Wednesday, April 13, 2011

More (sur) real bills

Posted by Bionic Mosquito on 4/13/2011 5:39:57 PM
@Ingo Bischoff

Apparently you are referring to a dialogue from some other thread, as I see nothing of the history here. Could you reference this please?

Now, on to this comment:

"...referring to Real Bills as credit instruments is either willfully mistating a fact or it is ignorance of the fact."

The supplier of raw material, who cannot otherwise sell his goods because of the lack/shortage of gold (ability to pay) of the next level producer, sells the raw material based upon a real bill. This is credit; you may call it whatever you want, but you will continue to be wrong.

The baker says to the miller: "I have no money, but I want your goods. Please give them to me. You will get paid later." This is credit. And as Fekete says that the source of commercial credit is not savings, but production, he is an inflationist and an advocate of funny money.

"Dr. Fekete's point is that Fed banks have to present actual FRNs in the form of Treasury paper to the Fed Agent to receive "credit"."

Check the Fed's balance sheet. There is every kind of garbage on it, almost to the exclusion of Treasury paper. If the Fed wanted to buy my 1964 VW Beetle, they could do it. Prove me wrong. Your assertion is stunning given the reality.

"The law does not allow the Federal Reserve banks to purchase Treasury paper directly from the U.S. Treasury because that would make money creation through the Federal Reserve banks a charade, reserve requirements a farce, and the dollar a sham."

While technically the Fed buys in the secondary market, when the primary market KNOWS the Fed will buy $600 billion of paper, and the Fed announces it as such, your distinction is meaningless in economic terms. I assure you, the banks understand the game.

"These comments by Dr. Fekete can best be understood by reading the statement made by George R. James, member of the Federal Reserve Board before the U.S. Senate hearing on the Banking Act chaired by Senator Glass in 1935."

I appreciate your grasp of the history of these institutions. However, your continued reliance on statements and statutes from 80 years ago is baffling. We see what the Fed is. It seemed obvious to many in 1913 what the Fed would become. That Fekete's statements can be understood by understanding a world that ceased to exist decades ago (if it ever existed at all) makes the statements rather unimportant in understanding the truth of the system today, setting aside the numerous economic fallacies contained in his statements.

Posted by Bionic Mosquito on 4/13/2011 9:22:05 PM
@Ingo Bischoff

My neighbor (call him Joe) owns a donkey. He insists it is a thoroughbred. Now, in our neighborhood, their are many farms that raise thoroughbreds, so we know one when we see one. Joe's donkey is no thoroughbred.

But Joe's brother-in-law (Frank) sits on the town council. Frank got tired listening to Joe complain at every family gathering about his so-called thoroughbred being called a donkey. So Frank had the town council pass a law. Joe's donkey was now a thoroughbred, by law. Except everyone knew it was a donkey.

"What in fact happens is that the miller says to the baker: "I am offering you my flower so you can produce bread, IF YOU PAY ME WITHIN 90 DAYS [emphasis added]. I know you will sell the bread since people must eat. I have no doubt, nor will any subsequent holder of this Real Bill, that you will pay on maturity. Please sign here.""

Ingo, once again, using your own words as my evidence, it is clear that real bills are credit. To pay in 90 days, instead of on delivery, is credit. That someone passed some law that defines or governs bills of exchange does not change the economic reality; this is credit.

You are trying to peddle your donkey as a thoroughbred. Just because Frank passed a law doesn't change the nature of the donkey.

"Dr. Fekete understands this, and I understand this."

That you and Fekete understand this says more about cognitive dissonance than it does about your (or his) understanding of economics. Your explanations give away the reality that Real Bills are another promise of pixie dust: wealth from nothing, the same voodoo sold by Ben Bernanke.

Posted by Bionic Mosquito on 4/14/2011 8:26:25 AM

@Ingo Bischoff

I make no assumption about who is wealthier, the baker or the miller. Wealthy individuals, even cash-rich individuals, utilize credit in their business dealings. That they may not require credit makes it no less credit. Why do you introduce a strawman?

You and Fekete are peddling a donkey but calling it a thoroughbred. In your case, the reason seems to be because bills of exchange are governed by "law X" while commercial credit is governed by "law Y." This may offer a legal distinction, but there is no economic or monetary distinction.

As to there being a difference of interest charged as opposed to taking a discount on a note, economically there is none.

Exchanging goods for final payment (final payment requiring money, not a money substitute) to be made at some future date is credit. Interest charged or taking a discount is economically identical. It requires lawyers to come up with different methods and means to complicate the matter. To the businessman, the net result in the cash flows are identical.

That some might prefer taking a discount on a bill of exchange as opposed to utilizing interest in a conventional note does not matter. This is what makes a market.

Posted by Bionic Mosquito on 4/14/2011 2:39:10 PM

@Dave Jr

"Monetary inflation is moot."

This is incorrect. It always results in misallocation of resources, and therefor a) overall wealth destruction and b) a transfer of wealth toward the first recipients of the inflated money supply. It is true with real bills, as resources are taken from consumers and savers in favor of producers.

"Price inflation is what matters."

This, of course, is also the defense claimed by central bankers. "Watch price inflation [a thing impossible to measure] and ignore the theft going on via debasement of the money supply." As to real bills and price inflation, there is no doubt that with real bills prices are higher than they would have been absent real bills, as inherently demand would be lower.

Your words are the words of those supportive of central banking and fiat money. To the extent you speak knowledgeably regarding real bills, you demonstrate that the philosophy underlying central banking is the same philosophy underlying real bills.

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