What Backs the Buck?
By Barry Ritholtz - November 2nd, 2009, 12:30PM
Macro Notes
Corporate credit markets feeling the correction tooPeter Boockvar
The equity market correction over the past few weeks due to sovereign credit concerns on top of China policy tightening moves, mixed US economic data and a raised bar of earnings expectations has also gotten around to the credit markets over the past few weeks. Today, the investment grade CDS index is at 105 bps, up 4 from Friday and vs 84 bps two weeks ago. It was last at this level in late Nov in response to the news that Dubai was requesting a standstill agreement on their debt obligations. The KDP high yield index is rising to the...
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November 2nd, 2009 at 12:45 pm
Fannie Mae and Freddie Mac MBS are not agencies. Fannie Mae was an agency, but was converted to a government sponsored enterprise in 1968. This is an important distinction because under the Federal Reserve Act, the Federal Reserve Act may only buy securities that are backed by the full faith of the federal government. Fannie Mae and Freddie Mac MBS is not backed by the full faith of the federal government through any law, thus the Federal Reserve is breaking the law by purchasing securities from those enterprises.
November 2nd, 2009 at 12:46 pm
Remember the Fed said they didn’t want to create panic when they refused Bloomberg’s FOIL request. It’s too scary for the public to know who they’ve been ladeling money out to and the assets they’ve taken as collateral. We’ll find out about those assets as time goes by…
November 2nd, 2009 at 12:48 pm
What backs the buck?
You can’t fool me.
The U.S. Dollar is backed by a smile and a wink.
November 2nd, 2009 at 12:49 pm
Back to the 1920’s except – no gold.
Good plan; what could go wrong?
November 2nd, 2009 at 12:52 pm
“What Backs the Buck?”
Fraud.
November 2nd, 2009 at 12:57 pm
somebody should spool the SNL skit “Change Bank”, b/c that’s the only thing you’d ever get by trying to ‘redeem’ FedRes Notes..
This Post, is utter, and complete ____________ .
November 2nd, 2009 at 1:03 pm
[...] A neat chart that depicts the changes to the Federal Reserve’s balance sheet over time. (Big Picture) [...]
November 2nd, 2009 at 1:21 pm
In other words, the paper in your wallet is backed by paper in the vaults. This is why I am continually astonished you peeps ascribe so much legitimacy to our economy that you constantly bicker about the characterization of trivial market movements.
MEH — you aren’t objecting to Ritholtz’s post, per se, are you?
November 2nd, 2009 at 1:23 pm
“What Backs the Buck?”
The ability to pay taxes. Nothing else. The rest is all smoke and mirrors.
If you merge together the FEDReserve and the FEDS, on liability side is bucks and bonds, on the asset side is the alphabet soup, some aircraft carriers and stuff, some roads, some buildings etc etc.
The dollar will have backing as long as people can be persuaded to pony up to pay for the assets listed above.
I really is as simple as that. Isn’t it?
November 2nd, 2009 at 1:24 pm
what backs the buck?
hmm . . .is this a trick question?
November 2nd, 2009 at 1:26 pm
or inversely-
what doesn’t back the buck?
answer: everything
November 2nd, 2009 at 1:34 pm
Nukes.
November 2nd, 2009 at 1:39 pm
CNBC S,
not sure I’m following..care to try to draw that out some more?
I’d blame it on the 3rd of a ‘three-Martini’-Lunch, but that’d be as much of a Lie as the agitprop in this Post..that dude’s name is ‘Koning’ is, almost, an Irony too rich for words..
November 2nd, 2009 at 1:42 pm
this economic data point, however, is definitely bullish. and about time….
http://www.semi.org/en/MarketInfo/Book-to-Bill/index.htm?id=highlights
North American Semiconductor Equipment Industry
September 2009 Book-to-Bill Ratio of 1.17
SAN JOSE, Calif. – October 20, 2009 – North America-based manufacturers of semiconductor equipment posted $732.8 million in orders in September 2009 (three-month average basis) and a book-to-bill ratio of 1.17, according to the September 2009 Book-to-Bill Report published today by SEMI. A book-to-bill of 1.17 means that $117 worth of orders was received for every $100 of product billed for the month.
November 2nd, 2009 at 1:43 pm
manny-
don’t forget- the USSR had a lot of nukes- a lot of good it did them-
the ruble crashed and burned and the country imploded-
so maybe having a bloated military isn’t all it’s cracked up to be
November 2nd, 2009 at 1:45 pm
@ahab: I hear you. I was being a bit facetious. Can’t really muster up any more outrage these days. I got nothing today. Tomorrow could be a different story.
November 2nd, 2009 at 1:46 pm
@ahab: And I think having a bloated military (and associated industrial complex that keeps us motivated to be involved in perpetual wars) is actually one of the reasons for our decline (and the Soviet Union’s).
November 2nd, 2009 at 1:47 pm
Mannwich is absolutely correct.
Thousands of nuclear weapons pointed all over the world back the dollar. It’s what the United States is, the greatest blackmailer in the history of the world.
November 2nd, 2009 at 1:49 pm
MEH obviously didn’t read the chart. There are a lot of big and confusing words in it so we’ll cut him a lot of slack.
Of course you can’t redeem money, just like you can’t redeem your shares in IBM.
But that doesn’t mean money isn’t a fully backed claim. Just like IBM shares are backed while unredeemable.
Bring all comments, hate mail, marriage proposals, & questions this way!
November 2nd, 2009 at 1:52 pm
“Thousands of nuclear weapons pointed all over the world back the dollar. It’s what the United States is, the greatest blackmailer in the history of the world.”
If that’s the case, then the 2nd-strongest currency in the world must be the Russian ruble.
November 2nd, 2009 at 1:53 pm
@impermanence:
That kind of reminds me of our national policy: Don’t negotiate with terrorists, unless they have nukes (real or financial), of course…
HCF
November 2nd, 2009 at 1:53 pm
“so maybe having a bloated military isn’t all it’s cracked up to be”
The War Machine will devour the State. That’s how it works.
November 2nd, 2009 at 1:58 pm
http://finance.yahoo.com/news/Obama-Private-public-sectors-apf-1954366305.html?x=0&sec=topStories&pos=5&asset=&ccode=
WASHINGTON (AP) — President Barack Obama said Monday the public and private sectors must find more ways to create jobs to continue the nation’s climb out of an economic recession.
Obama said the economy has pulled back “from the brink” but still has a long way to go, especially in creating jobs. The president said job losses would continue for weeks and months to come and called for bold, innovative action by his administration, Congress and the private sector to create more good-paying jobs.
OK…I’ve got an idea and I won’t cost a dime…you know the commercials “What if firemen ran city government?”…You know the ones…
Well, I propose “time share” on congressional and executive branch jobs…50% of the time I propose small businessmen to take the place of the Secretary of the Treasury, President, Senate, Congress…
…you get the idea…Whaddya think? Winner, winner, chicken dinner?
B in T
November 2nd, 2009 at 2:01 pm
@MRegan: “Will devour?” How about “IS devour-ING?”
November 2nd, 2009 at 2:02 pm
@Bruce: How about more military industrial complex jobs? More are signing up for the military every day. Might as well send them in harms way to be killed or maimed (for highly dubious reasons) for three squares a day. Seems like a fair deal to me.
November 2nd, 2009 at 2:04 pm
MEH, your last sentence @ 12:57 appears to criticize Ritholtz’s “Post”, but your reply confirmed you were referring to Koning.
November 2nd, 2009 at 2:04 pm
MW-
“Thanks for the conjugation improvement,” he nodded in agreement.
November 2nd, 2009 at 2:08 pm
@MRegan: I don’t mean to quibble, but……
November 2nd, 2009 at 2:09 pm
Governments can indeed back their currencies by force. But this is non-chartable intangible asset.
And force only works for so long. Zimbabweans spontaneouly stopped using the Zim$ in favor of the US dollar despite grave threats of violence by Mugabe and his thugs.
Having real assets is the best long term backing for a currency.
November 2nd, 2009 at 2:10 pm
I’m glad you guys are finally coming around to the realization that “the full faith and credit of the United States Government” is morally equivalent to “at the point of a nuclear-tipped ballistic missile”.
Nukes back the dollar, but force projection requires a Navy. The Soviet Union couldn’t afford a navy, and that’s why it couldn’t protect its currency, or its empire.
Like the recruiting commercials running during NFL games goes: The US Navy, a force for Good.
But they don’t say that “good” equals whatever is in the best interests of the United States of the Banksters.
November 2nd, 2009 at 2:12 pm
By the way, during the 3rd Century, the Roman emperors tried to account for their burgeoning fiscal deficits by reducing the silver content in their coins, which led to inflation and ultimately regression to the barter system and general regression of civilized society in many parts of their empire.
We skipped the “reducing the silver content” part and went straight to paper money. We are printing more and more money and debt to “back that money”.
God help us.
November 2nd, 2009 at 2:14 pm
Manny,
I was in the army 1970-72. Don’t get me started about useless wars…
November 2nd, 2009 at 2:14 pm
He’s talking about a new WPA ya know. It consistent with the magnitude of the gov actions taken so far. Hes talking about innovative ways to solve long lasting high unemployment. The actions taken thus far to temporarily save the banking system equal or exceed what FDR did – and it ain’t over yet. 2 of the Big 3 have failed. the cheerleaders on CNBC might be temporarily making us feel good blowing smoke up our asses, but the unemployed don’t spend. I’m sure they weren’t calling it the Great depression in 1931. The WPA wasn’t created until 1935, Barry’s ahead of the curve!
U.S. work program for the unemployed. Created in 1935 under the New Deal, it aimed to stimulate the economy during the Great Depression and preserve the skills and self-respect of unemployed persons by providing them useful work. During its existence, it employed 8.5 million people
November 2nd, 2009 at 2:17 pm
new WPA, needs a catchy new name concept. National Service Corps, something like that
November 2nd, 2009 at 2:17 pm
“‘redeem’ FedRes Notes . . .SNL Change Bank skit”
good one hoffer-
for what could they be redeemed- except change- zinc or copper/nickel denominations of coinage worth far less than the value indicated on the coin-
as a histoy lesson to anyone interested- the dime- because it was originally a silver coin was smaller than the nickel- but worth more because of the actual value of the metal content-
so next time a kid asks you why a dime is smaller than a nickel- you can answer that question w/ authority
November 2nd, 2009 at 2:17 pm
@Bruce: Oh, I’m sure you could school me well on such things. I don’t know even 1% of what you and the likes of the Curmudgeon (and many others) know on such matters and don’t even pretend to.
November 2nd, 2009 at 2:19 pm
The new “WPA” = military service for endless wars. Kill two birds with one stone (or more) for lack of a better term.
November 2nd, 2009 at 2:22 pm
TGCNBCS – Correct me if I am wrong, but didn’t the fall of the Roman Impire usher in the Dark Ages. Dark for Western society, not so much Eastern.
Does this mean I should be stocking up on my batteries?
November 2nd, 2009 at 2:25 pm
You all are forgetting we’re salt of the earth Americans! God is blessing us. Our increasingly God-centric population’s prayers will save us. And that military industrial complex that is bankrupting us is necessary – terrorists and middle east countries would have destroyed us by now without it. No inflation, employment lagging indicator, winning Afganistan is vital, Uncle Ben is on the job, nothing to see here, move along!
November 2nd, 2009 at 2:37 pm
Ritholtz, you have unified us! Nothing unifies the peeps like posts about the USD! Why did you wait so long, Ritholtz the Unifier?
Where’s Wanger?
November 2nd, 2009 at 2:41 pm
Its a cool graphic but doen’t kinda look like a Warhol interpretation of a “Technicolor Yawn” but fitting in that it references our econobarf.
November 2nd, 2009 at 2:43 pm
cnbcs/F420d
cnbcs- to follow up on your observation- Wes posted this link back in Septmeber- discussing inflation, debasement of currency and the Roman Empire- bit long but worth it if you have time-
does not look favorably upon the military, rulers or civil servants-
investigates how freedom of the common man was slowly deprived and the transition to actual servitude to working hereditary plots of land occurred – the beginnings of a feudal system-
http://mises.org/story/3663
hat tip Wes
November 2nd, 2009 at 2:48 pm
“What backs the buck?”
As War would say, “Absolutely Nothin’”.
November 2nd, 2009 at 2:49 pm
ahab — Thanks for that link…definitely look forward to reading it.
Next time you guys (and I do mean guys) are browsing at a Borders, take a look at http://www.amazon.com/Lost-West-Forgotten-Byzantine-Civilization/dp/0307407950
It is not a rigorous historical text, by any means, but an entertaining read for when you are browsing at a Borders.
November 2nd, 2009 at 3:04 pm
TGCNBCS – My boys rented Transforms, I am looking forward to watching it just so I can see what her name, maybe catch a glimps of her tattoos too.
Ahab – Thanks for the link.
November 2nd, 2009 at 3:06 pm
CNBC, re rome. The inflation during the decline of the roman empire is often remarked upon but the inflation during their rise to power less so.
Inflation in prices of goods was significant during the rise of the empire, but it was outstripped by rising incomes.
Bad inflation and good inflation.
November 2nd, 2009 at 3:09 pm
CNBCS – That looks like a good read. I do not know why they teach history the way they do in puplic schools. When Rome split, Constantinople (Easter side) continued to rule, while Rome (Western Side) Struggled.
But the way they teach it in school there was ONLY the Western Side.
November 2nd, 2009 at 3:10 pm
JP K,
I appreciate the Slack, preferably by the Meter, you know, the ‘inflation-adjusted’ Yard..
but, more seriously, even the US Treas notes the sea-change in the value of the currency circulating in our ‘Economy’, as–
“…Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy….”
http://www.treasury.gov/education/faq/currency/legal-tender.shtml
people would do well by perusing http://www.frbsf.org/currency/historical/index.html
but, again, this chart qualifies, to abuse that word, as Agitprop. Simply, it leads one astray by substituting technical ‘fact’, FRN are a ‘first lien’, for operative Reality, they’re worth nothing, save the other deluded Souls that need to collect them to pay-off the Mob that demands them..
November 2nd, 2009 at 3:12 pm
“Governments can indeed back their currencies by force. ”
This is true, but not in the way it first seems. The ‘force’ that backs a currency is the coercive power of a government to collect taxes. What backs any money – ultimately – is simply the promise of future work (or goods… but that still depends on work). Every nation has the ability to produce future work – some better and more efficiently than others – so if you think a country has strong potential for future work and a strong ability to tax that work, then the currency is backed by strong promise.
November 2nd, 2009 at 3:13 pm
All the discussion of Rome reminds of a good question:
Has DEFLATION ever killed a great civilization? If not, then what the F are policymakers so scared of?
I suspect inflation has killed a great many more governments, currencies, and societies than deflation ever could. Deflation always ends because people eventually do need stuff (i.e. spending never ever goes to ZERO).
HCF
November 2nd, 2009 at 3:15 pm
“Has DEFLATION ever killed a great civilization? ”
What previous civilisations have been 97% credit based with a vast army of possibly violent proles dependant on just in time delivery of victuals to the nearest hypermarket?
One wonders what we have created.
November 2nd, 2009 at 3:21 pm
@scepticus:
> One wonders what we have created.
What we’ve created is a Federal government that is so monstrously large and so dependent on debt, that we have no choice but to debase our currency to pay everything back in less valuable dollars. God forbid we actually live up to financial obligations or live within our means… I guess it’s easier to just de facto default via inflation rather than officially default. This way, at least we keep S&P, Moody’s, and Fitch out of it. Of course, if any of those credit agencies were ever to downgrade, I’m sure they could just be raided or nuked out of existence =)
HCF
November 2nd, 2009 at 3:26 pm
MEH,
Like yourself, the website you point out confuses redemption and backing. Something can be backed, while not being redeemable on demand. Like a stock; backed but not redeemable.
To understand the Fed, you have to look at the core legal document on which it is based; the Federal Reserve Act. You can’t fall back on a FAQ put out by the US Treasury for your knowledge.
Lastly, the words constituting the founding documents of any organization are not mere technicalities; they are the very rules that constitute the way in which said organization acts. As such, words are important. Take away “first lien” from the FR Act and dollars will indeed be worth nothing.
November 2nd, 2009 at 3:26 pm
Bruce, I was in Phu Bai in 1970-71 defending the left coast
November 2nd, 2009 at 3:31 pm
Inflation is a symptom, not a cause, of declining empires. A policy of currency devaluation (inflation) is just one of many desperate measures declining empires undertake to extend by illusion the day of their final reckoning.
Empires are neither created nor destroyed by dint of monetary mischief. They are only deluded for a time, and the time grows shorter with each succeeding attempt.
November 2nd, 2009 at 3:32 pm
“Every nation has the ability to produce future work – some better and more efficiently than others – so if you think a country has strong potential for future work and a strong ability to tax that work, then the currency is backed by strong promise.”
Agreed. But if a country loses its ability to tax, a central bank’s currency can still be of value, as long as the assets held by that central bank holds are valued. These assets might be gold, buildings, the bonds of defunct government monopolies now competing with private firms, interest paying loans to private banks, etc..
November 2nd, 2009 at 3:33 pm
@ Mannwich at 2:17 pm
“Bruce: Oh, I’m sure you could school me well on such things. I don’t know even 1% of what you and the likes of the Curmudgeon (and many others) know on such matters and don’t even pretend to.”
Jeff – what surprises me, despite cogent commenters here, the likes of b’n't, curmudgeon, meh, etc, is how little general outcry there is in public from older gen’s, esp the remaining of the Greatest Generation who carried the burdens of the GD and WWII and early boomers who enjoyed growing up in the 50s & early 6os then got grounded in realpolitik through civil rights struggle , ‘nam, “greed is good” etc. we know we and our kids and grandkids are getting screwed down the road for the sins of the profligateand yet where is the outrage?
when i speak up within my immediate family, my older sibling says, “what are you gonna do?” and the youngest sez, “you sure are obsessing about this bank thing”
November 2nd, 2009 at 3:37 pm
@ scepticus
Agreed. BTW, I replied to your objection to my post on the other thread, http://www.ritholtz.com/blog/2009/11/ambrose-evans-pritchard-worry-about-japan-not-america/#comment-231436
@ everyone else
Step aside! It is the Mark E. Hoffer vs. J.P. Koning smackdown regarding the FedRes. The moment of truth has arrived. Two men enter, one man leaves. Koning uses two initials, while Hoffer only one. I don’t know what that means for the match.
Two men enter, one man leaves!
November 2nd, 2009 at 3:41 pm
On a slightly different note, what do you all make of the sudden spike in the Dow over the last 10-15 minutes? Obviously the PPT can’t allow a major bearish reversal the day after a 250 pt. down day on the Dow… =)
HCF
November 2nd, 2009 at 3:44 pm
JP K,
drawing a parallel between shares of Stock, and FedRes Notes is fatuous, at best. Much like the, repeated, insistance, that they, FRNs, are a ‘first lien’..
you seem to be, convienently, for the sake of your Art, ignoring that was, once, Money, is, now, merely, Currency.
and, also, one can repeat ‘first lien’ ’til the Chickens come Home to Roost, but it, also, Fails to answer for the continual depreciation of the Purchasing Power of the U$D since the inception of the FedRes, ~1913.
IOW, it’s (‘first lien’ verbiage) a distinction, w/o a difference, a.k.a. Rule 1 in Agitprop made EZ.
November 2nd, 2009 at 3:56 pm
this stuff has been well covered..might, as well, let this:
“…That is some pretty heavy stuff: overturning society by destroying the currency of a nation, by using hidden forces that not one in a million are able to understand. However, Keynes knew this to be the truth, as he was one who was without equal in the debauchery of our currency; until Alan Greenspan took the stage – the reincarnation of John Law.
Ayn Rand nicknamed Sir Alan the undertaker, a most fitting title for the head of the Federal Reserve, under whose watch more debt was created then in all previous administrations combined. A world record that will most likely stand adamant against the passing ages.
How does one explain the behavior of Keynes and Greenspan, whose monetary policies destroyed the purchasing power of our money? There are not many “above” these infamous players that are in the class of one in a million that understands, nevertheless there are a few, as the following quote by one of the Rothschilds clearly expresses: “The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favors, that there will be no opposition from that class.” [3]
Nonetheless, opposition still exists, as this paper is a testament thereof. It is in the spirit of finding the truth and dispelling the forces of economic law on the side of destruction, be it done knowingly or unknowingly – that the following is offered.
1933 REVISITED
It is true that in 1933 the government, under the auspices of President Roosevelt, confiscated all private holdings of gold, and made it illegal to own gold as private property. For a more detailed discussion of the gold confiscation see Social Security: The New Deal – A Raw Deal, Part 5 .
Once the confiscation took place, it is incorrect to say that we were any longer on the gold standard: we were not, as gold was now illegal to own. It was considered a crime to own one of the two metals that our Constitution mandates as legal tender:
Article I, Section 10, Clause 1 . “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.” [4]
Note the wording “emit bills of credit”. This is a reference to paper money, aka Federal Reserve Notes. For a more detailed discussion see the series The Constitution of the United States & Honest Money .
It is incorrect to say that the currency was backed by gold once Roosevelt issued any of the following: Presidential Executive Order 6102 ; the Emergency Banking Relief Act of 1933 US Statutes at Large ; and the 1934 January 31 Presidential Proclamation (no. 2072) of Franklin D …The Gold Reserve Act . For a more detailed explanation see: Letter to Congress
The currency was no different then the markers that a riverboat casino issues to an addicted gambler that has not the means to fulfill his contractual obligations. Even the Federal Reserve knows this to be true:
“Neither paper currency nor deposits have value as commodities, intrinsically, a ‘dollar’ bill is just a piece of paper. Deposits are merely book entries.” [5] …”
[5] Modern Money Mechanics Workbook, Federal Reserve Bank of Chicago, 1975 [6] Stanek vs. White, 172 Minn.390, 215 N.W. 784
http://www.marketoracle.co.uk/Article288.html
by Douglas V. Gnazzo
speak for itself..
really, I’d love to see any of the, quoted, above be proven as Factually Incorrect..
November 2nd, 2009 at 4:15 pm
dollar backed by Manners, lol
deflation crushes the rich, and crushes the government because they are usually so extended, tax receipts dive off of a cliff
society’s die because no one likes math, too much oa a pain in the arse.
November 2nd, 2009 at 4:15 pm
MEH
Just because I maintain that the dollar is backed doesn’t mean that I think the backing is necessarily of good quality, nor am I trying to protect/justify the Fed in any way. I’m much more comfortable with a system of competing banks than one dominated by a central bank.
A deterioration of the backing quality of the dollar helps explain the continual deprecation of its purchasing power since 1913. The Fed overpays for government debt, ie. pays more than the market would. Any organization that continually overpays for its assets will have a constantly worsening balance sheet. As a result, all claims to those assets – bonds, stocks, debts, notes – suffer.
November 2nd, 2009 at 4:24 pm
Is that “no mas, no mas”, Koning? I was frankly hoping for more. Hoffer and I cannot stand each other, but I have always agreed with the man on his FedRes rant.
You are arguing that a dollar that is backed by nothing is still backed!
Will anyone, ANYONE please challenge Mark E. Hoffer on this most fundamental and existential of debates, before I hide off in a cave with some canned food and a shotgun?
November 2nd, 2009 at 4:50 pm
“Marcus Aurelius Says:
November 2nd, 2009 at 12:52 pm
“What Backs the Buck?”
Fraud.”
Word.
November 2nd, 2009 at 5:09 pm
@CNBC Sucks…you better just find a cave. And take a rifle, too.
MEH got him. The language of the Federal Reserve Act has about as much value as its constantly-depreciating currency.
If you want to argue semantics and parse statutes, there is a fairly good case can be made that virtually all of the FedRes’ actions 3rd and 4th qtr 2008 and into 2009 violated its own charter and subsequent laws defining its purposes. But again, those words are just like the currency, being devalued everyday in as economic, and thereby political, power gets sucked into black power hole that is Washington, where decision-making ability goes to never again escape the event horizon.
November 2nd, 2009 at 5:27 pm
This should be required reading for everyone, everywhere.
Doesn’t congress claim that the dollar is legally 1/42.22 of an ounce of gold? If anyone can point me to where they sell gold for 42.22 an ounce please do so right away!
The dollar is nothing more than a promise backed by a promise to pay an identical promise. Since the Treasury will not in fact give you anything tangible for your dollar (try it) then the dollar really just becomes a promise to pay nothing.
Credit Deflation….
November 2nd, 2009 at 5:44 pm
JP K,
I agree that something can be “backed” without necessarily being directly exchangeable for that backing. What I don’t get, is how one can invent a currency, let’s call it the Schmollar, print up a billion of these Schmollars out of thin air, loan them out to Joe Schmoe (gov’t, business, citizens, etc.) and then say that the Schmollar is “backed” by this loan. The loan is denominated in Schmollars and the Schmollars which you will be getting paid on your loan are worth nothing except the fact that they are “backe”d by that very loan. So you’re basically backing the Schmollar by a promise for payment in Schmollars which are backed by a promise for payment in Schmollars which are backed by a promise for payment in Schmollars… etc. etc. ad infinitum. At the end of that chain there’s gotta be some sort of tangible asset or else the “backing” is fake. To say the dollar is backed by loans denominated in dollars is silly. If that’s all it takes to back a currency, we can all just print up as much of our own currency as we want and demand that it have value…. so long as we loan it out to someone?
November 2nd, 2009 at 5:49 pm
@batmando: What that tells me is far too many people of that generation have either thrown in the towel and/or feel powerless amidst the complexity of the situation (or as my father-in-law reminds me – he can barely get anything done on a local level and he’s VERY ACTIVE, how’s he supposed to influenced federal policy?), so they’re just hoping for the best (and hopefully preparing for the worst). I fear that not enough are doing the latter. Too much “hoping” and not enough preparing.
November 2nd, 2009 at 5:51 pm
I honestly believe that what backs the dollar is really what backs everything else right now – - our collective ability as human beings to delude ourselves. It’s “extend & pretend” on hyper-macro scale. If (when?) that ends, watch out. Hopefully I’m long gone by then.
November 2nd, 2009 at 5:57 pm
@ The Curmudgeon
Hey Mudge, hope things are well with you. You were away for a while. I used your global wage arbitrage argument for a few rants over the summer. Mannwich told me the reason, so hopefully things are fine. Unfortunately, I will have to settle for the single-shot, made-in-China 12-gauge from Wal-Mart, because the Libertarians bought all the good American .30-06s already.
@ Ben
I just sent you an email thanking you for that quick and thoughtful response. Why the heck were the Jaguars running MJD when they were behind?
This is a dark, DARK day for The Great CNBC Sucks. I have to proclaim the Proudhon to my Marx, Mark E. Hoffer, the winner of the FedRes debate. Thanks for nothing, Koning.
The Libertarians won today on the Ritholtz blog. Widows and orphans weep on the street (not sure which street). But there is always…tomorrow!
November 2nd, 2009 at 6:05 pm
@CNBCS: Now you know why I refused to trade MJD to you for your offer (which was basically for a bag of dirty jockstraps). The Jags will run him to death even if they are getting killed, which means he racks up huge points every single week. That was the steal of the draft at the #7 pick.
November 2nd, 2009 at 6:56 pm
Jeff, I was thinking you just about wet your pants when Andy picked Brees and The_Patriot_Way picked Brady right before you. I knew you would not be a dolt so I was prepared to take Fitzgerald with the 8th pick. I never expected Chris Johnson’s health would last until Week 8 as an every-down NFL running back.
The steal of the draft was Andy’s with Ray Rice in the EIGHTH ROUND though. Andy missed on Slaton (second round), but made up for it with Rice.
November 2nd, 2009 at 7:45 pm
The full faith and credit of the United States Government. . . or maybe China. I’m not sure any more. I would note that I have a couple of Hanky Panky’s autographs in my wallet.
November 3rd, 2009 at 8:38 am
Zebov,
It’s true that currency is backed by bonds, and bonds are promises to pay currency. Where is the real asset backing currency then? Well it helps to remember that a bond indentures specifies that bond holders have a claim on a firm’s real assets. Should the firm be unable to pay interest on the bonds, the bondholders can make good on this claim. Thus, when all the chips are down, money is backed by bonds, and bonds are backed by real assets. Cheers!
November 3rd, 2009 at 2:26 pm
So it’s more that the dollar is backed by the collateral for the loans, not the loans themselves. Before the great collapse, the chart shows the dollar backed by government bonds. So in the end, the dollar is backed by the U.S. government’s power to steal real property from the people–or if that’s too extreme of wording, to tax the people and force them to pay these taxes under threat of confinement or death, and if you can’t pay they will take your real assets. Now in addition to that, a large portion is backed by MBS’s or loans out to banks that have crap as collateral. Which means these new dollars are mostly worthless, unless the FED can show us there is some real quality collateral on those loans (which there isn’t or else they wouldn’t be hiding it). Well THAT’s depressing.
November 3rd, 2009 at 3:42 pm
You got it.
Although a lot of government backing is made up of real assets: land, buildings, roads, and infrastrucuture. Stuff that people would pay to use even if there was no government monopoly backed by force.
November 27th, 2009 at 6:15 pm
[...] Källa: http://www.ritholtz.com/blog/2009/11/what-backs-the-buck/ [...]