, silver, platinum, titanium, and other precious metals are determined by the amount of supply and the demand for that supply.

 

In 1969 the silver would also be removed from new coins and all money would become tokens, generally copper sandwiches, having almost no value within themselves.  All money became a valueless instrument for the exchange of goods and services, having no real innate value in itself except that of the word of the nation issuing it.

 

Today money of one country has to be exchanged for that of another when one visits Europe or Asia or, for that matter anyplace else that isn’t part of one’s country.  With very few exception it has no relevance in another country but it does have an exchange value in the banks of other countries, where generally, for a small fee, it can be exchanged for the currency of that particular nation.

 

Money is no longer as good as gold, there is no longer any gold behind it.  The metal has become too expensive and its supply is too limited to be used for a base for currency.

 

This in a nutshell is a short simplified history of money and its uses.

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Now, in terms of the modern world what is money and what are it uses?  Today money serves a myriad of purposes.  While it is no longer an object of intrinsic value it still serves as an object of inherent value.  It is, first of all, a form of score-card which demonstrates ones’ standing in the overall society, like Donald J. Trump the billionaire.  Mainly it allows the traditional exchange of goods and services within the society and between nations.  But in addition to this money also functions within the nation in relatively new ways.

 

According to most economists there are various forms of economics.  For our purposes the two more important ones are Microeconomics (small) and Macroeconomics (large).  Everything that has so far been considered falls into the area of Microeconomics (small economics).  In essence an individual has so much wealth (gold) or earnings that comprises what he/she possesses and earns.  That can be spent to satisfy needs and wants or saved for a future time of need or desire.  Some of it can be used as a commodity and invested in income gaining property or stocks and bonds or anything that will pay an income.

 

Virtually every individual or family unit fits into this category.  So also do government entities like municipalities and individual states.  Their incomes would be comprised of taxes and fines.  If any of these people or entities need more money than they are taking in or have then they can borrow.  For individuals and families there are banks and credit unit loans or credit cards.  For municipalities and states there are short and long term bond issues.  These eventually must be paid off with interest.  This is usually tax free for state and local governments and ridiculously high for credit cards.

 

Of course the object with individuals and families is to live within their incomes.  There are big-ticket purchases like automobiles and homes that generally do require long term payments or occasional emergencies like a large auto repair bill or a sick child.  With cities and states the taxes are supposed to be high enough to cover their expenses.  But they also have long term expenditures like roads and bridges which are inordinately expensive and must also be paid off over the long term.

 

The problem that comes up with individuals and families is when too many short-term expenses are charged to credit-cards, much more than can possibly be paid off in a billing cycle.  Then the recipients are paying 18 or more percent interest on these loans and life becomes an uncomfortable struggle to survive.  Particularly since the standard of living for many people will continually exceed their incomes.  This is not unusual with many families.

 

With municipalities and states the same pattern can occur.  The entities income does not match their expenditures.  This can be caused by a large number of reasons besides irresponsibility on the part of the city fathers.  Industry can move out of the area drastically reducing the tax base or other changes that drastically affect the tax base such as a natural disaster or a recession or depression.

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All this, prior to 1933, would also include the individual nations.  They would also be funded by their incomes in taxes and fines.  But from that point on, by changing from money being precious metals to printed paper, the situation became different for all the industrial nations that had switched to paper money.  And in the United States, particularly since 1969, all printed money is just that, official paper with numbers stamped upon it which in itself has no real value; it has become merely a means of trading goods and services for goods and services.

 

Federal or Central Governments still follow the age old practice of Microeconomics, collecting taxes and issuing fines for different forms of misbehavior.  But, more importantly, now in addition they also practice Macroeconomics, wherein they attempt to control the amount of money continually present within the nation.  They tend to try to keep inflation low and economic growth at a steady pace of about 3 to 4%.  Countries like modern China prefer a growth rate of 8% which they are no longer able to maintain.

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Economics is concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services.  What we have mainly looked at so far has been Microeconomics, dealing with individuals, families, local and state governments.  Macroeconomics deals with the National or Federal Government and applies these principles to the entire economy of the nation.  Its ultimate purpose is to use this knowledge to positively regulate the economy of the entire state in order to avoid economic downturns and keep the nation at its level of highest efficiency.

 

Consequently Macroeconomics (Big Economics) is now, in addition to collecting, controlling revenue, and attempting to maintain a regular level of growth a regulatory device, attempting to even out the overall incomes of the majority of the population.  Income taxes are graduated, that is, the more the individual earns the higher is his/her tax rate.  This is truer in European and Asian nations than in the United States where the graduated income tax rate is currently toped-off at $400,000 and the percentage of income paid at that amount stops rising regardless of how high the income is beyond that amount.

 

It would seem that the bulk of the Congressional Legislators, particularly the Republican legislators, have no real knowledge of modern economics and are still functioning with only an awareness of Microeconomics.  Some of the far-right, Tea Party, legislators have publically stated that they totally understand economics because they have raised families.  Consequently their reaction to economic downturns is to use a “common sense” approach which, in turn, worsens conditions.

 

It would seem that in the United States the one occupation that requires no knowledge of economics or government is that of a Republican Congressman.  Since taking over the House of Representatives in 2011 they have just passed one bill in 2015 that applied Fiscal Policy; and that was a continuation of a law that expired which added a small tax to the purchase of gasoline that has been used for road maintenance.  Every other bill dealing directly or indirectly with employment actually decreased it, adding to the level of unemployment within the nation.  One can safely say they have been penny wise and dollar stupid.  They have favored government economizing over growing employment.  And even here they have not been consistent, going on mad spending splurges like the 1.145 Trillion Dollar Funding Bill of 2015.

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Basically the Central Governments issues paper money as it is needed by their particular society.  The National Debt is itself partly a fiction since the Government owns the majority of its own National Debt and will use it at times to adjust conditions within the nation.  The amount of money in circulation within the society is supposed to be the full amount needed for the nation to operate at its highest level of efficiency.

 

The Agency, in the United States, that does this is the Federal Reserve.  It continually monitors the entire economy throughout the fifty states and territories belonging to the nation.  On a constant basis it is supposed to continually fine tune the overall economy.  The Federal Reserve has twelve districts that cover the entire nation.  To a certain extent its powers are limited.  It can make adjustments to the economy but the changes or corrections it makes generally are slow in coming about.  Even though its’ Board of Directors meet once a month and carefully considers what is happening in the overall economy it can miss or misconstrue important economic changes within the society.

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The Democrats, the political party begun by Thomas Jefferson in the late 18th Century which still persists, during the Great Depression of 1929 took control of the Federal Government in 1933.  They tended to totally dedicate themselves to helping the public pull out of the Great Depression.  They dedicated or rededicated themselves to helping the ‘forgotten men” survive in what had become almost overnight an alien world.  They became responsible for the welfare of all their citizens, creating what Franklin D. Roosevelt called a “New Deal” for everyone, caring for those who could no longer properly care for themselves.

 

Freedom to the Democrats meant freedom from want and need.  President Barack Obama’s Affordable Health Care (Obamacare) meant an extension of these rights.  To the Republicans, on the other hand, freedom means government withdrawal from the public lives, giving them, among other things, the right to starve, freeze, and die.

 

In solving societal problems the Federal Government in 2009 and 2010, with the Democrats controlling both Houses of Congress and the Presidency, saved the banks and the United States auto industry by extending them massive loans and the Public by enacting Affordable Health Care.

 

According to Mitt Romney, speaking for the Republicans during his 2012 Presidential Campaign, he would have done neither of these.  It should be noted that the Affordable Health Care Law was modeled after a similar law which Romney had signed into law during his one term as governor of Massachusetts.

 

The probability would have been in 2009, if Republican actions were taken by the Republican candidate, John McCain that the United States and the industrial world would have fallen into a depression far greater than that of 1929.

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What we are dealing with here is Macroeconomics (Big Economics).  The application of vast amounts of money to parts of the economy to avoid an economic disaster that would affect everybody in the U.S. society.  President Obama did this upon assuming office over a two year period.  At the end of that time two important events occurred: first, for various reasons during the Midterm Election of 2010 the Republicans achieved a majority in the House of Representatives and second, 2010 was a census year in which the seats in the House of Representatives were reapportioned to adjust for the increase in the national population.  In those states which the Republicans controlled they gerrymandered the new voting districts to their advantage whereby they were able to get enough seats in the House to maintain control of that body.  In fact they were able to get and keep their majority in the House even though more votes were cast for Democrats throughout the United States in the next Midterm Election.

 

What followed from 2011 on was that no fiscal policy bills were passed.  In fact what the Republicans did in Congress was to shrink the size of the Federal Government when possible and actually increase the unemployment problem by decreasing funding for both federal and state governments.  The chairman of the Federal Reserve at this time was Ben S. Bernanke.  After unsuccessfully requesting that Congress pass Fiscal Policy laws numerous times he came up with Creative Monetary (Money) Policy.

 

Both Bernanke and Obama were able to work through the Great Recession and point the country toward recovery by the use of massive blocks of spending, adding large amounts of currency to the National Cash Flow.  What was being dealt with here is called Macroeconomic (Big Economics), the Federal Government controlling the economics of the nation and freely spending money in order to avert disaster.

 

The question arises: How much currency can the Federal Government print and distribute without destroying the economy?  That’s an interesting question?  Remember the money itself has no inherent value.  Theoretically any amount can be printed and issued.  But if it is done endlessly growing inflation will occur and the value of the currency will systematically decrease until it becomes valueless.

 

The limitation in terms of the amount issued would be determined then by the rate of inflation.  Once inflation reaches some single digit point, say 5 or 6%, then the limit would be reached.  But this limit was never reached.  Inflation stayed at 2 to 3%.  In 2009 President Obama added well over a trillion dollars through bank and auto loans, plus other forms of expenditure and the inflation rate stayed at its original level.  Later in the Presidency the FED for a period of well over two years added 85 billion dollars a month to the Nation Cash Flow, $45 billion buying up pieces of mortgage paper and adding $40 billion directly to the National Cash Flow. The FED added well over a trillion dollars.   Again there was no change to the inflation rate.

 

Interestingly, with all this cash being added the indication was that the country had a phenomenal need for additional money to circulate so that economic growth could occur.  Congress should have been the agency applying most of these funds.  If they had the monies could have been more focused on upgrading the dated infrastructure of the United States.  Instead over half the funds resolved the Housing Dilemma created by the deregulated banks from the 1980s on.

 

It should be noted that the money spent on mortgage paper, unlike the bank and auto loans which were repaid with interest, was never directly recovered.  The mortgages in all 50 states had been fractionalized into well over a hundred parts each and applied to many different Hedge Funds.  The record-keeping that the banks had set up to expedite the financing and refinancing was unbelievably sloppy.

 

In essence no one owned a fair percentage of those houses because it was almost impossible to put enough pieces of mortgage paper together to make up over 50% of the ownership in these properties.  Consequently how could anyone foreclose on any of these homes?  The spread sheet or sheets that the government would need to determine when it owned enough of any property would probably cost more to generate than the properties were worth.  In any event the Federal Government was more interested in solving the Housing Problem than in collecting on its debt.

 

In addition all those people would no longer be deducting their interest payments on their income taxes.  And a percentage of the home owners suddenly had more disposable income which they spent on short term activities like more eating out, infusing the additional currency into the National Cash Flow which, in turn, increased productivity and employment in the nation.  The government would indirectly get a good part of this money back in increased taxes across the nation.  Here the Federal Government was spending vast amounts of money, which Congress refused to do, upgrading the entire nation.

 

 

 

 

The Weiner Component #130 – The World Economies & the Greek Crisis

On Monday, June 29 2015, the leading indicators on the American stock market took a sharp dive; the DOW dropped 350.33 points and the NASDAQ went down 122.04 points.

All this because Greece was at the point of near bankruptcy, with a massive payment that was due Tuesday June 30, which the government couldn’t and didn’t meet. Negotiations for a new loan broke down the Friday before, when the Greek negotiating team walked out of the meeting. The Greek Prime Minister, Alexis Tsipras and the leftist Syriza party who were elected to end austerity, called for a referendum to be held a week later, letting the people decide what to do. The next day, Tuesday June 30th 2015, Greece defaulted on its debt.  On Wednesday, July 1, the Greek government attempted to come to an agreement with the European Central Bank. When the referendum was held a week later the majority of Greek citizens voted against paying back the debt.

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The Greeks through nefarious practices for the last decade or so were able to hide the fact that the government was spending far more than it was taking in in taxes. They continually kept spending far more than the GDP (Gross Domestic Product), the amount of wealth the country produced. In addition Greece apparently has a lot more tax cheaters than any of the other European nations, consequently they estimate that about 20 million euros worth of taxes and their earnings were/are going into numbered Swiss bank accounts.   The American firm, Goldman Sacks, had earlier engendered creative economics for multi-million dollar fees and allowed the government and people of Greece and other countries, some of which were part of the 19 nations of the Eurozone, to engage in picturesque bookkeeping and spend far more than they should have.

At the beginning of 2010 it was discovered that Greece had paid Goldman Sacks and other banks millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The most notable is a major currency swap that hid billions worth of Greek debts and loans which were factiously converted into yen and dollars, thus hiding the true extent of the debt. The purpose of this and similar actions was that these various Greek governments could continue spending. An interesting short term solution to an ever growing long term problem that would eventually explode.

The process of paying back its debt, currently set at 270 billion dollars, began toward the end of 2008 with a massive economic collapse. The financial crash that occurred at this time in the United States and beyond, diversely effected Greece, Portugal, Spain, and Italy of the Eurozone Nations. These countries had been working since that time to get themselves out of debt. They have not succeeded, actually Greece has significantly increased her level of debt.

Greece has now essentially defaulted on a repayment instalment of 1.7 billion dollars that was due on June 30, 2015. She could only meet this payment if she borrowed all of the funds from the European Central Bank plus an addition 50 to 60 billion dollars to keep herself functioning.  It’s a movement of figures in different columns of the banks bookkeeping that seems to go on forever with the debt never disappearing but continually growing.

On the first Saturday in July the people of Greece voted on a referendum determining whether or not they should pay back their debt to the nations of the Eurozone.  I understand that the referendum was fairly complex and that a lot of people had a problem determining exactly what it meant.  Also the government recommended a no vote.  They came out with a strong no vote.  Consequently the Greeks defaulted upon their debt but may still un-default it.

Currently Greece’s unemployment level is over 25%.  For the last six years the government has been paying back this debt without really diminishing the principle because she has to borrow to do so.  And the country has undergone ever increasing levels of privation in order to do this and accomplished nothing.  The banks were closed in Greece by government order and the amount of cash that could be taken out of ATM machines was very limited. The country essentially limped along close to total bankruptcy.  Much more money was needed than the country had in order to make the installment payments that Greece seemed to have or could reasonable get.  A real solution to this matter seemed highly problematic.

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One of the major basic questions dealing with Greece and the Eurozone is what is really National Wealth?  Is it money or the goods and services produced within a given amount of time, usually a fiscal year, stated in terms of money value?

Money, for about the last fifty years has had nothing behind it but the word of the government issuing it.  Its domestic value is determined by what people will sell or take for it and internationally by what other countries will trade for it.  Basically, today, it is a tool, which allows the exchange of goods and services within the particular nation and throughout the world.  In essence it is the grease that allows the economies to function. Without an acceptable form of currency a nation faces complete economic disaster.

The problem with printing more money, which is a power the Greek Government does not have as a member of the Eurozone, is that too much money in circulation tends to force up the price of goods and services as people compete for these items.  It will eventually bring about a depression.  On the other hand too little money in circulation tends to reduce the amount of goods and services needed, as people are limited in what they can afford.  This can also bring about a recession leading to a depression. The trick is to have enough in circulation so that maximum productivity can be reached and maintained.  This also has to be gradually increased as the population of the nation increases.  In Greece today there is not enough funds left to service either the needs of the country or the debt.

People are taking their funds out of the country leaving the banks with a shortage of cash. The banks were closed several weeks ago to end a run on them with long lines waiting to withdraw their cash. The country was either days or hours away from total bankruptcy when the banks were closed.  Currently Greece is trapped in an ever increasing cycle of growing debt in order to just maintain its existence.

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The Eurozone today is in a situation fraught with contradictions.  When the Eurozone were first formed in 1999 the 19 nations agreed to function as a single economic unit with a single currency working through a central bank.  Meanwhile, with the exception of currency control, each of the 19 independent states gave up none of their sovereignty and still continued to act as an independent entity. Some of these 19 nations were far more economically secure than others.  Greece was one of the poorer nations that acted like the wealthier states and continually spent more money than it could realistically afford.

Up until the end of 2008 the U.S. and other industrial nations were a-flow with money. Then, starting with the United States, the Housing Bubble burst and property values in that country went down the toilet.  Internationally the flow of money tightened.  Suddenly Greece and these other countries were heavily in debt.  In order to meet these debt payments the governments had to divert a good percentage of their taxes.  An ever larger percentage of the GDP left these countries and there was not enough left to perform the regular services which the governments ordinarily provided.  This in turn forced the governments to lay off large numbers of government employees which, in turn, exacerbated unemployment and decreased the GDP.  In order to meet these payments Greece had to borrow more funds from the European Central Bank, actually increasing its debt.  With a shrinking economy the government had to further economize in an attempt to meet its payments.  This caused more and more economic shrinkage in the country.

What currently exists in Greece is a lose, lose situation with no hope in sight and well over 50% of the population in the referendum have voted for permanent default.  But if the Central Bank in the Eurozone grants this then Portugal, Italy, Spain and Ireland may demand the same treatment.  In fact it could become a pattern with some of its members.  Yet if it doesn’t grant relief they also face an impossible situation.  Greece is currently just days ahead of its banks running out of money and going into bankruptcy. It’s quite a dilemma.

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In the United States toward the end of 2008 a similar situation existed.  This was caused by the explosion of the Real Estate Bubble brought about by the large banks in the country over a thirty year period.  The banks had divided each of the many home mortgages into hundreds of pieces and the different pieces were combined and sold in a multitude of different Hedge Funds.  Actually no one owned the mortgages, just fractional pieces of them.  The large banks financed or refinanced the mortgage paper, then sold the pieces, administered everything and charged fees for everything they did. Once the mortgages were sold the money was lent out again.  It was an endless process with the banks collecting multimillions in fees. In this way a million dollars could fund one hundred million or more in mortgages.  The banks were in such a hurry to continue the process that they devised an unbelievable sloppy system of record keeping that was fraught with error.  This meant there was no accurate record keeping of the multitude of transactions.

When the Real Estate Bubble burst in late 2008 the large banks began foreclosing on properties that they did not own.  It took a while for the courts to realize the fraud and all the large banking houses were fined heavily for these and other illegal actions.  What the country faced was a possible twenty years or more of insane confusion in the housing industry and a depression greater than that of 1929.  With the addition factor that most of the large banking houses in the U.S. could go under and the movement of money throughout the country would become a trickle.

The first actions were taken by President George W. Bush during his last few months in office when the Federal Government began the process of bailing out most of the banks. This was followed by President Barak Obama who successfully continued bailing out most of the large banking houses and also the auto industry and avoided a deep depression.

The housing crisis was largely solved by the Federal Reserve under the sterling leadership of Ben Bernanke, who for a period of over two years bought 45 billion dollars’ worth of mortgage paper every month, spending well over a trillion dollars.  The mortgages came from all 50 states and were all fractional shares of an endless number of properties.  In essence what the FED did was to contribute well over a trillion dollars to this enterprise with no way of collecting any of it back.  In fact it contributed this amount of money to the general welfare and growth of the economy.  And the process brought back a level of prosperity and solved the mortgage dilemma in a period of just a few years.

The difference between this solution and the current problem in the Eurozone is that no one in the United States has ever mentioned what was being done.  All that the FED announced was that they were buying back mortgage paper.  There was never any discussion about the morality of the issue or the fact that they would never be able to cash these mortgages.  To my knowledge no one questioned the meaning of this statement.  If the country and Congress had been aware of what was happening we might still be in the middle of the mortgage crisis that the banks in their greed caused. People do not like someone else to get something for free even if it indirectly benefits them.

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Over the July 4th Weekend the majority of the Greek population voted to reject the current austerity negotiations with the other Eurozone nations.  As a result the European, American, and other stock markets dropped on the following Monday.

Basically the issue is with what is the Central European Bank dealing? Is the issue the Greek default on an impossible debt?   Or is it a problem the Eurozone is facing regarding one or some of her members?  If it’s the former then default is inevitable sooner or later with the lack of stability that would follow this action.  If, on the other hand, the issue is the latter then it becomes a problem of the entire Eurozone and its solution is one involving all the states of the Eurozone.  The result of this could be a new stability for all the states within the Eurozone.

We’ve seen that dealing with this issue totally as a Greek problem is insolvable from any aspect.  If other members of the Eurozone want to punish Greece for excess spending over a decade that ended 6 or 7 years ago they are not only hurting Greece but also themselves and their own futures.  But if this issue is dealt with as a Eurozone problem then there are possible solutions from which all of the Eurozone states can benefit.

What is required is a consortium of all the Eurozone states to handle not just Greece’s economic problem but also that of Spain, Portugal, and Italy. They are also in debt to the European Central Bank. If it is everyone’s problem they all need to participate in its solution.

Basically what these states have to deal with is the setting up of a central legislative body representing all of the states that can determine what is best for all of the states. They need to bring about a United States of Europe that has the authority to function for the benefit of all the states within the Eurozone.  And all the states need to give up some of their sovereign rights for the good of the union. This, incidentally, was their original goal

Numerous problems will have to be faced and resolved, particularly in terms of the extent of representation each state will have in this new union.  With a union each state would be stronger than it currently is and the euro would be back on a solid footing as one of the world’s safest forms of money. The European Central Bank would be the European version of the American Federal Reserve and the world’s stock markets would again be more stable.

Is this possible? That’s a good question. There are innumerable problems that have to be solved before this can come about.  But if the answer is, yes, then there would be more stability not only in the Eurozone but also throughout all the industrial nations.

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It would seem that the interests of Germany, France, and some of the other members are against Greece defaulting and exiting from the Eurozone.  Rather than fall out of the Eurozone on Thursday, July 9, 2015 the Greek government capitulated by delivering a new package of economic reforms to the ECB, raising taxes and the retirement age. Faced with the collapse of the country’s banking system and total economic catastrophe the government yielded on the issues that led to the previous collapse on a new rescue plan.  The retirement age is being pushed to 67 and government pensions are being cut by 15% for government workers who retired at age 62 after 40 year of employment.  The government will also withhold more taxes from state salaries and pensions and deduct a 6% healthcare premium from retirees’ checks.  The reforms are projected to generate at least 13.2 billion dollars in revenue over the next two years.

Currently the Greek debt is over 175% of its GDP.  It needs to be reduced or rescheduled over a longer period of time with the interest rates kept low to prevent the debt from growing. The Greek people need to take a more realistic attitude about repayment.

On Monday, July 13, 2015, after long hours of deliberation, with some states of the Eurozone arguing that the Greek prime minister’s word could not be trusted, the other states agreed to bail out Greece with a loan of about 50 billion euros.  Presumably Greece will pass further economizing measures and the loan will be implemented gradually. There is a payment due on the debt in about two years and Greece will be able to reduce her debt somewhat at that time if she adheres to her agreement.

The problems that the Greek government has to meet at this time is to economize enough to at least make a payment on her debt and also to restore the confidence of her own population in her banking system. The probability is that as soon as the banks are reopened within the country there will be at least a light run on them.  Presently the Greek Government’s solution is to reopen the banks and only allow very limited withdrawals.  Many people with large enough incomes may deposit the salaries in other countries, fearing that the bank closure could happen again.  It will take time for domestic confidence to be restored.  And a payment must be met in about two years.

Another problem which effects the entire Eurozone is one dealing with the declining value of the euro. The euro when it first appeared was worth about 1.5 dollars.  Last year with the infusion of a large amount of euros by the European Central Bank into the national flow of the Eurozone it dropped to about 100.3 percent of the dollar. On Monday July 13 with the current solution to the Greek Crisis the euro was worth 90.51 cents to the dollar. On Tuesday, July 14, the euro had risen to 1.1034 to the dollar. What will happen to its value in the future?  I suppose that is dependent on how well the Eurozone continues to function.

Greece will have a payment due in about two years. If she is able to make a payment  and not have to borrow more money then, the Eurozone will function properly and the value of the euro will have risen.  If, on the other hand, Greece has to borrow money again to just stay alive then there is no telling what the disaster will be for the Eurozone.

On Monday, July 20, 2015 the banks in Greece reopened; but the amount that could be withdrawn from any account was severely limited. What does this portend for the immediate future?  We’ll have to wait and see.

(Footnote:  To my readers: you must forgive me for not responding to your enquiries.  I get innumerable requests daily.  If I answered all of them I wouldn’t have time left to write the blog.  Virtually all your enquiries are answered in The Weiner Component #122 – Responding To Your Enquiries.)

English: Alexis Tsipras in a press conference ...

English: Alexis Tsipras in a press conference in Komotini. Ελληνικά: Συνέντευξη Τύπου του Αλέξη Τσίπρα στο ξενοδοχείο Ξενία στα πλαίσια της επίσκεψης του στην Κομοτηνή 13.11.2008 (Photo credit: Wikipedia)

 

English: Greece's recent debt history, between...

English: Greece’s recent debt history, between 1999 and 2010. (Photo credit: Wikipedia)

 

The Weiner Component #54 – The History & Use of Money

Money cash

Over most of human history money, gold coins, have been an object of value that have been exchanged for either goods or services of equal value.  This changed in 1933 when money became essentially a paper note with symbolic intrinsic value, which was still used for the exchange of goods and services.  Finally in 1969 the last vestige of theoretical gold was removed from paper money and all coins became copper sandwiches where before they had contained silver.  Since that time there has been nothing behind the dollar except the word of the United States Government.

Economics exists on two levels: one, which affects everybody, is Microeconomics, and the other, which effects only the Federal Government, is Macroeconomics.  Microeconomics deals with individuals and family incomes and budgets; with any entity that lives on a fixed specific income, be it taxes, rents, dividends, or earnings.  Macroeconomics deals with the government adjusting and fine-tuning the entire economy of the nation.  It has to do with adjusting the money supply, interest rates, and the functioning of the nation.

Money, the amount of money one has or earns, determines where that individual fits in the general society.  If one has an adequate amount with which to live then it is not overly important; but if one never has quite enough, then its lack supplies an endless pressure on an individual and his family’s life.  Unfortunately the majority of the population does not ever have quite enough.

What is the problem with having enough money?  Better yet, what is money?  What is it really worth?  Why is money unequally distributed among the population?

Historically, during ancient times, precious metals like gold and silver were exchanged for goods.  This was done in addition to barter.  The metal would be weighed and the weight would determine the value.  Probably the Phoenicians, who traded along the Mediterranean Sea, began this practice well over two thousand years ago.  They traded value for value.

At some point in history, again probably by the Phoenicians, money was invented.  A set amount of gold or silver was stamped with some image, usually a ruler of some dominion.  The coins were uniform, always having the same weight, thus being of a constant value.  This eliminated using scales for the exchange of goods and services.  It made doing business easier.  The basic concept remained the same, trading something of value for a metal of equal value.

The invention of coins, as less valuable metals were gradually used, allowed over time for an end of barter and an extension of the exchange of goods and services for money, which could be traded at any times for other goods and services in virtually any region or state.

How long did it take for this system to become established throughout the ancient world?  Probably it took at least hundreds of years for it to become common practice.

What developed was a system of exchanging goods and or services for an equal value in metals (coins, money).  Once this was established business could occur anywhere.

Probably from its inception or shortly thereafter there were never enough coins to handle the amount of business possible.  This kept the value of the metal high and allowed for slow economic growth.

The Roman Emperor, Nero, from what we know, was the first or at least one of the first rulers to “water the money;” that is, to add a less expensive metal to the molten gold from which the coins were cast.  The process increased the amount of money the state could spend but I also resulted in a continuous inflation during his reign by lowering the value of the coins.

With the exception of the 16th Century, when Spain looted the New World and brought seemingly endless shiploads of gold to Europe that were immediately turned in currency (gold coins). This brought about a period of inflation that lasted about ninety years.  During this period wages stayed the same but the value of the money continually decreased.  It was a time of rapacious inflation

Outside of this period there has always been a shortage of gold in relationship to the amount of trade (business) that could be done.  Also By the 16th Century Letters of Credit were developed in Europe by banking houses, which made the transfer of money in large amounts fairly simple.  In fact, the Hanseatic League and the Renaissance banking houses created a form of checking.  In essence modern capitalism began here.

In order to stretch the needed money supply and increase their profits banking houses issued paper money that, presumably, could be turned into gold (coins) at any time.  Of course, if any negative rumor occurred, and all the depositors brought their paper money in to exchange it for gold there would be a run on the bank.  The bank would run out of gold, the balance of the paper would become worthless, and the bank would become bankrupt.  These periods brought about the business cycle, periods of prosperity and depression within the respective nations.  Modern capitalism thus came into existence.

The Great Depressions of 1929 and 2008 were results of this type of action.  The great banking houses of the United States brought them both about.  Prior to 1929 the banks lent endless amounts of money to people with which to buy stock.  The margin rate was 10%.  For every dime the citizen invested he could buy one dollar’s worth of stock.  This drove the price of stocks through the ceilings, creating multi-billions of dollars.  With the competition to get rich quickly stock prices continually rose until they reached a point in 1929 when this whole house of cards collapsed and the investors and the banks went bankrupt within a relatively short period of time.  The nation teetered on the point of economic collapse until 1933 when Roosevelt became president.  He was able to bring about partial recovery until 1939 when World War II broke out.  The war ended the Great Depression in 1939 in the United States since there were endless orders for war supplies and food production coming into the U.S.

What Roosevelt did in1933 was to double the money supply by collecting all gold coins and issuing paper in their place.  He also doubled the value of gold from $16 an ounce to $32 dollars an ounce, thereby doubling the money supply and giving the government the ability to spend billions in economic recovery.

But, if we go by the value of the Stock Market, it was not enough.  The value of the Stock Market went from 86 billion dollars to 16 billion dollars.  Roosevelt needed to increase the value of gold to 64 dollars an ounce to match the amount of money that existed in circulation before the 1929 Crash.  This he could not do.

With the Real Estate Debacle, which occurred late in 2008 the situation was similar.  The banks over a thirty-some year period had discovered that they could bundle mortgages into massive packages and sell them as hedge funds, supposedly as safe interest paying investments to innumerable investors.  What the banks did was to issue the mortgages, sell them off in bundles, get their original investments back, and then process the funds for fees on several levels.  In essence they controlled the mortgages without having any money invested in them.  This was continued until the banks were issuing loans based upon 125% of the appraised value of the real estate.  This process continued over three decades until the bubble burst and property values dropped like lead weights from tall buildings, leaving many of the homeowners underwater, owing more on the property than it was suddenly worth.  Both Presidents Bush and Obama pumped money into the banks, bailing them out before the entire financial structure of the United States collapsed.

In both the above cases the banks were motivated by intense greed, endless profits, exploiting the system to become super-rich.  In 2008 the bankers were earning in the multi-millions as their compensation packages, and those below them were not far behind them earning lesser million in fees.  The real estate industry was going berserk with the multitude of fees they were earning.  Many homeowners were happily using their real estate as bank accounts and industry was prospering.  It was a happy “twilight state” that lasted until the bubble burst and the economy tanked.  Then if not for the steps taken by the Obama Administration, the entire nation would have collapsed.

The major historic problem still exists, even though the government prints and issues money as needed, there is not enough money in circulation to allow for all the exchange of goods and services needed within the society.  Can this problem be rectified?  The answer is easily by the Federal Government using both fiscal and monetary Policy.

The major problem here as far as the overall population is concerned is that most people still think of money in terms of gold.  With Macroeconomics it is a tool that the government uses to enhance productivity.  In itself money has no real value except that assigned to it by the government as a token of exchange.  The Federal Government can issue as much as it feels is needed.  The only limitation on this is inflation.  If there is too much money in circulation, more money that goods and services needed then we could have a rabid inflation.  This and this only would limit the amount of currency that the government can circulate.  Money is not gold and should not be treated as such.  This behavior can limit productivity and bring about a continuing recession as it has since the end of 2008.

Unfortunately the Tea Party Republican controlled House of Representatives has not only not used fiscal policy but has also seriously restrained Federal spending, exacerbating the problem of unemployment.  We are still in a recession with a seven plus percent level of unemployment.  This could easily be rectified if the Federal Government could take proper action.

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The Weiner Component #37 – The Concept of Money

Chicklet-currency

Cash, currency, paper bills, checks, credit cards, electronic deposits and transfers are all examples of money.  But what is it really?  What is its real value? 

Money, the currency of each nation, is the means of exchange used within that society, the means of exchanging goods and or services earned in the present or at some time in the past and saved for present or future use.  It is also a means of setting up the economic pecking order of individual levels within a society.  In the United States, for example, the more you earn, the more successful you are.  Generally it also denotes to which economic class you belong, what level of economic prosperity an individual has or has not achieved. 

Determining the actual value of money is interesting.  There is nothing behind any currency other than the word of the nation that issues it or the National Debt of that particular country.  Up until 1933 when Roosevelt took the country off the gold standard by collecting all the gold coins, had them melted down into gold bricks, buried them in depositories, issued gold certificates to the Treasury, and had the banks issue paper bills denoting that they were “Federal Reserve Notes,” money had been exchanging value for value.  A one ounce gold coin was a twenty dollar piece which could be exchanged anywhere for $20 worth of goods or services throughout the world.  The Roosevelt Administration changed the value of gold from $18 dollars an ounce to $36 and required that all gold mined in the United States be sold to the Federal Government.

Historically, the problem was that there never, with the exception of the Sixteenth Century when the gold in the New World was looted and sent to Europe, enough gold available to serve the business needs of the various industrial nations.  As a result of this, the amount of gold available for all commerce both within and between nations had been and was stretched by using paper bills that theoretically could be exchanged for gold at anytime.  Of course when this was done there was a run on the banks, causing bankruptcies and a depression. 

The amount of currency needed in circulation today has to be enough to allow for a full exchange of all needed goods and services in the society.  The money itself has no real intrinsic value; it is merely a tool that allows for this exchange.  The amount in circulation has historically been arbitrary, generally determined by the amount of gold coinage available, and then partially controlled by the state and by the financial institutions within the society that have continually operated on the basis of pure profit for themselves regardless of the consequences to the general society. 

This lascivious control, mostly by private enterprises has led to innumerable economic disasters such as the Great Depression of 1929 and the Real Estate Debacle of 2008; both of which almost toppled the entire society.  The two economic disasters were based upon an ever-increasing frantic race for increasing immediate gains, banks and a part of the general population rapidly acquiring massive amounts of currency for themselves.  This issue was not understood until well into the Twentieth Century and the assorted nations have never yet exercised their sovereign power to totally control or regulate the money supply. 

In the United States the myth that is constantly being propagated is that the Federal Government is inefficient or incapable and that only private enterprise and the Market System can properly run the economic system within the country.  It is bogus nonsense!  It was the Federal Government that both in 1933 and in 2009 saved the country from total economic collapse.  And, in both cases,  it was private enterprise and the Free Market System that almost destroyed the economy.

The reason we have had recovery since the bank caused disaster of 2008 has been through the actions of the Obama Administration and the creativity of the Federal Reserve in utilizing imaginative Monetary Policy.  In 2009 and 2010 the President and Congress saved the nation from total economic collapse.  Since 2011, when the Republicans gained control of the House of Representatives they have done everything they could to hamper economic recovery by their austerity program which has tended to actually shrink a recovering economy.  They seem to be more concerned with discrediting the Obama Administration than working to bring about recovery.  Their constant cry is to cut government spending, particularly in discretionary programs, and reduce the National Debt.  One direct result of their austerity program has been the collapse of a fifty some year old bridge in Washington along a major highway.

Money has no real value; it is a tool that the society uses to exchange some form of labor for goods and services needed for comfortable living.  As long as there is no wild inflation, more money being available in the general society than products that can be produced, there is no danger from rapid inflation.  .

In the crazy escalation of currency during the Real Estate Bubble that exploded in the latter end of 2008, where people utilized their homes as bank accounts, there was no real inflation, only economic growth.  The money supply shrank enormously as real estate values collapsed.  We have still not fully recovered from that bank-induced recession that could have toppled the entire economy.

It is time to stop treating money as the ultimate object of wealth and begin treating it as an object of exchange, as a tool that can be utilized to create and maintain a healthy economy with everyone prospering. 

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The Weiner Component #26 – Monetary Policy & The Real Estate Market

English: President Barack Obama confers with F...

According to an article on the first page of the Business Section in the Sunday, February 17, 2013 issue of the L.A. Times there is now a shortage of residences available in the Inland Empire housing market, the epicenter of the Southern California housing crash.  There was earlier a profusion of foreclosed housing available there, many more than there were people available to occupy them.  The paper’s position is that “there is a flood of all-cash offers from investors,” with “some backed by Wall Street war chests.”  Now there is a large shortage of properties and new construction is occurring.

Is this true?  Yes, but it doesn’t make the point that they are indicating in their article. These houses have been in the process of being bought-up since shortly after the Housing Crash in 2008 for virtually pennies on the dollar, many of them illegally since the banks that sold them in short sales or otherwise did not really own them; their mortgages had been broken up into innumerable real estate bundles that were then marketed as Hedge Funds.

In point of fact the banks after the 2008 crash and during the government financial bailouts were funding mortgages on a very reduced level.  They required buyers to have good financial records and put down at least twenty percent of the cost of the houses in cash; something most people could not do.  They always accepted full cash payments for the properties they sold.  Actually, in many cases, the banks accepted far less than appraised cash values; thus helping to further reduce property values.

Even with the cash buyers the available housing properties were in the many hundreds.  The syndicates that bought them took over just a fraction of what was available.  What happened?

Currently and for a considerable period of time the major purchaser of real estate in the United States has been the Federal Reserve; they are and have been spending forty-five billion dollars a month purchasing distressed housing which the banks originally sold in bundles after breaking up each mortgage into one hundred to a thousand parts.

Since the midterm Election of 2010 the extreme end of the Republican Party has been in control of The House of Representatives and has passed no bill to aid the housing dilemma or to increase employment.  The Republican minority in the Senate has been able to filibuster anything it didn’t like, particularly bills that had to do with job creation and housing.  There has been no fiscal policy, the Federal Government spending money to upgrade the economy.

The only way possible for money to be added to the economic flow of cash in the nation has been through the Federal Reserve’s use of Monetary Policy.  Under the chairmanship of Dr. Ben Bernanke there have been extremely imaginative uses of Monetary Policy.  The Fed is and has been spending $85 billion a month on Monetary Policy.  Forty billion dollars is being used to repurchase government debt and forty-five billion dollars is going to buy real estate paper.

In essence they are adding $40 billion each month to the National Cash Flow and reducing by $45 billion the number of properties available.  This has allowed for both a slow economic growth and enough of a shortage of houses to allow for new construction throughout the country.

The result of this is phenomenal in slowly bringing about a number of economic solutions.  First off, the banking mortgage debacle created a situation where no one really owned the majority of the houses that defaulted on their loans.  The individual mortgages had been divided into multitudinous pieces where no mortgage owner has more than a very small fraction of ownership in the property and the records kept of these dealings where unbelievably sloppy.  There was no one to legally foreclose on anything.  In point of fact it will take a decade or two to sort this out.  These are the properties upon which the banks were foreclosing.  They did this by computer generating documents that the courts, for a while, assumed to be sacrosanct.  The Fed, by gradually buying up all these mortgages, can sort them slowly, as they get them, putting the pieces together.

The purchase of the real estate paper allows the Fed to do a number of things.  As we’ve seen above it can sort the mortgages and eventually define ownership on these bundled houses.  In the process it has and continues to create a shortage of properties and restart housing construction throughout the country.

Because of the need for more money in the National Cash Flow the FED will not foreclose on any of these properties.  Many of them are not only underwater they are at the bottom of the ocean.  By 2008, before the Crash, many banks were refinancing mortgages at 125 percent of their appraised value.  A large number of these foreclosed properties dropped to half or less of their pre-crash value.

The recipients of these properties pay full taxes on their incomes; they cannot deduct for the interest they do not pay.  The governments, state and Federal, are receiving at least 25% of the money that would have been deducted in interest payments as taxes.  This is adding billions to the National Cash Flow.  It is, as we’ve seen creating a shortage in national housing.  In a period of four to five years the Federal Government is more than getting its investment back in financial benefits for the entire economy.  The Government will eventually be getting back far more than the $45 billion it is spending every month.

Once the bundles are sorted out and the government has full ownership of these properties they will not foreclose because that would take money out of the economy.  The people will live in these properties until they decide to leave or pass on.  Then the property will revert to the government being worth, at that time, far more than they are at present.  Then also the housing debacle will no longer exist.

The Federal government, working through Monetary Policy in order to grow the economy, is bringing about the current housing situation in the United States. It, as we’ve seen, a new creative use of Monetary policy, which has never been done before, and it will effectively solve the bank-created housing dilemma.

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