Sorry but I am confused.
Lets use the 700 billion bailout for an example. Where does that money come from and exactly how is it created? Thanks!!!!
Don't confuse wealth with money. Money does NOT go down when asset values such as stock or property go down. Wealth does, but cash as measured by M1, M1, or the now secret M3 does not......
And soon there will be so much cash around that asset prices, hard assets like property, gold, metals, will sky rocket, and inflation will beat the crap out of the working man. Poor bastards.
I think that money actually does go "poof". Let's say that Joe Blow buys a house on 100% financing for $500k. Later on, in the midst of a housing slump, it is worth $400k. He lost his job and can't pay the note anymore, so he sends the keys to the bank. The bank manages to sell it for $400k and scratches off the remaining $100k from its books as "bad debt". Right there, when the bank took off $100k from the "assets" side of the balance sheet, those $100k went "poof". Now, with reduced assets, the bank has less money to lend.
But I see the other side, the guy who sold the house to Joe Blow for $500k, those $500k are still in his pocket no matter what. So from that point of view, the money didn't evaporate.
This is confusing.
The money didn't go "poof". The asset that you BOUGHT with the money, went "poof". The money you paid for the asset is still out there, in the hands of the smart guy who sold you that asset. Now the Fed is printing more money to put into that asset to inflate its value.
The treasury is supposed to auction off the notes but the can "monetize" them, which is the banking expression, by printing T Bills/Notes and depositing them with the Federal Reserve, which can then use them as credit to make loans. In fact the money supply of Treasury Notes at the Fed increased by over $150B even before the bill became law.
Any way you slice it there will be dollars everywhere, inflation will be rampant, and eventually the auctions will undeliver one after the other, until the US declares bankruptcy or default on at least the foreign portion of the national debt. And there has never been a model of the default world currency with $15T of debt going under.
Gold seems like the only play.
I think I am beginning to see the picture. Tell me if my simple analogy is correct.
Mr. US Government needs 700 billion. So he borrows it from Mr. Chinese and gives him a 700 billion IOU – the T-bill.
Now Mr. Chinese is going to want his money back with interest. So Mr. US Government can come up with it 3 ways:
A) Increase taxes.
B) Cut spending.
C) Print it up.
So if its option C. than the money supply gets diluted and people who have GOLD get rich. Is this correct?
The US Treasury issues Treasury Bills and Notes and sells them through both competitive and non-competitive auctions to the 20 primary dealers with accounts at the Federal Reserve.
BNP Paribas Securities Corp.
Bank of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
the proceeds are deposited as electronic funds into the general account of the Treasury at the Federal Reserve Bank New York....the checking account of the US government, where your tax refund comes from, for example.
From this acount, funds will be disbursed into the capital accounts of bank holding companies (likely also at the Federal Reserve) in exchange for preferred shares and warrants.
I am assuming the Treasury will open an e-trade account to hold these shares
Thanks for the great answer - but it raises even more questions.
1) You are saying the gov will print up T bills and notes and not really 700 billion cash, right? So they are actually creating credit out of thin air and not cash out of thin air, right? But in the end, I guess credit/cash out of thin air is pretty much the same, right?
2) What is the collateral on the 700 billion of T-bills & notes - toxic debt? If so, why would anyone want to buy these?
3) Which begs this question - Do they have buyers for the t-bills & notes yet?
4) Will the buyers be the Chinese, etc?
5) Is it possible no one will want to buy them?
Sorry for all the dumb questions, but you got me thinking. Thanks!