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A random discussion About The Fed & Money Printing (with a member of reddit)

Editors note - This is raw text taken from reddit. There are some grammar and stylistic glitches but the substance and sentiment of the responder is spot on target in my humble opinion. WallStreetSilver has 218,000 members. This is a spirited group of villagers who believe in sound money like silver & gold. There are some very smart apes in this group. This group has members like Rafi Farber, Joe Brown, Greg Mannarino, the Economic Ninja, The Happy Hawaiian, and silvertomars (along with hundreds of other intelligent creatures. I must also emphasize that the fiat camp is comprised mostly of losers like Jim Cramer, Paul Krugman, J. Powell, etc and they are no match for the apes)

The PickAxe: Why does The Fed print money instead of having a constrained money supply?

reddit user AAcmotorman:

There must always be more and more loans taken out to feed the system. This is because we have a DEBT-BASED CREDIT SYSTEM. This system is based on attracting the next greater fool into the scheme, whether it's bond investors, IMF clients, mortgage-backed securities, etc.

Moreover, there must be a pipeline of future loans. If the money supply were allowed to return to its core value (think 1929 depression), it would cease to exist. So the key to this entire system is debt owed by the government that can only come from us who need the dollars - to give to them to pay the obligation - to make it worth anything.

Not only that, the dollars we give them must come from a loan that is at least within the possibility of probabilities that we can pay back. The loans are the only way our dollars exist at all. In fact, this system could not have ever been possible unless it first began as a hard currency because you can't start a system where we owe something that nobody cares to have.

This is an exponential problem. Because while the principle can be paid back, there is an ever-growing deficit in dollars to pay back the interest on all the loans, which creates artificial scarcity. All systems will tend to bog down due to the normal ebbs and flows of the natural business cycle. During these times, the government can't risk the situation I mentioned above, where we enter into a depression and markets correct too much. It is terrible for the system because people will stop taking out more loans. You can't ever have people hurrying to pay back their loans or a time of economic stagnation where growth pauses to allow for bankruptcies and deleveraging. This deleveraging will result in the destruction of dollars, leading to more deleveraging, more defaults, and so on.

The logical extension of this problem is that the system implodes on itself down the road. Once this natural deleveraging happens in a normal hard currency system interest rates rise again due to the ability for people to pay more interest because they feel they can afford to do so. Growth explodes and so does the money supply until (in a gold-backed fractional reserve system) the interest rates cause this to reverse and the banks who were offsides go bad as well as the companies.

This is the problem we face. For our system to survive, any time we enter into a period of stagnation, it must be met with more and more government spending to prevent the deleveraging from shrinking the money supply by too much and becoming a situation that feeds on itself.

This is also why you hear the "2% target inflation is necessary and beneficial" nonsense out of the fed. They want to always see prices increasing, never decreasing. This would show that we have entered into a deflationary spiral that could end in destroying our entire country. This government spending was all well and good so long as it wasn't too much and it was actually on useful, productive things that created real growth. Which has been the case for most of the 50 years we have had a pure fiat currency.

Governments, businesses, and banks worldwide were more than willing to keep bidding the price of bonds up because it provided a return that was above inflation and was stable and gave you access to the most liquid and widely traded markets in the world.Everyone wanted to be there because America was growing due to the seemingly never-ending business cycle we have here.

Most trade was made in our currency, and the dollar was backed by billions of debt slaves who were always hungry to repay their loans to get ever larger ones. However, the never-ending business cycle has led to massive misallocations of capital due to banks who never have to worry about reserve requirements and the US government, who doesn't care what it spends money on or if it is wasteful.Now we, the people, can't do it anymore.

The growth potential isn't there anymore due to massive inefficiencies and dead-end markets created by bubbles created by endless spending on things that are not helpful for growth (think handouts).

I think the story of QE(fed money printing) has a dual purpose. First, I believe QE is a tactic played by the fed to play to the need for the dollar to never feel too scarce. Second, I believe that the government had finally gotten to the point where they both needed to spend money as much as they needed us to not have to give it to them to spend it. They wanted a way to get more for their efforts. If they were to take the dollars from the economy that needs them to spend them again, they were worried it could cause too much liquidity to be removed and cause asset prices to decline. They wanted both to spend more and have the asset prices continue their upward trajectory. Growth had poorly stalled from 2000 to 2008, and they needed a way to really juice the markets to create fake wealth effects while also handing out money as a stop-gap to keep debts being paid, and loans being taken. So they decided to venture into what Putin calls "unsecured debt spending".