-----BEGIN PGP SIGNED MESSAGE----- Hash: SHA1 There are a number of myths about money creation that have captivated anti-central bankers but do not advance their position.
> The act of borrowing by the federal government causes money to > spring into existence. Public debt does not create money, it creates debt. Debt is the obligation of the debtor to repay, and an asset to its holder. The quality of the asset is a function of the credit worthiness of the borrower. Debt can be monetised by currency producers and banks and other deposit taking organisations. The debt of a person, corporation or government is not normally money because: 1. it is not normally used as a medium of exchange 2. it is not fungible 3. it is often not even liquid. Currency producers (such as central banks and currency boards) are organisations that typically monetise debt and maintain a balance sheet that consists of: Liabilities: Assets: Currency issued Liquid Reserves Deposit Balances Bonds and Loans Owner's Equity These items are related by the equation: Liabilities + Owners' Equity=Assets Currency producers monetise assets, including assets such as foreign currency reserves, gold reserves, government bonds and corporate bonds. They do not create money out of 'thin air' they create money out of assets that they hold. They monetise assets, including assets that are the debts of others (government bonds, corporate bonds etc.). Commercial banks also create money by monetising assets. The main difference is that bank reserves include currency board and central bank liabilities (cash and central bank balances). The balance sheet of banks usually includes loans as the biggest asset class, and banks maintain bonds and cash as more liquid assets, to maintain liquidity. Holders of bank money (i.e. depositors) have their money protected by two main methods: 1. Banks maintain positive owners' equity, as a buffer against lending losses and 2. Banks maintain liquid reserves and asset liquidation strategies to meet withdrawals This gives depositors confidence that they will not suffer losses of their principal and that their funds will be able to be withdrawn on demand. Holders of money and currency more generally, are reliant on currency producers (currency boards and central banks) for the effectivness of money as a medium of exchange and store of value. Central banks and currency boards can, by maintianing certian practices and objectives, better serve users of money: 1. Maintain positive owners' equity, so that they are capable of redeeming all their liabilities 2. Maintain high quality and liquid assets and 3. Pursue a monetary policy that preserves the value of their denomination of currency The simpliest way to do this is to be a currency board. This means that the currency producer monetizes assets denominated in a reference commodity such as US dollars or gold, and redeems its currency in this asset at a fixed rate. It maintains confidence in this promise by maintianing adequate assets to redeem al its liabilities at the fixed rate. The alternative to this is to be a central bank, and operate a monetary policy basedon pursuing price stability, full employment or other goals, although price stability seems to be most in fashion as the sole proper goal of monetary policy at this time. The favoured means of implimenting monetary policy at this time is via an Official Cash Rate (interest rate that is) that the central bank targets or is willing to borrow and lend at or near. Lowering the cash rate promotes expansionary policy, increasing the rate promotes contractionary policy. Central banks donot profit from expansion of the money supply, but from the interest it earns on its assets, less the interest it pays on its liabilities. On plastic currency outstanding, no interest is payable, so this can be a profitable business. On its balances central banks do pay interest, and so their profits come from the difference between this interest paid and the interest earned on its assets (e.g. bonds). The profits of central banks and currency boards are generally called seinorage profits. I repeat that the central banks do not make any profits from the actual issue of currency, as they must obtain offsetting assets to maintain their balance sheets. I am not defending central banking, just describing it and how it works. I would rather see central banks evolve into gold exchange standard currency boards, but one has to understandhow they work in order to apreciate how simple and easy this evolution would be. Hostility towards interest and the monetization of assets is not helpful. David Hillary -----BEGIN PGP SIGNATURE----- Version: PGPfreeware 7.0.3 for non-commercial use <http://www.pgp.com> iQA/AwUBPECtsxNDEcR4nEncEQLDhQCgtcgM037UGiQdaOGm/JB2ksEfuAQAoPbo Ju4yD6mKRC3D/95vcbU0yxpQ =uQjs -----END PGP SIGNATURE----- --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.
