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Money Dr. Green Wall Street • Lou – Easy money creates financial instability – Economic progress depends on fundamentals • Investment and innovation • Bud’s Father – Financial speculation is parasitic on the creation of economic value – Yet, it destroy that very economic value upon which it depends, symbolized by Blue Star Airlines Speculation • Made easier by a fiat money system • Since the creation of our fiat money system in 1972 a series of instabilities – – – – – – Dot.com IPOs (1990s and subsequent 2000 bust) Orange County bankruptcy (1994) S&L Crisis and junk bonds (mid-to-late 1980s) Oil industry (mid-1980s) Drysdale Securities and Penn Square Bank (1981-1982) the farm belt and LDC debt crisis (1980-1981) Fiat Money • Fiat money is so-called because it is not backed by any tangible asset such as gold, silver, or even seashells. • The issuing government has decreed by fiat that “this money is a legal exchange medium, and it is worth what we say.” • Lacking a gold backing or backing some other precious metal, what gives the currency value? Fiat Money • Fiat money holds its value – only as long as the people using that money continue to believe it has value – as long as they continue to find people who will accept the currency in exchange for goods and services. • The value of fiat money relies on confidence and expectation. History • All fiat money systems have collapsed • It encourages levels of debt and risks that become unsustainable • When it becomes unsustainable, confidence is lost in the currency • When confidence is lost, it collapses and becomes worthless Fiat Currencies • France – Mississippi Scheme – Became Worthless • England – South Sea Bubble • Germany and Italy – Hyperinflation • Argentina – Currency collapse US Fiat Currencies • Continental – no solid backing and being easily counterfeited, the continentals quickly lost their value • Greenbacks – The government’s paper money flooded the banks so that by July 1864 greenback dollars were worth a mere 35 cents in gold. • Bretton Woods – Unstable hybrid Federal Reserve • Controls money supply by – Open market operations • Buying government securities increases supply • Selling government securities decreases supply – Discount rate • The rate at which member banks may borrow short term funds directly from a Federal Reserve Bank • Lower rates makes credit cheaper – Reserve requirement (fractional reserve system) • Amount of money and liquid assets that Federal Reserve System member banks must hold in cash or on deposit with the Federal Reserve System – Lender of last resort Consequences • • • • Undermines sound banking practices Asset Bubbles Business Cycle Transfer of wealth to – Government – Big banks – Big contractors • War • Rising costs of living What kind of people does a system of easy money create? • Speculators (Using Aristotle’s Virtues) – – – – – – – Rashness Self-indulgent Tastelessness and vulgarity Empty vanity Destructive ambitiousness Untruthful Envious