Musings About Things I Wish I Understood.

The things I don’t understand in this world would fill the Library of Congress and no I an not going to bore you by trying to recount them all. But, I have been musing about a few things and I wondered if maybe someone out there in internet land has some answers. So, here are some of the things I have been mulling around in my head.

Money

Back in the good old days, our money, the US dollar, was backed by gold. Richard Nixon put an end to that in 1971. We and the world converted to a fiat money system where the US dollar became the world’s reserve currency and the dollar, or greenback, was backed by the full faith and credit of These United States of America. Much has changed since 1971. Nations like the US don’t bother printing money anymore. Banks and Central Banks like our Federal Reserve can and do create money out of thin air with a few key strokes of the computer and money magically appears in bank accounts around the world. So, once the dollar was backed by gold and then a dollar was backed by the words “full faith and credit” and now we don’t even have dollar bills. We have binary 0 and 1 in a computerized account. The world’s and the US economies continue to function because everybody has been condition to accept this strange arangement. For example, someone in Japan writes a check or does a wire transfer of Y yen to a company in the US, that company will send to the person in Japan X dollars worth of their product. I don’t understand it. I wish I did.

The Dollar As The World’s Reserve Currency

So, in 1971, the world decided to use the US dollar as its reserve currency. Why did Nixon and his advisors think this was a good idea for the United States? Until the financial crash of 2008, having the dollar as the world’s reserve currency was not a blessing. It was a curse! From 1971 to 2008 every one of America’s trading partners manipulated their currencies to be less than they a free market would indicate. This makes their products cheaper for Americans and, therefore,  they sell, sell, sell to America.  Of course, our trade imbalances over the years just kept getting worse. Now, I suppose since the Great Recession, we are probably glad of the dollar’s position in the world. It may be the only thing keeping the US from becoming the next Greece or Spain. Did Nixon and friends know this day was coming? I don’t know. I don’t understand it. I wish I did.

Quantitative Easing

One could argue that QE1 had some marginal benefits for the economy, but QE2 had much less benefits, and QE3 will be worse. Bernanke says QE3, to the tune of $40 bullion per month, will be used to buy mortgage-backed securities. I guess that will make Wells Fargo happy and the Wall Street casino players are happy and once again most of the digital dollars will end up in the excess reserve accounts of the big banks just like it did with QE1 and QE2. So, why does Bernanke think this pledge of indefinite digital money-making is going to get people to buy homes and businesses to borrow and invest and, thereby, create jobs, when it  has not worked the first two times. I read today an article where a big time hedge fund operator said that the Fed has the best economist in the world. They know everything except their own limitations. I don’t get it. I wish I did.

Congress and Politicians in General

On this I know I am not alone. Congress has the lowest approval rating ever. I think they deserve that rating. Last year we were entertained the circus of the debt ceiling crisis, a Super Committee to resolve what the whole congress couldn’t and everyone knew in advance that it was a waste of time. The Democratic controlled Senate won’t allow a budget to be produced so they keep making Continuing Resolutions. And, even after the Republicans take control of the House, they don’t even have the backbone to say to the Senate there will be no Continuing Resolution unless we take Obama’s stimulus money out of the baseline budget. All of our politicians, with only a few exceptions,  are more interested in their next election than they are of America’s future. We ended up having our credit rate lowered and it is going to happen again in a few months when we will be entertained by another congressional circus. This time, however, it will be a lame duck congress putting on the circus. One side will scream about spending cuts and the other side will scream about tax increases and in the end they will raise the debt limit and pass some short-term Continuing Resolution and kick the can down the road  so the next congress can deal with the mess. I don’t understand politicians. I wish I did.

There are a few more things on my mind today, but it is time to bring this post to a close. One of those things was ObamaCare, which no one understands either. However, I did come across this video at the What We Think and Why blog that you may find interesting. The woman speaking is Dr. Barbara Bellar who is running for the state senate in Illinois. The Doctor may not know the “why” of ObamaCare but she does have a handle on the “what” of it. Amazingly she wraps it all up in one sentence; all be it a very long sentence.

watch?v=vdnY8r7_fLw&feature=player_embedded

(I don’t know why this YouTube videao won’t embed today.)

Well, now you know what I’m thinking. What are your thoughts?

 

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35 thoughts on “Musings About Things I Wish I Understood.

  1. I would only say that it is a lame duck Senate which is ruled by our dictator not to move forward on any bills that the House passes. Bills usually go back and forth for compromise and/ or are voted up or down. The House has passed a budget and hundreds of other bills. We cannot even find out where any of the Senators stand on various issues by not permitting votes.. It is unfair to say that we have a dysfunctional congress when it is for the most part the Senate fault which is exatly the way Obama wants it.– blame it on Congress.

    1. You are right, of course. The Democrat Senate has blocked everything. Still I am not satisfied with the Republican House either. They could have done more if they had the courage. And, then there is the bupatisan support for things like NDAA that drive me crazy.

    2. The Senate, yes. And Harry Reid #1. That man is the biggest obstructionist of any and all legislation. He won’t call for debates or votes on barely any House-passed bills–and he wouldn’t even vote on Obama’s budget! Why Nevada keeps voting him back in is absolutely beyond me.

  2. All of this can be traced to hubris; an outsize belief that a groups of “smart” people can control it all. Hayek called it a fatal conceit.

    Bernanke is doing QE3 because we have nowhere else to go. We are a heroine-addicted gambler broke and in hock to the mob. Our only shot is to go to another loan shark to buy ourselves time.

  3. I can keep you company in my befuddlement of all four issues; Money, the dollar as reserve currency, QE123, and Congress.
    I generally agree with the low rating given to Congress by the people, but what makes me scratch my head in amazement even more than those four issues is that while only 17% of the people approve of Congress, 47% of these numskulls called “the people’ approve of President Obama.
    Now, explain that to me, Jim.

  4. Think of money as a contract between entities for goods and services rather than a thing. Money is the agreed upon value of goods and services in a transaction.

    Gold is a more arbitrary standard of value than a mortgage-backed security (MBS)… and just as volatile. In the case of gold, its perceived value depends on its supply. Why should value depend on the supply of a yellow rock dug up in South Africa?

    Wealth and worth are not dependent on the supply of a single mineral.

    On the other hand, the value of an MBS depends on the ability of home buyers to pay their mortgages without default. More people default, MBS value goes down. People don’t default and MBS value goes up.

    When there is more home ownership, there is more overall wealth in a nation. Wealth and value is better reflected in a MBS than it is in a rock.

    1. AZ, you know I love ya and normally I appreciate your explications by theory. Not this time. I’ve read the theory. I know how it is supposed to work. But, the real world is something else. It is mostly perception by some mysterious FX echange market. Explain to me why some countries can manipulate their currencies and get away with it while others can not. Take the country where I live, The official exchange rate has been fixed for years at 4.3 to the dollar. and, the government even issues dollars to some businesses and individduals at that rate; but, not nearly enough to meet the demand. Therefore there is a black market, which today is 12 to the dollar. And, if a citizen here crosses the border into Columbia to bui dollars today, it will take 13.53 to the dollar. This country is a major OPEC oil exporting country. It brings in tonnes of dollars every day. Yet, when this country sells bonds, it has to pay 10, 11, or 12% interest and they have never been close to default on their debts. So, it must be perception that drives the bond market. One more thing. If this country’s reserves of hard currencies were divided by the money units in circulation, the implicit exchange rate would be just over 22 to the dollar. Sorry, but your theories aren’t helping.

    2. Heck, I’d be disappointed if you agreed with everything I say.

      For sure, I don’t have a lock on truth. If I did, I’d use it to become a multibillionaire and wouldn’t care if it were in either gold or MBS. 😉

      Currency exchange rates, interest rates and the stock market are total mysteries to me.

      All countries, though, manipulate their currencies for political and economic reasons… including us. QE3 is an example of that. The whole purpose of the Fed is to manipulate our currency to meet its dual mandate.

      QE3 has rankled a number of other countries already who say that it’ll affect their currency values.

      Wealth is a qualitative thing not easily defined and measured quantitatively.

  5. You wrote:
    “someone in Japan writes a check or does a wire transfer of Y yen to a company in the US, that company will send to the person in Japan X dollars worth of their product.”

    There is more to it than that. There has to be a currency exchange for that transaction to happen. The Y yen must be somehow converted to X dollars in a separate banking transaction before the original transaction can be completed.

    The U.S. dollar being the world’s reserve currency means that the Japanese bank upon which the yen check is written must have enough U.S. dollars on hand to complete the transaction with the U.S. company.

    If they don’t, which is usually the case, they have to sell yen to the Fed in exchange for dollars until after the transaction is completed in dollars. Then the Fed sells those yen back to the Japanese bank. That is usually an overnight transaction.

    The Fed collects a fee for that service. If the yen were the world’s currency of exchange then the Japanese central bank would provide the service and collect the fee.

    Most U.S. companies operating in foreign countries conduct all their business in U.S. dollars.

    Note:
    The Chinese are diligently working behind the scenes to bolster its yuan as a currency of world trade and eventually as the world’s reserve currency.

    Should that happen the U.S. will be in serious fiscal trouble because of our enormous debt. The cost of borrowing to service that debt will become prohibitive resulting in a decline in services the federal government can provide.

    That will send a cascading downward spiral throughout the entire U.S. economy.

    1. China may pretend to want to change the way the world’s finances work, but in trith, they like it just the way it is. They do need for Europe and the US to get some fiscal control, that is true. Also, they are decades away from being able to be the worlds reserve currency.

      Beyond that, my point is that back in the days of barter and in the days of gold backed currencies, the average man knew he was making a fair exchange. Today, one never knows when the market will decide that the money you have in the bank is worthless.

    2. China’s admirable quality is they are single-minded in doing what is best for them. It is the methodologies they employ that are horrendously despicable.

      The United States has to divorce itself from the notion of fair play when dealing with China. Otherwise, they will steal us blind when we aren’t looking. We haven’t been very good at keeping an eye on them either.

      Yes, they may be a couple decades away from cornering the financial world and manipulating it to their exclusive benefit, but they are steadfast and relentless working toward that goal. That is the scary part.

      You only need read the Financial Times regularly to know that.

      Regarding “fair exchange”… the value of something in a fair exchange is determined by what the buyer is willing to pay. Same is true of gold.

      Case in point, the “pet rock” phenomena of the 1970s. There is no logical reason why anyone should go out and buy an ordinary rock at a store that they could just pick up for free in their back yard… yet they did just that, and did so in droves.

      For a while a rock-in-a-box suddenly became a valuable commodity because gullible consumers were convinced it was.

  6. The one thing we can be sure of Jim is that nearly the entire Congress has been corrupted. The only ones that may not be … yet … are the freshman members, but you can rest assured they are immediately intimidated by the committee leaders into “going along” with the way things are done in Washington or their state won’t get any “perks” from the pork.
    What’s most disturbing is the fact that eveyone in the Congress and the Supreme Court knows that Obama is a fraud, yet they have been totally complicit in allowing him to squat in the White House, never bringing up his ineligibility or the proven forged and fraudulant birth records. Every member of the Congress has violated his/her oath of office to defend the Constitiution … yet all have bowed to this situation. Unless we clear out all the career politicians and the Republican establishment … we’re finished.

      1. Couldn’t there be an addendum added to limit terms? I think that Congress knows that Obama is not eligible to be in his position, but what do we do about it? Fire them all?

      2. Hi Linda. Certainly there could be a costitutional amendment. We wouldn’t want to hold our breaths wait ting for Congress to limit themselves. Buy, if the Tea Parties in each state got behind the idea and pushed an amendment, it would be a long shot but it could happen if two thirds of the state approved it.

      3. During the formative years of our nation, it was a burden to serve, both financially and the time away from family and home. Travel was difficult and quarters while serving were not taht great. Our founders probably could not envision a society where we would make “serving” such a lucrative power trip. They probably had no idea that anyone would WANT to serve for more than a few years.

  7. Silverfiddle has the right idea.

    QE exists because all the juice has been sucked out of monetary policy for a decade or so. Manipulating interest rates on an occasional basis has always been the tool of the Federal Reserve Bank. Unfortunately, the real interest rates for banks to borrow money is close to zero, anyway, so, there is no incentive for the banks to loan money to risky clients.

    Oh, where did these risky clients come from? First of all, they are out there by the millions. These are people that are not credit worthy, and if financed in large numbers would collapse the financial system we have that is based on faith.

    It is too bad and so sad that it did crash. Well, so much for lowering interest rates. Right now, the Bogues, people with bogus credit, are out there gaming the system. We should pay attention to how car dealers handle Bogues. They find financing companies willing to take the risk, and get huge rebates from those finance companies for a car sale. We should do the same in housing. The worse the risk, the higher the interest rates and penalty fees to finance. It’s a tough world out there when the Federal Government intervenes and takes all rationality out of markets.

    The term, Bogues, is a real term. Just ask any US car dealer. They can make lots of money off Bogues. Pretty much every car dealer has finance managers specializing in bad credit customers.

    When it comes to the US dollar becoming the world’s reserve currency, that happened a long time before 1971. It was the Bretton Woods System that established the US dollar as the world’s reserve currency after World War II. That’s because we pretty well dominated the world economically.

    I remember the US dollar being officially pegged at $35 per ounce of gold in the 1960’s, Of course, the French whose asses we saved twice in the same century, several times mounted runs on US gold reserves by redeeming dollars for millions of ounces of gold at a time. If you don’t think the French are ass holes, just take a whiff if one comes near.

    So, even before Nixon, the US dollar was the world’s reserve currency.

    There are legitimate reasons for getting off of the gold standard. There is no way the gold standard, or any other standard based on a commodity, could reflect the strength of the American economy. When you get right down to it, the economy is based on the ability of its people to feed themselves, protect themselves, and their ability to produce wealth. Gold, nor any other commodity is a measure of the real strength of a nation or of its currency.

    Gold holds no intrinsic value except for its industrial worth. The market price of gold is based on speculation just as is the price of any currency. There is no magic in gold as a base for a currency. Maybe one of your commenters can convince me otherwise.

    Congress? Screw them!

    1. Uh, oh. I just read my comment and there is a problem.

      The banks can get money, now, at pretty much a zero rate of interest. In other words getting money to loan is not a problem.

      The problem is that there are few companys expanding at this time. The banks don’t want to accumulate bad loans on their balance sheets, event though the Fed is buying all the crap sold to them, earlier.

      I don’t see how another QE will help to any extent.

    2. Altough we differ some on the value of a gold standard, I agree with your other points, Bob. Money can be tied to any commodity or combination of of commodities. It is not a perfect system, but it does mean that an act of Congress is required to alter the value of one’s currency instead of the stealth actions of an independent central bank. Austrian economists agree on this.

  8. I have been musing about these things also and I wish I understood why…why…the only thing I can come up with is the majority of these pols really don’t care about US…and it is up to We The People to take our country back!…starting on Nov. 6th…WE CAN DO THIS!

    PLU from SSF

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