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alstry (35.03)

Money 101 For Fools

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April 16, 2011 – Comments (3)

MONEY IS SIMPLY A MEANS TO OBTAIN THE PRODUCTION OF ANOTHER.  Money can be alomst anything and so can production, good or serivce.
 

Money comes in 3 forms:
1.  Love/Volunteer...unconditonal disinterested generosity
2.  Trade/Currency/Gold/Silver/Barter...the exchange of value, can be almost anything
3.  Force/Steal...somethings don't need explaining

All three of the of the above are effective ways to obtain the production of another.  The Taj Majal was built out of love and many fortunes have been made by thieves and armies.


In the Industrial Age, trade is the primary way production was exchanged.  Currency is the money driving most exchanges. In a SPECIALIZED system, you need currency to trade for the basic needs like Food, Water, and Fuel since few produce such items for themselves.. When the currency fails, a new form of trade must develop or all that is left is LOVE and FORCE.

Most people don't know why currency is an acceptable form of money in modern Industrial systems.  It is strange since almost anything of value in Industrial systems is measured in currency.  The value of a year of a person's labor.  The value of an ounce of gold or silver.  How much people value the accumulation of the entire's life's production....called net worth.

Currency works because of the nature of how it is createdThis is key.  All currency in our current system arises out of a debt relationship.  Up until recently, all debt relationships were backed by existing production, collateral, or the reasonable expectation of production.

Since each dollar was created out of production, each dollar could be exchanged for something of value.  In collateralized loans, since bankers were generally conservative by nature, they made sure that the collateral backing the loan/currency created was more valuble than the currency created.  This was true until the recent housing bubble/mortgage crisis when TRILLIONS of loans and currency were created backed by nothing more than hot air....ESSENTIALLY CREATING COUNTERFEIT CURRENCY through fruadulent/predatory lending.  As long as the people didn't appreciate that little/nothing backed by the new dollars, they accepted them for their production.

An issue that arises with a debt based money system is that interest accumulates with each loan....and if you are creating lots of loans without production backing them, pretty soon, the loans themselves become the driver of production and without increasing amounts of loans issued, the debt/interest becomes impossible to pay back. Since assets can't be liquidated to pay off the loans...when the lending slows, the entire debt/currency system collapses...2008 for those that can't remember and why it as so easy for those of us that understood money could see the collapse coming.....and so did Wall Street because money is our game.

The only way to prevent the collapse is to create more currency to pay off the loans.....however, in order for the NEW currency to be OF VALUE, there must be collateral backing it.......or the reasonable expectation of production.  Since the private sector was essentially insolvent.....the only potential borrower the Fed had to create money was the U.S. Government......however, the Government's tax receipts collapsed because of the credit crisis.  Consequently, the amount of money needed would be so large that there would be no party, or collection of parties capable of making such as massive loan.

The only choice the Fed had at that point was to simply print money out of thin air.....backed only by the hollow argument that America's future production would be collateral even though the Fed's banking system was cutting off America's production by cutting off mainstreet from credit/currency making it impossible to generate sufficient production against such a massive backdrop of EXISTING debt.

But as we know, money can take many forms.....and force is money.  So even though all knew America's production could no longer back its currency, we still had force, a very powerful force networked by military bases around the world.  But as you can probably guess, many don't like trading with one using Force to back up its currency.....it tends to create very stressful relationships in short order.

And as time goes on and relationships get strained and trading partners become bolder.....more and more start to questioning the legitimacy/collateral backing the currency and start demanding more and more of it for trade.  If the offending nation keeps printing money out of thin air....the money starts losing value at an accelerating pace decreasing the capacity for production as input costs/commodities become prohibitively expensive.

At some point, the currency stops being a functional means of exchange because there is simply too little production or reasonable expectation of production backing it.  Once the currency loses functionality for trade, and the nation has extinguished most love.....the only choice the nation has left to obtain the production of others is FORCE.

And when you are nations as big and strong as America and Europe, and opposed by nations as big and strong as Brazil, Russia, India, and China(BRIC).....you have the potential for one BIG fight as the world tries to impose its force upon each other.

3 Comments – Post Your Own

#1) On April 16, 2011 at 11:58 PM, alstry (35.03) wrote:

Once you understand money, you understand why NO MORAL person can dispense investment advice in the current environment.

Since so few really understand money......one must refrain from judging others....for they know not what they do for the most part.

Once money is created out of thin air....and not backed by production or the reasonable expectation of production......it becomes a cluster flock trying to determine who gets the printed money....as more and more begin to realize that the only limitations on the amount printed are the arbitrary limitations set by the one printing.

If a banker can get a bonus of $20,000,000 printed dollars he doesn't deserve, or his wife get $200,000,000 printed dollars she doesn't deserve......how much should you get that you don't deserve....or a homeless family get that they don't deserve?

Printing money can be fun when you don't have to have production/collateral or the reasonable expectation of production backing it.....why do you think counterfeiters always have smiles on their face.....

until they get caught.

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#2) On April 17, 2011 at 9:44 AM, alstry (35.03) wrote:

As food and fuel prices rise, expect spending to be concentrated in those areas and less everywhere else. 

As more and more printed/counterfeit dollars chase less and less production, expect the price of the little production remaining to skyrocket in dollar terms.

http://finance.yahoo.com/news/Consumers-feel-the-pinch-of-apf-3014714615.html?x=0&sec=topStories&pos=6&asset=&ccode=

Counterfeiting is always fun in the beginning....it just becomes a mess when people figure out what you are doing...

At some point, we will be required to change our currency or use force to obtain the production of others.

 

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#3) On April 23, 2011 at 5:24 PM, buffalonate (93.97) wrote:

Why do you write the same thing in every blog post?  Doesn't it get old?

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