Wednesday, August 02, 2006

Filling Holes

One of the things that isn't discussed much and that I think I finally got my head wrapped around is why currency works.

If you have a gold standard and resources can be brought into the market anywhere (Like an agrarian economy), then the money sort of swirls around from place to place in a slow chaotic motion driven by the seasons.

In a Fiat System where resoruces come from specific locations and are provided by specific families or organization, then money flows from the point of creation through an economy and downslope to the source of resources, where it sits and accumulates.

It's the flow of money that makes it valuable in a fiat system. So long as it flows, it can be used for trade and eventually to buy oil. Further, money that is flowing, propagates and makes more money, in the form of fiat loans. If the money isn't being loaned, it doesn't grow and less money chases finite resources.

This is why the GDP is an important measurement. It measures the flow of money through the system. The flow of fiat money and not the quantity, determines the strength of economies.

A nation that produces mostly money as it's export product, will be able to keep spending money to buy foriegn resources, only so long as the money accumulates somewhere else.

And that's the part that's dangerous. For our fiat money there has to be a source and a sink. The money has to flow in one direction and disappear. That means it has to be destroyed or accumulate soemwhere.

In our current system, the money is generated out of thin air by the Federal Reserve and by banks when they write loans. It flows through various businesses and accumulates debt that can never be repaid. Finally it makes it's way to nations that produce goods and resources. Those nations can't spend it as fast as they get it, so they accumulate it. As long as they keep accumulating it, the additional money they receive has value.

Now after Peak Oil, when oil declines for a nation, we experience a bit of a backwash. The money flow slows, so the reserves start getting spent. To counter, the money must be created faster to push the money into banks faster than it wants to come out. The Saudi Royals for instance will have to accumulate money ever faster, even while their oil production declines.

That means that the speed at which money travels from the Federal Reserve to the Saudi bank accounts must be increased. To do so, less must go to wages, and more shoved through corporations in shady finance arrangements. Especially finance arrangments that generate money from virtually nothing, like derivatives. A government can also use this money to create subsidy driven jobs that produce a need to consume. Highway projects for bridges going no where and wars are a way to keep the spending going toward consumable resources.

At some point though, the money is created and moved so quickly and does so little work in creating job and raising wages to match, that it loses it's need to purchase resources and goods. If you don't have a working class, your nation can't buy goods or oil. There are only so many projects that a government can generate out of thin air, for the purpose of speeding the flow of money into oil accounts.

Our own government in the US is demonstrating that it can no longer speed the money along fast enough if the money is used in the US. So it borrows to spend and use it in foriegn nations.

When the Saudi Oil reaches a tipping point, the oil will no longer be filling coffers, it will begin to flow back out of those savings accounts. The money will cease to flow. When it does not flow, then the fiat system will stop. Debts will not be repayable and institutions will not be able to borrow. The Federal Reserve won't be able to lend new money.

The trillions in saved monies being held in the Middle East and China, represents a huge wave of backwash that will flow back upon us, until the dollar finally seeks it's true value.


At 7:37 AM, Anonymous Anonymous said...

wease, morning, you wrote:
"A government can also use this money to create subsidy driven jobs that produce a need to consume. Highway projects for bridges going no where and wars are a way to keep the spending going toward consumable resources".

bingo, I agree, and believe that will be the artificial prop briefly supporting us, the BIO -OIL bubble, Also you are aware of huge shipments of opium heading out to filter thru the global population? (soon too a drive-by near u) That money has to be laundered in order to be of use, no?
Does this have validity?Money has to be printed as fast as the price of oil increases as long as oil is the gold standard,ie: dollars=oil. Isn't US in enviable position of having the commodity it most craves priced in its own created jelly beans? If oil goes to 100 dollars by the unique nature of the oil-dollar relationship we must print, in fact that is our primary DUTY in this terrible petrodollar/irony we are in. Those that sell or hoard will find no solace in any other currency at this time. This in turn briefly creates the positive feedback loop of flooding the world with dollars. Here in america if you own lots of stock in these variety companies you can ride out price increases with increased dividends and salary increase. So if you want to look short term the pain of the many will translate to the enriching of a ever smaller few. Whose currency will stand up to ours? Even as phoney baloney as our coins and deposit position is, any, the Euro? Will we bomb the EU?
Rumor has it they are trying to create a unified North American currency

You know I hate it when they end an abstract in which they talk highly about the subject but then they close with there is no interest at this time. Yea, right, Canada Mexico under our 'Umbrella" This is what we have got to look forward to, endless jockeying by more and more for less and less at the macro and micro end of the scale. And since they each covet each others shit, it will never be solved. I also include the "if I can't have it nobody can" as a form of coveting. How will Israel pay for all its destruction?
I will say, I am absolutely convinced in the Holocaust, The Israelis are proving it was possible, and in fact probably helped it happen, as callus and indifferent as they are to human life. Aye, but thats off topic

At 8:18 AM, Blogger Alan P. said...

The whole fiat money scheme works great as long as the countries that receive our money do not use it for the common good. Much of it is destroyed in the stock market or in land speculation, more is loaned back to the U.S. This works because this system is designed to benefit the few at the expense of the many. The few wish to maintain the value of the dollar and keep the U.S. economy afloat because that is where their grift is held.

At 10:15 AM, Anonymous Mike said...

Well said, Weas. But you almost understate how bad things can get when you say, "To do so, less must go to wages, and more shoved through corporations in shady finance arrangements."

Actually, they can just "print" so much that even if and when it seeps down to the rank-and-file, it's so devalued as to be nearly worthless.

And don't forget another horrible factor: rising consumer costs in the face of devalued wages. So how does that overactive American consumer purchase what he (thinks he) needs? On CREDIT! So the banks win on the way out . . . and on the way back in.


At 4:21 PM, Blogger confusedforeigner said...

Stagflation here you come. Soon.


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