Banking 12: Treasuries (government debt)

[AdrianAzian]

At first one wonders how the Fed is able to just create money out of nowhere. No it actually steals it from the people by taxes and inflation. It steals prosperity from the future . As Sal said in the video, the government can always just "TAX MORE PEOPLE" to pay back their debt or IOU. Thats why its "risk free". Thats why the Fed can print so much without limit. And FROM US is ultimately where the Fed gets all this money. TAXES & INFLATION

[IvanAndreevich]

Faith is a dirty word. If someone wants you to have faith in something, might as well skip on it and stick to the facts and evidence about it instead. You know, form your opinion rationally.

[fiedag]

Had to laugh: "some new war we want to fight, or bureaucracy we want to create..." - very dry.

[WilliamNaville]

@fiedag LOOOLLL

[MatDerKater]

Brilliant series of videos!

But it is now common knowledge that the Federal Reserve is a privately owned bank, which pays its 'owners' dividends of 6% per annum.

If anyone is in any doubt then GOOGLE it, until you find an extract from the Fed's own public statements which admits it in a very contorted round about way. The fact that it is a private bank has also been proven in US case law.

[Luigi84289]

@Holisticism1 Socialism. It could tax the wealthy to spread it around. Those in poverty don't pay taxes.

[boubs87]

half of the video is a repetition of what was previously covered. why?

[bammbamm12]

Sorry - can;'t watch one more second. With all the cursor wiggling, and all the endless repetition, it's enough to drive a person stir crazy.

[f0revern0ty0urs2]

I'm a little bit confused,each of those 2 primary banks have 200 money in demand deposits,yet they received only 100 notes from the treasury.

What have they been lending out then?Are those notes out. they received from the treasury the same currency as the money which they have lend out?

[Luigi84289]

@f0revern0ty0urs2 They each receive 100. They have 200 dollars in gold reserves total.

[ananiasacts]

@hansfbaier, If everything is backed by something real of equal value then wouldn't any loan become impossible?

[hansfbaier]

@ananiasacts I only talked about backing US treasuries, not every loan. Loans were perfectly possible in gold standard times, so that would be no problem.

Nevertheless I would be concerned about the massive amount of wealth the Fed would suck in if it started buying stocks or real estate instead of US treasuries and its impact on those markets.

[Luigi84289]

@ananiasacts No because you can always print more notes or make checking accounts and electronically put amounts in there. Everyone allows electronic transactions and accepts unbacked dollars. The banks have it made as long as too many people don't ask for their dollars at one time.

[prayfortruejustice]

State owned banks like the BND (Bank of North Dakota) essentially create debt free money for the state, and provide low interest credit to farmers and businesses. Rather than compete with private banks - they can support them as a clearing house, check processor, and risk sharing partner on private loans.

State owned Banks can be capitalized initially with state bond issue. All Bank "profits" go back to the state to pay for programs and offset taxes.

[prayfortruejustice]

There has been no gold standard since 1971.

Federal Reserve Credit and Notes are borrowed into existence via T-Bonds exchanged for FRNs. FRNs are obligations of the privately owned Federal Reserve and the US (people) paid 700 Billion in tax to the FED in interest in 2009.

The only public debt-free US money today is old US Notes (rare) and all coins from the US Mint. The FED pays 100% face value for coins and this profit or "seigniorage " (700 million in 2008) goes to offset the US debt.

[hansfbaier]

Backing the US Dollar by US Treasuries essentially means that the US dollar is a fraud: Treasuries are payable in Dollars, no material securities; so both are effectually but paper.

A real solution would be if the reserve disposes of treasuries and

acquires only stocks or loans which are backed up by physical securities

(like a house in a housing loan).

That way the dollar *really* would represent the economy, since

stocks represent the businesses that power the economy.

[hansfbaier]

@hansfbaier Hmm, just learned that stocks are only a part of the equity... so that won't work,

isn't there something out there which parts ownership of the whole company, including its assets?

[ananiasacts]

@hansfbaier, why don't you consider the taxing authority of the federal government to be a more reliable backing for money than the market value of real property? The fact that treasuries are sold in an auction means that it is the lenders who determine how trustworthy our government is (how much treasuries yield in interest.) I see no reason to consider any part of that mechanism as fraudulent or even misleading. I can't think of a better way to define money. What do you want to see changed?

[hansfbaier]

@ananiasacts The Treasuries are paper;

they are payable with paper money;

if money is to represent wealth, where is

the value here?

What I'd want to see changed: Let treasuries be backed

by real property (real estate, companies, stocks, raw materials, etc.);

So when the state goes bankrupt, you still get a share on those securities

and not just a piece of paper.

[ananiasacts]

@hansfbaier, I have no idea what you're trying not say. Turn you paper money into something you believe does have "value" if you fear that our currency doesn't. No one is forcing you to hold cash. Frankly, your complaint makes no sense to me because if you really believed that our government is deliberately debasing our currency to exploit us, it means that you could easily make a great deal of wealth via a highly leveraged bet against our currency. Why seek to destroy that opportunity?

[hansfbaier]

@ananiasacts My point is that if the government goes insolvent all that is

left of dollars and treasuries is paper. If treasuries were backed

up by real securities, the situation would be different.

This is not too far-fetched: The state of California just was on the edge of bankrupcy not too long ago.

[ananiasacts]

@hansfbaier, if the government goes bankrupt guns themselves will turn out to have been the best token for wealth, and you can't seriously suggest we lug boxes full of them around just to do business. You can't consider anything defined by the state, like real property, as wealth without the state itself, and if you have that, then there is no reason it's taxing authority cannot be turned into whatever other form of wealth you wish to hold.

[jakebarnes28]

Excellent primer on the subject. Definitely food for further inquiry.

The tax/repayment issue of the treasuries and risk factors are what are being referred to when commentators speculate on the risk to our currency value when no one shows up for the US Treasury bond auctions.

Its also why the fact that foreigners owning our T-bills is NOT the risk its made out to - if they sell, en mass, their investment tanks.

Owe the bank 100 and it owns you - owe a million - you own it.

[personova]

Sal, the revenue base dynamics of the US no longer support the debt owed. You cannot tax indefinitely. We have reached a Laffer effect, such that any marked increase in taxation will not increase revenue, in fact it may even reduce revenue. The ability to pay, the confidence in US Treasuries, is not good as gold, and really the US credit rating should be Junk. Especially, in maintenance of wealth.

[notme222]

@personova, The US is demonstrably NOT at that point. You might have a point if you take current spending as a given. But the gov't could, if it were willing, cut spending and pay off debts, which is why the T-bills remain "risk free". That wouldn't be true indefinitely, but is sufficiently for now. So the Laffer curve is irrelevant to the topic.

Contrast this with Greece, which is on the verge of default. They are a warning for what could happen, but a contrast to our current position.

[7wiiskate]

the info is great. bit i would have like it better if he had done it in a regular blackboard with chalk so that it could be more easily understood and looked at. just my opinion. tnx 4 the upload

[lwanatt]

w/ blackboard the lecturer always gets infront of the material and blocks my view, i like this better

[Pantz104]

I have a question. If you loan the government X amount of dollars (bank notes) and they fulfill their promise to re-pay you with interest, would you not still end up losing out? Although it would appear you now have more dollars than you loaned out, the purchasing power of those dollars has deceased due to inflation over the many years.

[Evulmeh]

I find it interesting that there are so many people against FED etc. on the internet, yet the views on these videos are now about 6,000...

Wondering if those ppl are just not willing to learn more :P

[atrickpay11]

@Evulmeh why does one need to learn about how it's intricate operations work in order to oppose it? I myself just oppose the State having a currency because it is destructive to liberty.

[lwanatt]

the problem with the fed is that if someone can gain control of the fed they can more than predict market trends they can manufacture them. as we know the right amount of money will buy control over anything, this is no exception, and the profits gained by these individuals perpetuate the cycle in an inconceivably destructive way, leaching all of the real value right out of the economy and into private hands.

[blumyztikk]

fed is the most powerful institution in your country because it controls reserves, i have question. to who fed is responsible for...are they above everything?

[joshborne]

Yes!

[hansxxxx666]

no!

[hansxxxx666]

They are independent as an institution.

But of course they are responsible for building trust in the US economy.

If they would act criminal, they lose the world's trust, the dollar would be worthless, and the economy would be destroyed.

Comprende? ;)

[blumyztikk]

yes thanks, i'm just really interested in those things..it's good to ask isn't it?

[hansxxxx666]

sure!

[Evulmeh]

The law? :P

[jackuy12345]

thx dude i really learn a lot of information about bank from, keep them up sir!!!!

[nietzsco]

I understand the principle of 'Treasuries' , but as a non US citizen I'm not entirely aware of the context in which they work. How does the US government choose who it borrows money off? And are the 'Treasuries' literally bits of paper that you just keep until the government gives you your money back or somebody else buys the treasury off of you?

I'm sure i've fundamentally misunderstood something but I'd appriciate help from any Americans who can help me.

[draggeddownthehole]

I live in Canada. How I understand it, the government prints a bunch of paper called Treasury bonds (a sort of security) in exchange of canadian dollars (CAD or bank notes). Those dollars are then used to pay public workers. The dollars were created out of nothing by the banks (probably owned by english bankers) and the Govt pays interest on the treasuries, which are a form of loan. So the bank notes are backed by Treasuries.

[blahdelablah]

@draggeddownthehole

So, just to clarify, the treasuries are the government's way of loaning money from the central bank? The treasuries become a promise to pay back more than is printed by the bank (with the extra coming through taxes)?

[chor1962]

Hi All

Have a question, if all the national banks use a common currency issued by the Central bank and the resereve ratio is 50% i would like to know where do the national banks get the remaining 50%currency from to give loan to customers, because the Central bank is going to give these national banks money only proportionate to the gold reserves they deposite with the central banks?

[ananiasacts]

They don't. The currency mostly sits around in vaults because people use checks instead. The point is that for every note the bank has they are allowed to loan out two.

[jdcremin]

If the bank has 100 gold and the reserve requirement is 50% how can it then lend 200? I thought it would be able to lend 50 (having to keep 50% in reserve). If the RR was 10% it could lend 90 etc..

[jdcremin]

Wait - I think I'm confusing fractional reserve lending with reserve ratio.

Let me watch the videos again.

[dpod916]

if you have to keep 50% if your demand accts on reserve and you have 100 gold pieces then by keeping that 100 gold pieces on reserve you could loan out 200 gold pieces because 100 is 50 percent of 200

[dpod916]

which really shows how risky our banks can be to our financial system since we have a 10 percent reserve ratio the federal reserve then only has to keep 10 percent so while a normal bank can loan out 10 times its reserves threw this method you could loan out 100 times the actual wealth drastically increasing the money supply which causes inflation

[jdcremin]

Thanks - I finally came to that conclusion after much thouhgt. It seems that the loaning out of 90 of a 100 deposit still holds but after the multiplier effect it increases and is capped at the 10% reserve ratio which you explained. If the banks ever decide to loan out these billions that they've recently aquired -look out.

[gwynedd1]

The formula works like 100/.5 thus only 200 can be created. However that is the maximum. You are only taking into account one loan deposit cycle. The initial loan is $50 which will likely be a deposit of $50 which can become a $25 loan etc.

[jdcremin]

I was considering many loan cycles during the fractional lending money multiplier - it is capped at a reserve ratio of perhaps 10%. $50 can multiply to $500 at that reserve ratio - through multiple lending of a lessening portion of the $50.

[mystryunfold]

this shows how the crual the system and our govts are.if privately owned central banks make a mess, its govt who has to clear it i.e. if you asks for you money back, they tax you more. Futhermore, the govt borrows the money from FED at interest and has to taz you for that.This system is flawed & needs to be completely changed.

[wmacorlando]

6:22 - "any surplus profits from this bank go back to the Federal Government" may sum up why the federal government is bailing out the banks.

[khanacademy]

IOU = I owe you. As in "I owe you money". In the case of Treasuries, its a piece of paper from the government saying that they owe you money.

[kggoh]

I think now it should be "I owned your money"

[melnick1985]

Is there any way you could go over, puts, curency accumulators, options? Thank you so much your videos have helped me so much.

[LuminaChannel]

I'm not sure if I understand IOU, are those Obligations?

[pongman]

Sal I hope you're ready to be called by President elect Obama to work on the economy. Get your bags ready because I sent him a response on your bailout idea. You might have to bring some warm clothes perhaps some thermal underwear and some LLBean "Herman Survivors" just in case it starts to snow. lol

[jdrizd2]

I thought the interviewers reaction to Sal's suggestion that the government loan directly to businesses on CNN was humorous! Uh, you mean let irresponsible businessmen fail in business?

[FranceParisian]

alas