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Chernynkaya On January - 17 - 2011

I heard this on NPR’s This American Life, and for the first time in my life, my eyes did not glaze over. Three stories explaining the deliberate fantasy that is money:

YAP

There was an island in the South Pacific called Yap. They had an impractical method of currency—gigantic stone disks, some taller than a person. They only used them for big purchases, like for a dowry or to ransom a warrior captured in battle. I‘m sure you can see where this is going: Pretty soon, the actual giant stone circles did not need to be physically transferred between parties; it became understood who the owner was. That was an innovation! The stone that was quarried for these giant circles was on another island, and one time, during a storm, the raft used to carry the stone was overturned. The crew survived but the stone was at the bottom of the Pacific. When they arrived on Yap, it turned out to be no problem. The islanders said, Look, we believe you. There is a giant stone at the bottom of the ocean and it still belongs to So-and-so.

That is not so different from what we do today. Since 1933, there is no gold behind our dollars, and even if there were, what good is gold? It’s only worth something because everyone agrees it is. We agree on the idea of money. Today, even currency itself is essentially gone—there are only computers firing impulses between parties. And those transfers represent…nothing tangible at all.

BRAZIL

Brazil is a poor country, and so, most everything is bought on installments, from sunglasses to cars. This is a very recent development for that country—since 1994 to be exact. Buying on installments would have been impossible previously. Before then, there was terrible inflation—80% a MONTH. It started in the 1950’s when the president of Brazil wanted to build the capital, Brazilia, in the middle of the jungle but didn’t have enough money, so he printed a bunch. 80% inflation a month means that a pair of sunglasses that costs $10 today will sell for more than $10,000 in one year.

For decades, Brazilians lived with high inflation like this, and could not figure out how to fix it. Prices changed daily. There were people who worked in large stores whose only job was to change the prices on all items every day. Housewives would go to the supermarket and run ahead of the guy changing the prices to get yesterday’s cheaper prices.  You couldn’t save any money either—it would be worth less every day. And you wouldn’t want to produce anything that took too long to get to market because the raw materials would be worth less than they cost you to buy.

They tried several things. First, a price freeze, but no one wanted to sell anything and merchants held back goods, thinking the prices would go up.  They tried confiscating everybody’s money—you can imagine how well that went over! There was almost an insurrection, and the government was impeached. Then, in 1994 the government asked four economists to help them fix this problem.

These guys understood that the very nature of money is a fiction, and they used that mass delusion to fix inflation. The government stopped printing so much money and cut spending, but every bit as important was to gain the publics’ trust in the money. People had to be tricked into thinking money had value. They invented a new currency, one that was stable, trustworthy. But this currency would not be real, would not have coins or bills. They called it “a virtual currency,” or a Unit of Real Value—a URV. People would still carry cruceros, tangible money in their pockets, but when they got their paychecks it was in URV’s, taxes were in URV’s and prices of goods and services were in URV’s. And the URV’s were stable.

When you asked how much a quart of milk was it was always One URV. Now, you still had to pay for the milk with the cruceros in your pocket. But every day, the newspapers would print the value of the URV’s relative to the crucero. Yesterday, the price of milk was One URV, which equaled 7 cruceros. Today, the price of milk was still One URV, but it took 14 cruceros from your pocket. The idea was, people would start thinking in URV’s. You were always paid your same salary in URV’s, say, 1000 URV’s. The price of milk was always One URV, regardless of the inflation of the crucero. Amazingly, people accepted that. After a while, once people trusted the URV, inflation came down and prices were in synchrony, they did away with the old currency. The “Real” (pronounced Ree-AL) became the new currency—it was the URV. The Brazilian real is equal to One URV and one US Dollar.

Everyone in Brazil tricked themselves on purpose into believing this fake currency was real. Everyone was happy—inflation was solved! BRzillIANT!

WEEKEND AT BERNANKE’S

When the US was on the gold standard, it was clear how much money we had and what it was worth. Each dollar corresponded to a dollar’s worth of gold in a vault somewhere. (Which, as I mentioned, is still a construct.) When we went off the gold standard, someone had to be entrusted to figure out how much that dollar was now worth. The Central Bank was created to do that: The Federal Reserve.

The Fed is the only institution empowered to create money. It controls the amount of money in our economy and it controls interest rates, among other things. Yet most don’t realize it is not a part of the Federal government—and this will become immensely significant. The Chairman of the Fed is appointed by the President and Congress has oversight, but it is an independent body.

The Fed conjures money out of a void. Every 6 weeks, at the Federal Reserve in DC, there’s a meeting at which there is no press, no Congress and not even the President is allowed. Members of the Fed make presentations about the economy. And then, they take a vote—should there be more, or less, money in the US economy? The ramifications are who can get loans to start businesses, create jobs, or if there is too much money, create inflation and hurt the economy. The fate of the US economy rests on these decisions made every six weeks. Since 2008, when the economy deteriorated, the Central Bank did some unprecedented stuff. The danger is that if the Fed screws up, the fiction that we call the US Dollar loses value.

How do they create money out of nothing? It’s not just about printing it although they tell the Treasury to do that too. They need to get vast amounts of money on the street fast, so they need banks. They put money into the banks’ hands by buying something from them—something safe: US Treasury Bonds. Big banks have billions of dollars of these bonds. This transaction, of course, does not involve cash; it’s all done via computer. When the banks lend that new money out, that’s how money enters our economy. And that is also the way the Fed raises or lowers interest rates—more money to banks equals lower interest rates.

What I just described was the way it had always been done—boring and safe…until 2007, when the banks had all these investments that were plunging in value and they needed someone to lend them money.

The Fed has always had special emergency powers that it can use when the banking system is on the verge of collapse. They can create a bunch of money and lend it to the banks.  In 2008 they did just that and it was revolutionary.  Revolutionary because, for one, these banks were no longer the traditional, previously regulated banks the Fed was designed to deal with. The Fed created over a TRILLION dollars that they loaned to Wall St—GS, Morgan Stanley, Bear Sterns and the like, as well as to Citigroup, B of A, and even to regular companies like Verizon and Harley Davidson. The second radical thing the Fed did was to depart from their boring, safe buying of Treasury bonds, and instead they accepted all sorts of assets for collateral—toxic assets.   Mortgages on resort hotels, and malls in Oklahoma, for example.

In 2008 the economy was still on the verge, so the Fed did something else unprecedented. Remember, they wanted to get money out there on the street as fast as possible. They created more money than ever before and made the single biggest purchase they had ever made: Home mortgages. But not the sub-prime ones the banks had on their books—the safe, high quality types in the form of mortgage-backed securities. But how many to buy? How much money needed to get circulated through these purchases? There was no economic theory to fall back on and they were guessing. They literally picked a big, round number, according to one member of the Fed who was there. They decided on $1.25 trillion. (I have to remind myself: A trillion is to a million dollars what a million is to one dollar.)

It took the four employees of the Fed, sitting in grey cubicles at PC’s, weeks and weeks to buy those mortgage-backed securities. Where did the $1.25 trillion come from? They made it. That is the nature of Central Banking around the world. Alchemy.

This is part of the story that I think very, very few people understand: That $1.25 trillion does NOT get added to the deficit. The federal deficit occurs when the government spends more money than it takes in via taxes. The Federal Reserve is not part of the federal government and thus has nothing to do with the deficit. But if the Fed loses money from all the toxic assets they bought from Goldman Sachs, et al, is that somehow going to come out of our taxes? No. Again, it’s not part of the federal government but mostly, the Fed, every single year, makes a profit. It creates money out of thin air and uses that money to buy bonds—which pay interest. (In 2009, at the height of the crisis, it made $47 billion.) And their profit is always turned over to the government so it actually reduces the deficit. The money created by the Fed has nothing to do with the TARP; it has nothing to do with the stimulus. Most economists would say, Thank God the Fed used their powers to do this– it kept us out of soup lines.

We have heard the opposite from the Right, and especially people like crazy Ron Paul. He thinks the Congress should be responsible for monetary policy. Can you imagine that!? His abolish-the-Fed campaign used to be ignored as whacky. Now he chairs the Committee which oversees the Fed.  True, there is some truth to the claim that the Fed got us in to trouble through their policies—Greenspan is infamous for helping create the housing bubble with low interest rates. But I would take a bunch of eggheads at the Fed any day over the frothing Congress.

We are now in unchartered territories. If too many people stop trusting the Fed, they lose trust in money itself (see Brazil). Simply, we trust the Fed and other countries trust the Fed, and therefore we all trust our money. The value of our money is based on that trust—not gold, or tulips. The magic of Central Banking is it works SOLELY on trust. It is an agreed-upon fiction. Once that trust is gone, our money becomes just another stone on the bottom of the ocean.

I think that’s both very cool and very strange. Like saying to Tinker Bell, “We DO believe in fairies!”

Categories: Featured, News & Politics

Written by Chernynkaya

I am an artist and have lived in Los Angeles all of my life, except for a brief hippie period when I lived in SF. I am currently (semi-unwillingly) retired, but have had several careers.

56 Responses so far.

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  1. chazmania says:

    Great piece…
    I still find the whole thing complete LUNACY….

    I mean we can go on and on about the system and how its self regulations seems logical but its full out BAT SHIT CRAZY.

    your big stone story is perfect proof its ignorant and archaic thinking..

    For one thing this system is NOT working in the long run and The idea does not take into account the idea of resources..the value is not on resources the value is on value itself..so what we are all supposed to go around completely duped up on our own delusions of what value money is…Personally i cant sustain that for very long a little thing called my LOGIC kicks in after a bit and says to me this is all such Bull shit….
    We have to get a fucking grip already…We WILL not survive much longer living in this kind of distorted fantasy thinking no matter what kind of official seal with an eagle holding grass in its mouth we stick on it…If its based on nothing it is nothing…and its very nature is killing us..its creating nothing but the worst aberrant behavior..If we have to have money it has to be based around the worth of our resources and products not some corporspeak justification for skimming off piles of it for some wankers in high places…

    And if i printed my own money i would go to jail in quick time..
    how come i cant fix MY deficit this way????HUH??????FUCK!!!!!!!!!

    All the best…you rock!

    • Chernynkaya says:

      😆 Chaz-- thanks for reading it. I’m laughing (through my tears) becasue it made you so angry--what a great rant! All true--what more can I add? and THANKS!!

  2. SueInCa says:

    And Cher that is the one problem I have with homeowners losing their homes. If the banks were actually taking those losses and trying to collect on them, that would be fine. In my opinion I don’t believe the banks are in any hurry to unload what they are responsible for because the Fed is holding the asset, however that does not stop their foreclosure process. Not to mention, that if pushed, most banks cannot even provide the note on any given loan. It is another “shell game” being played by the government and the financial community and people are passively taking it in the “you know what”. The banks are eventually going to resell those homes and no one will be made whole because the money is not really there. It was the long con brought to us by Wall Street and the Government.

    • Chernynkaya says:

      Gee-- that’s an excellent point: The FED bought those mortgages, didn’t they-- they bought those toxic assets. And yesterday, they posted that 27% was re-payed. How’d that happen??

      • SueInCa says:

        Your guess is as good as mine. I think it is impossible to figure out who owes what to whom after all the CDS, CDOs, CD(squared) transactions. In fact, I am not even sure I own my house and can prove it because WFB never sent a copy of my note. The ownership documents are even more convoluted now with houses being sold in foreclosures and short sales. I believe part of the reason it is taking banks so long to respond on short sales and foreclosures is 1)they cannot locate a note and 2)after due diligence to find the note, they have to make a forgery. Like I said, the long con.

  3. bito says:

    I don’t remember all the chicken littles squawking during the fall of the dollar under Dubya?

    [img]?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=480&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=false&fo=ve&id=TWEXB&transformation=lin&scale=Left&range=Max&cosd=1995-01-04&coed=2011-01-05&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2011-01-18&revision_date=2011-01-18&mma=0&nd=&ost=&oet=&fml=a&fq=Weekly%2C%20Ending%20Wednesday&fam=avg&fgst=lin[/img]

    Wonder if you flipped that over and it would reflect the “price” of gold?

    http://krugman.blogs.nytimes.com/2011/01/18/the-recent-history-of-the-dollar/

  4. choicelady says:

    Community Currency -- perfectly legal, based on Colonial moral economic principles in barter. Very cool.

    http://www.sustainable-city.org/articles/currency.htm

    • kesmarn says:

      That’s a fascinating article, c’lady!

      I’m curious as to how communities who develop this type of currency deal with community members who have little (of commercial value) to put into the exchange bank. Say — seriously handicapped people, or 90 year old folks. Have you ever come across any theories on this?

      • chazmania says:

        good thought…what “obligation” do we have as a collective species to take care of anyone else..whats the “value”? It seems the monetary system we have all but ignores this and even has disdain for the question..

  5. Khirad says:

    That’s the part that always got me: the philosophical question that always received a glazed look. Now mind you, economics glaze my eyes over most of the time, but I don’t think it’s that ignorant for me to make the following point.

    They would say “it’s not backed on gold,” or that “gold futures this and that,” and “buy gold,” and I would ask: well, why is gold worth anything?

    And thus the stare that said “by god you are a simple, stupid creature.”

    What does it matter that we exchange one mass delusion for another, like, say this?

    [img][/img]

    Or forget stone rais, what about units of Aishwarya Rai?

    I mean if it’s based on beauty, quite frankly, I always liked silver and copper more than gold.

    If it’s on scarcity, well, the population can’t sustain that anymore.

    As if to prove a point check out Brazil’s first series of the new real in 1994:

    http://en.wikipedia.org/wiki/Brazilian_real#First_series_.281994-2003.29

    All stainless steel. They’ve gone more standard since then, but if everyone can agree that that’s money, what does it matter?

    • Chernynkaya says:

      Exactly, Khirad, what does it matter? It’s not really matter anyway. Units of Aishwarya Rai are too fleeting, but you did give me an idea: why not exchange units of Satyajit Ray? Or better still, units of Guru Har Rai! Hooray! Let’s exchange units of compassion.

      • Khirad says:

        Yes, her stock has plummeted ever since she was taken off the market with the Bachchan merger.

        However, were only great films like Satyajit’s or Lisa Ray in Water more valued.


        Or were only Sikh references coveted like gems by more than just I. Quite impressive. 😉

  6. AdLib says:

    Truly enjoyed your article, Cher!

    Perhaps one might go a tiny step further to describe money as a shared delusion and those who are the wealthiest are the most insane?

    It is interesting to think about those frothing at the mouth about going back to the gold standard, which, as you well describe, is just a mineral that’s given its own arbitrary value no differently than non-gold-based money.

    When I was younger, I remember having a revelation that what could be a cure to many of society’s woes would be to go back to a system of barter. However, practically speaking, I wouldn’t know how many chickens to pay for a doctor’s visit but I understand that there’s a Republican in NV with a lot of time on her hands who may be able to help.

    • Chernynkaya says:

      I’m glad you enjoyed it--Thanks, AdLib!

      Not only are the rich the most insane but, as Dorothy Parker said: If you want to know what God thinks of money, just look at the people he gave it to.

  7. bito says:

    Very good, Cher and a more understandable than Mr. Paul’s posts. Can hardly wait until these “true patriots” begin to undermine the trust in the Fed and US dollars with Mr. Paul’s hearings and them voting to not raise the debt limit.

    • Chernynkaya says:

      Bito, upon hearing this explanation, it also makes me ponder the implications for those mortgage-backed securities that the Fed bought from Wall St. firms. What does that mean for the mortgage modification program? Or for the robo-signer scandals?

      • bito says:

        Good question, Cher, I think it would depend on the terms of the swap. Off hand, I don’t know what those are. I’ll have look in to that and ponder myself.

        My biggest objection to QE1&2 (part of the swap) was that the Fed did not spread the “money” to the regional and state banks and invested mostly in the largest 8 banks on Wall Street. If it was meant to ease lending, pump up the economy and reduce unemployment (one of the Feds responsibilities), why Wall Street?

    • Chernynkaya says:

      Bito-- that absolutely occurred to me too. Paul must know that could be the result.

  8. AdLib says:

    I’m traveling to the UK and wondering if I can convert fruitcakes into pound cakes.

    • whatsthatsound says:

      I’d advise against it. You don’t want to be fruitcake wise and pound cake foolish.

    • Chernynkaya says:

      😆 !

      Careful-- BabyJesus chased the fruitcake-changers from the temple.

      • AdLib says:

        The Tea Partiers Biblical wish is that, “The fruitcake shall inherit the Earth.”

        • Chernynkaya says:

          That proves that we are worlds apart from the TPs! Jesus would actually say that it is easier for a camel to pass through the eye of a fruitcake… no, I mean he said it is easier for a fruitcake to pass through the eye of a rich man than a… oh, just “I won’t be fooled again!”

          • choicelady says:

            AdLib and Cher -- this is probably the BEST theology I’ve read in many years. Cher -- your summation -- I won’t be fooled again -- is pretty much Jesus’ teaching. Coupled with “love thy flaky neighbor”, of course.

            And here on the Planet, a whole new Biblical exegesis is born. Are we good or what?

            • Chernynkaya says:

              C’Lady-- you’re right! I missed the true meaning even as I typed. But if you have time, and want really amazing theological thinking, take a look on the TO/OT thread and the video of the little French girl. Blows your socks off!

  9. Questinia says:

    Cher’s post has become a rally for “Restoring Honor to Fruitcakes”.

    Forgive us Cher!

    • Chernynkaya says:

      Nothing to forgive at all, Q and all you guys!

      But just remember: The love of fruitcake is the root of all evil!

      • choicelady says:

        The OBSESSIVE love of fruitcake. A respectful love is fine. If God did not want us to love fruitcake, he would not have passed on the recipe.

        Oh. Wait. He gave us liver and rutabagas, too. Well, hey -- everybody makes mistakes.

  10. whatsthatsound says:

    Fruitcakes for Fruitcakes!

  11. whatsthatsound says:

    I know exactly what you’re talking about! Why, just the other day I inherited 10.5 million bucks from The Bank Of Africa as a “due wining/inheritance and contract payment” all in one! I’m of course ecstatic about this, and unsure about how I will spend my remaining days of leisure.

    • BigDogMom says:

      Morning or Evening in your case WTS, me too! My new friend, the Prince of Nigeria, has promised me that the money will be deposited into my account very soon! Like you, I have spent hours pondering what I should with all this money….

      • whatsthatsound says:

        I feel truly blessed, because I haven’t really done all that much “wining” to be honest. In fact, I never wine anything!

        The way it was explained to me was, the transaction is being handled by the law firm of Howell and Fudd, who have headquarters on a tiny island around three hours from Hawaii. They’re both very old and stuck in their old habits, so we’ll both just have to sit tight while they get around to it. Mr. Fudd, in particular, is vewwwy vewwwy pwecise!

  12. Questinia says:

    SUCH an interesting post, Cher! I’m one of those people who finds money vulgar and an embarrassment to have to think so much about because of just the inanity of the delusion! Can you imagine how much TIME is spent on fretting about money? How many divorces occur because of money?

    Time IS money!

    Let’s get rid of it and deal with another lucre.

    In Katz’ Delicatessan, for instance they have tickets. But tickets are dumb too. We should deal in FOOD! Like a lean brisket sandwich will get you a new roof (OK, it would have to be awesome brisket and a year’s worth). The best cooks and bakers would be the “richest”. They could teach lesser cooks to hone their skills. Prep cooks could be the new work force and, you guessed it, sous-chefs would be middle management. The only “fiscal” crisis would occur around Christmas time when there would be an influx of bad fruitcake into the “eggconomy”. Places like McDonald’s would go out of business because they do not deal in food. It’s as faux as the money that it puts into investors’ pockets.

    OMG, I am SO hungry right now.

    • Chernynkaya says:

      Hey, Q-- I just re-read your reply and this stood out:

      Time IS money!

      Oh, jeez. Just when I’d stopped trippin’ about money, you had to say that! I’m off on another reverie. And now I’m hungry too!

    • whatsthatsound says:

      I like your idea, and think that in fact fruitcakes could be used instead of gold. Last forever, heavy, same boring brick shape. Just put them all in a vault somewhere. Fort Knotts (Berry Farm) perhaps.

      • Questinia says:

        Invest in fruitcakes as they could be the next currantsy.

        • whatsthatsound says:

          The Federal Preserves won’t be able to keep up with the demand.

        • BigDogMom says:

          I can just see it now, Glenn Beck building a show around the need to buy and horde fruitcakes…one of his new sponsors.

          (ps: Am I the only one in the world who truly likes fruitcake?)

          • Questinia says:

            I LOVE FRUITCAKES!! Are we the only ones? In that case we should form a coalition. We need to start managing a PR campaign to reverse the awful rep they have.

            Of which I am guilty of perpetuating.

            I am truly sorry for trying to fit in with the fruitcake-haters. I am not worthy of fruitcake!

            • BigDogMom says:

              The road to recovery starts, first by admitting there is a problem…be proud, stand tall and remember that you are not alone in this…

              Fruitcake Lovers Unite!

          • whatsthatsound says:

            (no, truth be told, I like ’em too)

            • Questinia says:

              Fruitcakes ROCK!

              [img][/img]

            • BigDogMom says:

              Lawd, I was beginning to believe I was the only one in the world who did.

              I believe I’m going to start a blog or a facebook page on the glories of the fruitcake!

              It has been much maligned over the years and these needs to stop….free the fruitcake!


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