Where Conspiracy and Reality Collide

 I was recently sent this video clip of Glen Beck on Fox Noise discussing the “Amount of money in circulation”  and how this stimulus plan will be devastating to our Children”  If you haven’t watched it you can do so at the link below.  While I am not a Nobel economist,  the following is how I understand the process of Money Creation and it’s effect on inflation.. (This is a first pass but I wanted to get out right away, I will be polishing it on-going)  I welcome comments which might better explain this process…

First the Glenn Beck / Fox Noise Segment:

An Inconvenient Debt

Now for the Inconvenient FACTS…

Let’s start in the beginning..  With the passing of the Federal Reserve act in 1916, the way money was created changed forever.  It established a system where banks could loan 9 times as much money as they held in assets.  Where did this money come from? It was created out of thin air at the moment the loan closed.  Over 90% of ALL the money created in this country (and the world) since then, is created this way, and not “Printed” as Mr. Beck erroneously suggests.  

You see the U.S. money supply has not been directly proportional to gold holdings since 1916, not 1973 as he suggested..  1973 was arguably just a ploy to deregulate the value of gold (which had been artificially held at $35.00 / ounce) and it had no real effect on our money supply..   The big jump Mr. Beck tries to associate with Nixon’s taking us off of the gold standard was actually more likely caused by the rampant deficit spending, (to the tune of $500 billion) by the Reagan administration.  Of course one can’t expect Fox news to say anything negative about the conservative second coming Ronald Reagan. I am not going to discuss the flaws in the Fractional Banking system, but instead to discuss the issue of inflation within this system.

In the fractional banking system, there is a fundamental difference between Printing money and Loaning money. Both add money to circulation but they are significantly different.

When money is Printed ie paper dollars,  Mr. Beck is correct (the only time in this whole video) in saying that this addition of currency to circulation devaluates the dollar.. It is not backed by any tangible asset, just the good faith of the US government.  It is suggested that this money is loaned to the US, but that is a complicated issue too much so to discuss here..

When money is Loaned by banks, it is backed by a promise to repay, with money coming from productivity that the loan helped generate. It becomes in effect a promised asset, and creating money this way does not necessarily devaluate the dollar.  Over 90% of all money is created this way, and so one can see Mr. Beck’s quaint chart and logic is incorrect propaganda..

The logic behind this system is, that it allows the money supply to expand with the economy naturally, under the assumption that the Lender will insure the borrower can and will repay it. Thus there must be productivity out there somewhere that the borrower will generate, typically through work, that will equal, and repay the loaned money eventually. At that point the created money is backed by productivity and it’s as good as gold. This assumption, however, was the fatal flaw in the recent housing crash, A concise explanation of this process can be found in this post.  The creation of loans, ie money cannot be regulated by the market itself without on-going risk of collapse..

So how does this all apply to the Bailout?

The amount of inflation created by stimulus spending really depends on how the “Stimulus” is generated…

Let’s start with the Conservative mantra Tax Cuts.  Tax cuts theoretically cause no inflation, a good thing.. But they also cause very little Stimulus, with no more than $1.2 in GDP created per dollar spent, (See Stimulus comparison chart) ie. little of the money given back really get’s spent into the system.  Basically, this is because the money is giving to everyone, proportional to taxes paid, with the majority given to more solvent people who will not spend more just because they get a tax cut..

Next, non-infrastructure spending increases..

This type of spending including extended unemployment and increases in food stamps,  typically generates more than $1.50 GNP per dollar spent..  This is because this money is given to people who will spend it all immediately because they are financially strapped.  In a crisis like this, I think this number could be much higher… THIS type of spending can have no impact on inflation if it is paid through revenues, but if it’s paid with created money, it will devaluate the dollar.  But remember, the dollar has devaluated as much as 30% compared to other currencies just based on market perceptions, without any currency increase because ultimately, the currency market is the perfect example of a free market and is driven a great deal by investor perception, and not just hard numbers.. For more on this read George Soros’ wonderful book “A Crisis of Global Capitalism”

Finally, the best form of stimulus… Infrastructure spending.. 

Infrastructure spending is money loaned against productivity generated, and that productivity effectively backs the money created. Sometimes the project actually generates money to pay the loan back, but this is not necessary to effectively back the money created.  These types of spending average OVER $1.5 in GDP per dollar spent AND they give something in return… namely INFRASTRUCTURE.  But as I have out lined in my letter to President Obama entitled “What to do” , it appears to me (and Thomas Friedman) that the best return on infrastructure spending comes not from repairing 20th century infrastructure, but instead from investing in 21st century infrastructure that can make the US more competitive in the global market and bring jobs HOME..

~ by Eric Harrington on February 8, 2009.

Posted in Current Events, Politics, Previously Published, Uncategorized
Tags: Glenn Beck Inconvenient debt, stimulus and inflation