So now we had paper money that could not be redeemed into gold anymore and now central banks can produce any liquidity necessary to save the fractional reserve banking system in a recession and in a banking panic. However, there still remains a limit to inflation since not all central banks inflate in the same rhythm.
Some central banks inflate faster than others and when they do this, they inflate faster than others, there is an embarrassing devaluation or depreciation of the currency. It can harm financial corporations, international corporations. It is also a clear sign to the population that there is something wrong, that the currency has less value everyday and the population may want to adopt foreign currency.
So the different rhythms in inflation is a problem for central banks. For example the German bank inflated to additionally less than other central banks such as that of France. That is the reason why it was then brought under control through the ECB. This is the logical end of the monetary interventionism in the financial system. The central bank has an incredible amount of power. It would be impossible to assume in a free society. While communism collapsed in 1989-1990, the central piling still continues. The Fed and the ECB exert total control on the monetary system. They have the part to create money at their will. And this is important because the welfare of the state depends on this, on this monopoly. On money.
So now I would like to do another thought experiment with you. Imagine that you have the power the federal reserve has. You would be the only person that can produce money. Let’s say you can just print it with your computer or more simply you can access your online bank account and you can put any number in it and everybody would have to accept the money you produce. Then you would have a power that is comparable to the ring in Lord of the Rings. Would you use this power? You know the ring is almost irresistible. Temptation is almost irresistible. In fact Gandalf didn’t want the ring.
Actually you might want to do something good with it but the result of the setup always would be a permanent flow of goods and services to you, your friends and your family. And of course these would lead to a tendency for prices to increase. For example, if you want to buy a BMW, you just produce new money. If you had not produced the additional money so prices have built up. Now you get the BMW, the other person doesn’t and then the dealer has more money and the dealer may want to buy a coat for his wife, bidding up prices of coats and the coat producer’s income is higher and then he starts spending and gradually, as I explained yesterday, the new money extends through the economy increasing prices and changing the stream of goods and services towards the first receivers of the new money.
So the power of the printing press is virtually irresistible but you have to be very careful not to overdo it for several reasons. People might start to resist the scheme and try to destroy your power when they see that you just have to print money and you get rich and they get poorer all the time, they may revolt. So before it gets to this point, you may want to restrict your money production. What can you do besides? Well you can try to get important and powerful allies in the establishment. So let establishments participate in the scheme by channelling some money into their pockets, make them dependent on the system and make them dependent on the continual increase in the money supply. Then the establishment will always support you and the monetary system in itself, they will use that power and influence also in the media to support the system.
What can you do further? Well there are other means of diluting the source of unrest and resistance so you could develop a strategy to consider the money creation and create diversions. So you may transfer the new money through several steps in a very complicated system whose mechanisms are very hard to grasp. You may also try to convince people that actually this scheme is good for them. Yeah you may say what you are doing is actually you are stabilizing the price level or you are altruistically trying to spawn employment which by the way are the two official goals of the Federal Reserve – to stabilize the price level and to increase employment. People may actually start to like you, claim that without you the financial system will collapse. One point is that in your arguments, you should always concentrate on one effect of your monetary increase in the money supply that is lower interest rates at the reasonable level.
Banking and Financial Markets | Philipp Bagus
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